Akamai Technologies, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides services that accelerate and improve delivery of Internet content and applications through a globally distributed platform. The filing covers the unaudited three months ended March 31, 2011, compared with the same period in 2010. Akamai operated as one reportable segment. Approximately 30% of revenue came from outside the United States, including 18% from Europe.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $276.0 million | $240.0 million | +15% |
| Income from operations | $72.7 million | $66.1 million | +10% |
| Operating margin | 26.4% | 27.5% | Down 1.1 percentage points |
| Net income | $50.6 million | $40.9 million | +24% |
| Net margin | 18.3% | 17.0% | Up 1.3 percentage points |
| Diluted EPS | $0.26 | $0.22 | +18% |
| Adjusted EBITDA | $129.2 million | $118.1 million | +9% |
| Net cash from operations | $88.5 million | $87.8 million | +1% |
Cost of revenues increased 32% to $89.1 million, reducing gross margin to approximately 67.7% from 71.9%. The increase primarily reflected higher co-location, network equipment depreciation, internal-use software amortization and bandwidth costs, partially offset by lower bandwidth costs per unit.
Cash, cash equivalents and marketable securities totaled approximately $1.26 billion at March 31, 2011. Cash and cash equivalents were $217.2 million. Total assets were $2.37 billion and total liabilities were $164.6 million. The filing states that Akamai had no outstanding indebtedness requiring interest payments at March 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Media and Entertainment, Commerce and Enterprise customers; High Tech revenue declined $1.6 million because of lower software download volumes.
- Revenue growth was driven by higher traffic and increased purchases of value-added services, but was partially offset by lower customer pricing.
- Cost of revenues rose faster than revenue, primarily from infrastructure expansion and higher depreciation and amortization.
- Research and development expense declined 4% to $12.6 million, while sales and marketing expense increased 7% to $53.4 million and general and administrative expense increased 11% to $43.9 million.
- The effective tax rate declined to 32.2% from 40.4%, principally because of the geographic composition of income. Management expects the rate to remain relatively consistent during the remaining quarters, excluding discrete items.
- Stock-based compensation declined to $15.7 million from $19.1 million; management nevertheless expects full-year 2011 stock-based compensation to increase slightly from 2010.
- Akamai repurchased 1.0 million shares for $42.8 million during the quarter, compared with $21.9 million of repurchases in Q1 2010.
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $88.5 million. Investing cash flow was negative $74.5 million, including $35.6 million of property and equipment purchases and $10.6 million of capitalized internal-use software costs.
- The company expects 2011 capital expenditures to be approximately 16% of total revenue, primarily to expand network capacity, funded through operating cash flow.
- Financing cash flow was negative $30.7 million, primarily due to share repurchases.
- Management believes existing cash, marketable securities and forecast operating cash flow will fund working capital and capital expenditures for at least the next 24 months.
- A $150 million extension of the stock repurchase program was authorized in April 2011, beginning in May 2011.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued quarterly and annual net income during 2011, but did not guarantee future profitability or performance at recent levels.
- Management observed moderated traffic growth in volume-driven solutions during Q1 and continued unit-price pressure from competition, particularly in digital media.
- Total bandwidth, co-location, depreciation and software amortization costs are expected to increase as traffic and network capacity expand, although lower bandwidth pricing may partly offset the increases.
- Recurring revenue depends on retaining contracts, offsetting cancellations and price reductions, adding customers and expanding services purchased by existing customers.
- Akamai held $136.8 million of auction rate securities at par value, with an estimated fair value of $124.5 million. Auctions continued to fail, limiting liquidity; management classified the securities as long-term and considered the impairment temporary.
- Contractual commitments totaled approximately $321.0 million, including $158.8 million of real estate leases, $80.6 million of bandwidth and co-location commitments and $81.6 million of open vendor purchase orders.
- The company had $16.1 million of unrecognized tax benefits, including approximately $4.5 million of interest and penalties, and $5.1 million of outstanding letters of credit.
- Material risks include competition and pricing pressure, customer loss, network outages or security breaches, dependence on third-party bandwidth and co-location providers, foreign exchange exposure, intellectual-property claims, regulatory and privacy changes, and potential additional impairment or liquidity constraints related to auction rate securities.
- Management reported effective disclosure controls and procedures as of March 31, 2011, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether revenue growth and traffic increases can continue to offset declining unit prices and customer churn.
- Whether infrastructure investment and co-location costs will pressure gross and operating margins during the remainder of 2011.
- The liquidity, valuation assumptions and eventual recovery of the auction rate securities portfolio.
- Actual 2011 capital expenditures, operating cash flow and cash tax payments as tax credit carryforwards are utilized.
- Share repurchase activity and its effect on cash balances and diluted share count.
- Developments in the pending initial public offering litigation and any potential intellectual-property, regulatory or security-related contingencies.