Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the first quarter 2020, Akamai technologies Inc. earnings Conference call.
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After the speaker presentation, there will be a question and answer session.
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It is now my pleasure to introduce head of Investor Relations Tom Barth.
Thank you operator.
Everyone and thank you for joining optimized first quarter 2020 earnings conference call.
Speaking today will be soundly optimize chief Executive officer, and adds a gallon optimize chief financial officer.
Before we get started please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance.
These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statement.
Additional information concerning these factors is contained in optimize filings with the FCC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
The forward looking statements, including it didn't it's called represent the company's view on April 28, 2020, Akamai disclaims any obligation to update these statements to reflect future events or circumstances.
As a reminder, where were you referring to some non-GAAP financial metrics during today's call.
Detailed reconciliation of GAAP and non-GAAP metrics can be found into the financial portion of the Investor Relations section and my Dotcom and with that let me turn the call over to Tom.
Thanks, Tom and thank you all for joining us today.
Before I get into the numbers I want to acknowledge how much the world. It's been disrupted by the co bid 19 pandemic.
All of our lives have been impacted in ways that would've been hard to imagine only a short while ago.
And optimize our primary concern is for the health and safety of our employees their loved ones, our customers and partners and the communities, where we work and live.
Fortunately, we're in a position where almost all of our employees can work remotely and we've been doing that successfully for the last two months.
We've also implemented special measures to protect employees, who need to travel for example to a data or operations center.
And we're doing what we can to help employees, who face, especially challenging situations as a result for the pandemic.
That's businesses and consumers around the globe adjust their routines and the interests of public health. The Internet is being used at a scale. That's a world is never experience.
In addition to the hundreds of millions of people who've been working from home governments are leveraging the internet to keep citizens inform and to provide economic assistance houses of worship our streaming services and communities are engaging online to relieve the social isolation fell by men.
And of course education Commerce and entertainment are now almost entirely online.
As much of the World Hunkered down in place Akamai is continuing to work behind the scenes and keep the internet functioning as a lifeline for organizations and people everywhere.
I'll talk more in a minute about optimize unique role during the pandemic and the impact of the pandemic on our business.
First I'll review, our Q1 financial performance.
I'm pleased to report that I come I had a very strong first quarter on both the top and bottom line.
Revenue was $764 million.
8% year over year end up 9% in constant currency.
Non-GAAP operating margin in Q1 was 30%.
One point over Q4, and consistent with Q1 of last year.
Non-GAAP EPS in Q1 was a dollar and 20 cents per diluted share.
9% year over year end up 11% in constant currency.
These excellent results were driven by the continued strong performance in March security solutions greater than expected traffic levels and by our continued focus on operational efficiency.
That's more business is conducted over the internet the ability to scale becomes critical and when it comes to scale Akamai is a clear leader.
Traffic on our platform increased dramatically in March as enterprises turned to lock in my to move more of their operations online.
Despite the cancellation or postponement a major sporting events like March Madness, and Champions League soccer, our traffic increased by about 30% over a four week period at the end of Q1.
Perfect reached a peak of 167 Terabits per second which was more than double the peak in the first quarter of 2019.
We're very pleased there is capacity we added to the platform last year has enabled us to help our customers when they need us mouth.
We're also making a big difference when it comes to helping the major carriers handle the explosion in demand.
That's because we deployed our infrastructure deep into carrier networks and close to end users.
Nearby Offloading, an enormous amount of traffic, yeah, what otherwise congested core backbones and routes.
Of course performance is also critical as business has moved the majority of their operations online.
Although some other companies have experienced cases of performance degradation and even extended outages in recent months I'm very happy to report that optimize performance has remained consistent and strong over the past quarter.
In fact, our measurements indicate that the page download times provided by our industry, leading eye on service have significantly improved over the past year.
This is in spite of the large increase in traffic and as a direct result of our relentless efforts to improve the performance of our services.
Okay. My is also helping to protect many of the world's major enterprises as more employees work from home and as I T departments increased their focus on business continuity.
We believe that optimize market, leading security services are needed now more than ever as attackers take advantage of the pandemic ramp up their exploits on enterprises across all verticals.
In Q1, our cloud based security portfolio generated $240 million in revenue.
28% year over year in constant currency.
Sales continued to be led by our flagship services for eat loss prevention application layer firewall and bought management.
We also saw strong surge in bookings for our next Gen Zero Trust Enterprise Security solutions.
The strong demand we saw in Q1 for our security and media services more than offset the reduced revenue we receive from companies that have been hit hardest by the pandemic.
Especially in the travel and hospitality vertical.
Where appropriate we're modifying the terms of these customers contracts to provide them some relief and flexibility often in return for extended contract line.
We value our customers in Washington to think of lock in my address affordable and reliable partner for the long run.
We're fortunate that our financial strength enables us to provide assistance the customers in me, which we believe will benefit our shareholders and the global economy over the long term.
We've also played an important role in helping to support websites and applications associated with response to the pandemic.
And the OCC My foundation is providing substantial financial assistance for numerous relief efforts around the world.
Most of all today I want to recognize and thank our nearly 7800 employees are working so hard to serve the thousands of organizations and billions of Internet users who rely on us during this very challenging times.
I couldn't be prouder of the way that our people have stepped up and what they're managing to accomplish despite their own personal challenges in dealing with a pandemic.
Their spirit and leadership during a time a crisis is a key part of what makes block of my such a unique and strong company.
Lastly, I want to offer a warm welcome to our board's newest member Marianne Brown Marianne joined docket Weisbord last month and brings with her extensive financial and operational expertise as well as valuable leadership experience with global technology driven companies.
I'll now turn the call over to add for more details on our Q1 performance and our outlook for Q2 Ed.
Thank you Tom before I begin I would also like to thank our fellow employees with her amazing work dedication.
I would like to acknowledge our customers and partners, especially those we've been hardest hit by the global pandemic.
Today I planted to review our Q1 results.
Discussed the impact the pandemic is having on our business.
Provide Q2 guidance and an update on the full year.
As Tom mentioned, we delivered a very strong quarter on both the top and bottom line.
Q1 revenue was $764 million up 8% year over year were 9% in constant currency.
Driven by a significant increase global traffic as well as continued strong growth across our security portfolio.
Revenue from our media in carrier Division was $358 million up 8% year over year, 9% in constant currency.
The outperformance immediate was primarily due to the surgeon traffic from OTI T. video gaming, social media and news and information sites as more and more people around the world began to shelter in place.
Revenue from our Internet platform customers was $45 million inline with our expectation.
Revenue from our web division was $406 million up 8% year over year in 10% in constant currency.
Revenue growth for this group of customers was again driven by our security business.
Moving onto revenue by geography.
International revenue was $335 million up 16% year over year were 19% in constant currency.
We continue to see very strong international growth, especially in a feature.
Foreign exchange fluctuations had a negative 3 million dollar impact to revenue on a sequential basis any negative 7 million dollar impact on a year over year basis.
Sales in our international markets represented 44% total revenue in Q1.
Three points from Q1 2019 in up two points from Q4 level.
Revenue from our U.S. markets was $429 million up 3% year over year.
Moving now to costs cash gross margin was 77% consistent with our expectations.
GAAP gross margins, which which includes both depreciation and stock based compensation was 65%.
Good point from Q1 of last year.
Non-GAAP cash operating expenses were $260 million inline with expectations.
Adjusted EBITDA was $327 million up $8 million from Q4.
In up 9% from the same period and 29 team.
Our adjusted EBITDA margin was 43% up two points from Q4 and up one point from Q1 of 29 team.
Non-GAAP operating income was $230 million of $8 million from Q4 levels and up $20 million were 9% from the same period last year.
Non-GAAP operating margin was 30% of one point from Q4 levels consistent with Q1 of last year.
Capital expenditures in Q1, excluding equity compensation in capitalized interest expense for $136 million.
This was lower than our guidance range, given some pandemic related supply chain disruptions and travel restrictions that delayed some planned network build out.
However.
Thanks in part to the capacity work, we undertook in 29 King we're very pleased but we've been able to maintain network resiliency. During this virus outbreak.
Moving onto the earnings.
GAAP net income for the first quarter was $123 million for 75 cents earnings per diluted share.
This included a restructuring charge of about $11 million associated with the prior actions I mentioned on our last quarterly call.
We did not take any new restructuring actions during Q1.
Non-GAAP net income was $196 million or $1.20 cents earnings per diluted share up 9% year over year up 11% in constant currency and two cents above the high end of our guidance range due to higher than expected revenue in the quarter.
Taxes included in our non-GAAP earnings were $35 million based on a Q1 effective tax rate of 15%. This was slightly better than we expected due to stronger than expected growth outside the U.S.
Now I will turn to some balance sheet items.
We believe that our balance sheet is strong we anticipate that we can maintain this position in the face of the current economic uncertainty.
As of March 30, Onest, our cash cash equivalents marketable securities totaled $2.2 billion.
Our total debt at the end of Q1 remained unchanged at $2.3 billion.
As a reminder, our debt is comprised of two convertible notes with par values of $1.15 billion. Each immaturity in 2025 in 2027, respectively.
Now I will review our use of capital.
During the first quarter, we spent $81 million to repurchase shares buying back approximately 900000 shares.
We have approximately $750 million remaining on our previously announced share repurchase authorization.
We plan to continue to leverage our share buyback program offset dilution, resulting from equity compensation overtime and subject to global financial conditions.
In summary, we were very pleased with our Q1 results.
Given these uncertain times and with the increased volatility we are seeing in global markets I thought it would be helpful to provide some additional context on the impact at the recent elevated traffic levels may have on our media division and the negative impact depend demick may have on some key verticals and our web division.
First as Tom mentioned.
In many countries around the world issuing shelter in place orders, we've seen a dramatic increase in media traffic across our platform.
We expect this elevated traffic to continue to how the positive impact on our Q2 results. However, we anticipate the traffic levels may start to moderate life begins to report returned to normal.
As the warmer summer months get underway a larger markets.
As an aside.
Could you maybe wondering about live sports as a reminder, no individual live event has a significant impact on our results and today a stronger traffic from shelter in place orders has more than offset the impact of live sports cancellations and postponements.
Moving now to our web division.
There are two vertical notably impacted by the global pandemic travel and hospitality commerce and retail.
The travel and hospitality vertical accounted for roughly 4% of total aka my revenue in Q1.
This vertical is comprised of over 200 customers globally, including some of the largest airlines hotels cruise lines and travel related sites.
Most of these customers have seen sharp declines in demand a trend that is expected to continue throughout 2020.
Our commerce and retail vertical is an area. We have highlighted for some time as being under financial pressure. This vertical includes more than 900 customers globally and represents approximately 16% of optimize total revenue.
Well, we have seen a recent traffic uptick with some customers other customers are struggling, especially those that rely heavily on brick and mortar operations.
We believe they could become increasingly challenged the longer shelter in place quarters continue.
As Tom mentioned, we have already begun to work with many of our customers whose businesses have been impacted by the pandemic.
Q1 was negatively impacted by approximately $5 million due to a combination of contract restructurings and elevated bad debt reserves.
Well it is difficult for us to projected total impact we do expect to incur additional charges for the coming quarters. The comp if the economy continues to suffer.
I'd now like to provide our outlook for the second quarter.
We're projecting Q2 revenue in the range of $752 million to $778 million were up 6% to 12% and constant currency over Q2 2019.
Given the covert related impacts on the business I just discussed we expect to see continued sequential growth in our media division and a slight decline sequentially and our web division in Q2.
Current spot rates.
Foreign exchange the expected having negative 7 million dollar impact on Q2 revenue compared to Q1 levels and having negative 11 million dollar impact on a year over year basis.
At these revenue levels, we expect cash gross margins of approximately 76%.
Q2, non-GAAP operating expenses are projected to be $252 million to $260 million.
Factoring in the cash gross margin operating expense expectations I just provided we anticipate Q2 EBITDA margins of approximately 43%.
Moving now to depreciation we expect non-GAAP depreciation expense to be between $98 million to $101 million.
We expect non-GAAP operating margins of approximately 30% for Q2.
Moving onto Capex, we expect to spend approximately 186, the $206 million, excluding equity compensation in the second quarter.
This assumes theres not a significant change in the overall economic environment and that we will catch up on our Capex spend the first half 2020 Q2.
And with the overall revenue would spend configuration I just outlined we expect Q2 non-GAAP EPS in the range of one dollar in 18 cents to $1.24 cents or up 14% to 20% in constant currency.
The Cps guidance assumes taxes of approximately $34 million to $36 million based on an estimated quarterly non-GAAP tax rate of approximately 15%.
And it also reflects a balloon fully diluted share count approximately 164 million shares.
As our Q1 results in Q2 guidance demonstrate here, we are optimistic about content. The continued strength of our business even in the life of the pandemic.
As you are seeing from other companies reporting however, it has become much more challenging to protect economic conditions, resulting customer impacts in the second half of the year.
As a result of this uncertainty, especially as it relates to the holiday shopping season. In Q4, we are withdrawing full year 2020 guidance at this time.
We plan to reassess providing annual guidance next quarter as we gain additional insights into the direction of the global economy.
We're very thankful for the resiliency of our employees the diversification of our revenue the strength of our customer relationships and our strong balance sheet.
We believe we are well positioned to continue to help our customers. During this very difficult time by providing them with the best most secure digital experiences around the world.
Thank you, Tom and I would be happy to take your questions operator.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key please standby well we've compiled acuity roster.
And our first question comes from lineup will power with Baird.
Great. Okay. Thank you for taking the question well I guess first I hope everyone to talk to my team is saying is helping to shape as possible.
Maybe two quick questions if I can.
First I'd love to get more granularity of possible.
On the sources of have strengthened media, maybe just trying to understand that strengthen MTT video versus gaming, if there's any way to kind of rank order what you're seeing there.
But in the second question is is on security given the uncertain climate and questions on T. budgets, maybe just talk about how you're thinking about security growth.
Going forward and what you're seeing in terms of potential lengthening sales cycles versus the need for work at home capabilities.
Yes, sure I'll take the the first one Tom and you take the second one.
So strengthen media really came like I mentioned in the no early remarks, you really saw strength across.
Several different sub verticals and media, probably the largest would be and OTI T. video, but also was a very very strong gaming quarter, especially in March and you know really we saw significant uptake in.
Traffic over the last couple of weeks of March and you know as the shelter in place.
Orders came around the World is we got to places like Europe, India and the U.S., we really saw a dramatic increase so it's pretty much strength across the board and really across the globe as well.
Yeah and first thanks for the good that concern about aka my employees and I'm happy to report that by and large where all are doing well.
You know in terms of the question on security growth a you know what looking very strong you know when partly that's because the attackers aren't you know were held back by the pandemic or working remotely and in fact, we've seen a substantial increase in attack activity and.
Perhaps that perhaps they're doing that because.
They know I T managers have a lot of other things that they got a worry about in terms of supporting their workforce remotely.
That increases vulnerabilities and.
And so it's really up a perfect storm for the attackers to run their exploits and we have products that are really well designed to help major enterprises deal with that both for securing their web sites and apps and also of course securing access for their employees, who are now remote all of my son.
And so we've seen a very strong uptick in bookings for our enterprise security products and I guess the last point there is our customer base is the world's major enterprises.
And that they're going to a fair better than most.
Through the pandemic and we have very good relationships and so we're in a better position you know to provide them with the new security capabilities, and where the increased capacity that theyre going to need for the security products. So you'd on balance I think you know the security business is looking very strong.
And of course, you know, we're all hoping that.
You know the global recession doesn't really deepen our persist for a long time.
Great. Thank you.
Thank you.
Your next question comes from lineup Keith Weiss with Morgan Stanley.
Excellent. Thank you guys for for taking the question and very nice quarter.
Two questions one on as we think about Q2.
Any any quantification you could give us in terms of kind of the puts and takes a it particularly on sort of the the drags of having to reprice some of those contracts I'm, assuming repressed having to amend some of those contracts on the performance out of the equation and he can you give us and just like what kind of impact that has gone on.
Q2, and then on the flip side of equation is it possible to quantify kind of be.
Your expectation for how well this sort of opt traffic is going to sustain into Q2 like how much of that did you actually put into the guide on it on a go forward basis.
Sure Hey, Keith said, so I'll start with the Web Division, you, obviously and I, what I tried to do was call. It a couple of verticals that.
Customers are experiencing some significant challenges so we're dealing with those on a case by case basis and you know in the prepared remarks, I talked a little bit about how we expect to see steel slate.
A sequential decline in the web business and really what that's all about just a couple of things that we have to take into consideration.
Some cases, the customers will come direct to us and ask us if there's anything we can do to help them. During this period of time, where there's a lot of uncertainty in some cases will amend contracts and we'll get something in exchange for that in other cases, we have to assess the.
The ability of the customer to pay offs and so there's some customers in particular in certain geographic areas of the country that we're more concerned about and if you don't have if you have any concern about the customer's ability to to pay you have to reserve that revenue. So the combination of that going on you know I am I am encouraged to see that the capital.
Markets have been opened and we've seen a number of customers that have been.
Been able to secure funding, there's obviously availability with certain government bail out programs and things like that.
But it is an area that we're keeping a close eye on and then obviously you know bankruptcies or another possibility.
So what we did as we did it ran a number of different scenarios that we assumed that we would continue to see additional pressure in the web business. When we would see a slight decline. Obviously this is out of control out of our control in terms of you know what's going to happen with this pandemic and also one of the control of our our customers and in many ways.
So then on the website on the media side excuse me, we assume that this continued strong traffic growth that we saw in March we continue throughout most of the quarter.
We made an assumption that in June that we may see us a slight decline in the traffic as you know things hopefully start to get back to normal in the warmer must start to hit.
You know, we've seen a pretty strong traffic growth here in the in April.
Got it and just in terms of that nature of the contract negotiations is it more on billings terms or does does actual pricing change do you give us some color on to what you're willing to give your customers and is there anything kind of out of bounds and what you're not willing to do in terms of contract amendments.
Yes, sure I mean, you know you take a case by case, we always take the long term view a lot of these customers have been with us for 15 or 20 years and you know that certainly they could take the travel and hospitality vertical that was a vertical that I never worried about it. We so it's made up a fantastic amazing companies. They have been always pay on time, they're usually.
What's that early adopters for our new solutions et cetera, but obviously, they just saw demand evaporate here in the second quarter excuse me in the first quarter. So you know we work with them sometimes it could be a you know you enter into a zero overage contract a lot of customers are asking for extended terms and payments. So we have to right I'll take that into considering.
And sometimes it's some some credit relief, but we do it case by case, so far the customers have been pretty reasonable in terms of thereafter hasn't been things that had been completely a outrageous so far.
That's super helpful. Thank you guys.
Thank you.
Your next question comes from the line of James Fish with Piper Sandler.
Hey, guys glad to hear you guys are doing well.
Personal bases and from a business basis during this time.
Wishes to you and the rest the after my team I just want to double click on Will's question and what are you guys seeing thus far with the security solutions with work from home specifically more about that new cloud web gateway or security solution and the a problem.
Yeah, so strong bookings there.
Now the secure web gateway.
It is just now available in beta and as part of our enterprise Threatprotect or solution version, three though and I think you know that really increases the strength of the offer. However, we're seeing a lot of the bookings now he has been enterprise application access and you think of that as the VPN replacement think of that is not saying.
That that's all your employees, who you suggest you know log in it and physical building now have to do it from home and you need to secure I mean, you need to scale that overnight.
And so I think that's why we're seeing a real up uptake there.
And in General I think these are the solutions of the future for enterprise security. They they unable to zero trust model or they are much more secure for than the traditional solutions that enterprises have been using now for decades and put it can put a big dent in enterprise data breaches in the future.
Got it and then on the media side I mean, one of your peers and in that space just the share loss with some of the streaming services I guess, where are you guys able to capture some of that share given that the actimize network size or did you see any specific media share gains with some of the new or Oki TV services.
Yeah. So that's great question.
We did you know one of the things that.
It's been a bit of a challenge in the industry is that.
It's been a surge demand so capacity becomes a bigger component of the equation and along with that becomes performance. So in some cases, we've seen pretty nice share gains.
Across the board so we've been very happy with that much in Q1.
Thanks, guys have good ones.
Thank you.
Thank you.
Our next question comes from the line of Sterling Auty with JP Morgan.
Yes. Thanks, Hi, guys you mentioned in your prepared remarks that no single live sporting event is meaningful part of revenue I think you've talked in the past that things like the Olympics in World Cup that span a couple of weeks are more meaningful so I'm wondering how you quantified or how you gauge the.
Joel or a fade off in traffic in June versus the the loss of the Olympic steel share within the guide and what we should be thinking as we go into the back happened here.
Yes, sure Sterling so.
To get into a little bit of detail on this one just to try to help you guys. Though so we did talk about there's no individual event is material take the Olympics for example.
When you think about the Olympics Theres, obviously, the direct right holders. There's the web traffic that can sometimes go along with an event of that size you noted the.
Travel and news and things like that and then is also live television. We've got several folks if you know show live television and then obviously the duration of the streaming is what really matters. You know, we do web delivery do services, we do security et cetera, but it's filling up the went to the streaming in an event like that could be in you know, it's called the $3 million to $5 million range, maybe a few mill.
You know on a really good year.
I think about live sports in general, it's probably a little over 1% of our total revenue throughout the year.
So right now you've seen in Q1, we certainly more than offset the.
The lack of live sports and we expect that to happen in Q2. So in terms of what weve built into our guidance. We're assuming that live sports is not fully back up and running and that's what we're seeing from the OTI T. and others other gaming and other sub verticals were more than offset that in Q2.
Oh, that's great transparency. Thank you for that and then on the security side can you give us a sense of where the strength is coming from this aspect how much of that strengthen spending is new customers coming onto the platform versus existing customers either taking more product for existing customers just.
Paying more because of either some sort of volume commitment on any of this or just help peel back the onion a bit on the contributions from the growth in security.
Yes sure. Good question stone so the first of all I'll take it from a couple of lens, we'll start off with the product side. So we saw great strength with bought man KSD services, and the ATP, albeit a bit smaller.
Good uptake of.
Solutions.
No I provided this metric before in terms of the number of customers that have.
Purchase a security product for up to about 57% now up from 55 last quarter. So we're seeing good uptake in the installed base and growing there and also customers taking on more than one product no customer buying two or more up to about 29% that's up.
The point from last quarter as well, so we're doing well the installed base in terms of bookings were seeing new customer bookings again being led by no by security and no against things and good stuff and you can install base and we're also very excited about page integrity, we came up with our limited availability patient Tegra, we signed a number of customers.
This quarter and expect to continue to do that throughout the year, Tom mentioned secure web gateway, which is up and data now and then obviously enterprise you've got a long way to go there.
[laughter].
Thank you.
Our next question comes from the line of Heather Bellini with Goldman Sachs.
Hi, This is Caroline on for how they're on first off I do want to Echo the comments, let my colleagues on the line I've already made I do hope that you on your families are staying safe healthy.
First off I I wanted to dive a little bit more into here.
The comments that you made about O T. I'm curious, how how how I'd be able to demand environment trended relative to your expectations or I guess put another way how much of the GP strength would you characterize I teach the new launches the share gains versus the general increasing.
User traffic that was triggered by the shelter in place orders.
Yes. Good question you know when it's one that you know challenged might seem to come up with a number and it's it's a little difficult times like this.
Tend to suffer accelerate trends, we see in the market no TT growth being won and obviously cord cutting being another and in March is when we really saw a big uptick in traffic. So there's no doubt that the shelter in place really drove a lot of traffic, but we also had a you know a major customer launch a new service over in EMEA.
And you know we had our own models about what we expected and yes, I would say, we did a little bit better could be because of the shelter in place.
But I'd say, it's kind of a combination of both the shelter in place, but also we had done we took some share in some places as well like I talked about earlier, we have you know capacity and lot of places where it really matters rebuttal outperform some of our competitors in certain areas. So it's sort of a combination of everything but I would say that shelter in place certainly did hell.
Accelerate the trend that we're seeing in the market.
Got it and you know can you talk there why what the demand was like you know sort of in the last two weeks in March and what are you seeing now, especially in areas like 18, Jay where some of those countries sort of relax the shelter in place orders and people are starting to return back to the.
Our workplace.
Yeah, the demand increased steadily through March.
And a total traffic and you know increasing from.
In March to April Hi, and you can see as countries went into shelter in place you see the traffic increased.
You know and I think most of the world as well.
Well at least the traffic wise is still in that did not a condition of being high and.
We look forward, we may see more normal growth from here, depending as Ed said on you know live events and Oki t. launches and so forth.
So a P.J. I would say also very strong and as you know a lot of our I've got a lot of strong growth there.
Got it thank you so much.
Thank you.
Next question comes from the line of James Breen with William Blair.
Hi, Thanks for taking the question just on the Capex side, you talked about a little a delayed some sort of the expansion that you had.
You were prepared for just because some of the build out you did the end of last year.
Are there any concerns about both ways, continuing and the ability to sort of meet demand.
From a customer side as we go forward here.
Hi, Yes, we think were.
Past the delays you know we did have a you know about 90 days of delay on delivery of a bunch of servers, but you know we've had we have plenty of capacity.
As you can tell by hitting a peak, which is really what the capex a you know governs doubling year over year.
And at this point, we think we're in very good shape up with a supply lines and getting the port capacity, we want to the rest of the year or we have the tax and all the cities, where we need to do that to do the installation and we have the approvals from pretty much all the major governments that you know our folks can move around.
Around even where it's a very strict locked down just because we're such a critical resource and in countries around the world. So you know we're optimistic.
No as Ed said on being able to continue to deploy capacity.
And to stay ahead of the demand.
Great. Thank you.
Thank you.
Our next question comes from the line of Michael Turits with Raymond James.
Good evening, I'm glad to hear villains, well that's to everyone.
Well.
Yes, withdrawing guidance, because I think through your different segments.
I'd like to just try to focus on which are the ones that.
Divide that uncertainty because it sounds like CDN and strong now really at worst.
At least on the media side at worst come back to levels that will that.
Security.
It doesn't sound like you think theres some uncertainty that's macro related but perhaps there isn't giving you tell me think there is.
And so we're left with.
Ecommerce and around travel and retail so am I right and that's it that's really the reason why we have them I'm certain that cause you to pull guidance in that segment.
Yeah, Hey, Michael the that yeah, I mean, obviously, we hated to hated to do that as we ran our scenarios is so much that's out of our control and you know really impacts our customers. You know for example, if you run into a second.
Flare up of Miss in the fall and get into another round of soft shelter in place what how does that impact our customers business, especially in the web division, obviously would be bullish for the media division because we see those elevated traffic levels, but on the website.
Can you know considerable and you know, what's the consumer going to do how's the consumer gonna behave and with Q4 being a very strong seasonal quarter for US you can imagine as you run through a number of scenarios you. Your range just gets really wide and we just didn't think it would be helpful. That's why we provided some additional color. So you guys can run your.
Models by giving you some side relative size and number of customers et cetera, that's really what's driving Michael is just the.
Uncertainty around those were the web division customers and more in particular to what's happening with the virus, which is so much that's out of all of our controls and including capital markets, you know who knows in the second round right now it's good to see some of our customers getting funding, but that may close down at the second round happens and.
Elevated bankruptcies consumers may not be spending may not be traveling. So you know that's not something that were experts and wanted to get more time to get some more color rather than providing something we felt was on helpful.
And then if what do I think that CDN as a vision, obviously, the only thing you're guiding to to Q, but [noise].
CDN is made up about the media side as well as the website. So so do you think they there's enough in traffic.
To give you an offset to both live sports and to web that you can see growth in the CDN business year over year next quarter.
So in in Q2, Yeah, I would say right now there's a good chance that we could see a this the strength in medium no more than offset live sports and potentially the impact of web. Its you know right now we get 60 days to go and never know what can happen here in the last 60 days why we feel.
The larger than normal range, but it is possible and I wouldn't be surprised if we saw studio and.
Gross debt here in Q2.
Great. Thanks, very much because all of us.
Actionable.
Thank you enter next question comes from the line of Tim.
With Oppenheimer.
Thanks, two questions on Tom can you maybe back to second talk about what you kind of expect for a secular shifts and internet.
Usage and trends and maybe.
How cold it here might change what you guys are doing your strategy if at all or maybe you know other areas that you might want to invest in as a result of all this and then just a quick follow up on the on security on the.
The bookings can you give us maybe just some comparisons would pass waters is just like you know well they don't 10, 20% above trend that you've seen the last few years or you know any kind of color around that would be great. Thanks.
Yeah in terms of the secular shifts I think there's a reasonable prospect that there will be much more use of the internet coming out of this permanently than there was going in and in many areas. You look at E. Commerce and you know traditionally that was the penetration of E Commerce, Inc.
Commerce as a whole is growing about 2% of the year and low to mid teens and pretty much now the large majority of Congress is online and you know after people get used to doing that for an extended period a lot of that share gain may become permanent that's really good for Akamai you look at a media.
And you know movie releases being done online a lot of consumption now moving online and that may become permanent a lot of that as well you look at work from home I. You know there wasn't a lot of that before but now there's just a ton of it and after you've done it for awhile.
I think you may see a lot of that become permanent I and so just just across the board. It's it's not so much new uses of the internet that weren't done a little bit before but now they're being done at massive scale and there's a prospect that the scale would be very large coming out and so when we look at the secular.
You know Tailwinds here, obviously, we're worried about a global recession that talked about we just have no idea how long are deep that'll be where we're hoping we get out of this pandemic situation by the end of year and things. There you know looking better that's beyond our control, but once we do emerge we know it does seem like there's.
A lot of strong tailwinds for OCC in my because the things I described are all the things that were really good added in the market leaders at and so I would say long term view very bullish.
About aka my you know, it's not a major product shift for US obviously go to market now we're changing how we do that because we're not traveling a you know so the go to market motions are all virtual and digital now and we've gotten off to a great start there on how many of you came to our virtual edge live event, but.
Amendments attendance, there and really good feedback.
So how we approach customers, how we talk to them physically is changing and and that's that's fine a you know we're in good shape there.
You know in terms of the security bookings yeah for the enterprise security products, you know very substantial increase you know year over year in Q1 and that seems to be continuing into Q2.
So that is good news now takes a while for that to turn into revenue of course.
But that's that's a very positive development and I do think that again in the long term with more employees working from home and already they need to stop data breaches and protect enterprise applications and data that there is a bright future for our zero Trost enterprise security products.
Thank you.
Thank you.
Your next question comes from the line of Cobi than this.
With Cowen.
[noise] George Thank you.
Two questions. If I may I guess, the first slide show a bit further down on bad debt I'm wondering if you could provide any more color is that later as a percentage of revenue or what the actual step up was in the quarter and.
Now what should we be looking for that could suggest that you might have to take up a little bit further evidencing. The second quarter and then just real quickly on pricing I'm just curious if the incremental volumes that you're seeing.
Tightly CDN business, whether it's just the broader oki chenier cdnineteen related if we're seeing any significant or material check in and pricing trends. Thank you.
Sure I'll take those who are.
Bad debt was up a couple of million this quarter.
There's a new accounting standard that we adopt the beginning of January assay, 326, which basically you know when the pass you to look at sort of get walkie here, but in the patch it to look at the.
Storage and anything that happens within the quarter now you have to look at potential future credit losses. So think of it almost like your bank. We are evaluating your trade receivables and having to put up a reserve for potential future credit losses.
And I mentioned earlier will be extending out.
Yes in some cases and payment terms for folks in some cases. They you know what just asking for some some time in other cases and like in places like India. They physically can't get into the office in the not set up to do electronic payments. So we'll be evaluating that as every company that is off the standard we'll be doing the same so I do expect that bad debt expenses will go higher and we did a plan for that.
In our guidance to see and the DNA line that that will start to tick up a bit.
On the pricing side pricing in the CDN market. It's I didn't see anything this quarter that was out of the ordinary I will say, though that.
We are seeing as I talked about capacity.
The push for capacity reservation fees, which essentially is just getting a little on top of what you'd normally get for the cost a bit delivery.
Capacity is at a premium at this point. So we are seeing a little bit of a benefit there but in terms of the normal pricing environment, It's still volume based and I don't see a lot of different some in the market at this point.
Great. Thank you very much.
Thank you.
Our next question comes from the line of GE, and Lee with RBC capital markets.
Hi, Thank you I understand from Mark Mahaney, Thanks aren't taking a question. So maybe just a couple point why not a guide you mentioned the article weaknesses and.
Hospitality travel commerce, how can you, perhaps ballpark the magnitude of the impact and maybe Mike you bake in a similar impacting Q to Q or do you expect that and you have to do guy or do you expect that you kind of a worsening scenario just given so much of that is just happened in the last last month.
In the quarter and then a follow up thank you.
Yeah sure. So as you know in the guide we did expect that we'd see additional pressure in those verticals and you know as my prepared remarks, I talked about how we expected the web division to decline slightly they also usually up.
Vision that grows very steadily you know obviously with the exception seasonally strong Q4 go into Q1. So we are anticipating that so I did bake in some of that and then included in the range is a various set of scenarios in terms of you know good better best in terms of how how we will land you know so far in the first 30 days of the core 28 days of the costs.
Order I would say, we're you know trending about what I would have expected, but let's see how things go here in the next 60 days as we as we finish up the quarter hopefully at some of these countries and state start to come back out of a shelter in place we don't see lifting all panic back to a things getting worse than you know sports consumer confidence.
So we don't see as much pressure, but.
That's how we thought about.
Got it and and another question just on security, maybe pre and post colder.
Maybe parsing out the Oh, the covert impact for that ready head and.
Yes, that's torajan, Okay. How is the growth has been trending.
And your expectations and what's kind of the cadence the transition to narrow trust and maybe after you know the Calvin impact you mentioned a few you know you launch is going to have yeah, obviously page integrity being won a SWT as well that well be at more material revenue driver in the out years.
Now do you see any of these new product launches actually becoming more meaningful revenue driver and perhaps this year or an action or sooner than projected.
Yes. Good question I I would say the security growth remains very strong.
You know it's been in the high Twentys for some time and we saw that in Q1.
As well and that's going in to co bid I I think you know the pandemic as we talked about the rate of a taxes increased as bad as that is a you know during the pandemic as the attackers try to take advantage of it I would say.
Now the new services like page integrity at secure web gateway in enterprise security or you know Andy increased bookings around enterprise security those are things that will drive revenue in the future you know solar sometime between bookings and growth I would say that.
The pandemic in the stuff that's happening there helps a you know zero trust because in our enterprise security because there's even more need for it you know and in some case, it's it's an urgent need whereas before there was a I think it was it early days of a trend towards moving because you're off trust. So there's an issue.
Celebrant because of the pandemic I don't think a pandemic you know yet you've seen any change in revenue because if I did the same way you would for traffic traffic you monetize that immediately as soon as you know you're delivering more you get the revenue for it with security products that more.
Or is the bookings and the recurring revenue that's generated as customers buying new services or increase the services. They have and so there I think there is benefit.
You know in the future, but we haven't havent experience that yet in the same way we have the traffic.
Great. Thank you.
Thank you.
Next question comes from the line of Rishi Jaluria with D.A. Davidson.
Hey, guys. Thanks, so much for taking my questions, Matt nice quarter and glad to take care of warm stacking said just two from my end I first wanted to go back to retail and commerce as a vertical.
You know look at it I know it's been under pressure.
Been pretty cold bid it feels like certain parts of that vertical though might be doing a better than others in this environment right, especially those like like a Walmart.
With that are selling essential goods and services and you know we're seeing pockets of E. Commerce. So wanted to get a sense for for what are you seeing with in that vertical and you know as you think.
Your your withdrawing of guidance one of the factors being a you know uncertainty around the holiday shopping season. There was that is that a function of just the impact from the fact that we're in a recession. It might take time for recoveries, so discretionary spending might be down or or maybe some more detail around that.
And then the second question I wanted to ask you talked a little bit about.
The payment terms and restructuring or deals one of your competitors are pierie's talked about.
Some customers deferring minimum traffic commitment in this environment just wanted to get a sense is that something that you are seeing as well. Thanks.
All right. So the second one so in terms of deferring minimum traffic amendments, we haven't got into that as matter of fact traffic is up significantly. So that's there hasn't been an issue for US there are some customers in the web division that have opted for the zero overage, but that's been a normal sales motion. So I wouldn't say I wouldn't really called anything there.
On your question about retail and worried about there you're correct. There's winners and losers. Some some folks have done very well have you seen traffic go higher and their underlying businesses are doing well, but there's an awful lot of them that are stressed and you know I talked about the size of vertical 60% of revenue over 900 customers got global so.
You know the really the big thing that we're we're concerned with and I think you hit it on the head with is.
The success with the depth of this reception and how do consumers behave or they're going to go up spend where they're going to go back into stores.
What's the ability of our customers to be able to you know raise enough capital to get through this this issue you know in some cases, we're going to see unfortunately, some customers go bankrupt hate to see it it does happen.
Some liquidate some come out on the other side, but whenever that happens it's a it's a disruption for us we have to stop taking revenue write off revenue in the quarter take a bad debt hit for some of the older receivables. So it just becomes very disruptive.
It's hard for us to really call out you know, what's going to happen because I think what's going to drive the depth of this reception is gonna be what happens with the virus.
And to people feel comfortable coming out as we never dealt with this before so it's really hard for us to make the call and you know just given the size of that vertical it can swinging around quite a bit. So that's what our that's why we decided to to withdraw guidance.
That's helpful. Thank you.
Thank you.
Next question comes from the line of Lee Crow with B. Riley.
Great. Thanks for taking my questions and congrats on a solid quarter all things considered.
Wanted to focus first on the security business I think last call you guys kind of highlight a 20% growth as the baseline for the year, obviously Q1 tracking kind of ahead of that and you're speaking to some momentum with bookings.
<unk> is is it reasonable to say that you know that 20% or possibly higher it's still reasonable.
And then second question just wanted to focus on international that maybe could you parse out contribution of security versus media delivery.
Especially with the context of some new launches on Teesside, Thanks for taking my questions.
Sure. So I'll start with the security question I mean, obviously, we're off to a great start here with you know, 28% constant currency growth not feeling pretty good about Q2, obviously Q1's bookings were strong.
We signed one of our largest a security deals in our in our history with one of our large media company. So no good to see that we'll see the benefit that in Q2. So I think Q2 will see really strong.
Broken we did call out 20%, it's possible, we could do better than that obviously the verticals. We called out that are challenged do have a big security customers. So to the extent that theres bankruptcies and things like that that can bump you around a little bit but.
You know feeling pretty good here in the first half certainly that will be growing at that at greater than 20% and as possible for the year really just depends on.
How things go somewhat on the comments I made earlier.
And your second question on international in terms of the strength I'd say there it's similar to what we see in the U.S., probably a bit more security adoption, probably more greenfield internationally, especially in places like Latin America pretty low penetration there, which is good as part of the reason we did the exceeded transaction that.
Just a good base to to.
The grow the security business there.
We are seeing similar trends that we saw in the in the U.S. here, where you see security and the verticals like financial services and Commerce and travel first and then you're seeing media start to catch up we've done some pretty good deals on a media side as well. So I'd say it is probably more greenfield and outside the U.S., but we are seeing very similar trends.
Got it thanks for taking my questions guys.
Thank you.
Next question comes from the line of Jeff Van Rhee with Craig Hallum.
Great. Thanks, I think most might have been answered I just wondered lane remaining I think as you look at the enterprise sales effort and this was a little outside of sort of the covert environment currently, but I know long term tremendous growth opportunity.
When you look at the sales process and where you are at this point can you just talk to your satisfaction with.
When rates with process with just the overall execution effort in sales within enterprise and things that are yet to be gone to really get that running where you wanted if it isn't.
Yeah, we're pretty happy with where that is now a with pretty much everything you mentioned you know the people are the process. The execution as you could imagine a this is a difficult time to go out and get bookings you can't physically meet with your account or you know the the the buyers out.
There are the I.T. folks are just you know.
Swamped with adjusting to the new reality and yet we had a great bookings quarter. You know you know better than expectation on our enterprise security products much big improvement over last year in that side, we're starting off the second quarter very well. So I think that's an area, where we're very happy you don't see that generating revenue today.
But that will certainly help US you know going forward.
Got it great. Thank you [noise].
Thank you enter next question comes from the line of Brandon Misspell with Keybanc capital markets.
Okay, great. Thanks for taking the question.
Wondering if one Fred maybe both Fred can you give us a sense of.
We've talked about some customers doing well in ecommerce some not can you give us a sense of as you look at your customer base, what could be a worst case scenario, if we're going into the global recession. Throughout 2020, you know what percentage of revenue would be at risk.
And I'm curious with customers hitting increased traffic during the quarter, how does the pricing change and is it dynamic during the quarter, where they hit sort of a new threshold for traffic and they re price to a lower level I'm just curious how that works. Thanks.
Yeah, I'll take that person and I'll, probably take the second.
You know.
As Ed talked about I think you know barring some kind of a deep and long lasting recession that you know wipes out you know major customers and a lot of them or you know just totally a wipes out consumer buying.
Which of course hurts the commerce vertical.
You know I think we're in good position, we have a really diverse customer base, our largest vertical as media, which is cranking, a and actually benefiting in many ways from the new reality Oh, you know what's the pandemic has caused a our customer base tends to be the biggest names in the business.
And generally speaking, they're the ones that are going to thrive the best even if.
The global recession, you know deepens and his lengthy and you know it just did I think no one really knows a you know what the future holds for the global recession and.
If it really is deep at the end of the year and you know it's going to persist into you know 2021 that could could you know our commerce customers and companies pretty much everywhere under pressure and you know it's hard to really no what the impact of that could be and that you know you know impacts the potential down.
Outside of any guidance, we can give and on the other side. We've got as you know substantial upsides in the media business and insecurity, a you know above where we were thinking and as Ed talked about you know just we want to be careful that we don't know for sure that just persist in gross and they're all year long and.
As Ed talked about in June he even you know we put in a you know a dampening their in June on that.
And so that's really what's going on in our thinking that there's the potential for large upside and the potential for you know downside that are hard for us to really quantify and it's it's beyond our control at this point I would say at a high level business is very strong as you can tell with you know the strong Q1.
John and I and I think a strong guide, albeit with a wider range in Q2, and Ed you want to talk about pricing with increased traffic.
Yes, sure. So you know obviously customer no one size fits all for customer pricing, but what I would say is that true typically we do have tiered pricing in most of our contracts, especially the ones with very large volume. So that as you do clip into new tier as you do get typically a lower rate for that tier.
But again it does vary from from customer to customer, but we do a most cases have some kind of a tiered pricing structure.
Great. Thank you and I guess I'm just as a follow up you guys give the travel hospitality exposed and sort of talked helped by the events, but could you give us what percentage of revenues coming from what you would call SMB. Thanks.
Oh, it's very small yeah, we do very little with us and B, we have a couple of partners.
That work with SMB like for example, our carriers will sell.
Some security offering small medium business, that's a small part of our business. We have a few few like ODP partners and other partners, but it's not a significant part of our business at all.
Great. Thanks.
Okay, well, thank you everyone.
In closing, we will be presenting at several vocal investor call them.
Throughout the rest of the second quarter.
Details of these can be found any investor relations section of the OCC My Dotcom I want to thank you for joining us and all of US at Optum I wish you will continue to help and wish you a very nice evening. So thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
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