Akamai Technologies, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing content and business applications through a globally distributed platform of more than 325,000 servers in over 130 countries. The filing covers the unaudited quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Beginning March 1, 2021, the company reorganized into the Security Technology Group and Edge Technology Group.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $860.3 million | $792.8 million | $2.556 billion | $2.352 billion |
| Revenue growth | 8.5% | — | 8.7% | — |
| Income from operations | $205.3 million | $181.2 million | $587.1 million | $523.9 million |
| GAAP operating margin | 23.9% | 22.9% | 23.0% | 22.3% |
| Net income | $178.9 million | $158.6 million | $491.1 million | $443.7 million |
| Diluted EPS | $1.08 | $0.95 | $2.96 | $2.69 |
| Adjusted EBITDA | $396.0 million | $351.3 million | $1.157 billion | $1.033 billion |
| Adjusted EBITDA margin | 46% | 44% | 45% | 44% |
Security Technology Group revenue increased 25.9% in Q3 and 26.7% for the first nine months. Edge Technology Group revenue declined 0.2% in Q3 and was essentially flat for the nine-month period. International revenue grew 15.8% in Q3 and 14.6% for the nine months, compared with U.S. growth of 2.6% and 3.9%, respectively.
Cost of revenue increased to 36.8% of revenue in Q3 and 36.9% for the nine months, versus 35.7% and 35.2% in the prior-year periods. Research and development increased to 9.6% of Q3 revenue and 9.5% for the nine months, while sales and marketing declined to 12.6% and 13.2%, respectively.
Stock-based compensation was $49.0 million in Q3 and $153.8 million for the nine months. Amortization of acquired intangible assets was $12.0 million and $35.4 million, respectively.
Cash flow, liquidity and debt
- Cash provided by operating activities was $1.018 billion for the nine months, compared with $923.9 million in 2020.
- Capital spending and capitalized internal-use software totaled $435.5 million, compared with $564.4 million in the prior-year period.
- Cash, cash equivalents and marketable securities totaled approximately $2.8 billion at September 30, 2021, including $1.265 billion of cash and cash equivalents and approximately $1.488 billion of marketable securities.
- Principal convertible debt totaled $2.3 billion, consisting of $1.15 billion due in 2025 and $1.15 billion due in 2027. The balance-sheet carrying amount of convertible senior notes was $1.959 billion.
- Management reported net cash of approximately $452.4 million after deducting convertible-note principal.
- No borrowings were outstanding under the $500 million revolving credit facility, which expires in May 2023.
- Financing cash outflows were $292.8 million, including $251.3 million of share repurchases. The company repurchased 2.3 million shares during the nine months.
- Management expects existing cash, marketable securities and operating cash flow to fund foreseeable needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was led by continued demand for security products, including Bot Manager, Kona Site Defender, Prolexic and access-control offerings.
- Edge revenue was pressured by lower sales of website and application performance solutions, pricing pressure, media consolidation and moderating traffic growth following the 2020 pandemic surge.
- Cost of revenue increased faster than revenue because of network expansion, higher co-location and network-support costs, and increased depreciation of network equipment.
- Research and development expense increased 19.8% for the nine months, reflecting headcount growth and employee redeployment following the reorganization.
- Sales and marketing expense decreased 9.0% for the nine months due primarily to headcount reductions and the consolidation of the global sales organization.
- Operating margin, net income and adjusted EBITDA margin improved despite higher network investment and depreciation.
- Operating cash flow increased, while capital investment declined as network expansion slowed from 2020 levels.
Guidance, outlook, risks and unusual items
The filing does not provide clear quantitative quarterly or full-year revenue or earnings guidance. Management expects traffic and related revenue growth to moderate during the remainder of 2021, continued challenges in website and application performance solutions, higher depreciation expense, and increased research and development expense.
In October 2021, after the reporting date, Akamai completed its approximately $600 million acquisition of Guardicore. Management expects the transaction to be dilutive to earnings per share at least through 2022 and anticipates additional amortization of acquired intangible assets. The purchase-price allocation was not complete when the financial statements were filed.
Other notable items include a $12.6 million nine-month loss from the GO-NET equity-method investment, including the company’s share of a technology impairment; restructuring charges of $5.6 million; and a potential Massachusetts tax exposure of approximately $48 million before potentially available state tax credits if the company ultimately loses its tax appeal.
Key risks include slowing traffic and revenue growth, pricing pressure and competition, customer migration to do-it-yourself or multi-vendor solutions, cybersecurity incidents, service outages, network capacity and supply-chain constraints, foreign-exchange volatility, acquisition integration, privacy and data-localization regulation, tax uncertainty, and dilution or cash requirements associated with convertible notes.
The company stated that substantially all employees remained remote due to COVID-19 and that employees whose roles do not require in-person presence were not required to return to offices before May 1, 2022. Management reported no significant operational disruption from remote work.
Investor verification items
- Verify the sustainability of Security Technology Group growth and whether Edge Technology Group stabilizes after pricing and traffic pressures.
- Assess the effect of moderating pandemic-related traffic growth, customer consolidation and pricing declines on 2021 and future revenue.
- Review Guardicore’s purchase accounting, integration costs, expected dilution and incremental amortization following the October 2021 closing.
- Monitor network investment, depreciation, bandwidth and co-location costs for their effect on operating margins and free cash flow.
- Evaluate the timing and funding of the $2.3 billion convertible-note obligations, including potential conversion-related dilution or cash settlement requirements.
- Track share repurchases under the remaining 2021 authorization and the new $1.8 billion authorization effective January 1, 2022.
- Review the GO-NET investment losses and the Massachusetts tax appeal, including potential charges or benefits.
- Confirm the company’s stated liquidity outlook against acquisition spending, capital expenditures, leases, repurchases and other commitments.