Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Akamai Technologies, Inc. Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Tom Barth, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining Akamai's Fourth Quarter and Fiscal Year 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 including statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to material differently 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 February 11, 2020. Akamai disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the Financial portion of the Investor Relations section of akamai.com. And with that, let me please turn the call over to Tom.

Thanks, Tom, and thank you all for joining us today. Akamai delivered excellent results in the fourth quarter. Revenue was $772 million, up 8% over Q4 in 2018 and up 9% in constant currency. This very strong result was driven by the continued rapid growth of our security business, a better-than-expected holiday commerce season and substantial increases in traffic for our media customers. Our non-GAAP operating margin in Q4 was 29%, up 1 point over Q4 in 2018. Q4 non-GAAP EPS was $1.23 per diluted share, up 15% year-over-year and up 16% in constant currency. These excellent results were due to our strong revenue growth, the benefit from cost reductions made over the past year and a lower tax rate. For the full year, we exceeded our projections on both the top and bottom lines. Revenue was $2.89 billion, up 8% over the prior year in constant currency. We're especially pleased to report that we expanded non-GAAP operating margin to 29% in 2019, up substantially from 24% in 2017 and putting us very close to our target of 30% operating margin in 2020. Non-GAAP EPS for 2019 was $4.49, up $0.87 or 24% over 2018. We generated $1.1 billion in cash from operations last year. In Q4, our Security portfolio continued to be the fastest-growing part of our business, with revenue of $238 million, up a very strong 29% year-over-year in constant currency. Security revenue for the year was $849 million and represented 29% of our total revenue in 2019. We believe that our Security business is poised to make Akamai one of the very few publicly traded companies that generate more than $1 billion in annual revenue from cybersecurity solutions. In 2019, over 1,500 enterprises relied on our market-leading Kona Site Defender and Bot Manager solutions to defend against…

Thank you, Tom. As Tom outlined, Akamai delivered another great quarter in Q4. We exceeded the high end of our guidance range on revenue and earnings. Q4 revenue was $772 million, up 8% year-over-year or 9% in constant currency, driven by continued strong security growth and higher-than-expected holiday traffic in our media and commerce verticals. As I mentioned on our last call, holiday seasonality from e-commerce and traffic from our large media customers could play a large role in our Q4 performance, and it did. Revenue from our Web Division was $420 million, up 9% year-over-year and 9% in constant currency. Revenue growth from this group of customers was again driven by our Security business as well as higher-than-expected holiday e-commerce traffic. Revenue from our Media and Carrier Division was $353 million, up 8% year-over-year and 8% in constant currency. The better-than-expected growth in Media came mainly from strong OTT video traffic. Revenue from our Internet platform customers was $52 million, up 20% from the prior year. It is worth noting that Q4 benefited from approximately $6 million of event-specific revenue that we do not expect to reoccur in Q1. Security revenue across the company continued to be very strong, and for the fourth quarter, was $238 million, up 29% year-over-year and 29% in constant currency. Moving on to revenue by geography, international revenue was $326 million in the fourth quarter, up 17% year-over-year or 18% in constant currency. Foreign exchange fluctuations had very little impact on revenue on a sequential basis, but had a negative impact of $3 million on a year-over-year basis. Sales in our international markets represented 42% of total revenue, up 3 points from Q4 2018 and consistent with Q3 levels. Finally, revenue from our U.S. market was $446 million, up 3% year-over-year. Moving now to…

[Operator Instructions]. Our first question comes from the line of Sterling Auty with JPMorgan.

So looking at the strength in international revenue growth, is it fair to look at the OTT launches as relying on Akamai more for international distribution versus U.S.? Or what else explains the real strength internationally?

Store, this is Ed. I'll take that one. So I'll answer it in two ways. First is the -- we record the revenue where the customer is based. So to the extent that there's a U.S. customer that has a launch, that would be considered U.S. revenue. But you bring up a really good point. As these folks start to look internationally, we tend to get a greater share of that traffic as our international deployment is much greater than anyone. On the international revenue growth, we're seeing very, very strong growth. If you remember a couple of years ago, we made significant investments in our go-to-market capabilities and also our network that we're seeing great traction, especially in Asia Pacific. And we recently closed on our acquisition with Exceda and expect to see some decent growth down there as well as that's sort of an underserved market.

Okay. And then maybe one follow-up, Tom, for you. Looking at some of the newer security, specifically SWG and Identity Cloud, how should we think about the ramp of those solutions within your Security portfolio in context of that $1 billion-plus revenue guidance for 2010.

Yes, it's early days for both. We're just launching the Secure Web Gateway. That will be part of Enterprise Threat Protector 3.0. We're really excited about that market. But early days, and we're just starting to get the bookings now. So for that to be a major contributor, you're looking at 2021, 2022. Identity Cloud met plan this year, and that's already, because of an acquisition, further along. And we're excited about the potential there in terms of privacy, regulation compliance. As you know, we've now got CCPA in effect in California. Other states are looking to put laws into place. GDPR, of course, in Europe. And I think enterprises are going to be looking for help in dealing with that. So we're optimistic about the future growth there.

Our next question comes from the line of Robert Gutman with Guggenheim.

From the segment breakout of cloud versus CDN, it seems like, from our perspective, the CDN really outperformed in the quarter. So I guess some of that was attributable -- you said there's $6 million of large Internet platform stuff, specific events. But can you talk with a little more clarity about the additional outperformance in the quarter, a little more specifically?

Yes, sure. This is Ed. I look at it through two lenses. One, we talked about on the web side, the commerce traffic was much higher than we thought going into the quarter with the Thanksgiving holiday falling as late as it possibly could and fewer shopping days. We were expecting to see a little bit less traffic, we actually saw more. So we're very happy with that. And then on the media side, we saw a strong OTT traffic. We saw that, as you mentioned, with the Internet platforms, that event-specific revenue certainly helped. We also saw a very strong live sports, especially across Europe. APJ did a lot better than we had expected in terms of traffic. A good gaming quarter. Software downloads were strong as well as new devices come online. There's a lot of firmware updates and things like that. And just to sort of put it in context for you, the last week of the year was exceptionally strong. On our normal traffic pattern, we tend to see our highest traffic levels on Sundays on a recurring basis. We tend sometimes could be 15% to 20% higher than we normally see during the week. And between the day before Christmas and New Year's eve, we saw what I would refer to as eight Sundays in terms of elevated traffic, which is something that we typically don't see. So a lot of factors that came into play here, both in our Web business as well as our Media business.

Our next question comes from the line of James Fish with Piper Sandler.

Congrats on an awesome end of the year and success around the new OTT service launches. I guess, first, how are you thinking about enterprise security investments to get stand-alone security sales really moving in 2020 and beyond.

Yes. So we have both on the product and product support side and go-to-market with sales specialists and experts in making enterprise security sales, a lot of attention on that. We saw a substantial increase in revenue and bookings this year. Still relatively small, given the early days for Zero Trust and some of the new products that we're bringing out now in enterprise security. And of course, as you know, our head of web sales is an expert in selling enterprise security services. So we've got a lot of expertise there and there's significant investment because we'd like to see that business really ramp up. And I think there's good potential for that.

Got it. And then how do you plan on positioning the -- specifically the Secure Web Gateway in that market, given you do have a larger -- a large competitor out there that's doing fairly well as well as some of the firewall vendors trying to move into the proxy market.

Yes, that's business we want to go out and get. And I think there's a lot of greenfield as well. Those -- in terms of the cloud solution provider for Secure Web Gateway, pretty small total revenue, relatively speaking, to what could be. And I think we're going to have a very competitive offer. And when you combine it with the rest of Akamai Security business, we're the larger player out there. We're well known, we're trusted. We have 1,500 major enterprises using Kona Site Defender already. And in some sense, this is a very natural partner to that to now protect the enterprise employee and the enterprise apps from importing malware, just as we protect the public-facing websites from attacks from the outside. So a lot of synergy with what we are the market leader at, and we have a lot of trust among the major enterprise CSOs out there and the buyers of functionality like Secure Web Gateway. So I am optimistic about our future there.

Our next question comes from the line of Keith Weiss with Morgan Stanley.

As we think about these investments you guys are making to sort of build out capacity and be able to handle the growing OTT traffic, I was wondering if I get kind of your perspective on the durability of these OTT revenues over time. As some of these services become bigger and bigger, is there a risk that these will start to sort of go more in-house in Akamai and then the services are going to be more of a transitory step for these OTT companies? Or do you believe that this could be kind of a durable good revenue for you guys over an extended period of time?

Keith, this is Ed. Good question. Right now, I would say, certainly, in the near term, it looks like it's a nice durable revenue stream for us. I'd encourage you to look at the platform customers. Obviously, we had good stabilization and growth there and it shows that even in the DIY world, there's still a place for Akamai and especially as these folks start to look to go global, that's a big opportunity for us. And it's possible you could see some of these folks take some of the delivery in-house themselves. But just in general, most of the OTT folks out there today are going multi-CDN and I think that there's going to be a place for us. I don't think all of them will go DIY. It's possible that none of them do. But if they do, I think there's still a big place for us.

At the end of the day, our goal is to do a better job with quality. We've got incredible scale. And also, we've got a great cost profile, which is unique. And so I think we have a compelling value proposition. And even to the extent folks do some DIY already, we're working in an environment with traffic splitting, as Ed said. And going all DIY is incredibly risky for a business. You have no fail over, it's not their core expertise. And I don't think it makes a lot of sense for these folks.

Our next question comes from the line of James Breen with William Blair.

Just one, can you just give us a little more color on the OTT space and how that sort of manifests itself that you've seen so far in the numbers from a ramp-up perspective as these guys circle launch more, we'll see some more this spring. And how the multi CDN strategy might work? Is there a primary and secondary? Is it sort of -- is the traffic end of being split amongst 2 or 3 people? That would be a lot of help. And then just as we progress through the year, a little bit of color sort of on the margin progression as well. And then obviously, there's the Olympics, right, in December. So how does that impact the business as we've seen in past years?

Okay. Thought I'd get some help if I didn't get to all of them here. So I'll start with the last one. You talked about margin progression. I made some comments earlier that Q1, I believe where you'll see the lowest operating margin for the year and then it will trend up, and we guided to 30%. In terms of the multi-CDN environment, I would say, today, most big video players and most large software distributors do have a multi-CDN strategy and it can vary. In some cases, we'll do 80%, 90%. In some cases, we might do 25%. Usually, what we find is, as the needs for, say in gaming, capacity becomes a much bigger requirement, we tend to get a lot more share. We get a lot more share when we perform better. We get a lot more share as companies look to expand outside the U.S. It's a lot harder to build out capacity and drive your cost down outside the U.S. where bandwidth is more expensive. And a lot of those folks will look to us to take additional share. And in terms of how these things ramp, typically, when you see a launch, you'll see a lot of promotion around initial launch, a big spike in traffic, then it sort of levels off. Depending on promotions and things like that, you'll see traffic kind of go up and down, depending on various promotions as well as different types of content. Certain shows are more popular than others, et cetera. And then as they expand outside of -- into new markets, that also is another big jump in traffic. I think you also asked about the Olympics. That will be in Q3. We talked about sort of the revenue progression as you think about how we go from Q1 into the back half of the year. The back half of the year will be -- you'll start to see a step-up in revenue as we get into a strong Q3 with the Olympics as well as the beginning of the election, and some OTT launches. And then Q4 is obviously our strongest seasonal quarter.

Our next question comes from the line of Will Power with Baird.

Yes, just a couple of quick questions. So great to see the continued security strength. I wonder if you could give us any further breakdown as to the sources of the upside there, a 29% growth between Bot Manager, WAF, DDoS? And then as you think about the guidance for 2020, I think you said you expected to see -- exceed $1 billion of revenue. I guess that leaves a lot to interpretation. But that would imply maybe something closer to low 20s. How should we think about that trajectory? Does it really drop that much, or is mid 20s kind of a good place to be for growth?

Yes. So we're seeing very strong growth in WAF, DDoS, Bot Manager and also our managed security services. The security attack landscape is moving so fast and the adversaries are so capable that more and more leading enterprises are turning to us for our services support. And as we talked about on, I think it was the last call that all of these businesses are now more than $100 million a year for us, and that's what's driving the bulk of the dollar growth right now. And behind that, we have the newer products that we talked about. I listed the 5 of them coming to market -- have come to market in the last year or are coming to market. And I don't think they'll drive a ton of the growth next year, but that's what keeps the growth going I think beyond next year. We'll see upside. And if the products really take off, for example, Page Integrity, we could see some revenue that starts helping the growth by the end of the year, but those are really to keep it sustained over the longer haul. Ed, do you want to add?

Yes. So we didn't provide specific guidance, but obviously, if you get to exceed over $1 billion and you're about the 20% range, I think that's probably a decent place to peg the models for now. And if you recall last year, we started the year thinking we'd do it in the mid-20s and ended up at 30%. So I was just pegging it in the 20% range, and we'll continue to update you as we go. There's still a lot of room to go in our installed base. Only 55% of our customers today buy security products. That's up about 7% from last year. So there's still a long way to go. And only 28% of our customers are buying two or more. So a lot of room in the installed base and a lot of our new security sales of customers are being led by security first.

Our next question comes from the line of Alex Henderson with Needham.

I was hoping to ask a little bit of a question around the pricing environment, particularly as we've moved volumes out of the monolithic web 2.0 customers into the splintering of a lot of smaller customers, but still relative scale. Are you seeing some benefit from the relative pricing between those 2 as that movement happens? And then along the same lines, how do we think about the initial scramble among the various players to try to get share? Has pricing been more aggressive because of that, less aggressive? What are you seeing on the pricing front?

Yes, so this is Ed. I'll take that one. I've said this in the past that the pricing market, the pricing for high-volume media tends to be pretty efficient, and really, it's volume that drives it. And in terms of the pricing environment, I haven't seen people get super aggressive in terms of anything that's outside the norm when it comes to grabbing share. And I would say, at this point, customers are really more interested in the quality than the price because the pricing right now, and there's not a ton of differential between the different players at certain volumes, it really just comes down performance in terms of share.

Great. And just sort of follow-up on that would be, obviously, there's a parsing of traffic share out based on various geographies, various cities and the like. Over time, I would think that there will be a reshuffling as people either deliver good service. You guys deliver high-quality service, somebody else might stumble. How long a process does that take? Is it a quarter or two? Or is it much faster than that, if there's quality issues?

Well, it depends. I mean, a lot of times, you can see share shifts immediately. It depends on how the customers actually load balancing traffic. We've had instances where, in the last couple of quarters, in particular, where some of our competitors have stumbled and had significant trouble and we'll see a big shift of traffic move over to us. In some cases, that will stay for the long term. In some cases, as the company who's had trouble fixes their trouble, it will move back. But it can be pretty quick. And I can tell you that a lot of these media customers have gotten pretty sophisticated in terms of how they're looking at quality, and there's a lot of different metrics that they measure. And you're absolutely right. To the extent that somebody is struggling in a particular city, it could be in a particular city on a particular operator network or with a particular device type, where they'll shift share depending on who's performing better based on all sorts of different metrics that they're looking at.

Our next question comes from the line of Michael Turits with Raymond James.

Congrats on the good quarter. First, on the onetime event, could you tell us anything more about the general nature of it. I mean, frequently, you talk about 1 at a time events not having that big an impact. And was it in the IP platform group because they had obviously had a big bump.

Yes, Michael, this is Ed. Yes, they were in the IP platform. Obviously, there's not a lot of customers that sort of want to get too specific. But in general, event-driven revenue sometimes can be for our large-scale launches or big video events, et cetera, where customers will come to us for a variety of different reasons. In some cases, it's for services or security or for capacity or for delivery. So just kind of think about it in that light that it's for specific events that we were asked to help out a couple of customers, and we're happy to do it, and we're always looking for that type of business. But you're right. I mean, if you look at it in the grand scheme of things, $6 million on a $772 million quarter is not all that material. But certainly, a good business, and we're always happy to take it.

And then I wanted to ask you about margins. Obviously, you haven't given any guidance beyond the 30% EBIT. But what are the puts and takes? And how do you think about it strategically at that point? There are so many interesting places that you could invest that would hit the income statement, especially on the security side. So how do you think strategically about that balance?

Yes. So we haven't -- we're not going to give guidance for 2021 or beyond at this point. And we're focused on the 30% for this year. And we always want to be as efficient as we can. And it's across the board in decreasing the cost to serve traffic from our servers through better software. We had a lot of people working on that. It's being efficient with where we allocate our headcount dollars. It's efficient in terms of our procurement functions. So that's always a focus, and we're going to do as well as we can do. Now you're right, there can be trade-offs. We're making significant investments in the business. Obviously, CapEx to increase our scale advantage over the competition on a global basis. We're making a lot of investments in innovation, particularly in the security product area. As I mentioned before, the landscape there moves so quickly, and we're in a great position, but we want to stay ahead with the development of new capabilities there. And so as we see opportunities, we do make investments to keep revenue growth being strong and hopefully make it better over time. And there's a balance. We want to be fiscally responsible. We proved we can do that. We've already grown our operating margin by 5 points over the last 2 to 3 years, and we'll take the step with another point this year. At the same time, it's really important for us to be investing in innovation or new products to drive future growth.

Our next question comes from the line of Brad Zelnick with Crédit Suisse.

I wanted to ask sort of a follow-up to Alex Henderson's question, but really more from a different perspective. As we see the investments that you're making in capacity, I wanted to ask more about your views on capacity in the overall market and how that's informed pricing across the industry. So as you look at capacity across the industry today in your own plans, how do you view the level of capacity available in the market compared to demand?

Hey, Brad, this is Ed. Yes, that's a good question. I would say that Tom just talked about hitting a peak of 140 terabits per second today. That's becoming more of a norm. It seems that on Tuesdays tends to be the day that you see lots of software and gaming releases. And it's more and more players now are having much, much bigger needs in terms of these big spikes in capacity, and our day-to-day traffic continues to rise. I talked about that Sunday phenomenon. I would say that our customers certainly are getting a lot more nervous about capacity and talking to us way in advance of these, whether it's a new launch or going into a new geography. And certainly, when they're doing new games, picking up the phone and talking to us about the concern about capacity. You've got folks spending hundreds of millions of dollars on rights for sporting events and hitting new peaks every year. So it is becoming a bit of a premium here. Now does it translate into per gigabyte pricing? Not always, no. But in some cases, you can get capacity reservation fees, where you can guarantee somebody a block of capacity. And customers are, in some cases, willing to pay for that.

Excellent. And if I could just follow-up with one on security. Any color that you can offer on your success selling security outside of your existing customer base? And perhaps if you can touch on the impact that your carrier partners are having on the security business this quarter, and any insight that you might have to what you're expecting out of them in 2020.

Yes. Obviously, most of our security revenue, as we talk about products like WAF and Bot Manager, which tend to be sold to our traditional base. DDoS prevention, particularly the Prolexic capabilities, can go more broadly. Anybody operating a data center that has critical capabilities and that's connected, they got to worry about DDoS attacks and so we do pick up an expanded base there. I think going forward, the enterprise capabilities, the Secure Web Gateway, Multi-Factor Authentication, Enterprise Defender, that brings us into a whole new scope of potential customers and verticals that we don't service a lot today. And that's one reason you're really excited about the enterprise security business as a component. Mentioned the carrier side, we do have great relationships, as I probably know, with the world's major carriers, pretty much all of them. And we have developed security products that we make available to them on a white label basis. And that's where they would then go and attack the small and medium business market. We talked about last time on the call, our SPS service, which is a version of sort of a lower end of our enterprise security, Enterprise Threat Protector solution. But the carriers sell it under their own brand and they go live with it. And that's a great model for us. We don't even touch the customer there, but it generates growing revenue. So we do work with the carriers closely around our security solutions. Some of them also resell our regular enterprise-class solutions as well.

Yes. And just to add on that, what you asked about, Brad, just on the impact for the quarter. There's one thing just to highlight that we did -- similar to last year, we had some licensed pull-ins from Q1 about $3 million or $4 million of security license sales to the carriers that were expected to hit in Q1, that hit in Q4. So just keep that in mind as you're modeling out the security business in Q1.

Our next question comes from the line of Heather Bellini with Goldman Sachs.

This is Caroline on for Heather. So given your acquisitions of Janrain and KryptCo, do you guys feel like you have a complete product set to be competitive in the identity and zero trust market? who and do you typically compete against in those markets?

Yes, I think we do. And in fact, we've been named as the leader there, if you look at the Forrester Magic Quadrant. And as I mentioned in the prepared remarks, the leader in our Zero Trust strategy. So I think we're really excited about it. And it's not just Janrain and KryptCo, but now Secure Web Gateway being added to Enterprise Threat Protector, Enterprise Application Access, which take you through out of the world where you're getting network layer access, which is leading to so many of the data breaches and now access is being controlled at the app layer. And once it's -- a customer is using that, then we can actually apply our services like Kona Site Defender to scrub all traffic from "trusted devices" that are internal to make sure they're not spreading malware because it's so easy to get malware onto a device. You don't want it to spread within an enterprise. And you want to make sure that the enterprise is an exfiltrating sensitive data to botnets. And those are the capabilities we bring to market now with Enterprise Defender. And I think Janrain and KryptCo add to that and make it even stronger.

Got it. That's helpful. And then just really quickly on the Internet platform customers. Could you remind us of who the big Internet platform customers are that might tend to drive some upside surprise? And then how should we think about that revenue line trending going forward? Like should we expect it to be growing positively year-over-year versus in prior years where it was declining?

Yes. So this is Ed. I'll take that question. So in terms of the way to think about the model going forward, obviously, with these customers, there are 6 of them and we have renewals from time to time. So I would sort of model that out at about $40 million a quarter roughly. We'll be looking for upside, obviously, as we go, but that's probably a decent place to put a mark in the sand. And in terms of the customers, it's the giant Internet platforms, it's Apple, Microsoft, Google, Facebook, Amazon and Netflix is in that group of customers.

Our next question is from the line of Tim Horan with Oppenheimer.

Tom, it's kind of interesting how you have such peaks in utilization of the network in Sundays and Tuesdays and different days of the week. Is there ways to kind of smooth that utilization out? Because, essentially, it's almost 0 marginal cost -- the networks there and you're not using it all that much. And I guess, with some of these new products that you have on enterprise and security, do they leverage the network in unique ways so that you can have unique products and services versus anyone out there?

Yes. So surely, you have two questions there. And the second one on how does security mesh with the platform in getting leverage. That's a great question because we get fantastic leverage of our edge platform with security. The same servers and equipment and bandwidth and colo that's used to deliver these fabulous amounts of traffic, that same infrastructure and expense is used to absorb these gigantic attacks. And Akamai is unique in being able to absorb and defend against these giant attacks. And that's because we have fabulous amounts of capacity. So we get great financial leverage and infrastructure leverage with our edge network. And also, the edge is really important, as we've talked about, for delivering traffic. If you're not at the edge, you don't get access to the bandwidth that you need to give high-performance delivery of video or software. And being at the edge is where you need to be to absorb all the attack traffic right as it's coming on to the Internet. If you wait and try to do it at the data center, you're going to get overwhelmed and it doesn't work. So really strong leverage there. Now in terms of the network peaks, they're not -- it's not wildly different. I look at it now and you look at our traffic charge, and the minimum at night, on the least day of the week, is sort of what the peak was across the entire platform a couple of years ago. So it's not huge differences in the peaks and the troughs. And you can never make it totally flat because it's our customers that are driving that. And when they want to distribute a new game and they want everybody to get it quick or there's a live event, or you've got people home at night watching their OTT, well, we got to supply the capacity for that. So I don't think you'll ever see a world where it's exactly the same amount of traffic every hour of the day or every day of the week. But we're in pretty good shape there when you look at the traffic plots.

Great. And how unique do you think your infrastructure still is at this point? I mean, there's a lot of people building CDNs and said they have CDNs, a lot of the hyperscalers building out CDNs. Just any thoughts on what you're seeing out there?

Yes, we are very unique. And you can see it in so many ways. Part of the uniqueness is that we really are an edge platform. Now these days, edge has become a buzzword. And so everybody says they're an edge network. It's just not true. And the way you can measure that is how many distinct locations do they have servers. And we're in 4,000 places. We're in 1,000 different cities. We're in over 1,500 networks. Nobody gets anywhere close to that. And so that's one way we're unique. You can also see it in the scale of our business, the traffic levels that we're serving. You can see it in the security business. Who's out there with our kind of security revenue in a real cloud service. You can't find really anything close to that. And it's because, again, of the edge platform and all the technology we built on top of it. Now you're right. There's a lot of CDNs. More and more, there's dozens of CDNs around the world. But they are tiny in comparison in terms of what they can do. And I think you have to look beyond the marketing, the buzzwords, to see what are they really doing? What are they really capable of? What are the -- where are their servers really located. And also take a hard look at the financials. Are they profitable, or are they trying to buy some revenue? Do they have a scalable model that some day really is going to be profitable? And I think it really is important to take a close look because there's just a lot of hype, and a lot of buzz and some big IPOs, and it's not real. We are unique.

Our next question comes from the line of Colby Synesael with Cowen and Company.

This is Michael on for Colby. How should we be thinking about the level of M&A you could do while still being able to achieve your 30% operating margin target?

Yes, our plan is to achieve 30% this year. And we're always looking for good acquisitions that can help us provide more value to our customers and to grow revenue. And of course, we're very disciplined buyers. So it's not that we're doing a lot of deals and we're very careful before we do larger deals. And as we look at the year ahead, we expect to do some deals, and we expect to hit 30% operating margins.

Our next question comes from the line of Brandon Nispel with KeyBanc.

Great. One for Ed, one for Tom. I think, Ed, what are really the puts and takes in your guidance for 2020, does it specifically embed that you capture a certain percentage of traffic from new OTT services? And then maybe for Tom, along those lines, how are you going to measure the company's success in what seems to be a growing OTT market?

The first one. So we included in our guidance that we will participate in a lot of the OTT services that are coming to market, and some that are expanding. It's really hard to call how successful these will be. I mean, we have conversations with the customers. We know what their plans are. We make sure we build our capacity to be able to capture as much of the traffic that we can. But it really does come down to end consumer demand. It comes down to hours watched, how active the subscribers are, comes down to bit rate. So really hard to tell, but we've got some models from the past that we use and try to leverage. But you really don't know until you get a few months under your belt exactly how big and successful these will be. But we do the best we can to try to bake in an assumption for a good level of success.

Yes. Yes. And to your second question, obviously, we measure success in terms of revenue, margin and profit and the growth of those metrics and at a different level. And strategically, we measure it in terms of share, scale, performance and reliability. And our goal is to grow our share, have even more massive scale to be -- continue our reliability. I think already today, we're the go-to player, if you ask any of the big OTT guys. And we want to grow that further. And we are making investments, and you see it in the CapEx. For example, you don't see it as easily in terms of the OpEx and the salaries of the people that are working on making the performance even better and the reliability even better because we're making the bet that OTT usage is going to grow a lot over the next several years. And then as that happens, we want to capture a lot of that on Akamai and to do it profitably. We worry a lot about cost, making our CapEx be a lot more cost-efficient to run, to get a lot more bits per second out of each dollar of CPU. So strategically, it's about increasing our capacity, reliability, scale and share with the goal of generating more revenue, profit and, of course, margins.

And maybe if I could just follow-up on Ed's comments. Ed, it sounds like you are definitely including traffic from some new OTT services. Does your expectation include that you capture what would be your typical video traffic share in the market or something more or less than that?

Yes, I think I would say it's the typical share that were expected. But obviously, we're going to do our best to get as much as we can. But in terms of modeling perspective, you just put in what you think is a normal share based on the various customers.

Our next question comes from the line of Rishi Jaluria with D.A. Davidson.

Quick, quick ones. One for Tom, one for Ed. Tom, on the -- I just wanted to maybe get your perspective, Janrain's about a year since you closed the acquisition. I wanted to get a sense for how it's performed relative to your expectations and how you're thinking about that product as a driver within your Security business. And just some questions on margins. I wanted to understand -- you clearly saw a lot of strength in OTT and internationally, want to understand what the -- maybe gross margin implications of both of those are as they become an increasing mix shift?

Yes, this is Tom. I'll take the first one. Yes, we made our revenue plan on Janrain this year. We're doing well with the integration. I think as we look forward, we're excited about the potential for helping major enterprises comply with the increasing and more diverse regulations that are being passed. A lot of our customers do business across many states and countries. And it's harder and harder for them, with largely their homegrown solutions, to keep up with compliance. Now that's a new industry, really. And so that will take some time to develop. But I think has exciting potential for the future. And Ed, do you want to take the margin?

Yes, sure. So in terms of margins, obviously, the OTT media business is a lower margin than, say, our Security business. So as the mix shifts, you can get a slight movement. I think we're -- we talked about being down about 1 point year-on-year, but I think it's really more in the round. And then in terms of international, one of the things that we did several years ago that was really smart is we made a significant investment in our carrier relationships. And Tom talked about being in thousands of locations and thousands of cities around the world. By having so much traffic, we feel -- we provide a lot of value to the carriers. So we get generally very favorable economics in some of the hard-to-reach places that tend to be really expensive. So the margin internationally, in most places, is pretty decent for us. So again, just the way to think about it is your media business is going to be slightly lower on the gross margin line, your security business is going to offset that.

Our next question comes from the line of Lee Krowl with B. Riley FBR.

Great. Hats off on the good execution. Two quick questions. Just from a multi-CDN approach. Geographically speaking, with the rollout of some of these OTT streaming launches, just given your guidance of scale relative to your competitors, do you kind of anticipate that with your scale, you could perhaps garner more share as some of these services go internationally, just based on your ability to execute and provide capacity where perhaps your peers cannot?

Yes, that is the plan. And that's what we've been talking about is to leverage our massive edge platform that exists all around the world. We're in 1,000 different cities and several of these OTT businesses are global in nature. And so it is our goal to leverage the scale and the performance and our reliability that's established there to gain share.

Yes, so just to add a little bit here, like I said, we spent a lot of time investing with our relationships with the carriers around the world. And there are some really challenging places to build out capacity. Latin America, in particular, is one that's very challenging. And we see outsized share in countries like the Philippines, Indonesia, across the Middle East and India, again, areas that are a little bit harder for some of our competitors to get to. And also, it requires an investment in people to be able to go out, establish those relationships and build out the capacity. So I think we're very smart in our approach in terms of our investments, and we're continuing to invest, and a lot of what we're doing with our CapEx is we're building more and more capacity outside the U.S.

Got it. And then just a second question, more of a housekeeping question. But are there any anticipated major renewals in 2020?

So there's always going to be lots of renewals throughout the year. And -- but I did last quarter, I'll do this last year, excuse me, and I'll do again this year, is I'll call out if there's anything going into a quarter that needs to be highlighted but we've factored that into our guidance.

Yes. And one of the nice things is that we're much more diverse in our customer base now. We don't have customers that account for 10% or more of our revenue. In fact, you take the giants there, and they're all like 2% or 3% at most. So there's much less impact to our business now if a giant customer has a major repricing.

Operator, we have time for one more question.

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum.

Great. Just maybe two quick ones for me. First, on the network utilization, how is the target utilization rate changed over the last 3 years with respect to the overall network utilization? And I think of that, particularly in light of multi-CDN, our switching strategy is becoming easier. And then the second question, shift gears over to sales, if you would. And I'm just curious, going into '20, how did you tweak the comp or sales structure approaches? Namely what particular behaviors, new behaviors did you try to incent? Looking for what changed there.

Yes. I don't know that there's a fundamental change in network utilization strategy. I think there is -- we do, as Ed mentioned, in many cases, get reservation fees. The capacity on the Akamai platform is enormous, but it's not infinite. And we want customers to understand that if they may need to have large amounts of capacity, we need to have that conversation upfront and plan for it. And it doesn't -- we're not just going to sit and not have traffic and all of a sudden take it because somebody else falls over. And so I think with almost all the major customers out there, we have a very strong relationship. We have a large fraction of the traffic, and we have an understanding of what more we might take in the event they have problems with other vendors, if they're doing traffic splitting. Ed, do you want to talk about the sales comp?

Yes, on the sales compensation, there's really no major change this year. We had talked about two years ago, we have made some big changes in the media world to help them focus on gaining share and selling security. But in terms of the tweak we're making to the comp plans this year, there's nothing really major to call out.

Thank you, Jeff. In closing, we will be presenting at several investor conferences and events throughout the rest of the first quarter. Details of these can be found on the Investor Relations section of akamai.com. We want to thank you for joining us, and have a wonderful evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.