Akamai Technologies, Inc. — FY2010 Form 10-K Summary
Business context and reporting period
Akamai provides cloud-based services that accelerate, secure, and optimize delivery of Internet content and applications, including media delivery, application performance, software distribution, advertising solutions, mobile content adaptation, and security services. The filing covers the fiscal year ended December 31, 2010; quarterly data includes the fourth quarter ended December 31, 2010.
- Operates as one industry segment.
- More than 80,000 servers were deployed across more than 900 networks worldwide.
- Recurring-revenue customers increased to 3,483 at year-end 2010 from 3,122 at year-end 2009.
- International operations generated approximately 28% of revenue, including approximately 17% from Europe.
- No customer represented 10% or more of annual revenue; resellers represented 18% of revenue.
Financial performance and key metrics
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $1,023.6 million | $859.8 million | Up 19% |
| Operating income | $254.3 million | $223.5 million | Up 14% |
| Net income | $171.2 million | $145.9 million | Up 17% |
| Diluted EPS | $0.90 | $0.78 | Up 15% |
| Operating margin | 24.8% | 26.0% | Down 1.2 points |
| Net margin | 16.7% | 17.0% | Down 0.3 points |
| Adjusted EBITDA | $473.6 million | $405.2 million | Up 17% |
Cost of revenues increased 21% to $303.4 million, exceeding revenue growth. Co-location costs, network depreciation, internal-use software amortization, and traffic-related expenses increased as Akamai expanded its infrastructure. Sales and marketing expense increased 26% to $226.7 million, research and development increased 25% to $54.8 million, and general and administrative expense increased 15% to $167.8 million.
- Net cash provided by operating activities was $402.5 million, compared with $424.4 million in 2009.
- Investing activities used $335.4 million, including $192.0 million of property and equipment purchases and internal-use software capitalization and $12.7 million for the Velocitude acquisition.
- Cash and cash equivalents were $231.9 million; total cash, cash equivalents, and marketable securities were approximately $1.243 billion at year-end.
- Working capital was $713.3 million, compared with $433.9 million in 2009.
- All $199.8 million of 1% convertible senior notes were converted into common stock during 2010; no interest-bearing debt remained at year-end.
- Share repurchases totaled 2.5 million shares for approximately $92.0 million, with $91.7 million remaining under the authorized program.
- Capital expenditures and internal-use software capitalization totaled approximately $192.0 million, compared with $108.1 million in 2009.
Fourth-quarter 2010 revenue was $284.7 million and net income was $52.5 million, compared with fourth-quarter 2009 revenue of $238.3 million and net income of $40.1 million.
Material changes versus the prior comparable period
- Revenue growth accelerated to 19% from 9% in 2009, led particularly by media and entertainment traffic growth, commerce, enterprise, high-tech, and public-sector customers.
- Media and entertainment contributed $75.9 million of the $163.8 million year-over-year revenue increase, although lower unit prices partially offset traffic growth.
- Recurring-revenue customers increased by 361, while pricing pressure continued, particularly in digital media services.
- Operating margin declined because infrastructure, depreciation, amortization, sales, and research and development costs grew faster than revenue.
- Stock-based compensation increased to $76.5 million from $58.8 million. Remaining unrecognized compensation cost was $106.5 million, expected to be recognized over a weighted-average period of 1.4 years.
- Property and equipment, net, increased to $255.9 million from $182.4 million, reflecting continued network expansion.
- Akamai acquired substantially all of Velocitude’s assets for approximately $12.0 million in cash, adding mobile content transformation technology and recording $11.6 million of goodwill and $2.8 million of intangible assets.
- The company’s effective tax rate declined to 34.7% from 38.5%, but management expected cash tax payments to increase in 2011 as tax credit carryforwards were substantially utilized.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected revenue growth in 2011 to continue but at a lower rate than in 2010 and expected to remain profitable on a quarterly and annual basis, while emphasizing that profitability was not assured.
- Management expected 2011 capital expenditures to be approximately 16% of revenue, funded through operating cash flow.
- Bandwidth, co-location, depreciation, amortization, research and development, sales and marketing, and general and administrative expenses were expected to increase in 2011.
- Management expected continued unit-price declines from competition to pressure revenue and margins, with higher traffic volumes and value-added services needed to offset pricing pressure.
- Approximately $150.8 million of auction rate securities remained subject to failed auctions and were valued using Level 3 assumptions. The securities had an estimated fair value of $137.3 million and a $13.5 million temporary impairment recorded in accumulated other comprehensive loss.
- Contractual obligations totaled approximately $316.9 million, including $156.2 million of real estate leases, $79.9 million of bandwidth and co-location commitments, and $80.8 million of open vendor purchase orders.
- Unrecognized tax benefits, including accrued interest and penalties, totaled approximately $15.1 million; the filing states that timing of related payments could not be reasonably estimated.
- Key risks include intense competition and pricing pressure, reliance on network availability and third-party bandwidth providers, cyberattacks and service interruptions, international and foreign-exchange exposure, privacy and regulatory changes, intellectual-property disputes, employee retention, IPv4 exhaustion and IPv6 transition, acquisition integration, and volatility in marketable-security valuations.
- A longstanding shareholder class action relating to Akamai’s 1999 initial public offering remained subject to appeals, but management expected no material liability. A separate Section 16(b) action involving Akamai as a nominal defendant had been dismissed with prejudice as to Akamai; no liability was recorded.
- PricewaterhouseCoopers issued an unqualified audit opinion, and management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2010.
Most important facts for investors to verify
- Whether revenue growth and recurring-customer additions can offset ongoing unit-price reductions, especially in digital media.
- Whether rising co-location, bandwidth, depreciation, amortization, and personnel costs will further compress operating margins.
- The sustainability of operating cash flow after substantially higher network capital expenditures.
- The liquidity, valuation assumptions, and potential impairment exposure associated with the remaining auction rate securities.
- The effect of increased cash tax payments after utilization of tax credit and net operating loss carryforwards.
- The dilution and future expense effects of stock-based compensation, outstanding options, and restricted stock units.
- Execution of the Velocitude mobile strategy and the company’s broader product expansion.
- Potential financial exposure from contractual commitments, tax reserves, litigation, indemnification arrangements, and service-level obligations.