Akamai Technologies, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Akamai provides cloud-based solutions for delivering, optimizing and securing content and business applications through its globally distributed Intelligent Edge Platform. The platform included more than 200,000 servers across more than 130 countries and 1,700 networks as of December 31, 2018.
This Form 10-K covers the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter information; it is not a standalone quarterly filing.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2.714 billion | $2.489 billion | 9.1% |
| Income from operations | $362.5 million | $314.3 million | 15.3% |
| GAAP operating margin | 13.4% | 12.6% | Improved |
| Net income | $298.4 million | $222.8 million | 33.9% |
| Diluted EPS | $1.76 | $1.29 | 36.4% |
| Operating cash flow | $1.008 billion | $801.0 million | 25.9% |
| Adjusted EBITDA | $1.092 billion | $929.2 million | 17.5% |
| Adjusted EBITDA margin | 40% | 37% | Improved |
Cloud Security Solutions revenue increased 35.5% to $657.9 million. Web Division revenue increased 10.8% to $1.446 billion, while Media and Carrier Division revenue increased 7.2% to $1.268 billion. International revenue represented approximately 38% of total revenue, compared with approximately 34% in 2017.
Fourth-quarter 2018 revenue was $713.4 million and net income was $94.0 million, compared with fourth-quarter 2017 revenue of $658.5 million and net income of $27.5 million.
Liquidity, capital expenditures and debt
- Cash, cash equivalents and marketable securities totaled $2.101 billion at December 31, 2018.
- Net cash, after convertible senior notes, was $261.2 million.
- Operating cash flow was $1.008 billion; investing cash outflows were $506.5 million, including $405.7 million for property, equipment and internal-use software.
- The company had $1.840 billion of convertible senior notes at year-end, consisting of $690.0 million due in 2019 and $1.150 billion due in 2025. The 2019 notes were repaid at maturity in February 2019.
- A $500.0 million revolving credit facility was available, expandable to $1.0 billion under specified circumstances; there were no borrowings outstanding at year-end.
- Akamai repurchased 10.2 million shares for $750.0 million during 2018 and had $1.1 billion remaining under its repurchase authorization.
- Management expected cash, investments and operating cash flow to fund foreseeable needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth accelerated to 9.1% from 6.0% in 2017, led by security products, new offerings, media traffic and gaming-related activity.
- Profitability improved despite higher interest expense and operating costs. The operating margin increased to 13.4% from 12.6%.
- Net income benefited from higher operating income and a lower effective tax rate of 13.0%, compared with 29.1% in 2017, primarily reflecting the U.S. Tax Cuts and Jobs Act, foreign earnings and tax benefits.
- Cash flow from operations increased by $207.3 million, partly due to improved profitability and lower cash taxes.
- Interest expense increased to $43.2 million from $18.8 million, mainly because of the 2025 convertible notes.
- Restructuring charges declined to $27.6 million from $54.9 million, but management expected up to $12.0 million of additional restructuring charges in the first quarter of 2019.
- General and administrative expense included a $50.0 million one-time Akamai Foundation endowment, a $14.9 million Limelight litigation settlement charge and other stockholder-matter costs.
- The company retrospectively adopted the new revenue recognition standard and began capitalizing certain contract commissions. Management stated that the annual impact on revenue and operating results was not material, although quarterly comparisons were affected.
Guidance, outlook, risks and unusual items
Management expected slower revenue growth in 2019 because of pressure on commerce customers, contract renewals with large media customers, pricing pressure and fewer large media-driven events. It expected profitability to improve in 2019, but at a lower rate than in 2018, with additional improvement targeted for 2020.
Management planned continued investment in security, research and development, network capacity and internal-use software. Headcount was not expected to increase significantly in 2019. Network server useful lives were expected to increase from four to five years, which was expected to reduce 2019 depreciation expense.
- Competition, pricing pressure, customer insourcing and reduced usage by major Internet platform customers could limit growth and margins.
- Cybersecurity attacks, service defects, network capacity constraints and third-party infrastructure failures could disrupt operations and damage reputation.
- International operations expose the company to foreign currency, privacy, data localization, regulatory, tax and geopolitical risks, including Brexit-related uncertainty.
- The company remained subject to tax audits and an appeal involving Massachusetts tax benefits. Management estimated that an adverse ruling could result in an approximately $35.0 million tax charge.
- Unrecognized tax benefits totaled approximately $67.8 million, of which $33.2 million could be recognized within 12 months.
- Contractual obligations totaled $3.153 billion, including $951.3 million of real estate leases, $182.8 million of bandwidth and co-location commitments, $178.7 million of purchase orders and $1.840 billion of convertible notes.
- A January 2019 acquisition of Janrain for approximately $125.0 million in cash occurred after year-end.
- The company planned to move into a new Cambridge headquarters in late 2019, creating potential transition costs and operational disruption.
Most important facts for investors to verify
- Whether security revenue growth can offset slower Web Performance growth, pricing pressure and declining usage by major Internet platform customers.
- Whether operating-margin improvement continues after excluding or adjusting for restructuring, litigation, charitable endowment and stock-based compensation charges.
- The cash-flow and dilution implications of the 2025 convertible notes, related warrants and the remaining $1.1 billion share-repurchase authorization.
- The outcome and timing of the Massachusetts tax appeal and other tax audits.
- The amount and timing of 2019 restructuring costs, headquarters-transition costs and Janrain integration expenses.
- The effect of the retrospective revenue-recognition adoption on quarterly trends and comparability.
- Execution against the company’s 2019 outlook, particularly revenue growth, security adoption, international performance and bandwidth and co-location costs.