Akamai Technologies, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing Internet content and business applications through a globally distributed platform of approximately 325,000 servers in more than 130 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the comparable 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $792.8 million | $709.9 million | $2.352 billion | $2.121 billion |
| Revenue growth | 11.7% | 10.9% | ||
| Income from operations | $181.2 million | $143.3 million | $523.9 million | $413.6 million |
| GAAP operating margin | 22.9% | 20.1% | 22.4% | 19.4% |
| Net income | $158.6 million | $137.9 million | $443.7 million | $358.9 million |
| Diluted EPS | $0.95 | $0.84 | $2.69 | $2.18 |
| Adjusted EBITDA | $351.3 million | $300.6 million | $1.033 billion | $892.3 million |
| Adjusted EBITDA margin | 44% | 42% | 44% | 42% |
Cloud Security Solutions revenue increased 23.1% year over year to $265.9 million in Q3 and 25.3% to $765.5 million in the first nine months. Q3 Web Division revenue increased 7.8% to $418.1 million, while Media and Carrier Division revenue increased 16.3% to $374.8 million. International revenue grew 19.8% in Q3 and represented approximately 44.8% of revenue.
Nine-month operating cash flow was $923.9 million, compared with $776.2 million in 2019. Capital spending and capitalized internal-use software totaled $564.4 million, including $395.8 million of property and equipment purchases and $168.6 million of capitalized software costs. Net cash used in investing activities was $425.0 million, and net cash used in financing activities was $152.6 million.
At September 30, 2020, cash and cash equivalents were $742.5 million and total marketable securities were approximately $1.812 billion. Management reported approximately $2.6 billion of cash, cash equivalents and marketable securities against $2.3 billion of convertible-note principal, or net cash of approximately $254.1 million. The $500 million revolving credit facility had no outstanding borrowings.
Total liabilities were $3.407 billion and stockholders’ equity was $4.108 billion. Convertible senior notes had a carrying value of $1.890 billion, consisting of $1.150 billion due in 2025 and $1.150 billion due in 2027 at principal value. The Company repurchased 1.3 million shares for $121.1 million during the first nine months and had $644.4 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Revenue growth accelerated primarily from higher media, gaming, video and social-media traffic associated partly with COVID-19-related changes in usage, as well as continued security-product growth.
- Operating margin improved because of higher revenue, efficiency initiatives and lower travel and marketing expenses, despite increased network investment and related depreciation.
- Cost of revenue increased to 35.7% of Q3 revenue from 34.8%, reflecting higher bandwidth, co-location, network build-out and depreciation costs.
- Sales and marketing expense declined 3.6% for the first nine months, primarily because in-person events and travel were reduced, while research and development increased 5.0%.
- Interest expense increased 58.4% for the first nine months to $51.8 million, primarily because of the 2027 convertible notes issued in August 2019.
- Restructuring charges were $10.4 million for the first nine months, including a $6.2 million right-of-use asset impairment; the Company does not expect material additional charges from this action.
- Cash and cash equivalents increased from $393.7 million at December 31, 2019 to $742.5 million at September 30, 2020, while short-term marketable securities declined and long-term securities increased.
Guidance, outlook, risks and unusual items
The filing does not provide a specific quantitative revenue or earnings guidance table. Management expects slower growth in web performance solutions to continue in Q4 2020, particularly because commerce, travel and hospitality customers remain under financial pressure. Management expects lower marketing and travel spending to continue, research and development expense to increase, and network-equipment depreciation to rise because of accelerated capacity investments.
Management expects current liquidity, marketable securities and operating cash flow to satisfy foreseeable cash requirements for at least the next 12 months, including capital expenditures, acquisitions, share repurchases, leases and other commitments. Approximately $465.9 million of cash and cash equivalents was held outside the United States.
COVID-19 increased Internet traffic and benefited media-related demand, but also created risks from customer financial distress, contract renegotiations, delayed payments, bankruptcies, reduced commerce and travel activity, and potential normalization of traffic levels. Supply-chain constraints affecting servers, bandwidth and co-location capacity could limit the Company’s ability to support future traffic growth.
Other principal risks include intense competition and pricing pressure, customer adoption of do-it-yourself or multi-vendor solutions, cybersecurity attacks, service disruptions, privacy and data-regulation changes, foreign exchange exposure, acquisition integration, intellectual-property claims, tax disputes and potential dilution or cash requirements upon conversion of the convertible notes.
The Massachusetts Appellate Tax Board ruled in the Company’s favor in July 2020 on certain tax benefits and exemptions, although the decision could be appealed. An adverse outcome could result in an estimated gross tax charge of approximately $41.0 million, potentially offset by $26.0 million of state tax credits.
After the reporting date, in October 2020, Akamai acquired Asavie for approximately $155.1 million in cash, or $128.0 million net of cash acquired. The purchase-price allocation was not finalized at the filing date. The Company also acquired certain Instart Logic assets for $36.4 million in February 2020.
Remaining customer performance obligations were $2.7 billion at September 30, 2020; approximately 70% was expected to be recognized as revenue over the following 12 months, excluding certain variable and renewal-related amounts.
Important facts for investors to verify
- Whether COVID-19-driven media traffic growth persists or moderates and how normalization affects revenue growth and margins.
- Whether increased network capital expenditures and depreciation produce sufficient incremental revenue and capacity utilization.
- Growth and pricing trends in Cloud Security Solutions versus slower web performance offerings.
- Cash conversion, accounts-receivable collections and customer credit losses as financially stressed customers respond to the pandemic.
- Liquidity and dilution implications of the $2.3 billion principal amount of convertible notes, including note-conversion and warrant exposure.
- Progress and final purchase-price accounting for the Asavie acquisition and the integration of acquired businesses.
- Potential appeal and financial impact of the Massachusetts tax ruling.
- Use of non-GAAP measures, including the substantial adjustments for stock-based compensation, amortization and convertible-debt accounting.