Akamai Technologies, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing content and business applications over the Internet through a globally distributed platform of more than 200,000 servers in over 1,700 networks and 130 countries. The filing covers the fiscal year ended December 31, 2017. Although the request references 2017 Q4, this is an annual Form 10-K; fourth-quarter results are included where disclosed.
Akamai operates as one reportable segment. Key offerings include performance and security, media delivery, enterprise security, network operator services, and professional support. The company completed acquisitions of Soasta and Nominum during 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $2.503 billion | $2.340 billion | 7.0% increase |
| Income from operations | $316.2 million | $459.6 million | 31.2% decrease |
| GAAP operating margin | 12.6% | 19.6% | Down approximately 7 points |
| Net income | $218.3 million | $316.1 million | 31.0% decrease |
| Diluted EPS | $1.26 | $1.79 | Decrease |
| Cash flow from operations | $801.0 million | $871.8 million | 8.1% decrease |
| Adjusted EBITDA | $931.1 million | $950.7 million | 2.1% decrease |
| Adjusted EBITDA margin | 37% | 41% | Down 4 points |
Revenue growth was led by Performance and Security Solutions, which increased 13.8% to $1.543 billion. Cloud Security Solutions revenue increased 32% to $481.5 million. Media Delivery Solutions declined 6.1% to $738.9 million, primarily because large Internet platform customers increasingly used internally developed infrastructure.
Web Division revenue increased 15.0% to $1.302 billion, while Media Division revenue declined 1.5% to $1.119 billion. Enterprise and Carrier Division revenue increased 14.3% to $81.2 million. International revenue increased 18.9% to $855.0 million and represented approximately 34% of total revenue.
Fourth-quarter revenue was $663.5 million, compared with $616.1 million in the fourth quarter of 2016. Fourth-quarter net income was $19.1 million, or $0.11 diluted EPS, compared with $91.6 million, or $0.52 diluted EPS, in the prior-year quarter. The fourth-quarter decline in profitability reflected significant restructuring charges and other expense increases.
Total costs and operating expenses increased to $2.187 billion from $1.880 billion. Cost of revenue increased to $875.8 million, or 35.0% of revenue, from 34.6%. Research and development increased 32.7% to $222.4 million, sales and marketing increased 15.6% to $493.6 million, and general and administrative expense increased 15.7% to $509.2 million.
Restructuring charges were $54.9 million in 2017, including $49.3 million related to the restructuring initiated in the fourth quarter. The charges included $32.0 million of software-related charges and $17.3 million of employee severance and related benefits.
Cash, cash equivalents and marketable securities totaled approximately $1.280 billion at December 31, 2017. The company reported net cash of approximately $589.5 million after considering the $690.0 million principal amount of convertible senior notes due February 2019. Total assets were $4.603 billion and total stockholders’ equity was $3.311 billion.
Cash used in investing activities was $459.7 million, including $369.1 million for acquisitions and $414.8 million for property, equipment and internal-use software investments. Cash used in financing activities was $365.0 million, including $361.2 million of share repurchases. Akamai repurchased 6.9 million shares during 2017 and had $333.3 million remaining under its repurchase authorization at year-end. The company does not pay a dividend.
Material changes versus the prior comparable period
- Revenue growth improved to 7.0%, but profitability declined materially because of restructuring charges, increased personnel and infrastructure costs, acquisition-related costs, and higher investment in new products and security capabilities.
- Cloud Security Solutions continued to grow rapidly, while Media Delivery Solutions declined as six large Internet platform customers reduced reliance on Akamai. Revenue from those customers fell from $250.5 million in 2016 to $202.9 million in 2017.
- Research and development expense increased substantially as Akamai expanded engineering resources and invested in product development and network scaling.
- International revenue grew much faster than U.S. revenue, increasing the company’s exposure to foreign currency, regulatory, tax and geopolitical risks.
- Akamai acquired Soasta for approximately $199.3 million and Nominum for approximately $180.3 million in cash. Purchase-price allocations remained preliminary at filing.
- Shares outstanding declined from approximately 173.3 million to 169.9 million during the year, primarily due to repurchases, despite continued equity compensation issuance.
- The company adopted new share-based-payment accounting guidance in 2017. It planned retrospective adoption of the new revenue recognition standard beginning January 1, 2018; management expected no material impact on historical consolidated income statements, but anticipated recording a $58.6 million deferred commission asset.
Guidance, outlook, management commentary and risks
Management expected 2018 revenue to increase through higher customer traffic, additional sales to existing customers and new customer wins. Management expected cost of revenue to increase in dollars but not as a percentage of revenue, while research and development, sales and marketing, and payroll-related costs were expected to rise because of 2017 hiring.
Management expected modest 2018 headcount growth after eliminating more than 300 positions in the first quarter as part of the restructuring. Additional restructuring charges of up to $15.0 million were expected in 2018, including severance and facility-closure costs.
The principal operating risks include intensifying competition and pricing pressure, slower traffic growth, customer insourcing, customer concentration within large media and Internet platform accounts, reliance on third-party bandwidth and co-location providers, cybersecurity attacks, service disruptions, acquisition integration, international regulation and foreign currency volatility.
Akamai had $690.0 million of convertible senior notes due in February 2019. The company stated that it was assessing repayment options. Conversion could require cash, shares or a combination, and the notes and related warrants could create dilution under specified conditions.
The company recorded a provisional $26.0 million net tax expense from the 2017 Tax Cuts and Jobs Act, consisting of a $43.4 million transition-tax expense partially offset by a $17.4 million deferred-tax remeasurement benefit. The final impact could differ during the permitted measurement period.
Akamai disclosed ongoing patent litigation with Limelight Networks. A trial concerning Limelight’s claims was scheduled for April 2018. No provision was recorded because management could not estimate a possible loss range, although the company stated that it did not currently expect a material impact.
The company also disclosed a 2016 Non-Prosecution Agreement with the SEC related to previously disclosed sales practices outside the United States. Violations could result in additional investigations, penalties or restrictions.
Most important facts for investors to verify
- Whether security and performance growth can offset continued declines in media traffic from large Internet platform customers.
- Whether the 2017 restructuring and 2018 workforce reductions produce the expected cost savings without impairing revenue growth or service quality.
- The refinancing, repayment or conversion outcome for the $690.0 million of notes due in February 2019.
- The final purchase-price accounting and financial contribution of the Soasta and Nominum acquisitions.
- The final measurement-period impact of the Tax Cuts and Jobs Act and the company’s broader tax exposures, including $90.7 million of unrecognized tax benefits.
- The outcome and potential financial exposure from the Limelight patent litigation and related indemnification obligations.
- The effect of customer insourcing, pricing pressure, fixed bandwidth and co-location commitments, and cybersecurity incidents on margins and cash flow.
- The impact of the new revenue recognition standard, including capitalization and amortization of customer acquisition commissions.