Akamai Technologies, Inc. 2019 Form 10-K Summary
Business context and reporting period
Akamai provides cloud-based security, content delivery and application performance solutions through its globally distributed Intelligent Edge Platform. The platform included more than 250,000 servers across approximately 3,900 locations, more than 130 countries and nearly 1,500 networks as of December 31, 2019. This Form 10-K covers the fiscal year ended December 31, 2019; fourth-quarter data is included in the unaudited quarterly information.
The company operates as one reportable segment. Revenue is presented by customer-focused Web and Media and Carrier divisions, and no customer represented 10% or more of annual revenue.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2.894 billion | $2.714 billion | 6.6% |
| Income from operations | $548.9 million | $362.5 million | 51.4% |
| GAAP operating margin | 19.1% | 13.4% | +5.7 pts. |
| Net income | $478.0 million | $298.4 million | 60.2% |
| Diluted EPS | $2.90 | $1.76 | 62.9% |
| Operating cash flow | $1.058 billion | $1.008 billion | 4.9% |
| Adjusted EBITDA | $1.211 billion | $1.092 billion | 10.9% |
| Adjusted EBITDA margin | 42% | 40% | +2 pts. |
Revenue growth was driven by higher media traffic, including video, gaming and software downloads, and continued Cloud Security Solutions growth. Cloud Security revenue increased 28.8% to $848.7 million. Web Division revenue increased 8.1% to $1.566 billion, while Media and Carrier Division revenue increased 4.8% to $1.327 billion. International revenue increased 16.3% to $1.199 billion and represented approximately 41% of total revenue, compared with 38% in 2018.
Cost of revenue declined to 34.1% of revenue from 35.1%, aided principally by lower depreciation from extending the expected useful life of network assets from four to five years. The change reduced 2019 depreciation expense by $31.5 million and increased net income by $26.1 million, or $0.16 per share.
At December 31, 2019, cash, cash equivalents and marketable securities totaled $2.372 billion. Convertible senior notes had $2.3 billion of principal outstanding, producing reported net cash of approximately $72.4 million. No borrowings were outstanding under the $500 million revolving credit facility, which may be expandable to $1.0 billion. Total assets were $7.007 billion and stockholders’ equity was $3.658 billion.
Operating cash flow was $1.058 billion. Investing activities used $1.668 billion, including $562.1 million for property, equipment and capitalized internal-use software, $165.3 million for acquisitions and $904.9 million of net marketable securities purchases. Financing activities used $35.7 million, including $334.5 million of share repurchases and repayment of $690.0 million of 2019 convertible notes, partially offset by the 2027 notes issuance.
Material changes versus the prior comparable period
- Profitability improved materially: GAAP operating margin increased from 13.4% to 19.1%, and net income increased 60.2%.
- General and administrative expense declined 10.1% to $516.1 million, primarily because the $50.0 million Akamai Foundation endowment and certain 2018 legal and stockholder costs did not recur.
- Restructuring charges declined from $27.6 million to $17.2 million, although management expects additional 2020 charges of $4.0 million to $7.0 million.
- Akamai issued $1.15 billion of 0.375% convertible senior notes due 2027 in August 2019 and used part of the proceeds for share repurchases, working capital and general corporate purposes.
- The $690.0 million of convertible notes due 2019 were repaid in cash in February 2019.
- The company acquired Janrain for $123.6 million and acquired Exceda and ChameleonX for aggregate cash consideration of approximately $44.6 million.
- Operating lease accounting was adopted in 2019, adding $758.5 million of right-of-use assets and $831.6 million of operating lease liabilities at year-end. The adoption did not affect earnings or cash flows.
- The company repurchased 4.0 million shares for $334.5 million during 2019; $765.5 million remained available under the repurchase authorization at year-end.
Guidance, outlook, risks and unusual items
Management expects slower revenue growth to continue in 2020, particularly because of pressure on commerce customers, pricing declines, and a higher number of large media and other contract renewals. Management expects overall profitability to improve if expense growth remains below revenue growth. It does not expect overall headcount to increase significantly and plans to manage sales and marketing spending while investing in research and development and network capacity.
Management expects higher 2020 capital expenditures and higher amortization of internal-use software. Key operating risks include intense competition and pricing pressure, customer migration to do-it-yourself or multi-vendor solutions, dependence on traffic growth, cybersecurity incidents, service disruptions, evolving privacy and data regulations, foreign currency exposure, acquisition integration, employee retention and the ability to manage bandwidth, co-location and network costs.
The company has a Massachusetts Appellate Tax Board appeal pending regarding certain tax benefits and exemptions. Management believes it is more likely than not to prevail and has not recorded a reserve; an adverse ruling could result in an estimated gross tax charge of approximately $35.0 million, potentially offset by $25.0 million of state tax credits.
Akamai recognized a $1.1 million loss from its 20% equity-method investment in GO-NET, a blockchain-based payments joint venture with MUFG, and expects additional losses as the venture develops. The company also recorded $17.2 million of restructuring charges, $187.1 million of stock-based compensation and $45.9 million of amortization of debt discount and issuance costs in 2019.
Management states that existing liquidity and forecast operating cash flow should fund foreseeable cash needs for at least the next 12 months. The company does not pay cash dividends and does not expect to do so in the foreseeable future. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Cloud Security growth can offset slower Web Performance growth, pricing pressure and large customer renewal risk.
- The sustainability of the 2019 margin expansion, including the benefit from the server useful-life change and the nonrecurrence of 2018 unusual expenses.
- Capital expenditure, internal-use software capitalization and depreciation trends as network traffic and capacity requirements increase.
- Leverage, potential dilution and cash obligations associated with the $2.3 billion principal amount of convertible notes, related warrants and note hedges.
- The outcome and timing of the Massachusetts tax appeal and other tax audits.
- Integration and commercial performance of Janrain, Exceda and ChameleonX, as well as future GO-NET losses.
- Execution against the announced restructuring, cost-efficiency and 2020 profitability objectives.