Akamai Technologies, Inc. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing Internet content and business applications. Its platform comprised more than 219,000 servers across over 1,500 networks in approximately 125 countries. The unaudited filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $572.1 million | $540.7 million | $1.140 billion | $1.067 billion |
| Income from operations | $110.2 million | $106.3 million | $224.3 million | $227.8 million |
| Net income | $73.6 million | $67.2 million | $148.5 million | $144.9 million |
| Diluted EPS | $0.42 | $0.37 | $0.84 | $0.80 |
| Operating margin | 19.2% | 19.7% | 19.7% | 21.4% |
| Net margin | 12.9% | 12.5% | 13.1% | 13.6% |
| Operating cash flow | — | — | $433.1 million | $363.8 million |
Q2 revenue increased 5.8% year over year, while six-month revenue increased 6.8%. Q2 net income rose approximately 9.6%; six-month net income rose approximately 2.4%. Six-month adjusted EBITDA was $465.2 million, with a 41% margin, compared with $437.3 million and a 41% margin in 2015. Non-GAAP diluted EPS was $0.64 for Q2 and $1.30 for the six-month period.
- Performance and Security Solutions revenue increased 15.7% in Q2 and 15.9% for the six months; Cloud Security Solutions revenue grew 42% and 44%, respectively.
- Media Delivery Solutions revenue declined 9.2% in Q2 and 6.7% for the six months.
- Services and Support Solutions revenue increased 17.6% in Q2 and 16.6% for the six months.
- Cost of revenue increased 14.7% in Q2 and 14.8% for the six months, reducing gross margin to 63.9% and 64.8%, respectively, from 66.7% and 67.3%.
- Sales and marketing expense declined 7.4% in Q2 and 4.4% for the six months, while general and administrative expense increased 8.5% and 11.2%, respectively.
- Six-month restructuring charges were $7.3 million, compared with $0.5 million in 2015, primarily from the 2016 organizational reorganization and abandoned internal-use software.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $326.6 million at June 30, 2016, compared with $289.5 million at December 31, 2015.
- Short- and long-term marketable securities totaled approximately $1.273 billion, producing cash, cash equivalents and marketable securities of approximately $1.6 billion.
- Convertible senior notes had a $629.0 million carrying value and $690.0 million principal amount, due in 2019. The notes carry no regular coupon and have a 3.2% effective interest rate.
- Management reported net cash of approximately $909.9 million after considering the convertible notes and stated that available liquidity and forecast operating cash flow should meet foreseeable needs for at least 12 months.
- Capital expenditures and capitalized internal-use software totaled $160.5 million during the first six months, versus $233.1 million in 2015.
- Financing cash outflows totaled $202.4 million, including $199.7 million used to repurchase 4.0 million shares. The remaining authorization under the $1.0 billion repurchase program was approximately $868.6 million at June 30.
Material changes, outlook and risks
- Management attributed slower overall growth primarily to “do-it-yourself” content-delivery efforts by two large Internet platform customers. Revenue from six large platform customers fell to $61.5 million in Q2 from $96.5 million in the prior-year quarter and to $134.0 million for the six months from $192.3 million.
- Management expected continued revenue decreases from these customers during the remainder of 2016. It also expected higher cost of revenue, research and development, sales and marketing, and general and administrative expenses in the remaining quarters.
- Management expected the full-year effective tax rate to decrease slightly, subject to discrete tax items and audit or tax-position developments.
- Principal risks include customer insourcing and traffic volatility, competitive pricing pressure, fixed bandwidth and co-location costs, network capacity and service interruptions, cybersecurity and privacy exposure, foreign currency and international regulatory risks, litigation, intellectual-property claims, and dependence on innovation and key personnel.
- The company completed an internal investigation into improper sales practices by a former employee and entered into a non-prosecution agreement in June 2016, agreeing to disgorge $0.7 million, which was accrued and paid.
- In July 2016, Akamai agreed to license certain patented technology to Limelight Networks in settlement of patent litigation. Limelight was required to pay Akamai $54.0 million in 12 equal installments over three years beginning August 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether declines from the six large Internet platform customers continue and whether Cloud Security growth offsets the Media Delivery contraction.
- The effect of higher bandwidth, co-location, network investment and personnel costs on gross and operating margins.
- Cash generation after capital expenditures and share repurchases, including the pace of the remaining repurchase authorization.
- Conversion, refinancing or potential dilution risks associated with the $690.0 million convertible notes and related warrants.
- Future costs or consequences associated with the non-prosecution agreement, international compliance, litigation and the Limelight settlement.
- The impact of foreign currency movements, seasonal traffic patterns, customer pricing pressure and evolving Internet, privacy and data regulations.