Akamai Technologies, Inc. — 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 three and six months ended June 30, 2010, compared with the corresponding 2009 periods. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $245.3 million | $204.6 million | $485.3 million | $415.0 million |
| Operating income | $56.8 million | $54.4 million | $122.9 million | $110.5 million |
| Operating margin | 23.2% | 26.6% | 25.3% | 26.6% |
| Net income | $38.1 million | $36.0 million | $79.0 million | $73.1 million |
| Net margin | 15.5% | 17.6% | 16.3% | 17.6% |
| Diluted EPS | $0.20 | $0.19 | $0.42 | $0.39 |
| Adjusted EBITDA | $112.1 million | $97.4 million | $230.3 million | $197.7 million |
Revenue increased 20% year over year in the quarter and 17% for the six-month period, driven by more recurring-revenue customers, higher traffic and increased premium-service sales. Q2 gross margin was approximately 70.7%; six-month gross margin was approximately 71.3%, compared with approximately 71.0% in the prior-year period.
- Six-month operating cash flow was $174.1 million, down from $194.3 million in 2009.
- Investing cash flow was an outflow of $223.7 million, including $101.3 million for property and equipment and capitalized internal-use software, $12.0 million for the Velocitude acquisition, and net purchases of marketable securities.
- Cash and cash equivalents were $120.5 million at June 30, 2010. Cash, cash equivalents and marketable securities totaled $1.112 billion.
- Total liabilities were $229.9 million and stockholders’ equity was $1.973 billion at June 30, 2010.
- The carrying amount of the 1% convertible senior notes was $63.6 million, with a disclosed fair value of $185.1 million. Holders may require repayment beginning December 15, 2010.
- Accounts receivable, net, was $164.6 million; one customer represented 11% of accounts receivable, although no customer represented 10% or more of revenue.
Material changes versus the prior comparable period
- Operating income increased 5% in Q2 and 11% for the six months, substantially slower than revenue growth because sales and marketing, research and development, and general and administrative expenses increased.
- Operating margin declined from 26.6% to 23.2% in Q2 and from 26.6% to 25.3% for the six months.
- Stock-based compensation increased to $20.3 million in Q2 and $39.4 million for the six months, compared with $13.3 million and $28.4 million, respectively, in 2009.
- Sales and marketing expense increased 33% in Q2 and 25% for the six months; research and development increased 45% and 32%, respectively.
- Cash from operations declined despite higher net income, while capital expenditures increased materially from the prior year as Akamai expanded its network.
- The Company converted $136.2 million of principal amount of convertible notes into 8.8 million common shares and recorded a $0.3 million loss on early extinguishment of debt.
- A $100 million stock-repurchase authorization was extended by an additional $150 million for one year. Akamai repurchased 1.4 million shares for $42.3 million during the first six months, with approximately $141.4 million remaining available at June 30.
- On June 10, 2010, Akamai acquired substantially all of Velocitude’s assets and liabilities for approximately $12.0 million in cash, recording $11.6 million of goodwill, $2.8 million of intangible assets and $2.4 million of contingent consideration.
Guidance, outlook, commentary and risks
- Management expected to remain profitable on a quarterly and annual basis during 2010 and 2011, but stated there is no assurance that positive net income will continue.
- Management expected international revenue to represent approximately 26% to 30% of 2010 revenue, compared with 28% in the first half of 2010.
- Full-year 2010 capital expenditures were expected to be approximately 17% of total revenue and funded through operating cash flow.
- Management expected operating expenses, depreciation, amortization, bandwidth costs, sales commissions and headcount to increase during the remainder of 2010. Lower bandwidth costs per unit were expected to partially offset higher traffic and infrastructure costs.
- Unit-price declines caused by competition and customer budget constraints could reduce revenue and margins. Seasonal e-commerce patterns may also produce lower summer revenue and stronger fourth-quarter revenue.
- Akamai held approximately $196.5 million of auction rate securities at par value; failed auctions limited liquidity. The securities had an estimated fair value of $177.7 million, including a $15.3 million temporary impairment in accumulated other comprehensive loss. In early July 2010, the Company exercised a put right and received $30.5 million at par value.
- The Company believed available cash, marketable securities and forecast operating cash flows were sufficient for working capital and capital expenditures for at least 24 months, but noted potential financing needs if business assumptions change or securities cannot be liquidated.
- Contractual obligations totaled $320.6 million, including $159.7 million of real-estate leases, $67.6 million of bandwidth and co-location commitments, $29.4 million of open purchase orders and $63.6 million of convertible notes assumed to be redeemed in December 2010.
- Material risks include competition and pricing pressure, customer loss, network outages or cyberattacks, reliance on third-party bandwidth providers, acquisition integration, international and foreign-exchange exposure, intellectual-property claims, privacy and regulatory changes, debt repayment requirements, and valuation risk related to auction rate securities.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2010, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth can offset continued pricing pressure and rising sales, marketing, infrastructure and personnel costs.
- The timing and funding of any December 2010 redemption or conversion of the remaining convertible notes.
- The liquidity, valuation assumptions and ultimate recovery of the remaining auction rate securities.
- Actual 2010 capital expenditures and operating cash flow relative to management’s expectations.
- The effect of elevated stock-based compensation and unrecognized compensation costs of $126.5 million.
- Progress and financial impact of the Velocitude acquisition and the leadership transition in which David Kenny was appointed President effective September 7, 2010.
- Developments in the pending IPO-related litigation and other contingencies, for which no liability was recorded at June 30, 2010.