Akamai Technologies, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Akamai provides cloud-based security, content delivery, application performance, media delivery, edge compute and carrier solutions through its globally distributed Intelligent Edge Platform, comprising more than 325,000 servers across over 130 countries. The filing covers the fiscal year ended December 31, 2020; fourth-quarter figures are included in the annual filing.
COVID-19 increased demand for streaming media, gaming, online commerce and remote-work security, while negatively affecting customers in travel, hospitality, commerce and related industries. Akamai had 8,368 employees at year-end, with approximately 99% working remotely.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $3.198 billion | $2.894 billion | +10.5% |
| Income from operations | $658.5 million | $548.9 million | +20.0% |
| GAAP operating margin | 20.6% | 19.1% | +150 bps |
| Net income | $557.1 million | $478.0 million | +16.5% |
| Diluted EPS | $3.37 | $2.90 | +16.2% |
| Cash flow from operations | $1.215 billion | $1.058 billion | +14.8% |
| Adjusted EBITDA | $1.397 billion | $1.211 billion | +15.4% |
| Adjusted EBITDA margin | 43.7% | 41.9% | +180 bps |
- Revenue mix: Web Division revenue was $1.666 billion, up 7.1%; Media and Carrier Division revenue was $1.532 billion, up 14.5%. Cloud Security Solutions revenue increased 25.1% to $1.062 billion.
- Geography: U.S. revenue rose 4.9% to $1.777 billion; international revenue rose 18.4% to $1.421 billion and represented approximately 44% of total revenue versus 41% in 2019.
- Cost structure: Cost of revenue increased 14.7% to $1.133 billion, causing gross margin to decline to approximately 64.6% from 65.9%. Sales and marketing expense declined 2.6%, while research and development rose 3.0% and general and administrative expense rose 6.2%.
- Cash and investments: Cash, cash equivalents and marketable securities totaled approximately $2.497 billion at year-end, including $352.9 million of cash and $2.144 billion of marketable securities.
- Debt and liquidity: Principal convertible notes totaled $2.300 billion, consisting of $1.150 billion due in 2025 and $1.150 billion due in 2027. Net cash, calculated by management as cash, cash equivalents and marketable securities less note principal, was approximately $196.9 million. The $500 million revolving credit facility had no outstanding borrowings.
- Capital investment: Purchases of property and equipment and capitalization of internal-use software totaled $731.9 million, up from $562.1 million in 2019. Property and equipment, net, increased to $1.478 billion.
- Share repurchases: Akamai repurchased 2.0 million shares for $193.6 million during 2020. Approximately $571.9 million remained available under the $1.1 billion authorization through December 2021. No cash dividends are expected in the foreseeable future.
Fourth-quarter 2020 results
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Revenue | $846.3 million | $772.1 million |
| Net income | $113.4 million | $119.1 million |
| Diluted EPS | $0.68 | $0.73 |
Fourth-quarter revenue increased approximately 9.6% year over year, while net income and diluted EPS declined approximately 4.8% and 6.8%, respectively. The filing text does not provide a separate fourth-quarter operating margin.
Material changes versus the prior comparable period
- Revenue growth accelerated from 6.6% in 2019 to 10.5% in 2020, driven principally by pandemic-related media traffic and continued security adoption.
- Operating margin improved despite higher network investment, bandwidth, co-location and depreciation costs. Cost savings and lower travel and marketing expenses helped offset infrastructure spending.
- Restructuring charges increased to $37.3 million from $17.2 million. The fourth-quarter 2020 restructuring included headcount reductions, software write-offs and facility-related costs; up to $7.0 million of additional severance-related charges were expected in 2021.
- Interest expense increased to $69.1 million from $49.4 million following the 2019 issuance of the 2027 convertible notes.
- Akamai recorded a $13.1 million loss from its GO-NET equity-method investment, including an $11.0 million impairment charge.
- A $20.0 million Akamai Foundation endowment contribution increased general and administrative expense in 2020.
- Akamai acquired Asavie for approximately $155.0 million in cash and acquired certain Instart Logic assets for $36.4 million. In February 2021, after year-end, it acquired Inverse for approximately $20.0 million.
Guidance, outlook, commentary and risks
- The filing does not provide formal quantitative revenue or earnings guidance. Management expects 2021 traffic growth to moderate from the elevated 2020 pandemic-driven levels, with network traffic beginning to stabilize in the fourth quarter of 2020.
- Management expects continued growth in security solutions, continued pressure on web-performance revenue, and ongoing financial stress among travel, hospitality, commerce and retail customers.
- Research and development spending is expected to increase in 2021, while overall headcount is not expected to increase significantly. Depreciation is expected to rise because of the 2020 network build-out, and capital investment is expected to continue at lower levels than in 2020.
- Akamai plans to reorganize in 2021 into an Edge Technology Group and a Security Technology Group supported by a unified global sales organization. Beginning in 2021, revenue will be reported separately for those groups.
- Remaining performance obligations were approximately $2.9 billion at year-end, with approximately 70% expected to be recognized as revenue over the following 12 months. This excludes anticipated renewals and certain variable usage-based revenue.
- Key risks include competitive pricing pressure, customer adoption of do-it-yourself infrastructure or multi-vendor strategies, cybersecurity incidents, service disruptions, dependence on third-party bandwidth and co-location providers, supply-chain constraints, privacy and data-localization regulation, foreign-exchange exposure, acquisitions, and continued pandemic effects.
- A Massachusetts tax matter remains subject to possible appeal. Management believes it will prevail and has recorded no reserve, but an adverse outcome could result in an approximately $41.0 million gross tax charge, potentially offset by approximately $27.0 million of state tax credits.
- Unrecognized tax benefits totaled approximately $29.5 million, including interest and penalties, and approximately $9.6 million could be recognized within 12 months.
- PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective as of December 31, 2020.
Important facts for investors to verify
- Whether 2021 media traffic and revenue growth normalize materially faster than expected after pandemic-related demand subsides.
- The sustainability of security growth and the extent to which web-performance pricing pressure offsets it.
- 2021 operating margin after higher depreciation, infrastructure costs, research and development spending, and restructuring costs.
- Cash generation after capital expenditures, acquisitions and share repurchases, and the company’s ability to manage the $2.3 billion convertible-note principal obligations.
- The outcome and timing of the Massachusetts tax appeal and other tax audits.
- The financial contribution, integration progress and impairment risk associated with Asavie, Inverse, GO-NET and other strategic investments.
- Potential dilution from convertible notes, warrants and employee equity awards, notwithstanding the associated note hedges and repurchase program.