Akamai Technologies, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud solutions for delivering, optimizing, and securing content and business applications through a globally distributed platform of approximately 300,000 servers in more than 130 countries. The filing covers the quarter and six months ended June 30, 2020; financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $794.7 million | $705.1 million | $1.559 billion | $1.412 billion |
| Revenue growth | 12.7% | — | 10.4% | — |
| Income from operations | $190.4 million | $135.8 million | $342.8 million | $270.3 million |
| GAAP operating margin | 24.0% | 19.2% | 21.9% | 19.2% |
| Net income | $161.9 million | $113.9 million | $285.1 million | $221.0 million |
| Diluted EPS | $0.98 | $0.69 | $1.74 | $1.34 |
| Adjusted EBITDA | $355.4 million | $292.6 million | $682.1 million | $591.7 million |
| Adjusted EBITDA margin | 45% | 42% | 44% | 42% |
Cloud Security Solutions revenue increased 26.6% year over year to $259.3 million in Q2 and 26.5% to $499.6 million for the six-month period. Q2 Web Division revenue increased 7.1% to $404.3 million, while Media and Carrier Division revenue increased 19.2% to $390.4 million. International revenue grew 21.8% in Q2 and represented approximately 44.2% of total revenue.
Cost of revenue was 34.8% of Q2 revenue versus 34.4% in the prior-year quarter, reflecting higher bandwidth, co-location, network build-out, and depreciation costs. Sales and marketing expense declined 8.6%, primarily because COVID-19 restrictions reduced in-person events and travel. Research and development increased 4.3%, while general and administrative expense increased 8.0%.
Operating cash flow for the six months was $521.9 million, compared with $478.8 million in the prior-year period. Capital expenditures and capitalized internal-use software totaled $335.7 million, compared with $275.8 million in 2019. Net cash used in investing was $200.4 million, and net cash used in financing was $142.0 million, including $107.9 million of share repurchases.
At June 30, 2020, cash and cash equivalents were $572.3 million and marketable securities totaled approximately $1.819 billion. Convertible senior notes had a combined principal amount of $2.3 billion and a net carrying value of approximately $1.873 billion. The company reported net cash of approximately $91.4 million after subtracting note principal from cash and marketable securities. No borrowings were outstanding under the $500 million revolving credit facility, which expires in May 2023.
Material changes versus the prior comparable period
- Revenue growth accelerated in part because COVID-19-related stay-at-home activity increased video, gaming, social-media, and other Internet traffic.
- Cloud Security Solutions continued to grow substantially, while Web Division growth remained slower and was pressured by customer weakness in commerce, retail, travel, and hospitality.
- GAAP operating margin improved to 24.0% from 19.2%, supported by revenue growth, efficiency initiatives, and lower travel and marketing spending.
- Interest expense increased to $17.2 million in Q2 from $8.4 million because of the 2027 convertible notes issued in August 2019.
- Accounts receivable reserves increased to $6.2 million from $1.9 million at year-end 2019, reflecting higher expected credit losses and COVID-19-related customer payment risk.
- Network investment increased materially to support higher traffic and address supply-chain and deployment constraints.
- The company acquired certain Instart Logic assets for $36.4 million in cash in February 2020, primarily resulting in a customer-related intangible asset.
- Restructuring charges were $10.4 million for the six months, including a $6.2 million right-of-use asset impairment; management did not expect material additional charges from this action.
Guidance, outlook, commentary, risks, and contingencies
The filing does not provide specific numerical revenue or earnings guidance. Management expected profitability to improve in 2020 if efficiency initiatives continued and the pandemic did not worsen materially. Sales and marketing expense was expected to decline from 2019 levels because of reduced events and travel, while research and development, network investment, depreciation, bandwidth, and co-location costs were expected to increase.
Management expected current cash, marketable securities, and operating cash flow to fund foreseeable needs for at least the next 12 months. The company also expected to continue network investments, pursue opportunistic acquisitions, and make share repurchases; $657.6 million remained available under the $1.1 billion repurchase authorization at June 30, 2020.
- COVID-19 could cause lower customer spending, contract renegotiations, delayed payments, customer bankruptcies, or reduced media and sporting-event traffic if stay-at-home activity declines.
- Higher traffic may not persist, while excess network capacity or supply-chain delays could pressure margins and returns on capital spending.
- Competition, pricing pressure, customer consolidation, multi-vendor strategies, and customer-developed infrastructure could reduce revenue or margins.
- Cybersecurity incidents, service disruptions, privacy regulation, and data-localization requirements could increase costs, liability, or customer attrition.
- Foreign exchange movements negatively affected year-over-year revenue by $7.6 million in Q2 and $14.3 million for the six months.
- The Massachusetts Appellate Tax Board ruled in the company’s favor in July 2020 on a tax dispute, but the decision remained appealable. An adverse outcome could result in a gross tax charge of approximately $37 million, potentially partly offset by $27 million of state tax credits.
- The company had routine litigation and indemnification obligations but did not expect current litigation to materially affect its financial condition or results.
Important facts for investors to verify
- Whether COVID-19-driven media and Internet traffic growth persists and offsets weakness in commerce, travel, hospitality, and other Web Division customers.
- Whether rising network capital expenditures, depreciation, bandwidth, and co-location costs preserve or erode operating margins.
- The conversion, dilution, and refinancing implications of the $2.3 billion principal amount of convertible notes, including related hedges and warrants.
- Trends in accounts receivable reserves, customer payment behavior, contract renegotiations, and deferred revenue.
- The outcome of any appeal of the Massachusetts tax ruling and the potential tax exposure described in the filing.
- Execution and returns from the Instart asset acquisition, restructuring program, and continuing network investments.
- Future share repurchases and their effect on share count, liquidity, and dilution from employee awards and convertible securities.