Akamai Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing content and business applications over the Internet through a globally distributed platform of more than 200,000 servers across 130 countries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $662.8 million | $605.8 million | $1.331 billion | $1.206 billion |
| Revenue growth | 9.4% | 10.4% | ||
| Income from operations | $57.1 million | $85.6 million | $125.7 million | $190.9 million |
| GAAP operating margin | 8.6% | 14.1% | 9.4% | 15.8% |
| Net income | $43.1 million | $56.8 million | $96.8 million | $131.3 million |
| Diluted EPS | $0.25 | $0.33 | $0.56 | $0.75 |
| Adjusted EBITDA | $261.7 million | $222.1 million | $518.2 million | $452.7 million |
| Adjusted EBITDA margin | 39% | 37% | 39% | 38% |
Cloud Security Solutions revenue increased 32.9% year over year in the quarter to $155.3 million and 34.3% for the six months to $304.5 million. Q2 Web Division revenue increased 10.6% and Media and Carrier Division revenue increased 8.1%. International revenue grew 21.4% in the quarter and represented approximately 37.7% of revenue.
For the six months, operating cash flow was $411.7 million, compared with $367.3 million in 2017. Investing cash flow was negative $529.6 million, including $201.7 million for property and equipment and internal-use software and $327.3 million of net marketable-securities purchases. Financing cash flow was positive $793.3 million, principally reflecting the 2025 convertible-note issuance, partially offset by note-hedge purchases and $185.5 million of share repurchases.
At June 30, 2018, cash and cash equivalents were $977.5 million and total marketable securities were $1.291 billion, for approximately $2.3 billion of cash and investments. Convertible senior notes had total par value of $1.84 billion, including $690.0 million due in February 2019 and $1.15 billion due in May 2025. The company reported approximately $0.4 billion of net cash after convertible senior notes and had no borrowings under its new $500.0 million revolving credit facility.
Material changes versus the prior comparable period
- Revenue increased, led by security products, new offerings, higher media traffic and international growth. Revenue from Internet Platform Customers declined to $44.1 million in Q2 and $88.5 million for the six months, from $51.2 million and $102.6 million, respectively.
- GAAP profitability declined despite revenue growth. Q2 operating income fell 33.3% and six-month operating income fell 34.2%; net income fell 24.1% and 26.3%, respectively.
- General and administrative expense increased 37.8% in Q2 and 36.1% for the six months, primarily due to a $50.0 million one-time Akamai Foundation endowment, the $14.9 million Limelight litigation settlement charge recorded in the six-month period, infrastructure expansion and higher compensation costs.
- Cost of revenue increased 9.7% in Q2 and 11.9% for the six months, with higher internal-use software amortization, payroll, stock-based compensation and network build-out costs.
- The company issued $1.15 billion of 0.125% convertible senior notes due 2025, purchased related note hedges for $261.7 million and sold warrants for $119.9 million. Proceeds are intended partly to repay the 2019 notes at maturity.
- The company repurchased 2.5 million shares for $185.5 million during the first six months and had $564.5 million remaining under its repurchase authorization at June 30, 2018.
- Revenue recognition guidance was adopted retrospectively on January 1, 2018. Management said the change primarily affects timing for a small number of licensed software customers and has little impact on core services; prior periods were revised.
Guidance, outlook, management commentary, risks and unusual items
- Management expects modest headcount growth during the remainder of 2018 and anticipates higher research and development, sales and marketing, internal-use software amortization and professional-services costs. It does not expect cost of revenue as a percentage of revenue to increase during 2018.
- Additional restructuring charges are expected in the remainder of 2018, primarily for facility consolidation, but management does not expect them to be material. Total restructuring charges related to the broader action reached $62.7 million, including $13.4 million in the first half of 2018.
- Management expects current cash, investments and operating cash flow to fund foreseeable needs for at least the next 12 months, including capital expenditures, acquisitions, share repurchases, commitments and repayment of the 2019 notes.
- Remaining performance obligations were $2.3 billion at June 30, 2018, with more than 70% expected to be recognized as revenue over the next 12 months. This excludes certain usage-based revenue and anticipated renewals.
- Key risks include pricing pressure and competition, slower traffic growth, customers developing internal delivery infrastructure, dependence on large Internet Platform Customers, cybersecurity incidents, service disruptions, foreign-currency volatility, international regulation and privacy requirements, acquisition integration, restructuring execution and debt repayment or conversion obligations.
- The company was under audit in multiple jurisdictions and appealed adverse Massachusetts tax audit findings. Unfavorable resolutions could materially affect the effective tax rate or tax liabilities. The six-month effective tax rate was 18.8%, versus 31.0% in 2017, primarily due to U.S. tax-rate reductions under the Tax Cuts and Jobs Act and stock-based compensation tax benefits.
- The company expects to adopt the new lease accounting standard in the first quarter of 2019 and anticipates recording significant right-of-use assets and lease liabilities.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether security-product growth and new offerings can offset pricing pressure in traditional delivery services and declining revenue from large Internet Platform Customers.
- The timing and funding of the $690.0 million 2019 convertible-note maturity, including whether repayment occurs in cash, shares or a combination.
- The effect of the 2025 notes, related warrants and note hedges on future interest expense, potential dilution and share repurchases.
- Whether restructuring actions produce expected savings without disrupting service quality, employee retention or revenue growth.
- The sustainability of reported margins after excluding the $50.0 million foundation endowment, litigation costs, restructuring charges, stock-based compensation and other non-GAAP adjustments.
- Potential tax exposure from Massachusetts and other audits, unresolved Tax Cuts and Jobs Act estimates and the company’s eventual GILTI accounting policy.
- Execution of the 2019 lease-accounting implementation and the resulting balance-sheet impact.