Q2 2020 Akamai Technologies Inc Earnings Call
Ladies and how big is going to buy a couple of calls have begun momentarily I guess, they get offended by your cost would be momentarily. Thank you.
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Ladies and gentlemen, thank you for standing by welcome to the aftermarket knowledge in Q2 2020 earnings Conference call.
It would be about today's call. This call is being recorded.
I'll now turn the call. So do you host Mr., Tom Bar head of Investor Relations, Sir you may begin.
Thank you operator, good afternoon, everyone and thank you for joining OCC My second quarter 2020, <unk> earnings Conference call.
Speaking today will be Tom Leighton, OCC mice, Chief Executive Officer, and Ed Mcgarvey 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.
All the number of factors that could cause actual results to differ materially from those expressed or implied by such statements.
The factors include uncertainty stemming from covert 19, pandemic and any impact unexpected geopolitical developments.
Additional information concerning these factors is contained and optimize filings with the FCC, including our annual report on form 10-K quarterly reports on form 10-Q.
The forward looking statements included in this call represent the company's view on July 28, 2020, Akamai disclaims any obligation to update these statements reflect future events or circumstances.
As a reminder, we'll be referring to some non-GAAP financial metrics during today's call.
A detailed reconciliation of GAAP and non-GAAP metrics can be found in of the financial portion of the Investor Relations section of alcohol Akamai Dot com.
With that let me turn the call over to Tom.
Thanks, Tom and thank you all for joining US today I'm pleased to report the Akamai achieved excellent results from the second quarter.
Revenue was $795 million up 13% year over year end up 14% in constant currency non-GAAP operating margin was 32%.
Three points over Q2 of last year, and non-GAAP EPS was a dollar and 38 cents per diluted share up 29% year over year end up 30% in constant currency.
He's very strong results were driven by a continuation of the high traffic levels. We've seen since the onset of the pandemic very strong demand for our cloud security solutions and by our ongoing focus on operational efficiency.
Welcome I was founded with a big enough, enabling the internet to scale, so that it could support millions of enterprises and billions of people everywhere.
Our mission has been to make all digital experiences.
I asked reliable and secure a mission that is especially important now I missed a devastating pandemic.
In our 22 your history as a company there's never been a time when optimize importance and value daily life, it's been more evident.
Due to the incredible work of our highly talented employees. We believed that our company has become an indispensable part of the Internet supporting remote were home Entertainment E learning online banking home deliveries logistics security systems and commercial transactions have all kinds.
Billions of people around the world is they cope with a pandemic.
The OCC in my intelligent edge platform has grown to include over 300000 servers in over 4000 locations and nearly 1500 network partners at the edge of the Internet.
Yes, it's where the end users are in where the content and applications need to be the edge is where connected devices and the internet of things are located where fiveg networks will become pervasive and increasingly we're security needs to be the stock. The many distributed attacks we size and sophistic.
Hey should continue to increase.
4000 locations spanning 100 at 35 countries is a powerful offering for global customers and goes far beyond that appointments of other cdns. Even if you would have somehow put them all together.
Our unique edge platform has provided enormous capacity to meet the unprecedented demand due to the impact of the pandemic. The launch of several low T T services and the release of numerous electronic games.
Traffic on the OCC My platform exceeded 100 Terabits per second every day in the second quarter.
That's a lot of traffic.
Of course, many cdns claim to have lots of capacity, but none get close to occupy when it comes to the actual delivery of contact.
As a result of our unparalleled scale and industry, leading performance reliability mock am I getting traffic share in Q2 on both an overall basis and at several of the world's largest media companies.
Combined now works with more than 220 of the world's largest OTI t. and broadcasting companies as well as with 24 of the world's 25, most popular video game publishers.
The enormous capacity of our unique edge platform has also enabled OCC might hit a fan the world's most important enterprises against the world's largest and most sophisticated attacks.
The size and sophistication of attacks has risen dramatically since the pandemic began a threat actors take advantage of the distraction and vulnerabilities created by employees working remotely.
Data from our enterprise Threatprotect or service shows that employee visits to sites with malware rose nearly fivefold in Q2, and just last month, we defend that a major bank and a major internet service provider against two of the largest attacks ever seen.
In Q2, we released our new and highly innovative aka my page integrity manager, which is designed to protect websites and end users from malware infected content that resides on third party sites.
Nearly half of the content on a typical website originates from third parties and attackers are embedded malware and this content to steal users credit cards and other personal data.
Page integrity manager provides visibility and intelligence to help organization stay ahead of this rapidly growing attack.
And it has received strong positive feedback from early adopters.
Well over 2000 customers, who use our web application firewall products are perfect candidates for this new solution.
That's good login credentials as another growing problem the customers increasingly seek our health and stopping.
We block to more than 53 billion credential abuse attempts last quarter more than four times that number we saw in Q2 of last year.
This increase is one reason why are bot manager service is now use by more than 600 of the world's major enterprises.
Overall Q2 revenue from our cloud security solutions grew by 28% year over year in constant currency and achieved a billion dollar run rate on an annualized basis.
This is an important milestone that spread reach by only a handful of cyber security businesses.
Our cloud security solutions are now relied upon by thousands of enterprises, including 30 of the world's top 35 banks 17 of the world's top 20 E. Commerce sites eight of the world's top 10 asset managers and the majority of the world's largest airlines hotels insurance firms.
In consumer goods companies.
The strong demand we saw in Q2 for our security and media services more than offset the reduced revenue growth. We saw from sectors of the economy that had been hit hardest by the pandemic.
Namely travel hospitality and brick and mortar retail.
And we've been successful in working with all customers and verticals to help them navigate through the disruption caused by the pandemic.
That's one of many reasons why aka my customer loyalty has remained very high and that our churn rate in the quarter stayed below 1% of annualized revenue.
As we've grown our business over the last several years, we've worked hard to improve our operating efficiency and profitability.
As a result, we were especially pleased to see our operating margins exceeded our target of 30% in Q2.
And also to see our non-GAAP earnings per share reach a dollar and 38 cents, where the double what we achieved three years ago.
Our profitability and cash generation is important because it gives us the financial firepower to continue to invest in innovation network capacity go to market capabilities and world class talent to fuel our future growth.
Before turning the call over to add I want to thank our nearly 8000 employees for their very hard work on behalf of our many customers and the billions of the internet users around the world.
Spiked a pandemic aka my employees have continued their can do attitude and customer first mindset, enabling our platform to manage more traffic more web transactions and more cyber attacks than ever before their creativity teamwork and tenacity are key to what makes aka myself for unique and strong company.
Okay.
Now I'll turn the call over to add for more on Q2, and our outlook for the second half.
Ed.
Thank you Tom [laughter] today and to review our exceptional Q2 results.
Discuss the impact covert 19 is having on our business you provide guidance for Q3 and the full year.
As Tom mentioned, we delivered a great quarter on both the top and bottom line.
Q2 revenue.
$795 million up 13% year over year or 14% in constant currency.
Driven by extremely robust traffic growth in media and another quarter very strong results from our cloud security solutions.
Revenue from our median carrier division was $390 million.
19% year over year and 20% in constant currency.
The outstanding performance of our media in carrier Division was a result, a very strong traffic growth.
Teachey video gaming software downloads.
This was a continuation of elevated traffic we saw in late March a shelter in place orders were issue in most countries around the world.
Revenue from our Internet platform customers was $51 million up 10% over Q2 of last year.
Revenue from our web division was $404 million up 7% year over year and 8% in constant currency.
Revenue growth from web customers was driven once again by security.
Revenue from our cloud security solutions totaled $259 million up 27% year over year and 28% in constant currency.
Cloud security revenue represented 33% total revenue in the quarter compared to 29% in the same quarter a year ago.
It is worth noting that approximately $7 million of security revenue in Q2 came from one time license sales to several carrier customers and we do not expect to see license sales at this level in Q3.
Moving onto revenue by geography.
International revenue was $351 million up 22% year over year were 24% in constant currency.
We're very pleased with our strong international performance, especially in a PJ in Latin America.
Foreign exchange fluctuations cutting negative 3 million dollar impact to revenue on a sequential basis and heading negative 8 million dollar impact on a year over year basis.
Sales in our international markets represented 44% of total revenue in Q2.
Three points from Q2, 2019, and consistent with Q1 levels.
Revenue from our U.S. market was $444 million.
6% year over year.
Moving now the costs cash gross margin was 77% consistent with Q1 levels.
GAAP gross margin, which includes both depreciation and stock based compensation was 65% also consistent with Q1 levels.
Non-GAAP cash operating expenses for $253 million inline with expectations.
Adjusted EBITDA was $355 million up $29 million from Q1 and up $63 million were 21% from Q2 2019.
Our adjusted EBITDA margin was 45% of two points from Q1 and up three points from Q2 2019.
Non-GAAP operating income was $258 million up $29 million from Q1 levels not $54 million for 26% from the same period last year.
Non-GAAP operating margin was 32% two points from Q1 levels and up three points from Q2 of last year.
Capital expenditures in Q2, excluding equity compensation and capitalized interest were $196 million inline with our guidance range as we begin to catch up on supply chain and travel disruptions that impacted our network build out in Q1.
Moving on to earnings GAAP net income for the second quarter was $162 million were 98 cents.
Earnings per diluted share.
Non-GAAP net income was $227 million were $1.30 age sense of earnings per diluted share up 29% year over year.
30% in constant currency, it's 14 cents above the high end of our guidance range.
Q2 results really demonstrated the leverage of our platform and operating model.
Taxes included in our non-GAAP earnings were $38 million based on the Q2 effective tax rate of approximately 14%.
Now I'll turn to some balance sheet items, we continue to believe that our balance sheet is very strong as of June thirtyth, our cash cash equivalents and marketable securities totaled $2.4 billion. During the second quarter, we spent $27 million to repurchase shares buying back approximately.
Her thousand shares.
We have approximately $658 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.
In summary, we're very pleased with our performance in the second quarter.
And before I turn to our Q3 and full year guidance I wanted to provide you an update on some of the things I discussed last quarter regarding cobot 19.
On our last call.
I shared with you details about what verticals that were most impacted by the pandemic during the first quarter, specifically travel and hospitality and commerce in retail.
As you would expect.
Our customers when the travel within the travel and hospitality vertical continued to be challenged in Q2.
Although some retail customers experienced notable increases in E commerce activity.
The uptick was tempered in some cases by bankruptcy and continued disruption to those customers that have a heavier reliance on brick and mortar.
Many global brands and both of these vertical rely heavily on a combined.
We plan to continue to work closely with them because they cope with near term financial pressures and look beyond into a post cobot 19 world.
As a result, Q2 was negative impacted by approximately $14 million related to a combination of contract restructurings and elevated bad debt reserves. This impact was inline with our expectations.
I'd now like to provide our outlook for Q3 and for full year 2020.
For Q3, we are projecting revenue in the range of 760 $785 million were up 7% to 11% in constant currency over Q3 2019.
The sequential decline in revenue embedded in our Q3 guidance reflects three items first we expect a recent actions taken in India to ban 59, Chinese based web applications.
We will negatively impact Q3 revenue by approximately $15 million sequentially.
We delivered traffic for approximately 30 of those applications in the second quarter.
Our guidance assumes a ban will remain in place for the balance of 2020.
Second.
We expect to see our typical seasonal summer traffic moderation as people begin to spend more time upside and away from their devices.
And third.
We expect to Internet platform customer revenue to decline by approximately $4 million to $5 million in Q3, primarily due to two of our largest platform customers renewing at new pricing levels in June.
The current spot rates foreign exchange is expected to have a positive 6 million dollar impact on Q3 revenue compared to Q2 levels and no impact on a year over year basis.
But these revenue levels, we expect cash gross margins of approximately 76%.
Q3, non-GAAP operating expenses are projected to be $249 million to $260 million up slightly from Q2 levels.
Factoring in the cash gross margin in operating expense expectations I just provided we anticipate Q3 EBITDA margins of approximately 43%.
Moving now to depreciation we expect non-GAAP depreciation expense to be between $99 million to $101 million.
We expect non-GAAP operating margin of approximately 30% for Q3.
Moving onto Capex, we expect to spend approximately $193 million to $203 million, excluding equity compensation in the third quarter.
And with the overall revenue and spend configuration I just outlined we expect Q3 non-GAAP EPS in the range of $1.20 cents to $1.24 cents were up 8% to 12% in constant currency.
The Cps guidance assumes taxes of approximately $34 million to $35 million based on an estimated quarterly non-GAAP tax rate of approximately 15%. It also reflects a fully diluted share count of approximately 164 million shares.
Moving onto annual guidance.
With increased visibility to Q3, and the remainder of the year I'm very pleased to reinstate guidance for the full year 2020.
Well our ranges are a bit wider than usual, we wanted to be as transparent as possible about how we see the remainder of the year shaping up.
We currently expect revenue of 3.1 to $5 billion to $3.175 billion, which assumes our security business contributes more than $1 billion.
Adjusted EBITDA margins of approximately 43%.
Non-GAAP operating margins of 30% to 31%.
Non-GAAP earnings per diluted share of $5 in two cents to $5 from 12 cents. This represents year over year growth of 12% to 14%.
This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 15% they fully diluted share count of approximately 164 million shares.
Finally, full year Capex is expected to be 22% to 23% revenue.
In summary, we continue to be very pleased with the performance of our business. We believe our excellent Q2 results demonstrated the profitability of our business model and scalability of our platform a revenue diversification deep enterprise customer relationships in our strong balance sheet and cash flow.
Thank you, Tom and I'd be happy to take your questions operator.
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Ladies and gentlemen can like after question. Please press Star then one when you touched on telephone.
Again, if you like asked the question. Please press Star then one.
One moment please.
Our first question comes from James Breen William Blair. Your line is okay.
Great. Thanks for taking my questions.
Just a couple on the customer side, you talked about the couple of renewals this quarter.
You can you just give us a little bit of color as to how those contracts work going forward then or is there any other anticipated renewals in the back half of the year and then just commentary around the security side obviously its.
Large business and a continued seem to continue to grow in the high 20% range.
I think a lot of us and it's been something lower 20% of beginning the year. So you can you talk about some of the products there maybe some of the new products in driving it and then just give a little more color in the overall picture. Thanks.
Hey, Jim This is Ed I'll take the first one and then Tom you can take the second one so in terms of the renewals.
Terms, a major renewals for the back half of the year I don't we don't expect anything large for the Internet platform customers that are there there will be no more renewals this year and in terms of the contracts pretty standard.
The good news I guess is a couple of them are no longer term nature not all of it we will have some renewals next year, but very pleased with how those contracts turned up Tom.
Hi, Yes, the revenue and security was driven by our flagship services Kona site defender.
Which provides web application firewall capabilities stops the attackers from taking over a website or corrupting it or stealing data.
Prolexic denial of service capabilities that stops the big attacks.
You have bot manager doing extremely well and that keeps adversaries from taking over accounts.
You know from stealing a customer information.
We also very strong security services business and those folks have been very busy as you could imagine with major I T shops, now trying support remote work and work from home on a sudden basis, where they really need security help closely related but a smaller business is our enterprise.
Security offerings, we do have new capabilities. There, we now have a secure web gateway.
That's available and coming up later this year multifactor authentication.
We also have a new service I talked about called page integrity manager and this award so one of the latest attack vectors, it's becoming pretty ramp it out there where the adversary puts malware into a third party side or third party code that's used by the primary site.
And what happens there is the the user comes to the main site and the main site links to third parties for their apps and other things that are useful usually and the browser follows those links and before you know what the browser is getting malware from one of those third party sites not malwares.
Designed to cause the browser to give up the users personal information like their credit card in some very famous breaches their resulting in large fines and page integrity manager stops that.
And notifies, our customer that they've got a problem in terms of where their linking their third party content also way back in my identity cloud.
Which provides capabilities around the user and their profile in history, making sure that user data stays safe and compliant with local regulations. So really a lot going on in our security business and we're seeing very strong growth there obviously.
Great. Thank you.
Thank you.
Our next question comes from Brad Zelnick of Credit Suisse. Your line is open.
Great. Thank you so much and congrats on all the success Tom I wanted to ask you about the edge computing opportunity there. There's a lot of buzz out there around the edge in and what somebody use I'd be curious to hear just from you. What are some of the use cases that convince you it's very real over what time line does it.
Materialize and how is aka my position to win in capturing this.
Yeah, we're the largest provider of edge computing services by far.
We have been doing it for close to 20 years and the idea that this is how somehow something new is just not true up you know it's most of our customers are using our edge computing capabilities for a variety of applications to.
AB testing for how users like their side.
To do things locally about what content actually gets delivered to the user what adds get delivered to the user.
Keeping track of how a user goes through a a site.
No the security.
Services use extensive compute power at the edge.
You know, we don't break it out as a separate revenue item, but if you use the definitions we see that you know a lot of folks in the analyst Committee or community are using I would say already Oh, it's over a 2 billion dollar business for US you know, we don't report it that way.
But most of our customers are using the computing in some form or another and also when it comes to edge. I think this is really important you know we've been talking about the edge in the importance of being at the edge really for again 20 years and recently, it's become popular as a buzz word and that's because the I just really.
The important but to be at the edge that means you got to be in thousands of places close to the users really clubs and words 4000 points of presence now.
You know the a lot of the other cdns, who talk about doing edge computing, maybe they're in a couple of doesn't cloud core datacenters, which is really not the edge. In fact, you can take probably well maybe even all of our CDN competitors, putting together and they don't get anywhere close to the edge presence that.
That aka my hats.
What's the future beds computing I think it's you know very large.
You look at Fiveg coming and that's going to utilize a lot of.
Capabilities it at the edge.
You know with Fiveg, you get a lot more devices connected aiotv becomes much more possible you have much lower the late season, the last mile and then that means it's even more important you do you know the computed delivery from the last mile. If you've got a huge latency in the last mile. Okay. The latency you introduce going from the edge the cores.
Not as bad, but you really now it becomes noticeable with Fiveg also you have a lot more bandwidth to fiveg. So I think that's an important driver a future revenue for Akamai also with key we already have and Aiotv edge connect platform that are customers are using its unique among cdns.
It uses different protocols.
Not a CTP by and large which is what powers a lot of the web today, but MQ TT. It uses the pub sub model, which is a whole different communication paradigm thats a lot more efficient.
And again uses not only computer at the edge, but you know data stores at the edge you know key value pairs and.
Databases at the edge and optimizing unique position to provide that but again I just want to be really clear edge computing is not a new phenomenon. It's Scott recent because you know with a couple of Ipos on the street, but we've been doing that at scale for a long long time.
Thank you so much time, that's it for me and congrats again.
Thank you.
Thank you. Our next question conference thoroughly Aki of JP Morgan Your line is open.
Yes, Thanks, Hi, guys. So as you kind of give us a couple the parameters that will impact you know Q3, but as I think about the full year guidance, how do you layered in perhaps some of the positive impacts that we would see from a more full roll out some of the new OTI T. solutions as well as the presidential election.
Hey, certainly thanks for question, so I'll start with the presidential election, I'd say this year coming into the year, we're expecting probably a bit more room that bust.
You know debate scheduled or a lot of competitors going out to the democratic seat that sort of ended quickly. So I'd say, it's probably going to be a bit more muted. This year, just because there I think there's only three debate scheduled is not.
As much.
Activity as I would've expected at this time, so nothing nothing outside of you know a little bit of revenue associated with that so nothing really significant on the OTI to launch is obviously, we just had one go a couple of weeks ago still early days. Another one go in May so still pretty early there.
I think we've got you saw the.
This the media revenue, obviously very very strong expect to see another strong quarter. Despite the fact that I talked a bit about dynamics in Q3 and for the rest of the year with those.
Applications in India being banned but.
There were seeing good growth, there and expect that to continue into the balance of the year.
All right Great and then one follow up how should we take about the contract restructurings.
Maybe in particular.
Gives me into the E commerce vertical in the back half of the year, maybe in light of question I'm getting a lot right now is.
Probably not a lot of foot traffic going to the malls could we be set up for just a massive E. Commerce holiday season, this year and traditionally that's been a big benefit for Akamai.
Yes. Good question. So you can imagine there's there's an awful lot of debate internally on that.
What I would say with contract restructurings I mentioned that we had about a 14 million dollar.
Headwind here in Q2 Q2.
Most of that was in travel retail we did see about 10 bankruptcies roughly this quarter.
And you know you look at the economic data. It's it's mix do you know there are some some numbers that are doing better than others. So as we go and look at the Q4, you've seen we'd given quite a wide range and if you do some math on the on kind of mid points.
No. It's kind of suggests a bit softer than we saw last year, maybe if we go to the high end it could be a bit better, but it's still tougher to call I will say no when I talked about the web vertical or what division excuse me last quarter expected to be flat to down a bit quite it a little bit better than I expected in Q2, mainly.
As we've seen a lot of our customers both in retail and travel be able to access the capital markets and stabilize their business is a bit but I still think it's going to be pretty rocky going into Q4, as we get into the fall season, who knows what happens with depend dynamic, but you know the thesis is correct. There's not a lot of people going to the stores you could see a lot of online retail.
Activity, we see a bit of a kind of a mixed bag. We see some that are doing much better than expected.
Terms, you traffic growth and others that are kind of in line and you've got some that are still struggling with just their legacy business and you know and financial difficulties. So we'll see but that's why we provided a wide range of is a couple of different ways. So different outcomes. It could happen here in Q4.
Got it thank you.
Thank you our next question cough and cold.
Oh Cowen your line is open.
Great. Thank you two questions. If I may I guess for AD I just wanted to follow up on on Jim's question regarding security and time appreciate the various sub segments that you are that she broke out can you help us system bucket or from a revenue perspective, some of the bigger drivers maybe either in dollars or percentage as we start to focus.
One of the security business I think it'd be helpful. Just to give more color on and where the revenue is actually coming from and then secondly that generally done any tuck in M&A. In some time is that's just a function of the disconnect with valuations or is it something out and trying to get a sense. If we should expect to see that kind of start to come.
I'm back into the fold maybe the next few quarters. Thank you.
Yes, sure so as far security goes I think it's a bit more at the same we saw strength with Kona site defender. That's our obviously our largest products and drives the most most revenue we're starting to see a nice uptick in prolexic.
It was a good could surprise for the quarter bought man continues to be probably our fastest growing.
Product security services are growing along pretty well, so it's really sort of strength across the board I think as I look into the future Tom talked a bit about page integrity. That's a product that we're really excited about if you think about the.
KSD base as really.
Good customer base to go and upsell that we're hoping that that has very similar characteristics about NIM, which is a nice addition onto.
To Kona site defender and.
Augment got to 100 million pretty quickly hopefully we can see the same with.
Page integrity.
Those calling in for example, the L., 50% of revenue that 60% of revenue on the security business any color there.
So we haven't broken it out yet it I'd say it is the largest percentage because for products over 100 million.
No that it's over 50%, but it's probably could probably close to that that's reasonable proxy.
And on the M&A question.
Were continuing our efforts there are the same pace is always a but we're also very disciplined buyers and when you're in the midst of a pandemic. It is a little harder.
Chicken dock diligence and if we were to close an acquisition, maybe a little harder to integrate it with the travel restrictions we have now so probably that's a damper and.
No I wouldn't say, there's huge bargains that have been created as a result of the pandemic at least not yet and we're very careful about what we buy to make sure. It makes good financial sense, but we're continuing with our efforts their full speed ahead.
Great. Thank you.
Thank you next question comes from Keith Weiss of Morgan Stanley Your laptop.
Hi, This is Josh bound for Keith just wondering if there's any way to quantify the benefit to Opex in Q2, and maybe in Q3 from.
More limited travel entertainment and expenses related to covert and then more broadly as it relates to margins how should investors think about margin expansion in the years to calm beyond the 30% to 31% for this year.
Yes, sure I'll take the first part.
So a few words on the second part maybe Tom you can chime in on that as well.
In terms of the travel so not a huge spin expenditure for us use a couple of million dollars a month. So we did see obviously a lot less travel this quarter, we'll see a little bit in Q3.
So not not a huge amount of savings there, but that did that help operating margins I think what really benefited the operating margin line was obviously extremely strong traffic.
Running the network at probably hotter than we'd like that's why you see us building out a lot more capex the network perform fantastically well, but you do want to make sure that you've got.
A lot more capacity to be able to handle big spikes and take advantage of opportunities when other competitors may have some struggles.
It's good to have a you know that extra capacity, but when you do run the network. How do you do see the drop to the operating operating line in terms of margins you know.
We've said in the past that we plan on operating a 30% want to continue to make investments in the business you saw we added.
400 adds this quarter and in the areas of research and development product and go to market. We think there's still a lot a lot of room for growth here. So we want to make sure we balance that appropriately.
Got it thanks.
Thank you.
Our next question comes from team, Chris Hi, profoundly along with us.
Well.
I appreciate the added color this quarter I just have won its on on the web proxy, it's been an fade and Ben freely available through some customers out there given your goodwill.
Why not accelerate the monetization of the product and accelerate the investments in the enterprise security to really step on the gas on that saw high profile area.
Well, yeah, we are working very hard in terms of both product delivery.
And with the sales effort and you know we were very pleased to see a substantially increased bookings. So far this year and a very much would like to continue to accelerate the penetration in that business.
Thanks.
Thank you our next question cost well power back.
Okay, great. Thanks, Let me up a couple of surgeons about 30 quickly.
Second the here I Wonder if you could just comment broadly on what's you're seeing on in terms of enterprise sales cycles broader pipeline are you continue to see that fits from co bid or are you starting to see any potential headwinds due to economic pressures of the and then and then my second question.
Just coming back to the media is there anyway to kind of help break apart the sources of upside there, obviously really strong results in.
Our core outliers between video gaming et cetera.
Yeah. This is Tom I'll take the first question.
I would say, it's a mixed bag we've covered on the one hand, a there is a much greater need for our security products, not just enterprise products with remote workforces, but pretty much all the security products because the attack.
Volumes and vectors of increase so much with a threat actors trying to take advantage of the situation. So that's a good tailwind in.
I think you saw the benefit of that so far this year on other hand, you know sales are a little harder because you can't visit customers everything is remote now now that said I think our teams have done a very good job adapting.
Virtual conferences and meetings and.
So I think we're dealing with that situation very well on balance I think we're in a much stronger position with our security offers in terms of the customers need for our products and I think it'll take the question on media upside.
Yes, so the good news it was really strength across a number of Arizona I'll dig into a couple of for you I would say one area in particular that stands out in my mind is gaming.
You know we saw on gaming activity and so a lot of major publishers, you know do some smart things, including running some some promotions to.
Promote their their games and offered.
Corrective incentives for folks to leverage their their portfolio.
During the time that you've got people locked up in a pandemic. So we saw not only just more robust game release quarter. You just saw us from really smart things by the game publishers and that drove a tremendous amount of traffic. So that was an area of particular strength and then obviously no surprise video.
The video from a lot of the existing provider some of the new will providers added as well that was strength pretty much across the board. It was you know both here in the U.S. and internationally.
Internet platforms, obviously provided some nice upside for the quarter. That's been a theme we've talked about a lot noted kind of been in that stabilization in the 40 45 million range and every once in a while we get some upside.
From those customers as well and then also social media. We saw you know we carry no a number of social media platforms and.
It's not much of a surprise if people are locked up in their homes and not traveling and going out to dinner and things like that spending more time online, including social media. So the good news is pretty much across the game, but if I did point out one thing in particular jumped out to be gaming.
Okay. That's great. Thank you.
Okay.
Thank you. Our next question comes from Heather Bellini of Goldman rationalize though.
Hi, This is Caroline on for Heather. Thank you got for taking my question. My first one is really just on the security business. I was wondering if you could give more color on what is the split between.
New business on the existing customers versus like a completely new Michael Turits and then if you are new news to optimize our opportunity to up sell.
CDN and other products Q.
To that security and I have a quick follow.
Sure no problem so.
Obviously, our business being a recurring revenue business you don't get a ton of revenue right off of that you signed up a new customers. So the majority of the business does come from existing customer base right now about 59% of our customers.
By a security product, which is up.
Couple of points from from last quarter.
And then you know about 31% of core customer bases buying more than one security products. So that's going to be a theme in terms of future growth that whether it's your AD you buy Kona site defender, you're adding page integrity or bought management or security services. So I'd say for the near for the certainly for the near term.
Being most of our growth coming from existing customers is where we're going to see the majority of the growth is no customers take on more security products and then as far as when you sign up as a new customer we do tend to sell a lot of protect and perform bundle. So it's not not unusual to see somebody come in.
As both a security customer and as a.
As a CDN customer, but throughout our history. If you look at you know our strategy has always been to focus on.
The largest web property properties largest banks largest.
Travel.
Retail customers et cetera, and to grow those accounts overtime.
We talk about how we work with some of our customers that have been challenged with.
David and restructuring contracts and offering some financial assistance that will pay off in the long run and that's always been our strategy. So.
Our focus on.
Acquiring new customers that have a lot of growth opportunity will Israel has paid off over the last 20 years most.
And can continue to focus.
Got any tonight.
Sorry go ahead.
But you had a second question.
Oh, yes, so the other one is to sign.
Can you talk about higher continuing to drive.
Share gains.
Well I remember you also said that as well so I'm kind of curious like what exactly is.
Kind of enabling you to gain more share shared traffic is there something on the you know the competitors or more so your guidance during the product innovation side.
Yeah, I assume there's probably three key areas. The first one is around performance so what a lot of.
The OTI providers or really any large scale media customer will do is still have their own settled performance metrics and you know her pretty much now most.
Large providers of media content will split with Cdns and usually it's the one with the best quality wins.
Pricing is pretty efficient in the market. So it's not as much about price anymore kaizens that you'll see that but it's really about performance. That's one thing I'd say the other thing is around.
The a.
Capacity that you have outside of the U.S. in particular, we tend to do much better.
In places that are harder to deliver.
And then I'd say the last thing is just having.
Scale is another area that.
Depending on the type of application you can see real big peak demands, whether that's in gaming or provide sporting events and such like so having capacity in the right places the best performance and having the scale is really what drives the to share gains.
Got it thank you so much.
Thank you.
Our next question comes from I met Daryanani of Evercore. Your line is open.
Thanks for taking my question guys I have up to as well.
First off I guess, when I think about the revenue performance this quarter on the CDN sites, especially I'm curious did you see in normal drop off in them and pot and usage patterns in the month of June this summer season kicked off.
I think that probably because given the fact the CHMP the in place remains broadly across the globe.
Do you think that Q3 could not see a seasonal drop because we're all unlimited and not able to travel at this point.
Yes, you do start to see a little bit of of traffic not accelerating as much I would say probably the best way to put it coming into the pandemic.
Something like that really accelerates a trend. So you saw a lot more internet users now adopting commerce adopting.
Watching video online cord cutting et cetera. So we saw a nice fall from from coated in.
In the pandemic and we've seen that sustain.
I'd say traffic was elevated probably longer than we had expected you will never been through one of these so it's it's hard to always call it but in terms of normal seasonality.
I would expect to see as the summer months come on we do expect to see traffic.
Certainly not grow as quickly as we saw the last quarter, but that's still be strong, but I would expect some seasonality that's reflected in our guide.
Got it if I was just follow up how do you think about security business performing in the back of the year relative to the topline expectations of given up especially some of the comments. We just had on the new customer part of the equation that here.
Yes, sure. So one thing I did call out on the call was that we had some license revenue. We do sell every quarter couple of million dollars of license in some of our dominant products to our carrier business, our target customers excuse me and this quarter in particular was a bit unusual just that we had.
No thats sort of performance I talk about 7 million in the quarter typically you see that purchase behavior in the left back half the here in Q4, its little bit unusual to see that in.
Q2, or Q3, so just wanted to call that out it's something we want to take into consideration and also as you look at sort of year over year growth rates Q4 of last year, we had an.
Massive sequential growth quarter over quarter, I think we're up about 22 million sequentially. So you know just kind of keep that in mind is your as you're doing your modeling to think about kind of your year over year growth, we talked about being over a billion.
At the beginning of the year, we gave guidance that we talked about doing a billion.
Revenue in security. So this implies sort of low 20% growth rate, which is better than we had.
But to coming into the year, and then again as far as new customers a concern when you've got to face this big.
The revenue growth is going to be is going to come from that.
But.
That existing customer base, and we continue to add new customers every quarter, but we'll make a material impact on the year that happens overtime so as the.
Continue to add customers over time, it'll it'll be more of a.
More of an impact on the overall growth, but it's going to be the existing customers and really drive the growth.
Thank you very much.
Thank you next question comes from Mark Mahaney of RBC. Your line is open.
Okay. Thanks, two questions then.
Sports has been I guess the non event what are you assuming what is a reasonable assumption for.
What kind of traffic you could get from sports and I guess, you've had such strong traffic.
The last couple of months, because we've all been at home, but without sports and so as sports no hopefully it comes back and you know MLB NHL et cetera.
[noise], how material could that be like what if we just learned over the last couple of months you can have really strong traffic growth without new sports at all and then the other thing I wanted to ask as you talked about these apps band in.
In India.
One of those apps could be band in the U.S. would that be similarly material event for you if that app would it be band in the U.S. Thank you.
Hey, Mark yes, thanks to the questions I'll take the second one first and I'll talk about sports right. After so the way to think about.
You asked if the U.S., but to do something very similar to what happened in India.
You know the number of Internet users in India is much greater than the U.S.. It's about three times. The overall population. So you'll have fewer users assuming kind of like for like and then also we tend to have a bit more competition in the U.S., we tend to get outsize share in India.
So I would not expected to be as material will be.
An impact we do for those 30 out that I talked about we deliver traffic here in the U.S., but it would not be as material.
In terms of sports so yes, right, we didnt really havent had much sports we had a little bit of the Premier League in the boom. This Liga over in Europe, One thing I was looking for ways to see.
We see a much different traffic profile now that you don't have spends in the stands.
And while we have a limited subset we got a couple of weeks now of major week of Major League Baseball and couple of Soccer League. We haven't seen anything that suggests that the traffic patterns are materially different I'd say, it's probably more normal when inline with what I wouldn't normally expect so.
Early snow, we've got NHL and NBA kicking off here at the end of the weak and then hopefully the NFL coming on and Champions League and IPO and a bunch of other things.
No I talk to the last call that for US sports in general is a little over a percent of our revenue.
Now if you get that all in a concentrated period of time that could.
Some decent revenue.
Still like I said early days to see how to behavior changes you know I've watched the number of baseball games and seeing it without fans is not as exciting personally but.
Hopefully it continues to.
Drive a lot of folks to watch online, but I think about it and that sort of person is about you know over the course of a year a little over a percent of revenue comes from live sports.
Currently the bigger ones being.
Well Champions League IPO somebody other sports not not quite as big.
Okay. Thanks, a lot it.
Okay.
Thank you.
A question constant Tim Horan Oppenheimer. Your line is open.
Thanks, guys like Tom back to the edge.
In the past I think you were little skeptical about being able to kind of gaming as a cloud service just because of the cost of the compute and the latency.
Maybe just any more updates on what you're seeing from you all from that perspective, and maybe any other applications that you think are perfect for your infrastructure that's already in place.
That that are new and more edge base.
Yeah, I don't think there's any change on the gaming landscape if anything.
I think you know the thesis that it is.
Less efficient to do all the compute.
In the cloud probably getting proved out companies have been working on that for over a decade.
Now, we do a lot of business with the gaming companies.
Our go to player for them to distribute software and there are things that we can do to optimize the performance.
You know as well, but I think doing all the computing the cloud.
It's not as efficient just economically.
You know with edge computing applications.
Pretty much all of our customers applications that run on OCC lumiere doing some kinds of commute compute.
Personalization the selection of the content that goes.
To the end user the format. It goes and you know the images, which image goes it depends on the device the connectivity in the last mile all optimize for performance.
So it's it's pervasive today I would say edge.
Computing on our platform, which is the reason why we don't you know separated out I don't think you can.
And also on the security side, we are inspecting the details of every single request that comes in and also the content that goes back out you know, we're placing software on the client for all sorts of purposes. Most recently for page integrity manager you know as you go to oil.
Web site that is protected by page integrity manager, we have our script down that client itself that is looking at everything the browsers being asked to do to see you know for example is it being asked to access your credit card or stuff that we believe is.
Personal information and send it to a place that we think as bad and I can't tell you how much we've already discovered is going on out there. So I would say edge computing is just pervasive today.
And the edge being our edge servers, and 4000 location, which is the real edge and also on the client we're doing a lot of computing, there as well and I do think that as the future and you know is you have richer applications. There's more use of that I think the big opportunity.
Going forward is in the Io T Arena, I think fiveg helps to enable that and as I mentioned before that's a whole different paradigm uses different protocols.
And different structures like the pub sub model and data stores and again being at the edge helps a lot to reduced latency is there.
Edge computing is not a new phenomenon.
I think thats really important to understand.
Just a quick follow up on security Ed I'm, assuming the vast vast majority security revenue is kind of recurring.
Or not usage based purchase any clarification, there and can you give us some color how does it compared your gross margins of security versus your consolidated gross margins. Thank you.
Yes, sure. So I'd say the majority is recurring there as we as I talked about we do some bundling. So you have a bundle of protecting perform so that can drive a little bit of variability and use it sometimes you see that kind of play out in Q4 to Q1, but the majority is recurring in nature.
And then your second question was on gross margins, yes. So.
The gross margin on security would be would be greater than what you would typically see on.
And it's an interesting debate right because you're using the same servers that are delivering a video to one all might be blocking and attack from another home.
And you know, it's just kind of shows the power of the model them and leverage that we have that.
As we build out this edge, we can build on new capabilities on top and those incremental capabilities have much higher incremental gross margin and security certainly falls into that category.
Thank you.
Thank you.
Our next question comes from receipts are learning as D.A. Davidson Your line is open.
Hi, guys. This is Hana Rudolph on Furbishing. Thanks for taking my question I'm just one for me here can you talk about how your customer conversations, especially around enterprise security solutions have shifted from when you last talk this three months ago, especially organizations like Navy moved out a tree is not at this point and our thinking more about medium and long term planning.
Yeah, I think at a high level the conversations are very similar.
But with much more urgency in some cases I am just give you an anecdote with.
A conversation with as CEO of a very large company and.
The CEO was.
Happy and worried about how quickly his IP team had enable the workforce to be remote and he was happy because within a week or the entire workforce was rolled out because basically a shelter in place rules are put in place on the other hendi was worried because you'd always wanted to remote.
Workforce, but was always told by his Chief Security Officer would take two years to make it be secure and all of a sudden workforces remote in a week and that led to a really good conversation about okay. How can we really secure at for them.
That's where our enterprise application access product and our zero Trust suite of solutions really makes a big difference.
It is it's a service on our platform. It does it security at the application layer not a network layer. So never mind, the pandemic and remote work is just a lot more secure to start with but now you're in a position. We're very quickly we can enable them to have security.
For a remote workforce that employees can only access apps that they're allowed to and even then the employee device can't directly touched the after the data. It just touches on US and were scouring every communication to make sure that malware isn't being spread and that.
Data is not being actionable traded and of course, that's not possible.
Traditional approach. So I think you know the kogan situation with remote work has certainly.
You know enhance the interest in EA.
The attacks rising in general have enhanced interest in OCC in my security solutions and of course, you're right that Theres a lot of scrambling going on out there and so he is a little more complicated in terms of up the sales process, but on balance I would say we're doing better.
Than we expected and you know on balance there is more tailwinds associated with.
The pandemic for our business because customers need our help even more than before.
Great Super helpful. Thank you.
Thank you. Our next question constantly crowd of B. Riley FBR. Your line is open.
Great. Thanks for taking my questions and congrats on a very solid quarter two questions first on the impact of the Indian App band.
You quantified the impact a little a little bit more detail I'm curious if that makes an assumption for a backfill from apps.
At our still available to consumers.
As an offset or is that just a complete loss business and then secondly.
Can you just maybe talk about Capex leverage I assume as we start to lap some of these OTI t. launches from a year over year perspective is there an ability to see leverage now that you've built in some of the capacity or is there a working assumption that as we continue to see proliferation of these products that capex will need to kind of.
Match the growth in traffic.
Yes, sure. So in terms of the IZEA band, we assume that there is a complete loss there obviously there's.
Lets users move to other applications to the extent that theres other options in the market, we're obviously not having conversations.
With all those customers in some cases, we were.
Some of them are customers now some of them are trying to.
To acquire.
So yeah, we're just assuming that there's really no.
Two real impact right now just because it's an unknown we haven't seen any major shift or anything like that that should sort of traffic has disappeared for lack of a better term I know this is something we've never dealt with before so we're kind of in unchartered territory. So we did is just wanted to call. It out for you guys. So you could to think about it in your models, because obviously well but.
You too gotten very very strong at above where.
Yeah. The consensus was it is a shutdown and that is a material reason why obviously if that traffic comes back that would be great I wouldn't expect it to all come back at once I think it'd be some kind of a ramp but you know to the extent that.
Other players in the market pick up some of this behavior and some of the.
The.
Various things folks are doing with those apps were going to be right, they're trying to acquire those customers and with our scale and capacity and performance we should be in great shape to get it but there's no assumption that there's a shift from one to another.
First Capex goes you know this quarter should be the high watermark for the year.
Obviously, we weren't expecting a pandemic.
You know starting off the year or common mentioned during 100 terabytes everyday of the of the quarter. Obviously, a came with a lot more revenue. So what we're doing now is just kind of retooling and building up more capacity.
Just in anticipation that there could be a second when you move of cobot here and maybe another big spikes, we want to be prepared for that when our capacity planning, we're going to assume that that traffic comes back in India, we're not making the assumption you're on the revenue side, if we're wrong will grow into it.
When I says I think about sort of a normal capex range.
Network Capex is real like focus on I know you kind of look at that headline number and I look at the software cap being sort of that's 7% to 8% range. We've got a full gross expense in the TNF R&D. So R&D running a 13, 14% of revenues about the right way to look at it I think thats, helping spend and then if you.
Look at network Capex in the 7% to 10% range is kind of.
Normal range with.
This year, obviously being closer to 14 because of the pandemic I think is part of the right way to think about it and to the extent that.
We see the opportunity for significant growth accelerated cord cutting or whatever we're going to go after it pretty aggressively.
Got it thank you for there should be too.
Thank you.
Our next question.
Van Rhee with Craig Hallum. Your line is open.
Okay.
Surged in Zero Trust bookings forgive me if I missed it but just any comfortable comment this quarter in terms of bookings on zero Trust and then the other.
Related to security as well I think you'd sort of your it goes at the managed security services was about a thousand users and a bit over 100 million in revenues any update there.
I missed the first part of the question, but I think it had to do with.
Our enterprise Zero Trust.
Solutions, and we had a very strong quarter. There we don't break out the individual numbers you know for that solution set yet, but we saw very strong growth and we're very pleased with that.
With the managed security services that you can imagine this is a time when our customers need us more than ever.
With that you have the range of attacks increasing their sophistication and now you know our customers really busy trying to figure out how to securely support our remote workforce. So.
I'm very pleased with the results there and that's continued very strong growth of our security solutions.
Thank you.
Thank you.
Our next question comes from brand NIPSCO of Keybanc capital Your line is over.
Great. Thank you for taking the questions I wanted to get you have just thoughts on the CDN business.
That business hasn't grown this fast in over five years.
Really exceeding where it has the last couple of years I guess is it your view that growth can get you sustained at these levels than seemed like it from your guidance, but.
How should we think about the target growth rate. So the CDN business over the next caller 18 to 36 months secondly.
Maybe the points dead to call the balance sheet quick asset for the company as we're hoping you can outline some of your capital allocation priorities.
And share your thoughts on.
Potentially any.
Return to capital to shareholders beyond the share repurchase program, which you guys didn't repurchase that many shares this quarter.
But hoping you can share more details thanks.
Sure I'll. Thank you Sir so just in terms of CDN business.
On several calls go we were asked the question of what it takes to get the CDN business to.
Get back to the healthy growth written like what we have today, you know I think well no. One would have predicted a pandemic would be the reason that kind of what happened I think it's sort of kind of step back behind that you think what behavior going to drive it was.
No significant adoption.
Of Internet video gaming.
Commerce online bank and just people using the Internet a lot more and I would say that to the extent that anything driving that acceleration.
If any of those trends, we stand to gain and I think the CDN business is going to always be a little bit lumpy in terms of its growth rate I don't think so the go up into the right now just given the dynamics in the business and we obviously have several verticals now that are challenged travel and hospitality and retail which has been kind of the challenge vertical for.
So while.
When you get into the high volume CDN business, you always have to deal with volume and pricing that I've been with a company for 20 years and that sort of rule has been in place since I started.
So that as companies grow volumes unit prices go down our economics work the same way.
With our vendors and the way we.
No build our network in designer technology to drive cost. So so you'll always have a little bit of lumpiness, but really what you'd have to look at is what are some of the macro trends how successful these OTI t. offerings.
What's the next.
No big trend in something like gaming you get stabilization in your retail and travel vertical.
So it's possible I think you know this was a good test case and showing that.
As possible to get back to a healthy growth rate and CDN, but there's a lot of lot of things to consider.
Different dynamics, some that are out of our control.
The other question was on capital allocation, yes. So we don't we talk about offsetting dilution we've done that in the past and overtime. If you look at our share count Opportunistically we.
No use.
Share buyback program to reduce the number of shares.
Back 2018, because the large $750 million buyback you would have any intentions of doing that at this time, but it's something that we always talk to our board about and or something that we look at but right now as I said in the prepared remarks, we're looking at just offsetting dilution.
Overtime and no we'd love to be able to find some good strategic acquisitions. We're always looking we're very disciplined buyers active shoppers.
Valuations and some of this spaces that were in the security in particular.
Started to correct that as we went into the.
Beginning of the pandemic, but they certainly.
Come out of that probably even a bit more stretched and when we went in so you know we're gonna be patient look for the right opportunity, but no M&A will certainly be an area that.
We look to utilize our capital for.
Thank you.
Operating in fact, one more call.
Thank you, let cliff comes from Alexander from Needham and company. Your line is okay.
Hey, Thanks for taking my question. This is Roger going on for Alex I. Just quick question on E commerce acknowledging that the broader retail market remains pressured but on top opportunities in that space Im just wondering to the extent actimize nickel to win new ecommerce logos and the current environment.
Then secondly, given your investments and button that patient tighter is occurrence.
Vertical value security little more than the average customer and that might be a differentiator for summer.
Yes, the first one I didnt quite catch all the second once allows you to repeat that after I said the commerce question. I think the question was does this enable us to this environment able us to acquire new customers.
Yes, sure I mean I think.
Well, it's an area, where we today work with many of the large ecommerce customers today, but certainly.
The way I look at it as companies are shifting from more brick and mortar to online one of the conversations we're having with our customers is about that shift and what else whatever products that they need and you know how they planning on making them more of that push towards on so I think that's a good trend for us and.
I'd say pretty much every retailer is you'll get some presence online but.
You know certainly it there there are some opportunities there, but you know the to the flip side. There's also a lot of challenges in that in that market as well as we've talked about and I'm sorry to use repeat your second question.
Yes, yes, yes.
Hello.
Yes.
You know with security that is a huge differentiator for US you know where the market leader of by far with cloud security solutions and as I mentioned the vast.
So a majority of the world's biggest ecommerce sites make use of our security solutions today, I would say in that vertical.
Sales are led by security and then our delivery and acceleration would be an add on.
We include you know the basic D. S. A dynamic side accelerator services part of Kona site defender Bot manager is critical today for any.
Commerce side, and we're really uniquely differentiated with our capabilities there.
So security is.
Very important across not only E commerce, but many verticals today.
That's perfect. Thank you.
Well again, thank you Tom an AD that wraps up I think our question. So I want to thank everyone for joining us in closing we will be presenting at a number of virtual investor conferences and events throughout the rest of the third quarter and details of those can be found on the Investor Relations section of OCC My dotcom.
Thank you again for joining us and all of US year Dock. My wish you continue to help to you and yours, so have a nice evening.
Thank you ladies and gentlemen at that conference you May now disconnect have a great day.
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