AKAMAI TECHNOLOGIES INC quarterly report, Q2 FY2011

Akamai Technologies, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2011. The unaudited filing covers Akamai’s single operating segment: services that accelerate and improve delivery of Internet content and applications. The company operated a globally distributed platform in approximately 70 countries.

Financial performance and position

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Revenue	$277.0 million	$245.3 million	$552.9 million	$485.3 million
Income from operations	$73.2 million	$56.8 million	$146.0 million	$122.9 million
Net income	$47.9 million	$38.1 million	$98.5 million	$79.0 million
Diluted EPS	$0.25	$0.20	$0.52	$0.42
Operating cash flow	Not separately provided	Not separately provided	$200.4 million	$174.1 million

Revenue increased 13% year over year in the quarter and 14% for the first six months, driven primarily by media and entertainment traffic growth, increased value-added services for commerce and enterprise customers, and new public-sector contracts. Price reductions partially offset traffic-driven growth.
Approximate Q2 margins were 67.6% gross, 26.4% operating and 17.3% net, compared with 70.7%, 23.2% and 15.5%, respectively, in Q2 2010. For the six months, operating margin was 26.4% versus 25.3% and net margin was 17.8% versus 16.3%.
Cost of revenues increased 25% in Q2 and 28% year to date, primarily because of higher co-location costs, network-equipment depreciation, internal-use software amortization and traffic-related bandwidth costs. Lower bandwidth prices per unit partially offset these increases.
Cash and cash equivalents were $205.6 million at June 30, 2011, compared with $231.9 million at December 31, 2010. Total marketable securities were $1.08 billion, producing cash, cash equivalents and marketable securities of approximately $1.29 billion.
Total assets were $2.40 billion and total liabilities were $175.8 million at June 30, 2011. The filing states that the company had no outstanding indebtedness requiring interest payments during the first six months of 2011.
Net cash used in investing was $156.2 million, including $89.0 million of property and equipment purchases and capitalized internal-use software costs. Net cash used in financing was $73.1 million, including $92.6 million of share repurchases.
Property and equipment, net, increased to $274.4 million from $255.9 million at year-end 2010. Goodwill remained $452.9 million; other intangible assets declined to $53.9 million from $62.5 million due to amortization.

Material changes versus the prior comparable period

Revenue increased $31.7 million in Q2 and $67.6 million year to date.
Operating income increased 29% in Q2 and 19% year to date, while net income increased 26% and 25%, respectively.
Research and development expense declined 19% in Q2 and 12% year to date, primarily because more development costs were capitalized and stock-based compensation decreased.
Sales and marketing expense decreased 4% in Q2 but increased 1% year to date. General and administrative expense increased 5% in Q2 and 8% year to date, reflecting headcount, facilities and legal costs.
Stock-based compensation declined to $11.6 million in Q2 and $27.3 million year to date, from $20.3 million and $39.4 million, respectively, primarily because management determined that certain performance-based restricted stock units were unlikely to vest.
The effective tax rate for the six months declined to 34.7% from 38.3%, primarily due to the geographic composition of taxable income and lower-tax foreign jurisdictions.
Cash from operations increased $26.2 million year over year, while share repurchases increased to $92.6 million from $42.6 million.

Guidance, outlook, risks and unusual items

Management expected to remain profitable on a quarterly and annual basis during 2011, but provided no assurance that profitability would continue at recent levels.
Management expected 2011 capital expenditures to be approximately 16% of total revenue, funded primarily through operating cash flow. It expected cost of revenues, research and development, sales and marketing, and general and administrative expenses to increase during the remaining quarters of 2011.
Traffic growth in volume-driven solutions moderated during the first half of 2011. Competition caused unit-price declines, particularly for high-volume digital media customers; future revenue and margins depend on offsetting price reductions with traffic growth and value-added services.
Seasonality may reduce sequential revenue growth during the summer, with historically higher e-commerce-related revenue in the fourth quarter.
The company held approximately $136.4 million of auction rate securities at par value, with a $12.2 million temporary unrealized loss. Auctions had failed since 2008, limiting liquidity. Management expected sufficient cash, short-term investments and operating cash flow to prevent a material liquidity impact, but valuation remains sensitive to interest rates, expected terms and issuer credit quality.
Contractual obligations totaled approximately $316.4 million, including $153.2 million of operating leases, $82.8 million of bandwidth and co-location commitments, and $80.4 million of open vendor purchase orders. Outstanding letters of credit were $6.5 million, and unrecognized tax benefits totaled $17.1 million.
Management cited risks from intense competition, pricing pressure, network outages or attacks, dependence on third-party bandwidth and co-location providers, rising infrastructure costs, international operations, foreign exchange, privacy and regulatory developments, intellectual-property claims, IPv4 exhaustion and the transition to IPv6.
The board authorized an additional $250.0 million of repurchases on August 8, 2011, increasing total authorization for the twelve-month period beginning in May 2011 to $400.0 million. This was a subsequent event after the quarter-end.
Existing IPO-related litigation remained pending. Management recorded no liability and did not expect a material adverse effect, although an adverse outcome could affect results in the period resolved.

Most important facts for investors to verify

Whether traffic growth and new value-added services continue to offset customer cancellations, contract renewals at lower prices and competitive pricing pressure.
Whether higher co-location, depreciation, software amortization and bandwidth costs compress gross margins despite lower bandwidth costs per unit.
The liquidity and valuation assumptions for the $124.1 million fair value of auction rate securities, including the sensitivity to discount rates and expected holding periods.
The pace and return on network capital expenditures, which management expected to equal approximately 16% of 2011 revenue.
The effect of planned share repurchases on cash balances, share count and per-share results.
The timing and cash impact of increased tax payments as tax credit carryforwards are substantially utilized.
Developments in the IPO-related litigation, unrecognized tax benefits, contractual commitments and other contingencies.