Akamai Technologies, Inc. — FY2023 Form 10-K Summary
Business context and reporting period
Akamai provides security, content delivery and cloud-computing services through Akamai Connected Cloud, a globally distributed platform spanning more than 4,100 edge points of presence in approximately 130 countries. The filing covers the fiscal year ended December 31, 2023. The requested Q4 2023 period is addressed primarily through fourth-quarter share-repurchase disclosures; the filing presents full-year financial statements rather than a complete quarterly income statement.
Security was the largest revenue category, while security and compute together represented more than half of total revenue. Akamai launched 13 new core computing regions during 2023, bringing the total to 24, and had more than 10,250 employees at year-end.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $3.812 billion | $3.617 billion | 5.4% |
| Security revenue | $1.765 billion | $1.542 billion | 14.5% |
| Delivery revenue | $1.542 billion | $1.669 billion | (7.6%) |
| Compute revenue | $504.2 million | $405.5 million | 24.4% |
| Income from operations | $637.3 million | $676.3 million | (5.8%) |
| Net income | $547.6 million | $523.7 million | 4.6% |
| Diluted EPS | $3.52 | $3.26 | 7.9% |
| Operating cash flow | $1.348 billion | $1.275 billion | 5.8% |
| Capital expenditures and capitalized software | $730.0 million | $458.3 million | 59.3% |
- GAAP gross margin was approximately 60.4%, down from 61.7%; GAAP operating margin was 16.7%, down from 18.7%; and net income margin was 14.4%, compared with 14.5%.
- Adjusted EBITDA was $1.608 billion, with a 42.2% margin versus 42.3% in 2022. Non-GAAP operating margin increased to 29.8% from 28.6%.
- Cash, cash equivalents and marketable securities totaled approximately $2.3 billion at December 31, 2023, including $232.9 million of cash held outside the United States.
- Total convertible senior-note principal was $3.565 billion: $1.150 billion due in 2025, $1.150 billion due in 2027 and $1.265 billion due in 2029. The $500 million revolving credit facility had no borrowings outstanding, and the company was in compliance with its covenants.
- Operating cash flow exceeded capital expenditures and capitalized software by approximately $618.4 million before acquisitions, share repurchases and marketable-securities activity.
- Operating lease obligations totaled $1.144 billion, including $224.2 million payable within 12 months; additional leases of approximately $195.0 million had not yet commenced.
Material changes versus the prior comparable period
- Security growth and continued expansion of compute, including the Linode platform, more than offset a declining delivery business. Delivery revenue continued to be pressured by pricing at renewal and slower traffic growth following the pandemic-related surge.
- Cost of revenue increased 9.2% to $1.511 billion, driven primarily by higher co-location, bandwidth, network build-out and payroll costs related to compute expansion. Management expects these costs to increase again in 2024.
- Capital investment increased substantially as Akamai expanded compute infrastructure. Management also began migrating certain third-party cloud services onto Akamai Connected Cloud to reduce external cloud costs.
- Restructuring charges increased to $56.6 million from $13.5 million, mainly due to headcount reductions and facility impairments associated with the FlexBase workplace program. Additional FlexBase charges may occur in early 2024, but management does not expect material additional charges.
- Interest and marketable-securities income increased to $45.2 million, largely because of higher investment balances and interest rates following the 2029 notes issuance. Interest expense increased to $17.7 million.
- The company issued $1.265 billion of 1.125% convertible notes due 2029 and used proceeds partly to fund future repayment of the 2025 notes and share repurchases. Shares outstanding declined to 151.2 million at year-end from 156.5 million.
- Akamai repurchased 7.8 million shares for $654.0 million during 2023. In Q4, it repurchased 495,623 shares for $54.9 million at an average price of $110.75, leaving approximately $537.9 million authorized for future repurchases.
- The previously reported material weakness related to income-tax controls was remediated as of December 31, 2023. Management and PwC concluded that internal control over financial reporting was effective.
Guidance, outlook, commentary and risks
- The filing does not provide a clear quantitative 2024 revenue or earnings guidance range. Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in 2024, while continuing to manage operating margins.
- Management expects current cash, marketable securities and forecast operating cash flow to fund foreseeable needs for at least the next 12 months, including capital expenditures, acquisitions, repurchases, leases and other commitments.
- Remaining performance obligations were $3.4 billion at year-end, with approximately 65% expected to be recognized as revenue over the next 12 months. This excludes anticipated renewals and certain usage-based revenue.
- The company expects the OECD-related 15% global minimum tax framework to increase its effective tax rate beginning in 2024, although it does not expect a material impact on results or cash flows.
- Key risks include slowing revenue growth, continued delivery pricing and traffic pressure, intense competition from large hyperscale cloud providers, execution risk in scaling compute, cybersecurity incidents, service outages, supply-chain and co-location constraints, foreign-exchange volatility, global geopolitical conflicts, evolving privacy and internet regulation, acquisition integration, tax audits and the refinancing or conversion of the 2025 notes.
- Approximately 5% of employees are located in Tel Aviv, and management notes potential workforce and operational effects from the Israel-Hamas War. The company also experienced revenue effects related to the war in Ukraine.
- Cyber threats and breaches involving Akamai, customers or vendors have occurred, but management states that such threats have not materially affected the business or operations to date.
Most important facts an investor should verify
- Whether security and compute growth can sustainably offset continued delivery revenue declines.
- The 2024 effect of higher co-location and infrastructure spending on gross and operating margins, including the benefit from migrating third-party cloud workloads.
- Cash generation and funding capacity for the $1.150 billion 2025 note maturity, ongoing capital expenditures, leases and share repurchases.
- The impact of the global minimum tax and any tax-audit developments on the effective tax rate and cash taxes.
- Progress in scaling enterprise compute, utilization of the 24 core regions and returns on the increased infrastructure investment.
- Potential dilution or cash obligations associated with convertible notes, warrants and equity compensation.
- Exposure to cybersecurity events, service-level credits, regulatory changes, geopolitical disruptions and unrecorded bandwidth or purchase commitments.