阿卡邁科技 (AKAM) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2019 Akamai Technologies Earnings Conference Call.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Tom Barth, Head of Investor Relations.

Please go ahead.

Thank you, Janice, and good afternoon and thank you all for joining Akamai's first quarter 2019 earnings conference call.

Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Ed McGowan, Akamai's Chief Financial Officer.

Before we get started, please note that today's comments include forward-looking statements.

These statements including regarding revenue and our 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.

Additional information concerning these factors is contained in Akamai's filings with the SEC, 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 April 30, 2019.

Akamai disclaims any obligation to update these statements to reflect future events or circumstance.

As a reminder, we'll be referring to some non-GAAP financial metrics during today's call.

A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com.

And with that, let me turn the call over to Tom.

Thanks, Tom, and thank you all for joining us today.

Akamai delivered excellent results in the first quarter with revenue, margins and earnings all coming in above expectation.

Revenue was $707 million, up 6% over Q1 of 2018 and up 8% in constant currency.

Q1 non-GAAP EPS was $1.10 per diluted share, up 39% year-over-year and up 42% in constant currency.

The revenue overachievement was driven by the continued rapid growth of our Cloud Security business and very strong traffic growth from our media customers.

Our earnings also benefited from a lower tax rate and our continued focus on operational excellence.

Our EBITDA margin in Q1 was 42%, up 4 points over Q1 of last year.

And our non-GAAP operating margin expanded to 30%, up 2% -- 2 points from the prior quarter and up 5 points over Q1 of 2018.

We were very pleased to see our margins improve for the sixth consecutive quarter.

As you can clearly see from our strong financial results, we've made excellent progress towards our goal of achieving non-GAAP operating margins of 30% in 2020 while also continuing to invest in innovation, new products and acquisitions to drive our future growth.

Our Security portfolio continued to be the fastest growing part of our business in Q1, achieving revenue of $190 million, up 29% year-over-year in constant currency.

And Bot Manager continued to be our fastest-selling new product in recent memory with nearly 400 customers now under contract.

Bot Manager uses sophisticated AI and machine learning to distinguish between human neuromuscular signatures and machine-generated requests.

This technology is especially effective in forwarding bots that try to take over end user accounts and commit fraud across a range of consumer-facing applications such as apparel sales, event ticket sales, travel reservations and gaming and streaming services.

Our success in the cybersecurity space was widely recognized in Q1 when we were named as the winner of 9 industry awards.

For example, our flagship Kona Site Defender service won the award for Best Web Application Solution at the recent RSA Conference.

And a well-known security buyer's guide announced that they will honor our new Enterprise Application Access service as the best enterprise secure access solution and the best security solution for retail at their upcoming awards event in June.

While it's gratifying to receive such accolades, we do not intend to slow down or rest on our laurels.

In January, we closed our acquisition of Janrain, a market leader in the customer and identity access management space.

Using their technology, we've created the Akamai Identity Cloud, a new service which is designed to help customers stop credential abuse and account fraud, manage and protect consumer data and comply with regional data regulations.

Last quarter, we also announced our new joint venture with Mitsubishi UFJ Financial Group of Japan.

The joint venture is called GO-NET, which stands for Global Open Network.

GO-NET will offer a new blockchain-based online payment platform that's designed to enable next-generation digital financial transactions to be scalable, fast, efficient and secure.

We expect that GO-NET services will become available in Japan next year.

And earlier this month, we announced our expanded partnership with Microsoft Azure.

By combining the power of Azure with the vast reach of the Akamai Edge, we plan to help content providers maximize performance and scale, mitigate cost and realize the benefits of the cloud to deliver the best possible online experiences.

We believe that this partnership demonstrates the essential role that our Edge platform plays in the evolving hybrid cloud ecosystem.

We were also very pleased with the strong performance of our Media business in Q1.

Traffic growth is expected for both OTT traffic and software downloads with several records set for volume.

And we continue to grow traffic faster than the Internet as a whole in Q1, which means that we continue to gain share.

We believe that our Edge platform's ability to deliver superior performance at scale and when it counts most is a key reason why so many of the world's major media companies rely on Akamai for their content delivery.

In summary, we're very pleased with our results in Q1 and the strong momentum that we've established heading into 2019.

It's very good to see our strong revenue growth in security, the strong traffic growth in our CDN business, the continued improvement in our operating margins and over 40% growth in non-GAAP EPS for the third quarter in a row.

We also continue to bring innovative new technology to market and to receive awards and recognition for our product leadership.

And we managed to do all these while keeping Akamai a great place to work.

In fact just this month, Akamai was named 1 of 50 Great Places to Work in Washington, D.C., 1 of the 3 best places to work in Poland where we have over 600 employees and one of America's best midsize employers.

Our highly talented and motivated workforce is a key differentiator for Akamai and one reason why we're off to such a great start in 2019.

Now I'll turn the call over to Ed to review our Q1 results and provide guidance for the year ahead.

Ed?

Thank you, Tom.

I'm very pleased to be here for my first call as Akamai's CFO, especially with such great results to talk about.

Before I begin, I want to thank Jim Benson for all his efforts ensuring a seamless transition.

As Tom outlined, Akamai continued to perform well and had a very strong first quarter.

We exceeded the high end of our guidance range on revenue, operating margin and earnings.

Q1 marked the sixth consecutive quarter of non-GAAP operating margin expansion.

We remain confident in our ability to achieve our goal of 30% non-GAAP operating margins in 2020.

Q1 revenue came in above the high end of our range at $707 million, up 6% year-over-year or 8% in constant currency.

Revenue growth continued to be solid across the business, driven by rapid growth of our security services and higher-than-expected media traffic, notably within the Internet Platform Customers.

Revenue from our Web Division was $376 million, up 7% year-over-year or 9% in constant currency.

Web Division growth was led again by another very strong quarter of security growth as we continue to see strong adoption of our entire security portfolio.

First quarter security revenue was $190 million, up 27% year-over-year or 29% in constant currency.

We are very pleased to see continued strong revenue growth from both our Web and Media Division customers.

Revenue from our recently closed Janrain acquisition contributed almost $4 million in the quarter and is included in our total security revenue.

As Tom mentioned, we believe security remains a tremendous growth opportunity and we plan to continue to invest to further enhance and extend our product portfolio as well as expand our go-to-market capabilities.

Revenue from our Media and Carrier Division customers was $330 million, up 5% year-over-year or 7% in constant currency, led by higher-than-expected traffic growth in gaming, video and software downloads.

Revenue from the Internet Platform Customers was $47 million, up 6% from the prior year and up 9% from the prior quarter.

Q1 marks the first time since this Q3 of 2015 that we have seen growth year-over-year from this group of customers.

Moving on to geographies.

Sales in our international markets continued to be strong and represented 41% of total revenue in Q1, up 2 points from the prior quarter.

And Q1 represented the first time our international revenue was greater than 40% of total.

International revenue was $288 million in the quarter, up 17% year-over-year or 24% in constant currency, driven by continued strong growth in Asia and another solid quarter in EMEA.

Foreign exchange fluctuations had a positive impact on revenue of $1 million on a sequential basis but a $15 million negative impact year-over-year.

Finally, revenue from our U.S. market was $418 million, down 1% year-over-year.

Moving on to costs.

Cash gross margin was 78%, down 1 point from Q4 levels, 1 point higher than the same period last year and in line with our guidance.

Our margins continue to benefit for our ongoing network efficiency efforts.

GAAP gross margin, which includes both depreciation and stock-based compensation, grew 66%, consistent with Q4 levels.

As a reminder, we needed to change our estimated useful life of servers from 4 years to 5 years this quarter.

That change resulted in a benefit of approximately $8 million and had a 1 point impact on our GAAP gross margin, in line with our expectations and our guidance.

Non-GAAP cash operating expenses were $253 million, down $9 million from Q4 levels and in line with our guidance.

Moving now to profitability.

Adjusted EBITDA was $299 million, down $2 million from Q4 levels, but up $43 million or 17% from the same period in 2018.

Our adjusted EBITDA margin came in at 42%, consistent with Q4 but up 4 points from Q1 2018 and at the high end of our guidance range.

Non-GAAP operating income was $210 million, up $9 million from Q4 levels and up $43 million or 26% from the same period last year.

Non-GAAP operating margin came in at 30%, up 2 points from Q4 levels, up 5 points from Q1 of last year and above our guidance range.

Capital expenditures in Q1, excluding equity compensation and capitalized interest expense, were $130 million and in line with our guidance.

Moving on to earnings.

Non-GAAP net income was $181 million or $1.10 of earnings per diluted share, up 39% year-over-year and up 42% in constant currency and $0.05 above the high end of our guidance range.

These strong earning results were driven by higher-than-expected revenue growth, ongoing network and operating expense efficiencies and a slightly lower tax rate.

Taxes included in our non-GAAP earnings were $37 million based on a Q1 effective tax rate of 17%.

This effective tax rate is 1 point lower than our guidance, driven by a higher percentage of foreign earnings.

Moving on to GAAP earnings.

GAAP net income for the first quarter was $107 million or $0.65 of earnings per diluted share.

Now moving to some balance sheet items.

We continue to have a very strong balance sheet.

As of March 31, our cash, cash equivalents and marketable securities totaled $1.2 billion.

During the quarter, we paid our $690 million convertible debt obligation that was due in February.

This payment reduced our total debt to $1.2 billion of senior convertible notes, which will be due in May of 2025.

During Q1, we also had 2 other large cash outlays worth noting.

The first was the acquisition of Janrain, which closed in January, and the second was the funding of our joint venture with Mitsubishi Financial Group of Japan.

Another balance sheet item I'd like to call out is that we adopted the new lease accounting guidance or ASC 842 in the first quarter.

This resulted in us putting operating lease assets and liabilities on the balance sheet related to our leases for office space and our colocation facilities.

ASC 842 did not have an impact on our income statement or cash flows.

Now I'll review our use of capital.

We continue to focus on the importance of returning capital to shareholders.

During the first quarter, we spent $35 million on share repurchases, buying back approximately 500,000 shares.

We expect the amount of quarterly share repurchases to increase during the year as we aim to fully offset our dilution during 2019.

We have $1.1 billion remaining on our previously announced share repurchase authorization.

Going forward, we intend to continue to return a large percentage of free cash flow through share repurchases balanced against preserving our flexibility for strategic opportunities.

We believe our disciplined and balanced capital allocation approach will allow us to continue to drive shareholder value through investing organically in the business, pursuing M&A and continued share repurchases.

We are very pleased with how the business performed in Q1 and we remain confident in our ability to execute on our plans for the long term.

Now I'd like to provide Q2 guidance and an update on our previous 2019 guidance.

Looking ahead to the second quarter, we are projecting another solid quarter on both the top and bottom lines.

This is despite foreign exchange headwinds from the strengthening U.S. dollar.

At current spot rates, foreign exchange fluctuations are expected to have a negative impact of approximately $12 million compared to Q2 of 2018 and a $2 million sequential revenue headwind in Q2.

Therefore, we are estimating Q2 revenue to be in the range of $688 million to $702 million or up 6% to 8% in constant currency over Q2 2018.

At these revenue levels, we expect cash gross margin of approximately 78%.

Q2 non-GAAP operating expenses are projected to be $255 million to $260 million, up from first quarter spend levels, driven partly by a full quarter of Janrain expenses and our Edge customer event in June.

Factoring in the cash gross margin and operating expense detail I just provided, we anticipate Q2 EBITDA margins in the range of 40% to 41%.

Moving now to depreciation.

We expect non-GAAP depreciation of $87 million to $89 million.

Factoring in this guidance, we expect non-GAAP operating margin of approximately 28% for Q2.

Moving on to CapEx.

We expect to spend approximately $157 million to $167 million, excluding equity compensation, in the second quarter.

This includes approximately $34 million related to the continued build-out of our new headquarters as well as a more significant network investment in anticipation of increased OTT traffic in 2020.

And with the overall revenue and spend configuration I just outlined, we expect Q2 non-GAAP EPS in the range of $0.97 to $1.02 or up 22% to 28% in constant currency.

This EPS guidance assumes taxes of approximately $34 million based on an estimated quarterly non-GAAP tax rate of approximately 17% and it also reflects a fully diluted share count of 165 million shares.

Looking ahead to the full year, we are increasing our revenue and EPS guidance.

On the revenue side, despite a projected year-on-year headwind of $32 million from foreign exchange, which is up $16 million since our last guidance, we are increasing our guidance to revenue in the range of $2.82 billion to $2.86 billion.

For the full year, we anticipate adjusted EBITDA margins of approximately 41% and we expect non-GAAP operating margins of approximately 28%.

As we mentioned last quarter, we do expect to see some expense headwinds during the remainder of 2019.

In particular, we are anticipating approximately $8 million per quarter of additional operating expense beginning in Q3 as the benefit of our patent royalty payments from Limelight comes to an end and as we take on higher costs related to our new Cambridge headquarters.

Therefore, we expect to see a slight decline in both EBITDA and operating margins in Q3 from Q2 levels, with an improvement in Q4.

Moving on to CapEx.

Full year CapEx is expected to be approximately 19% to 20% of revenue.

Included in our 2019 CapEx spend is roughly $100 million of onetime costs related to the build-out of our new headquarters.

Excluding this spend, we (technical difficulty) CapEx to be at the high end of our long-term model due to increased network build-out in anticipation of more significant OTT traffic in 2020.

Moving to EPS.

We are increasing our non-GAAP EPS or non-GAAP earnings per diluted share by $0.05 to $4.05 to $4.20 for the full year 2019.

This higher range is despite a projected incremental $0.06 foreign exchange headwind compared to our previous guidance.

Our EPS range assumes an expected non-GAAP effective tax rate of approximately 17% and a fully diluted share count of approximately 164 million shares.

In summary, we are very pleased with our first quarter results and our improved outlook for the year.

Thank you.

And Tom and I would like to take your questions.

Operator?

(Operator Instructions) And our first question comes from Keith Weiss of Morgan Stanley.

A very nice quarter.

If I could maybe sneak in a 2-parter.

One, on the strength that you guys saw with Internet Platform Customers or the big platform customers coming back, so how do you guys think about the durability of that strength?

Is that -- are these levels sort of -- is growth something that we could expect on a going forward basis?

And that's part one.

On the other side of the equation, on the security side of the business, still really good growth there.

It didn't kind of exceed expectations in the same way that you had in prior quarters.

How are you feeling about sort of the durability of growth there?

And then a nuanced question.

Given that those are mostly subscription businesses, I would have expected a little bit more of a sequential increase quarter-on-quarter in the security business, particularly since Janrain has entered into that.

Anything that we should just be thinking about in terms of onetime items last quarter that might have sort of changed that seasonality, that q-on-q increase that we've seen in a lot of prior quarters?

Sure, Keith.

This is Ed.

I'll take the first question on the strengthening the Internet Platform Customers.

So the strength really came from video, gaming and software.

And I think the important thing here is to note that -- what it really demonstrates is that despite the fact that these are large, do-it-yourself customers, Akamai still has an important role.

And generally, these customers will turn to us for scale or reach in geographies where they're not built out, for security, for web delivery, for functionality or for delivering live video.

So we believe we still have a big opportunity with the Internet Platform Customers.

But in terms of your second question as far as should we think about this growth as being sustainable, I'd say kind of looking to the next quarter, I project it to be sort of flat to probably down $1 million to $2 million and sort of that range for the rest of the year.

You got to keep in mind that they are primarily large media customers.

And just like any media customer, we'll have to go through some ups and downs in terms of contract renegotiations and also some of the content that we deliver, whether it's gaming content or software downloads, can also be a little bit seasonal in the sense that you may have some quarters where you have unusually large downloads or, in the case of Q1, we saw a significant number of really popular gaming business.

And on the security side, we're really excited about the potential for our Security business.

Growing at 29% was a little bit higher than we forecasted in guidance for our Q1.

Now, remember that the Nominum acquisition has now experienced its full year-over-year wraparound.

And so it will be a little bit smaller now than they were before, but 29% is great.

In terms of Janrain, as Ed mentioned, it was a small amount in Q1, about $4 million.

Now the nice thing about Janrain is that it has a long runway.

I've talked to a lot of customers since the acquisition.

They are very excited about the technology to manage customer logins, to do that in a safe way so they don't lose customer data.

There's a lot of regional laws being passed around the world and they got to comply with those laws and we can help them do that with Janrain.

We can help support user opt-in in terms of how the data is used.

So a lot of runway to go with Janrain, very exciting.

And of course, you have our Enterprise security solutions, which I briefly mentioned in terms of winning awards in Q1.

And they, again, are very small revenue today, but a tremendous runway with our zero trust architecture.

A lot of excitement around that for the future.

So we're optimistic we can keep growing our Security business at a very rapid clip well into the foreseeable future.

Yes, Keith.

Just on your question around onetime items, there's one thing to point out.

In Q4, we had a stronger-than-expected quarter with Nominum and Q1 was a little bit slower.

That tends to be timing.

That's fairly common with the carriers where you tend to see a bit stronger Q4, a little bit weaker in Q1.

That's how I'd point it out.

And your next question comes from Sterling Auty of JPMorgan.

Wanted to dive into the increased investment in the network ahead of the OTT demand.

If I rewind a little while back, we were in a similar situation, granted I think with more uncertainty on what Apple might do and be able to do in terms of their service, et cetera.

But what I'm curious about is where's the confidence level this time around in the visibility that, that traffic will actually materialize in 2020?

And how might the monetization of that traffic differ versus traditional media traffic, if at all?

Sure.

I'll take that one, Tom.

So yes, we're increasing our investment.

And this time, I think what I would say is different is last time was really focused around one event here.

And we've talked about a number of customers that are coming out with launches, Disney is one example, where there's a number of different opportunities that we're more confident that we'll be able to see additional traffic growth associated with those.

In terms of the profitability relative to traditional media, I would say in line.

I wouldn't expect anything different there other than the fact that you see significantly higher volumes.

A lot of media pricing is based on volume discounting, so maybe a little bit of that there.

But that's the primary reason why we're more confident.

The other thing to note too is our normal growth for traffic has been very, very strong.

Tom alluded to the fact that it's growing faster than Internet rates, so to the extent that we lean in a little bit here in Q2 just to be ready in case we do see significant traffic growth out of the gates.

If we don't see that, we can just dial back our CapEx spend and grow into the additional dollars that we're spending.

Yes.

We're always going to use this equipment.

The worst that happens, we don't see a lot of the upside on revenue, but we'll be using that equipment a quarter or 2 later.

And our next question comes from Brad Zelnick of Credit Suisse.

A good performance this quarter.

My first question is for Tom.

Tom, in your prepared remarks, you talked about expanding the Microsoft Azure partnership, which I think appeared in the press release earlier this month.

And I think some people might have missed it.

So can you talk about the nature of the relationship?

Is there incentive for either side to sell each other's products and capabilities?

And what would have to happen for this relationship to generate upside to your forecast this year?

Yes.

I think it's a very good relationship for Akamai and Azure and especially for our customers.

We'll be going to market together with a much better approach starting with big media companies to distribute their streaming and video assets.

It's a coupling of the technology layer, which results in better performance.

There's economic benefits to our customers to take advantage of it.

You don't have a very large cost associated with getting content off of the storage, off of Azure on to Akamai CDN that you would have with other large cloud providers or CDNs.

That's a very big cost that people don't talk about, but really impacts our customer base.

And so not only will they get better performance through this partnership, but they're going to get lower cost at the same time.

And of course, adding Akamai's scale and Edge platform, which is close to all the end users and the video players, you greatly enhance the scale of the solution for big media companies.

So I think it's really exciting for our customer base and it's great to have such a cooperative relationship that I think will be good for Akamai and Azure.

And if I could sneak in one for Ed.

Any help in appreciating your security performance across Web and Media customers?

And are you still seeing benefit from the more aligned go-to-market with Media?

Absolutely.

Yes, great question.

So again, both divisions grew very nicely in Q1 and we saw accelerated growth in the media space and continued benefit from the alignment we did about 1.5 year ago with the sales force.

So very pleased with what we're seeing in both Media and Web.

And our next question comes from Mark Mahaney of RBC Capital Markets.

This is Mike Chen on for Mark.

I just have 2. So I was wondering if you can provide any additional color on some of the churn trends you're seeing.

Anything in particular that's driven this result?

And then in terms of Cloud Security, given that Nominum is fully lapped, would you say that mid to high 20% growth is reasonable for the segment for the coming years?

Yes.

The churn was again very low in Q1 and very -- we're talking low single digits, so great work there.

And of course, that helps the growth of the business.

And we're very optimistic about the growth of our Cloud Security business.

We forecasted mid-20s and we did better than that in Q1.

And you look at the potential for our Akamai Identity Cloud, which is powered by Janrain and organically developed Akamai capabilities, and you look at our zero trust solution with our Enterprise security capabilities, and there's a lot of potential for future growth there.

And our next question comes from Alex Henderson of Needham.

I know you guys got a number of contracts that are coming up that are in the process of renegotiation.

And I was wondering as the Security business is increasing as a percentage of sales, is that helping you to offset some of the pricing pressure that you might have otherwise been enduring as a result of people being able to move content from CDN to CDN easier when they're not linked into the security?

How much is that impacting your pricing thoughts?

Sure, I'll take that one.

So in terms of the customers that came up for renewal, we mentioned on our last call because it was notable, a little bit unusual that we had a number of large media customers were consolidated in the industry and are coming up for renewals, so that's why we had called it out actually.

Actually, that's why you see the midpoint of the range down a bit from where we reported last quarter.

What I would tell you is that all -- we tend -- most of those repriced in Q1 and as far as our expectations, came right in line with our expectations, maybe a touch better.

We have a pretty good handle on the industry and what we expect in terms of pricing declines and renewals and whatnot.

So I was happy to see that, that came in as we expected.

And as far as your question around security and the impact on pricing, I would say this.

We have a strategy, especially in the Web Division, where we're bundling security and web performance.

And what you see there is exactly what you described where you will see pricing pressure typically in your web performance side of the business and what our teams will do is bundle in security as a way to remain sticky.

It's much more sticky in the application.

But also what it does is while the web performance price may decline, you're able to maintain higher revenue levels when you bundle in security.

One more question, if I could throw it in.

So obviously, Fastly has now filed to become public.

There's obviously interest in competition as a result of these smaller companies coming out.

Can you talk about what you're seeing in terms of pricing relative to the smaller competitors that are coming out?

I know you talked about your yeti comments the prior quarter.

But has there been any change in behavior?

It's my sense that the pricing is actually formed around some of these new players in the category.

Yes.

As you know, there's dozens of small CDNs out there, literally dozens.

And you mentioned Fastly.

We see them some in the market.

They're not among the leading CDN competitors that we're battling day-to-day out there in the market and have been for a long, long time.

The folks we've seen most out there are the ones that have been doing it 10 or 15 years.

And they -- they're the ones that we would most often see in the market.

Pricing.

It's always competitive out there and there's no change with that.

And that's where we got a big advantage.

We're highly profitable.

We put a lot of effort into driving efficiency.

And that's not just at the operational level, but the technical level.

We can drive a tremendous amount of traffic out of our -- each dollar of CPU, each dollar for power and square foot of colo, and that gives us a huge advantage.

When a customer needs a price point, we can go in there and offer that price point and stay very profitable whereas the competitors that you're talking about are losing a lot of money.

And when you're tiny, you can get away with that for a little while, but it really is hard to scale and eventually you hit a wall that you just can't keep doing that.

And that's why a lot of the little CDNs have really struggled to get a size of several $100 million in revenue.

When they're really small, you can pretty much make anything happen, but it becomes hard to grow the company.

And also with our profit and the amount of money we're generating, we plow that back into development of new innovative technology, acquisitions of other companies that provide capabilities that our customers want.

You see that in the context of the Security business and Ed talked about Protect & Perform.

So when we go compete against a lot of the other CDNs out there, we're in a great position with Protect & Perform and all the other capabilities we have and the other CDNs just can't stack up to that.

So when they're small, it's easy to show a little bit of growth, but hard to scale that.

And at the end of the day, our major Enterprise customers want to see a company they can rely on over the long haul.

And our next question comes from Robert Gutman of Guggenheim.

First, just revisiting the contract renewals.

So is that completed in the first quarter?

In other words, is there any more to come in the second quarter?

And secondly, if you could talk about in the Web Division, it seems that the security aspect is doing very well.

Can we get some color on the non-security products and the demand there?

Any progress you've made operationally?

Sure.

So I'll take that one.

In terms of the contracts completed, we completed most of them in Q1.

We've got another one to go here in Q2, but that's been factored into the guidance.

Like I mentioned earlier, we've got a really good handle in terms of what goes on in our market and our pricing.

So I anticipate that to come in line with what we're expecting.

On the web side, we don't break out our web performance product revenue anymore.

That's the best way to think about it.

If you look at our just CDN and as a proxy for web performance growth, it's probably fair.

But in terms of some of the other products, we've seen great growth with our Image Manager products, with -- and continued growth with our performance management products, the -- our DPM, our...

Digital Performance Management.

Digital Performance Management products.

So we're still seeing really good growth outside of security with some of newer web performance products.

Our core web performance business is, as we've talked about, the area where we do see a bit of a pricing pressure.

And our next question comes from Michael Turits of Raymond James.

So Tom, Internet traffic is growing faster than the Internet, so gaining share on a traffic basis.

But with the CDN group down 1% and up 2% constant currency, it seems that it's clear that you're getting share on a revenue basis, at least if I use the CDN number.

So is that because the performance piece is dragging it down?

Or is it because of price declines on the Media Delivery side?

Yes.

So Mike, I think it's really 3 things here.

One, there is some pricing declines, as you talked about.

That's one factor.

The other thing is that we're coming off a pretty seasonally strong quarter in Q4.

But in terms of the CDN business as a whole, as you mentioned, it's growing about 2%.

We expect to see that probably be flat to slightly decline as we work through some of these pricing declines that we talked about with renewals.

But as Tom mentioned, we are gaining share and still growing, so we're offsetting our pricing declines.

Also, as we package performance and delivery in Protect & Perform packages, it does make it harder to allocate the revenue, which is why that we report the divisions overall.

Obviously, in the Web Division, it's Performance and Security, products-dominated.

Media is dominated by delivery and OTT, has some security sales, but dominated by the delivery of products because it's just hard when a customer buys the package, Protect & Perform, to allocate the revenue.

So the CDN probably is doing a little bit better than you might think, but generally flattish to low single digits I think is a fair estimate there.

Okay.

And if I get just one quick follow-up.

You mentioned -- when you talked about the investment for next year in anticipation of the uplift in OTT, you mentioned Disney.

But are there any other events we can talk about or launches that give you visibility because obviously there's always some risk investing ahead of these things?

Sure.

Yes.

So I don't think you keep in mind, Michael, is that next year is an even year.

So we'll have the Olympics and we'll also have presidential election.

So in general, an even year as we see -- along with that, just additional traffic growth.

So that's one thing to factor in.

But there's been a number of other publicized OTT offerings, NBC, Time Warner, et cetera.

And as I mentioned before, we have excellent relationships with all the folks that have been rumored to have OTT launches going into next year.

We feel pretty confident that we should be able to get a meaningful share of that business.

And our next question comes from Heather Bellini of Goldman Sachs.

This is Caroline Liu on for Heather.

Just quickly back on the Cloud Security business, I might have missed the response to Keith's question, but is all of that revenue subscription at this point?

And then based on the fact that Janrain contributed I think you said $4 million this quarter, could you share with us your expectation for Janrain for the full year?

Yes.

Sure.

I'll take the last part.

So Janrain, as we talked about in the last call, had about approximately $20 million and we still -- we believe that's still the right number for the year.

And security is -- the bulk of that is subscription.

There are examples, I guess, with very large customers that can have a traffic component, but most or all of that is subscription and probably will become increasingly so.

So you can think of security as a subscription business.

Got it.

And then back to, I guess, pricing in the performance segment.

I mean, a few quarters ago, you mentioned retail weakness.

Is that still the case?

Or is anything changing there?

Yes, so that's still the case.

And the U.S. retail market in particular is under an enormous amount of pressure.

Saw a couple of additional bankruptcies this year in the U.S. retail market.

And what I would say about that is we haven't seen anything dramatically change in terms of the level of pricing compression.

So it's relatively consistent in what we factored into our guide going forward.

And our next question comes from Colby Synesael of Cowen.

Two questions, if I may.

One, just hung up on the Security business.

So the Security business was up $5 million quarter-over-quarter.

And you've mentioned obviously now a few times that Janrain is $4 million, so it was up $1 million on an organic basis.

And as you mentioned, the subscription business.

The $1 million sequential increase doesn't seem to align with guidance for plus 20% growth to the year.

So I was hoping you can give us a little more color on that.

And then secondly, your U.S. business has been obviously roughly flat for a while now.

It was down, I think, slightly in the first quarter.

And obviously, that's very different than what we're seeing internationally.

And I would have thought that with the big 6 Internet customers outperforming in the quarter, we would actually have seen the U.S. businesses see a step-up in its growth since I assume that's where the majority of traffic for those types of customers is coming from, but we didn't see that.

So I'm just trying to understand what is it about the U.S. business that's fundamentally and structurally so much different than the results that we're seeing outside U.S.

Sure.

I'll take the first one -- first question -- or second question first.

In terms of the U.S. business, if you look at year-over-year, last year, we had the benefit of the Olympics in Q1 and also we had Nominum.

And as I mentioned, we had a very strong Q4 in Nominum last quarter and a little bit lower than expected here in Q1 where last Q1 we had a pretty strong quarter with Nominum so you get that wraparound.

The other thing to keep in mind too is that in the U.S., that's where we have our biggest part challenge with the Web business where our U.S. retailers are.

So we've seen some continued pressure in that area.

So that's -- those are really the things that have kept our U.S. growth down.

And in terms of the way to think about the international growth, that's an area that we're going to continue to invest in.

We've been, for many quarters now in a row, we've seen significant growth in Asia as well as in Europe and there's large opportunities in places like the Middle East and Latin America.

So we're very bullish on the international growth.

And I think as we look at the remainder of the year for the U.S., as I mentioned earlier, some of those large customers that we're consolidating, most of them are in the U.S. So I expect to see that flattish to slightly down in the U.S. here for a couple of quarters until we start to see growth accelerate going into next year.

And then your other question was on security.

If you look sequentially, you're right, we're up about $5 million quarter-over-quarter.

Some of that is from Janrain.

Remember, I did mention earlier that we did have a lot higher -- well, not a lot, but we had higher revenue in Nominum in Q4 and lower-than-expected revenue in Q1.

So when you normalize that, it's back to somewhat of a normal sequential growth, but maybe a little bit less than what you've seen in Q3 and Q4 last year, but a pretty decent clip.

And we're still calling for mid-20s security growth year-over-year.

And our next question comes from James Fish of Piper Jaffray.

Congrats on a great quarter.

Just wanted to sneak in a few here.

A big question we're getting is around pretty much your anniversary-ing the Epic Games or Fortnite's win in Q2 here.

Are there any customers at this point that are more than 2% of revenue, not specifically Epic Games, but maybe you can talk about the IP guys, especially because they came back this quarter.

And then secondly, on the Enterprise Application Access product, what are you seeing in terms of adoption now that you're doing both external and internal application access?

Okay.

Epic Games.

So you talked about the anniversary-ing of Epic Games, which is -- which did launch here in -- actually late Q1, early Q2.

And then I think the question was on any customers over 2%.

We don't break that out.

But what I can tell you is we certainly don't have any one even close to 10%.

And we're seeing continued strong growth in gaming.

So Epic is -- or Fortnite has really started the trend that a lot of other companies are trying to replicate.

And as I mentioned, one of the strengths here in Q1 was due to gaming.

I expect that to continue in the future.

But one of the nice things about us relative to some of our competitors is that we don't have a lot of customer concentration risk with any of our large customers.

We have some large customers that can bounce you around one quarter and another as they go through renewal, but we don't have very significant customer concentration anyway.

And in terms of our Enterprise security offerings led by Enterprise Application Access and the zero trust architecture, we're having a lot of positive response to the architectural approach.

I'd say it's early days.

Good growth, revenue doubled year-over-year in Q1.

And we're very optimistic about the future.

Now, it's still early days.

It will take time for traditional enterprises to migrate to the cloud-based security model and migrate from a network layer authentication and security model, which has been the tradition now for a long time, to an application layer authentication and security model that's in the cloud.

But very good discussions with customers.

They're very interested.

The analyst community is very supportive.

And we're seeing very strong revenue growth, but early days and still relatively small amounts of revenue.

But as we look to the future, we think it's an important source of growth for us.

And our next question comes from James Breen of William Blair.

Can you just talk about where the growth is coming from with respect to your existing customers versus new customers?

And is a lot of the international growth coming from existing sort of U.S. customers that are expanding globally?

Sure.

This is Ed.

In terms of growth, obviously we've got such a huge installed base, so a lot of growth does come from our existing customer base and that comes through additional traffic growth as well as selling more services to existing customers.

So we always find that the bulk of that typically will come from our existing customers.

That said, we've had a couple of quarters here in a row of pretty significant new customer bookings.

Now, of course, we're growing off a really big base, so it's not a huge material number per se.

But we've made some changes in our go-to-market last year.

We're starting to see some benefits of that and starting to see new customer growth start to pick up a bit.

In terms of the difference between the U.S. and international, international is more of a greenfield opportunity that we're going into places like China, Indonesia and India, so a lot of new customers require there.

So new customer growth is probably a little bit stronger in our international market than it is in the U.S.

And our next question comes from Sameet Sinha of B. Riley FBR.

A couple of questions.

Let me first start with enterprise security.

And you spoke about growth there.

Do you think you need to make a Prolexic kind of an acquisition to kind of accelerate and provide you that sort of momentum and brand name visibility in the industry?

Secondly, talking about -- and to specifically address this in a while, so let me ask this.

I mean, last year, you had a number of operational improvement initiatives within the company, including a consultant who was in there.

Can you talk to us about where are you in that process?

Are you done with all the improvements that you need to make?

Or there are few things more in the recommendations that are yet to be kind of initiated?

Yes.

Obviously, we've been very happy with the Prolexic acquisition.

I think it really did help accelerating the growth of our organically developed Security business.

And we've made several acquisitions since then in the security space that we've been happy with and continue to look for potential acquisition.

I don't think we need to buy something in a very large scale to be successful in enterprise security, but it's an area we're looking closely at.

And of course, we've got to be cognizant of price points there.

There's some pretty high valuations in the enterprise security space, but it is an area that we continue to look at.

And in terms of where we are in the operational improvement initiatives, it's something that we continue to work.

We are very happy to see that we hit 30% in Q1.

It's something that we're working on through the year and into next year.

We have gotten benefit from our consulting engagement.

That's largely completed.

But we are always focused on operational efficiencies and are investing in making our services be more efficient and how we allocate headcount and OpEx to focus that on the areas of greatest growth for the company.

And our next question comes from Ken Talanian of Evercore.

I was wondering, could you rank order the potential drivers that might cause you to exceed your security growth expectations factored into your guidance for the year?

Well, obviously, we have to see how fast the Janrain revenue accelerates our Akamai Identity Cloud offer.

We have to see how fast the adoption takes place for our zero trust architecture.

These are things that are hard to forecast exactly.

They're very early stage and relatively small numbers today.

But if those were to take off faster than we expect, that would help.

Bot Manager, as I mentioned, has been extremely successful in the marketplace now.

It's about 400 customers.

We expect that to continue to ramp during the year.

And if it ramps faster, that can be helpful.

Ed, do you have anything else to add?

Yes.

Obviously, you've got, as Tom mentioned, Janrain and zero trust is working out small numbers.

So in terms of impacting this year, it's going to be from our core KSD, Bot Management and Prolexic.

That's the main drivers.

And as you look further out with Janrain and with Enterprise, that will be future growth drivers along with continued growth.

We still have a lot of opportunity in our installed base to be able to sell security.

We had talked about -- there was an earlier question on media.

There was an area that we had identified 1.5 year ago where there was a lot of opportunity and we've seen we've been able to execute on that.

We still have ways to go.

So basically, it's going to be from your core products and have a lot of room to go.

And also from a new customer acquisition standpoint, most of our new bookings right now are coming from security.

So we're leading with security.

So it's a customer acquisition story as well.

Great.

And if I may just sneak one in.

Your DSOs were a bit higher than historically.

Was there anything that changed in linearity of your business?

No.

So that -- it's funny.

If you go back a year ago, it's roughly the same thing.

There's a couple of things going on with timing.

We actually have a number of customers that are prepaying.

So we sent out some invoices for our customers paying in advance for a full year.

And if you look at the quality of the aging, the aging quality is fantastic.

So it's really nothing in terms of collectability or anything around that.

It's a fairly a normal jump we see from Q4 to Q1.

And our next question comes from Jeff Van Rhee of Craig-Hallum.

Just a couple for me.

I just wanted to go back to the sales sort of go-to-market changes.

You mentioned that you've seen some impact and some increase in capture from new customers.

Is it on pace with what you expected?

It's hard to get a sense of what the timing was when we didn't really see those impacts.

But is it to your expectations as to where you thought you would be at this point?

Yes.

So in terms of the new customer acquisition, I'd say we're probably doing about as good as we expected.

We made those changes about a year ago.

So it takes a while for it to take hold.

You have investment and lead generations, site sales, staff development and things like that.

So -- but in terms of how it's progressing so far, we're on pace, maybe a touch ahead.

But again, it takes a while for that to become a more material number over time.

Okay.

Got it.

And on the platforms, was the bulk of the sequential increase in platforms from one of those platform customers?

No.

Essentially, it's fairly well distributed.

There was growth, like I said, in all the different parts of the business, from gaming downloads, from software downloads, from video delivery.

And as I mentioned, one thing just to be mindful of when you have things like downloads, that actually can be a little bit seasonal.

That's why I said if you look towards Q2 and beyond thinking of flat to down $1 million or $2 million is probably the right way to be thinking about those customers.

For now, I can tell you I used to run that sales organization.

The team is actively engaged with those customers and constantly looking for opportunities for growth to the extent that we can become an extension of what they're doing and offer -- whether security or additional scale and reach, we're there to do it.

So we're certainly not giving up on this group of customers and hope we can grow the future.

But that said, we just want to be cautious as we think about guiding that going forward.

Got it.

And one last one, if I could.

I recall sort of thinking back maybe even a decade ago, I recall hearing you guys talk about Edge compute.

How has that changed now?

Certainly a lot, maybe a lot more noise about Edge compute.

But what does it mean to your business at this point?

Yes.

So we have the ability for our customers to run applications on our Edge platform.

We're increasing the investment there.

Also, this plays into our IoT Edge Connect platform where you can have really tens and hundreds of millions of devices maintain always-on connections to the platform.

Often, they'll speak non-web protocols.

And so we'll be supporting the ability to run logic for metadata, for command and control so that these devices can be monitored and you can have a learning based on it.

Basically, you want to think of Akamai as providing the kind of compute that you need to manage applications in user devices on our Edge platform, both for web application, but also IoT kinds of applications.

What you won't see us do is a generic kind of thing with just CPU for any purpose at all.

So you won't see us do like an EC2 kind of a platform.

It really needs to be material to our customer's businesses in managing applications and IoT devices.

That's the sweet spot for us.

And you'll see that kind of capability on our Edge platform.

And our final question comes from the line of Brandon Nispel, KeyBanc.

Okay.

Great.

Most have been answered.

I just wanted to ask Tom maybe.

Did you learn anything from Google's Stadia announcement regarding cloud gaming?

And maybe can you specifically talk about what type of discussions you're having with your customers?

Then one for Ed.

Headcount growth was -- headcount was down sequentially.

I was just curious if you could update us on what your expectations are for total headcount growth in 2019.

Yes.

I don't think we've learned anything in particular there.

As we talk about, we work closely with pretty much all of the major gaming companies.

I think people have been talking about running games -- the CPU for the games in the cloud data centers for a long time.

It's always a question about how much financial sense that makes.

We work with pretty much all the major gaming companies.

I think managing the metadata associated with the consoles and the devices that are playing games make sense for us.

We can do that through our IoT Edge Connect platform, but I don't know that there's going to be a lot of the streaming for the individual game necessarily coming from the cloud.

And people have been talking about that now.

Our customers, we've been talking about that for probably over a decade.

In terms of your question on headcount, yes, headcount is down.

As you know, it's -- you may know that we've had a couple of restructuring charges in the last couple of quarters as we look to optimize some of our investments, the investments in some areas and invest in others.

In terms of headcount growth going forward, Tom talked about the opportunities in security.

So we're going to see some of that savings from other areas be reinvested back in security as well as our go-to-market, especially in the international markets where we see significant opportunity.

In terms of headcount growth, I expect headcount to grow a bit here as we've -- we're taking some of these actions and we haven't built out the entire workforce in terms of making these investments.

So that's also factored into our guide.

We're going to talk about operating margins coming down a touch here in Q4 and then reaccelerate in Q2 and Q3 and then reaccelerate in Q4.

Great.

And if I could just follow-up, Tom, on your response to Stadia.

Are there technical limitations for games to be streamed from a cloud location?

It seems like Google had bought -- figured something out in terms of the latency issue that probably used to be a problem.

Well, obviously if you're playing a multiplayer game, latency makes a big difference.

And so you need to be doing the stream close to the end user.

That would be the only technical constraint.

There are economic considerations.

If you're -- if it's a high-quality game, you now have a stream for an individual user where the CPU or the user has to purchase but sitting in the cloud.

And the experiences we've had talking to the major folks doing that over the last decade, when they try to think about doing it at scale, the economics don't look so good.

There's been some desire to do it.

So in certain countries, maybe you don't have faster the game.

Maybe the game works on multiple devices, you don't have the players.

There's reasons you'd want to do it, but I haven't seen it -- I've seen people talk about it for a long time.

We can certainly handle the low latency aspect, but it's been more of the economics around that in terms of will that really take off at scale.

Well, I wanted to thank everybody for joining us this evening.

In closing, we will be presenting to several investor conferences and events throughout the quarter.

Details of these can be found in the Investor Relations section of akamai.com.

And thank you again for joining us and have a 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.