Akamai Technologies, Inc. — FY2015 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 approximately 1,400 networks and 120 countries. The filing covers the fiscal year ended December 31, 2015, including fourth-quarter results. Akamai operates as one reportable industry segment.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2.197 billion | $1.964 billion | +11.9%; +15.5% at constant currency |
| Income from operations | $466.2 million | $489.5 million | -4.8% |
| GAAP operating margin | 21.2% | 24.9% | Down 3.7 percentage points |
| Net income | $321.4 million | $333.9 million | -3.8% |
| Diluted EPS | $1.78 | $1.84 | -3.3% |
| Net margin | 14.6% | 17.0% | Down 2.4 percentage points |
| Cash flow from operations | $764.2 million | $658.1 million | +16.1% |
| Adjusted EBITDA | $897.3 million | $852.5 million | +5.3% |
| Adjusted EBITDA margin | 41% | 43% | Down 2 percentage points |
Fourth-quarter 2015 revenue was $579.2 million versus $536.3 million in fourth-quarter 2014. Fourth-quarter net income was $88.4 million, or $0.49 diluted EPS, versus $97.1 million, or $0.54 diluted EPS, in the prior-year quarter.
- Performance and Security Solutions revenue increased 16.7% to $1.050 billion. Cloud Security Solutions revenue increased to $254.4 million from $170.0 million.
- Media Delivery Solutions revenue increased 6.5% to $977.4 million, reflecting slower growth in the second half of 2015.
- Service and Support Solutions revenue increased 15.7% to $170.3 million.
- Cost of revenue rose 18.8% to $725.6 million, or 33.0% of revenue versus 31.1% in 2014, driven by bandwidth, network expansion, payroll, depreciation and software amortization.
- Research and development expense increased 18.6% to $148.6 million; sales and marketing increased 16.3% to $441.0 million; and general and administrative expense increased 19.2% to $388.3 million.
- International revenue was $593.0 million, approximately 27% of total revenue. Foreign currency reduced reported revenue by $71.7 million; constant-currency revenue growth would have been 15.5% rather than 11.9%.
Liquidity, capital expenditures and debt
- Cash, cash equivalents and marketable securities totaled $1.524 billion at December 31, 2015, compared with $1.628 billion at year-end 2014.
- Net cash after convertible senior notes was approximately $834.2 million.
- Operating cash flow was $764.2 million. Investing cash outflows were $435.6 million, including $445.0 million for acquisitions, property and equipment, and capitalized internal-use software.
- Financing cash outflows were $267.7 million, including $302.6 million of share repurchases. During the fourth quarter, Akamai repurchased 1.666 million shares for $100.2 million at an average price of $60.14.
- Akamai had $690.0 million par value of 0% convertible senior notes due in 2019, carried at $624.3 million after debt discount. The initial conversion price was approximately $89.56 per share; the notes could potentially convert into approximately 7.7 million shares.
- Contractual obligations totaled $1.240 billion, including $279.5 million of real estate leases, $147.4 million of bandwidth and co-location commitments, $123.2 million of open purchase orders and $690.0 million of convertible notes.
- Management stated that existing liquidity and forecast operating cash flow should meet foreseeable cash needs for at least the next 12 months.
Material changes, outlook and unusual items
- Revenue growth moderated in the second half of 2015, particularly in Media Delivery Solutions, as the two largest U.S. media customers increasingly pursued “do-it-yourself” delivery approaches. Management expected this moderation to continue into 2016.
- Profitability declined as expenses grew faster than revenue. Akamai continued investing in network capacity, OTT media capabilities, product development, sales infrastructure and international expansion.
- Three acquisitions were completed in 2015 for aggregate purchase consideration of approximately $142.3 million: Xerocole, Octoshape/Codemate and Bloxx. Their consolidated impact was not material individually or in aggregate.
- Management expected 2016 cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase, although headcount growth was expected to slow from 2015 levels.
- Management expected 2016 operating cash flow to increase with higher anticipated revenue and collections, partially offset by higher cash operating expenses.
- In February 2016, the company announced a realignment of product, development, sales, channels and marketing organizations, with implementation expected in April 2016. Severance charges were expected from the realignment.
- In February 2016, the board authorized a new $1.0 billion share repurchase program through December 31, 2018. The prior program had $131.0 million remaining at December 31, 2015.
- The effective tax rate was 29.6%, favorably affected by a retroactive U.S. tax court ruling concerning stock-based compensation in intercompany arrangements, which generated a $9.1 million benefit for 2010–2014.
- Akamai was conducting an internal investigation, assisted by outside counsel, concerning sales practices in a non-U.S. country. The company voluntarily notified the SEC and Department of Justice in February 2015, was cooperating with the agencies, could not predict the outcome and had recorded no provision.
Principal risks and contingencies
- Intense competition, commoditization, pricing pressure and customers developing internal or multi-vendor delivery capabilities could reduce revenue and margins.
- Dependence on usage by large media customers creates forecasting volatility; customer traffic decisions and contract renewals may materially affect results.
- Network outages, cyberattacks, service defects, insufficient bandwidth or co-location capacity and rising SSL-related operating costs could cause service disruptions, liability and reputational damage.
- Foreign currency movements, international regulatory requirements, privacy and data-localization rules, and potential FCPA violations could adversely affect results.
- Convertible debt creates refinancing, conversion-payment, dilution and potential repurchase obligations. The notes’ terms do not limit future indebtedness.
- Unrecognized tax benefits totaled $72.3 million, including interest and penalties; management did not expect recognition of these benefits in the following 12 months.
- Routine litigation was not expected to be material, but the outcome of the sales-practices investigation remained uncertain. Indemnification obligations for intellectual-property, negligence or other claims can be potentially unlimited, although insurance may offset some exposure.
Investor verification checklist
- Verify whether Media Delivery Solutions growth and usage from the largest media customers continued to slow in 2016.
- Assess whether Cloud Security growth offset media-related weakness and supported improved revenue mix and margins.
- Track bandwidth, co-location, depreciation, internal-use software amortization and stock-based compensation growth relative to revenue.
- Review cash generation after capital expenditures, acquisitions and share repurchases, including the $690.0 million notes due in 2019.
- Monitor the SEC and Department of Justice investigation for potential penalties, remediation costs or accounting provisions.
- Evaluate execution and costs associated with the 2016 organizational realignment and the company’s new $1.0 billion repurchase authorization.