Akamai Technologies, Inc. — FY2014 Form 10-K 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 more than 170,000 servers in approximately 1,300 networks and over 100 countries. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are also presented. Akamai operates as one reportable industry segment.
Approximately 27% of annual revenue was generated outside the United States. No customer represented 10% or more of revenue. The Prolexic acquisition, completed February 18, 2014, expanded Akamai’s cloud security capabilities.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,963.9 million | $1,577.9 million | +24.5% |
| Income from operations | $489.5 million | $414.0 million | +18.3% |
| Operating margin | 24.9% | 26.2% | Down 1.3 points |
| Net income | $333.9 million | $293.5 million | +13.8% |
| Diluted EPS | $1.84 | $1.61 | +14.3% |
| Cash flow from operations | $658.1 million | $563.9 million | +16.7% |
| Cash, cash equivalents and marketable securities | $1.628 billion | $1.247 billion | +30.6% |
Net margin was 17.0%, compared with 18.6% in 2013. Adjusted EBITDA was $852.5 million, representing a 43% margin versus 44% in 2013. Non-GAAP net income was $448.8 million, or $2.48 per diluted share, compared with $367.4 million, or $2.02 per diluted share, in 2013.
Fourth-quarter revenue was $536.3 million, up from $436.0 million in the prior-year quarter. Fourth-quarter net income was $97.1 million, or $0.54 diluted EPS, compared with $80.3 million, or $0.44 diluted EPS, in the fourth quarter of 2013.
- Media Delivery Solutions revenue was $917.4 million, up 20.6%.
- Performance and Security Solutions revenue was $900.7 million, up 29.1%, including the contribution from Prolexic.
- Service and Support Solutions revenue was $145.8 million, up 24.1%.
- Cost of revenue increased 19.5% to $610.9 million, but declined to 31.1% of revenue from 32.4%.
- Research and development expense increased 33.5% to $125.3 million, sales and marketing increased 35.2% to $379.0 million, and general and administrative expense increased 27.7% to $325.8 million.
Operating cash flow was $658.1 million. Investing cash flow was negative $1.179 billion, principally due to the $386.5 million cash acquisition of businesses, $318.6 million of property, equipment and internal-use software investment, and net purchases of marketable securities. Financing cash flow was positive $436.0 million, primarily reflecting the convertible notes issuance, partly offset by $268.6 million of share repurchases.
At year-end, Akamai had $1.3896 billion of marketable securities and $238.7 million of cash and cash equivalents. Total assets were $4.002 billion and stockholders’ equity was $2.945 billion.
Material changes versus prior comparable period
- Revenue growth accelerated to 24.5% from 14.8% in 2013, driven by new customers, incremental services, usage above commitments, one-time events, and Prolexic revenue.
- Operating income increased, but operating margin contracted because sales and marketing, research and development, and general and administrative costs grew faster than revenue.
- Prolexic was acquired for $392.1 million and contributed goodwill of $293.9 million and acquired intangible assets of $87.0 million. Management stated that the acquisition was slightly dilutive to 2014 EPS.
- Akamai issued $690.0 million of zero-coupon convertible senior notes due 2019. The year-end carrying value was $604.9 million, with $15.5 million of related interest expense recognized in 2014.
- Annual share repurchases increased to 4.6 million shares costing $268.6 million. $433.6 million remained available under the repurchase authorization at year-end.
- Property and equipment, net, increased to $601.6 million from $450.3 million, reflecting continued network expansion and internal-use software investment.
- Foreign currency movements reduced 2014 revenue by approximately $7.8 million versus 2013.
Guidance, outlook, risks and unusual items
The filing does not provide specific 2015 revenue or earnings guidance. Management expected 2015 operating cash flow to increase with higher revenue and expected cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars. Planned investments include additional servers, internal-use software, hiring, information technology and facilities.
- Management expects network traffic and demand for video, gaming, software downloads, web performance and security services to continue growing, but faces pricing pressure and potential customer migration to internal or competing solutions.
- Network bandwidth, co-location, SSL traffic, employee growth and infrastructure investments may pressure margins. The company has substantial fixed or minimum purchase commitments.
- Contractual obligations totaled $1.187 billion, including $690.0 million of convertible notes, $223.3 million of real estate leases, $149.9 million of bandwidth and co-location commitments, and $124.0 million of open vendor purchase orders.
- Akamai was conducting an internal investigation into sales practices in a foreign country representing less than 1% of revenue. The company voluntarily contacted the SEC and Department of Justice in February 2015, could not predict the outcome, and recorded no provision.
- Unrecognized tax benefits, including interest and penalties, totaled $41.1 million; management believed $4.3 million could be recognized by the end of 2015.
- The company’s principal risks include intense competition, customer renewals at lower prices, cybersecurity and service interruptions, international regulatory and foreign-exchange exposure, acquisition integration, intellectual-property claims, privacy regulation, and dependence on third-party network and co-location providers.
- The change in estimated network asset lives from three to four years reduced 2014 depreciation expense by approximately $21.1 million and increased net income by approximately $15.5 million, or $0.09 per share.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2014.
Most important facts for investors to verify
- Whether revenue growth, particularly in Performance and Security Solutions, remains sufficient to offset pricing pressure and rising operating expenses.
- The effect of Prolexic integration, security demand, acquisition-related amortization and potential future acquisitions on margins and EPS.
- Cash generation after capital expenditures, internal-use software capitalization, acquisitions and share repurchases.
- The company’s ability to manage the $690.0 million convertible notes due 2019 and potential dilution from the related warrants, which have an exercise price of approximately $104.49 per share.
- The resolution and potential financial, regulatory or reputational impact of the foreign sales-practices investigation.
- The sustainability of tax benefits and the 30.4% effective tax rate, given that certain credits and other favorable items may not recur.
- Future bandwidth, co-location, SSL and infrastructure costs, as well as the company’s long-term contractual commitments.