Akamai Technologies, Inc. — 2016 Q1 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. The company operated a globally distributed platform of more than 216,000 servers across over 1,500 networks in approximately 120 countries. This unaudited filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $567.7 million | $526.5 million | +7.8%; +8.6% constant currency |
| Income from operations | $114.1 million | $121.5 million | -6.1% |
| GAAP operating margin | 20.1% | 23.0% | -2.9 percentage points |
| Net income | $74.9 million | $77.7 million | -3.7% |
| GAAP diluted EPS | $0.42 | $0.43 | Declined |
| Non-GAAP diluted EPS | $0.66 | $0.61 | +8.2% |
| Adjusted EBITDA | $234.1 million | $223.4 million | +4.8% |
| Adjusted EBITDA margin | 41% | 42% | -1 percentage point |
| Operating cash flow | $190.2 million | $99.7 million | +90.8% |
- Performance and Security Solutions revenue increased 16.1% to $315.9 million, including Cloud Security Solutions revenue of $81 million versus $55 million.
- Media Delivery Solutions revenue declined 4.2% to $205.9 million, primarily because the two largest U.S. media customers increased their “do-it-yourself” content delivery efforts.
- Services and Support Solutions revenue increased 15.6% to $45.9 million.
- Cost of revenue increased 15.0% to $194.7 million, or 34.3% of revenue versus 32.2% in the prior-year quarter, reflecting higher bandwidth, network expansion, payroll, depreciation and software amortization costs.
- Research and development expense increased 14.0% to $40.8 million; general and administrative expense increased 14.2% to $102.3 million. Sales and marketing expense decreased 1.2% to $102.2 million.
- Cash, cash equivalents and marketable securities totaled approximately $1.5 billion at March 31, 2016. Management reported net cash of $833.2 million after the convertible senior notes.
- Cash and cash equivalents were $312.9 million, compared with $289.5 million at December 31, 2015. The company held approximately $200 million of cash outside the United States.
- The company had $690 million principal amount of zero-coupon convertible senior notes due 2019, carried at $623.5 million net of discount and issuance costs.
Material changes versus the prior comparable period
- Revenue growth remained positive but slowed in media-related services because of lower traffic from two major customers and continued customer adoption of internal delivery capabilities.
- Cloud security was the primary growth driver, with revenue increasing approximately 47% year over year.
- GAAP operating and net margins declined as infrastructure investment, personnel costs and other operating expenses grew faster than revenue.
- Restructuring charges increased to $6.8 million from $42,000, primarily reflecting organizational realignment, severance and the abandonment of certain internal-use software projects.
- Operating cash flow nearly doubled, supported by stronger customer collections and lower commission and bonus payments.
- Investing cash flow shifted to a use of $55.4 million from a source of $57.1 million, while financing cash usage increased to $115.7 million, primarily because of higher share repurchases.
- The company repurchased 2.2 million shares for $108.7 million at an average price of $48.97 per share. A new $1.0 billion repurchase authorization superseded the prior program.
- A reorganization created Media, Web, and Enterprise & Carrier divisions and revised the categorization of certain solution revenue.
Guidance, outlook, commentary and risks
- The filing does not provide a clear numerical revenue or earnings outlook for full-year 2016. Management expected slower growth in media-related services to continue into the second quarter and possibly the second half of 2016.
- Management expected 2016 cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars, although hiring growth was expected to moderate from 2015 levels.
- Management expected the full-year effective tax rate to decrease slightly, subject to potential discrete tax items.
- Management believed existing cash, marketable securities and operating cash flow would cover foreseeable cash needs for at least the next 12 months, including capital expenditures, facility and technology investments, commitments and planned share repurchases.
- Key risks include slower network traffic growth, customer “do-it-yourself” delivery strategies, pricing pressure, dependence on large media customers, intense competition, cybersecurity or service interruptions, bandwidth and co-location capacity constraints, foreign-exchange exposure, international regulatory compliance and execution of the organizational realignment.
- The company continued an internal investigation into sales practices in a non-U.S. country representing less than 1% of revenue. The company voluntarily notified the SEC and Department of Justice, is cooperating with both agencies, recorded an immaterial provision for expected disgorgement, and stated that the outcome cannot be predicted.
- Routine litigation was not expected to have a material effect, but legal fees associated with ongoing litigation were expected to increase during 2016.
- The company adopted debt issuance cost presentation guidance retrospectively, reducing December 31, 2015 assets and liabilities by $6.2 million without affecting earnings, financial position or cash flows.
- Management was evaluating the future effects of new revenue recognition, lease accounting and share-based payment standards.
Important facts for investors to verify
- Whether Cloud Security growth can offset continued weakness or slower growth in Media Delivery Solutions.
- Traffic and revenue trends from the two largest media customers, including the extent of their internal delivery investments.
- Whether infrastructure, bandwidth, co-location and personnel costs stabilize sufficiently to support operating-margin recovery.
- Remaining capacity under the $1.0 billion share repurchase authorization and the effect of repurchases on share count and liquidity.
- The potential cash, penalty, disgorgement, regulatory and reputational consequences of the foreign sales-practices investigation.
- The maturity, conversion conditions and potential dilution or cash requirements associated with the $690 million convertible notes due in 2019.
- Actual adoption impacts from forthcoming accounting standards and the company’s ability to maintain effective controls during its organizational restructuring.