Akamai Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Akamai provides cloud solutions for delivering, optimizing and securing content and business applications over the Internet through a globally distributed platform of more than 200,000 servers across over 130 countries. The filing covers the unaudited quarter and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $705.1 million | $662.8 million | $1.412 billion | $1.331 billion |
| Income from operations | $135.8 million | $57.1 million | $270.3 million | $125.7 million |
| GAAP operating margin | 19.2% | 8.6% | 19.2% | 9.4% |
| Net income | $113.9 million | $43.1 million | $221.0 million | $96.8 million |
| Diluted EPS | $0.69 | $0.25 | $1.34 | $0.56 |
| Net cash provided by operating activities | — | — | $478.8 million | $411.7 million |
Q2 adjusted EBITDA was $292.6 million, or 42% of revenue, compared with $261.7 million and 39% in Q2 2018. Six-month adjusted EBITDA was $591.7 million, or 42% of revenue, versus $518.2 million and 39% in the prior-year period. Non-GAAP diluted EPS was $1.07 in Q2 and $2.17 for the six months.
- Cloud Security Solutions revenue was $204.8 million in Q2, up 31.9% year over year, and $394.9 million for the six months, up 29.3%.
- Q2 Web Division revenue increased 8.1% to $380.4 million; Media and Carrier Division revenue increased 4.4% to $324.7 million.
- International revenue increased 15.5% in Q2 and 16.5% for the six months, while U.S. revenue was essentially flat. Foreign exchange reduced year-over-year reported revenue by $10.9 million in Q2 and $25.6 million for the six months.
- Cost of revenue was 34.4% of Q2 revenue and 34.2% for the six months, compared with 35.5% and 35.3%, respectively, in 2018.
- Cash, cash equivalents and marketable securities totaled approximately $1.3 billion at June 30, 2019. Convertible senior notes had $1.15 billion of principal outstanding, producing reported net cash of approximately $179.5 million.
- Cash and cash equivalents were $515.9 million at June 30, 2019, compared with $1.036 billion at December 31, 2018. Total assets were $5.343 billion and stockholders’ equity was $3.395 billion.
- The company had no borrowings under its $500 million revolving credit facility.
Material changes versus the prior comparable period
- Revenue increased 6.4% in Q2 and 6.0% for the six months; constant-currency growth was 8.0% for both periods.
- Profitability improved materially, with Q2 net income up 165% and six-month net income up 128%. Operating margin expanded by approximately 11 percentage points in both comparisons.
- General and administrative expense declined 29.4% in Q2 and 25.2% for the six months, primarily because the 2018 periods included a $50 million Akamai Foundation endowment, Limelight settlement and other stockholder-related costs.
- The company repaid $690 million of convertible notes at maturity in February 2019 and repurchased $116.2 million of common stock during the first six months. Approximately $983.8 million remained available under the $1.1 billion repurchase authorization.
- Akamai acquired Janrain for $123.6 million in cash in January 2019. The preliminary purchase allocation included $99.7 million of goodwill.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. The adoption did not affect reported operating results or cash flows.
- The estimated average useful life of network assets increased from four to five years, reducing depreciation expense by $9.2 million in Q2 and $16.7 million for the six months, and increasing net income by $7.6 million and $13.9 million, respectively.
Guidance, outlook, commentary and risks
- Management expects slower revenue growth in 2019, particularly in Web Performance, due to pressure on commerce customers, large customer renewals, pricing declines and fewer large media-driven events.
- Management expects overall profitability to improve in 2019 and 2020 if revenue growth continues to exceed expense growth, while noting potential quarterly expense variability.
- Management expects internal-use software amortization, payroll and professional-services costs to increase in 2019, but does not expect cost of revenue to increase as a percentage of revenue.
- Remaining performance obligations were $2.4 billion at June 30, 2019, with more than 70% expected to be recognized as revenue over the next 12 months.
- Management expects current cash, marketable securities and operating cash flow to fund foreseeable needs for at least the next 12 months. Future needs include capital expenditures, facility expansion, acquisitions, share repurchases, leases and other contractual commitments.
- Material risks include competition and pricing pressure, slowing customer demand, variable media traffic, cybersecurity attacks, service disruptions, dependence on third-party bandwidth and co-location providers, foreign currency exposure, international regulatory and privacy requirements, acquisition integration, tax audits and litigation.
- A Massachusetts tax controversy could result in an estimated tax charge of approximately $30 million if resolved adversely.
- The company expects to move into a new Cambridge headquarters in late 2019; the transition could cause disruption and unanticipated costs. Additional operating leases not yet commenced totaled $553.3 million at June 30, 2019.
Important facts for investors to verify
- Whether Cloud Security growth continues to offset slower Web Performance and pricing pressure.
- The sustainability of margin expansion after excluding one-time 2018 charges and considering higher software amortization, lease costs and network investment.
- Cash deployment, future share repurchases and the company’s ability to maintain liquidity while funding acquisitions and capital expenditures.
- The potential dilution, cash settlement obligations and warrant effects associated with the 2025 convertible notes.
- Progress and costs related to the Janrain integration, headquarters relocation and restructuring program.
- Developments in the Massachusetts tax appeal and other tax audits, cybersecurity matters, litigation and regulatory obligations.