Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2020 Akamai Technologies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] It is now my pleasure to introduce Head of Investor Relations, Tom Barth..

Thank you, operator. Good afternoon, everyone. And thank you for joining Akamai’s First Quarter 2020 Earnings Conference Call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Ed McGowan, Akamai's Chief Financial Officer.

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

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

Additional information concerning these factors is contained in Akamai’s filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the Company's view on April 28, 2020.

Akamai disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section at akamai.com.

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

Thanks, Tom. And thank you all for joining us today. Before I get into the numbers, I want to acknowledge how much the world has been disrupted by the COVID-19 pandemic. All of our lives have been impacted in ways that would have been hard to imagine only a short while ago.

At Akamai, our primary concern is for the health and safety of our employees, their loved ones, our customers and partners, and the communities where we work and live. Fortunately, we're in a position where almost all of our employees can work remotely, and we've been doing that successfully for the last two months.

We've also implemented special measures to protect employees who need to travel, for example, to a data or operation center. And we're doing what we can to help employees to face especially challenging situations as a result of the pandemic.

As businesses and consumers around the globe adjust their routines in the interest of public health, the internet is being used at a scale that the world has never experienced.

In addition to the hundreds of millions of people who've been working from home, governments are leveraging the internet to keep citizens informed and to provide economic assistance. Houses of worship are streaming services and communities are engaging online to relieve the social isolation felt by many.

And of course, education, commerce and entertainment are now almost entirely online. As much of the world hunkers down in place, Akamai is continuing to work behind the scenes to keep the internet functioning as a lifeline for organizations and people everywhere.

I'll talk more in a minute about Akamai’s unique role during the pandemic and the impact of the pandemic on our business. But first, I'll review our Q1 financial performance. I'm pleased to report that Akamai had a very strong first quarter on both the top and bottom lines. Revenue was $764 million, up 8% year-over-year and up 9% in constant currency.

Non-GAAP operating margin in Q1 was 30%, up 1 point over Q4 and consistent with Q1 of last year. Non-GAAP EPS in Q1 was $1.20 per diluted share, up 9% year-over-year and up 11% in constant currency.

These excellent results were driven by the continued strong performance of our security solutions, greater than expected traffic levels, and by our continued focus on operational efficiency. As more business is conducted over the internet, the ability to scale becomes critical. And when it comes to scale, Akamai is the clear leader.

Traffic on our platform increased dramatically in March as enterprises turned to Akamai to move more of their operations online. Despite the cancellation or postponement of major sporting events, like March Madness, and Champions League Soccer, our traffic increased by about 30% over a four-week period at the end of Q1.

Traffic reached a peak of 167 terabits per second, which was more than double the peak of the first quarter of 2019. We're very pleased that the capacity we added to the platform last year has enabled us to help our customers, when they need us most.

We're also making a big difference when it comes to helping the major carriers handle the explosion in demand. That's because we've deployed our infrastructure deep into carrier networks and close to end users, thereby offloading an enormous amount of traffic that would otherwise congest core backbones and routers.

Of course, performance is also critical as businesses move the majority of their operations online. Although some other companies have experienced cases of performance degradation and even extended outages in recent months, I'm very happy to report that Akamai's performance has remained consistent and strong over the past quarter.

In fact, our measurements indicate that the page download times provided by our industry leading Ion service has significantly improved over the past year. This is in spite of the large increase in traffic, and is a direct result of our relentless efforts to improve the performance of our services.

Akamai is also helping to protect many of the world's major enterprises as more employees work from home and as IT departments increase their focus on business continuity.

We believe that Akamai’s market leading security services are needed now more than ever, as attackers take advantage of the pandemic to ramp up their exploits on enterprises across all verticals. In Q1, our cloud-based security portfolio generated $240 million in revenue, up 28% year-over-year in constant currency.

Sales continue to be led by our flagship services for DDoS prevention, application-layer firewall and bot management. We also saw a strong surge in bookings for our next-gen Zero Trust enterprise security solutions.

The strong demand we saw in Q1 for our security and media services more than offset the reduced revenue we received from companies that have been hit hardest by the pandemic, especially in the travel and hospitality vertical.

Where appropriate, we are modifying the terms of these customers’ contracts to provide them some relief and flexibility, often in return for extended contract line. We value our customers and want them to think of Akamai as a supportive and reliable partner for the long run.

We are fortunate that our financial strength enables us to provide assistance to customers in need, which we believe will benefit our shareholders and the global economy over the long term. We've also played an important role in helping to support websites and applications associated with response to the pandemic.

And the Akamai Foundation is providing sustainable financial assistance for numerous relief efforts around the world. Most of all today, I want to recognize and thank our nearly 7,800 employees for working so hard to serve the thousands of organizations and billions of internet users who rely on us during these very-challenging times.

I couldn't be proud of the way that our people have stepped up and of what they're managing to accomplish, despite their own personal challenges and dealing with a pandemic. Their spirit and leadership during a time of crisis is a key part of what makes Akamai such a unique and strong company.

Lastly, I want to offer a warm welcome to our Board's newest member, Marianne Brown. Marianne joined Akamai's Board last month and brings with her extensive financial and operational expertise, as well as valuable leadership experience with global technology-driven companies.

I'll now turn the call over to Ed for more details on our Q1 performance and our outlook for Q2.

Ed?.

Thank you, Tom. Before I begin, I would also like to thank our fellow employees for their amazing work and dedication. And I would like to acknowledge our customers and partners, especially those who have been hardest hit by the global pandemic.

Today, I plan to review our Q1 results, discuss the impact the pandemic is having on our business and provide Q2 guidance and an update on the full year. As Tom mentioned, we delivered a very strong quarter on both the top and bottom line.

Q1 revenue was $764 million, up 8% year-over-year or 9% in constant currency, driven by a significant increase of global traffic, as well as continued strong growth across our security portfolio. Revenue from our Media and Carrier division was $358 million, up 8% year-over-year and 9% in constant currency.

The outperformance in media was primarily due to the surge in traffic from OTT video, gaming, social media and news and information sites as more and more people around the world began to shelter in place. Revenue from our internet platform customers was $45 million, in line with our expectations.

Revenue from our Web division was $406 million, up 8% year-over-year and 10% in constant currency. Revenue growth for this group of customers was again driven by our security business. Moving on to revenue by geography. International revenue was $335 million, up 16% year-over-year or 19% in constant currency.

We continue to see very strong international growth, especially in APJ. Foreign exchange fluctuations had a negative $3 million impact to revenue on a sequential basis and had a negative $7 million impact on a year-over-year basis.

Sales in our international markets represented 44% of total revenue in Q1, up 3 points from Q1 2019 and up 2 points from Q4 level. Revenue from our U.S. markets was $429 million, up 3% year-over-year. Moving on to costs. Cash gross margin was 77%, consistent with our expectations.

GAAP gross margins, which includes both depreciation and stock-based compensation, was 65%, down a point from Q1 of last year. Non-GAAP cash operating expenses were $260 million, in line with expectations. Adjusted EBITDA was $327 million, up $8 million from Q4 and up 9% in the same period in 2019.

Our adjusted EBITDA margin was 43%, up 2 points from Q4 and up 1 point from Q1 of 2019. Non-GAAP operating income was $230 million, up $8 million from Q4 levels and up $20 million or 9% from the same period last year. Non-GAAP operating margin was 30%, up 1 point from Q4 levels and consistent with Q1 of last year.

Capital expenditures in Q1, excluding equity compensation and capitalized interest expense were $136 million. This was lower than our guidance range, given some pandemic-related supply chain disruptions and travel restrictions that delayed some planned network buildup.

However, thanks in part to the capacity work we undertook in 2019, we are very pleased that we've been able to maintain network resiliency during this virus outbreak. Moving on to earnings. GAAP net income for the first quarter was $123 million or $0.75 cents of earnings per diluted share.

This included a restructuring charge of about $11 million associated with the prior actions I mentioned on our last quarterly call. We did not take any new restructuring actions during Q1.

Non-GAAP net income was $196 million or $1.20 of earnings per diluted share, up 9% year-over-year, up 11% in constant currency, and $0.02 above the high end of our guidance range, due to higher than expected revenue in the quarter. Taxes included in our non-GAAP earnings were $35 million based on a Q1 effective tax rate of 15%.

This was slightly better than we expected, due to stronger than expected growth outside the U.S. Now, I will turn to some balance sheet items. We believe that our balance sheet is strong. We anticipate that we can maintain this position in the face of the current economic uncertainty.

As of March 31st, our cash, cash equivalents and marketable securities totaled $2.2 billion. Our total debt at the end of Q1 remained unchanged at $2.3 billion. As a reminder, our debt is comprised of two convertible notes with par values of $1.15 billion each and maturity in 2025 and 2027, respectively. Now, I will review our use of capital.

During the first quarter, we spent $81 million to repurchase shares, buying back approximately 900,000 shares. We have approximately $750 million remaining on our previously announced share repurchase authorization.

We plan to continue to leverage our share buyback program to offset dilution, resulting from equity compensation over time and subject to global financial conditions. In summary, we are very pleased with our Q1 results.

Given these uncertain times and with the increased volatility we are seeing in global markets, I thought it would be helpful to provide some additional context on the impact that the recent elevated traffic levels may have on our media division and the negative impact the pandemic may have on some key verticals in our Web division.

First, as Tom mentioned, with many countries around the world issuing shelter-in-place orders, we have seen a dramatic increase in media traffic across our platform. We expect this elevated traffic to continue to have a positive impact on our Q2 results.

However, we anticipate that traffic levels may start to moderate if life begins return to normal, and as the warmer summer months get underway in our larger markets. As an aside, some of you may be wondering about live sports. As a reminder, no individual live event has a significant impact on our results.

And to-date, the stronger traffic from shelter-in-place orders has more than offset the impact of live sports cancellations and postponements. Moving now to our Web division. There are two verticals notably impacted by the global pandemic, travel and hospitality, and commerce and retail.

Travel and hospitality vertical accounted for roughly 4% of total Akamai revenue in Q1. This vertical is comprised of over 200 customers globally, including some of the largest airlines, hotels, cruise lines and travel-related sites. Most of these customers have seen sharp declines in demand. The trend is expected to continue throughout 2020.

Our commerce and retail vertical is an area we have highlighted for some time as being under financial pressure. This vertical includes more than 900 customers globally and represents approximately 16% of Akamai's total revenue.

So, while we have seen a recent traffic uptick with some customers, other customers are struggling, especially those that rely heavily on brick and mortar operations. We believe they could become increasingly challenged, the longer the shelter-in-place orders continue.

As Tom mentioned, we have already begun to work with many of our customers whose businesses have been impacted by the pandemic. Q1 was negatively impacted by approximately $5 million due to a combination of contract restructurings and elevated bad debt reserves.

Although it is difficult for us to project the total impact, we do expect to incur additional charges in the coming quarters, if the economy continues to suffer. I'd now like to provide our outlook for the second quarter. We are projecting Q2 revenue in the range of $752 million to $778 million, or up 6% to 12% in constant currency over Q2 2019.

Given the COVID-related impacts on the business I just discussed, we expect to see continued sequential growth in our media division and a slight decline sequentially on our Web division is Q2.

At current spot rates, foreign exchange is expected to have a negative $7 million impact on Q2 revenue compared to Q1 levels and have a negative $11 million impact on a year-over-year basis. At these revenue levels, we expect cash gross margins of approximately 76%. Q2 non-GAAP operating expenses are projected to be $252 million to $260 million.

Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q2 EBITDA margins of approximately 43%. Moving now to depreciation. We expect non-GAAP depreciation expense to be between $98 million to $101 million. We expect non-GAAP operating margins of approximately 30% for Q2. Moving on to CapEx.

We expect to spend approximately $186 million to $206 million, excluding equity compensation in the second quarter. This assumes there's not a significant change in the overall economic environment and that we will catch up on our CapEx spend for the first half of 2020 in Q2.

With the overall revenue and spend configuration I just outlined, we expect Q2 non-GAAP EPS in the range of $1.18 to $1.24, or up 14% to 20% in constant currency. This EPS guidance assumes taxes of approximately $34 million to $36 million, based on an estimated quarterly non-GAAP tax rate of approximately 15%.

It also reflects a fully diluted share count of proximately 164 million shares. As our Q1 results and Q2 guidance demonstrate, we are optimistic about the continued strength of our business, even in the light of the pandemic.

As you're seeing from other companies reporting, however, it has become much more challenging to predict economic conditions, resulting customer impacts in the second half of the year. As a result of this uncertainty, especially as it relates to the holiday shopping season in Q4, we are withdrawing full year 2020 guidance at this time.

We plan to reassess providing annual guidance next quarter as we gain additional insights into the direction of the global economy. We're very thankful for the resiliency of our employees, the diversification of our revenue, the strength of our customer relationships and our strong balance sheet.

We believe we are well-positioned to continue to help our customers during this very difficult time by providing them with the best and most secure digital experiences around the world. Thank you. Tom and I would be happy to take your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Will Power with Baird..

Great. Okay. Thank you for taking the question. Well, I guess first, I hope everyone in Akamai team is staying as a healthy and safe as possible. Maybe two quick questions, if I can.

First, would love to get more granularity if possible on the sources of strength in media? Maybe just trying to understand, the strength in OTT video versus gaming, if there's any way to kind of rank order what you're seeing there? Then, the second question is on security, given the uncertain climate and questions on IT budgets.

Maybe just talk about how you're thinking about security growth going forward and what you're seeing in terms of potential lengthened sales cycles versus the need for work-at-home capabilities..

Yes, sure. I'll take the first one, Tom, and maybe you take the second one. So, the strength in media really came, like I mentioned in the earlier remarks, we really saw strength across several different sub verticals in media, probably the largest would be in OTT video. It also was a very, very strong gaming quarter, especially in March.

And really, we saw a significant uptake in traffic over the last couple of weeks of March. And as the shelter-in-place orders came around the world as we got to places like Europe, India, and the U.S., we really saw a dramatic increase. So, there's pretty much strength across the board and really across the globe as well..

Yes. And first, thanks for the concern about Akamai employees. And I'm happy to report that by and large, we're all doing well. In terms of the question on security growth, it’s looking very strong. And partly, that's because the attackers aren't held back by the pandemic or working remotely. In fact, we've seen a substantial increase in attack activity.

And, perhaps -- that perhaps they're doing that because they know IT managers have a lot of other things that they got to worry about in terms of supporting their workforce remotely that increases vulnerabilities. And so, it's really a perfect storm for the attackers to run their exploits.

And we have products that are really well-designed to help major enterprises deal with that, both for securing their websites and apps and also for securing access for their employees who are now remote, all of a sudden. And so, we've seen a very strong uptick in bookings for enterprise security products.

And I guess, the last point there is, our customer base is the world's major enterprises. And they're going to fare better than most through the pandemic. And we have very good relationships.

And so, we're in a better position to provide them with the new security capabilities or the increased capacity that they're going to need for the security products. So, on balance, I think the security business is looking very strong. And of course, we're all hoping that the global recession doesn’t really deepen or persist for a long time..

Great, thank you..

Thank you. And our next question comes from line of Keith Weiss with Morgan Stanley..

Thank you, guys, for taking the question and very nice quarter.

So, two questions, one on -- as we think about Q2, any quantification you could give us in terms of kind of the puts and takes, and particularly on sort of the drags of having to reprice some of those contracts -- or I’m assuming reprice, having to amend some of those contracts on the performance side of the equation? Any sense you could give us and just like what kind of impact that has on Q2? And then, on the flip side of the equation, is it possible to quantify kind of the -- your expectation for how well this sort of up traffic is going sustain into Q2, like how much of that did you actually put into the guide on a go forward basis?.

Sure. Hey, Keith. It’s Ed. So, let’s start with the Web division. Obviously, what I tried to do was call on a couple of verticals that our customers are experiencing some significant challenges. So, we're dealing with those on a case by case basis.

And in the prepared remarks, I talked a little bit about how we expect to see a slight -- sequential decline in the web business. And really what that's all about is a couple of things that we have to take into consideration.

In some cases, the customers will come direct to us and ask us if there's anything we can do to help them during this period of time where there's a lot of uncertainty. In some cases, we'll amend contracts and we'll get something in exchange for that. In other cases, we have to assess the ability of the customer to pay us.

And so, there's some customers in particular in certain geographic areas of the country that we're more concerned about. And if you don't have -- if you have any concern about the customers’ ability to pay, you have to reserve that revenue. So, the combination of that is going on. I am encouraged to see that the capital markets have been open.

And we've seen a number of customers that have been able to secure funding. There's obviously availability with certain government bailout programs and things like that. But, it is an area that we're keeping a close eye on. And then, obviously, bankruptcies are another possibility. So, what we did is, we did -- ran a number of different scenarios.

And we assumed that we would continue to see additional pressure in the web business and we would see a slight decline. Obviously, this is out of control -- out of our control, in terms of what's going to happen with this pandemic and also out of the control of our customers in many ways.

So, then, on the media side, we assume that this continued strong traffic growth that we saw in March to continue throughout most of the quarter. We made an assumption that in June that we may see a slight decline in the traffic as things hopefully start to get back to normal and the warmer months start to hit.

We've seen a pretty strong traffic growth here in April..

Got it.

And just in terms of the nature of the contract negotiations, is it more on billing terms, or does actual pricing change? Give us some color on to what you're willing to give to your customers and is there anything kind of out of bounds in what you're not willing to do in terms of contract amendments?.

Yes, sure. I mean, you take it case by case, we always take the long term view a lot of these customers have been with us for 15 or 20 years. And they certainly take the travel and hospitality vertical. That was a vertical that I never worried about. It's a -- made up of fantastic, amazing companies. They have been always pay on time.

They're usually folks that are early adopters of our new solutions, et cetera. But obviously, they just saw demand evaporate here in the second quarter -- excuse me, in the first quarter. So, we work with them. Sometimes it could be you enter into a zero overage contract. A lot of customers are asking for extended terms and payments.

So, we have to take that into consideration. Sometimes it's some credit relief, but we do it case-by-case. So, far the customers have been pretty reasonable in terms of their RASK. There haven't been things that have been completely outrageous so far..

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

I just want to double click on Will’s question.

What are you guys seeing thus far with the security solutions with work-from-home, specifically more about that new cloud, web gateway or security solution and the EAA product?.

Yes. So, strong bookings there. Now, the secure web gateway is just now available in beta and as part of our Enterprise Threat Protector solution, version 3.0. And I think that really increases the strength of the offer. Where we're seeing a lot of the bookings now is an Enterprise Application Access.

And you think of that as the VPN replacement, think of that as a thing that lets all your employees who used to just log in, in a physical building now have to do it from home and you need to secure them and you need to scale that overnight. And so, I think that's why we're seeing a real uptake there.

And in general, I think, these are the solutions of the future for enterprise security. They enable the zero trust model, they are much more secure within the traditional solutions that enterprises have been using now for decades and can put a big dent in enterprise data breaches in the future..

And then, on the media side, I mean, one of your peers and in that space get the share loss of some of the streaming services.

Were you guys able to capture some of that share, given the Akamai network size or did you see any specific media share gains with some of newer OTT services?.

Yes. So, that's a great question. We did -- one of the things that has been a bit of a challenge in the industry is that there's been a surge of demand, so capacity becomes a bigger component of the equation. And along with that comes performance. So, in some cases, we've seen pretty nice share gains across the board.

So, we've been very happy with that in Q1..

Thank you. And our next question comes from the line of Sterling Auty with JP Morgan..

You mentioned in your prepared remarks that no single live sporting event is a meaningful part of revenue. But, I think you've talked in the past that things like the Olympics and World Cup that span a couple of weeks are more meaningful.

So, I'm wondering how you quantified or how you gauged the potential for a fade off in traffic in June, versus the loss of the Olympics this year, within the guide and what we should be thinking as we go into the back half of the year?.

So, I'll get into a little bit of detail on this one, just to try to help you guys out. So, we did talk about there's no individual events is material. Take the Olympics for example.

When you think about the Olympics, there's obviously the direct right holders, there's the web traffic that can sometimes go along with an event of that size, the travel and news, and things like that. And then there's also live television. We've got several folks that show live television.

And then obviously, the duration of the streaming is what really matters. We do web delivery, we do services, we do security, et cetera. But it's really the length of the streaming. An event like that could be, let’s call it, the $3 million to $5 million range, maybe a few million on a really good year.

If I think about live sports in general, it’s probably a little over 1% of our total revenue throughout the year. So, right now, you see in Q1, we certainly more than offset the lack of live sports, and we expect that to happen in Q2.

So, in terms of what we've built into our guides, we're assuming that live sports is not fully back up and running and that what we're seeing from the OTT and other gaming and other sub verticals will more than offset that in Q2..

That's great transparency. Thank you for that.

And then, on the security side, can you give us a sense of where the strength is coming from, from this aspect? How much of that strength in spending is new customers coming onto the platform versus existing customers, either taking more product, or existing customers just paying more because of either some sort of volume commitment on any of this or just help peel back the onion a bit on the contributions from the growth in security?.

Yes, sure. Good question, Sterling. So, first of all, I'll take it from a couple of lenses. I'll start off with the product side. So, we saw great strength with strength with Bot Man, KSD services, and EAA and ETP, albeit a bit smaller, good uptake of multiple solutions.

And I've provided this metric before in terms of the number of customers that have purchased a security product for up to 57% now, up from 55% last quarter. So, we're seeing good uptake in the installed base and growing there.

And also, customers taking on more than one product, customer buying two or more, up to about 29%, that's up 1 point from last quarter as well. So, doing well with the installed base. In terms of bookings, we're seeing new customer bookings, again being led by security. And, again, so you see this stuff in your installed base.

And we're also very excited about page integrity. We came up with our limited availability page integrity. We signed a number of customers this quarter and expect to continue to do that throughout the year. Tom mentioned secure web gateway, which is up in beta now and then obviously enterprise has got a long way to go there..

Thank you. And our next question comes from the line of Heather Bellini with Goldman Sachs..

Hi. This is Caroline on for Heather. First off, I do want to echo the comments that my colleagues on the line have already made. I do hope that you and your families are staying safe and healthy. First off, I wanted to dive a little bit more into the comments that you made about OTT.

I'm curious, how has the OTT demand environment trended relative to your expectations, or I guess, put another way, how much of the OTT strength would you characterize as due to the new launches, the share gains versus the general increase in user traffic that was driven by the shelter-in-place orders?.

Yes. Good question. And this is one that I challenged my team to come up with a number. And it's a little difficult. Times like this tend to self-accelerate trends you see in the market and OTT growth being one and obviously cord-cutting being another. And in March is when we really saw a big uptick in traffic.

So, there's no doubt that the shelter-in-place really drove a lot of traffic. But we also had a major customer launch a new service over in EMEA. And we had our own models about what we expected. And I would say, we did a little bit better, could be because of the shelter-in-place.

But, I’d say, it’s kind of a combination of both the shelter-in-place, but also, we had -- we took some share in some places as well, like I talked about earlier, we have capacity in a lot of places where it really matters, we’re able to outperform some of our competitors in certain areas.

So, it's sort of a combination of everything, but I would say that, shelter-in-place certainly did help accelerate the trend that we're seeing in the market..

Got it.

And can you talk through what the demand was like, sort of in the last two weeks of March? And what are you seeing now, especially in areas like APJ where some of the countries have sort of relaxed the shelter-in-place orders and people are starting to return back to their workplaces?.

Yes. The demand increased steadily through March and total traffic increasing from March to April. And you can see, as countries went into shelter-in-place, you see the traffic increased. And I think most of the world is, at least the traffic wise is still in that condition of being high.

And as we look forward, we may see more normal growth from here, depending, as Ed said, on live events and OTT launches and so forth. So, APJ, I would say also very strong. And as you know, a lot of our -- got a lot of strong growth there..

Got it. Thank you so much..

Thank you. And our next question comes from the line of James Breen with William Blair..

Thanks for taking the questions. Just on the CapEx side, you talked about a little bit delay and sort of the expansion that you had, you were prepared for just because some of the build out you did at the end of last year.

Is there any concern about those delays continuing and the ability to sort of meet demand from a customer side, as we go forward here?.

Yes. We think we're past the delays. We did have about 90 days of delay on delivery of a bunch of servers, but we've had plenty of capacity. And as you can tell by hitting a peak, which is really what the CapEx governs of doubling year-over-year.

And at this point, we think we're in very good shape, with the supply lines and getting the full capacity we want for the rest of the year. We have the tax in all the cities where we need to do that. We do the installation.

And we have the approvals from pretty much all the major governments that our folks can move around, even where it’s a very strict lockdown, just because we're such a critical resource in countries around the world. So, we're optimistic, as Ed said, on being able to continue to deploy capacity and to stay ahead of the demand..

Great. Thank you..

Thank you. And our next question comes from the line of Michael Turits with Raymond James..

With you guys withdrawing guidance, as I think through your different segments, I’d like to just try to focus on which are the ones that provide that uncertainty. Because it sounds like CDN is strong now. And really, it worst, at least on the media side at worst, come back to the level it was at.

Security, it doesn't sound like you think there's some uncertainty that's macro related, but perhaps there isn’t. And you can tell me if you think there is. So, we're left with ecommerce and around travel and retail.

So, am I right, Ed that that’s really the reason why we have an uncertainty that caused you to pull guidance in that segment?.

Yes. I mean, obviously, we hated to do that, as we ran our scenarios, there is so much that's out of our control and really impacts our customers.

For example, if you run into a second flare-up against in the fall and get into another round of shelter-in-place, how does that impact our customers business, especially in the Web division? Obviously we would be bullish for the media division because we’d see those elevated traffic levels. But on the website, it could be considerable.

And what's the consumer going to do, how is the consumer going to behave? And with Q4 being a very strong seasonal quarter for us, you can imagine, as you run through a number of scenarios, your range just gets really wide. And we just didn't think it would be helpful.

And that's why we provided some additional color, so, you guys can run your models by giving you some size, relative size and number of customers, et cetera. That's really what's driving, Michael, is just the uncertainty around those Web division customers and more, in particular to what's happening with the virus.

There's just so much that's out of all of our controls, and including capital markets. Who knows in the second round right now, it's good to see some of our customers getting funding, but that may close down at the second round happens, and elevated bankruptcies, consumers may not be spending, may not be travelling.

So, it's not something that we're experts in and we wanted to give it more time to get some more color rather than providing something we thought was unhelpful..

And then, if I think about CDN as a division, obviously the only thing you’ve guided to is 2Q. But, CDN is made up of both the media side as well as the website.

So, do you think that it is enough in traffic to give you an offset to both, live sports and to web that you can see growth in the CDN business year-over-year next quarter?.

So, in Q2, yes, I would say right now there's a good chance that we could see the strength medium, no more than offset live sports and potentially the impact on Web. Right now, we have 60 days to go.

And you never know what's going to happen here in the last 60 days, whether it gives you a larger than normal range, but it is possible and I wouldn't be surprised if we saw CDN growth here in Q2..

Thank you. And your next question comes from the line of Tim Horan with Oppenheimer..

Tom, could you maybe step back a second and I can talk about what you kind of expect for a secular shifts in internet usage and trends and maybe how COVID here might change what you guys are doing, your strategy, if at all or, maybe other areas that you might want to invest in as a result of all this? And then, just a quick follow up on security.

On the bookings, can you give us maybe just some comparisons of past quarter? Is it like well -- 10 points and above trend that you've seen the last few years or any kind of color around that would be great? Thanks..

Yes. In terms of the secular shift, I think there's a reasonable prospect that there will be much more use of the internet coming out of this permanently than there was going in.

And in many areas, you look at ecommerce and traditionally that was -- the penetration of ecommerce and commerce as a whole has grown about 2% of the year and low to mid teens and pretty much now the large majority of commerce is online. And after people get used to doing that for an extended period, a lot of that share gain may become permanent.

That's really good for Akamai. If you look at media, and movie releases being done online, a lot of consumption now moving online. And that may become permanent, a lot of that as well. You look at work from home, there wasn't a lot of that before. But now there's just a ton of it.

And after you've done it for a while, I think you may see a lot of that become permanent. And so, just across the board, it's not so much new users of the internet that weren't done a little bit before. But now they're being done at massive scale. And there's a prospect that the scale will be very large coming out.

And so, when we look at the secular tailwinds here, obviously, we're worried about a global recession, as Ed talked about. We just have no idea how long or deep that will be. We're hoping we get out of this pandemic situation by the end of the year and things are looking better. That's beyond our control.

But once we do emerge, it does seem like there's a lot of strong tailwinds for Akamai. Because the things I described are all the things that we're really good at and the market leaders at. And so, I would say long term view, very bullish about Akamai. It's not a major product shift for us. Obviously, go to market now.

We're changing how we do that, because we're not traveling. So, the go-to-market motions are all virtual and digital now. And we've gotten off to a great start there and how many of you came to our virtual edge live event but tremendous attendance there and really good feedback.

And so, how we approach customers, how we talk to them physically is changing. And that's fine. We're in good shape there. In terms of the security bookings, yes, for the enterprise security products, very substantial increase year-over-year in Q1.And that seems to be continuing into Q2. So, that is good news.

Now, it takes a while for that to turn into revenue, of course. But, that's a very positive development.

And I do think that again in the long term, with more employees working from home, and already the need to stop data breaches and protect enterprise applications and data that there is a bright future for our Zero Trust enterprise security products..

Thank you..

Thank you. Your next question comes from the line of Colby Synesael with Cowen..

Great. Thank you. Two questions, if I may. I guess, first I just want to drill a bit further down on bad debt. Wondering if you could provide any more color as it relates to -- as a percentage of revenue or what the actual step up was in the quarter.

And what should we be looking for that could suggest that you might have to take it up a little bit further potentially in the second quarter. And then just real quickly on pricing.

I'm just curious with the incremental volume that you're seeing tied to the CDN business, whether it's just the broader OTT trend or CD-19 related, if we're seeing any significant material shift in pricing trends. Thank you..

Sure. I'll take those. Bad debt was up a couple of million this quarter. There's a new accounting standard that we adopted at the beginning of January ASC 326, which basically in the past used to look at -- sorry to get wonky here, but in fact, you had to look at the historic and anything that happens within a quarter.

Now you have to look at potential future credit losses. So, think of it almost like you're a bank where you're evaluating your trade receivables and having to put up a reserve for potential future credit losses. And I mentioned earlier, we'll be extending out, in some cases, some payment terms to folks.

In some cases, as they are just asking for some time. In other cases, like in places like India, they physically can't get into the office and are not set up to do electronic payments. So, we'll be evaluating that as every company that adopts this standard will be doing the same.

So, I do expect that debt expenses will go higher, and we did plan for that in our guidance. So, you’ll see in G&A line that that will start to tick up a bit. On the pricing side, pricing in the CDN market, I didn't see anything this quarter that was out of the ordinary.

I will say, though, that we are seeing, as I talked about capacity, the push for capacity reservation fees, which essentially is just getting a little on top of what you'd normally get for the cost of this delivery. Capacity is at a premium at this point. So, we are seeing a little bit of a benefit there.

But, in terms of the normal pricing environment, it's still volume-based and I don't see a lot of difference in the market at this point..

Thank you very much..

Thank you. And our next question comes from the line of Jane Lee [ph] with RBC Capital Markets..

Hi. Thank you. This is Jane for Mark Mahaney. Thanks for taking the question. So, maybe just a couple of points, one on the guidance. You mentioned the vertical weaknesses in your hospitality, travel, commerce.

Can you give perhaps ballpark the magnitude of the impact? And maybe just like, do you bake in a similar impact in Q2, or do you expect that in your Q2 guide -- or do you expect that to kind of be a worsening scenario, just given how much of that has just happened in the last month of the quarter? And then, I have a follow-up. Thank you..

Yes, sure. So, in the guide, we did expect that we see additional pressure in those verticals and in my prepared remarks I talked about how we expected the Web division to decline slightly. It’s not usually a division that grows very steadily obviously with the exception of a seasonally strong Q4 going to Q1. So, we are anticipating that.

So, I did bake in some of that and then included in the range as a various set of scenarios in terms of good, better, best in terms of how we will land. So far in the first 30 days -- or the 28 days of the quarter, I would say, we're trending about what I would have expected, but see how things go here in the next 60 days as we finish up the quarter.

Hopefully as some of these countries and states start to come back out of shelter-in-place, we don't see a panic back to things getting worse. And there's more consumer confidence, we don't see as much pressure. But that's how we thought about it..

Got it. And another question just on security, maybe pre and post COVID. Maybe parsing out the COVID impact before that really hit and you see a surge in booking.

How the growth has been trending versus your expectations and what's kind of the cadence of transition to Zero Trust? And maybe after the COVID impact, you mentioned a few new launches and it has obviously page integrity being one, SWG as well that will be a more material revenue driver in the out years.

Now, do you see any of these new product launches actually becoming more meaningful revenue drivers in perhaps this year or next year, sooner than projected?.

Yes. Good question. I would say, the security growth remains very strong. It's been in the high 20s for some time, and we saw that in Q1 as well, and that's going into COVID. I think, the pandemic as we talked about, the rate of attacks is increased as bad as that is, during the pandemic, as the attackers try to take advantage of it, I would say.

Now ,the new services like page integrity and secure web gateway and enterprise security and the increased bookings around enterprise, security, those are things that will drive revenue in the future. So, there's some time between bookings and growth.

I would say that the pandemic and the stuff that’s happening there helps Zero Trust because in our enterprise security, because there is even more need for it. And in some cases, it's an urgent need. Whereas before there was -- I think it was early days of a trend towards moving to Zero Trust. So, there's an accelerant because of the pandemic.

I don't think the pandemic yet you've seen any change in revenue because of it, the same way you would for traffic. Traffic, you monetize that immediately, as soon as you're delivering more, you get the revenue for it.

With security products, that more is the bookings and the recurring revenue that's generated as customers find new services or increase the services they have. And so, there -- I think there is benefit, in the future, but we haven't experienced that yet in the same way we have the traffic..

Thank you. And our next question comes from the line of Rishi Jaluria with D.A. Davidson..

First, I wanted to go back to retail and commerce as a vertical. Look at -- I know it's been under pressure, even pre-COVID.

It feels like certain parts of that vertical though might be doing better than others in this environment, right, especially those like a Walmart that are selling essential goods and services, and we're seeing pockets of ecommerce. So, I wanted to get a sense for what are you seeing within that vertical.

And if you think you're withdrawing of guidance and one of the factors being uncertainty around the holiday shopping season. Is that a function of the impact from the fact that we're in a recession, it might take time for recovery.

So, discretionary spending might be down or maybe some more detail around that? And then, the second question I wanted to ask, you talked a little bit about the payment terms and restructuring your deals. One of your competitors or peers talked about some customers deferring minimum traffic commitments in this environment.

Just wanted to get a sense, is that something that you are seeing as well. Thanks..

All right. So, I’ll start with the second one. So, in terms of deferring minimum traffic commitments, we haven't got into that. As a matter of fact, traffic is up significantly. So, it hasn't been an issue for us. There are some customers in the Web division that have opted for the zero overage, but that's been a normal sales motion.

So, I wouldn't say -- I wouldn't really call of anything there. On your question about retail and what we’re worried about there. You're correct. There's winners and losers. Some folks have done very well and we’ve seen traffic go higher, and their underlying businesses are doing well. But there's an awful lot of them that are stressed.

And I talked about the size of the vertical, 16% of revenue over 900 customers. That's global.

So, the really the big thing that we're concerned with and I think you hit it on the head with this, the depth of this reception and how do consumers behave, are they going to go out and spend, are they going to go back into stores, what's the ability of our customers to be able to raise enough capital to get through this issue.

In some cases, we're going to see unfortunately some customers go bankrupt. I hate to see it, it does happen. Some liquidate, some come out on the other side. But whenever that happens, it's a disruption for us. We have to stop taking revenue, write-off revenue in the quarter, take a bad debt hit for some of the older receivables.

So, it just becomes very disruptive. And it's hard for us to really call out what's going to happen, because I think what's going to drive the depth of this reception is going to be what happens with the virus and do people feel comfortable coming out, as we've never dealt with this before. So, it's really hard for us to make the call.

And, just given the size of that vertical, it can swing around quite a bit. So, that's what our -- that's why we decided to withdraw our guidance..

That's helpful. Thank you..

Thank you. And our next question comes from the line of Lee Krowl with B. Riley..

Great. Thanks for taking my questions. And congrats on a solid quarter, all things considered. I wanted to focus first on the security business. I think, last call, you guys kind of highlighted 20% growth as the baseline for the year. Obviously Q1 is tracking kind of ahead of that, and you're speaking to some momentum with bookings.

Is it reasonable to say that that 20% or possibly higher is still reasonable? And then, second question, I just wanted to focus on international. Maybe could you parse out contribution of security versus media delivery, especially with the context of new launches on the OTT side? Thanks for taking my questions..

Sure. So, I'll start with the security question. Obviously, we’re off to a great start here. 28%, constant currency growth. Feeling pretty good about Q2. Obviously, Q1’s bookings were strong. We signed one of our largest security deals in our in our history with one of our large media companies. So, good to see that and we see the benefit of that in Q2.

So, I think Q2, we’ll see really strong growth. And we did call out 20%. It's possible we could do better than that. Obviously, the verticals we call out that are challenged, do have big security customers. So, to the extent that there's bankruptcies and things like that can bump you around a little bit.

But, feeling pretty good here in the first half., certainly that will be growing greater than 20%. And it's possible for the year, really just depends on how things go, some of the comments I made earlier. And your second question on international in terms of the strength, I’d say, there it’s similar to what we see in the U.S.

probably a bit more security adoption, quite more greenfield internationally, especially in places like Latin America, pretty low penetration there, which is good. That’s part of the reason we did the exceeded transaction that gives us a good basis to grow the security business there. We are seeing similar trends that we saw in the U.S.

there where you see security and verticals like financial services and commerce and travel first and then you’re seeing media start to catch up. We've done some pretty good deals on the media side as well. So, I'd say there's probably more greenfield in outside the U.S., but we are seeing very similar trends..

Got it. Thanks for taking my questions, guys..

Thank you. And our next question comes from the line of Jeff Van Rhee with Craig-Hallum..

Great, thanks. I think most might have been answered. Just one remaining. I think as you look at the enterprise sales effort, and this is a little outside of sort of the COVID environment currently, but I know long term, tremendous growth opportunity.

When you look at the sales process and where you are at this point, can you just talk to your satisfaction with win rates, with process, with just the overall execution effort in sales within enterprise and things that are yet to be done to really get that running where you wanted, it if it isn’t..

Yes. We're pretty happy with where that is now, with pretty much everything you mentioned, the people, the process, the execution. As you could imagine, this is a difficult time to go out and get bookings. You can't physically meet with your accounts, the buyers out there, the IT folks are just swamped with adjusting to the new reality.

And yet, we had a great bookings quarter, better than expectation on our enterprise security products, much -- big improvement over last year, and that's -- we're starting off the second quarter very well. So, I think that's an area where we're very happy. You don't see that in generating revenue today. But that will certainly help us going forward..

Got it. Great. Thank you..

Thank you. And our next question comes from the line of Brandon Nispel with KeyBanc Capital Markets..

Okay, great. Thanks for taking the question. I'm wondering if - one for Ed -- maybe both for Ed. Can you give us a sense of -- again, we've talked about some customers doing well in e-commerce, some not.

Can you give us a sense of, as you look at your customer base, what could be a worst case scenario if we’re going into the global recession throughout 2020? What percentage of revenue would be at risk? Second, I'm curious, with customers hitting increased traffic during the quarter, how does the pricing change? Is it dynamic during the quarter, where they hit sort of a new threshold for traffic and they reprice to a lower level? I'm just curious how that works.

Thanks..

Yes. I'll take the first and Ed will probably take the second. As Ed talked about, I think, barring some kind of deep and long lasting recession that wipes out major customers and a lot of them or just totally wipes out consumer buying, which of course hurts the commerce vertical, I think we're in good position. We have a really diverse customer base.

Our largest vertical is media which is cranking and actually benefiting in many ways from the new reality of what the pandemic has caused. Our customer base tends to be the biggest names in the business. And generally speaking, they're the ones that are going to thrive the best, even if the global recession deepens and is lengthy.

And it's just that I think no one really knows what the future holds through the global recession. And if it really is deep at the end of the year, and it's going persist into 2021, that could put our commerce customers and companies pretty much everywhere under pressure. And it's hard to really know what the impact of that could be.

And that impacts the potential downside of any guidance we can give. And on the other side, we've got, as you know, substantial upsides in the media business and in security above where we were thinking. And as Ed talked about, just we want to be careful that we don't know for sure that just persists and grows from there all year long.

And as Ed talked about, in June, he even -- we put in a dampening there in June on that. And so, that's really what's going on in our thinking that there's the potential for large upside and the potential for downsides that are hard for us to really quantify. And it's beyond our control at this point.

I would say at a high level, business is very strong, as you can tell with the strong Q1 and I think a strong guide, albeit with a wider range in Q2.

And Ed, do you want to talk about pricing with increased traffic?.

Yes, sure. So, obviously, customers know one size fits all for customer pricing. But, what I would say is that typically we do have tiered pricing in most of our contracts, especially the ones with very large volume, so that as you do clip into new tiers, you do get typically a lower rate for that tier.

But again, it does vary from customer-to-customer, but we do in most cases have some kind of a tiered pricing structure..

And I guess, just as a follow-up, you guys gave the travel hospitality exposure and sort of talked about live events, but could you give us what percentage of revenue is coming from what you would call SMB? Thanks..

Oh, it's very small. Yes, we do very little with SMB. We have a couple of partners that work with SMB. Like, for example our carriers will sell some security offerings to small, medium business. It’s such a small part of our business. We have a few OVP partners and other partners. But, it’s not a significant part of our business at all..

Okay. Well, thank you, everyone. In closing, we will be presenting at several virtual investor conferences and events throughout the rest of the second quarter. Details of these can be found in the Investor Relations section of akamai.com. I want to thank you for joining us.

And all of us at Akamai wish you continued health, and I wish you a very nice evening. So, thank you..

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