Akamai Technologies, Inc. — Q1 2017 Form 10-Q 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 across 130 countries. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $609.2 million | $567.7 million | +7.3%; +8.0% constant currency |
| Income from operations | $115.2 million | $114.1 million | +1.0% |
| GAAP operating margin | 18.9% | 20.1% | Down 1.2 percentage points |
| Net income | $80.9 million | $74.9 million | +8.1% |
| GAAP diluted EPS | $0.46 | $0.42 | +$0.04 |
| Effective tax rate | 29.4% | 33.5% | Down 4.1 percentage points |
| Operating cash flow | $142.6 million | $191.4 million | Down 25.5% |
| Adjusted EBITDA | $240.5 million | $234.1 million | +2.8% |
| Adjusted EBITDA margin | 39% | 41% | Down 2 percentage points |
Performance and Security Solutions revenue increased 16.9% to $369.1 million, including Cloud Security Solutions revenue of $109.8 million versus $80.7 million in the prior-year quarter. Media Delivery Solutions revenue declined 9.0% to $187.4 million. Services and Support Solutions revenue increased 14.7% to $52.7 million.
Cost of revenue was $205.7 million, or 33.8% of revenue, compared with 34.3% in the prior-year quarter. Research and development increased 27.7% to $52.2 million, sales and marketing increased 11.1% to $113.6 million, and general and administrative expense increased 12.4% to $115.0 million. Stock-based compensation was $39.0 million, compared with $31.7 million.
Cash and cash equivalents were $522.3 million at March 31, 2017. Short- and long-term marketable securities totaled approximately $1.06 billion at fair value, bringing cash, cash equivalents, and marketable securities to approximately $1.6 billion. Convertible senior notes had $690.0 million of principal outstanding and a $645.7 million carrying value; management reported net cash of $894.1 million.
Capital expenditures and capitalized internal-use software costs totaled $91.2 million. Financing activities included $72.5 million of common-stock repurchases and $33.9 million of employee tax payments related to net share settlement of equity awards. Cash and cash equivalents increased by $198.2 million to $522.3 million, primarily because of proceeds from marketable-security sales and maturities.
Material changes versus the prior comparable period
- Revenue growth was led by security offerings, while Media Delivery Solutions declined because several large Internet Platform Customers increasingly used internal infrastructure.
- Revenue from six Internet Platform Customers declined to $51.4 million from $72.5 million.
- Operating margin decreased because operating expenses grew faster than revenue, particularly research and development, sales and marketing, and general and administrative costs.
- Net income and diluted EPS increased, helped in part by the lower effective tax rate and the absence of the $6.8 million restructuring charge recorded in Q1 2016.
- Operating cash flow declined because of higher bonus payments, higher cash taxes, and prepayments for multiyear network-maintenance contracts.
- Foreign currency movements reduced reported revenue by approximately $4.0 million year over year; international revenue represented approximately 33% of total revenue versus 30% in Q1 2016.
- Akamai repurchased 1.1 million shares for $72.5 million at an average price of $65.78. Approximately $622.0 million remained available under the authorized repurchase program at March 31, 2017.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a clear numerical revenue or earnings guidance range. Management expects Media Delivery Solutions growth to moderate further in the quarter ending June 30, 2017, and stated that growth in the second half of 2017 could be lower than recent rates. Management expects 2017 expenses to increase, including network, software-amortization, payroll, research and development, sales and marketing, facilities, and infrastructure costs.
In April 2017, after the reporting date, Akamai acquired SOASTA, Inc. for $199.0 million in cash. Purchase-price allocation was not finalized when the filing was issued, and management expected the transaction to be slightly dilutive to EPS for at least the remainder of 2017.
A $4.5 million payment was received from Limelight Networks under a patent-license settlement; $4.0 million reduced general and administrative expense and $0.5 million was recorded as interest income. Separately, Limelight litigation alleging patent infringement remains pending. Akamai has indemnified XO Communications for damages in that matter, has asserted counterclaims, and recorded no provision because a possible loss or range of loss could not be estimated.
Management believes existing cash, marketable securities, and operating cash flows will be sufficient to meet foreseeable cash needs for at least the next 12 months. Key risks include slower network traffic growth, customer insourcing, pricing pressure, fixed bandwidth and co-location commitments, cybersecurity incidents, service disruptions, competition, foreign-currency exposure, acquisition integration, litigation, tax audits, regulatory changes, and the refinancing or settlement of the 2019 convertible notes.
The company adopted new share-based-payment accounting guidance in 2017, which contributed to the lower effective tax rate and changed cash-flow presentation. It expects adoption of the new revenue-recognition standard on January 1, 2018 and expects the lease standard adoption planned for the first quarter of 2019 to create significant right-of-use assets and lease liabilities.
Important facts an investor should verify
- Whether security-related growth can offset continuing declines and slower traffic growth in Media Delivery Solutions.
- The impact of reduced usage by the six Internet Platform Customers and any further customer insourcing or pricing concessions.
- Whether operating expenses, infrastructure investment, and headcount growth pressure GAAP and adjusted margins.
- The final purchase-price allocation, integration costs, and earnings impact of the SOASTA acquisition.
- The status and potential financial exposure of the Limelight patent litigation and related indemnification obligations.
- The company’s ability to fund the 2019 convertible notes, acquisitions, capital expenditures, and share repurchases while maintaining liquidity.
- The effects of the 2018 revenue-recognition adoption and 2019 lease-accounting adoption on reported results and balance-sheet leverage.