Akamai Technologies, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; comparative periods ended June 30, 2020. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business context
Akamai provides cloud services for delivering, optimizing and securing content and business applications through a globally distributed platform of more than 325,000 servers in over 130 countries. Effective March 1, 2021, the company reorganized into the Security Technology Group and Edge Technology Group, supported by a unified global sales organization.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Revenue | $852.8 million | $794.7 million | +7.3% |
| Income from operations | $199.4 million | $190.4 million | +4.7% |
| GAAP operating margin | 23.4% | 24.0% | Down 60 bps |
| Net income | $156.5 million | $161.9 million | -3.3% |
| Net margin | 18.4% | 20.4% | Down 200 bps |
| Diluted EPS | $0.94 | $0.98 | -4.1% |
| Adjusted EBITDA | $385.7 million | $355.4 million | +8.5% |
| Adjusted EBITDA margin | 45% | 45% | Stable |
For the six months ended June 30, 2021, revenue was $1.696 billion, up 8.8%; operating income was $381.8 million, up 11.4%; net income was $312.2 million, up 9.5%; diluted EPS was $1.88 versus $1.74; and GAAP operating margin was 22.5% versus 22.0%.
Revenue and operating trends
- Security Technology Group revenue rose 25.4% in Q2 to $325.1 million and 27.2% for the first half to $635.3 million, driven by growth across security products including Bot Manager, Prolexic and Access Control, as well as the acquired Asavie business.
- Edge Technology Group revenue declined 1.4% in Q2 to $527.7 million, primarily because of lower application-performance revenue, partially offset by edge applications growth. First-half Edge revenue increased 0.1%.
- International revenue increased 14.9% in Q2 and 14.0% for the first half; international revenue represented approximately 47.3% and 46.2% of the respective periods’ revenue. Foreign exchange benefited year-over-year reported revenue by $19.4 million in Q2 and $35.3 million for the first half.
- Cost of revenue increased 15.6% in Q2 and 14.9% for the first half. The principal drivers were network investment, higher depreciation, co-location costs and network build-out expenses.
- Sales and marketing expense declined 9.4% in Q2 and 7.7% for the first half, reflecting headcount reductions, employee redeployment, lower travel and fewer in-person marketing events.
- Research and development expense increased 20.5% in Q2 and 17.7% for the first half, reflecting headcount growth, stock-based compensation and strategic product investment.
Cash flow, liquidity and capital structure
- Six-month operating cash flow was $627.9 million, compared with $521.9 million in 2020.
- Six-month investing cash flow was negative $195.9 million, including $319.3 million for property, equipment and capitalized internal-use software, and $15.6 million for the Inverse acquisition.
- Six-month financing cash flow was negative $199.6 million, including $154.4 million of share repurchases and $76.3 million of employee tax payments related to net share settlement.
- Cash and cash equivalents were $581.1 million at June 30, 2021. Short- and long-term marketable securities totaled approximately $2.0 billion, giving total cash, cash equivalents and marketable securities of approximately $2.6 billion.
- The company had $2.3 billion of principal amount of convertible senior notes outstanding, due in 2025 and 2027; the carrying amount of convertible senior notes was $1.941 billion. Management reported net cash of approximately $281.1 million based on cash and marketable securities less debt principal.
- No borrowings were outstanding under the $500 million revolving credit facility, which expires in May 2023.
- The company repurchased 1.5 million shares for $154.4 million during the first half, with $417.5 million remaining under the authorized $1.1 billion program through December 2021.
- Management expects existing cash, marketable securities and operating cash flows to cover foreseeable needs for at least the next 12 months.
Material changes, unusual items and contingencies
- The company acquired Inverse, Inc. in February 2021 for $17.1 million to enhance enterprise security and zero-trust capabilities. The purchase-price allocation was not finalized at quarter-end, and management stated that the acquisition was not material to reported revenue or earnings.
- Q2 included a $2.1 million restructuring benefit, primarily from releasing a lease obligation. First-half restructuring expense was $5.0 million, down from $10.4 million in the prior-year period; no material additional charges are expected.
- Loss from the GO-NET equity-method investment increased to $10.8 million in Q2 and $11.5 million for the first half, including the company’s share of a long-lived technology impairment. Management expects additional losses in 2021 and beyond.
- Effective tax rates were 9.7% for Q2 and 8.5% for the first half, compared with 10.3% for the corresponding 2020 periods, primarily due to foreign income taxed at lower rates and foreign tax-liability revaluation.
- A Massachusetts tax matter remains subject to potential appeal. An adverse outcome could result in an estimated gross tax charge of approximately $43 million, potentially partially offset by approximately $30 million of state tax credits. No reserve was recorded because management believes it is more likely than not to prevail.
- Remaining customer performance obligations were $2.8 billion at June 30, 2021; approximately 70% was expected to be recognized as revenue over the following 12 months. This excludes variable usage-based consideration and anticipated renewals.
Guidance, outlook and principal risks
- Management expects traffic and related revenue growth to moderate during the remainder of 2021 as pandemic-related restrictions ease and the unusually strong 2020 media and gaming traffic comparisons normalize.
- Website and application performance solutions remain under pressure from competition, contract-renewal pricing declines, media consolidation and slowing media traffic growth.
- Management expects depreciation to increase during 2021 because of equipment deployed in 2020 and continued, though lower, network investment. Research and development spending is expected to increase, while sales and marketing costs are expected to remain relatively consistent with the first half.
- Nearly all employees were working remotely, and employees whose roles did not require in-person presence were not expected to return to offices before May 1, 2022. Management reported no significant operational disruption from remote work.
- Key risks include slower traffic and revenue growth, customer migration to internal or multi-vendor solutions, pricing pressure, intense competition, cybersecurity incidents, service outages, supply-chain and network-capacity constraints, foreign-exchange volatility, privacy and internet regulation, acquisition integration, tax disputes and potential dilution or cash requirements associated with convertible notes.
Investor verification points
- Verify whether security growth can offset continued Edge Technology Group and web-performance pricing pressure after pandemic-related traffic comparisons normalize.
- Track cost of revenue, depreciation, co-location and bandwidth costs to assess sustainability of GAAP operating margins.
- Reconcile reported liquidity and net cash with the $2.3 billion convertible-note principal, including potential conversion dilution and 2025 maturity requirements.
- Monitor operating cash flow against network capital expenditures, acquisitions and share repurchases.
- Assess the potential financial impact of the Massachusetts tax appeal and ongoing GO-NET losses.
- Review the company’s non-GAAP adjustments, particularly stock-based compensation, debt-discount amortization, restructuring items and equity-method losses, when comparing adjusted profitability with GAAP results.