Q1 2021 Akamai Technologies Inc Earnings Call
[music].
Good day, and thank you for standing by the.
The Akamai technologies first quarter 2021 earnings call.
At this time, all participants on listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to your host today, Tom Barth head of Investor Relations.
Thank you operator, good afternoon, everyone and thank you for joining Akamai as the first quarter 2021 earnings conference call.
Speaking today will be Tom Leighton, Akamai, Chief Executive Officer, and Ed Mcgowan, Akamai 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 in such statements. The.
The factors include uncertainty stemming from COVID-19, 19, pandemic and any impact from unexpected geopolitical developments.
Additional information concerning these factors is contained in akamai filings with the SEC.
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 May four 2021.
<unk> disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we'll be referring to some non-GAAP financial metrics during today's call of <unk>.
Detailed reconciliations of GAAP and non-GAAP metrics can be found in of the financial portion of the Investor Relations section of the Akamai Dot com and 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 delivered excellent results in the first quarter Q1 revenue was $843 million up 10% year over year and up 8% in constant currency. The strong result was driven by the continued rapid growth of our security business.
This accelerated growth in our edge applications business and continued high traffic levels on our intelligent edge platform.
Non-GAAP operating margin in Q1 was 31%.
And Q1, non-GAAP EPS was a dollar of 38 cents per diluted share.
15% year over year and up 11% in constant currency.
With the strong start to 2021, we're proud of that Akamai has continued to enable and to protect remote work homeschooling E Commerce and online entertainment for billions of people around the world.
Very challenging circumstances.
Our security solutions portfolio performed especially well in Q1 generating revenue of $310 million up 29% year over year and up 27% in constant currency the fair.
Strong growth was experienced across most of our security products.
<unk>, our new page integrity manager solution.
Page integrity manager helps enterprises defend against malware in third party software and applications customers that adopted page integrity manager in Q1 included Maersk the world's largest container shipping operator, and groupon the global E Commerce marketplace.
Mayor of Skus has more than 4000 scripts half of which of third party scripts to drive millions of dollars of online business every hour man.
Managing this complex and dynamic environment had become an increasingly difficult security challenge for Mers and so they now use page integrity manager to improve visibility and the security threats and to prevent the loss of critical data.
Our bot manager solution also continued to perform very well in Q1 op manager is designed to mitigate a wide variety of automated attacks, including accounts stuffing attacks, where credentials stolen from one website or checked for validity of thousands of other websites.
When valid credentials are found Emmanuel attack is then often used to extract value from the compromised accounts.
Losses from account takeovers of new account fraud are estimated at over $10 billion annually in the U S.
In order to afford such manual attacks, we launched the beta for our new account protector solution in Q1.
Accounts protector shields organizations from account takeover and other kinds of fraudulent human activity without increasing friction for legitimate customers.
Account protector works by detecting and real time weather of user logging into an application is the legitimate account owner or an impostor in possession of stolen credentials.
One of our beta customers for this new solution is a well known restaurant franchise. It was under attack by cyber criminals, who were compromising the loyalty accounts of their diners. The criminals were stealing loyalty reward points and then reselling them on the dark web.
The digital theft outrage, the diners, whose points were stolen and angered restaurant owners, who unknowingly provided meals to fraudsters.
With help from Akamai. The franchise can now identify the situations where humans are impersonating valid diners and take action to stop the illicit transfer of loyalty points the nearby stopping the fraud and enabling the franchise to focus on accelerating sales.
We're also excited about the success of Akamai fastest growing security segment access control, which reached an annualized revenue run rate of $100 million in Q1 up more than 170% over Q1 of 2020 and up over 60% organically.
Our access control segment provides secure connectivity for users applications workloads, and Iot systems, regardless of their location.
Products in this area include enterprise application access enterprise threat protector, and our new secure mobile and secure Iot solutions that we acquired from <unk> in October.
Our secure mobile and secure Iot products provide security visibility and control for mobile devices at the edge.
These services deter malicious activity in support of acceptable use policies without needing to install the client on the device.
The solutions are sold to our carrier partners, such as AT&T weird forms the basis for their access my land solution.
These capabilities have been especially important in helping school districts secure student devices. During the pandemic. So that students can learn from home safely.
Our security solutions also continued to gain recognition from the leading analyst firms in Q1 our.
Our market, leading web application firewall capabilities earn Gartner peer insights customers' choice of distinction.
And Forrester named Akamai as a leader in Ddos protection for the third time.
Saying large enterprise clients that want an experienced trusted vendor to make their ddos problem go away should look to akamai.
Turning to our CDN portfolio Q1 marked another quarter of very strong traffic growth for Akamai.
Led by OTT video services and downloads of the gaming software.
On March 16th traffic on the Akamai platform reached an all time high of 200 Terabits per second.
This is 19% higher than the peak in Q1 of last year, and two and a half times the traffic peak in Q1 of 2019.
Daily peaks were also high in Q1, averaging 143 terabits per second.
In fact traffic on our platform exceeded 110 terabits per second pretty much around the clock in Q1.
Overall, our CDN products and services generated revenue of $532 million in Q1 up 2% year over year and flat in constant currency.
The edge application segment generated $45 million in revenue last quarter up more than 30% over Q1 of 2020.
As you may recall from the discussion at our Investor Summit in February. This revenue amount includes edge computing solutions, such as edge workers that we build discretely, but does not include the wide array of services that use our computing capabilities at the edge.
As we discussed during our recent Investor Summit, we believe that there is the potential for substantial future growth in the area of edge computing as we anticipate more enterprises moving their compute workloads to our edge platform for offload improved performance security and global scale.
A timely example of such a shift is manifested in our new vaccine edge solution, which is enabling over two dozen public health agencies and pharmacy change around the world to deliver and secure COVID-19 vaccine registration sites in the face of extraordinary flash crowds.
In multiple instances akamai was called in to rescue government agencies, whose web sites had crashed under load.
<unk> and frustrated citizens, who waited for long times before getting kicked out without a reservation.
In some cases these websites of would be using solutions provided by competitors that were not able to handle the low.
We're pleased to partner on vaccine edge with Salesforce Dot com and we're proud that our edge worker solution is made of real difference to the many millions of citizens trying to get the vaccine as quickly as possible.
Our customers are now using edge workers for a wide range of applications. For example, a leading theme park operator is using edge workers to help manage demand as they plan to reopen parks.
Publicly traded sports and entertainment company as implemented G of fencing, using our edge Kb data store together with edge workers to ensure the users access only relevant broadcast content for their location.
A nationwide home improvement retailer and the global credit card company or using a b testing logic at the edge to deliver fast and personalized user experiences.
We're enabling Dev ops workflows for our global sportswear brand I'm managing Canary releases were only of targeted group of users can see of new experience.
And we're enabling a leading global manufacturer of devices to authenticate their users at the edge, which improves performance and reduces their cloud costs.
We're also proud of the progress that we're making with our sustainability efforts in the past year, we doubled our platform capacity with no increase at all in our platforms carbon footprint and.
And just two weeks ago on Earth day, we announced it by 2030 Akamai intends to power, 100% of our global operations with renewable Energy Inc.
Improve the energy efficiency of our platform by an additional 50%.
Mitigate of 100% of our platform of emissions.
And continue to recycle 100% of our electronic waste the.
These goals reflect akamai commitment to be a responsible efficient and forward looking company.
In summary, we're very excited about the innovative technology that we're developing the strong demand from customers for our security and edge computing solutions, and our Q1 financial performance on both the top and bottom lines.
The gross strategy and goals that we outlined to you in our Investor Summit on February 25th set our direction for the future.
And we believe that our strong Q1 results show that we've been executing according to plan.
Now I'll turn the call over to Ed to provide further details on our Q1 results and the outlook for next quarter and 2021.
Ed.
Thank you Tom.
Before I provide additional details of our Q1 performance I'd like to remind everyone that as a result of the reorganization, we announced last quarter we've.
We've refocused the company from a vertical aligned divisional structure to a product oriented lens.
I will therefore be focusing my discussion today on our security technology group and our edge technology group.
Charity group as you might imagine encompasses all of our security solution. The edge group includes our media delivery and web performance CDN business, along with our edge compute solutions.
We plan to provide additional revenue detail for the different product lines within our security technology group and edge technology group on an annual basis. However, we might highlight specific subgroup details from time to time on our quarterly earnings calls if we feel it will help provide greater context.
On our results.
Finally, as I mentioned on our last call. We will continue to report both web division the media and carrier Division results, along with our Internet platform customer results.
On our website for the balance of 2021 to assist with this reporting transition.
So with all of that said as Tom outlined Akamai delivered another excellent quarter in Q1, we.
We were very pleased to exceed the high end of our guidance range on both revenue and earnings Q.
Q1 revenue was $843 million up 10% year over year or 8% in constant currency.
Driven by continued strength across most major product areas in our security business better than expected traffic from OTT video gaming customers and very strong performance in our edge applications business.
Revenue from our security Technology group was $310 million up 29% year over year or 27% in constant currency.
Driven by broad based strength across most of our security products.
Revenue from our edge technology group was $532 million up 2% year over year or flat in constant currency, we benefited from strong traffic growth driven by OTT video and gaming as well as strong growth in our edge applications business as Tom mentioned earlier.
As expected foreign exchange fluctuations had a positive impact on revenue of $3 million on a sequential basis and positive $16 million on a year over year basis.
International revenue was $380 million up 13% year over year for 8% in constant currency.
Sales in our international markets represented 45% of total revenue in Q1 up one point from Q1, 'twenty 'twenty and consistent with Q4 levels.
Finally revenue from our U S market was $463 million up 8% year over year.
Moving now to costs.
Cash gross margin was 76% in line with our expectations GAAP gross margin, which includes both depreciation and stock based compensation was 64%.
Non-GAAP cash operating expenses for $267 million in line with our expectations.
Now moving on to profitability adjusted EBITDA was $375 million of $49 million or 15% from the same period in 2020.
Our adjusted EBITA margin was 45% up two points from Q1 'twenty 'twenty.
Non-GAAP operating income was $264 million up $34 million or 15% from the same period last year.
Non-GAAP operating margin came in at 31% of one point from Q1 last year and above our guidance range due to leverage from our revenue outperformance.
Capital expenditures in Q1, excluding equity compensation and capitalized interest expense for $150 million consistent with our guidance range. We continue to expect Q1 capex to represent the high watermark for quarterly Capex spending in 2021.
GAAP net income for the first quarter was $156 million or 94 cents of earnings per diluted share.
Our Q1 GAAP results include a $7 million restructuring charge related to the company realignment, we announced last quarter, which was in line with our expectations.
Non-GAAP net income was $228 million or one dollar and 38 cents of earnings per diluted share up 15% year over year up 11% in constant currency and seven cents above the high end of our guidance range due to our revenue outperformance.
Taxes included in our non-GAAP earnings were $38 million based on a Q1 effective tax rate of approximately 14%.
Now I will discuss some balance sheet items as of March 31st our cash cash equivalents in marketable securities totaled approximately $2.5 billion after accounting for the $2.3 billion of combined principal amounts of our two convertible notes net cash was approximately $154 million.
As of March 31st.
Now I will review our use of capital during the first quarter, we spent $58 million to repurchase shares buying back approximately 600000 shares. We ended Q1 with approximately $514 million remaining on our previously announced share repurchase authorization.
Our plan remains to leverage our share buyback program to offset dilution, resulting from equity compensation overtime as.
As a result based on current market conditions, we expect to spend at least $350 million for the full year 2021.
Moving onto Q2 guidance.
We are projecting Q2 revenue in the range of $839 million to $853 million or up 6% to 7% as reported or 3% to 5% in constant currency over Q2 'twenty 'twenty.
There are two factors to consider as you think about year over year comparisons for Q2.
First in.
In 'twenty 'twenty, we saw a significant uptick in traffic on our network starting at the end of March and continuing through the remainder of the year is the result of global Lockdowns.
As our excellent Q1 results demonstrate traffic has continued to grow on our network. This year, but we don't expect to see the same traffic growth rates from a year ago going forward. This creates more challenging year over year comparisons for our edge delivery business, starting in Q2 and continue continuing for the remainder of 2000.
'twenty one.
The second.
The Q2 year over year growth comparison also reflects the continuing ban of some Chinese based apps in India.
As a reminder.
These apps, which were banned in Q3 of last year contributed revenue of approximately $15 million in Q2 2020.
Foreign exchange fluctuations are expected to have a negative 3 million dollar impact on Q2 revenue compared to Q1 levels and a positive $18 million impact year over year.
At these revenue levels, we expect cash gross margins of approximately 76%.
Q2, non-GAAP operating expenses are projected to be $261 million to $266 million.
We anticipate Q2 EBITDA margins of approximately 45%.
Moving now to depreciation we expect non-GAAP depreciation expense to be between $116 million to $117 million.
Factoring in this guidance, we expect non-GAAP operating margin of approximately 31% for Q2.
Moving on to Capex, we expect to spend approximately $133 million to $138 million, excluding equity compensation in the second quarter.
And with the overall revenue and spend configuration I just outlined we expect Q2 non-GAAP EPS in the range of one dollar and 35 cents to one dollar and 40 cents.
The EPS guidance assumes taxes of $37 million to $39 million.
Based on an estimated quarterly non-GAAP tax rate of approximately 14 cents.
Excuse me 14%.
It also reflects a fully diluted share count of approximately 165 million shares.
Looking ahead to the full year, we are raising our guidance for both revenue and EPS.
We now expect revenue of three point for the three point for three $5 billion, which is up 6% to 7% year over year as reported or up 5% to 6% in constant currency.
We now expect security growth to be in the low twenties for the full year 2021.
We are estimating non-GAAP operating margin of approximately 30% to 31%.
The non-GAAP earnings per diluted share of $5 45 sets the $5 52 sets.
This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 14% and a fully diluted share count of approximately 164 million shares.
Moving onto Capex full year Capex is expected to be approximately 16% of revenue unchanged from our prior outlook.
We are very pleased to have delivered such strong results in Q1 and to be able to increase our outlook for the full year.
Thank you, Tom and I would be happy to take your questions operator.
If you'd like to ask a question at this time please press the star.
And the number one key on your Touchtone telephone.
To withdraw your question at the parking again that is star then one to ask the question.
Our first question comes from Colby <unk> with.
Cowen Your line is all of them.
Hi, This is Michael on for Colby two questions for me.
First can you give us some update on your M&A pipeline for security and how the number of opportunities Youre seeing compares to this time last year and secondly, you know one of your C. D. M. P. S flag that they saw loss of market share due to performance and is there anything that you can flag related to market share gains or for potential losses.
During the quarter that'd be helpful. Thank you.
Sure I would say the M&A pipeline is comparable to last year. There is a whole lot of companies for sale.
On the pricing for typical of companies in the security area.
You know remains very high and I think in many cases unrealistic.
So I think overall of the dynamics there are pretty comparable to where they were last year. As you know akamai is always looking for opportunities.
We're also very disciplined in terms of actually what.
What we end up buying.
In terms of CDN market share of the the very large mead.
The media companies do compare the CDN vendors in terms of their traffic share and you know if a vendor is doing better than others. They tend to get more share and thats why akamai has such a large share when it comes to delivery of media traffic and of <unk>.
Vendor has outages or performing poorly, which we see you know a fair amount out there among our competition are they can lose share.
And so that's a very typical dynamic nothing new there it's been that way for several years and.
And that's why Akamai put such an effort to have the world's best performance since why we have so much of the traffic.
Perfect. Thank you very much.
Our next question comes from James Fish with Piper Sandler.
Hey, guys. Congrats on the quarter first can you just give us more color behind the media CDN business in terms of especially the gaming vertical specifically just really trying to understand how fast the revenue our traffic from gaming itself is growing and what the exposure to gaming overall, given what we're seeing with the commvault.
Michael as.
As well and that normally Ed you don't typically raise in Q, Paul in Q1, I guess, what the confidence at this point of this.
This quite of the year versus normal.
Hey, Jim.
So first I'll take the first question, which was around.
The media of the gaming growth in particular, so we don't break out specific growth rates, but I can say that Ah <unk>.
Gaming in particular was one of the stronger verticals in terms of growth very pleased with what we saw in the other thing is I'd say the names of the.
And the number of customers that we saw growing it wasn't just your normal handful of gaming customers. So we saw some benefit from the continuation continuous continuation of the gaming console releases. We saw in Q4. We also saw a lot of publishers of some pretty significant releases during the quarter. So in general is a really good gaming quarter.
<unk>.
We're off to a pretty good start here in Q2 and.
As you know this the gaming release can be a bit seasonal but so far it's been a pretty good start for the year like I said I'm pretty happy with the.
The performance across many different customers in terms of guidance. Yeah. We just start off with having a great year traffic has been very strong you saw the security performance you know.
It's a little bit we get a lot of exposure on the FX side, so having one quarter down and having the first month of the core of the second quarter down because of a little bit more confidence going into the year. So.
Felt that we had enough visibility at this point to to raise guidance as you know the second half of the year is always a little bit more challenging where Q3 you tend to see the summer.
Summer seasonality, we didn't see that last year because of the pandemic, we'll probably see a little bit of that on the media side and then Q4, obviously tends to be are the strongest seasonal quarter, where you have.
Strong e-commerce and strong media. So we're feeling pretty confident at this point, we felt it was appropriate to take the guidance of touch.
Thanks for that congrats again.
Our next question comes from Keith Weiss of Morgan Stanley.
Excellent. Thank you guys for taking the question and Ed.
Very nice quarter.
That last question and just kind of the increased confidence in the year is it more on the CDN side or more on the security side because it does sound like you feel good about some of those new products ramping our credit pretty nicely on the security portfolio and Youre talking about the at the low twenty's growth for the year. So I'm, hoping you could clarify that.
And then out of a follow up question on margins, if we have time.
Yeah, we had a very strong start for the year, it's great to see the security business growing at 29% and the you know as we talked about it's really across the board, it's not a single product doing well, but just the strength everywhere in security and you know when you see that kind of performance and we look ahead to the.
Back part of the year.
We are confident that we're going to do better than we had thought coming into the year.
You know the the just great performance.
There's also a good performance on the CDN side.
Happy to see that up 2% as Ed talked about you do worry about FX there a.
And what can happen, but on balance business very strong and off to a great start Ed do you want to add any color to that.
Well I think you covered the Tom I think you know seeing the strength of security and being able to take that up a touch of last quarter. We were in the 18% to 20% range now or in the.
The low Twenty's and then on the CDN side, we do have some tougher compares but we're seeing you know really strong traffic and not seeing any decrease from what we've seen over the last year. So we're feeling pretty good about the.
Got it that sounds great and then on the on the margin side of the equation.
We're past the peak in terms of Capex sort.
Sort of spending of Capex intensity.
But it's going to take some time for that the flow through kitchen. The gross margin. So that's probably more of like a calendar 'twenty two impact, but you did come in a little bit ahead on operating margin this quarter.
And next quarter, we're looking for 31%.
The expectation that youre going to try to sort of take that up with increased investment in the business or is there potential for kind of more flow through of upside into it the better margins for the year.
Yes, Okay, two things to think about the the first one is we have our <unk>.
Biggest expense lines are payroll and we have our annual what we call. Our merit increase cycle that kicks in July one so youll see a little bit of increase of our operating expenses for carrying our current employees, but we will be investing the security.
For the plant we've got some planned investments in the back half of the year, but you know we took the guidance range up from what we said approximately 30 last night in the 30 to 31, so running of 31 year, but b the touch under in Q3 as we go through our Merit cycle and then you know Q4 is always a little bit of a wildcard in terms of how strong the revenue performances, but we want to make sure we're investing back in.
The business, we see really good growth in the security, but also in our edge applications business as well.
Got it is there a potential for gross margins to start to become a little bit of a tailwind into the back half of the year.
Yeah, I mean, you've got to keep in mind the mix there Keith the overtime I think as you get into as we talked about in the Investor Relations Day, where you saw our security margins gross margins are higher you have got your media margins are lower so it's really of the mix and while we're exceeding our plans so far on security, it's going to take a bit for that to really manage the man.
The first itself in higher gross margins.
Just need to get a bigger percentage of the business coming from security and I don't know if you look at the part of the business of media. That's growing it's primarily the high volume video of high volume media that tends to be where you have for the most competition and pricing pressure. So you kind of balance those two the two out of your kind of keep the margin gross margins flattish year for the year and the let's say over.
There's a chance that we could see some expansion there, but we're not going to call that out right now.
Got it excellent. Thank you so much for the color guys.
Our next question comes from Sterling Auty with J P. Morgan.
Hi, this is such a thorn in for Sterling Auty.
Can you give guidance.
I was on the organic growth in the security for the quarter.
Yes sure. This is Ed we had about $10 million of contribution from <unk>, which would be about four percentage points I would say, though that.
When we acquired also the our plan was to do roughly $30 million in revenue in the first year and we're obviously exceeding that so.
We've been able to take that asset and really start to scale. It so well, it's technically inorganic I'd say, we deserve some credit for being able to significantly accelerate that growth rate. So if you back out the 4% you'd be said 29 of 25 and 22% Paul constant currency basis.
Okay, and then just a follow up on that the.
The gross gross margin some sales and marketing are down.
Seasonally so can you give more colors on the acquisition.
Yes, so on the sales and marketing what you'll find is the Q4 tends to be our highest quarter for sales and marketing expenses, where you have the treasury last year. When you were exceeding our plan and we get into accelerators. So you get a reset on the compensation of the whole youll see it spike up again in Q4 of this year.
And on gross margin.
Yeah, So gross margins were flat quarter over quarter.
In line with what we expected so really there's nothing to call out there.
Could patch.
Our next question comes from Tim Horan with Oppenheimer.
Thanks, guys great of Great security quarter.
Was there any one time items any license deals or anything else that would suggest why you know why the growth could slow down so much up on acceleration like this and can you comment on how enterprise security is doing is it meeting your expectations at this point.
Yes, sure Tim I'll take the first one on the Tom is going to talk about enterprise. Afterwards. So yeah. There's there was really nothing to call out in terms of license revenue, but I'm glad you reminded me because when you guys of building your models remember last year in Q2, we did have an unusually strong.
License quarter. So as you kind of build your models and look at your comparisons remember last year, we had 7 million of the.
License revenue in Q2, we don't expect that again in Q2 of this year and in Q1, there was really nothing.
Unusual as Tom said, it really strength across many different products and security.
Easy for us to just call out one thing, but the good news for US is we see strength everywhere and Tom if you want to talk a bit about.
About the enterprise.
Yeah, the access segment performed very well.
We noted we're now at a 100 million dollar of revenue run rate. So it's great to start the year in Q1, there are very strong growth over 170% over last year now of course that include the odds of E. P.
You take that out organic growth still over 60% in that segment. So I'm very pleased and as Ed noted, we're pretty excited about the odds of the acquisition.
Especially as you get the emergence of five G M.
And you get I O T applications, but the ability to secure enterprise devices across the board.
I think it's very exciting for the future.
And we're really in a unique position to do that and we have great relationships with the carriers. So we think we'll really be able to scale that business to a global basis.
And just following up on the M&A question with New security products. Do you think you can shift more to internal development from your own R&D as opposed to acquisitions or.
How has that been trending the last few years.
I think it's a good healthy mix as you know we've made the several acquisitions, mostly tech tuck ins, the occasionally something a little bit larger.
And we do a lot of organic investment and research and development very active they're very innovative you know maybe a good example of page integrity manager, which we launched last year.
And doing really well in the marketplace and we did that was a blend of of tech tuck in you know what.
Seven to 10 employees in the company, we acquired in a lot of organic development at the same time.
To make a very successful product quickly bring it to market a M.
And in very strong adoption in early days.
Thank you.
Our next question comes from Alex Henderson with Needham.
Hey, guys you have Mike She goes on the line here for Alex Henderson.
Could you comment on the security growth Youre experiencing I'm just trying to.
Think about this the mandan and the increased expectations you guys have now is any of this at all related to I guess budget finally coming to market. Following the headlines that we saw earlier in the year around the solar winds in the Microsoft Exchange servers X.
And then the second comment on that would be the improved outlook that you have for security is the is it also expected to be broad based on the go forward basis.
Yeah, Let me take the first question there and that's a really good question.
The attack landscape is just breathtaking.
You know you think you've seen it all in the next week you read the next headline.
The and the attackers are very powerful you have nation states large scale organized crime.
You know just what and what they're doing is.
The scary now the great news for Akamai and our customers is that we have solutions that can protect enterprises for a large majority of those attacks.
Great example is the recent exchange server hacked, where many thousands of enterprises got hacked.
Lost their emails, which is really bad.
<unk>, our I T Department was running an exchange share just like all of those other companies are and the difference is we didn't get hacked because we use our own enterprise security solutions, and we had enterprise application access sitting in front of our exchange server and that meant that the ball.
Non ability couldnt be exploited because the.
The employee doesn't just get to go contact the exchange server. They did you know then somebody can come in and the for your authenticated by the exchange server you can exploit the vulnerability and <unk>.
That they got to get to Akamai that come the occupant Akamai is enterprise application access product, we authenticate them.
And if it's a bad guy outside trying to do something no way they get in and not only that they don't get directly to the exchange server because they have to pass through our securities. So if they're trying to do bad things will stop it.
And it's all about you know our approach to zero Trust and yes, we can protect enterprises from these sorts of things and you know even in zero day attacks.
No about the exchange hack before.
The other enterprises or Microsoft Ed and yet we were protected at zero day because of our solutions. So I think you know the as the of tax increase that does increase awareness and that does help drive our security business.
And I see no end to the tax comedy there's there's more on the way and.
And we're in a great position to be able to help the leading enterprises stay safe against those attacks.
Great and then just following up that broad based strength that we're talking to who weren't as bad as expected on a go forward basis with the updated outlook we have today.
Yes, it was.
<unk> across the board and we're anticipating that through the rest of this year and of course, you know what.
I, our Investor day, we talked about the three to five year CAGR goals and if you go back to that material youll see its pretty strong across the board there in terms of of our anticipated growth over the longer term.
Great. Thank you.
Our next question comes from James Breen with William Blair.
Thanks, Thanks for taking the question just wondering if you give some color on the U S versus the international mix it.
It seemed like U S has had a pretty good acceleration on the year over year basis this quarter.
As this pandemic driven.
Or is it more around the products that's getting sold and then just secondly on the margin spread EBITDA margins of 45% you guided to that for the next quarter given the business mix now or is that sort of the starting point in terms of margin structure given the.
Capex coming down and the investments et cetera. Thanks.
Yeah, Hey, Jim.
So on the the bulk of EBITA margin question first yes. So 45 is the good spot for for all of this quarter, obviously, we get a little bit of expense coming in the Q3 of 44 45 ish, but I think youre thinking about it in the right range on the U S versus internationally of U S was pretty strong we've been having.
Having pretty decent U S growth remember go back a year or so a little over a year ago, we were kind of flattish and we start to turn things around there, but it has to do with the strength that we're seeing of media of lot of the companies are in the U S.
In terms of international still having very strong growth internationally we.
We do come up against some tougher compares there is a pretty strong media business outside of the U S. So you'll see some some tougher compares on the media delivery side and as I called out from an international perspective, there's a we're still lapping that $15 million of lost revenue associated with the best apps in India.
And then.
Just wondering the question are there any sectors that youre seeing that were particularly hit hard by the pandemic that are maybe starting to come back a little bit more.
As the vaccines gotten rolled out.
Yeah, Yes, good question, Jim So I would say.
The hotel and travel is probably stabilizing a little bit I wouldn't say, we're in the growth phase yet you're starting to see some early signs, it's probably still a few quarters before we start to see that business returned to a growth engine for us.
Retail, it's still a mixed bag you've got some that are doing well some of that aren't doing well and just just keep in mind that that's a 20% of our total business 40% of your new.
The old legacy web business, but.
But I'd.
I'd say we're in the.
The optimistic but still a ways to go before we declare victory there.
Great. Thanks.
Our next question comes from Brandon <unk> with Keybanc.
Great two questions for Ed one.
Tom Ed could you just outline how we should be thinking about working capital for the year and then for the full year 'twenty one what's embedded in your outlook for FX versus your prior expectation then for Tom how should we think about the growth in edge applications sequentially as we move throughout the year.
You mentioned of about $45 million this quarter. Thanks.
Hey, Brendan the I'll take the second one first in terms of FX. So.
The FX rates, what we do is at the beginning of the quarter, we sort of take a look at where the FX rates are assumed that's going to stay for the balance of the year in terms of how it was relative to the beginning of the last quarter. We gave guidance. Some currencies are up some are down that's roughly somewhat in line of talked about in the prepared remarks that FX sort of came.
As expected, we got a little bit of a headwind here quarter over quarter, mostly weakness in the yen.
But I would say just keep an eye on it though to just.
If you kind of just step back and do the math to get you know a little over $1 billion worth of non U S denominated revenue.
But the the extent that you get one.
The 1% swing that can swing the $10 million on an annual basis.
Of the major currencies for us of Euro yen pound and then it kind of drops off from there and the.
The other currencies aren't as impactful, but those of the three to keep an eye on and then working capital I would say like any other year.
You will see.
Nothing unusual in terms of working capital this.
This year with the Q1, you see us for.
From a cash flow perspective, we pay out our bonuses early in Q1, you see cash flow the working capital pick up of touch.
The call out in terms of collections the Bachelor than fantastic.
Nothing of the payable side of its unusual as we've talked about Capex is already of the five points. So nothing really unusual the call on the working capital.
Yeah and in terms of of the edge applications question Youre right about $45 million in Q1.
We don't guide separately on an annual basis for that you just saw over 30% growth in Q1 and at IR Day, We did talk about end of the three to five year CAGR.
Our goal there is over 30%.
So I you know at a high level I'd expect to see US continue with very strong growth through the rest of the year and edge applications.
Great. Thanks for taking the questions.
Our next question comes from Robert <unk> with Raymond James.
Great. Thanks, just two questions for me one good to see the guide up on the security business two of low Twenty's rate, but you did just report security growth of 29%. So just how should we read into that why should we expect that growth rate to the salary materially in the two just what are you seeing on CDN per unit pricing as the level of price decline.
The more steeper than usual as larger customers renegotiate, they're now larger CDN contracts and a COVID-19 boost the traffic environment.
Yeah, So I'll take both of those so on the the low twenty's of the way to think about it.
I just called out when Tim asked the question about the license revenue you've got a tougher compare in Q2 with $7 million of license revenue, we don't anticipate.
Repeating in Q2, you also have the also the acquisition that will anniversary in Q4. So when you take those two factors into consideration you'll see.
The growth rate come down a touch of as those sort of work themselves out.
On the CDN pricing environment.
Nothing really to call out there.
I've been in this business for a little over 20 years of sort of got numbed the pricing at this point and I don't see anything that the.
She is unusual and also if there was anything in our top and the.
Earnings day.
Analyst day, we called out the top eight customers anyone who's over 1% as a metric.
And if theres anything in that group of customers worth calling out of certainly do that and there's really nothing at this point to call up and as far as renewals are going we do a pretty good job of anticipating what to expect and it hasn't been.
Negative surprises so far.
Thanks, a lot.
As a reminder, if you'd like to ask the question at this time of that Star then one.
Our next question comes from Jeff Van read the Craig Hallum.
Hey, guys. This is rudy on for Jeff. Thanks for taking my questions I don't want security of said Theres broad based strength in the quarter you expect that to continue.
Are there any products in there maybe one or two that were just a little bit weaker or saw some challenges or slowdowns, just anything you'd call out.
I don't think there's anything to call out there just really is outstanding.
How a quarter across the board of very pleased with how the security business is doing.
Got it and then the sustainability goals by 2030 is is there any bounds you can put around.
You know maybe how much expense for those investments there.
For your factoring in for 'twenty, one or just what the expected impact of margin might be from investments there maybe on the longer term.
Yeah. So.
At the time with the team of went through this and there's really not any significant expenses that we.
The fate for several years and even then the the cost of the team has rolled up as not all of that significant we've actually been able to do some pretty creative deals.
Certain projects on renewable energy that.
I've worked out to be from a pricing perspective in the overall net economics have been the.
Neutral to even favorable of cases, so nothing really there to note. The team is doing a fabulous job on it in the.
As time goes on if there's anything we need to call out and certainly let you know.
Got it great. Thank you that's it for me.
Our next question concerned Charlie Ehrlich with Baird.
Hey, Thanks for taking the questions Chuck there of the gone for willpower.
I was hoping to dig in a little bit more into the legacy Web division.
Could you maybe talk a little bit more about maybe the puts and takes in that segment and the declines we're seeing there.
And then what it might take the stabilized that segment.
Okay.
Yeah, So I would say similar to what we've talked about in the past you've got.
Obviously strong security growth you've got from a from a verticals perspective, you have two verticals retail and travel which make up 40% of the legacy Web Division.
Vertical our division excuse me.
And you know we're still like I said on the a few questions ago, we're not quite out of the woods, there yet and we're starting to see some stability, but we're not seeing the type of growth yet there. So it's going to take a bit for that to recover.
We're doing a nice job of dealing with certain pricing pressure in those verticals with opening up all the shares of the wallet, whether it's additional security products or really starting to see a lot of interest in our edge compute at edge applications business as well, so we'll see dollars potentially ship delivery into the that categories. We could go through price.
Negotiations, but that's pretty normal.
And once we start to see probably the couple of quarters hopefully the travel in the retail business get back to normal. If these vaccines Holden life returns to normal hopefully start to see that segment of the business growing again.
Okay, and then on the Internet platform customers sort of continuing to see some growth there which is great is there anything specifically, that's driving that growth and which we expect for the rest of the year from that cohort.
Yeah, So it's becoming less impactful. So that's why we're kind of going away from that metric you didn't hear me talk about in our prepared remarks, I think years ago people were concerned that that may go to zero and we talked a couple of years ago about that stabilizing that getting it back to growth in the the team has just done a phenomenal job. So I'd first tip my hat to the.
Team, that's managing those accounts they've done a nice job of finding areas for us to add value to incredibly innovative technology companies that have their own C. D. M and we found a nice spot to pick up business, whether it's adding security or deliver graphics for video and gaming for big scale.
All of them or for live video or even on demand video. We're just finding a nice niche there and that continues to grow it's up about $1 million quarter over quarter.
Very impressive growth rate.
I'd say stability is probably a good way to think about that going through the year. You know there's always upside with these accounts of the teams identifying new areas of opportunity.
All the time so.
Very pleased with the with where we are with those of those customers and expect to see probably similar numbers, what youre seeing now down a little bit quarter quarter, depending on certain things that are going on in those accounts.
Got it thank you.
Our next question comes from Alex Henderson with Needham.
Hey, guys, Mike Chico's here again, and thanks for getting me on the line.
I did just want to follow up.
Just looking at my model versus where you guys came in the sales and marketing expense. This quarter was much lower than what we had anticipated even.
If the removing the accelerated from for acuity, even just looking at Q1, 'twenty one versus Q1 'twenty.
The the amount of leverage in the model can you can you talk to how we should expect the.
Sales and marketing to play out over the course of the year are there savings being realized when the real one division of the reorganization that you guys had talked to earlier this year.
Yeah, that's a good point Mike.
So as part of the reorganization of some shift between sales and marketing research and development of a few million Bucks.
Remember correctly and then there was some savings as we moved from the divisional model to one or so there was some synergy mostly at the management level.
So you'll see some of those costs go away as well.
Great. Thank you for clarifying that.
Okay, well. Thank you everyone in closing, we'll be presenting at several investor conferences and roadshows throughout the rest of the second quarter details of these can be found in the Investor Relations section of Akamai Dot com.
Thank you for joining us and all of US here of the Akamai wish you continued good health to yourself as well as to your families have a nice evening.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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