Akamai Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2013. Akamai provides Internet content and application delivery services through a globally distributed platform of more than 130,000 servers in 1,100 networks across 87 countries. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Revenue | $378.1 million | $746.2 million |
| Revenue growth versus 2012 | 14.1% | 14.7% |
| Income from operations | $97.5 million | $198.7 million |
| Operating margin | 25.8% | 26.7% |
| Net income | $61.9 million | $133.4 million |
| Net margin | 16.4% | 17.9% |
| Diluted earnings per share | $0.34 | $0.73 |
| Adjusted EBITDA | $165.8 million | $331.8 million |
| Non-GAAP diluted EPS | $0.46 | $0.98 |
For the first six months, operating cash flow was $232.8 million, compared with $242.1 million in the prior-year period. Investing cash flow used $158.2 million, including $100.8 million of property and equipment purchases and $35.1 million of capitalized internal-use software costs. Financing cash flow used $66.2 million, principally due to $82.8 million of share repurchases.
At June 30, 2013, cash and cash equivalents were $204.9 million and marketable securities were $913.5 million, for approximately $1.1 billion of cash, cash equivalents and marketable securities. Total liabilities were $277.4 million and stockholders’ equity was $2.45 billion. The filing does not report outstanding borrowings or debt; reported liabilities primarily comprise operating obligations, accrued expenses and deferred revenue.
Material changes versus the prior comparable period
- Revenue increased 14.1% in the second quarter and 14.7% year to date, driven by new customers, incremental services sold to existing customers, higher traffic and certain one-time usage-related items.
- Performance and Security Solutions revenue increased 19.4% in the quarter and 18.2% year to date. Service and Support Solutions increased 41.4% and 38.5%, respectively.
- Advertising Decision Solutions revenue declined because the business was divested in the first quarter of 2013. Akamai received a $25.0 million face-value convertible note, recorded at a June 30 fair value of $20.0 million.
- Cost of revenues declined 5.0% in the quarter and 4.3% year to date, improving gross margin to 67.0% and 67.2%, respectively, from 60.4% and 60.7% in the revised 2012 comparisons.
- The company increased investment in personnel and growth initiatives. Sales and marketing expense rose 20.0% in the quarter and 23.7% year to date; research and development rose 17.7% and 21.4%.
- Depreciation expense decreased following a change in the estimated average useful life of network assets from three to four years, effective January 1, 2013. The change reduced depreciation by approximately $11.0 million in the quarter and $25.1 million year to date.
- Net income increased 39.9% in the quarter and 52.5% year to date. The six-month effective tax rate declined to 34.0% from 38.6%, partly due to the reinstated federal research and development credit and the geographic mix of earnings.
- Prior-period expense classifications were revised: certain service, support and network build-out costs moved from sales and marketing and general and administrative expense to cost of revenues. Total expenses, operating income, net income, cash flows and balance-sheet amounts were unaffected.
Guidance, outlook, risks and unusual items
- Management expected the company to generate net income on a quarterly and annual basis during 2013, but did not provide specific revenue or earnings-per-share guidance in the filing.
- Management expected revenue growth to depend on adding customers, increasing services sold to existing customers and offsetting customer cancellations and pricing pressure. Fourth-quarter seasonality and lower summer usage may affect sequential results.
- Cost of revenues was expected to increase during the remainder of 2013 as traffic, server deployments, co-location costs, internal-use software amortization and payroll increased, partly offset by lower bandwidth unit costs and lower depreciation.
- Research and development, sales and marketing, and general and administrative expenses were expected to increase as the company continued hiring, product development, international expansion and facility investments. Headcount increased by 379 full-time employees during the first six months.
- Unrecognized stock-based compensation was $164.0 million at June 30, 2013, expected to be recognized over a weighted-average period of 1.3 years. Six-month stock-based compensation expense was $47.7 million before tax.
- Key risks include intense competition and pricing pressure, customer non-renewals, reliance on traffic growth, network outages or cyberattacks, dependence on third-party bandwidth and co-location providers, foreign-exchange exposure, international regulatory requirements, intellectual-property claims and execution risks from rapid hiring and acquisitions.
- Contractual commitments totaled approximately $289.0 million, including $136.3 million of real-estate leases, $73.2 million of bandwidth and co-location commitments and $79.5 million of open vendor purchase orders. The company also had $27.8 million of unrecognized tax benefits and $6.8 million of outstanding letters of credit.
- Management stated that routine litigation and guarantees were not expected to have a material effect. Disclosure controls and procedures were deemed effective as of June 30, 2013.
Most important facts for investors to verify
- Whether revenue growth remains durable after excluding one-time usage-related items and the effects of the ADS divestiture.
- Whether traffic growth and efficiency initiatives continue to offset pricing declines, bandwidth costs and co-location expenses.
- The effect of the extended network-asset useful lives on future depreciation, reported earnings and comparability.
- The sustainability of operating cash flow after rising capital expenditures, software capitalization, hiring and share repurchases.
- The valuation and collectability of the MediaMath convertible note, which depends on significant unobservable assumptions.
- The impact of substantial stock-based compensation, remaining contractual commitments and potential tax exposures on future cash generation.