Akamai Technologies, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing, and securing online content and business applications through a globally distributed platform of approximately 200,000 servers in more than 1,400 networks and 115 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the same periods in 2014.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $551.0 million | $498.0 million | $1.618 billion | $1.428 billion |
| Revenue growth | 10.6% | — | 13.4% | — |
| Operating income | $115.7 million | $120.2 million | $343.5 million | $353.4 million |
| GAAP operating margin | 21% | 24% | 21% | 25% |
| Net income | $88.0 million | $91.2 million | $233.0 million | $236.8 million |
| Diluted EPS | $0.49 | $0.50 | $1.29 | $1.31 |
| Adjusted EBITDA | $222.2 million | $213.1 million | $659.5 million | $620.9 million |
| Adjusted EBITDA margin | 40% | 43% | 41% | 43% |
Revenue at constant currency increased 14.7% in the quarter and 17.4% for the nine months. Foreign exchange reduced reported revenue by $20.4 million in the quarter and $58.2 million for the nine months.
- Q3 revenue by solution: Media Delivery $244.9 million, Performance and Security $262.7 million, and Service and Support $43.4 million.
- Cloud Security Solutions revenue was $64.7 million in Q3 and $180.7 million for the nine months, compared with $46.5 million and $120.4 million, respectively, in 2014.
- Cost of revenue rose to 33.2% of revenue in Q3 and 32.9% for the nine months, versus 31.9% and 31.4% in the comparable periods.
- Cash provided by operating activities was $546.4 million for the nine months, compared with $462.5 million in 2014.
- Capital expenditures and capitalized internal-use software totaled $366.1 million for the nine months, compared with $226.3 million in 2014.
- Cash and cash equivalents were $256.5 million at September 30, 2015. Marketable securities totaled approximately $1.248 billion, producing cash, cash equivalents, and marketable securities of approximately $1.5 billion.
- Net cash, after the convertible senior notes, was reported at $814.9 million.
Balance sheet, debt, and liquidity
Total assets were $4.185 billion at September 30, 2015, compared with $4.002 billion at December 31, 2014. Convertible senior notes had a $619.4 million carrying value and $690.0 million principal amount. The notes mature in February 2019, bear no regular cash interest, and have an effective interest rate of approximately 3.2%.
Akamai repurchased 2.8 million shares for $202.4 million during the first nine months, including 1.1 million shares for $76.3 million in the third quarter. Approximately $231.2 million remained available under the $750 million repurchase authorization at September 30, 2015.
Management stated that existing cash, marketable securities, and forecast operating cash flow should be sufficient to meet foreseeable cash needs for at least the next 12 months, including capital expenditures, hiring, facilities, share repurchases, commitments, potential acquisitions, and other strategic transactions.
Material changes versus the prior comparable period
- Revenue grew, but reported growth was reduced by currency movements; constant-currency growth was materially stronger.
- Performance and Security Solutions grew faster than Media Delivery Solutions. Media Delivery growth moderated, particularly among large media customers.
- GAAP operating income, operating margin, net income, and diluted EPS declined despite revenue growth, primarily as expenses increased faster than revenue.
- Cost of revenue increased due to bandwidth, network build-out, payroll, depreciation, and internal-use software amortization investments.
- Research and development, sales and marketing, and general and administrative expenses increased as Akamai expanded headcount, facilities, infrastructure, and go-to-market capabilities.
- Operating cash flow improved, partly because of lower cash taxes, stronger collections, vendor-payment timing, and an income tax refund.
- Investing cash outflows declined from 2014 because the prior period included the larger Prolexic acquisition, but infrastructure spending increased substantially.
- Akamai acquired Xerocole for $16.6 million and Octoshape for $107.0 million during 2015. Bloxx was acquired for $18.7 million in cash on October 30, 2015, after the reporting date.
Guidance, outlook, risks, and unusual items
- Management expected continued moderation in Media Delivery revenue growth through the fourth quarter of 2015 and into 2016, citing slower traffic growth from large media accounts and increased customer “do-it-yourself” delivery approaches.
- Management expected fourth-quarter cost of revenue, sales and marketing, and general and administrative expenses to increase in absolute dollars, while hiring growth would slow. Network and infrastructure spending was not expected to continue at the same rate as in the first three quarters.
- Management expected the full-year effective tax rate to remain relatively consistent with the 30.7% rate reported for the first nine months, excluding potential discrete items.
- The company was conducting an internal investigation into sales practices in a non-U.S. country representing less than 1% of revenue. The investigation included potential Foreign Corrupt Practices Act compliance issues. Akamai voluntarily notified the SEC and Department of Justice, was cooperating, could not predict the outcome, and had recorded no provision.
- Key operating risks include competition and pricing pressure, customer insourcing, slower network traffic growth, service disruptions or security breaches, dependence on third-party bandwidth and co-location providers, foreign currency volatility, acquisitions and integration, regulatory and privacy changes, and potential dilution or cash requirements associated with the convertible notes.
- Available-for-sale securities included $68.8 million of corporate bonds in a continuous unrealized-loss position for more than 12 months; management concluded the losses were temporary.
- Future accounting changes include a January 2016 reclassification of approximately $6.2 million of deferred financing costs to reduce the convertible notes liability. The company did not expect a material earnings or cash-flow effect.
Investor verification checklist
- Verify whether Media Delivery growth continues to decelerate and whether Cloud Security and other Performance and Security offerings offset that pressure.
- Monitor operating leverage, particularly cost of revenue, infrastructure spending, headcount growth, and general and administrative expense.
- Reconcile GAAP results with management’s non-GAAP measures, including the effects of stock-based compensation, acquired-intangible amortization, and debt-related amortization.
- Track operating cash flow against capital expenditures, capitalized software, acquisitions, and share repurchases.
- Assess the integration and performance of Xerocole, Octoshape, and Bloxx and the resulting goodwill and intangible-asset balances.
- Follow developments in the SEC and Department of Justice investigation, including any potential fines, penalties, or financial provisions.
- Evaluate liquidity relative to the $690.0 million convertible note principal, potential conversion or repurchase obligations, and future capital allocation.
- Consider the impact of foreign exchange rates, customer insourcing, competitive pricing, network costs, and security or service interruptions on future margins and cash flow.