Q3 2020 Akamai Technologies Inc Earnings Call
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I would now like to hand, the conference or Whats your speaker today, Tom Arnoy. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining optimized third quarter 2020 earnings conference call.
Speaking today will be Tom Leighton optimize chief Executive Officer, and Ed down 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 statements.
The factors include uncertainties stemming from the COVID-19, pandemic and any impact from the unexpected geopolitical developments.
Additional information concerning these factors is contained in <unk> filings with the FCC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
The forward looking statements included in this call represent the company's view on October 27 2020.
Okay. My disclaims any obligation to update these statements to reflect future events or circumstances.
As a reminder, we will be referring to some non-GAAP financial metrics during today's call.
A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of walk My dog.
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 that Akamai achieved excellent results in the third quarter.
Revenue was $793 million.
12% year over year and up 11% in constant currency non.
Non-GAAP operating margin was 32%.
Three points from Q3 of last year.
Non-GAAP EPS was a dollar and 31 cents per diluted share up 19% year over year and up 18% in constant currency.
He's very strong results were driven primarily by the continued strong performance of our security products and high traffic levels on our edge platform.
We're very proud of how our company is continue to deliver fast intelligent and secure online experiences for billions of users around the world as we support our customers during these challenging times.
We're also very pleased that our hard work to improve operating efficiency and profitability has put us in an excellent position to exceed our goal of 30% operating margins for the year.
Our media and carrier business continued to perform very well in Q3 benefiting from high traffic levels for video streaming and gaming software downloads. In fact, one giant video on demand service increase their traffic on our platform by a factor of four last quarter.
That's more entertainment moves online Akamai has continued to prove that our unique edge platform scales to meet the unprecedented demand for streaming video popular gaming releases and complex Apiay transactions.
We can do this in part because we position more than 325000 servers in more than 4000 locations in over a thousand cities.
At Akamai, we position content very close to end users and we make sure it's available when and where it's needed.
In addition, our highly advanced Internet mapping algorithms route traffic around congestion to maintain excellent application performance for our customers.
Our unique etch platform also allows our customers to perform a wide variety of computational pass close to end users, resulting in faster performance instant scalability and lower cost.
For example, a leading social networking company uses optimize edge platform to manner JP I request for their recommendation engine.
Eating apparel company uses our platform to supply health information to users based on their fitness tracker.
Several major companies use akamai to provide critical weather updates based on local conditions as well as geographic information such as nearby points of interest or locations of desired services.
Many of the world's largest LTT companies use akamai to help manage the critical components of their architecture on the edge.
Including functionality for user authentication content recommendations and payment processing.
Some of the world's largest credit card companies use our platform to assist with authentication and authorization of payments via digital gateways.
Several of the world's largest gaming companies use optimize edge to assist in managing user profiles in registration as well as a band leaderboards.
And the AD Tech ecosystem uses applications running on the Akamai edge to assist with AD calls bidding and placing consent cookies to remain compliant with data privacy regulations.
It's important to note that while some cdns are talking about edge computing or serverless computing as if they're somehow new technologies Akamai has been providing these services to thousands of customers for well over a decade.
And already this year, we've handled well over 100 real again, Hey, P. I request on our edge platform.
The vast capacity bar platform combined with our unparalleled security intelligence and machine learning algorithms has also enabled all combined to defend the many of the world's most important enterprises against the largest and most sophisticated cyber attacks. This.
This capability has proved to be especially important during the recent wave of ransom de dos attacks.
Since August Weve been approached by dozens of major businesses around the world that it received extortion matters running them with massive de dos attacks, if they didn't pay a ransom.
In response, our security experts performed emergency integrations of our Prolexic service, which enabled these enterprises to continue or resume business operations without experiencing any service disruptions from the attacks.
As a result, we've added many new enterprises to our Prolexic customer base, including several global banks and insurance companies, a leading travel website into national stock exchanges.
In addition to Prolexic.
Also continued to see strong growth from our market, leading Kona site defender and Bot manager services.
Managers been especially valuable in stopping account takeover attacks, which are greatly increased in scale and sophistication.
In fact, the number of malicious login attempts by bots that we blocked in Q3 it was more than double the number we handled in Q2.
I'm also pleased to report that our recently launched HAGE integrity manager solution, we should design to identify and sport major heart attacks and malware and third party scripts is off to an excellent start.
Strong customer interest and bookings.
In another sign of our leadership and cyber security Forester recently named Dr. My as a leader in zero Trust with the highest possible scores for network security workload security a P. eyes, you wrote trust advocacy and market approach and just last week Gartner recognized docket.
As a leader in its 2020 magic quadrant for web application firewall for the fourth year in a row.
Overall Q3 revenue from our cloud security solutions was $266 million up 23% year over year in constant currency and accounting for 34% of optimize total revenue.
To further build on our growth in security we were pleased to announce today that Akamai has acquired has to be a leader in securing mobile access for enterprises.
That has to be partners with some of the world's largest mobile network operators to enable enterprises to connect manage and secure communication amongst cell phones and other I O T devices.
Without the need for client software on the device.
These capabilities are critical for organizations with mobile Workforces for large numbers of connected devices by.
By integrating as a b solution with Actimize unique edge platform and arming it occupies vast array of real time security data, we plan to enable enterprises to greatly improve the security of their operations, while also improving the performance of their internal applications.
As a b will complement our security product lines with a cellular specific security offering which is an important step in our strategy to capture the emerging opportunity in fiveg.
It is also synergistic with our enterprise application access product and complements our I O T edge cloud solution.
Following enterprises to improve the reliability and consistency of real time communications with bio T. devices.
And to easily secure those endpoints to avoid compromise.
As we look to the future we believe that the deployment of Fiveg and I O T applications and provide significant opportunities for akamai.
Fiveg technology improves the performance of the last mile providing higher throughput and lower latency and the potential to connect a lot more people and things and.
And that could spawn the creation of new applications, such as ultra low latency video augmented reality I O T applications and analytics had a massive scale deep threat intelligence for attack mitigation and much more that we can even imagine yet.
The impact of Fiveg on innovation to be similar to the way broadband enabled new social networking apps that you could have imagined before.
As Fiveg networks come online, we believe that end users and connected devices will demand faster performance and greater scale in cloud data centers can provide.
And thus that our edge architecture will become more important than ever.
In fact, Gartner estimates that by 2022 more than half of enterprise generated data will be created and process outside of traditional cloud data centers.
The breadth of our edge platform means that we're incredibly close to billions of end users and being so close means that akamai is in a unique position to provide the near instant response times very high quality video experiences serverless computing capabilities and the market leading security services that our customers are demanding.
In summary, we're very pleased with our performance. So far this year, we believe that our strong growth profitability and cash generation provides us with the financial firepower to continue investing in the innovation network capacity novel products and World class talent needed to fuel our future.
Okay.
Now I'll turn the call over to Ed for more on Q3, and our outlook for the fourth quarter.
Ed.
Thank you Tom.
Tom outlined Akamai delivered another excellent quarter in Q3.
We were very pleased to exceed the high end of our guidance range on revenue operating margin and earnings.
Q3 revenue was $793 million.
12% year over year.
Were 11% in constant currency driven.
Driven by another quarter of robust security growth continued strong performance from our media and carrier Division and a weaker U.S. dollar.
Revenue from our web division was $418 million up 8% year over year were 7% in constant currency.
Revenue growth for this group of customers was again led by our security business and to a lesser extent, we also benefited from lower than expected cobot related credits to customers.
Revenue from our media in carrier Division was $375 million up 16% year over year.
Overachievement in Q3 came from higher than expected OTI to video and gaming traffic along with continued momentum in security.
We were pleased to see traffic remain at elevated levels, which helped offset helped offset the approximately $15 million negative impact from India's ban Fiftynine Chinese apps that we discussed on our last quarter's call.
Revenue from Internet platform customers was $51 million up 15% from the prior year and above our expectations due to higher traffic.
Security revenue for the third quarter was $266 million up 23% year over year.
Driven by continued global demand for our web and enterprise security solutions.
As Tom mentioned earlier, we also saw strong demand for de Dos protection from our Prolexic products in Q3.
Foreign exchange fluctuations had a positive impact on revenue of $10 million on a sequential basis and positive $4 million on a year over year basis.
International revenue was $355 million up 20% year over year or 18% in constant currency.
We have strong performance internationally, despite the sequential headwinds in India that I previously mentioned.
Sales in our international markets represent 45% total revenue in Q3 up.
Three points from Q3, 2019, and up one point from Q2 levels fine.
Finally revenue from our U.S. market was $437 million up 6% year over year.
Now moving to costs cash.
Cash gross margin was 76% in line with our expectations.
GAAP gross margin, which includes both depreciation.
Stock based compensation was 64%.
Non-GAAP cash operating expenses were $252 million, roughly flat with Q2 levels and in line with our guidance.
Now moving on to profitability adjusted EBITDA was $351 million $51 million were 17% from the same period in 2019.
Our adjusted EBITDA margin was 44% up two points from Q3 2019.
Non-GAAP operating income was $251 million up $43 million or 20% from the same period last year.
Non-GAAP operating margin came in at 32% up three points from Q3 last year.
Capital expenditures in Q3, excluding equity compensation and capitalized interest expense were $200 million in line with our guidance range.
GAAP net income for the third quarter was $159 million or 95 cents earnings per diluted share non.
Non-GAAP net income was $216 million or $1.31 cents earnings per diluted share up 19% year over year.
18% in constant currency and seven cents above the high end of our guidance range due to higher than expected revenue.
Taxes included in our non-GAAP earnings were $37 million based on the Q3 effective tax rate of approximately 15%.
Now now I will discuss some balance sheet items, we continue to have a very strong balance sheet as of September thirtyth, our cash cash equivalents and marketable securities totaled approximately $2.6 billion up approximately $163 million.
End of Q2.
After accounting for the $2.3 billion of combined principal amounts of our two convertible notes net cash was approximately $254 million as of September thirtyth.
This increase was driven by a number of factors that include an exceptionally strong cash collections quarter.
Now I will review use of cash our use of capital.
During the third quarter, we spent $13 million to repurchase shares buying back stock approximately 126 120000 shares.
We ended Q3 with approximately $644 million remaining on our previously announced share repurchase authorization.
Our long term plan remains to leverage our share buyback program to offset dilution, resulting from equity compensation overtime.
In summary, we are very pleased with our Q3 results.
Before I provide guidance I wanted to take a moment to remind everyone that several factors that will impact Q4 first.
First seasonality.
Seasonality plays a large role in determining our fourth quarter financial performance, we typically see.
Are the normal traffic for our large media customers and from seasonal online retail activity for our E commerce customers.
Which are both difficult to predict especially in the current economic environment.
Also as Tom mentioned earlier today, we announced the acquisition of positive.
In the fourth quarter, we expect the acquisition to add approximately $4 million of revenue and to be dilutive by approximately one penny of non-GAAP, yes.
It's also worth noting as I mentioned earlier that our Q3 revenue was negatively impacted by approximately $15 million due to the actions taken by the Indian government to ban 59, Chinese based web applications in India.
Our Q4 guidance assumes the ban in India remains in place for the balance of 2020.
In addition.
The U.S. government has taken a similar stance with respect to some of these applications and.
And absent absent court action or change in policy. Those bands are scheduled to take effect in mid November.
As a result, our Q4 guidance assumes an additional $4 million to $5 million negative impact to revenue sequentially based on the U.S. fan going into effect mid November.
And the unanticipated event. These 59 applications were subject to a total global Bath. The total additional negative impact to our revenue would only be approximately 3%.
To be clear this represents an extreme assumption that we do not currently expect to occur and we are not modeling and our current outlook. However.
However, I wanted to provide you with additional color added transparency to make the point that our customer base remains well diversified across many customers industries products and geographies.
Finally at current spot rates foreign exchange fluctuations are expected to have a positive 2 million dollar impact on Q4 revenue compared to Q3 rather than Q.
Q3 levels any positive 6 million dollar impact year over year take.
Taking all these factors into consideration we are projecting Q Q4 revenue in the range of $812 million to $837 million were up 4% to 8% in constant currency.
For Q4 2019.
The framework guidance further we'd expect to be towards the lower end of the range yeah.
If we see a more modest quarter T T and gaming traffic ecommerce activity is weaker than expected.
The impact of the covert pandemic leads to an inability of our customers to pay for our services and the U.S. dollar strengthens and creates foreign exchange headwinds.
Conversely, we'd expect to be at the higher end of the range.
If we see if we experience a more robust than normal online holiday shopping season, and we see stronger than expected demand for OTI to video gaming traffic.
Including potential upside for two highly publicized new game console releases expected later this quarter.
At these revenue levels, we expect cash gross margin of approximately 76%.
Q4, non-GAAP operating expenses are projected to be $268 million to $279 million.
With the sequential increase primarily due to higher commissions related expenses from sales compensation accelerators kicking in during the fourth quarter, given our very strong performance this year relative to our plan.
Factoring in the gross margin and operating expense expectations I just provided we anticipate Q4 EBITDA margins of approximately 43%.
Moving now to depreciation we expect non-GAAP depreciation expense to be between $106 million to $108 million, reflecting our accelerated surber deployment in Q3.
Factoring in this guidance, we expect non-GAAP operating margin of approximately 30% for Q4.
Moving on to Capex, we expect to spend approximately $193 million to $199 million, excluding equity compensation in the fourth quarter.
And with the overall revenue and spend configuration I just outlined we expect Q4 non-GAAP EPS in the range of $1.28 cents to $1.32 cents were up 2% to 5% in constant currency.
The CP EPS guidance assumes taxes of $36 million to $37 million based on an estimated quarterly non-GAAP tax rate of approximately 15%.
It also reflects the fully diluted share count of approximately 165 million shares.
In light of the Q4 guidance I provided in our strong performance through the third through the third quarter.
For the full year 2020, we now expect revenue of $3.164 billion to $3.189 billion, which is up 10% year over year constant currency.
We expect non-GAAP operating margins of approximately 31% and we expect non-GAAP earnings per diluted share of $5.16 to $5.20, which is up 15% to 16%.
A year.
In summary, we are very pleased with how our business has continued to perform during a very challenging times. Thank you, Tom and I would be happy to take your questions operator.
Thank you, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated our first question comes from the.
The line of Tim Horan with Oppenheimer. Your line is open. Please go ahead.
Okay guys. Good quarter on can you talk about edge, a little bit more maybe how did your service offerings compared to your peers and what do you think your win rate is on you know on pitches for edge.
Oh, well, yeah edge refers to our platform, which really is unique in the sense that you know we're in 4000 locations were in a thousand cities. We are uniquely close to the end users out there in the billions of end users around the world.
You know other companies talk about edge and they might be in a couple dozen locations. You know a factor of 100 last and because we're close that's really important because we're going to get better performance. If you're closer the latency has less and it's going to be faster also if you're close you've got access to the band.
With that and the scale and you know that's why we have so much more scale than the other cdns and that's really important to customers that have a lot of traffic you know the big LTT providers and that big software downloads and that's why so much of their business comes to optimize also.
You know being in those locations gives us a huge advantage on cost because even though a large fraction of those 4000 locations, we don't pay for bandwidth and co Lo and power.
So it's free for US you know with the infrastructure, we pay for our Capex, but our competitors aren't there. There are competitors are in big data centers and that is the most expensive real estate in the world and so we're in a position that we can provide compelling pricing.
To the major enterprises out there and our competitors if they're going to do that they have to do with losing money and that's not sustainable.
Now any one of the many competitors we have out there you know all generally speaking much much smaller at any given time they could take on some traffic and show. Some you know high percentage growth on very small numbers, but it's hard to sustain that when you you don't really have a sustainable advantage and then you see that happen as the traffic you know some of their traffic.
Their moves around among the smaller players now in addition, it's not just about CDN and delivering traffic it's accelerating the traffic, it's providing functionality on the edge close to the end user and I talked about a lot of examples that were you know where were doing that today and of course processing a lot of the apiay transactions.
Which are tied to the functionality over 100 trillion. So far this year and then you have the security aspect, which our CDN competitors by and large don't have they may partner with other companies are startups to have some you know security story, but that's now a billion dollar business racamier growing up.
Over 20%.
And security is just really viable viable vital for our customers and it works in tandem with the application acceleration with the edge computing. All is one service all on one platform and if you're not on the edge, there's no hope to withstand the larger tax that we're seeing today.
Thank you and our next question comes from the line of coffee successful with Cowen. Your line is open. Please go ahead.
Great. Thank you just going back to security Im just curious.
With the security results. Thus far this year have been much different pad COVID-19, not had happened I'm just curious how you would.
Quantify the impact that could have a 19 it had on the security business, whether whether good or bad and then secondly, deep long term operating margin of 30% I think youve message that Ashford remained flat.
As we go into the outer years after now hitting your target, but can you just remind us why that is and why won't continue to see increased operating margin.
Leverage thank you.
Sure I I think we'd see strong security growth with or without Covance there.
There are some of our products that are really helpful for enterprises as they have more of a remote workforce and so we did see uptick in bookings there. So I think there's you know somehow the attack rates have gone way up and I do think some of that is taught has tied to coal bed now whether we'd see the ransom.
Dos attacks that you know are widespread just in the last couple of months you know we might have seen that anyway, maybe there <unk>. There was an increase because the price is bigger now you know you if you're attacking a commerce company that had 90% of their business and brick and mortar Ah well they care about the 10% for sure but when all of their.
Business is online now they they really really care. So there is a bigger prize and maybe that's incented. The attackers to up you know the attack level or maybe that's just the world we're living in where we're going to be seeing more and more attacks. Even if we get cobot under control and you know I can tell you you know we see a lot of attacks in Asia.
Perfect just like we do here and in Europe, even though it's a P.J. Colbert is largely under control there and operations are largely returned to normal and yet the attacks. The ransom P. Dos attacks. You know just is increasing just as fast over there that one of the national stock exchanges that was.
Taken offline that is now an OCC and my customer was in Asia Pacific.
In terms of the 30% we do think that's a good place to operate the company over the longer term and you know where that said we're going to do everything we can to operate as efficiently as possible and you see that this year. You know we you know this year, we've been doing over 30%.
And so if we can do that and we continue to make the investments we want to make to achieve long term growth in the business. Then you know we will.
Yeah, but I think that's the right way to think about it is 30% is a good baseline and when we can overachieve that we're going to do that.
And I guess, just one quick follow up to the security question I mean, given what sounds like some upside arguably do you think that you're in a position to sustain that 20% plus growth rate over the next few years.
Oh, certainly we'd like to do that you know, we're seeing very strong growth in Kona site defender and Prolexic and Kona site defender is our web App firewall product bot manager doing very well and the next generation that will be even stronger at preventing account takeover security services business, we've talked about it.
Is doing very well and I think with the increase in attacks and the sophistication of attacks were seeing even more demand for our security services. It's just too hard for even major enterprises to keep up and then you have the newer solutions, our enterprise services enterprise application access enterprise Threatprotect.
After now equipped with the first version of our secure web gateway, we're going into beta with our multifactor authentication service next month as we talked about our page integrity manager, which sits on top of Kona off to a great start we'd like to see that track the way that bot manager good getting out of the gate.
Do you know of course, we've announced today and I'm really excited about the as of the acquisition you know I think that opens up a whole new category for us that will well see it accelerate a growth as we get more fiveg deployments as you see more Io t. applications out there and what that.
As is it a sense all the cellular traffic safely directly to optimize before it gets onto the internet and that way, we could really protect enterprises and their cellular devices and I think that's a market that is very exciting for the future.
Great. Thank you very much.
Thank you and our next question comes from the line of Sterling Auty with JP Morgan. Your line is open. Please go ahead.
Yeah. Thanks, Hi, guys. So wondering you made the comment that one of the big video providers you solve for X. increase in traffic that would seem to be more than just the cobot related I'm. Just wondering what else you saw in that particular account and is that something is happening and other accounts as well.
Yes, we talked about you know we're.
We're continuing to gain share if you exclude the 59 Chinese apps were obviously government regulation has lessen the traffic were delivering there Ah and that's based on you know our scale and performance and you know ability to offer a market competitive prices.
For our customers and so I I think you've seen that you know trend you know over the last couple of years, we've talked about it we put a lot of effort you know into continuing to improve performance continuing to improve our scale and on a global basis.
And that puts us in a great position against the competition in the market and you're right. The Forex is obviously not [laughter] Kogan Koby did improve traffic. There's no question about that but nothing like for us.
Well, that's great and then one follow up you touched upon it in your prepared remarks in your guidance, which is E commerce heading into the holiday season, it's been it's been a little while since Youve updated us can you give us a sense of where do you see in terms your customer base, we didn't like that E. Tailing 100, or you know that 100 largest E.
Commerce sites and vendors that are out there.
A very very strong you know well north of 90% of the.
The top commerce companies rely on optimized.
For application acceleration and also importantly, increasingly importantly security and as I mentioned before now that these companies a lot of them. Most all their business is online answer of security really really matters.
Were obviously the the go to supplier there.
Excellent. Thank you.
Thank you and our next question comes from the line of James Fish with Piper Sandler. Your line is open. Please go ahead.
Thanks for the questions guys. Tom you sound really excited here on these new security solutions again, I guess, how how how are you thinking about the web security gateway market and do you need more investment in an enterprise security sales team to get this product more penetrated and beyond just the CDN installed base.
Yeah in fact on a lot of our.
Customers for the enterprise products are new to Akamai and had bought our pre existing product line. That's because you know our web products delivery and you.
You know a web app firewall or primarily to.
A subset of the Fortune 500, maybe a third of the verticals to a half the verticals, but enterprise security is something that pretty much all the fortune 500 would need.
And so that has increased our market and we have you know put effort into you know our specialist teams that are you know help the salesforce I would say that all of our sales force now is very adept at selling the you know the the traditional akamai security products and the most.
To them are actually pretty good now with the the newer products with enterprise security page integrity manager Swig is just new out there so very early on.
But I think we'll be in good shape, there and as of the of course, that's sold by carriers as is our Sps solution and.
And so we would sell to the world as well as to be a now aka myself to the world's major carriers and provide a solution that they then take to enterprises and I think that's a model that we're very excited about and increasingly you'll see with our enterprise security products will be led by channel partners and carriers being.
The majority of that.
Got it just as my follow up you know, we're starting to see a new wave of applications get the sides again like we did last decade with with Netflix and your two being is being two examples I guess what are you guys hearing from customers regarding their own potential CDN built out for some of the some of the applications that they have you know one of the.
Our customers for example hit their five year goal is within one year.
Weights are you asking about what are we seeing in terms of D. I y or what we're seeing in terms of big LT key players in their market penetration and success.
Both I'll take both.
[laughter], Okay, well, yeah, RTT is certainly increasing in a lot of the offers are seeing substantial success. Obviously, some are doing better than than others, but I do think you know OTI T is here to stay obviously got tailwinds from the pandemic.
You know, but I think people are are as they view more online that becomes more of a pattern and that will outlive the.
The pandemic of course, I think we'd all like to get back to a world. When you can go out and see a movie probably not it's going to be anytime soon you know here in the Americas or in EMEA, and I think more and more of the movie watching TV shows will be you know watch online.
D. I Y is something that you know that we exist in a few of the largest content.
Content providers and you know I don't think we've seen a huge shift there are you can sort of track that with our the cloud giant customers, which has been fairly steady.
Over the last year or so.
It's really hard to build out something like that for yourself. It it costs hundreds and hundreds of millions of dollars if not more.
End up spending more than you would with Akamai and you don't get the quality you'd get with Akamai and not only that if you're if you are a global company you got to do it you know all around the world. That's yes. It does it make sense now some of the biggest companies do it and I think you'll continue to see that.
But there's not been a real fundamental shift there.
Appreciate the color Tom Thanks, and congrats on the quarter.
Thank you.
Thank you and our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is open. Please go ahead.
Hi, This is ray Mcdonough on for Brad. Thanks for taking the questions first Tom if I could I wanted to ask about gaming and and as you mentioned, we're approaching a new console cycle for both Sony and Microsoft coming out with new consoles and from what I understand they've made some changes how games will be downloaded.
With the caveat that downloads and gaming files are becoming larger and more ubiquitous how should investors think about the contribution of gaming how much does it represent today and how big of a growth driver do you think it can be into next year.
I'm going to hand that one over to Ed Yeah.
Yeah. So you obviously gaming has been a busy.
Business, it's strange for us quite a bit over the last couple of years to the multiplayer gaming has changed the dynamics and if you think about the consoles that are coming online. Obviously two major players. It's been say four or five years. Since we've had a major upgrade cycle. So I'd say you can kind of throw history out. This is sort of a new chapter I think it could be a good source of.
Of upside for us in terms of its contribution we don't break it out specifically, but I would say, it's that's probably the second largest contributor in our media business next to video.
So you know as I talked about in the guidance section that this could be as the source of upside and you know it's hard to tell we'll know when we get there, but this could last into the early part of next year as you know in.
Some of the publishers come up with new games and.
Consumers are buying the new console they have to update the system with firmware and then catch up with all the old games that they had so I think this is a pretty good trend for US you know its going up it's hard to predict whenever you have something as large and as you.
Rightly pointed out the game downloads the frequency and the size are only increasing.
Yeah that makes a ton of sense I appreciate that color and if I could just just a quick follow up coming out of the first half the year there seems to be some supply control constraints industrywide you know understanding that every region is a bit different how is capacity industry ride trending and how about how should investors.
Think about your capital expenditure expenditure plans into next year.
Yeah, Great question. So obviously this year was a pretty big year for Capex and you know, we really been on a journey here for the last call. It 18 months, where we've increased the capacity of the network and I'm glad we did I think Ah.
Tom in the team and a great decision to do this and obviously, we couldn't have predicted the pandemic, but we had a lot of.
Well TT launches coming and.
As you talked about just a few minutes ago on gaming.
That's becoming more and more challenging because.
Customers want to get their games at the same time and that requires a lot more capacity and so we spent spent quite a bit on capex. We actually took advantage of some some bulk purchases here at the end of the year.
Added a tremendous amount to our capacity. So I would expect next year to be back in sort of the normal level of capex and down several points from what we're seeing today.
Great. Thanks for the color.
Thank you and our next question comes from the line of will power with Baird. Your line is open. Please go ahead.
Okay, great. Thanks, I'll ask a I guess a couple here, maybe first I'd love to get some perspective on what you're seeing in the international.
Irene I guess really despite the challenges you are facing in India continues to see strong growth maybe just if you can just touch on what the sources to go straight.
We're kind of outside of India.
India.
Yes sure. So yes, you are right to point out is actually not India that was impacted it was actually China because the customers.
That were impact to the 59 Chinese apps, we serve about 30 of them those.
Those were actually customers insider, so China revenue, obviously was a bit more challenging quarter.
India was actually one of the areas of strength and what I was encouraged by that so many different countries in all different geography, So Latin America, Brazil and Mexico.
Over in the <unk> in Europe, we saw strength in the UK, Germany, and the Netherlands, and then over in Asia, We saw strength in Australia, Indonesia.
Continued strength in Japan, So it's really across the board, we're very pleased with the international growth and if you think about.
Coming into a quarter, where you're losing $15 million of revenue from your international.
Our customer base and to be able to still grow sequentially and grow 20% year over year. It's it's a it's very impressive and as I've talked about in other calls you know I think we have a unique advantage.
Industry.
From an international perspective, we made the investments early on and sales and building out our network and our capabilities.
But I think it's a huge advantage for us and so on.
Remarkably well model is delivering media, but also in security.
And is that international strength concentrated in any particular products or solutions or is it more broad based.
I'd say, it's more broad based than certainly the early days. It was all about media delivery and application acceleration. The U.S. market was the first to adopt the security solutions, but now security is.
Becoming a really nice growth engine for us internationally.
Okay and then my second question just about M&A notwithstanding the acquisition announced this morning, maybe you could update us on appetite for M&A as we exit this year and into 2021, maybe any color around no areas of focus and potential size kind of what you're seeing out there in the market.
Yeah, we continue to be very active in looking at potential deals.
You know obviously, it's a little trickier with the pandemic has travels restricted but that's not preventing us.
For doing transactions as you saw from today's announcement.
You know I would say so far the pandemic really hasn't impacted market caps you know very much you know that may happen at some point, depending on what happens with the global economy. So I would say it's business as usual right now.
Okay. Thank you.
Thank you and our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Please go ahead.
Excellent. Thank you guys for taking the question and nice quarter.
Lot of.
The questions I had were covered so a couple of kind of more detailed questions. If you will one on that gaming team a lot of what people are talking about for gaming on a go forward basis is shifting to more streaming game subscriptions and yet it's not just Microsoft like other vendors have they had their platforms.
Or game streaming can you talk to us about how optimizer is positioned for that potential shift towards more of a game streaming it sounds like something that would be kind of right up your alley.
Yeah, so it depends exactly what you're referring to but if it's a you know a gaming tournament, where a lot of people are watching yeah, we do that already and that creates a fair amount of traffic if its a situation where an individual's game and their screen is being streamed.
We don't do that very much will handle the medidata and the security around that.
You know the economics around screaming individuals you know what they would see on their screen. That's pretty challenged you know people have been working at that the big gaming companies for well over a decade, and we haven't really gotten the economics to work Oh, we would handle the medidata their security the log ins you know the leader.
For all that kind of stuff you know we handle let's just the individual stream is not not so economical.
Got it got it that makes sense and then one detail question on the on the security solutions. In particular access is a solution that you guys have rolled out and it's something that we hear a lot from a lot of different vendors across the spectrum, whether its guys coming from legacy security perspective like these killer for.
Citrix has their access solutions can you talk to us about sort of how the competitive environment in there. It is shaking out for you guys.
Where where do you guys see yourselves doing well and who do you run up against most often.
Yeah, we compete well with Z. scale are there.
I would say that the vast majority of the competition is the traditional you know see PE vendors and their traditional ways of doing things and you know our value proposition is that we can do it.
The cloud a that's a lot easier and more secure and we can once we have it and we're providing access we can layer in you know Kona site defender and our other technologies, which you know the other companies don't have a and that makes it a superior service.
So I'm optimistic about the future growth there and even though we compete you know with Z. scalar and compete well really the the two of US are out there competing against the traditional way of doing things.
Got it excellent. Thank you guys.
Thank you and our next question comes from the line of Amir Danny.
Evercore. Your line is open. Please go ahead.
Hi, this is actually on for all.
Thank you for taking the question so I guess the.
Summer quarter guide.
Sales were up 7% year over here and that's kind of a strong deceleration versus the 12% to 13% range weve seen over the last few quarters.
I guess, the Indians fan account for 20 million or 200 basis points of of dry but.
What do you see as kind of a headwind there.
Yes, So I think if you look over the last couple of quarters. Certainly Q2 was so you saw a big jump due to the depending on that.
And the additional traffic I forgot I know the good news, we've been able to maintain the traffic and even.
Phil in the different that was caused by the $50 million in Q4, and you're right to point out that that revenue is gone and I talked about an additional 4 million a few less bad goes into effect here.
Coming up in mid November.
Last Q4 was an exceptionally strong quarter quarter over quarter. There's a few things if you want to look at kind of comparing the jump that we normally see from Q3 to Q4, we just talked about the.
Those applications the Chinese applications as one piece as you recall in Q2 I talked about some license revenue was about $7 million that we saw from our carrier business that traditionally we see in Q4 than we saw in Q4 last year, we're not expecting that again, so that's that's a piece of it.
Then the other thing that is a little bit different this year.
You recall back.
Q2.
29, keenly at our customer conference and we introduced our zero overage offering to our web division customers.
That was really a response to customers who are looking for more predictable spend with optimized. So you can imagine retailers are not the ones who mostly.
So for this this offering and again.
Yes.
Media customers and that's to smooth out some of the different holidays and various piece that they have in their business.
Now that's been in the market now for about 18 months. So we're starting to see some pretty good uptake on that what that means that you just see a little bit of a flattening out seasonality.
Got it thank you so much.
Thank you and our next question comes from the line of James Breen with William Blair. Your line is open. Please go ahead.
Great. Thanks for taking the questions just one on security can you just give us a little color around the the 23% growth and how.
How much of that came from existing customers, taking new products.
And maybe on that point.
If you have a security customers, taking three of your products and to take a fourth.
Leave most of that business is contractual how does that manifest itself into the relationship or the contract with the company at the time and then just secondly on CDN media.
Traditionally, we see a little bit of a step down in volumes in the third quarter as more people are outside in July and August.
We didn't see as much last year. This timeframe doesn't seem like you saw this year just your overall thoughts on that and.
He sort of.
Overtaking some of the linear television et cetera. Thanks.
Yeah, Great question, So I'll start with the second one we didnt you're right we didn't see as much of a seasonal dip I did see a little bit in Europe towards the end of the quarter.
You know you got to remember that we also.
I've been in kind of a partial lock down for most of the summer. So I would say that that probably adds to it you know.
We do typically see a seasonal dip here in Q3, but again outside of a little bit and give up I didn't really see much across the across the world. So.
So that was a good trend for us and your first question was around security growth of 23% in what's making it up I think it was the the question was around the new versus existing [laughter], primarily the biggest growth is from existing customers.
Today, we have about 61% roughly of our customer five security from us.
Our new customer acquisition is led by security button, a recurring revenue business in any given quarter, new customers aren't going to add a ton to the revenue profile. So it's a it's typically your existing customers.
And then the other question on as customers contract with us for multiple services.
It tends to be sometimes it can be demand driven so do you have something like a ransomware attack you have an emergency integration and you said that your contract.
Other times it can be upon renewal, where you're adding functionality so somebody might be kona site defender customer they want to add bot manager what we're seeing some really good early uptake with customers that are Kona site defender customers that are having page integrity that can be done mid contract going and just added to your contract typically you have some form of an MSC.
With your customer and you can just add products fairly easily.
And just a follow up to that is as you look across your entire revenue base right now in terms of total revenue how much of that is is a contractual versus more volume driven like your traditional CDN business.
And that business is actually the majority of it is contractual there's some volume metric components to security, but really when you think about the business in total the big variable in terms of volumes is in the media business.
And in terms of total revenue as you look at media and security combined.
How much is total revenue you think is more volume driven.
Oh, that's a good question, probably a quarter, maybe a third at the map. The most really it depends on the quarter like in a quarter like this Q4, where you have a stronger seasonality, we'll see a little bit more.
Than the normal but the majority of the business is contractual.
Great. Thanks.
Thank you and our next question comes from the line of Jeff Dan Marino with Craig Hallum Capital Group. Your line is open. Please go ahead.
Oh, great. Thanks for taking my questions most of what I had as it has been at a answer to just a few on the managed security services I remember a while back you reference that I believe is a thousand customers in a 100 million in revenue I don't know that we've gotten an update just curious if you could update that and then any commentary around verticals that stood out poor calling in the quarter.
Sure. So it won't have a myth security services no don't have a customer number here for you, we'll probably give you a more wholesome security update later, when we get to next year, but it's still growing at double digits, which is great. So managed security services has been actually really a key differential.
<unk> differentiated for us what we're finding is while we feel tools for customers to be able to manage the security products on their own a lot of times they want us to do it for them.
For example, bot manager, we're finding that there is a lot of demand for managed bot manager.
Sounds like the greatest product name, but.
The descriptive of what's happening and then on the Kona site defender side managing fire.
Well firewall rules can be complicated and oftentimes customers would like us to do that.
As well.
Yeah in terms of the verticals, obviously, the financial vertical as huge as you could imagine for where security.
Commerce increasingly important as more of their business moves online and interestingly enough you know big media.
Gaming sites are now seeing a lot of attacks new sites, obviously, especially during an election cycle are big targets and the OTI t. sites and protecting accounts there.
It is really important so I pretty much any big brand name.
You know as a.
Big buyer of our security services.
Great. Thank you.
Thank you and our next question comes from the line of Rishi Jaluria with <unk> Davidson. Your line is open. Please go ahead.
Hi, guys. This is kinda Rudolph onshore ratio. Thanks for taking my questions today. So on the I think the acquisition could you just talk about what overlap. There is between you and then goes in terms of the actual technology today, and then the customer basis.
I didn't catch that question can you repeat it please.
Yeah on that as if the acquisition could you just talk about what overlap there is between you and as heavy in terms of actual technology and the customer may says.
Oh, great No really good question are there is not a lot of overlap there their primary capability is to take the traffic.
I'm a cellular device.
And vector it through the carrier.
Into what today is their platform now.
We are going to take that in factored into the Akamai platform and then we can layer in our enterprise security capabilities. Our application firewall capabilities, you know secure web gateway make sure that traffic stay secure so that the device doesn't end up growing to a site with malware.
Fair or and if it does to make sure that malware doesn't get back on the device and so there's very little overlap in capabilities, but very strong synergy.
And the really nice thing is that their technology does it need to make use of the client you know in a lot of the devices out there, especially in I O T may not be equipped with that kind of capability.
Let's go straight to the cellular connection.
And also there's no way around it because its handled with the Sim card layer. So it's not a situation like where the normal device, where the user can sort of get around any corporate security and go where they want and then get malware on the device and bring it back into the enterprise.
Great. That's really helpful. Thank you and then is there anything to call out on this quarter with regard to the Internet platform customers aside from the higher traffic I know you guys expected a greater sequential decline due to repricing and then how should we think about growth of this cohort for the remainder of the year.
Yeah, Great question, So, yes, definitely a nice upside surprise for US you know as I as I mentioned on last call. We did do repricing with two large customers in that enough cohort.
And typically it takes call it six to nine months to get back to you know traffic levels, where your revenue sort of gets back to where we started from we.
We were able to do that and more here in Q3. So that was that was great and it was a.
Big jump in traffic from a from a couple of customers. So it's really good news there and I would say you know in terms of this year render this year Q4 tends to be a pretty strong quarter. So I'd expect something.
In this range, maybe a touch higher.
Great. Thank you.
Thank you and our next question comes from the line of Brendan Nice fell with Keybanc capital markets. Your line is open. Please go ahead.
Great. Thanks for getting me in.
Two if I could what do you guys see somebody from a traffic perspective, thus far in the fourth quarter versus really the third quarter and taking a step back how should we think about the higher traffic growth in 2020 translating into some contract repricing situation. It's in the 2021 and then on the acquisition.
I called out 4 million in revenue.
Is it safe to assume that that acquisition to close today.
Two month benefit for this year, roughly and can we annualize that in terms of modeling purposes for next year with some growth expectation. Thanks.
Yes, so why don't I start with the last one on my way back so as far as the acquisition goes I mean, that's that's the way the math would work out for this quarter just keep in mind that the when you go through a.
Purchase accounting and the two year integration costs and things like that there's some some movement. There I will give you an update on Uh huh.
Revenue contribution this will be for next year, we do our next call but.
But yes, if you're thinking about it in the.
Way, but in terms of like how much growth add on and things like that we'll we'll update you as we get a few months into the integration and have a plan fully built out.
20, 2021, you talked about pricing and volumes did its just a standard part of the business unit will always have a.
Some number of customers that are up for renewal at any given time will average contract length is typically 18 months and with a year to two sometimes you get a little longer so at any given time, you're going to have renewals I think we've done a good job of calling out when there's anything that's unusual meaning you have a group of customers are all coming up at once we're you know we've talked.
Last year, when we had some big acquisitions and some of our customers acquiring you Trust will continue to do that but there's really nothing to call out at this point and we'll be giving you a full update on 25 in the February call.
And then I think your third question was on traffic for the fourth quarter are you seeing anything relative to Q3.
Obviously back to school fall season, due to slight pickup in traffic, we could do that in our guidance I think the only thing to call out as you know we can reduce the.
Elevated traffic sports, but then.
So a nice source of traffic for us and that's certainly continues this year.
Great. Thank you.
Thank you and our next question comes from the line of Lee Crawford with B Riley Securities. Your line is open. Please go ahead.
Great. Thanks for taking my questions guys. Two quick questions. I think you mentioned the web division saw some upside from customer credits.
Curious if you could quantify that upside and then if there is a similar.
Contribution in Q4.
Yes, sure so I wouldn't necessarily call. It a contribution I think the way I would describe it is if you recall in the Q1 call we talked about how the negative impact was around $5 million in the Q2, we talked about it being 14, so going into the quarter. We had modeled that we would have seen a further negative impact you know, it's really hard to predict.
You know what's has never been in one of these before so it's really hard to predict what customers are going to request and then ask for so the good news. There is we had very little less and less than a million dollars impact as a matter of fact, we got a little bit of a positive impact or bad debt assumptions as we had assumed with some customers that had filed for bankruptcy that have come back post bank.
C.
We're a little bit higher up on the the the train there. So we were able to recover some of that that money that we had to write off so in general that was a positive surprise. So I wouldn't say that it was a pickup of any time that we would expect in this quarter I think what I outlined in the <unk> and the guidance section was there's.
There is a potential that you know as we get into a second wave and we see customers going under a lot of stress that you could see something similar to what we've seen in prior quarters, we're not anticipating that right now.
That's obviously something as you kind of build your models and handicap that you'd want to think about it worse. The pandemic gets the more stress the retailers are under the most trusted travel hospitality customers are under there's a potential that you could see a little bit of headwind there.
You have to do some things on the restructuring or credit side.
Got it and then just another question.
You guys added a lot of capacity in 19, and certainly significant capacity in 2020.
In response to both streaming media as well as kind of the pandemic related uptick in traffic you know.
As we lap those comparisons for both capacity as well as traffic growth and we kind of hit.
You know some of the slower quarters with that added capacity maybe.
Maybe just talk about the puts and takes between margins and you know keeping the servers running hard to offset costs.
One of your competitors kind of indicated a little bit of a margin headwind as server capacity overstretched.
Well pull back in demand.
You know as we lap some difficult comps over the coming quarters, how do you kind of think about capacity versus the margin standpoint.
Yes. Good question. So you know mix is obviously something that you have to take into consideration. The good news for US you know if you think about.
The 20 plus years, we've been in this business, we've always seen unit economics, where volumes go up prices go down we've been able to do a phenomenal job of driving down costs in our network.
And the fact that were.
Such a scale, there's a mix between fixed port contracts versus variable contracts. We get this Tom mentioned a lot of our traffic is free and that sometimes can include both space power and bandwidth.
So we have a whole team that is most likely focused on that and we continue to make.
Improvements in our server.
So to be able to get more throughput per machine. So.
So you know obviously as mixed changes you can have a you know a point here or there move but in general I think we've done a phenomenal job maintaining margins. Despite you know the.
The realities of the high volume media business. So.
So you know I don't I don't.
No the specifics of what you're talking about with our competitor, but we don't see any significant declines in margins as a result of adding all this capacity if anything I think it gives us a tremendous advantage you know one of the interesting things that we saw this quarter well I saw we lost a lot of traffic in India.
We actually picked up a lot of traffic in India from other customers as a result of having additional capacity you get better performance for more capacity you have and we were able to benefit and filling some of that gap that the.
15 million, we lost and some of it was anything into your region.
Got it that's helpful. Thanks for taking my questions and congrats on a good quarter.
Thanks.
Thank you and our next question comes from the line of Mark Mahaney with RBC. Your line is open. Please go ahead.
Okay. Thanks, I'll do my business questions were asked so I'll just ask in the event of a change in administration next week.
And you think about the implications for your business in terms of.
We think from R&D tax credit policies, I don't know immigration issues or corporate tax rates. What do you think will be the biggest impacts on your business were there to be a change that we're there to be a change in administration.
Well, maybe just settling down the overall environment [laughter] out there would be good.
Stress levels are obviously pretty high you know in the country and this country right now and it'd be good to get past that you know.
Obviously taxes might rise.
You know I don't think that changes the operation of the business in any way, obviously, there would be a one time reset on NY ESO tax rate were to go up and Ed can talk more to that but I don't see the fundamentals of our business changing one way or another depending on who wins Ed what thoughts do you have about that.
Yes. Good question Mark So I would say you know terms attached is.
Obviously, a lot of our earnings come from outside the U.S. So you know it's rumored that there's a 7% increase or whatever may come at some point next who knows if it comes in 21 as a way to Europe would've been 22. So they would have some impact on us, but like I said, a lot of earnings or outside the U.S. couple of other things to keep an eye on though.
Interest rates, so with the fed being very accommodative and interest rates near zero I think about our reinvestment of our marketable securities So you're going to get a lower interest rate.
In terms of return so that's going to impact your GPS or touch and then the last thing would be around foreign exchange. So depending on what type of stimulus do you have the dollar gets weaker because as a result of us printing more money than.
Lastly that could be a benefit for us because the way to think about our international businesses. We've got we're profitable outside the U.S. and.
Nearly half of our businesses outside the U.S.. So that can can be a benefit potentially if the dollar were to get weaker so those would be sort of the three areas financially, but so the jump off the page let me.
Okay, great. Thanks, Tom Thanks, Ed.
Well. Thank you everyone in closing we will be presenting at a number of virtual investor conferences and events throughout the rest of the fourth quarter details of these can be found in the Investor Relations section of occupied dotcom. Thank.
Thank you for joining us all of US here at Och. My wish continue go to you and yours and I have a very nice evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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