Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Akamai Technologies Q4 and Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time.

[Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure hand the conference over to Tom Barth, Head of Investor Relations. Sir, you may begin..

Thank you, Bryan, and good afternoon, everyone, and we appreciate you joining Akamai's fourth quarter and fiscal year end 2018 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; Jim Benson, Akamai's Chief Financial Officer; and Ed McGowan, Akamai's Senior Vice President of Finance.

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied 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 12, 2019.

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 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 $713 million up 8% over Q4 2017 and up 10% in constant currency. Q4 non-GAAP EPS was $1.07 per diluted share up 51% year-over-year and up 52% in constant currency.

These very strong results were driven by the continued rapid growth of our security business; the continued improvement in our media and carrier division; and a robust holiday commerce season in our Web Division. Our bottom-line also benefited from a lower tax rate and from our continued focus on operational excellence.

EBITDA margins in Q4 expanded to 42% and non-GAAP operating margins expanded to 28%. Q4 marked our fifth consecutive quarter of increasing margins and we anticipate further margin expansion in 2019.

We also have clear line of sight to achieving non-GAAP operating margins of 30% in 2020, while continuing to invest in innovation and new products to drive our future growth. For the full year, revenue was $2.7 billion up 9% over the prior year. Non-GAAP EPS for 2018 was $3.62 up a $1 or 38% over 2017.

We're especially pleased to report that we generated over $1 billion in cash from operations last year. This was up 26% over 2017 and represented 37% of our revenue. In Q4, our security portfolio continued to be the fastest growing part of our business with revenue of $185 million up a very strong 38% year-over-year in constant currency.

Security accounted for 26% of our total revenue last quarter and our Security business exited 2018 with a revenue run rate of $750 million per year. We now expect our security business to top the $1 billion mark in annualized revenues in 2020. That's a remarkable milestone, but we're not planning to stop there.

With our acquisition of Janrain which closed on January 23, and the development of our new Zero Trust Enterprise Security Solution, we anticipate that our security business will continue to grow at a very fast pace for many years to come. Janrain establishes Akamai as a market leader in the customer identity and access management space.

Their solutions are designed to manage user log-ins and data for major consumer facing Web sites. They verify the identity of the end-user and make sure that the user experience is optimized and secure. Janrain does this in part by keeping track of how users access their accounts. For example, which devices they use and from which locations.

We believe that we can use this data to help strengthen all our security solutions. And by combining Janrain's technology with our Bot Manager Solution, we believe that we can make it even harder for attackers to hack into or steal user accounts. Janrain will also help us protect enterprises from data breaches.

That's because Janrain stores user information so that the enterprise doesn't have to. And if an enterprise doesn't keep user information like user names, passwords, phone numbers and addresses then it can't be stolen from that enterprise in a data breach. Keeping user data safe means more than just not having it stolen.

It also means complying with the various data privacy laws that are being adopted by governments around the world. And it means helping end users have more control over who gets access to their data and what they can do with it.

This is going to be increasingly important in the future and we believe that our unique security solutions can help position Akamai as a company that can be trusted in a world where big tech companies are being called out for their questionable uses of personal information.

As we look forward, we're also excited about our new Zero Trust Enterprise Security Solution. Last quarter, we signed our first Zero Trust deal worth more than $1 million per year. And we sold it to a manufacturer in Asia.

Now as most of you know manufacturing is not a vertical known for buying our traditional Web services but manufacturing companies do care about cyber security and protecting their enterprise. And the same is true for just about every major company today.

And so, with our enterprise security solutions, we see an opportunity to dramatically expand the range of companies that we can serve. And since companies typically spend more on enterprise security than they do on Web security, we expect this emerging business to have a more meaningful impact on our revenue beginning in 2020.

We're also continuing to invest in other innovative technologies that could bring substantial future returns. For example, today we announced a new joint venture with Mitsubishi UFJ Financial Group of Japan. The joint venture will offer a new block chain based online payment platform called Global Open Network or GO-NET for short.

GO-NET is designed to enable next generation digital financial transactions to be scalable, fast, efficient and secure. The new platform is expected to become available in the first half of 2020. We were also very pleased to see the continued improvement in our media and carrier business in Q4.

Traffic growth last quarter remain very strong in our OTT and gaming sectors. And in December, we achieved another record for peak traffic driven by software downloads from Microsoft and Fortnight and streaming of the UEFA Champions League.

We continue to grow traffic faster than the Internet as a whole in Q4, which means that we continued to gain share and because of our relentless focus on efficiency, we actually spend less on network costs in 2018 than we spent in the prior year. Overall, we're very pleased with the progress we made last year. We accelerated revenue growth.

We made dramatic improvements to our margins. We grew non-GAAP EPS by nearly 40%. We developed innovative new technology that we believe will drive substantial revenue growth in the future. And we delivered excellent value to our customers further decreasing our already low customer churn rate.

And we managed to do all this while keeping Akamai a great place to work where corporate social responsibility is a strong part of our culture.

For example, we rank as one of the Forbes just 100 companies doing right by treating workers and customers well, protecting privacy, producing quality products, minimizing our environmental impact, giving back to our communities and by providing ethical leadership. We rank as one of the best employers for diversity out of 50,000 U.S.

firms with more than 1000 employees. And we scored a perfect 100 on the Human Rights Campaign's Corporate Equality Index.

I'd like to take this opportunity to thank all of the talented employees on our global team for all their hard work on behalf of our customers and shareholders in 2018, because of their continued innovation and great customer service, Akamai is very well positioned for the years ahead.

I also want to take this opportunity to say a special thank you to Jim Benson. As you may have seen in today's press release, Jim is planning to retire from Akamai later this year. And he'll be transitioning his CFO duties to Ed McGowan in March.

Jim has been a great CFO and I'm very grateful to him for his many contributions to Akamai's growth and future success. Over the last 10 years, Jim has developed an outstanding finance organization and he's instilled a strong operational and financial discipline across the company.

He's been a great business partner not only for me, but for the entire Akamai senior leadership team and the Board. His many contributions to Akamai will be fondly remembered for many years to come.

Although Jim is stepping out of the CFO role after filing the 10-K in March, I'm very pleased that you'll be staying on as an Executive Advisor to help ensure a smooth transition. While we're sad to see Jim leave, we're also delighted about Ed's promotion to CFO.

Ed is a highly accomplished finance executive and an 18-year veteran of Akamai, with broad knowledge of our business, our customers and the industry. He began his career with us in finance and sales operations. And then, took on executive roles in Corporate Development and Global Media and Carrier sales.

Most recently Ed served as SVP in Finance, overseeing business finance, customer revenue operations and FP&A as well as leading a key transformation project to drive increased levels of sustained profitable growth.

Having worked closely with Ed for over a decade, I'm looking forward to benefiting from his experience and knowledge in the role of CFO as we work to deliver profitable growth for our shareholders in 2019 and beyond.

Now I'll turn the call over to Jim to review our Q4 and 2018 results, and then, Ed will share our guidance for Q1 and 2019 as well as some preliminary thoughts about 2020.

Jim?.

Thank you for the kind words Tom, and good afternoon everyone. This is a great team here at Akamai and I am very proud of what we've accomplished over the last nine years.

With revenues approaching $3 billion a year a rapidly growing security business with the $750 million annualized run rate, a more diversified portfolio that I believe positioned Akamai for long-term success, industry leading profitability and a consistent focus on managing the business for the long-term while delivering results in the near-term.

As I approach my 10th year helping to lead and drive the business and after discussing my desire to make a change with Tom, I've decided this is the ideal time for Akamai to transition to the next CFO to lead our next phase of continued growth and expansion. The company has been demonstrating strong business results.

We have a very talented finance team and bench in place and there are many exciting future growth opportunities ahead. I am very pleased to be turning the reins over to Ed McGowan, who I have worked with over the past nine years most recently as my Senior Vice President of Finance.

I'm looking forward to helping Ed, Tom and the team in the near-term spending some more time with my family and considering my next professional challenge. I am confident that this transition will be seamless. With that, let me now dive into the details of our strong Q4 financial results.

As Akamai -- as Tom outlined, Akamai continued to perform well and had an exceptional fourth quarter closing out a fantastic 2018. We exceeded the high-end of our guidance on revenues, operating margins and earnings and delivered substantial operating margin improvements for the fifth consecutive quarter.

We continued to execute well and to demonstrate the leverage in Akamai's operating model. And we remain confident, we will show further progress in 2019 and have clear line of sight to achieve our goal of 30% operating margins in 2020.

Q4 revenue came in above the high-end of our guidance range at $713 million up 8% year-over-year or 10% in constant currency or up a healthy 11%, if you exclude the six large Internet platform customers. Notably this is the fourth straight quarter of year-over-year double-digit revenue growth, when you exclude the Internet platform giants.

Revenue growth continued to be solid across most of the business with the over achievement compared to guidance driven by the rapid growth of our security services. And higher than expected holiday season traffic in our media and commerce verticals notably.

I mentioned on our last call that holiday season traffic would play a large role and where we would land relative to our fourth quarter guidance. And it did. Traffic was solid across our core installed base with particularly strong growth coming in our gaming over the top and commerce verticals.

Revenue from our media and carrier division customers was $328 million in the fourth quarter up 8% year-over-year or 9% in constant currency and up a healthy 14% in constant currency excluding the large Internet platform customers.

Revenue from the Internet platform customers was $43 million in the fourth quarter consistent with Q3 levels and in line with our expectations. Revenues from these customers continued to stabilize and represented just 6% of total Akamai revenues.

Our lowest level of revenue concentration in recent memory and a testament to our continued progress on diversifying our revenue base across customers, solutions and geographies over the past several years. Moving now to our Web Division.

Revenue from these customers was $385 million up 9% year-over-year or 10% in constant currency, a slight acceleration from Q3 levels driven by a strong online retail season for our e-commerce customers.

We also continue to see a strong uptake in our new product areas namely Bot Manager, Image Manager and Digital Performance Management as well as further strong growth and adoption for our core security solutions.

Turning now to our results for our security solutions, fourth quarter revenue was $185 million up 36% year-over-year with 38% in constant currency and yet another quarter of tremendous revenue growth from increased customer adoption of these solutions globally.

We are particularly pleased to see continued strong revenue growth in our security offerings in Q4 and throughout full year 2018 from both the Web and Media division customer bases. Entering 2019, our rapidly growing security business now at an annualized revenue run rate of $750 million.

As Tom mentioned, we believe security continues to present a tremendous growth opportunity for us and we plan to continue to invest in this area to further enhance and extend our product portfolio and go-to-market capabilities.

Our recent entrance into Customer Identity and Access Management is a great example of how we're adding complementary capabilities to our world-class security offerings as well as acquiring additional enterprise sales talent.

Moving on to our geographies, sales in our international markets continue to be strong and represented 39% of total revenue in Q4 up 1 point from the prior quarter.

International revenue was $279 million in the fourth quarter up 20% year-over-year with 23% in constant currency driven by continued strong growth in our Asia-Pacific region and another solid quarter in our EMEA region.

Foreign exchange fluctuations had a negative impact on revenue of $3 million on a sequential basis and $8 million on a year-over-year basis. Finally, from our U.S. market, revenue was $434 million up 2% year-over-year and up 4% excluding our large Internet platform customers.

Moving on to costs, cash gross margin was 79% up nearly 2 points from Q3 levels in the same period last year and 1 point above our guidance due to higher revenues and improved network efficiencies.

Not only is this the second consecutive quarter that our bandwidth and co-location dollar spend declined year-over-year, but absolute expenses for a full year 2018 were lower than 2017 spend as well. This is noteworthy given the significant increase in traffic over the same period.

We are very pleased with our continued ability to efficiently manage network cost. GAAP gross margin which includes both depreciation and stock-based compensation was 66% also up 2 points from Q3 levels and in line with our guidance.

Non-GAAP cash operating expenses were $262 million up $18 million from Q3 levels this was slightly above our guidance driven by increased year-end commission and bonus costs associated with the revenue over achievement.

Moving now to profitability, adjusted EBITDA for the fourth quarter was $301 million up $28 million from Q3 levels and up $56 million or 23% from the same period in 2017. Our adjusted EBITDA margin came in at 42% up 1 point from Q3 levels up 5 points from Q4 2017 levels and in line with our guidance range.

Non-GAAP operating income for the fourth quarter was $201 million up $20 million from Q3 levels and $42 million or 26% from the same period last year. Non-GAAP operating margin came in at 28% up 1 point from Q3 levels up 4 points from Q4 of last year and in line with our guidance range.

I am very pleased with the five consecutive quarters of margin expansion we have seen from our ongoing efficiency efforts and feel confident, we can achieve our 30% non-GAAP operating margin goal in 2020, while continuing to make the required investments to drive both growth and further scale and leverage in the business.

Capital expenditures in Q4 excluding equity compensation and capitalized interest expense are $125 million in line with our guidance for the quarter. For the full year 2018, capital expenses came in at 16% of revenue and in line with our long-term model range.

Moving on to earnings, non-GAAP net income was $176 million or $1.07 of earnings per diluted share, $0.04 above the high-end of our guidance range. These strong earnings results were driven by continued top-line execution, ongoing network and operating expense efficiencies and a lower tax rate.

Taxes included in our non-GAAP earnings were $32 million based on a Q4 effective tax rate of just over 15%. This effective tax rate is a couple of points lower than our guidance due to a higher mix of foreign earnings and the resulting year-to-date true up in the quarter. For the full year, the 2018 non-GAAP tax rate was just under 18%.

Moving on to our GAAP earnings. There was one noteworthy item impacting our Q4 GAAP results that I'd like to provide some color on. We recorded a $13 million restructuring charge in Q4 and we expect to record an additional restructuring charge of approximately $10 million to $12 million in Q1.

These charges are primarily related to workforce reductions of approximately 125 employees in January or about 2% of our total headcount.

Also included in our restructuring charge are some small capitalized software impairments from decisions to deprioritize certain investment areas that have not achieved the commercial success and return on investment we expected.

It is important to note these restructuring actions are being taken to enable some rebalancing of our investments, divesting in some areas, investing in others and to position the company to meet our long-term goals of continued growth and scale.

Factoring in this GAAP-only restructuring charge, GAAP net income for the fourth quarter was $94 million or $0.57 of earnings per share. Now, I'll review our use of capital. We continue to focus on the importance of returning capital to shareholders.

During the fourth quarter, we spent $124 million on share repurchases buying back roughly 1.9 million shares. For the year, we spent $750 million buying back 10.2 million shares representing 124% of our free cash flow.

And resulting in our share count declining from 171 million shares at the beginning of the year to 165 million shares in the fourth quarter.

We now have $1.1 billion on our previously announced share repurchase authorization and going forward we intend to continue returning to our shareholders a significant percentage of our free cash flow through share repurchases balanced against our preserving our flexibility for other strategic opportunities.

We believe our disciplined and balanced capital allocation approach will allow us to continue driving shareholder value through investing organically in the business, pursuing additional M&A like we recently completed with Janrain and returning capital to stockholders via share repurchases.

In summary, we are pleased with how the business performed in Q4 and throughout 2018 and remain confident in our ability to execute on our plans for the long-term. I'd now like to turn the call over to Ed to cover the Q1 and 2019 guidance along with some initial thoughts on 2020. And again, I want to say how pleased I am to hand the reins to you.

I know we are in good hands.

Ed?.

Thanks Jim. It's been a pleasure working closely with you over the past nine years. I look forward to following your example of professionalism and business leadership in years ahead. Before I move on to guidance, there are three housekeeping items that I wanted to highlight.

The first relates to a change in our network server useful lives as some of you may recall, we announced on our Q4 2012 earnings call that we were required to extend the useful life of our network servers from three years to four years based on the actual server useful life trends.

We carefully monitor the useful lives of all of our capital assets annually and based on the outcome of that review; we now need to extend the useful lives of our network servers from four years to five years, similar to when we made the change six years ago.

This extended useful life is a direct result of the continued software and hardware initiatives that we have put in place to manage our global network more efficiently because we are now using our servers in our network for an average of five years, we have determined it is appropriate under GAAP accounting to adjust our useful life policy to five years and this change will be effective in Q1.

Please keep in mind this change has no impact on cash flow, but will result in roughly a $24 million depreciation benefit in 2019 and a benefit of approximately $7 million in 2020. We have provided a supplemental table in the Investor Relations section of our Web site that details the impact of this change.

Also during Q1, we closed on our recently announced acquisition of Janrain. As we previously stated, Janrain will be approximately $0.05 to $0.06 dilutive to non-GAAP EPS in 2019. But, we expect it to be accretive to non-GAAP EPS in 2020. Finally, just a reminder that our $690 million convertible bond is maturing on February 15, 2019.

We are expecting to repay bondholders at par value using a portion of our $2.1 billion of cash on the balance sheet as of December 31, 2018. Moving now to guidance. Today, we are providing guidance for both Q1 and full year 2019 along with some early thoughts on 2020.

Looking ahead to the first quarter, we are projecting another solid quarter on both the top and bottom-line. We do expect to see some normal sequential revenue decline that we typically see in Q1 due to seasonality. And perhaps a bit more pronounced this year due to the very strong holiday season this past quarter.

In addition, we expect some foreign exchange impact from the strengthening U.S. dollar. The current spot rates foreign exchange fluctuations are expected to have a negative impact of approximately $14 million compared to Q1 of 2018.

Therefore, we're expecting Q1 revenues in the range of $690 million to $704 million or up 5% to 7% in constant currency over Q1 of 2018. At these revenue levels, we expect cash gross margins of approximately 78%.

Q1 non-GAAP operating expenses are projected to be $252 million to $256 million down from fourth quarter spend levels even as we absorb the incremental expenses associated with the Janrain acquisition.

The decline in Q1 is partially due to incentive compensation plans resetting at the beginning of the year partially driven by the recent workforce reduction actions, Jim mentioned a few moments ago.

Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q1 EBITDA margins in the range of 41% to 42% consistent with Q4 levels.

Moving on to depreciation, we expect non-GAAP depreciation expense to be between $90 million to $92 million which includes the impact of the network server useful life change I mentioned earlier. Factoring in this guidance we expect non-GAAP operating margin of 28% to 29% for Q1.

Moving on to CapEx, we expect to spend approximately $126 million to $136 million excluding equity compensation in the first quarter. With the overall revenue and spend configuration I outlined. We expect Q1 non-GAAP earnings per share in the range of $1 to $1.05 or up 31% to 37% to constant currency.

This EPS guidance assumes taxes of $35 million to $37 million based on an estimated quarterly non-GAAP tax rate of approximately 18%. And it also reflects a fully diluted share count of 164 million shares.

Looking ahead to the full year, we are anticipating revenue in the range of $2.81 million to $2.85 million which factors in a negative impact of roughly $16 million due to foreign exchange. We also expect a revenue by quarter to follow the same quarter-over-quarter trends that we saw in 2018.

For the full year, we expect adjusted EBITDA margins of approximately 41% and we expect 2019 non-GAAP operating margins of approximately 28% up approximately 1.5 points over full year 2018 levels. And we are on a trajectory to further expand non-GAAP operating margins to 30% in 2020. It is worth noting that we do see some expense headwinds in 2019.

We expect approximately $8 million per quarter of additional operating expenses beginning in Q3 as the benefit of our patent royalty payments from Limelight comes to an end.

And as we take on higher rent costs related to our new Cambridge headquarters, therefore, we expect to see a slight decline in both EBITDA and operating margins in Q3 with an improvement in Q4. Moving on a CapEx, full year CapEx is expected to be approximately 19% of revenue.

Included in our 2019 CapEx spend is roughly a $100 million of onetime costs related to the buildout of our new headquarters that is expected to be completed by the end of this year. Excluding our headcount related spend, our CapEx levels are in line with our long-term model.

At these revenue and margin levels along with an expected non-GAAP effective tax rate of approximately 18% and fully diluted share count of approximately $164 million, we anticipate non-GAAP earnings per diluted share of $4.15 for the full year 2019.

At the midpoint of that range non-GAAP EPS would be up 14% year-over-year when adjusted for foreign exchange. We are pleased with how full year 2019 is shaping up particularly from a margin expansion and profit perspective.

In 2019, we plan to continue investing and innovating in areas we believe will drive future growth, continue to refine and optimize our go-to-market efforts and ensure we are well-positioned to capture a growing share of the OTT market as we continue to focus on quality, cost and scale.

We are optimistic that our efforts in 2019 across the company will result in an acceleration in growth rate for both revenue and EPS in 2020. Given our expectations of significant traffic growth in 2020 due to more events such as the Olympics and the U.S.

Presidential election as well as more direct to consumer offerings coming to market later in 2019 and early 2020, strong adoption of our new Customer Identity and Access Management products, increased market traction of our enterprise security products and continued strong growth in our core Web security products such as Kona Site Defender and Bot Manager.

In closing, we are very bullish about the opportunities ahead for Akamai. We are confident in our ability to deliver revenue growth along with margin and earning expansion, achieve our 30% operating margin goal in 2020 and continue to invest in innovation to drive future growth. Thank you. Tom, Jim and I would like to take your questions.

Operator?.

Thank you, sir. [Operator Instructions] Our first question will come from James Breen with William Blair. Your line is now open..

Thanks for taking the question. Just can you talk about the security business and how you've seen the sales go between sort of the core DDoS, and then, some of the other products that you've sold. From a customer perspective what types of products taking all services from you guys? Thanks..

Yes. We're seeing strong adoption across the board starting with DDoS, then we have Kona Site Defender, which protects applications from being corrupted or taken over or the Web site content from being corrupted, theft during transactions. Bot Manager as we've talked about before is our fastest new selling product and memory.

The majority of transactions today are no longer human. There's bots and particularly the bots are trying to take over user accounts. The vast majority of log-ins today are not legitimate people but bots who are trying out stolen credentials.

So very strong adoption across the board, and we're starting to get traction now with our Zero Trust Enterprise Security Solution. As I mentioned we signed up our first $1 million a year customer. And what was really nice about that is it came from an account that would never have likely bought our normal content delivery, Web acceleration products.

So, the security business just across the board is doing very well..

From a growth perspective, is growth coming from -- or can you give a little color on where it's coming from new customers versus existing customers taking more volumes?.

It's both. The large fraction of our new customer bookings are for security today and we are getting good up sell with the new products within the existing base.

For example, Bot Manager being a new product with our enterprise security offerings, early days, but there's both new customers like the one that became our $1 million customer, they weren't a customer before, but also selling that within existing accounts.

So, I would say both are strong new customers and upselling the new security offerings within existing accounts..

Great thanks..

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

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

Thank you..

You're welcome. Just a follow on the cloud security question, cloud security remains really impressive.

How should we think about the sustainability and the visibility that you have here to the growth? And can you comment on pricing trends for WAF and DDoS in the market?.

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

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

Thank you. And Jim, just to follow-up or add perhaps, in Tom's remarks, he had mentioned that you'd spent less on network costs in 2018 than in the prior year and Jim in your prepared remarks as well. You talked about efficiencies with bandwidth and qualification costs.

Can you just remind us once again the sources of efficiencies along the entire stack? And how you're able to do that and what the limits of these are as we look out into achieving 30% and perhaps even beyond in the years to come?.

That's a great question. I mean this is not new for Akamai as you know. We've made tremendous progress on network efficiencies for a long, long time. And some of the things we've talked about in the past have been, we continue to implement new software to get more throughput out of our servers.

And so, you certainly saw that I think because of our breadth and the amount of traffic that we serve from a bandwidth perspective, we get very favorable bandwidth pricing and in some cases, we actually get free bandwidth for our customers.

The same is true for co-location that we've been able to reduce our co-location spend by reducing the footprint and getting more throughput out of the servers as I mentioned. So, I would say it's not new. It's something we've been doing for quite some time. We continue to work on engineering innovation to continue to drive that.

We continue to work on things around negotiations with providers and I expect those things will continue Brad. I do think that as I outlined at our Investor Day in June that I expected that network costs and our gross margins on a cash basis would be in the high 70s. And we're ahead of where I expected to be.

So, I think we should be able to stabilize those margins from where they are. And as I outlined before that on the path of 30, we're pretty close. We'll call it -- we're at roughly 28% now. And we think we're going to be able drive more efficiency out of G&A in particular.

We're building out a new procurement set of capabilities and we're going to be able to drive more procurement savings we've done some facility consolidation. We'll continue to do that and we're driving some IT enablement that will allow us to take more G&A costs out. So primarily kind of going forward mostly from G&A.

I'd say we're also getting some efficiencies on the go-to-market side as we build out a more efficient go-to-market model in both our Web and our media division.

And so, I mean that's not going to be the bulk of where the incremental margin is going to come from it's going to largely come from G&A, but you'll also see continued improvements within sales and marketing spend..

That's really helpful.

But just to be clear, the tick up in CapEx in 2019, that's really just due to the $100 million one-time expenditure towards the new headquarters, correct?.

Yes. Yes. And I outlined at the Analyst Day that we'd have a big uptick kind of one-time for the new Cambridge headquarters. If you -- I think Ed outlined in his prepared remarks that if you actually adjust for that, we're actually well in line with our model that we've outlined a kind of 15% to 16% of revenue.

So, the uptick in CapEx is all Cambridge headquarter related..

Perfect. Thank you so much..

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

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

Yes. Some of the largest Internet platform companies have do-it-yourself efforts. They are used for large software downloads, some basic delivery.

Our services we believe are a lot more effective at doing this offer, a lot more scalability and higher quality and that's the reason there's so few of the companies that really could think about affording to do what themselves because that's a big cost for them. I don't see any fundamental change in that landscape.

In general, the competitive landscape as a whole hasn't really changed all that much. There's a lot of competitors, the folks that have been doing CDM for a long, long time, plenty of startups out there trying to get in the business. And of course, the do-it-yourself. No fundamental change.

We, I think continue to gain share and we do that through superior performance, competitive pricing, the largest scale that's available on the Internet and increasingly our security solutions are very helpful for us in terms of gaining share especially with the performance solutions.

We sell packages protect and perform, in the same platform that accelerates the side or delivers the content secures it and security is really important for our customers and nobody really is in a position to offer the kinds of capabilities that we do there..

Thank you..

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

Great. Thank you. A few questions on growth. I was hoping you can give us what the organic growth was in 2018, so backing out the benefit from some of the acquisitions that occurred in parts of 2017. And then, also what the implied organic revenue growth is for 2019 and maybe as part of that just what your assumptions are for Janrain.

And then, my other question just has to do with the performance segment, I know you don't break that out anymore, but when you give your guidance for 2019, what is your just broad expectations or assumptions for that that went into that. Thank you..

Yes, sure. This is Ed. In terms of our organic growth last year, it's [4.7%] [ph]. If you look at Nominum headed about $40 million roughly last year to the growth rate. As far as our expectations around Janrain expecting it to be approximately $20 million not significant for 2019 in terms of revenue.

But we do expect to get significant traction in the marketplace with our customers and expect to see significant growth going into 2020 in new Janrain products.

And as far as the organic growth, now, we're expecting [cyber] [ph] security solutions to be growing in the mid 20s as Tom talked about it and if you do the math on that basically it would suggest that the CDM and other business is roughly flat and a lot of that is driven by trends that we're seeing in media.

We had a very tough compare this year in terms of media, in terms of the gaming sector. We have a number of large renewals in the first half of the year. We've got some industry consolidation that's really adding to the impact of some of those renewals and a lot of these deals were put in place about 18 to 24 months.

So, I'd say that's really normal things that you see in the media and entertainment place. As far as the Web Division, we are continuing to see a little bit of pressure here in the commerce space as we talked about in the past and that's really what's adding to the flattening of our CDN and other business.

We do expect to see that return to growth in 2020 as we expect to see a significant uptick in our media business going to 2020..

Great. Thank you..

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

Great. Thanks. I wanted to ask a question about the enterprise security products specifically. In the past, compared those enterprise -- I guess the enterprise business to what the security business was in its early days. And I just wanted to ask I guess, how the enterprise business has been doing so far relative to those expectations.

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

Doing very well. Obviously, early days, but we had very strong bookings this year up substantially over 2017. And so, and we're anticipating even stronger bookings next year. So, I would say we're very pleased with the progress in enterprise security. I think in the long run, it should be a bigger business than the Web security business.

You think about enterprises more of them, almost all of them in fact care about enterprise security. And only really certain verticals are focused on Web security, which is our current product set.

And the amount of money that enterprises spend today on firewalls and trying to prevent data breaches is much greater than what companies will spend on securing a Web site. So, I think the market's bigger and I think we're really at the cusp of a major change in how enterprises secure themselves.

The notion of Zero Trust what everybody is talking about that now. Take years for enterprises really to fully make the transition, but the first customers now are embracing that and adopting Zero Trust Solutions. So, I think a very exciting future..

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

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

Thank you, Sterling..

And then, in terms of, you talked about the different detail around the growth dynamics into 2019. I think that's very helpful. But you did mention in the prepared remarks especially the OTT strength and with preparation some of the launches that have gone on.

What are you seeing in terms of the uptick there and is the pricing in those opportunities different than what you've seen in traditional media delivery?.

Yes. So, a couple of things there. And I'll start with the back, the last part of the question around pricing. Really pricing in the media space is really driven by volume. So, there's really no difference in terms of high volume with OTT customer or high-volume software download customer.

We do tend to get additional value on our OTT space from security sales and professional services et cetera. But in terms of the traffic expectations as we look at the guidance, we take a look at the customers that we have today, we've got pretty good trends and track record in terms of understanding how their businesses grow.

As we look out, I talked a little bit about some of the launches that may be coming at the back half of '19 and '20. We tend to take a bit of a conservative approach there for a variety of reasons.

Many of the things that go into an OTT launch that went past us really revolve around traffic growth and there's a lot to think about in terms of the exact date of the launch, sometimes launches can be moved. It is very complex technology and workflows that are involved. Sometimes customers want to launch them either in a limited fashion.

It's really not until it gets to be a service that is a market that we really get a good handle in terms of what we expect in terms of volumes.

Also, other things that impacted is the service of paid subscription services is ad supported, what is the user adoption, what's our share of traffic, what's the engagement time of the user, what's the bit rate? So, as we look at 2019 any of these OTT offerings that are coming in the back half of the year were very, very conservative in terms of the adoption rate, the impact on outcome..

Okay. All right. That makes sense to me. And then, one follow-up would be, you gave the 28% operating income margin guide for 2019. I want to make sure I'm thinking about this the right way.

What would that guidance have been under the old depreciation rules in terms of the four years instead of five years?.

Yes. I said it's about $24 million FX, so it's a little less than a point. Yes, keep in mind also that I mentioned that we're taking on Janrain as well, so included in the guidance was the impact of Janrain. So, you'd have to add that back-in. So, if you add those two things roughly [net each other out] [ph]..

Okay, great. Thank you..

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

Thank you, guys for taking the question and a nice quarter. Two questions from me, one, just more broadly and I guess this is a question for Ed. Kind of walk us through again sign of where you guys get the confidence to sort of this for accelerating growth into 2020? And I mean forecasting is top [or saying] [ph] two years is really tough.

But what are the kind of like mechanical things that you can see better growth in 2020? And then, one, this is probably for Tom.

How do you enter in 2019? How do you feel about sort of your sales forces ability to sell outside of your traditional customer? I mean like the selling point within a customer of going from the guy who's traditionally in charge of the Web site to now selling directly to a [indiscernible] or just selling to other guys within the organization who hasn't traditionally been be the sweet spot for Akamai..

Sure. I'll take the 2020, the confidence there. So, one thing to think about -- I will talk about media first and I'll get into the Web in a second. If you think about media, there is a odd year, even year phenomenon and I talked about in the prepared remarks that 2020 will have additional events for us that we won't see in '19.

And one of the reasons why our growth rate is a little bit lower in the media business this year is the fact that we did have some large events in 2018. That's one thing.

The other thing I mentioned was the -- some of the big renewals that are coming up and I touched a bit on the consolidation in the industry there's been some very, very big consolidation.

And there you're taking, that will be a bit more of a decline in terms of your prices due to the fact that you've got no additional volume that's added when you put the two companies together. And also, there are a number of services for example, the companies might have professional services engagements and whittle that down to one et cetera.

But these things are very temporary. And what we see is you see a decline in the business. And then as traffic ramps you see revenue grow again so that that's one thing. The other thing is that we've seen some significant security growth in both of our verticals.

But sticking with media, we made a change back in the beginning of the year and our compensation plans and we saw a significant increase in our revenue from security and there's still a tremendous amount of wide space there to go. And then, in terms of the OTT offerings I talked about, if you look at some of the offerings that are coming to market.

Well, I talked about -- bit about being a little bit more cautious in '19 and '2020 we feel that those offerings will start to take hold in the market and we believe we're positioned very well to do so.

And part of that is addressing some of these concerns around consolidation and being -- playing the long game in terms of being a partner and helping with some of the synergies on the cost side. On the Web side, there's a number of go-to-market initiatives that we put in place.

We're starting to see some pretty good traction in terms of our new customer efforts that we've put in place in 2018. We're seeing significant growth in outside the U.S. both in APJ and EMEA. We're also seeing some pretty good growth in APJ and Media as well.

And then, just security in general within the Web Division, so a lot of wide space to go and then we're very optimistic about the Customer Identity Access Management demand that we expect to see there as well as an uptick in our enterprise security products.

So, all of that together gives us the confidence to feel that we'll see an acceleration in 2020..

That's super helpful..

And on your question about selling the security solutions, we've made a lot of progress there. Pretty much all of the sales force is expected to be able to sell security solutions and they're doing that with the Kona sales, the CSO, with a security organization pretty much always involved there even though that's sold to for the Web site.

With the Bot Manager product and being all about fraud prevention there that's the security organization typically heavily engaged with that. Prolexic that's a data center protection level sale really nothing to do with the Web site per se. It protects all the assets in the data center.

So, there we're dealing with the data center networking security side of the house. We're putting a lot of effort in our marketing to get better known as a security company. Past year we hired a new Global Head of Web Sales, Scott Lovett who's well-known as a security expert.

In fact, the large majority of our new customer bookings are led by security now. So, I would say we're doing very well and making the transition in terms of a sales force that sells CDN to a sales force that sells security. Now the Zero Trust Solutions is the next step in that direction. And we're off to a good start there..

Thanks. That sounds great. Thanks a lot guys..

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

Great. Thank you. Thanks for taking the question. I'm going to ask a growth question again. So, you mentioned the CDN business will be flat in 2019, but return to growth in 2020 due to the big events. What do you think is sort of two-year stacked growth rate and what's sustainable in that business over a multi-year timespan? That's one.

And two, just to be clear, I guess more of a housekeeping, does your guidance embed pricing declines from some of the consolidation that's going on? Thanks..

Sure. I'll take the last question. This is Ed. I'll take the last question first. Yes, we did embed the expected pricing declines in our guidance. In terms of the core CDN business, if you look at our core CDN business excluding net giants just as the giants can sometimes skew some of the results. They grew at about 4% in '17 and above 4% and '18.

We're calling for roughly a flat year here as we go through some of the items that I talked about and then a return to growth. So, I think looking at that trend low single digits is probably the right way to think about that business.

I think one of things that Jim pointed out some of their cost initiatives that are going on in that business, it is a very profitable business for us and it's something that we're going to continue to optimize as we go forward.

And really in terms of the next big leg up in growth OTT once that becomes a significant portion of users viewing time that's the decision to begin to accelerate..

Great. Thank you..

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

Hey, guys. Good evening. Thanks for taking my question. Jim of course congratulations to you and a privilege working with you, and Ed, welcome to the slot and congratulations as well..

Thank you..

Two questions, one on CDN, one on security. First, one on CDN, in terms that that flattish growth for 2019.

Is that any different in terms of the growth expectation for the media delivery piece as opposed to the Web performance piece within the CDN segment?.

Yes. So, it's roughly the same, Michael. Give or take a percentage point or two..

Right.

So, it sounds like that's maybe a slightly an improvement maybe in performance stabilizing a bit?.

I would say it's more stabilizing a bit..

All right. And then, my next question is on Security. So, security isn't great. As you pointed out it's about $750 million run rate and you're looking to get it to $1 billion by 2020. But I think it's probably been mostly WAF and DDoS up to this point. But, the combined market for those two is only about $2 billion.

So, it seems as if we're going to get to $1 billion yourself. Unlikely you'd be 50% of that market, so you must be anticipating a really good contribution outside of WAF and DDoS.

Can you give us some sense for how big you think the non WAF and DDoS piece of your security business could be by 2020?.

I think the vast majority of it will be WAF and DDoS in 2020. We do command a very strong share because we have really unique capabilities there in the market. Now that said, over the longer term we're looking for the non-WAF items particularly enterprise security, Zero Trust to drive a lot of growth.

We also get smaller contributions would be from Nominum with their enterprise security solutions that we sell actually to carriers and they provide it as a channel. And there's smaller pieces here and there with the fast DNS, but the vast majority is WAF and DDoS.

And I think it'll take a little bit of time for the other pieces really, which will be led by enterprise security and the Zero Trust solutions to be a big share of that.

I would count Bot Manager as part of WAF, when I say Bot Manager that's part of WAF because that's a very fast growing product and that's a pretty good share of what we'll see in 2020..

Great Tom. Thanks..

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

Hi. Thanks for taking the question.

I was just wondering in the non-GAAP operating margin guidance for the year, is there anything else that's one time holding that back besides the depreciation in Janrain anything related to headquarters or is that all in CapEx?.

Yes. So, as I mentioned in Q3, we'll start to see the rent expense hits in Q3 associated with the new headquarters building. Other than that there's really no onetime items in it. Obviously, as I mentioned the Limelight patent royalty going away in Q3, but other than that there's really no other onetime items.

But Janrain is also something that you need to -- keep into consideration as well in margin guidance..

Got it. Thank you.

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

I want to follow up on some of the -- two of the OTT questions.

Could you at least ring fence the opportunity in OTT for Akamai in kind of leaving aside the timing? How much of an incremental opportunity you see this some of the launches are relatively well publicized as to who hopes to launch an OTT service, but just maybe not talking specifically about customers, but whether any of those potential launches that are clear opportunities for you or some that just aren't because you don't -- you have never with that company.

Just ring fence the opportunity both on the low side and high side in 2020 and 2021? Thank you..

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

I think if you look longer term in what could be on a global basis for OTT, there's tremendous opportunity for growth. If you get to the point where the majority of TV or video watching is done online, which a lot of people think will happen and it's done at high quality say at least 10 megabits per second.

There's the opportunity for orders of magnitude of increased traffic. Now timing on that is really hard to predict. As you know there's a couple of companies that either do it all themselves and so we don't participate in their revenue, but for the large majority of the OTT providers those that are setting up new services both here and globally.

We have very good relationships and are in a position to benefit..

Okay. Thank you..

Operator, we have time for probably one more question..

Yes, sir. Our last question will come Sameet Sinha with B. Riley FBR. Your line is now open..

Yes. Thank you very much. And Jim and Ed congratulations on your next steps. A couple of questions here. Saw some nice leverage on the R&D line in the fourth quarter.

Can you speak to that specifically what exactly is going on? Obviously that division has probably been impacted somewhat by the consultant recommendations and other sort of efficiency initiatives that you have. Secondly, if you can just talk about the churn rate, this is the second quarter in a row where you mentioned that churn rate has gone down.

Can you specifically address what are some of the key initiatives that you've taken to make sure that this means a continued dynamic? Thank you..

On the R&D leverage. I mean as I outlined earlier the bigger source of leverage for the company for margin expansion is really going to come from G&A, sales and marketing to some extent and also some network costs. We did see a little bit of leverage in R&D.

As you know, we capitalize a fair amount of our R&D spend for new innovation and you should you view that as good because that effectively means that new product innovation that's being incubated. We saw a bit of an uptick on that from Q3 to Q4 in our kind of capitalization activity, which has a benefit in your operating expenses.

But I think by and large, we expect our R&D spend as a percent of revenue to be roughly flat over the next couple of years because we don't want to under invest in a critical area to drive growth for the company..

Yes. In terms of the churn rate that's all about making the customer happy providing great performance. We have great professional services. Our people are really great and the customers like that. Innovative new products. Our customers want to see a roadmap and investment and innovation to help them stay ahead of the game.

A low rate of service incidents things that go wrong and we listen to our customers and engage with them. And provide them the level of service that they're looking for. So, in general our customers are very, very happy with Akamai and that's directly reflected in a very low churn rate.

And we are very pleased to see it decrease further in Q4 and 2018..

Okay. Thank you very much..

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

Ladies and gentlemen, thanks for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day..