Akamai Technologies, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides services that accelerate and improve delivery of Internet content and applications through a globally distributed platform. The company operates as one reportable segment. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Akamai had 177.7 million common shares outstanding as of May 6, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $368.0 million | $319.4 million | 15% |
| Income from operations | $101.2 million | $71.6 million | 41% |
| Operating margin | 27.5% | 22.4% | Up 5.1 points |
| Net income | $71.5 million | $43.2 million | 65% |
| Net margin | 19.4% | 13.5% | Up 5.9 points |
| Diluted EPS | $0.39 | $0.24 | 63% |
| Non-GAAP net income | $93.2 million | $65.3 million | 43% |
| Non-GAAP diluted EPS | $0.51 | $0.36 | 42% |
| Adjusted EBITDA | $166.1 million | $142.6 million | 16% |
| Cash flow from operations | $103.0 million | $92.5 million | 11% |
Cost of revenues declined 4% to $120.4 million, or 32.7% of revenue, from 39.1% in the prior-year quarter. The decrease primarily reflected lower depreciation of network equipment and lower bandwidth costs per unit. Research and development increased 25% to $21.9 million, sales and marketing increased 28% to $62.7 million, and general and administrative expense increased 7% to $55.4 million.
Cash, cash equivalents and marketable securities totaled approximately $1.1 billion at March 31, 2013, including $165.3 million of cash and cash equivalents and $917.2 million of marketable securities. Net cash decreased $36.7 million during the quarter to $165.3 million. Operating cash flow was partly offset by $86.9 million of investing cash outflows and $50.3 million of financing cash outflows.
Current assets were $831.7 million versus current liabilities of $211.9 million. Total liabilities were $261.9 million. The filing does not show material debt balances; liquidity was primarily invested in cash and marketable securities. Capital expenditures, including capitalized internal-use software, totaled approximately $63.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher online media consumption, increased software-download volumes, greater demand for web performance and security solutions, and stronger service attachment rates.
- Media Delivery Solutions revenue increased to $181.2 million from $154.9 million; Performance and Security Solutions increased to $156.6 million from $134.0 million; and Service and Support Solutions increased to $27.5 million from $20.4 million.
- Advertising Decision Solutions revenue declined to $2.7 million from $10.1 million. Akamai sold that business during the quarter to MediaMath for a convertible note receivable with a $25.0 million face value and $18.9 million fair value.
- Network equipment depreciation declined by approximately $14.1 million after Akamai extended the expected average useful life of primarily server assets from three years to four years. Management stated that this change reduced after-tax expense by approximately $10.3 million, or $0.06 per share, in Q1 2013.
- The effective tax rate fell to 30.4% from 40.6%, primarily due to lower-tax foreign earnings and the retroactive reinstatement of the federal research and development credit.
- Akamai repurchased 1.1 million shares for $40.3 million, compared with 0.2 million shares for $7.9 million in Q1 2012. Approximately $119.3 million remained available under the current repurchase authorization at quarter-end.
- Comprehensive income was $67.5 million, below net income of $71.5 million, primarily because of a $4.0 million foreign-currency translation loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to remain profitable on a quarterly and annual basis during 2013, but provided no specific revenue or earnings-per-share guidance in the filing.
- Management expected operating expenses, including research and development, sales and marketing, and general and administrative costs, to increase during the remainder of 2013. Cost of revenues was also expected to rise with traffic growth, server deployments, software amortization, and personnel investments, partially offset by lower bandwidth costs per unit and lower depreciation.
- Management expected the annual effective tax rate to increase slightly during the remaining quarters because the full benefit of the retroactive research and development credit was recorded in Q1.
- Revenue remains exposed to customer cancellations, lower renewal pricing, competition, seasonal usage patterns, and the need to offset unit-price declines with traffic growth and additional services.
- Key operating risks include network outages, cybersecurity attacks, dependence on third-party bandwidth and co-location providers, technology and service defects, intellectual-property claims, international and foreign-currency exposure, regulatory changes, and difficulty integrating acquisitions.
- Contractual commitments totaled approximately $289.5 million, comprising bandwidth and co-location agreements, real-estate leases, and open vendor purchase orders. The company also had $6.1 million of outstanding letters of credit and $27.2 million of unrecognized tax benefits, including approximately $6.0 million of accrued interest and penalties.
- Restructuring charges were $0.4 million in Q1 2013, related primarily to a pending employee claim from a prior workforce reduction. Routine litigation was not expected to have a material effect.
- Unrecognized stock-based compensation was $190.9 million at March 31, 2013, expected to be recognized over a weighted-average period of 1.4 years.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether traffic growth and new or expanded customer contracts continue to offset pricing pressure and customer attrition.
- The sustainability of the improved operating margin after the non-cash benefit from extending server useful lives.
- The effect of rising research, sales, marketing, infrastructure, and stock-based compensation costs on future margins and cash flow.
- The collectability and ultimate conversion or redemption value of the MediaMath convertible note receivable, whose valuation depends significantly on conversion assumptions.
- Actual capital expenditures, bandwidth and co-location commitments, and the pace of future share repurchases.
- Changes in the effective tax rate after the one-time benefit from the reinstated research and development credit.
- Exposure to service interruptions, cybersecurity incidents, intellectual-property disputes, foreign exchange movements, and customer concentration.