Akamai Technologies, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
Akamai provides cloud services that deliver, optimize, and secure online content, applications, software, and streaming media through a globally distributed platform of more than 140,000 servers in approximately 1,200 networks and over 90 countries. The filing covers the fiscal year ended December 31, 2013. Akamai operates as one reportable business segment. Approximately 29% of revenue came from outside the United States, and no customer represented at least 10% of annual revenue.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,577.9 million | $1,373.9 million | 14.8% increase |
| Income from operations | $414.0 million | $314.5 million | 31.6% increase |
| Operating margin | 26.2% | 22.9% | Up 3.3 points |
| Net income | $293.5 million | $204.0 million | 43.9% increase |
| Diluted EPS | $1.61 | $1.12 | 43.8% increase |
| Net margin | 18.6% | 14.8% | Up 3.8 points |
| Adjusted EBITDA | $696.8 million | $615.4 million | 13.2% increase |
| Adjusted EBITDA margin | 44% | 45% | Down 1 point |
| Cash flow from operations | $563.9 million | $530.0 million | 6.4% increase |
Revenue growth was driven by new customers, incremental services sold to existing customers, excess usage, and customer-specific events. Media Delivery Solutions revenue increased 16.0% to $757.1 million; Performance and Security Solutions increased 18.3% to $690.6 million; and Service and Support Solutions increased 36.5% to $128.1 million.
At December 31, 2013, cash, cash equivalents, and marketable securities totaled approximately $1.25 billion. Total assets were $2.96 billion, total liabilities were $328.3 million, and stockholders’ equity was $2.63 billion. The balance sheet showed no convertible senior notes outstanding at year-end. Operating lease, bandwidth, co-location, and purchase-order commitments totaled $380.3 million, and outstanding letters of credit totaled $6.8 million.
Investing cash outflows were $313.1 million, including $188.0 million of property and equipment purchases, $72.1 million of capitalized internal-use software, and $30.7 million for acquisitions. Financing cash outflows were $115.2 million, including $160.4 million of share repurchases. Akamai repurchased 3.9 million shares during 2013 and had $702.3 million remaining under its repurchase authorization at year-end.
Fourth-quarter results
Fourth-quarter 2013 revenue was $436.0 million, compared with $377.9 million in the fourth quarter of 2012. Fourth-quarter net income was $80.3 million, or $0.44 diluted earnings per share, compared with $68.3 million, or $0.38 per diluted share, in the prior-year quarter. Fourth-quarter cost of revenue was $134.0 million.
Material changes versus the prior comparable period
- Cost of revenue declined 3.6% to $511.1 million, and cost of revenue as a percentage of revenue declined from 38.6% to 32.4%.
- The company increased the estimated useful lives of network assets, primarily servers, from three to four years. This reduced 2013 depreciation expense by approximately $45.7 million and increased net income by approximately $33.6 million, or $0.18 diluted EPS.
- Research and development expense increased 25.6% to $93.9 million, sales and marketing increased 25.5% to $280.4 million, and general and administrative expense increased 21.5% to $255.2 million, reflecting significant hiring and infrastructure investment.
- The Advertising Decision Solutions business was divested in January 2013. Its 2013 revenue contribution was approximately $2.1 million, compared with $43.3 million in 2012.
- Foreign currency movements reduced 2013 revenue by approximately $15.0 million relative to 2012.
- The effective tax rate declined to 30.0% from 36.6%, primarily because of the retroactive domestic production activities deduction and reinstatement of the federal research and development credit.
- Prior-period expense classifications and cash-flow classifications were revised for immaterial errors; total expenses, operating income, net income, EPS, and net cash change were not affected.
Guidance, outlook, commentary, and risks
Management expected 2014 cost of revenue, research and development, sales and marketing, and general and administrative expense to increase in absolute dollars as Akamai expanded its network, hired personnel, invested in technology, and increased facility capacity. Management expected operating cash flow to increase with higher revenue and collections, partly offset by higher salaries, commissions, and other cash operating costs.
In February 2014, after year-end, Akamai acquired Prolexic for approximately $390.0 million in cash, plus assumed unvested options. Management expected the acquisition to be slightly dilutive to earnings per share initially and anticipated additional intangible-asset amortization. Akamai also issued $690.0 million of zero-interest convertible senior notes due 2019, entered into related note-hedge and warrant transactions, and used $62.0 million of proceeds to repurchase shares. Management stated that available liquidity, the note proceeds, and expected operating cash flow should fund foreseeable needs for at least 24 months.
- Competition, pricing pressure, customer non-renewals, do-it-yourself infrastructure, and dual-vendor strategies could reduce revenue or margins.
- The business has substantial fixed or contractual bandwidth, co-location, facility, and personnel costs, creating operating leverage if growth slows.
- Service interruptions, software defects, network failures, DDoS attacks, cybersecurity breaches, and insufficient bandwidth or co-location capacity could result in credits, liability, customer losses, and reputational damage.
- International operations expose results to foreign currency, regulatory, tax, privacy, anti-corruption, and data-protection risks.
- Acquisitions may create integration challenges, additional amortization, goodwill impairment exposure, and management distraction.
- Convertible debt creates refinancing, conversion-payment, repurchase, dilution, and leverage risks. The notes issued after year-end were not reflected in the December 31, 2013 balance sheet.
- Unrecognized tax benefits totaled approximately $30.6 million, including interest and penalties; approximately $3.2 million could be recognized by the end of 2014 based on ongoing audits.
- Routine litigation was disclosed, but management did not expect current matters to materially affect results. Indemnification obligations, including intellectual-property claims, may be unlimited, although no material costs had been incurred.
Investor verification checklist
- Verify the sustainability of the 2013 margin expansion after adjusting for the $45.7 million depreciation benefit from the server-life change.
- Assess whether revenue growth can offset media pricing pressure, customer churn, foreign-exchange headwinds, and the divestiture of the advertising business.
- Review the effect of the Prolexic acquisition on revenue growth, integration costs, amortization, margins, and EPS.
- Reconcile year-end liquidity with the subsequent $690.0 million convertible-note issuance, the $62.0 million share repurchase, and the approximately $390.0 million Prolexic purchase price.
- Monitor the $750.0 million share-repurchase authorization, equity-compensation dilution, and the potential dilution or cash obligations associated with the convertible notes and warrants.
- Evaluate the company’s contractual commitments, capital spending, server deployment requirements, cybersecurity exposure, and tax-audit outcomes.