Akamai Technologies, Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides security, delivery and compute solutions through a globally distributed platform with more than 350,000 servers in over 130 countries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $881.9 million | $860.3 million | $2.689 billion | $2.556 billion |
| Revenue growth | 2.5% | — | 5.2% | — |
| Income from operations | $160.4 million | $205.3 million | $508.8 million | $587.1 million |
| GAAP operating margin | 18.2% | 23.9% | 18.9% | 23.0% |
| Net income | $108.2 million | $178.9 million | $346.9 million | $491.1 million |
| Net margin | 12.3% | 20.8% | 12.9% | 19.2% |
| Diluted EPS | $0.68 | $1.08 | $2.15 | $2.96 |
| Adjusted EBITDA | $368.5 million | $396.0 million | $1.148 billion | $1.157 billion |
| Adjusted EBITDA margin | 41.8% | 46.0% | 42.7% | 45.3% |
Q3 revenue by solution was $379.5 million from security, $393.2 million from delivery and $109.1 million from compute. Nine-month revenue was $1.142 billion from security, $1.254 billion from delivery and $293.1 million from compute.
For the nine months, operating cash flow was $933.2 million, compared with $1.018 billion in 2021. Investing cash flow was negative $527.7 million, primarily reflecting $872.1 million of acquisition spending, including the Linode acquisition, and $347.5 million of property and equipment purchases plus capitalized internal-use software. Financing cash flow was negative $456.2 million, including $430.3 million of share repurchases.
At September 30, 2022, cash and cash equivalents were $457.8 million and marketable securities totaled approximately $894.9 million, for cash, cash equivalents and marketable securities of approximately $1.4 billion. Convertible senior notes had a carrying value of $2.284 billion, consisting of $1.15 billion due in 2025 and $1.15 billion due in 2027. No borrowings were outstanding under the $500 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Security revenue increased 13.4% in Q3 and 17.7% for the nine months, driven by application security, API protection and Zero Trust solutions, including Guardicore.
- Compute revenue increased 71.6% in Q3 and 59.8% for the nine months, primarily reflecting organic growth and the March 2022 acquisition of Linode. Linode contributed $33.1 million of Q3 revenue and $68.9 million for the nine months.
- Delivery revenue declined 14.9% in Q3 and 10.6% for the nine months, reflecting slower traffic growth, customer renewals, pricing pressure and the post-pandemic normalization of usage.
- The strengthening U.S. dollar reduced reported revenue by $38.9 million in Q3 and $86.0 million for the nine months versus the prior-year periods. Revenue growth at constant currency was 7.1% in Q3 and 8.6% for the nine months.
- Cost of revenue increased to 39.3% of revenue in Q3 from 36.8%, and to 38.2% for the nine months from 36.9%, due to network build-out, third-party cloud services, depreciation, energy and payroll costs.
- Operating margin and net margin declined due to higher operating expenses, acquired-intangible amortization, acquisition-related costs and a substantially higher effective tax rate. The nine-month effective tax rate was 27.6%, compared with 8.0% in 2021.
- Interest expense declined materially because adoption of new convertible-instrument accounting guidance eliminated most debt-discount amortization. The adoption increased 2022 basic and diluted EPS by $0.08 for Q3 and $0.24 for the nine months.
- Akamai repurchased 4.3 million shares for $430.3 million during the nine months and had approximately $1.4 billion remaining under its $1.8 billion repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
Management expects existing cash, marketable securities and operating cash flow to fund foreseeable needs for at least the next 12 months. Foreseeable uses include capital expenditures, information technology investments, acquisitions, share repurchases, leases and other commitments.
- Management expects slower traffic growth for the remainder of 2022 as pandemic-related restrictions recede and macroeconomic uncertainty increases.
- The company expects continued negative effects from the strong U.S. dollar, the war in Ukraine, inflation, rising interest rates, recession concerns and elongated customer sales cycles.
- Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase versus 2021, while continuing to manage margins and limit hiring to critical areas.
- Capital spending is expected to remain below recent historical levels as investment shifts from peak delivery capacity toward security and compute capabilities.
- The Linode acquisition is intended to expand Akamai’s cloud and compute-to-edge platform but creates integration, execution, supply-chain and goodwill or intangible-asset impairment risks.
- Nine-month restructuring charges were $13.0 million, primarily related to GO-NET impairment and the FlexBase workplace program. Additional FlexBase-related charges may occur, although material additional GO-NET charges are not expected.
- The company recorded a $7.6 million loss from its equity-method investment in GO-NET and an $8.9 million investment impairment within other expense during the nine months.
- Key ongoing risks include cybersecurity incidents, service outages, competition and pricing pressure, customer migration to internal or multi-vendor solutions, foreign-exchange volatility, supply-chain constraints, energy costs, privacy and regulatory changes, acquisition integration and debt repayment or conversion obligations.
Important Facts for Investors to Verify
- Whether security and compute growth can offset continued delivery declines and slower network traffic growth.
- The sustainability of margins amid higher cloud, energy, depreciation, payroll, acquisition and security-investment costs.
- Linode integration progress, compute customer adoption and the carrying values of goodwill and acquired intangible assets.
- Cash generation after acquisitions, capital expenditures and the remaining share-repurchase program.
- Liquidity and refinancing or cash-settlement requirements for the $2.3 billion principal amount of convertible notes due in 2025 and 2027.
- The impact of foreign exchange, macroeconomic conditions, the war in Ukraine and customer sales-cycle elongation on future results.
- The effective tax rate and any future discrete tax items related to intellectual-property transactions, global intangible low-taxed income and stock compensation.