Akamai Technologies, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides cloud solutions for delivering, optimizing and securing content and business applications over the Internet through a platform comprising more than 250,000 servers in over 130 countries. This unaudited filing covers the three months ended March 31, 2020, with comparisons to the three months ended March 31, 2019.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $764.3 million | $706.5 million | 8.2% increase |
| Income from operations | $152.3 million | $134.5 million | 13.2% increase |
| GAAP operating margin | 19.9% | 19.0% | 0.9 percentage-point increase |
| Net income | $123.1 million | $107.1 million | 15.0% increase |
| Diluted EPS | $0.75 | $0.65 | 15.4% increase |
| Net margin | 16.1% | 15.2% | Improved |
| Non-GAAP operating margin | 30% | 30% | Unchanged |
| Adjusted EBITDA | $326.7 million | $299.1 million | 9.2% increase |
| Adjusted EBITDA margin | 43% | 42% | Improved |
Cloud Security Solutions revenue increased 26.4% to $240.3 million. Web Division revenue rose 8.5% to $406.0 million, while Media and Carrier Division revenue rose 7.8% to $358.3 million. International revenue increased 16.3% to $335.4 million and represented approximately 43.9% of total revenue.
Cost of revenue increased 11.6% to $268.6 million, reducing gross margin to approximately 64.9% from 65.9%. Cost increases were driven primarily by network build-out and supporting services, co-location costs, payroll and network equipment depreciation.
Net cash provided by operating activities was $223.2 million, compared with $160.9 million in Q1 2019. Investing activities used $110.7 million, including $141.1 million for property and equipment, $74.3 million for capitalized internal-use software and $36.4 million for the Instart Logic asset acquisition. Financing activities used $111.8 million, including $80.6 million for share repurchases.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $384.1 million at March 31, 2020.
- Short- and long-term marketable securities totaled approximately $1.83 billion, producing cash, cash equivalents and marketable securities of approximately $2.2 billion.
- Convertible senior notes had total principal of $2.3 billion: $1.15 billion due 2025 and $1.15 billion due 2027. Their combined carrying amount was approximately $1.86 billion.
- Management reported net cash of negative $89.6 million after considering the $2.3 billion principal amount of convertible notes.
- No borrowings were outstanding under the $500 million revolving credit facility, which expires in May 2023 and may be increased to $1.0 billion under specified circumstances.
- Management expects cash, marketable securities and operating cash flow to satisfy foreseeable cash needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated in part because COVID-19-related shelter-in-place requirements increased Internet traffic, particularly for video, gaming and social media customers.
- Security revenue continued to be a major growth driver, while management reported slower growth in web performance solutions and expected further pressure in 2020.
- Operating profitability improved from higher revenue and cost-efficiency initiatives, despite higher cost of revenue and restructuring charges.
- Sales and marketing expense declined 2.0%, primarily because COVID-19 caused cancellation or postponement of marketing events.
- Interest expense increased 42.0% to $17.2 million following the issuance of the 2027 convertible notes in August 2019.
- Restructuring charges increased to $10.6 million from $6.4 million, including a $6.2 million impairment of a right-of-use asset. The company does not expect material additional charges from this action.
- Operating cash flow increased by $62.4 million, while investing cash flow shifted from a $236.2 million inflow in Q1 2019 to a $110.7 million outflow in Q1 2020, primarily because the company reinvested marketable-security maturities and increased network investment.
- The company repurchased 871,294 shares for $80.6 million at an average price of $92.45. Approximately $684.9 million remained available under the $1.1 billion authorization.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings outlook. Management expects overall profitability to improve in 2020 if efficiency initiatives continue, revenue growth exceeds expense growth and the COVID-19 impact does not worsen materially. Research and development expense and network investment are expected to increase, while overall headcount and sales and marketing expense are expected to be managed carefully.
COVID-19 produced both benefits and risks. Higher Internet traffic supported media-related revenue, but customers in commerce, travel, hospitality and other affected industries faced financial pressure, contract renegotiations and potential payment delays. Management also cited supply-chain disruptions, difficulty deploying network equipment, hiring constraints, remote-work challenges and uncertainty regarding the duration of elevated traffic.
Remaining performance obligations were $2.5 billion at March 31, 2020, with approximately 70% expected to be recognized over the following 12 months. The company acquired certain Instart Logic assets for $36.4 million in February 2020, primarily adding a customer-related intangible asset.
Material contingencies include tax audits and litigation. An unfavorable outcome in the Massachusetts tax controversy could result in a gross tax charge of approximately $36.0 million, potentially partially offset by $26.0 million of state tax credits that are not currently benefited. Routine litigation is not expected to have a material effect. Key ongoing risks include slowing growth, pricing pressure, competition, cybersecurity incidents, foreign-exchange exposure, network capacity and supply-chain constraints, customer credit deterioration, convertible-debt obligations and potential dilution.
The company adopted the expected credit loss standard and cloud-computing implementation-cost guidance on January 1, 2020; neither adoption materially affected the financial statements. Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether COVID-19-related traffic increases persisted after March 31, 2020 and offset weakening demand from commerce, travel, hospitality and media customers.
- Trends in Cloud Security Solutions growth, web performance growth, customer pricing and contract renewals.
- Whether increased network capital expenditures and equipment costs translate into sufficient revenue and margin benefits.
- Liquidity relative to the $2.3 billion principal amount of convertible notes, including maturity, conversion and potential dilution considerations.
- Accounts-receivable collections, credit-loss provisions and customer payment delays during the pandemic.
- The outcome and timing of the Massachusetts tax controversy and other tax audits.
- Progress integrating the Instart Logic assets and the company’s expected future acquisition and restructuring activity.