Akamai Technologies, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Akamai provides security, delivery and compute solutions through a globally distributed platform with more than 350,000 servers in over 130 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $903.3 million | $852.8 million | $1.807 billion | $1.696 billion |
| Revenue growth | 5.9% | — | 6.6% | — |
| Income from operations | $175.0 million | $199.4 million | $348.4 million | $381.8 million |
| GAAP operating margin | 19.4% | 23.4% | 19.3% | 22.5% |
| Net income | $119.5 million | $156.5 million | $238.7 million | $312.2 million |
| Diluted EPS | $0.74 | $0.94 | $1.47 | $1.88 |
| Operating cash flow | — | — | $563.9 million | $627.9 million |
| Adjusted EBITDA | $388.3 million | $385.7 million | $779.5 million | $761.1 million |
| Adjusted EBITDA margin | 43.0% | 45.2% | 43.1% | 44.9% |
Revenue mix and material changes
- Security revenue increased 17.1% in Q2 and 20.0% for the first six months, supported by application and API security and the Zero Trust portfolio, including Guardicore.
- Delivery revenue declined 10.7% in Q2 and 8.5% year to date, reflecting slower traffic growth, lower application-performance sales, pricing pressure and weakness among media, advertising and gaming customers.
- Compute revenue increased 73.9% in Q2 and 53.6% year to date, primarily from organic growth, cloud optimization and the Linode acquisition.
- Linode contributed $32.0 million of Q2 revenue and $35.8 million for the six months following its March 2022 acquisition.
- Reported revenue growth was reduced by the strengthening U.S. dollar; foreign exchange reduced revenue by approximately $29.4 million in Q2 and $47.1 million for the six months versus the comparable periods.
- Cost of revenue rose to 38.4% of revenue in Q2 from 37.5%, while total operating expenses increased to 80.6% from 76.6%. Higher network depreciation, co-location, network build-out, payroll, acquisition and restructuring costs pressured GAAP margins.
- The effective tax rate increased to 29.9% in Q2 and 25.7% for the six months, versus 9.7% and 8.5%, respectively, primarily because of an intercompany intellectual-property sale, higher global intangible low-taxed income and lower stock-based compensation tax benefits.
Cash, liquidity and debt
- At June 30, 2022, cash and cash equivalents were $426.7 million and total marketable securities were approximately $904.6 million, resulting in approximately $1.3 billion of cash, cash equivalents and marketable securities.
- Operating cash flow was $563.9 million for the first six months, down from $627.9 million, primarily because of income-tax payment timing and taxes paid on an intercompany intellectual-property sale.
- Investing cash flow was negative $432.1 million, including $872.1 million of net cash paid for acquisitions, principally Linode, and $249.5 million of property and equipment purchases and internal-use software capitalization.
- Financing cash flow was negative $226.7 million, including $267.6 million of share repurchases, partly offset by $75.0 million borrowed under the revolving credit facility.
- Debt included $1.15 billion principal amount of 2025 convertible senior notes, $1.15 billion principal amount of 2027 convertible senior notes and $75.0 million outstanding under a $500.0 million revolving facility expiring in May 2023.
- The board authorized a $1.8 billion repurchase program through December 2024; approximately $1.5 billion remained available at June 30, 2022.
- Management expects cash, marketable securities and operating cash flows to satisfy foreseeable cash needs for at least the next 12 months.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear numerical revenue or earnings guidance range.
- Management expects slower traffic growth for the remainder of 2022 as pandemic-related restrictions ease and macroeconomic uncertainty increases. It expects continued negative revenue effects from the strong U.S. dollar and the war in Ukraine.
- Management expects continued investment in security and compute, higher research and development, sales and marketing and certain network-related costs, while seeking to manage operating margins. Capital spending is expected to remain below recent historical levels as investment shifts from peak delivery capacity toward security and compute.
- FlexBase, launched in May 2022, enables more than 90% of the workforce designated as flexible to work from home, an office or a combination. The program generated $3.1 million of restructuring expense in the first six months, and additional charges may occur.
- GO-NET operations are being suspended and liquidated by its majority owner. Akamai recorded a $7.5 million restructuring impairment and a $7.6 million equity-method investment loss in the first six months; material additional impacts are not expected.
- Akamai acquired Linode for $898.8 million in cash. The preliminary purchase-price allocation included $617.8 million of goodwill and $197.5 million of identifiable intangible assets and remains subject to final valuations and other adjustments.
- Adoption of revised convertible-instrument accounting on January 1, 2022 eliminated the notes’ equity components, increased reported debt and reduced non-cash interest expense. Management stated that the adoption increased Q2 and year-to-date basic and diluted EPS by $0.08 and $0.16, respectively.
- Principal risks include slowing delivery traffic, pricing pressure and competition, acquisition integration, cybersecurity and service disruptions, supply-chain constraints, foreign exchange, inflation, rising interest rates, geopolitical developments, privacy regulation and potential tax liabilities.
- Cambridge continues to appeal the Massachusetts tax matter, although the Massachusetts Department of Revenue withdrew its appeal. Management believes it is more likely than not to prevail and has recorded no reserve.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether security and compute growth can offset continued delivery declines and slower overall traffic growth.
- The recurring impact of foreign exchange, pricing pressure, inflation, energy costs and higher network investment on operating margins.
- Linode’s revenue contribution, profitability and integration progress, including the final purchase-price allocation and goodwill exposure.
- Liquidity needs related to the 2025 and 2027 convertible notes, the revolving facility maturity and the ongoing share repurchase program.
- Potential additional FlexBase or other restructuring charges, GO-NET-related effects and the outcome of the remaining Massachusetts tax appeal.
- Exposure to cybersecurity incidents, service outages, data-privacy regulation, supply-chain constraints and geopolitical disruptions.