Akamai Technologies, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Akamai provides cloud services that deliver, optimize and secure content, applications and business services over the Internet through a globally distributed platform of more than 200,000 servers in over 1,600 networks across 131 countries. The filing covers the fiscal year ended December 31, 2016. The fourth quarter was included in the annual results; fourth-quarter revenue was $616.1 million and net income was $91.6 million.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $2.340 billion | $2.197 billion | 6.5% |
| Income from operations | $459.6 million | $466.2 million | (1.4%) |
| GAAP operating margin | 19.7% | 21.2% | Down 1.5 points |
| Net income | $316.1 million | $321.4 million | (1.6%) |
| Diluted EPS | $1.79 | $1.78 | 1.0% |
| Adjusted EBITDA | $950.7 million | $897.3 million | 5.9% |
| Adjusted EBITDA margin | 41% | 41% | Stable |
| Operating cash flow | $866.3 million | $764.2 million | 13.4% |
Performance and Security Solutions revenue increased 17.0% to $1.355 billion, including Cloud Security Solutions revenue of $364.9 million, up from $254.4 million. Media Delivery Solutions revenue declined 9.4% to $787.2 million, primarily because large Internet platform customers increasingly used their own infrastructure. Services and Support Solutions revenue increased 16.1% to $197.8 million.
Cost of revenue increased to $809.0 million, or 34.6% of revenue, from 33.0% in 2015. Research and development expense increased 12.8% to $167.6 million, while sales and marketing expense declined 3.2% to $427.0 million. General and administrative expense increased 13.3% to $439.9 million. Restructuring charges were $10.3 million versus $0.8 million in 2015.
Cash, cash equivalents and marketable securities totaled approximately $1.616 billion at year-end. Convertible senior notes had $690.0 million of principal outstanding and a $640.1 million carrying value, resulting in reported net cash of approximately $926.3 million after deducting principal debt. Total assets were $4.373 billion and stockholders’ equity was $3.224 billion.
The company generated $866.3 million of operating cash flow, used $469.4 million in investing activities and used $354.3 million in financing activities. Capital expenditures and capitalized internal-use software costs totaled $316.3 million. Share repurchases totaled $373.8 million for 7.0 million shares; $694.5 million remained available under the repurchase authorization at year-end. No dividends were paid or expected.
Material changes versus the prior comparable period
- Revenue growth slowed from 11.9% in 2015 to 6.5% in 2016, principally because Amazon, Apple, Facebook, Google, Microsoft and Netflix reduced reliance on Akamai for media delivery. Revenue from these customers fell to $250.4 million from $379.3 million.
- Cloud security remained the primary growth engine, with security revenue increasing 43%.
- International revenue increased 21.4% to $720.0 million and represented 31% of total revenue, versus 27% in 2015. Foreign currency reduced reported growth modestly.
- Operating margin declined as cost of revenue, research and development, and general and administrative expenses grew faster than revenue. Sales and marketing expense was reduced to align with slower growth.
- Operating cash flow improved substantially, while investing cash outflows were broadly comparable with 2015 and financing outflows increased due mainly to higher share repurchases.
- A 2016 reorganization created divisions centered on media, web, and enterprise and carrier solutions and resulted in $10.3 million of restructuring charges.
- Akamai acquired Concord Systems, Soha Systems and Cyberfend in 2016. The acquisitions were individually and collectively immaterial to consolidated results, but added goodwill and contingent consideration obligations.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific 2017 revenue or earnings forecast in the provided filing text. Management expects 2017 cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase, driven by network capacity and resiliency investments, amortization of internal-use software, hiring, information technology and facility expansion.
Management believes existing cash, marketable securities and forecast operating cash flow will satisfy foreseeable cash needs for at least the next 12 months. Contractual obligations totaled $1.752 billion, including $785.4 million of real estate leases, $126.2 million of bandwidth and co-location commitments, $150.6 million of purchase orders and $690.0 million of convertible notes. The notes mature in February 2019 and have a potential conversion into approximately 7.7 million shares, subject to the applicable conditions.
- Principal operating risks include slower traffic growth, customer insourcing, pricing pressure, commoditization, competition and the possibility of customers shifting to pay-as-you-go or lower-commitment contracts.
- Cybersecurity attacks, service defects, insufficient bandwidth or co-location capacity, and rising costs of operating SSL and other security infrastructure could adversely affect revenue, expenses and reputation.
- The company faces international currency, regulatory, privacy, data-transfer, tax and Brexit-related risks.
- Limelight Networks litigation alleging infringement of six patents was scheduled for trial in May 2017. Akamai asserted counterclaims, had provided an indemnity to XO, recorded no provision, and stated that the possible loss could not be estimated.
- In June 2016, Akamai entered into a non-prosecution agreement concerning previously disclosed sales practices and agreed to disgorge $0.7 million, including interest.
- A July 2016 patent settlement with Limelight required Limelight to pay Akamai $54.0 million over three years; Akamai received $9.0 million in 2016, recorded primarily as a reduction of general and administrative expense.
- Unrecognized tax benefits, including interest and penalties, were $77.1 million; management believed $15.8 million could be recognized by the end of 2017.
- The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2016, and PwC issued an unqualified audit opinion.
Important facts for investors to verify
- Whether security and web-performance growth can offset continued declines in media revenue from large Internet platform customers.
- Whether operating margin can stabilize as bandwidth, co-location, infrastructure, hiring, facilities and software amortization costs rise.
- The timing and outcome of the Limelight patent litigation and any potential damages or indemnification exposure.
- The company’s ability to fund the 2019 convertible-note maturity or any conversion-related cash obligations without excessive dilution or additional debt.
- The effect of the 2016 acquisitions, reorganized operating structure and new headquarters commitments on future expenses and returns.
- Future cash deployment among network investment, acquisitions and the remaining $694.5 million share-repurchase authorization.
- The impact of forthcoming revenue-recognition, lease, share-based-payment and credit-loss accounting standards on reported results and balance-sheet presentation.