Akamai Technologies, Inc. — Q3 2010 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 operating in approximately 70 countries. The filing covers the quarter and nine months ended September 30, 2010; financial statements are unaudited and presented under U.S. GAAP.
During the quarter, David Kenny became President, while Paul Sagan remained Chief Executive Officer. Akamai acquired substantially all assets and liabilities of Velocitude LLC in June 2010 to strengthen its mobile-market position.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $253.6 million | $206.5 million | $738.9 million | $621.5 million |
| Revenue growth | 23% | — | 19% | — |
| Income from operations | $59.0 million | $50.7 million | $181.9 million | $161.3 million |
| Operating margin | 23.3% | 24.5% | 24.6% | 26.0% |
| Net income | $39.7 million | $32.7 million | $118.7 million | $105.8 million |
| Net margin | 15.7% | 15.9% | 16.1% | 17.0% |
| Diluted EPS | $0.21 | $0.18 | $0.63 | $0.57 |
| Adjusted EBITDA | $114.1 million | $95.9 million | $344.4 million | $293.6 million |
For the nine months, net cash provided by operating activities was $292.1 million, compared with $299.5 million in the prior-year period. Investing cash use was $266.9 million, including $119.6 million of property and equipment purchases, $23.8 million of capitalized internal-use software, $12.2 million for the Velocitude acquisition, and net purchases of marketable securities. Financing cash use was $10.8 million, including $65.1 million of share repurchases.
At September 30, 2010, cash and cash equivalents were $197.6 million and total marketable securities were approximately $992.6 million, producing cash, cash equivalents and marketable securities of approximately $1.19 billion. Total assets were $2.26 billion and stockholders’ equity was $2.03 billion.
The carrying amount of the remaining 1% convertible senior notes was $58.6 million, with a stated fair value of $191.5 million. The notes were classified as current because holders could require repayment beginning December 15, 2010.
Material changes versus the prior comparable period
- Revenue increased $47.1 million, or 23%, in Q3 and $117.4 million, or 19%, for the nine months. Growth was led by Media and Entertainment, Commerce, High Tech, and Public Sector customers.
- Revenue growth was partly offset by lower unit prices, particularly for high-volume digital media customers, as competition and customer budget constraints increased pricing pressure.
- Cost of revenues increased 26% in Q3 and 19% for the nine months. Higher traffic, additional servers, depreciation, and software amortization more than offset lower bandwidth costs per unit.
- Operating and net margins declined year over year as cost of revenues, research and development, sales and marketing, and general and administrative expenses grew faster than revenue.
- Stock-based compensation increased to $18.6 million in Q3 and $58.0 million for the nine months, compared with $13.6 million and $42.0 million, respectively, primarily due to revised expected vesting of performance-based RSUs.
- During the nine months, $141.1 million principal amount of convertible notes was converted into common stock, resulting in issuance of approximately 9.1 million shares. The company repurchased 1.9 million shares for $65.1 million and had $118.6 million remaining under its repurchase authorization.
- Property and equipment increased to $239.5 million from $182.4 million at December 31, 2009, reflecting continued network expansion.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to remain profitable on a quarterly and annual basis during 2010 and 2011, but provided no formal revenue or earnings-per-share guidance and cautioned that profitability is not assured.
- Management expected fourth-quarter revenue and traffic to benefit from customer additions, expanded services, and seasonal e-commerce demand, while noting that fourth-quarter seasonality typically produces higher retail-related revenue.
- Fourth-quarter operating expenses were expected to increase, including bandwidth, network equipment, depreciation, software amortization, research and development, sales and marketing, and administrative costs. Capital expenditures for 2010 were expected to be approximately 19% of revenue.
- Management expected bandwidth costs per unit to continue declining, but warned that total bandwidth costs could rise if traffic growth outpaces savings or if lower-cost routing is not achieved.
- Auction rate securities with a fair value of $150.1 million remained subject to failed auctions and limited liquidity. The company recorded a $15.1 million temporary impairment in accumulated other comprehensive loss and relied on valuation assumptions including a five-year expected term and a 3.24% discount rate.
- Management believed available liquidity and operating cash flow were sufficient for at least the next 24 months, despite the restricted liquidity of the auction rate securities.
- The company expected most remaining convertible-note holders to convert before the planned December 15, 2010 redemption. It expected no outstanding interest-bearing debt at December 31, 2010 if the notes were converted or redeemed.
- Contractual obligations totaled approximately $341.8 million, including $157.9 million of real estate leases, $75.3 million of bandwidth and co-location commitments, $49.7 million of open purchase orders, and $58.6 million of convertible notes assumed to be redeemed in December 2010.
- Key risks include intense competition and price reductions, customer cancellations, dependence on network reliability and third-party bandwidth providers, cybersecurity and service interruptions, international and foreign-exchange exposure, intellectual-property claims, privacy regulation, acquisition integration, and potential additional impairment of auction rate securities.
- Pending securities litigation related to the 1999 initial public offering remained unresolved, but management recorded no liability and did not expect a material adverse effect based on the disclosed circumstances.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2010, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth continues to offset declining unit prices and customer cancellations, particularly in digital media.
- Whether operating margins stabilize as bandwidth, infrastructure, headcount, and stock-based compensation costs increase.
- The liquidity, valuation assumptions, and potential future impairment exposure associated with the $150.1 million of auction rate securities.
- The final treatment of the remaining $58.6 million of convertible notes, including conversions, redemption, dilution, and cash usage after December 15, 2010.
- Actual 2010 capital expenditures and whether they remain near management’s expectation of 19% of revenue.
- Changes in cash taxes as the company uses most of its net operating losses and tax-credit carryforwards.
- Developments in the outstanding securities litigation and other routine legal matters.