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<p type = "text" content = "Akamai Technologies (NASDAQ: AKAM)
Q4 2018 Results Conference Call
February 12, 2019 16.30. AND"data-reactid =" 23 ">Akamai Technologies (NASDAQ: AKAM)
Q4 2018 Results Conference Call
February 12, 2019 16.30. AND

Good morning, ladies and gentlemen, and thank you for being here. Welcome to the Akamai Technologies teleconference on the fourth quarter and fiscal year 2018 results. [Operator instructions] As a reminder, this teleconference is being recorded for replay purposes. It is now with pleasure that I give the conference to Tom Barth, Investor Relations Manager.

Sir, you can start.

Thanks Brian. And good afternoon to all, and thank you for taking part in the conference call on the results of the fourth quarter and the end of the year 2018 of Akamai. Tom Leighton, Chief Executive Officer of Akamai, will speak today. Jim Benson, Chief Financial Officer of Akamai; and Ed McGowan, senior vice president of finance at Akamai. Before you begin, please note that today's comments include forward-looking statements, including statements regarding income and earnings forecasts.

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 on these factors can be found in Akamai's SEC filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the views of the Company as of February 12, 2019. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

As a reminder, we will refer to certain non-GAAP financial indicators at the call of today. A detailed reconciliation of the GAAP and non-GAAP measures can be found in the financial section of the Investor Relations section of akamai.com. And with that, let me entrust the call to Tom.

Thank you, Tom And thank you all for your presence today. Akamai achieved excellent results in the fourth quarter. The turnover was $ 713 million, up 8% from the fourth quarter of 2017 and 10% at constant currency.

Non-GAAP fourth quarter EPS was $ 1.07 per diluted share, up 51% year-over-year and 52% at constant currency. These very strong results are the result of the continued rapid growth of our security business, the continued improvement of our media and carrier division and the strength of the holiday shopping season in our web division. Our net income also benefited from a lower tax rate and our constant focus on operational excellence. EBITDA margins in Q4 were 42% and non-GAAP operating margins were 28%.

The fourth quarter marks our fifth consecutive quarter of increasing margins and we expect a further increase in our margins in 2019. We are also clearly able to achieve non-GAAP operating margins of 30%. 2020, while continuing to invest in innovation and new products to ensure our future. growth. For the full year, revenues were $ 2.7 billion, up 9% from a year earlier. Non-GAAP earnings per share for 2018 were $ 3.62, up $ 1 or 38% from 2017.

We are particularly pleased to report that we generated more than $ 1 billion in cash flow from operations last year. This represents an increase of 26% over 2017 and represents 37% of our revenues. In the fourth quarter, our security portfolio continued to represent the fastest growing part of our business, with sales of $ 185 million, up 38% from the same period last year. period of the previous year, at constant exchange rate. Security accounted for 26% of our total revenue last quarter and our security business ceased in 2018 with a growth rate of $ 750 million a year.

We now expect our security business to exceed $ 1 billion in annualized revenue by 2020. This is a remarkable step, but we do not plan to stop there. With our acquisition of Janrain, which was finalized on January 23rd, and the development of our new trusted enterprise security solution, we anticipate that our security business will continue to grow at a very fast pace for many years to come. Janrain makes Akamai one of the market leaders in the management of customer identity and access management.

Their solutions are designed to manage – manage user connections and data from leading consumer websites. They verify the identity of the end user and ensure that the user experience is optimized and secure. Janrain does this in part by showing how users access their accounts. For example, what devices they use and from which locations.

We believe that we can use this data to strengthen all our security solutions. And by combining Janrain's technology with our Bot Manager solution, we think it's even harder for attackers to hack or steal user accounts. Janrain will also help us protect businesses from data breaches. Indeed, Janrain stores the user information so that the company does not have to.

And if a company does not keep user information such as user names, passwords, phone numbers and addresses, it can not be stolen from this company in case of data breach. Keeping users' data secure means more than just not stealing them. It also means that you comply with the various data privacy laws adopted by governments around the world. And it also means helping end users better control who has access to their data and what they can do with it.

This will be increasingly important in the future and we believe that our unique security solutions can help position Akamai as a trusted company in a world where leading technology companies are called for their dubious uses of technology. 39, personal information. In the future, we are also excited about our new, unsecured business security solution. Last quarter, we signed our first unsecured transaction for more than $ 1 million a year and sold it to a manufacturer in Asia. As most of you know, the manufacturing sector is not a well-known sector for buying our traditional Web services, but manufacturing companies are concerned about cybersecurity and protecting their business.

And the same goes for just about every major business today. So with our business security solutions, we see an opportunity to significantly expand the number of businesses we can serve. And as companies typically spend more on business security than on Web security, we expect this emerging company to have a more significant impact on our business as of 2020. We continue also to invest in other innovative technologies that could bring a substantial future results.

For example, we announced today the creation of a new joint venture with Japanese Mitsubishi UFJ Financial Group. The joint venture will propose a new online payment platform based on a chain of blocks, called Global Open Network or GO-NET. GO-NET is designed to enable next-generation digital financial transactions to be scalable, fast, efficient and secure. The new platform is expected to be available in the first half of 2020.

We were also very pleased to see the continued improvement of our media and operator activities in the fourth quarter. Traffic growth in the last quarter remained very strong in our OTT and gaming sectors. And in December, we reached another peak traffic record, thanks to software downloads for Microsoft and Quinze and the streaming of the UEFA Champions League. We continue to increase traffic faster than the Internet as a whole in the fourth quarter, which means we have continued to gain market share.

And because of our constant concern for efficiency, we actually spent less on network costs in 2018 than we spent the year before. Overall, we are very pleased with the progress made last year. Accelerated revenue growth, significantly improved our margins, increased non-GAAP EPS by almost 40%, developed a new innovative technology that we believe will lead to substantial revenue growth in the future, and provided excellent value to our customers, further reducing our already low churn rate. And we have managed to do all of this by keeping Akamai a nice place to work, where corporate social responsibility is an integral part of our culture.

For example, we ranked among the 100 Forbes companies that treat workers and customers well, protect privacy, produce quality products, minimize our environmental impact, give back to our communities and provide ethical leadership. Ranked among the top diversity employers among 50,000 US companies with more than 1,000 employees, we scored 100 on the Human Rights Campaign Business Equality Index . I would like to take this opportunity to thank all the talented employees of our global team for all the work done on behalf of our clients and shareholders in 2018.

Because of its continuous innovation and excellent customer service, Akamai is very well positioned for years to come. I also want to take this opportunity to thank Jim Benson in particular. As you may have seen in the press release today, Jim plans to retire from Akamai later this year. And he will transfer his duties as CFO to Ed McGowan in March.

Jim has been an excellent CFO and I am very grateful to him for his many contributions to the growth and future success of Akamai. Over the last 10 years, Jim has developed an outstanding financial organization and established a strong operational and financial discipline within the company. He has been an excellent business partner, not only for me but for the entire Akamai management team and board of directors. He will be remembered for his many contributions to Akamai for many years.

Although Jim is stepping down from the position of Chief Financial Officer after filing 10-K in March, I am very happy that he remains in the position of Executive Advisor to help ensure a smooth transition. We are sad to see Jim leave, but we are also delighted with the promotion of Ed as CFO. Ed is a highly accomplished financial executive and a veteran of Akamai for 18 years. He has extensive knowledge of our company, our clients and the industry. He began his career with us in finance and sales, then took on leadership roles in business development and global sales to media and operators.

Most recently, Ed served as Executive Vice President of Finance, overseeing corporate finance activities, client revenues and finance, finance and finance, as well as leading a key transformation project aimed at growing the profitable and sustainable growth rate. Having worked closely with Ed for more than 10 years, I look forward to leveraging his experience and knowledge as a CFO as we work to create profitable growth for our shareholders in 2019 and beyond. I will now give Jim the floor to review our results for T4 and 2018, then Ed will share our tips for Q1 and 2019, as well as some preliminary thoughts on 2020. Jim?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonFinancial director"data-reactid =" 68 ">Jim BensonFinancial director

Thank you for the good words, Tom, and good afternoon everyone. This is an excellent team here at Akamai and I am very proud of what we have accomplished over the past nine years. With a business turnover approaching $ 3 billion, the security industry is growing rapidly with an annualized rate of return of $ 750 million, a more diversified portfolio that I believe positions Akamai for its success. in the long run, unprecedented profitability and constant focus on business management. long-term while producing short-term results. As I approached my 10th year as a business leader and leader and after discussing my desire to make a change with Tom, I decided that it was the the perfect time for Akamai to move to the next CFO to lead our next phase of continued growth. and expansion.

The company has demonstrated solid business results. We have a very talented team and financial bench and many promising growth opportunities are forthcoming. I am very pleased to give the floor to Ed McGowan, who I have worked with for the past nine years as Executive Vice President of Finance. I am looking forward to helping Ed, Tom and the team in the short term, to spend more time with my family and to consider my next professional challenge.

I am convinced that this transition will be smooth. That said, let me now delve into the details of our strong fourth quarter financial results. Like Akamai – as Tom pointed out, Akamai continued to perform well and recorded an outstanding fourth quarter, ending a fantastic year 2018. We have exceeded the top of our earnings forecast, operating margins and earnings and made substantial improvements to the operating margin. fifth consecutive quarter.

We continued to function well and demonstrate the leverage of Akamai's business model. And we remain confident, we will make further progress in 2019 and we will have a clear line of sight to reach our target of 30% operating margin in 2020. Fourth quarter revenues have exceeded our target range of $ 713 million. dollars, up 8% a year. over a year or 10% in constant currency, or up 11%, if you exclude the six customers from the big Internet platform. In particular, this is the fourth consecutive quarter of double-digit revenue growth over twelve months, excluding the giants of the Internet platform.

Revenue growth remained strong in most businesses, with better-than-expected results, due in part to the rapid growth of our security services and higher than expected holiday season traffic in the media sectors. and trade, in particular. In our last call, I mentioned that traffic during the holiday season would be important and that we would be landing in the fourth quarter, and that's what happened. Traffic was strong across our installed base, with particularly strong growth in the gamers and trade sectors. Media and operator revenues for the fourth quarter were $ 328 million, up 8% from the previous year or 9% at constant currency and 14% at constant exchange rate, excluding customers of the large Internet platform.

Internet platform customer revenues were $ 43 million in the fourth quarter, in line with third quarter levels and our expectations. These clients' revenues continued to stabilize and accounted for only 6% of Akamai's total revenues. Our lowest concentration of business in our recent memory and a testimony of our continued progress in the diversification of our revenue base across multiple customers, solutions and geographic areas in recent years. Let's move on to our web division.

Sales generated by these customers amounted to $ 385 million, up 9% year-on-year or 10% at constant currency, a slight acceleration from the third quarter, under effect of the strong online retail season of our online business customers. We also continue to see strong adoption of our new products, namely Bot Manager, Image Manager and Digital Performance Management, as well as continued strong growth in the adoption of our core security solutions. In terms of our results for our security solutions, fourth-quarter revenue was $ 185 million, up 36% or 38% at constant currencies. A strong new quarter thanks to increased adoption of these solutions by customers worldwide. We are particularly pleased to see the continued strong revenue growth of our security offerings in the fourth quarter and throughout 2018, from both Web and media customers.

In 2019, our growing security company now has $ 750 million in annualized revenue. As Tom mentioned, we are confident that security continues to represent a tremendous growth opportunity and we plan to continue investing in this area in order to enhance and expand our product and service portfolio. our marketing capabilities. Our recent entry into customer identity and access management is an excellent example of how we are adding complementary features to our world-class security offerings, while acquiring new business sales talent. . In our geographic areas, sales in our international markets remained strong and represented 39% of total revenues in the fourth quarter, up 1 point from the previous quarter.

International sales for the fourth quarter reached $ 279 million, up 20% over the same period by 23% at constant currency, driven by continued strong growth in the Asia Pacific region and a strong new quarter in the EMEA region. Fluctuations in foreign exchange rates had a negative impact on operating revenues of $ 3 million on a sequential basis and $ 8 million over 12 months. Finally, in our US market, revenues were $ 434 million, up 2% year-over-year and 4% excluding customers of major Internet platforms.

Turning to costs, the cash flow was 79%, up almost 2 points compared to the third quarter of the same period last year and from one point to another. above our expectations due to higher revenues and improved network efficiency. This is not only the second consecutive quarter that our spending on bandwidth and roommate have dropped by one year on the other, but absolute expenses for the whole of the year. Fiscal year 2018 was also lower than the expenses of 2017. This is noteworthy considering the significant increase in traffic over the same period. We are very pleased with our continued ability to effectively manage network costs.

GAAP gross margin, which includes both amortization and stock-based compensation, was 66%, up 2 points from the third quarter, in line with our expectations. Non-GAAP cash operating expenses were $ 262 million, up $ 18 million from the third quarter. This figure was slightly above our expectations due to higher commissions and end-of-year premiums associated with revenue overruns. Turning now to profitability, adjusted EBITDA for the fourth quarter was $ 301 million, an increase of $ 28 million from the third quarter and $ 56 million or 23% over the same period last year. 2017.

Our adjusted EBITDA margin was 42%, up 1 point from the third quarter, up 5 points from the fourth quarter of 2017 and in line with our forecast range. Non-GAAP operating income for the fourth quarter was $ 201 million, up $ 20 million from the third quarter and $ 42 million or 26% over the same period last year. the previous year. The non-GAAP operating margin was 28%, up 1 point from the third quarter, 4 points from the fourth quarter of last year, and within our expected range. I am very pleased with the five consecutive quarters of margin increase we have seen as a result of our efficiency efforts, and I am confident that we can achieve our GAAP non-GAAP operating margin target of 30%. % in 2020 while continuing to make the investments needed to support both growth and growth. more scale and leverage in the business.

Fourth quarter capital expenditures, excluding stock and capitalized interest, were $ 125 million, in line with our guidance for the quarter. For the full year of 2018, investment expenses accounted for 16% of sales and are consistent with our range of long-term models. Going into earnings, non-GAAP net income was $ 176 million, or $ 1.07 diluted earnings per share, or $ 0.04 above the top of our range. forecasts. These good results are the result of the continued execution of results, the consistent effectiveness of network and operating expenses and the reduction of the tax rate.

Taxes included in our non-GAAP earnings were $ 32 million, based on a fourth quarter effective tax rate of just over 15%. This effective tax rate is a few percentage points below our expectations due to the higher foreign currency earnings mix and resulting cumulative accrual for the quarter. For the year as a whole, the 2018 GAAP non-GAAP tax rate was just under 18%. Let's move on to our GAAP results.

There is one notable element that impacts our Q4 GAAP results and on which I would like to bring some color. We recorded a restructuring charge of $ 13 million in the fourth quarter and we expect to record an additional restructuring charge of approximately $ 10 to $ 12 million in the first quarter. These expenses are mainly related to workforce reductions of approximately 125 employees in January, representing approximately 2% of our total workforce. Our restructuring charges also include certain small capitalization software impairments resulting from the decision to de-prioritize certain areas of investment that did not achieve the expected commercial success and return on investment.

It is important to note that these restructuring measures are being taken to allow a rebalancing of our investments, divestments in certain areas, investments in others, and to position the company in such a way as to achieve our long-term goals of continued growth and size. Based on this GAAP-only restructuring charge, net earnings under GAAP were $ 94 million or $ 0.57 of diluted earnings per share. Now, I will review our use of capital. We continue to emphasize the importance of restoring capital to shareholders.

During the fourth quarter, we spent $ 124 million on share repurchases to repurchase approximately 1.9 million shares. For the year, we spent $ 750 million to repurchase 10.2 million shares, representing 124% of our free cash flow, which resulted in a decrease in the number of shares from $ 171 million. at the beginning of the year at $ 165 million in the fourth quarter. We now have $ 1.1 billion on our previously announced share buyback authorization. And in the future, we intend to continue to return to our shareholders a significant percentage of our free cash flow through share repurchases, while preserving our flexibility to d & # 39; 39, other strategic opportunities.

We believe that our disciplined and balanced approach to capital allocation will allow us to continue to generate shareholder value by investing organically in the business, pursuing further mergers and acquisitions as we have done. have recently done with Janrain, and handing out capital to shareholders through stock repurchases. In summary, we are satisfied with the business developments in the fourth quarter and throughout 2018, and remain confident in our ability to execute our projects over the long term. I would now like to give Ed the floor to cover the orientations of the 1st and 2019, as well as some reflections on 2020. And once again, I want to say how pleased I am to leave you the reins.

I know we are in good hands. Ed?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance"data-reactid =" 88 ">Ed McGowanSenior Vice President of Finance

Thank you Jim. It has been a pleasure working with you over the past nine years and I look forward to following your example of professionalism and business leadership in the years to come. Before moving on to orientation, there are three elements of interview that I wanted to highlight. The first is a change in the useful life of our network server.

As some of you may recall, we announced in our Q4 2012 conference call the need to extend the useful life of our network servers from three to four years, according to trends in the actual life of the servers. We carefully monitor the useful life of all our capital assets each year. And based on the results of this review, we now need to extend the useful life of our network servers from four to five years, as was the case when we made this change six years ago. This extended service life is a direct result of ongoing software and hardware initiatives that we have put in place to more effectively manage our global network, as we have now been using our servers and network for five years on average. Selon la comptabilité selon les PCGR, il serait approprié d’ajuster notre politique de durée de vie utile à cinq ans. Cette modification entrera en vigueur au premier trimestre.

N&#39;oubliez pas que ce changement n&#39;a pas d&#39;incidence sur les flux de trésorerie, mais se traduira par un avantage d&#39;amortissement d&#39;environ 24 millions de dollars en 2019 et d&#39;environ 7 millions de dollars en 2020. Nous avons fourni un tableau supplémentaire dans la section Relations avec les investisseurs de notre site Web. cela détaille l&#39;impact de ce changement. De plus, au cours du premier trimestre, nous avons clôturé notre acquisition récemment annoncée de Janrain. Comme nous l’avons indiqué précédemment, Janrain aura un BPA dilutif d’environ 0,05 USD à 0,06 USD en 2019.

Mais nous prévoyons que cela aura un impact positif sur le BPA non-GAAP en 2020. Enfin, rappelons simplement que notre obligation convertible de 690 millions de dollars arrive à échéance le 15 février 2019. Nous prévoyons de rembourser les détenteurs d’obligations à la valeur nominale en utilisant une partie de notre capital de 2,1 millions de dollars. au 31 décembre 2018, le bilan se chiffre à un milliard de dollars.

Aujourd’hui, nous fournissons des orientations pour le premier trimestre et l’ensemble de l’année 2019, ainsi que quelques réflexions préliminaires sur 2020. Pour le premier trimestre, nous fournissons un autre trimestre solide en ce qui concerne le résultat net et le résultat net. Nous nous attendons à voir une baisse séquentielle normale des revenus que nous constatons généralement au premier trimestre en raison de la saisonnalité et peut-être un peu plus prononcée cette année en raison de la très bonne saison des vacances du dernier trimestre. En outre, nous nous attendons à un impact de change du renforcement du marché américain.

dollar. Au taux actuel, les fluctuations des taux de change devraient avoir un impact négatif d’environ 14 millions de dollars par rapport au premier trimestre de 2018. Nous prévoyons donc des revenus du premier trimestre compris entre 690 millions et 704 millions de dollars, soit une hausse de 5% à 7%. monnaie constante par rapport au premier trimestre de 2018. À ces niveaux de produits, nous nous attendons à des marges brutes de trésorerie d’environ 78%.

Les dépenses d’exploitation non conformes aux PCGR du T1 devraient s’établir entre 252 millions et 256 millions de dollars, en baisse par rapport aux dépenses du quatrième trimestre, alors même que nous absorbons les dépenses supplémentaires associées à l’acquisition de Janrain. La baisse enregistrée au premier trimestre est due en partie au réaménagement des régimes d’intéressement au début de l’année et en partie aux mesures de réduction de l’effectif récemment mentionnées par Jim, il ya quelques instants. En prenant en compte les attentes de marge brute et de dépense d’exploitation que je viens de vous fournir, nous nous attendions – nous prévoyons des marges du BAIIA pour le premier trimestre comprises entre 41% et 42%, conformément aux niveaux du quatrième trimestre allant de l’amortissement à la dépréciation, nous nous attendons à une charge d’amortissement non conforme aux PCGR. entre 90 et 92 millions de dollars, ce qui inclut l’impact du changement de durée de vie du serveur de réseau que j’ai mentionné précédemment. Compte tenu de ces indications, nous nous attendons à une marge opérationnelle non conforme aux PCGR de 28% à 29% pour le premier trimestre.

Passant aux investissements en immobilisations, nous prévoyons dépenser environ 126 à 136 millions de dollars, sans compter la rémunération en actions, au premier trimestre. Avec la configuration globale des revenus et des dépenses que j&#39;ai décrite, nous tablons sur un bénéfice par action non GAAP pour le premier trimestre compris entre 1 et 1,05 USD, soit une hausse de 31% et 37% à taux de change constant. Cette prévision de BPA suppose des impôts de 35 à 37 millions de dollars sur la base d’un taux d’imposition trimestriel non estimé selon les PCGR estimé à environ 18%, ainsi qu’un décompte des actions entièrement dilué de 164 millions d’actions. Nous prévoyons des revenus de l&#39;ordre de 2,81 millions à 2,85 millions de dollars pour l&#39;ensemble de l&#39;année, ce qui prend en compte un impact négatif d&#39;environ 16 millions de dollars lié aux taux de change.

Nous nous attendons également à ce que les produits d’exploitation par trimestre suivent les mêmes tendances que celles observées en 2018. Pour l’ensemble de l’année, nous nous attendons à des marges du BAIIA ajusté d’environ 41% et à des marges opérationnelles non définies par les PCGR de environ 28%, en hausse d’environ 1,5 point par rapport aux niveaux de l’année 2018, et nous sommes sur la voie de continuer à élargir les marges d’exploitation non définies par les PCGR à 30% en 2020. Il convient de noter que nous observons des obstacles en matière de dépenses en 2019. Attendez-vous à environ 8 millions de dollars par trimestre de dépenses d’exploitation supplémentaires à compter du troisième trimestre, à la fin des avantages des paiements de redevances de brevets de Limelight et à la hausse des coûts de location liés à notre nouveau siège social de Cambridge.

Par conséquent, nous prévoyons une légère baisse de l’EBITDA et des marges d’exploitation au troisième trimestre, avec une amélioration au quatrième trimestre. En ce qui concerne les investissements, les investissements annuels devraient représenter environ 19% du chiffre d’affaires. Nos dépenses en immobilisations de 2019 comprennent environ 100 millions de dollars de coûts non récurrents liés à la construction de notre nouveau siège, qui devrait être achevée d’ici la fin de l’année. En excluant les – hors dépenses liées à notre effectif, nos niveaux de CAPEX sont conformes à notre modèle à long terme.

Compte tenu de ces revenus et de ces marges, ainsi que d’un taux d’imposition effectif prévu non conforme aux PCGR d’environ 18% et d’un compte d’actions totalement dilué d’environ 164 millions de dollars, nous prévoyons un bénéfice par action non conforme aux PCGR de 4,15 $ pour l’année 2019. À mi-parcours de cette fourchette, le BPA non conforme aux PCGR serait en hausse de 14% d’une année à l’autre, corrigé des variations des taux de change. Nous nous félicitons de l&#39;évolution de l&#39;année 2019, notamment du point de vue de l&#39;expansion des marges et des bénéfices. En 2019, nous prévoyons de continuer à investir et à innover dans des domaines qui, à notre avis, seront le moteur de la croissance future, à continuer d’affiner et d’optimiser nos efforts de commercialisation et à nous assurer de bien positionner pour conquérir une part croissante du marché OTT. continuer à mettre l&#39;accent sur la qualité, le coût et l&#39;échelle.

Nous sommes optimistes sur le fait que nos efforts en 2019 dans l&#39;ensemble de la société se traduiront par une accélération du taux de croissance du chiffre d&#39;affaires et du résultat net par action en 2020, compte tenu de nos attentes d&#39;une croissance importante du trafic en 2020 en raison de plusieurs événements tels que les Jeux olympiques et l&#39;élection présidentielle américaine. ainsi que des offres plus directes destinées aux consommateurs qui arriveront sur le marché plus tard en 2019 et au début de 2020, l’adoption sans faille de nos nouveaux produits de gestion de l’identité et de l’accès des clients, l’attraction croissante de nos produits de sécurité pour entreprises sur le marché et la forte croissance continue de nos principaux produits de sécurité Web, Kona Site Defender et Bot Manager. En conclusion, nous sommes très optimistes quant aux opportunités à venir pour Akamai. Nous sommes confiants dans notre capacité à générer une croissance des revenus, une expansion des marges et des bénéfices, à atteindre notre objectif de marge opérationnelle de 30% en 2020 et à continuer d&#39;investir dans l&#39;innovation pour stimuler la croissance future.

Thank you. Et Tom, Jim et moi aimerions répondre à vos questions. Opérateur?

Questions et réponses:

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Opérateur"data-reactid =" 103 ">Opérateur

Merci Monsieur. [Operator instructions] Notre première question viendra de notre James Breen avec William Blair. Votre ligne est maintenant ouverte.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "James BreenWilliam Blair and Company – Analyste"data-reactid =" 105 ">James BreenWilliam Blair and Company – Analyste

Merci d&#39;avoir pris la question. Pouvez-vous juste parler du secteur de la sécurité et de la façon dont vous avez vu les ventes se situer entre le type de DDoS principal et certains des autres produits que vous avez vendus. Et du point de vue du client, quels types de produits [Inaudible] prendre tous les services de vous les gars? Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager"data-reactid =" 107 ">Tom LeightonGeneral manager

Oui, nous constatons une forte adoption à tous les niveaux, à commencer par les DDoS. Ensuite, nous avons Kona Site Defender, qui protège les applications contre la corruption ou leur prise en charge, ou contre le vol du contenu du site Web, lors des transactions. Bot Manager, comme nous en avons déjà parlé, est notre nouveau produit le plus rapide en mémoire. La majorité des transactions aujourd&#39;hui ne sont plus humaines.

Il y a des robots. Et en particulier, les robots tentent de prendre en charge les comptes d&#39;utilisateurs. La grande majorité des connexions d&#39;aujourd&#39;hui ne sont pas des personnes légitimes, mais des bots, qui essaient des informations d&#39;identification volées. Donc, très forte adoption à tous les niveaux et nous commençons à avoir du succès avec notre solution de sécurité d&#39;entreprise sans confiance.

Comme je l&#39;ai mentionné, nous avons recruté notre premier client doté d&#39;un million de dollars par an. Et ce qui était vraiment sympa à ce sujet, c’est qu’il provenait d’un compte qui n’aurait probablement jamais acheté nos produits d’accélération Web pour la diffusion de contenu. Le secteur de la sécurité se porte donc très bien.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "James BreenWilliam Blair and Company – Analyste"data-reactid =" 111 ">James BreenWilliam Blair and Company – Analyste

And from a growth perspective, is your growth coming from — or can you give a little color on where it&#39;s coming from, new customers versus existing customers taking more volumes?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="113">Tom LeightonGeneral manager

It&#39;s both. The large fraction of our new customer bookings are for security today, and we are getting good up-sell with the new products within the existing base. For example, Bot Manager being a new product. With our enterprise security offerings, early days but there&#39;s both new customers, like the one that became our million dollar customer.

They weren&#39;t a customer before, but also selling that within existing accounts. So I would say both are strong new customers and upselling the new security offerings within existing accounts.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "James BreenWilliam Blair and Company — Analyst"data-reactid =" 116 ">James BreenWilliam Blair and Company — Analyst

Great. Thanks.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="118">Operator

Thank you. And our next question will come the line of Brad Zelnick with Credit Suisse. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad ZelnickCredit Suisse — Analyst" data-reactid="120">Brad ZelnickCredit Suisse — Analyst

Great. Thanks so much for taking my questions. Congrats on a great Q4, and Jim it&#39;s been great working with you and we look forward to working with Ed. So, congrats on a great run there.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonDirecteur financier" data-reactid="122">Jim BensonDirecteur financier

Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad ZelnickCredit Suisse — Analyst" data-reactid="124">Brad ZelnickCredit Suisse — Analyst

You are welcome. Just a follow-on on the clock security question. Cloud security remains really impressive. How should we think about the sustainability and the visibility that you have here to the growth? And can you comment on pricing trends for [Inaudible] and DDoS in the market?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="126">Tom LeightonGeneral manager

Yes. We anticipate continuing a very strong growth rate, probably not in the 30s over the next couple of years but I would say certainly in the 20%, mid-20%. We did benefit last year from the acquisition of Nominum and their security products, which are doing quite well. But with the acquisition, we got a boost in 2018.

In terms of pricing, pricing is very strong. We have unique capabilities and they are very much needed by major enterprises. So, we&#39;re in a very strong position there to be able to maintain growth.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad ZelnickCredit Suisse — Analyst"data-reactid =" 129 ">Brad ZelnickCredit Suisse — Analyst

Thank you. And, Jim, just to follow up or, Ed, perhaps, in Tom&#39;s remarks, he had mentioned that you&#39;d spent less on network costs in 2018 than in the prior year. And, Jim, in your prepared remarks as well you talked about efficiencies with bandwidth and colocation costs. Can you just remind us once again the sources of efficiencies along the entire stack and how you&#39;re able to do that and what the limits of these are as we look out into achieving 30% and perhaps even beyond in the years to come.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonDirecteur financier" data-reactid="131">Jim BensonDirecteur financier

That&#39;s a great question. I mean, we — this is not new for Akamai. As you know, we&#39;ve made tremendous progress on network efficiencies for a long, long time. And some of the things we&#39;ve talked about in the past have been we continue to implement new software to get more throughput out of our servers and so, you certainly saw that.

I think because of our breadth and the amount of traffic that we serve. From a bandwidth perspective, we get very favorable bandwidth pricing, and in some cases, we actually get free bandwidth for our customers. The same is true for colocation that we&#39;ve been able to reduce our colocation spend by reducing the footprint and getting more throughput out of the servers, as I mentioned. So, I would say it&#39;s not new.

It&#39;s something we&#39;ve been doing for quite some time. We continue to work on engineering innovation to continue to drive that. We continue to work on things around negotiations with providers, and I expect those things will continue, Brad. I do think that, as I outlined at our Investor Day in June, that I expected that network costs and our gross margins on a cash basis would be in the high 70s, and we&#39;re kind of where I expected to be.

So I think we should be able to stabilize those margins from where they are. And as I outlined before that on the path to 30, we&#39;re pretty close. We&#39;re, call it, we&#39;re at roughly 28% now and we think we&#39;re going to be drive more efficiency out of G&A in particular. We&#39;re building out a new procurement set of capabilities and we&#39;re gonna be able to drive more procurement savings.

We&#39;ve done some facility consolidation. We&#39;ll continue to do that and we&#39;re driving some IT enablement that will allow us to take more G&A costs out. So, primarily kind of going forward, mostly from G&A, I&#39;d say we&#39;re also getting some efficiencies on the go-to-market side as we build on a more efficient go-to-market model in both our web and our media division. So — I mean, that&#39;s not going to be the the bulk of where the incremental margin is going to come from.

It&#39;s going to largely come from G&A, but you&#39;ll also see continued improvements within sales and marketing spend.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad ZelnickCredit Suisse — Analyst" data-reactid="138">Brad ZelnickCredit Suisse — Analyst

That&#39;s really helpful. But just to be clear, the tick up in CAPEX in 2019, that&#39;s really just due to the $100 million onetime expenditure toward the new headquarters. Correct?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonDirecteur financier" data-reactid="140">Jim BensonDirecteur financier

Yes. Yes. And I outlined that at the Analyst Day that we&#39;d have a big uptick kind of onetime for the new Cambridge headquarters. If you — I think Ed outlined it in his prepared remarks that if you actually adjust for that, we&#39;re actually well in line with our model that we&#39;ve outlined kind of 15% to 16% of revenue, so the uptick in CAPEX is all Cambridge headquarter related.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad ZelnickCredit Suisse — Analyst" data-reactid="142">Brad ZelnickCredit Suisse — Analyst

Perfect. Thank you so much.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="144">Operator

Thank you. And our next question will come from Tim Horton with Oppenheimer. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tim HortonOppenheimer Holdings — Analyst" data-reactid="146">Tim HortonOppenheimer Holdings — Analyst

Thanks. Tom, can you give us an update on your major hyperscale customers, essentially where are they with do-it-yourself? Do you think you&#39;re pulling ahead in terms of technology and cost capabilities versus them? And maybe some color with some of the sort of competitors that are out there. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="148">Tom LeightonGeneral manager

Yes. Some of the largest Internet platform companies have do-it-yourself efforts. They are used for large software downloads, some basic delivery. Our services, we believe, are a lot more effective at doing this offer, a lot more scalability, and higher quality.

And that&#39;s the reason there&#39;s so few of the companies that really can think about affording to do it themselves because that&#39;s a a big cost for them. I don&#39;t see any fundamental change in that landscape. In general, the competitive landscape as a whole hasn&#39;t really changed all that much. There&#39;s a lot of competitors.

The folks that have been doing CDM for a long long time, plenty of start-ups out there trying to get in the business and, of course, the do-it-yourself. No fundamental change. We, I think, continue to gain share and we do that through superior performance, competitive pricing, the largest scale that&#39;s available on the Internet, and increasingly, the — our security solutions are very helpful for us in terms of gaining share, especially with the performance solutions. We sell packages, protect and perform, in the same platform that accelerates the side or delivers the content secures it.

And security is really important for our customers and nobody really is in a position to offer the kinds of capabilities that we do there.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tim HortonOppenheimer Holdings — Analyst" data-reactid="153">Tim HortonOppenheimer Holdings — Analyst

Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="155">Operator

Thank you. And our next question will come from the line of Colby Synesael with Cowen & Company. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Colby SynesaelCowen and Company — Analyst" data-reactid="157">Colby SynesaelCowen and Company — Analyst

Great. Thank you. A few questions on growth. I was hoping you can give us what the organic growth was in 2018.

So backing out, the benefit from some of the acquisitions that occurred in parts of 2017. And then also what the implied organic revenue growth is for 2019. And maybe as part of that, just what your assumptions are for Janrain. And then my other question just has to do with the performance segment.

I know you don&#39;t break that out anymore, but when you give your guidance for 2019, what is your just broad expectations or assumptions for that that then went into that? Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="161">Ed McGowanSenior Vice President of Finance

Sûr. This is Ed. In terms of our organic growth last year, is probably around 7%. If you look at Nominum, added about $40 million, roughly, last year to the growth rate.

As far as our expectations around Janrain, expecting it to be approximately $20 million, so not significant for 2019 in terms of revenue but we do expect to get significant traction in the marketplace with our customers and expect to see significant growth [Inaudible] new Janrain products. And as far as the organic growth now, we&#39;re prospecting our security solutions to be growing in the mid 20s, as Tom talked about. And if you do the math on that, basically it would suggest that the CD and other business is roughly flat, and a lot of that is driven by trends that we&#39;re seeing in media. We had a very tough compare this year in terms of media, in terms of the gaming sector.

We have a number of large renewals in the first half of the year. We&#39;ve got some industry consolidation that&#39;s really adding to the impact of some of those renewals and a lot of these deals are — were put in place about 18 to 24 months. So I&#39;d say that&#39;s really normal things that you see in the media and entertainment space. As far as the Web Division, we are continuing to see a little bit of pressure here in the commerce space, as talked about in the past.

And that&#39;s really what&#39;s adding to the flattening of our CD and other business. We do expect to see that return to growth in 2020 as we expect to see a significant uptick in our media business going to 2020.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Colby SynesaelCowen and Company — Analyst" data-reactid="166">Colby SynesaelCowen and Company — Analyst

Great. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="168">Operator

Thank you. And our next question will come from Charlie Erlikh with Baird. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Charlie ErlikhRobert W. Baird and Company — Analyst" data-reactid="170">Charlie ErlikhRobert W. Baird and Company — Analyst

Great. Thanks. I wanted to ask a question about the enterprise security products. Specifically, in the past just compare those enterprise — or I guess, the enterprise business to what the security business was in its early days, and I just wanted to ask, I guess, how the enterprise business has been doing so far relative to those expectations.

So I guess, the question is how is the adoption, the bookings, and the overall interest been relative to your initial expectations for that enterprise business?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="173">Tom LeightonGeneral manager

Doing very well. Obviously, early days but we had very strong bookings this year, up substantially over 2017. And so — and we&#39;re anticipating even stronger bookings next year. So I would say we&#39;re very pleased with the progress in enterprise security.

I think in the long run, it should be a bigger business than the web security business. You think about enterprises, more of them — almost all of them, in fact, care about enterprise security and only really certain verticals are focused on web security, which is our current product set. And the amount of money that enterprises spend today on firewalls and trying to prevent data breaches is much greater than what companies will spend on securing a website. So I think the market&#39;s bigger and I think we&#39;re really at the cusp of a major change in how enterprises secure themselves.

the notion of zero-trust, everybody is talking about that now. Take years for enterprises really to fully make the transition but they — their first customers now are embracing that and adopting zero-trust solutions. So, I think a very exciting future.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="177">Operator

Thank you. Our next question will come from the line of Sterling Auty with JP Morgan. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling AutyJ.P. Morgan — Analyst" data-reactid="179">Sterling AutyJ.P. Morgan — Analyst

Yes, thanks. Hi, guys. First, Jim, congratulations on completing a great tenure as CFO and, Ed, congratulations on your promotion.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="181">Ed McGowanSenior Vice President of Finance

Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonDirecteur financier" data-reactid="183">Jim BensonDirecteur financier

Thank you, Sterling.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling AutyJ.P. Morgan — Analyst" data-reactid="185">Sterling AutyJ.P. Morgan — Analyst

And then in terms of — you talked about the different detail around the growth dynamics into 2019. I think that&#39;s very helpful, but you did mention in the prepared remarks, especially the OTT strength and with preparation some of the launches that have gone on, what are you seeing in terms of the uptake there? And is the pricing in those opportunities different than what you&#39;ve seen in traditional media delivery?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="187">Ed McGowanSenior Vice President of Finance

Yes. So a couple of things there. I&#39;ll start with the back — the last part of the question around pricing. Really pricing in the media space is really driven by volume.

So, there&#39;s really no difference in terms of the high volume of T customer or high volume software download customer. We do tend to get additional value on our OTT space from security sales and professional services, etc. But in terms of the traffic expectations,as we look at the — our guidance, we take a look at the customers that we have today. And we&#39;ve got pretty good trends and track record in terms of understanding how their businesses grow.

As we look out, I talked a little bit about some of the launches that may be coming at the back half of &#39;19 and &#39;20, we tend to take a bit of a conservative approach there for a variety of reasons. Many of the things that go into an OTT launch that will impact us really revolve around traffic growth. And there&#39;s a lot to think about in terms of the exact date of the launch, sometimes launches can be moved. There&#39;s very complex technology and workflows that are involved.

So, sometimes customers want to launch them either in a limited fashion. It&#39;s really not until it gets to be a service that is a market that we really get a good handle in terms of what we expect in terms of volumes. Also other things that impacted is the service of paid subscription services at ad supported what is the user adoption, what&#39;s our share of traffic, what&#39;s the engagement time of the user, what&#39;s the bit rate. So, as we look at 2019, any of these OTT offers that are coming in the back half of the year are very conservative in terms of the adoption rate, the impact on Akamai.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling AutyJ.P. Morgan — Analyst" data-reactid="192">Sterling AutyJ.P. Morgan — Analyst

D&#39;ACCORD. D & # 39; agreement. That makes sense to me. And then one follow-up would be you gave the 28% operating income margin guide for 2019.

I want to make sure I&#39;m thinking about this the right way. What would that guidance have been under the old depreciation rules in terms of the four years instead of five years?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="195">Ed McGowanSenior Vice President of Finance

Yes. So, I said it&#39;s about a $24 million impact, so it&#39;s a little less than a point. Oh, and —

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling AutyJ.P. Morgan — Analyst" data-reactid="197">Sterling AutyJ.P. Morgan — Analyst

D&#39;ACCORD. So, somewhere in the low —

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="199">Ed McGowanSenior Vice President of Finance

Yes, keep in mind also that I mentioned that we&#39;re taking on Janrain as well, so included in the guidance was the impact of Janrain. So, you&#39;d have to add that back in. So, if you those two things, roughly net each other out.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling AutyJ.P. Morgan — Analyst" data-reactid="201">Sterling AutyJ.P. Morgan — Analyst

D&#39;ACCORD. Great. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="203">Operator

Thank you. Our next question will come from line of Keith Weiss with Morgan Stanley. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Keith WeissMorgan Stanley — Analyst" data-reactid="205">Keith WeissMorgan Stanley — Analyst

Excellent. Thank you, guys, for taking the question and a nice quarter. Two questions from me. One, just more broadly, I think this is a question for Ed.

Can you kind of walk us through, again, sign of where you guys get the confidence to sort of do this for accelerating growth into 2020? And it gives — I mean, forecasting is top or so, saying, two years is really tough. But what are the kind of like mechanical things that [Inaudible] so you can see better growth into 2020? And then one — this is probably more for Tom. How do you — entering 2019, how do you feel about sort of your sales force&#39;s ability to sell outside of your traditional customer? I mean, like the selling point within a customer, going from the guy who&#39;s traditionally in charge of the website, to now selling directly to a CSO or just selling to other guys within the organization, who hasn&#39;t traditionally been the sweet spot for Akamai?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="208">Ed McGowanSenior Vice President of Finance

Sûr. So I&#39;ll take the 2020, the confidence there. So one thing to think about, we&#39;ll talk about media first and I&#39;ll get into web in a second. If you think about media, there is a odd year/even year phenomenon.

And I talked about in the prepared remarks that 2020 will have additional events for us that we won&#39;t see in &#39;19. And one of the reasons why our growth rate is a little bit lower in the media business this year is the fact that we did have some large events in 2018. That&#39;s one thing. The other thing I mentioned was the — some of the big renewals that are coming up, and I touched a bit on the consolidation in the industry.

There&#39;s been some very, very big consolidation and there you&#39;re taking I&#39;ll be a bit more of a of a decline in terms of your or your prices due to the fact that you&#39;ve got no additional volume that&#39;s added when you put the two companies together. And also there are a number of services. For example, two companies might have professional services, engagements, and whittle that down to one, etc., but these things are very temporary. And what we see is you see a decline in the business.

And then as traffic ramps, you see revenue grow again, so that&#39;s one thing. The other thing is that we&#39;ve seen significant security growth in both of our verticals. But sticking with media, we made a change back in the beginning of the year and our compensation plans and we saw a significant increase in our revenue from security and there&#39;s still a tremendous amount of whitespace there to go. And then in terms of the OTT offerings I talked about, if you look at some of the the offerings that are coming to market, while I talked about — a bit about being a little bit more cautious and &#39;19 and 2020, we feel that those offerings will start to take take hold in the market and we believe we&#39;re positioned very well to do so.

And part of that is addressing some of these concerns around consolidation and being — taking on — playing a long game in terms of being a partner and helping with some of the synergies on the cost side. On the web side, there&#39;s a number of go-to-market initiatives that we put in place. We&#39;re starting to see some pretty good traction in terms of our new customer efforts that we&#39;ve put in place in 2018. We&#39;re seeing significant growth in — outside the U.S.

both in APJ and EMEA. We&#39;re also seeing some pretty good growth in APJ in media as well. And then just security in general, within the Web Division, still a lot of whitespace to go and then we&#39;re very optimistic about the customer identity, access management, and demand that we expect to see there as well as an uptick in our enterprise security products. So all of that together gives us the confidence to feel that we&#39;ll see an acceleration in 2014.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="215">Tom LeightonGeneral manager

And on your question about selling the security solutions, we&#39;ve made a lot of progress there. Pretty much all the sales force is expected to be able to sell security solutions, and they&#39;re doing that, with the Kona sales, the CSO, with the security organization pretty much always involved there even though that&#39;s sold to — for the website. With the Bot Manager product and being all about fraud prevention there, that&#39;s the security organization typically heavily engaged with that. [Inaudible], that&#39;s a data center a protection level sale, really nothing to do with the website, per say.

It protects all the assets in the data center. So, there we&#39;re dealing with the data center networking, security side of the house. We&#39;re putting a lot of effort in our marketing, to get better known as a security company. Our — this year — past year, we hired a new global head of web sales, Scott Lovett, who&#39;s well-known as a security expert.

In fact, the large majority of our new customer bookings are led by security now. So, I would say we&#39;re we&#39;re doing very well and making the transition in terms of a sales force that sells CDN to a sales force that sells security. Now the zero-trust solutions is the next step in that direction, and we&#39;re off to a good start there.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Keith WeissMorgan Stanley — Analyst" data-reactid="219">Keith WeissMorgan Stanley — Analyst

Thank you so much. That sounds great. Thanks a lot, guys.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="221">Operator

Thank you. And our next question will come from the line of Brandon Nispel with KeyBanc Capital Markets. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brandon NispelKeyBanc Capital Markets — Analyst" data-reactid="223">Brandon NispelKeyBanc Capital Markets — Analyst

Great. Thank you. Thanks for taking the question. I&#39;m going to ask a growth question again.

So you mentioned the CM business will be flat in 2019 but return to growth in 2020 due to big events. What do you think is the sort of two-year stack growth rate and what&#39;s sustainable in that business over a multi-year time span? That&#39;s one and two, just to be clear, I guess, more of a housekeeping. Does your guidance embed pricing declines from some of the consolidation that&#39;s going on? Thanks.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="226">Ed McGowanSenior Vice President of Finance

Sûr. I&#39;ll take the last question. This is Ed. I&#39;ll take the last question first.

Yes, we did embed the expected pricing declines in our guidance. In terms of the core CDN business, if you look at our core CDN business, excluding the giants because the giant can sometimes skew some of the results, it grew at about 4% in &#39;17 and above 4% in &#39;18. We&#39;re calling for roughly a flat year here as we go through some of the items that I talked about, and then a return to growth. So I think looking at that trend, low single digits is probably the right way to think about that business.

I think one of the things that Jim pointed out, some of the cost initiatives that are going on in that business is it&#39;s a very profitable business for us and it&#39;s something that we&#39;re going to continue to optimize as we go forward. And really in terms of the next leg up in growth, OTT, once that becomes a significant portion of users&#39; viewing time, that should — you should see that begin to accelerate.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brandon NispelKeyBanc Capital Markets — Analyst" data-reactid="230">Brandon NispelKeyBanc Capital Markets — Analyst

Great. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="232">Operator

Thank you. Our next question will come from Michael Turits with Raymond James. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="234">Michael TuritsRaymond James — Analyst

Hey, guys. Good evening. Thanks for taking my question. Jim, of course, congratulations to you and a privilege working with you.

And, Ed, welcome to the slot and congratulations as well.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim BensonDirecteur financier" data-reactid="237">Jim BensonDirecteur financier

Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="239">Michael TuritsRaymond James — Analyst

Two questions, one on CDN, one on security. First of all, CDN, in terms that flattish growth for 2019, is that any different in terms of the growth expectation for the media delivery piece as opposed to the web performance piece within the CDN segment?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="241">Ed McGowanSenior Vice President of Finance

Yes, so it&#39;s roughly the same, Michael, in terms of [Inaudible]

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="243">Michael TuritsRaymond James — Analyst

D&#39;ACCORD. So about flat for both.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="245">Ed McGowanSenior Vice President of Finance

Give or take a percent a point or two.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="247">Michael TuritsRaymond James — Analyst

Right. So, it sounds like that&#39;s maybe a slightly an improvement maybe in performance stabilizing a bit?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="249">Ed McGowanSenior Vice President of Finance

I would say it&#39;s more stabilizing a bit.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="251">Michael TuritsRaymond James — Analyst

Right. And then my next question is this is on security. So, security has been great. As you pointed out, it&#39;s about a $750 million run rate, and you&#39;re looking to get it to $1 billion by 2020.

But I think it&#39;s probably been mostly [Inaudible] and DDoS up to this point. The combined market for those two is only about $2 billion, so it seems as if you&#39;re going to get the $1 billion yourself, unlikely to be 50% of that market. So you must be anticipating a really good company contribution outside of [Inaudible] and DDoS. Could you give us some sense for how big you think the non-[Inaudible] and DDoS piece of your security business could be by 2020?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="254">Tom LeightonGeneral manager

I think the vast majority of it will be [Inaudible] and DDoS in 2020. We do command a very strong share because we have really unique capabilities there in the market. Now that said, over the longer term, we&#39;re looking for the non-[Inaudible] items, particularly enterprise security, zero-trust, to drive a lot of growth. We also get — smaller contributions would be from Nominum with their enterprise security solutions that we sell actually to carriers and they provide it as a channel.

And there&#39;s smaller pieces here and there with fast DNS, but the vast majority is [Inaudible] and DDoS, and I think it&#39;ll take a little bit of time for the other pieces really and which will be led by enterprise security and the zero-trust solutions to be a big share of that. I would count Bot Manager as part of [Inaudible] when I&#39;m thinking — when I say Bot Manager, that&#39;s part of [Inaudible] because that&#39;s a very fast-growing product and that&#39;s a pretty good share of what we&#39;ll see in 2020.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael TuritsRaymond James — Analyst" data-reactid="257">Michael TuritsRaymond James — Analyst

Great, Tom. Thanks.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="259">Operator

Thank you. Our next question will come from of Robert Gutman with Guggenheim. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Robert GutmanGuggenheim Securities — Analyst" data-reactid="261">Robert GutmanGuggenheim Securities — Analyst

Hi. Thanks for taking the question. I was just wondering in the non-GAAP operating margin guidance for the year, is there anything else that&#39;s one time, holding that back besides the depreciation in January and anything related to headquarters or is that all in CAPEX?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="263">Ed McGowanSenior Vice President of Finance

Yes, so as I mentioned, in Q3, we&#39;ll start to see the rent expense hits in Q3 associated with the new headquarters building. Other than that, there&#39;s really no onetime item in and then, obviously, as I mentioned, the limelight patent royalty going away in Q3. But other than that there&#39;s really no other onetime items but Janrain is also something that you need to take to — keep into consideration as well in that operating margin guidance.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Robert GutmanGuggenheim Securities — Analyst" data-reactid="265">Robert GutmanGuggenheim Securities — Analyst

Je l&#39;ai. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="267">Operator

Thank you. And our next question will come from Mark Mahaney with RBC Capital Markets. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mark MahaneyRBC Capital Markets — Analyst" data-reactid="269">Mark MahaneyRBC Capital Markets — Analyst

Hey, I want to follow up on some of the — the two of the OTT questions. Could you at least ring fence the opportunity in OTT for Akamai in kind of leaving aside the timing, how much of an incremental opportunity you see this? Some of the launches are relatively well-publicized as to who hopes to launch in OTT service but just maybe not talking specifically about customers but are there any of those potential launches that are clear opportunities for you or some that just aren&#39;t because you don&#39;t — you&#39;ve never worked with that company? Just ring fence the opportunity both on the low side and high side in 2020 and 2021. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="271">Tom LeightonGeneral manager

Yes. Without talking about timing, we worked with all the companies that have been rumored to have OTT offers. And Ed talked about before, it&#39;s really hard to predict timing, scale, success, adoption, and those kinds of things. So we tend to take a pretty conservative view there in terms of our guidance.

I think if you look longer term in what could be on a global basis for OTT, there&#39;s tremendous opportunity for growth. If you get to the point where the majority of TV or video watching is done online, which a lot of people think will happen, and it&#39;s done a high quality say at least 10 megabits per second, there&#39;s the opportunity for orders of magnitude of increased traffic. Now timing on that is really hard to predict. As you know, there&#39;s a couple of companies that either do it all themselves, and so we don&#39;t participate in their revenue.

But for the large majority of the OTT providers, those that are setting up new services both here and globally, we have very good relationships and are in a position to benefit.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mark MahaneyRBC Capital Markets — Analyst" data-reactid="275">Mark MahaneyRBC Capital Markets — Analyst

D&#39;ACCORD. Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom BarthHead of Investor Relations" data-reactid="277">Tom BarthHead of Investor Relations

Operator, we have for probably one more question.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="279">Operator

Oui monsieur. Our last question will come from the line of Sameet Sinha with B. Riley FBR. Your line is now open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sameet SinhaB. Riley FBR–Analyst" data-reactid="281">Sameet SinhaB. Riley FBR–Analyst

Yes, thank you very much. And, Jim and Ed, congratulations on your next steps. A couple of questions here. So some nice leverage on the R&D line in the fourth quarter, can you speak to that specifically what exactly is going on? Obviously, that division has probably been impacted somewhat by the consultant&#39;s recommendations and other sort of efficiency initiatives that you have.

Secondly, if you can just talk about the the churn rate. This is the second quarter in a row where you mentioned that churn rate has gone down. Can you specifically address what are some of the key initiatives that you&#39;ve taken to make sure that this means a continued dynamic? Thank you.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowanSenior Vice President of Finance" data-reactid="284">Ed McGowanSenior Vice President of Finance

Yes, on the R&D leverage, I mean, as I outlined earlier that the bigger source of leverage for the company margin expansion is really going to come from G&A, sales and marketing to some extent, and also some network costs. We did see a little bit of leverage in R&D. As you know, we capitalized a fair amount of our R&D spend for new innovation. And you should you view that as good because that effectively means that new product innovation that&#39;s being incubated.

We saw a bit of an uptick on that from Q3, Q4 and our kind of capitalization activity, which has a benefit in your operating expenses. But I think by and large, we expect our R&D spend and as percent of revenue to be roughly flat over the next couple of years because we don&#39;t want to under-invest in a critical area to drive growth for the company.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom LeightonGeneral manager" data-reactid="287">Tom LeightonGeneral manager

Yes. And in terms of the churn rate, that&#39;s all about making the customer happy, providing great performance. We have great professional services, our people are really great, and the customers like that. Innovative new products, our customers want to see a roadmap and investment and innovation to help them stay ahead of the game.

A low rate of service incidents, things that go wrong. And we listen to our customers and engage with them and provide them the level of service that they&#39;re looking for. So in general, our customers are very, very happy with Akamai and that&#39;s directly reflected in a very low churn rate and we are very pleased to see it decrease further in Q4 and 2018.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sameet SinhaB. Riley FBR–Analyst" data-reactid="290">Sameet SinhaB. Riley FBR–Analyst

Great. Thank you so much.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom BarthHead of Investor Relations" data-reactid="292">Tom BarthHead of Investor Relations

Well, thank you. In closing, we&#39;ll be presenting at several investor conferences throughout the remainder of the quarter. Details of these can be found in the Investor Relations section of akamai.com, and we thank you for joining us and wish you a very nice evening.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="294">Operator

[Operator signoff]

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Duration: 67 minutes" data-reactid="296">Duration: 67 minutes

Call Participants:

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom Barth — Head of Investor Relations" data-reactid="298">Tom Barth — Head of Investor Relations

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tom Leighton — General manager" data-reactid="299">Tom Leighton — General manager

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jim Benson — Directeur financier" data-reactid="300">Jim Benson — Directeur financier

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Ed McGowan — Senior Vice President of Finance" data-reactid="301">Ed McGowan — Senior Vice President of Finance

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "James Breen — William Blair and Company — Analyst" data-reactid="302">James Breen — William Blair and Company — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brad Zelnick — Credit Suisse — Analyst" data-reactid="303">Brad Zelnick — Credit Suisse — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Tim Horton — Oppenheimer Holdings — Analyst" data-reactid="304">Tim Horton — Oppenheimer Holdings — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Colby Synesael — Cowen and Company — Analyst" data-reactid="305">Colby Synesael — Cowen and Company — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Charlie Erlikh — Robert W. Baird and Company — Analyst" data-reactid="306">Charlie Erlikh — Robert W. Baird and Company — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sterling Auty — J.P. Morgan — Analyst" data-reactid="307">Sterling Auty — J.P. Morgan — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Keith Weiss — Morgan Stanley — Analyst" data-reactid="308">Keith Weiss — Morgan Stanley — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brandon Nispel — KeyBanc Capital Markets — Analyst" data-reactid="309">Brandon Nispel — KeyBanc Capital Markets — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael Turits — Raymond James — Analyst" data-reactid="310">Michael Turits — Raymond James — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Robert Gutman — Guggenheim Securities — Analyst" data-reactid="311">Robert Gutman — Guggenheim Securities — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mark Mahaney — RBC Capital Markets — Analyst" data-reactid="312">Mark Mahaney — RBC Capital Markets — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Sameet Sinha — B. Riley FBR–Analyst" data-reactid="313">Sameet Sinha — B. Riley FBR–Analyst

More AKAM analysis

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