Tom Barth - Akamai Technologies, Inc. Frank Thomson Leighton - Akamai Technologies, Inc. James Benson - Akamai Technologies, Inc..

James Breen - William Blair & Co. LLC Rob J. Sanderson - MKM Partners LLC Timothy Horan - Oppenheimer & Co., Inc. (Broker) Vijay Bhagavath - Deutsche Bank Securities, Inc. Rishi Jaluria - JMP Securities LLC Mark D. Kelleher - D. A. Davidson & Co. John Blackledge - Cowen & Co. LLC Heather Bellini - Goldman Sachs & Co. Gray W.

Powell - Wells Fargo Securities LLC Keith Eric Weiss - Morgan Stanley & Co. LLC Ed Maguire - CLSA Americas LLC Sterling Auty - JPMorgan Securities LLC Mike J. Olson - Piper Jaffray & Co. Michael Bowen - Pacific Crest Securities Michael Turits - Raymond James & Associates, Inc. Will V. Power - Robert W. Baird & Co., Inc.

(Broker) Matthew Heinz - Stifel, Nicolaus & Co., Inc..

Good day, ladies and gentlemen, and welcome to the Akamai Technologies Incorporated Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tom Barth, Head of Investor Relations. Sir, you may begin..

Thank you and good afternoon, everyone, and we appreciate you joining Akamai's third quarter 2016 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Jim Benson, Akamai's Chief Financial Officer.

But 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 the actual results to differ materially from those expressed or implied by such statements.

Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on October 25, 2016.

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 our website.

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

Thanks, Tom, and thank you all for joining us today. Q3 was a strong quarter for Akamai with accelerated growth in our Cloud Security and Web Performance Solutions, an excellent performance for both earnings and free cash flow. Revenue in the third quarter was $584 million, up 6% year-over-year.

Non-GAAP EPS for Q3 was $0.68 per diluted share, up 10% year-over-year, and free cash flow was $172 million, bringing our year-to-date free cash flow to $444 million, up 146% over the same period from last year.

As we discussed during our last call, our overall revenue growth rates have been lower this year because of the do-it-yourself, or DIY, efforts by a few of the Internet's largest platform companies.

If we exclude the impact of Amazon, Apple, Facebook, Google, Microsoft, and Netflix from our results, then our Q3 revenue was $526 million, which is up 15% over Q3 of last year.

It's important to note that our future exposure to DIY on these accounts is now more limited than in prior quarters, since these six companies collectively accounted for 10% of our total revenue in the third quarter, down from 17% in Q3 of last year.

As I stated in past calls, while any company could, in theory, build their own CDN, I believe that such an approach is simply not practical for the vast majority of our customers, especially when you consider the scale that is now needed to defend a website against cyber attacks.

As a result, while I expect that there will be some further loss of revenue due to DIY efforts going forward, I believe that the continued strong growth of our core business means that we are very well-positioned to reaccelerate our overall revenue growth rate in 2017.

I was especially pleased to see the accelerated growth rate for our Web Performance and Cloud Securities Solutions in Q3. Our Security products generated $95 million of revenue in Q3, up 46% year-over-year. Overall, the revenue from our Performance and Security products was up 19% year-over-year.

Performance and Security were also top of mind for the over 2,200 attendees from 42 countries at our ninth annual Customer Conference in San Francisco last week.

At the conference, we shared Akamai's vision for the future of the Internet and we demonstrated our next generation of services, which are focused on providing the utmost in quality, scale, agility and security for online applications.

In addition, nearly 100 customers led discussions on topics such as the future of streaming television, personalized mobile experiences, the digital transformation of the enterprise, the proliferation of connected devices, and the evolving cyber security landscape.

Many speakers commented on the unique value that Akamai is providing for their online businesses. One, in particular, described how improving the performance of their web applications had led to a $1 billion of increased revenue with 80% of this amount being attributed to their use of Akamai services.

For those of you who are interested, videos of this presentation, as well as several others, including my keynote address on the future of the Internet, are available at our website at www.akamai.com.

I'm pleased to report that the innovation engine at Akamai has been running at full speed and at the conference, we showcased some of our most exciting new solutions, including Image Manager, Enterprise Threat Protector, and Enterprise Application Access, as well as the next generation of our very successful Ion, Kona Site Defender, and Bot Manager solutions.

We also demonstrated several new SDKs that are designed to enable our customers to easily embed Akamai software into their applications. By embedding our software into their apps, our customers can achieve faster performance, better video quality, stronger security, and in many cases, lower costs.

We can also preposition content on the devices, which enables our customers to deliver a high quality experience, even when a device doesn't have good connectivity to the Internet. As you might imagine, the most pressing topic of concern at the conference was security.

As the denial of service attacks last Friday demonstrate, the scale and sophistication of cyber attacks are rapidly increasing, along with the potential for disruption and damage. To make matters worse, attackers are now exploiting the Internet of Things to greatly increase the scale of their attacks.

This is an area where Akamai's unique architecture and world-class security platform continue to make a critical difference. We have an excellent track record of successfully defending our customers against the web's largest and most nefarious attacks.

That's because we have made substantial investments in innovative defense technology and because we place our servers at the edge of the Internet, where there is vastly more capacity than in centralized cloud data centers. As bad as last week's attacks were, I believe that much worse is yet to come.

Hundreds of millions of devices are connecting to the Internet every year and most are just as vulnerable as the DVRs and security cameras that were used in the Mirai botnet attacks last week.

Already this year, the number of DDoS attacks launched against our customers has more than doubled over 2015, and the number of reflection attacks is up by more than a factor of three. Soon, we'll likely be measuring the size of such attacks in terabits per second.

To address these concerns, we are continuing to develop new and innovative security offerings. In Q1, we plan to expand our offerings with the launches of Kona Site Defender 5.0 and Bot Manager 2.0.

The next version of Kona Site Defender will add protection for API endpoints to help secure not only websites, but also mobile infrastructure and other API-driven requests. Our next gen Bot Manager will feature enhanced bot detection and mitigation capabilities and stronger policy enforcement, based on business needs.

In addition to protecting websites and applications, we have also been developing services to help protect enterprise employees and infrastructure against phishing, malware and data exfiltration attacks.

Phishing is now the leading delivery vehicle for malware and ransomware, and malware is becoming increasingly more sophisticated, often bypassing existing blacklist based security solutions, and exploiting less protected threat factors such as DNS.

In response to these growing enterprise security risks, we plan to launch our new Enterprise Threat Protector, or ETP, service early next year. ETP provides a cloud-based recursive DNS service for enterprises that blocks access to malware sites and data exfiltration botnets.

At the conference, we also demonstrated our new Enterprise Application Access service for securing enterprise apps.

This service leverages software obtained through our recent acquisition of Soha Systems, and it addresses the growing need for businesses to more easily and effectively manage application access to a growing mix of users with different risk profiles.

For example, many companies want to manage access differently for their employees, contractors, partners, and other third parties. This is difficult to do using traditional solutions such as VPNs. Our new offering also removes the security risk inherent in traditional solutions of poking holes in firewalls to prevent access.

And it provides access on a per app basis, which further enhances security over traditional VPN solutions. The apps themselves can reside anywhere. For example, they can be hosted in a data center behind a traditional firewall or in a public cloud environment. App access is simple to deploy and simple to manage.

Customers can implement it in minutes and best of all, they can then easily leverage Akamai's other Performance and Security Solutions for all of their internal applications. Q3 was also an active quarter for our Media team. Our OTT business continued to grow at a strong rate, and we achieved several records for the broadcast of live events online.

Following a record breaking Euro 2016, we delivered a highly successful Rio Olympics and provided 43 broadcasters around the world with more than 10,000 hours of support.

Akamai monitored the entire event from our award-winning Broadcast Operations Control Center, and we delivered an unprecedented online viewing experience for over 100 million unique users.

Our platform streamed over 3 billion minutes of Olympic content, most of which was live, and we set a new record of 255 petabytes in total traffic delivered over the 19 days of the games. Later in the quarter, we also delivered a keynote event for a customer that exceeded 11 terabits per second of live traffic which is a record for a single event.

I believe that our experience and expertise in streaming high quality, global events at scale, reinforces our unique position to benefit from the increasing demand for high quality video online.

In summary, I'm confident that Akamai's business and market position remains strong and I'm excited about the significant opportunities for growth that lie ahead. I'll now turn the call over to Jim to review our Q3 financial results and to provide the outlook for Q4.

Jim?.

Thank you, Tom, and good afternoon, everyone. As Tom just outlined, Akamai had a strong third quarter on both the top and bottom lines.

Q3 revenue came in above the high end of our guidance range at $584 million, up 6% year-over-year, or up 5% adjusted for foreign exchange movement, and up 15% if you exclude the six large Internet platform customers Tom just mentioned.

Revenue from our Performance and Security Solutions was particularly strong, coming in at $345 million, growing 19% year-over-year, and was the driver of our revenue overachievement in the quarter. Performance and Security Solutions now make up nearly 60% of our total revenue.

We are very pleased with the continued revenue diversification into our more highly differentiated, higher margin offerings. Within this solution category, we saw an acceleration of year-over-year growth for both our Cloud Security and Web Performance Solutions.

Our Protect and Perform go-to-market strategy continues to resonate with both our existing and new customer base globally. Third quarter revenue for our Cloud Security Solutions was $95 million, up 46% year-over-year. Exiting Q3, our Security business is rapidly approaching an annualized revenue run rate of $400 million.

We are extremely pleased with the continued strong customer adoption of our unique and differentiated Cloud Security capabilities, and our recently launched Bot Manager offering. And as Tom mentioned, we plan to continue to invest in product innovation, and broaden our capabilities in the security space to drive additional growth.

Turning now to our Media Delivery Solutions, revenue was $188 million in the quarter, down 14% year-over-year. As we have discussed over the past year, the impact of DIY efforts in a few of our large Internet platform customers continued to weigh heavily on growth rates in the solution category.

Excluding the six large Internet platform customers, Media Delivery revenue was up 5% year-over-year.

This growth rate was slower than what we've seen in the past several quarters, partially due to a difficult comparison to the strong Q3 of 2015 when we had several large favorable one-time items in our Asia Pacific region, and partially from more and more customers upgrading their services from basic Media Delivery products to higher performing Web Performance products.

And while this product migration lowers our Media Delivery growth rates, we view it as a net positive for Akamai, since our Web Performance products tend to be stickier with our customers. Finally, revenue from our Services and Support Solutions was $51 million in the quarter, up 17% year-over-year.

We continue to see strong service attachment rates for our higher-end enterprise class professional services globally. Turning now to our customer division results, revenue from our Web Division customers was $285 million, up 17% year-over-year. We continue to see solid growth in this customer base, particularly with our Cloud Security offerings.

Revenue from our Media Division customers was $284 million in the quarter, down 4% year-over-year, but up a healthy 12% excluding the impact of the six large Internet platform customers. Finally, revenue from our emerging Enterprise and Carrier Division customers was $15 million in the quarter, up 43% year-over-year.

Moving on to our geographies, sales in our international markets represented 31% of total revenue in Q3, consistent with last quarter, and up four points from Q3 last year. International revenue was $180 million in the quarter, up 20% year-over-year, or up 17% in constant currency.

Foreign exchange fluctuations had a positive impact on revenue of $3 million on a year-over-year basis and no impact on revenue on a sequential basis. Third quarter revenue from our U.S. market was $404 million, up 1% year-over-year. The large Internet platform customers are based in the U.S., and weighed heavily on the U.S. market's results.

Outside of these customers, revenue growth was solid across the rest of the business. Moving on to costs, cash gross margin was 76%, consistent with Q2 levels and down a point from the same period last year, and in line with our guidance.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 65%, up one point from the prior quarter and down two points from the same period last year. GAAP operating expenses were $268 million in the third quarter.

These GAAP results include items such as depreciation, amortization of intangible assets, stock-based compensation, acquisition-related charges and other nonrecurring items. Excluding these items, non-GAAP cash operating expenses were $207 million, up about $5 million from Q2 levels and coming in near the low end of our guidance.

We received the first payment from Limelight in Q3, as part of the recent resolution of our long-running patent litigation. This expense offset was not factored into our guidance and was the main driver of why non-GAAP cash OpEx came in a little lower than we expected.

Adjusted EBITDA for the third quarter was $238 million, up $7 million from Q2 levels and up $16 million from the same period last year.

Our adjusted EBITDA margin came in at 41%, up one point from both Q2 levels and the same period last year, and above the high end of our guidance, driven by our revenue overachievement and the Limelight payment that I just mentioned. GAAP depreciation and amortization expenses were $85 million in the third quarter.

These GAAP results include depreciation associated with stock-based compensation, amortization of intangible assets and amortization of capitalized interest expense. Excluding these charges, non-GAAP depreciation was $74 million, down slightly from Q2 levels and below the low end of our guidance due to the timing of network deployments.

Non-GAAP operating income for the third quarter was $164 million, up $7 million from both Q2 levels and the same period last year. Non-GAAP operating margin came in at 28%, up one point from Q2 levels and down one point from the same period last year, and one point above the high end of our guidance.

Moving on to other income and expense items, interest income for the third quarter was roughly $4 million, up slightly from Q2 levels. Non-cash interest expense related to our convertible debt was roughly $5 million. As a reminder, this non-cash expense is excluded from our non-GAAP results.

Moving on to earnings, GAAP net income for the third quarter was $76 million, or $0.43 of earnings per diluted share, down 12% year-over-year.

Non-GAAP net income was $120 million, or $0.68 of earnings per diluted share, up 10% year-over-year and $0.06 above the high end of our guidance range, driven by higher revenues, lower operating expenses, and a slightly favorable tax rate.

For the quarter, total taxes included in our GAAP earnings were $36 million, based on an effective tax rate of 32%. Taxes included in our non-GAAP earnings were $49 million, based on an effective tax rate of 29%. This tax rate is about a point lower than our guidance due to a higher mix of foreign earnings.

Finally, our weighted average diluted share count for the third quarter was approximately 176 million shares, down slightly from Q2 levels, as a result of increased share buyback activity. Now, I will review some balance sheet items. Day sales outstanding for the third quarter was 56 days, down two days from Q2 levels.

Capital expenditures in Q3, excluding equity compensation and capitalized interest expense were $87 million, or 15% of revenue, and in line with our guidance for the quarter, 15% is slightly below our long-term model of 16% to 18%, as we continue to monitor traffic levels and invest in network expansion accordingly.

As a reminder, this CapEx number also includes capitalized software development activities. Cash flow generation continued to be extremely strong in Q3. Free cash flow was $172 million in the third quarter, or 29% of revenue, and $444 million year-to-date, or 26% of revenue.

Our balance sheet also remains very healthy, with $1.7 billion in cash, cash equivalents and marketable securities on hand at the end of the quarter. If you factor in our convertible debt, our net cash is approximately $1 billion. During the quarter, we spent $95 million on share repurchases, buying back 1.8 million shares.

As of Q3 end, we had approximately $773 million remaining on our current share repurchase authorization. And as we have discussed in the past, our overall aim is to deploy our capital to achieve favorable returns for our investors in a manner that we believe is in the best long-term interest of the company and our shareholders.

And given our strong balance sheet and cash generation, our share repurchase authorization is intended to continue our multi-year capital allocation plan, to offset dilution from our equity compensation plans and to provide us with the flexibility to opportunistically return more cash to shareholders, depending upon business and market conditions.

In summary, we are pleased with how the business performed in Q3, and we remain confident in the long-term prospects of profitable growth for the company.

Looking ahead to the fourth quarter, holiday seasonality plays a large role in our performance, driven by online retail activity for our e-commerce customers and traffic for our large media customers. As a result, the fourth quarter remains the hardest to predict. In addition, we expect foreign exchange headwinds from the strengthening of the U.S.

dollar over the past few weeks. At current spot rates, foreign exchange fluctuations are expected to have a negative impact on Q4 revenue of $3 million sequentially. Factoring in these variables, we are expecting Q4 revenue in the range of $593 million to $613 million.

To frame this guidance range, if the holiday – online holiday season is particularly strong, we would expect to be near the higher end of the revenue range. If the online holiday season is not as strong, then we would expect to be towards the lower end of the range.

At these revenue volumes, we expect Q4 cash gross margins of 77% and GAAP gross margins of 66%, both up one point from Q3 levels. Q4 non-GAAP operating expenses are projected to be $222 million to $227 million, up roughly $20 million from Q3 levels.

This sequential increase is larger than we have seen in recent years and is driven primarily by two factors.

First, we will be absorbing both the Soha and the Concord acquisitions; and second, as I shared with you on the previous calls, we are continuing to make important investments to drive incremental R&D innovation, targeted spending in both areas aimed at fueling long-term growth and scale.

Taking into account the items I just mentioned, we anticipate Q4 EBITDA margins of 39% to 40%. As I've said in the past, factors that would impact our EBITDA margin profile would be M&A activities and revenue volumes quarter to quarter. And as we absorb the Soha and the Concord acquisitions, they will weigh on the EBITDA margins in the near term.

And while I'm not providing specific guidance beyond Q4, as I said in our last earnings call, EBITDA margins may dip into the high 30%s in 2017. Moving on to depreciation, we expect Q4 non-GAAP depreciation expense to be $74 million to $76 million. Factoring in this depreciation guidance, we expect non-GAAP operating margin of 27% to 28% for Q4.

And with the overall revenue and spend configuration I just outlined, we expect Q4 non-GAAP EPS in the range of $0.65 to $0.70. This EPS guidance assumes taxes of $49 million to $52 million, based on an estimated quarterly non-GAAP tax rate of approximately 30%.

This guidance also reflects a fully diluted share count of approximately 175 million shares. On CapEx, we expect to spend approximately $82 million to $87 million in the quarter, excluding equity compensation. For the full year, this level of CapEx would equate to 15% of revenue, slightly under our long-term model of 16% to 18% of revenue.

In closing, we continue to be pleased with the performance of the business, and we remain confident in our strategy, and our ability to reaccelerate revenue growth and execute on our long-term plans. Thank you. And Tom and I would like to take your questions.

Operator?.

And our first question comes from the line of James Breen of William Blair. Your line is now open..

Thanks for taking the question. Just two. One, I guess for Tom, the revenue for the big six came down just a little bit sequentially.

What gives you confidence that that's moderating and eventually can grow from current levels or slightly below current levels? And then secondly, just on the M&A you did this quarter, was there any impact to this quarter's numbers from that? And can you just talk about the capabilities those two companies brought? Thanks..

Hi, sure. On the big six, I would expect some small further declines in the revenue there in the near term. It's hard to predict the longer term. As we've talked about, they do have their own do-it-yourself platforms.

I think we perform very well and offer a very compelling service at a compelling price point, but I think some companies are just so large that they feel its core that they have that capability themselves. Now, of course, the impact will be less going forward, because now it's 10% of our revenue, instead of a lot more.

In terms of the acquisitions, I'll let Jim comment on the numbers there. But in terms of their capabilities, Concord Systems helps us with managing big data. We think it's important for our IoT initiatives, which are in the early stages.

Soha Systems has a very compelling technology that we've been a customer of, and really thought it was very important.

It allows you to grant access to an enterprise application on a per app, per user basis, without poking holes in your firewall, without reconfiguring your VPN, without shipping a laptop to an employee or a contractor or a partner halfway around the world. You're set up in minutes. You can grant access in minutes. And it's a heck of a lot more secure.

It's also very synergistic with our services, because now it enables us, once we're providing the access for the app, we're actually delivering the app and we can accelerate it and provide security for the app, which is increasingly important as enterprise networks move into the cloud and the applications move into the cloud.

Jim, do you want to comment on the revenue?.

Sure. I mean, relative to revenue, neither company really had much of a revenue stream. And so there's really going to be no impact on revenue as a result of these acquisitions. Now, both of these companies combined probably have between 40 employees and 43 employees. So you can expect that they were going to now incur the expense for these employees.

So as I mentioned in the EBITDA guidance, that adding these employees will probably add, call it, $3 million to $4 million of OpEx within the quarter with no corresponding revenue. That's roughly the impact of those two acquisitions..

Great. Thank you very much..

Thank you. And our next question comes from the line of Rob Sanderson of MKM Partners. Your line is now open..

Hi, thanks. A couple of questions. The Web Performance business, this is the best quarter – result that we've seen in, I don't know, at least two years, I think.

What was really the driver of the reacceleration in that business? And then likewise on the Cloud Security growth reaccelerated there as you mentioned in the script, was this really driven by the launch of new products primarily? And also since that's a recurring revenue SaaS business, is the revenue upside really imply a much greater outperformance on the bookings side?.

Yeah. So in Web Performance, we have the Ion product line which is really achieving scale now.

We have a new solution with Image Manager and they both contributed to the strong performance in Q3 and I'm really excited about Ion 3.0 that'll be coming out early next year, which focuses on mobile apps and performance in difficult environments such as cellular networks and I think that is a great area of potential for us.

In Cloud Security, bookings are very strong and we have the next generation of the existing products. Bot Manager is relatively new and doing great. We have client reputation, which is also doing well and now we'll have going out next year not – as Jim said, not contributing a lot of revenue now, but two enterprise security products.

So I think we're very excited about the potential for future growth in the security products suite..

Operator?.

Thank you. And our next question comes from the line of Tim Horan of Oppenheimer. Your line is now open..

Thanks so much. Can you update us on the percentage of your customers that take your security products? And some of the larger denial of service attacks we've seen, were any of these customers, customers of yours or did you have any impact on those DDoS attacks? And I just had a quick follow-up..

Yeah, I mean, roughly a third of our customer base buy one of our security products. So we still have a lot of room to grow within our existing install base. And there's – certainly our install base is a little over 6,500 customers. So there's significant room to expand outside the install base with new customers as well.

So there's a significant opportunity to continue to grow our security portfolio, not just from adding new adjacent offerings but also penetrating the existing offerings with both existing and new customers. And in terms of the customers that were impacted on Friday, as you know, that was a result of an attack against a DNS provider, called Dyn.

If a customer was using Dyn to direct the traffic to a CDN, then there's nothing that we can do about it. Now, in some cases, we had customers that were using Dyn to direct traffic to the origin that we would have to go to. In that case, we were able to overcome Dyn's outage and actually get the content in real-time from those customers.

Otherwise, this would have been a lot worse. So we were able to help a lot of our customers through the Dyn attacks. If they were using Dyn and only Dyn for just getting the original direction to a CDN, then there's nothing that could be done unless they were using another provider.

That said, we do offer a service called Fast DNS, which has tremendous capacity for DNS resolutions and we have a lot of customers that use that and they were fine..

And Tom, just on the video-on-demand side on the Olympics, can you maybe just describe who your closest competitors are for that product? And how does your service kind of compare to your closest competitors right now for delivering that at scale? Thanks..

I think at scale is sort of the key. There's a lot of competitors for delivering video and for delivering media, literally dozens. When it comes to delivering events at scale, I think generally, Akamai is where the major companies turn to. That's certainly the case in the Olympics. We handled it for 43 broadcasters around the world.

And you see that for most of the major sporting events and online events. And that's because of our scale, because of our quality levels, because of the security. Those events are big targets for attackers, and so security is really important. So in those cases for the large scale events, Akamai is a go-to company..

Thank you..

Thank you. And our next question comes from the line of Vijay Bhagavath of Deutsche Bank. Your line is now open..

Yes, thanks. Yeah, hi, Tom, Jim. Congratulations, solid results. Yeah, my question for both of you is on your enterprise business.

It seems interesting, the new driver of growth, I would like to understand from both of you the scope and the investment levels you have in mind for this business and would it be primarily targeting, like, application delivery on premises VPNs, or do you have a broader mission for the business? And how should we think about the enterprise business driving top line growth, for example, over the next year? Thanks..

Well, let me talk a little bit about what the strategy and vision is there, and then Jim can talk about some of the numbers. The goal is to enable enterprise networks to move into the future where their applications are outside the firewall or maybe they're in the cloud.

The users are mobile, outside the traditional enterprise structure and to provide acceleration, off-load and security.

Starting with access to the application, managing that in a secure and efficient way and then delivery of the application to make it be really fast, to make it work in mobile and cellular environments around the world, to provide security for the enterprise applications so that they are not compromised by malware.

Also to protect the enterprise employees, so they are not compromised by malware to protect the enterprise infrastructure. So their emails or their intellectual property is not exfiltrated from the enterprise.

And finally to make the enterprise networking be more efficient, enterprise networks are about to go into their next generation, it will look different in the future.

And off-loading from congested pipes into branch offices becomes important because the enterprise wants to do things that by training that makes use of video that clogs the enterprise pipes. So the vision is really to support everything the enterprise needs as it evolves its network into the future..

And I would say from an investment perspective, I mean this business, as Tom mentioned, this is still early stage. And so, if you think back, it was not that many years ago, just three years or four years ago that our security business was kind of called single digit millions and that's roughly the size of what our enterprise business is today.

And so you can expect that we're going to continue to invest organically and inorganically as you have seen with the most recent acquisition with Soha in the enterprise space.

And as Tom's talked about in the past that we believe the revenue potential in the enterprise business is equivalent, if not bigger than that of our Delivery business and Media, as well as our Performance businesses. So, we are very early stage. I think it's going to be a significant driver of growth for the company.

I think it's going to take a while for that business to ramp, but I think we have a proof point of what we have done in security, and this is about basically taking, again, the Akamai platform and now applying it to the enterprise use case. So I think we're quite bullish on the growth opportunities in the long-term for enterprise..

Yeah, thanks. That's a much longer answer than I expected. Thank you..

Thank you. And our next question comes from the line of Greg McDowell of JMP Securities. Your line is now open..

Hi, this is Rishi Jaluria dialing in for Greg. Thank you for taking my questions. First, just a quick housekeeping question. I know in the past, you've discussed approximately what percentage of revenue came from your two largest customers, separate from the top six.

Can we have an idea of what proportion of revenue the top two customers represented in Q3?.

We are not going to disclose the top two. What we've tried to do, and we did it last quarter was to ring-fence the six customers that are large Internet platform customers. Notably, I can tell you that the revenue decline that we saw in that grouping of, call it the big six, that was notably from one of those top two customers.

So that will give you a little bit of color based on what we said before. But I think the better way of understanding what's going in the business is to understand what's happening with the large Internet platform customers of the grouping and not specifically nitpicking one or two customers.

Because I think, in general, the dynamic that's going on there is, as Tom said, these are all customers that have DIY capability and I think it allows investors to draw their own conclusions around what they think could happen with that customer set.

As he mentioned, that customer set represented about 10% of our revenues in Q3, down from 17% Q3 of last year, so you can certainly see that that's about a 40% drop in revenues year-on-year, notably being driven by the top two that we did mention, and more notably, one of those top two is the one that actually declined sequentially..

Okay, that's helpful. And if I'm not mistaken on the last earnings call, you had expected to see revenue reaccelerate in Q1 of 2017.

Is that still the expectation that will happen in that quarter, or could it be later than that in 2017?.

We are quite confident that we're going to see a reacceleration of growth in 2017. We did say in the second quarter that we thought that we would see growth in Q1. I think that's certainly our expectation, that I think for sure, we're going to see growth acceleration in 2017. I think based on what we see now, we (40:06 – 40:12)..

Okay. Next question, operator..

Thank you. And our next question comes from the line of Mark Kelleher of D.A. Davidson. Your line is now open..

Great. Thanks for taking the question. I was just wondering if you might touch on international, very strong. I understand it doesn't have the headwind of the Media side that the U.S.

has, but can you give us an indication of which countries are doing well, which products are doing well, and what your expectations are there?.

Yeah, we are quite pleased with the performance of our international growth, that we grew 17% in the third quarter. That's a little bit less than what we grew in the first half. We had some difficult compares in our Asia Pacific region. We had a particularly strong Q3 of last year, growing very well in Asia Pac, growing well in Japan.

In particular, very notably, there are markets within EMEA that we're growing well in. I think there are still certain markets in the southern economies of the southern markets of Europe that are still a little bit sluggish.

But I would say in general, it's across our broad solution set, we are growing well in Media and we're growing well in Performance and Security.

As we've said in the past, we have been weighting more of our sales investments over the last few years to the international markets and given the nature of our business being – especially in the Performance and Security Solutions, more of a subscription business, it takes a while for the revenue to grow and I think you are starting to see the payback from the investments that we have made over the last few years..

And the headwind – the currency headwinds that you mentioned, the $3 million, is that everywhere or is that particularly located someplace?.

Well, I mean you've seen it. It's mostly in the euro and greater British pound, obviously, fears of what's going on with Brexit have had some volatility with the foreign exchange market. So we are certainly not immune to that. That's largely where we are seeing the revenue impact from..

Okay, great. Thanks..

Thank you. And our next question comes from the line of Colby Synesael of Cowen. Your line is now open..

Great. Thanks for taking the questions. This is actually John on for Colby.

As it relates to your Performance and Security businesses, were there any one-time items that helped growth within each segment this quarter? And then can you maybe also provide an update on the competitive landscape and the pricing trends you are currently seeing in the marketplace? Thanks. Bye..

Sure. So, yeah, we had very strong growth in Performance and Security of 19%. It was strong, as Tom mentioned, in both Cloud Security and in Web Performance.

I'd say, we did get a bit of a benefit that we have a custom government business where we do have some special projects with the federal government, and we had a couple of large deals that closed within the quarter, call it, that probably accounted for a point of growth, but for the most part, it was across all of the product sets that did well.

And I forget what your second question was..

I'll get that. Yeah, the competitive landscape in Performance and Security really hasn't changed. There's a lot of companies. Pretty much all of the CDNs will have some sort of acceleration product and a lot of them have some sort of security product.

I think what differentiates Akamai is our scale, our track record to really defend against the hard attacks and to give the utmost in performance, especially in mobile and cellular environments, which, of course, are increasingly important..

Great. And if I could have one quick follow-up, to what degree are you seeing your customers increasing leveraging a multi-CDN strategy, maybe today versus what you were seeing a year ago? Thanks..

I don't think there's any real fundamental change there. You see that more commonly in big media accounts. And that's been around forever. I don't think there's any real change in terms of customers that are pursuing multi CDN.

Now, in some cases, customers will even tell us that it actually lowers their reliability and quality, because now if one of the CDNs goes down or has a problem, it does take a while for them to deal with that, and so it increases the chances for difficulty. It also increases their overhead, trying to manage several CDNs.

The CDNs have different capabilities. Akamai offers a lot of very useful functionality that the other CDNs don't, and so that means you can't always take advantage of it if you are trying to share traffic among CDNs. But it exists, particularly in media and I don't think there's any fundamental change there..

Great. Thank you..

Thank you. And our next question comes from the line of Heather Bellini of Goldman Sachs. Your line is now open..

Great. Thank you. I was just taking a look at the CDN revenue ex the Internet platform customers and it decelerated on a year-over-year basis again. I'm just wondering why is this, given the Olympics tailwind that you highlighted.

And also, what's the outlook for this segment on a combined basis in 2017? And what's your outlook for the non-Internet platform business in 2017 for the CDN side of the business? Thank you..

Right. So you're right, as I mentioned in my opening remarks, that the Media product growth rate slowed from what was, call it, the low double digits in the first half to 5% ex the Internet platform customers in the third quarter. And I mentioned a couple of drivers of it.

One is it is a difficult compare in our Asia Pacific region in particular that had very robust Media growth last Q3. And what we're seeing more and more is we're seeing more of our Media customers that were buying kind of a basic Media Delivery product. They're now upgrading. They're upgrading to a higher performing Web Performance Solutions.

So some of what you saw for growth deceleration in Media, you saw corresponding growth acceleration in the Web Performance business as customers kind of shifted their products from a Media product to a Web product. The only thing that's important to note is that that's going to happen.

One of the reasons why we went to the divisional structure for the company, which is more of a division of customer lens is if you look at our Media Division, its growth rates were 12%. And so product migrations that go from Media to a Web product, when you're looking at it from a customer basis, that it doesn't matter.

And so the growth rates in – when you look at it across the division lens that we had strong growth rates in Web customers. Web customers were 17% growth. We had strong growth rates in our Media customers at 12%.

It just so happened that our Media product set that we've seen a little bit of a shift of customers as they migrate from one product to another. And actually, when they do that, they're actually a bit stickier..

So I get that. I guess I'm just wondering – so the Olympics this year doesn't help offset the comp in Asia-Pac last year. I guess that's one follow-up.

And the other question would be then based on what you just expressed and how people are changing their buying, should we expect the CDN business to continue to decelerate then the way you just talked about the reporting and how customer buying is changing?.

Yeah, I mean, I'll answer them separately. So certainly on the Olympics that we've said it all along that the Olympics doesn't necessarily drive huge revenue. It drives a little bit of revenue. There are more notable events for what's capable for serving kind of live content across that many people.

So it's really a display of capability, more than it is a display of incremental revenue. So it's not as notable as kind of people might think. And I'm not going to provide guidance for 2017 for each one of these segments, but you're right. You may see a bit – when you look at the product segments, you may see a bit of a share shift from Media to Web.

We'll have to see that it – I think what we've seen notably is some large customers that have migrated from a Media product to a Web product, I don't know how much more notable that's going to be going forward, but there's a possibility that you'll start to see a shift from Media to Web Performance products, but again, when you look at it in a division lens, which I think is a more important way to look at it, that it's strong growth across all the customer sets.

And as we said to you that we tend to find that our Performance and Security Solutions are stickier. It represents 60% of our revenue. So from an investor perspective that we're actually starting to see growth acceleration come from the part of our business that is stickier with customers..

Great. Thank you..

Thank you. And our next question comes from the line of Gray Powell of Wells Fargo Securities. Your line is now open..

Great. Thanks for taking the question.

So as you work through the excess capacity created by customers who took CDN traffic in-house, do you see potential for gross margins to stabilize and maybe even improve?.

Well, you saw that. Actually our guide shows gross margins expanding in the fourth quarter that we stabilized gross margins at 76%, gross margin guidance for Q4 is 77%, and 66% on the GAAP gross margins. So what we said to you over the last few quarters is exactly what transpired.

We built out last year in anticipation of traffic for an OTT offering, didn't happen. It had an impact in the near term on margins. And we said that we would obviously dial back investment in alignment with what we saw for traffic projections. And it's just a matter of what you're starting to see is you're starting to see that play out.

So you're starting to see the margins come back to the levels that they were last year..

Got it. That's helpful. And then just one more, if I may.

What percentage of your revenue from the top six customers is CDN versus site Performance and Security? Should we just assume that the bulk of that is CDN?.

Yeah, I want to say it's like 80%. 80% plus of it is customers buying a Media product. Now, all those customers sit within our Media Division. So from a customer lens perspective, they're all in our Media Division, but the products that they buy are, I think, 80% plus are Media products..

Okay.

But there is some Performance and Security in that disclosure?.

Yes, there is..

Okay, got it. Thank you very much..

Thank you. And our next question comes from the line of Keith Weiss of Morgan Stanley. Your line is now open..

Excellent. Thank you, guys, for taking the question and a really nice quarter. I think this is going on a previous question when we were talking about the potential for mix shift into 2017.

But how should we think about the margin implications there going more towards Performance and Security versus just the Media? Should that be a positive for operating margins as we've head into 2017?.

I mean there are lots of factors that are going to affect the operating margins. I think you're right at the highest level, the gross margins for those products are higher.

I think as Tom mentioned, in talking about enterprise that you're going to see us make continued investments in R&D, and so what maybe, if you start to see a mix shift more to Performance and Security, it may benefit gross margins but we're going to make sure we're making the right investments in this new enterprise space.

And so I I'm not going to call margin expansion on the operating margin perspective in 2017.

In fact, what I said in the prepared remarks is I actually thought that kind of operating margins going into 2017 would likely be pressured because I think what we're going to do is some of the areas that we plan to grow in, in the enterprise space are going to require investment.

And we believe that there are huge, huge growth opportunities for the company for the long term. And we're going to make those investments now. And until revenue growth reaccelerates in a more substantive way, that's going to have pressure on EBITDA and operating margins while we make those investments..

Got it. And if I could sneak in one follow-up. There's a lot of sort of industry discussion about steep sort of price discounts on sort of the core Media business this quarter.

One, is that something that you guys would be willing to talk to, whether there was steeper discounts coming from you guys? And two, is that part of what pressured sort of the non-top six Media growth in the quarter?.

No. No. I know what you're referring to that, yeah, there have been bloggers that have talked about pricing. And I can tell you that we look at pricing on a regular basis. And one, I will tell you the Media business is a very competitive business.

Price points are always very aggressive, but the pricing environment and our response in the pricing environment is consistent. So we're not seeing a significant change up or down in the pricing environment. It is a very aggressive pricing environment, and we will price to ensure that we maintain and grow share.

But I haven't seen it necessarily get better or worse. It's pretty consistent..

Got it. Excellent, that's helpful. Thank you..

Thank you. And our next question comes from the line of Ed Maguire of CLSA. Your line is now open..

Hi. I was wondering if you could provide a bit more color on the dynamics of Media customers that convert to Performance customers. You talked about the new SDKs that customers can drop into their apps.

But could you walk through what really that transition would look like? And how – where there's the breakpoint in how those customers get classified?.

Yeah, they might have an object delivery product and which is just basic caching and delivery, if you want to think of it as basic CDN. But they want to have the delivery be faster. They want it accelerated. They want to have more dynamic content and have it be accelerated. So then they might upgrade to a DSA or an Ion.

Increasingly, media companies really care about security, so they want all of their content to run through Kona Site Defender and the entry level delivery product there would be DSD, which is a web product. So, what you see them doing is moving from basic object delivery, basic caching into Performance and Security product and that's good.

That's a good thing. It is a higher margin business, as Jim said. It's stickier and then from there, once they are more deeply on the platform, we can sell other capabilities, things like Image Manager, Bot Manager, so it's a good mix shift for us..

Great. And just a follow-up. With the recent Soha acquisition, the Enterprise Application Access offering does get you into a market that is competitive with the likes of Check Point or Citrix for remote access.

Do you have to do any different types of development or how are you thinking about selling this product as there may be a different buyer from who you traditionally have served?.

That's a – yeah, great point. The buyer is a little bit different for our enterprise products. Now, there's a commonalty with the Chief Security Officer, commonality with the CIO.

But the person who is worried about the enterprise network or the enterprise app security or the enterprise apps is often different than the person whose day-to-day job is the enterprise website. That said, we have great relationships in many major enterprises and so it's easy for us to cross over.

We do have folks that have special training around the new enterprise products. The beauty of both Enterprise Threat Protector and Enterprise Application Access is they are very easy to integrate and to turn on. And the value proposition is, I think, relatively easy to explain, much easier than things like Kona Site Defender and Ion, for that matter.

So I'm very optimistic that it will have success in being able to cross over with the enterprise products. And, yes, we will have a new suite of competitors as we move into the enterprise market. We will be probably seeing the big box providers who are trying to figure out how to move into the cloud.

And the big advantage we have is that we know how to work in the cloud very well, with high performance and high security, and then with a shared platform. And that's a big advantage..

Great. Thank you..

Thank you. And our next question comes from the line of Sterling Auty of JPMorgan. Your line is now open..

Yes, thanks. Hi, guys. On these very large DDoS attacks, can you give us a sense of what the cost to actually defend against them? Because I think before Friday's attack, there was a similar very large attack against KrebsOnSecurity that you guys were defending kind of pro bono. I think you stepped away.

So is that a material cost to defend the size of one of these attacks?.

Yes, the Krebs attack did share some of the same attacking entities as the Dyn attack, but it was different in that it wasn't going after DNS, it was going after the site itself.

And when you have attacks that say are maybe just downloading the site at massive scale, issuing GET requests, you want to think of one of the costs there is just the cost to support all the traffic. Because you may be delivering the traffic or even if you are filtering the traffic, it's coming in to us and that is a cost.

Not to mention with very large scale attacks, the human cost of monitoring it, making sure everything is fine and that there's no downstream impacts. So it's like running a very large-scale event at some level for however long the attack goes. So it can be expensive over time.

And we – it gets hard to do that for a long period of time in a pro bono situation in terms of the interest to our shareholders and to the interest of our paying customer base..

Right.

Kind of where I'm headed with this is are we seeing an increase in frequency? And there's some concern that the frequency and size of attacks will be increased and actually start to erode gross margin?.

No, I don't think in terms of the security business, it's an issue in terms of gross margins. We are certainly seeing rapid increases in the number of attacks as I talked about and rapid increases in the scale and sophistication of the attacks. And that's an area where Akamai really excels.

So I think as awareness of what's happening out there increases, that helps drive customer adoption for Akamai because we are really uniquely capable of defending against those kinds of attacks..

Got it. That makes sense. And just last question.

We talked about the non-top six, but within the top six, how should we think about 2017 and the different contracts that might be up for renewal on both sides of the fence?.

You are asking about the non-top six? Obviously, with the top six that I think we had shared last time that one of those customers renewed in the first quarter that you can expect that these customers, all of them have contract lives between one and two years each, and so you probably had each one of them are renewing, call it, one of them is renewing each quarter, roughly speaking.

And so that's roughly how it's going to continue..

Thank you, guys. I appreciate it..

Thank you. And our next question comes from the line of Mike Olson of Piper Jaffray. Your line is now open..

Thanks. I just have two quick ones.

First, this is probably splitting hairs and maybe you can't answer it, but at this point, we're just curious how many of the six identified potential DIYs are 2% or more of revenue? Is it just two of them or is it more than that at this point? And second, what is the pace of sales force additions look like at this point? It seems like for two years or three years in a row, you were adding 100 salespeople per year.

Are you still adding to that in a big way or is it more maintenance mode for the sales team of plugging holes versus making net adds to the team?.

Yeah, as far as the big – the six large net platform companies, I think we said in aggregate, they're 10%. We said the top two in Q2 were 5.5%. They were a little bit less than 5% combined this quarter. So it gives you a frame that there's really none of them beyond our largest customer that – they are all about 2% or less below them.

Actually customers five and six are relatively small. We have included them in the grouping just because they fit the classification of an Internet platform giant. And as far as the sales force is concerned, we continue to make investments in the sales force. We continue to make investments in go-to-market capability all the time.

We are not disclosing specifically the number of sales reps. We did that a few years ago because we were kind of doubling down in a much more substantive way, that we were doubling the size of the sales force over the span of a couple of years. So we're not growing the sales force at that rate, by any means.

But we continue to kind of add to the sales capability and as Tom mentioned, we will add it based on what we think the growth opportunities are and hire the appropriate skill sets. So you can expect that we will continue to do that going forward..

Thank you..

Thank you. And our next question comes from the line of Michael Bowen of Pacific Crest. Your line is now open..

Okay. Thanks a lot for taking the question. I guess my question would center around – with the growth in Media ex the top six around 5%, is that kind of something – is that range kind of the new normal we should think about? And then second question.

With regard to the good holiday selling season, as we watch the holiday season, what are some of the metrics that you would point us to that you guys would define as good or solid as we try to watch the quarter and kind of prognosticate where you are going to be coming in as far as your revenues? Thanks..

Yeah. So I will take them in order. So it's tough to say what the Media growth is going to be ex the digital (64:16) platform guys. Yes, they grew 5% in the third quarter.

As we've said in the past, that the Media product category is really about traffic and there is a lot of things that cause traffic to kind of ebb and flow, big software releases, gaming releases, more video delivery. So, I don't know if I would say 5% is the new normal. I mean obviously 5% is what we did in the third quarter.

I do think it's going to be pressured in that we have had some large customers that have transitioned from buying a Media product, to now – to a Web product.

So in that case, it will be pressured, but I still think there's a significant opportunity for growth in our Media products and – which is one of the reasons again going back to the divisional lens that we introduced a couple of quarters ago, that's one of the reasons why we grouped customers the way we have, because I think seeing what those customers are doing as a composite, I think, is a more important and meaningful way to look at it.

And relative to the holiday season, I mean, you can look at some of the things that we do. You can look at announcements, announcements of, it could be gaming releases. It could be announcements of things that are going to cause more consumption possibly of online activity.

It could be the introduction of new offerings, potentially new offerings for over-the-top bundles, things of that nature. Looking at things like ComScore, around what their predictions are going to be for the online e-commerce season. So there's a bunch of things that you can look at to kind of get a gauge.

You'll see statistics – you can't always directly correlate them to how we're going to fare, but they're probably reasonable proof points around whether things are trending in the right direction..

And if I can sneak – thanks for that. And if I could sneak one extra one in. When you talked about some of the Media revenue, basically some of that being supplanted by Web Performance.

And I don't know if you can answer this, but is some of that Media revenue bleeding off to some of the competitors? Would that be fair to characterize?.

No, no, no, this isn't about customers leaving the Media product category and churning. These are customers that are literally the sales rep and the customer having a discussion, as Tom mentioned. And they're upgrading to a higher performing product which happens to sit in our Web Performance product category.

So, no, this is not a function of they're migrating and they're migrating, either churning or migrating to a web – they're migrating to our Web Performance products where that's been the case..

Great. Thanks for taking the questions..

Thank you. And our next question comes from the line of Michael Turits of Raymond James. Your line is now open..

Okay, Michael Turits. Thank you. Two questions, guys. First, you sort of answered this about the reacceleration of growth in 1Q. But first question is, should the top six bottom as you expect it as a percentage of revenue in 1Q? And secondly, you said that there was only the government one point that was a one-timer from P&S.

But you are guiding in line with the Street at the midpoint, which kind of implies, assuming the same trajectory in Media, that the P&S returns to its prior growth rates at least based on the guide. So what am I missing? It seems as if there would be more one time based on the guide. So those two questions..

Yeah, so I'll take – relative to the large Internet platform customers that – again, what we've said is our visibility for these customers in the near term is pretty good. Our visibility for these customers beyond kind of, call it, the next quarter or the next two quarters is certainly less.

And it's hard to pick a percentage as you know, because it's a function of what happens with the rest of our business as well. I can tell you that roughly where – the revenue volumes, as Tom mentioned, we can expect that they're probably going to go down a little bit from where they were in Q3.

I don't think you're going to see – notably, I think these customers as a grouping, they're still going to be a sizable revenue contributor in 2017, whether they're contributing at the levels that they are now or something less than that, it's hard to predict.

But I think that they'll still be reasonable sized customers as a grouping, at least for 2017. And relative to – I'm not exactly sure what your question is around Performance and Security that – I think the point is that Performance and Security growth rates were 19% in Q3. We saw an acceleration in Web Performance.

We saw an acceleration in Cloud Security. What I was suggesting is that outside of that, we had a modest benefit in our custom government projects which probably contributed to about a point of that growth. So call it, the 19% growth. It would have been more like 18% growth had it not been for a couple of large projects..

I guess what I'm just trying to figure out is if that 18% is really a sustainable acceleration, because the guide kind of implies that it's not..

Yeah, I mean, again, it depends upon what happens, as you know, Michael, in Q4, especially for the Web Performance products in particular. The online commerce season is a big factor on how well that product category will do, because certainly that traffic for the commerce season affects the Web Performance products.

And so I'd say there is certainly a chance that its growth stabilizes in Q4 if there's a good and strong online holiday season, or it might dip, but I don't think it'll dip substantially..

Okay, thanks. Thanks, Jim. Thanks, Tom..

Thank you. And our next question comes from the line of Will Power of Baird. Your line is now open..

Yeah, great. Thanks. Yeah, a couple of questions. I guess a bit of a follow-up to a couple of earlier ones. I was just thinking about the Q4 revenue guidance. It looks like the implied sequential growth is a bit below past couple of years. It sounds like FX may be a piece of that and then perhaps a further decline in those top six customers.

I wonder if it's just that or are there some other pieces we should be thinking about in terms of the sequential compared to past years?.

No, I think you're thinking about it exactly right that some of the reasons for the sequential growth in prior periods or prior years was what was going on with the large Internet platform customers, the big two that we talked about in the past that they had been large contributors to Q3 to Q4 sequential growth in the past.

That's obviously not the case now. If you exclude those customers, where we look, we expect that the sequential growth rate outside of those Internet platform customers to be roughly consistent with what they've been seasonally the last couple of years..

Okay. All right. That's helpful. And then just probably not quantitatively, but perhaps qualitatively. You've got some big OTT launches coming from AT&T, the DirecTV Now product here in November. You got Hulu, Google, others, the products in 2017. Yet, it feels like you may be downplaying some of the growth opportunities in Media a little bit.

So I'm just trying to understand how you're thinking about the magnitude of those opportunities. What they could mean to you if we start to see more meaningful online traffic.

Is that something you think could still be a meaningful driver of your business in 2017 or beyond or something maybe changed on that front?.

No, absolutely, I think the future of OTT is bright. We have a strong growth already in our revenues for OTT. I do think there's a good chance you'll see numerous OTT efforts launched over the next one to two years. I think we're in a very good position to benefit from many of them, including some of the ones that you mentioned.

And I think that can be a very strong driver for revenue growth for us in the future. It's hard to predict how successful each one will be, but I think everybody thinks it's going that way. And as it starts to really materially get there, that's a good thing for us..

Yeah, Will, I think we're definitely poised to benefit from that. I think we're obviously a bit cautious, given what we called last year. And obviously it didn't happen to the volumes and levels that we thought. So I think when it does come, I think we will be poised to benefit from that at the time, but when it happens, it remains to be seen..

Yeah. Okay. That's helpful. Thanks..

Operator, we have time for one more question. I know there's several probably in the queue, but we have time for one more..

Okay. And our next question comes from the line of Matthew Heinz of Stifel. Your line is now open..

Thanks for getting me in. Good evening. Just one more question on the security side, if I could, given the continued increase in size and scale of the DDoS attacks.

Could you just kind of give us an update on the competitive landscape? I guess specifically in terms of how quickly do you think the TAM is growing for DDoS mitigation? What customer segments are showing the strongest demand growth? And lastly, have you kind of begun to see an uptick in competition from either carriers or traditional software vendors that are angling more towards cloud-based security products?.

I think we are positioned very well in the competitive landscape. The traditional landscape has been dominated by companies that sell you devices that you install in your data center and that just doesn't work anymore. The scale of the attacks makes it really impossible to defend yourself successfully that way.

You can't afford enough and you can't get enough connectivity with these large attacks. And what you need really is Akamai because we have such large-scale with our platform, and where we place our service at the edge of the Internet. Even the large cloud data centers cannot scale with these kinds of attacks.

So we're uniquely well positioned to defend against the large attacks. I think every enterprise needs to worry about it and I think there will be increased awareness after Friday's attacks that this is a big deal. So I think there's tremendous upside in the TAM across really all of our customer segments. And that's just for the DDoS attacks.

Of course, we also sell the Kona Site Defender solution that adds application layer defenses. That's where the bad guys are trying to come in and corrupt your website, and trying to steal your confidential information.

And then beyond that, as we talked about, we'll be entering the enterprise security space and that's where the bad guys are trying to infect the employees with malware, trying to exfiltrate sensitive corporate data such as emails, and that's potentially an even larger market down the road..

That's very helpful. Thank you. And then just as a follow-up – sorry, if I missed this before.

But what was the per share impact of the litigation settlement this quarter? And also how much on a per share basis is factored into your 4Q guidance?.

It's about $4.5 million a quarter and it's recorded as an expense offset. So roughly speaking, call it, roughly $0.02..

Okay.

And that's – fourth quarter will be the end of that?.

No, the way it has been structured is we are going to receive this over the next three years. And so you will see a quarterly payment of $4.4 million a quarter for basically the next 11 quarters..

Okay. So just to square that up with the EBITDA margin guidance, you said that you were positively impacted in 3Q.

Does your 4Q guidance incorporate that offset or is it normalized?.

Yes, it does. The 4Q guidance assumes we get $4.4 million again..

Okay. Thank you very much..

Okay..

So, I want to thank everybody. And in closing, we will be participating at a number of investor conferences and events in both the Americas and in Europe throughout the fourth quarter. Details of these can be found on the Investor Relations section of akamai.com. And we want to all thank you for joining us and have a nice evening..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..