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. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Akamai operated as one reportable business segment.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $345.3 million | $281.9 million | $996.1 million | $834.8 million |
| Income from operations | $80.2 million | $65.3 million | $218.7 million | $211.3 million |
| Net income | $48.2 million | $42.3 million | $135.7 million | $140.8 million |
| Diluted EPS | $0.27 | $0.23 | $0.75 | $0.74 |
| Adjusted EBITDA | $156.5 million | $122.4 million | $442.3 million | $377.7 million |
- Q3 revenue increased 23%; nine-month revenue increased 19% year over year. Media and Entertainment contributed the largest revenue growth, followed by Commerce, High Tech, Enterprise and Public Sector.
- Q3 gross margin was approximately 68.2%, compared with 66.9% in the prior-year quarter. Nine-month gross margin was approximately 67.9%, compared with 67.4%.
- Q3 operating margin was 23.2%, unchanged from the prior-year quarter. Nine-month operating margin declined to 22.0% from 25.3%, primarily because sales and marketing, research and development, and acquisition-related costs grew faster than revenue.
- Q3 net margin was 14.0%, compared with 15.0%; nine-month net margin was 13.6%, compared with 16.8%. Lower interest income and a higher effective tax rate also reduced reported net income.
- Net cash provided by operating activities was $383.6 million for the first nine months, up from $316.6 million. Net cash used in investing activities was $669.3 million, including $306.0 million for acquisitions and $159.2 million for property, equipment and capitalized internal-use software.
- Net cash used in financing activities was $92.0 million, including $111.6 million of share repurchases and $26.6 million of employee-tax payments related to net share settlements.
- At September 30, 2012, cash and cash equivalents were $182.7 million and marketable securities totaled $875.7 million, for combined cash, cash equivalents and marketable securities of approximately $1.1 billion. Total liabilities were $279.5 million. The filing does not show conventional debt balances as a material liability.
- Total assets were $2.54 billion, including $721.6 million of goodwill and $82.4 million of net acquired intangible assets.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with traffic growth in video and software downloads and increased demand for cloud, application and mobile performance solutions.
- Cost of revenues increased 18% in both the quarter and nine-month period. Bandwidth expense, network-equipment depreciation and internal-use software amortization increased, while co-location costs declined modestly in the quarter.
- Research and development increased 43% in Q3 and 46% for nine months; sales and marketing increased 39% and 36%, respectively. Stock-based compensation increased to $22.6 million in Q3 and $69.2 million for nine months, versus $15.1 million and $42.5 million.
- Akamai acquired Blaze, Cotendo and FastSoft during 2012 for aggregate cash consideration reflected in the filing of approximately $312.6 million before cash acquired. These transactions added substantial goodwill and intangible assets; Cotendo accounted for the majority of the purchase price.
- Goodwill increased from $452.9 million at December 31, 2011 to $721.6 million at September 30, 2012. Net intangible assets increased from $45.4 million to $82.4 million.
- The company repurchased 3.6 million shares for $111.6 million during the first nine months, compared with 9.4 million shares for $248.4 million in the prior-year period. Approximately $68.4 million remained authorized for future repurchases at September 30.
- The effective tax rate increased to 39.4% from 35.7% for the nine-month periods, primarily due to equity compensation effects, income mix and expiration of the federal research and development tax credit.
Guidance, Outlook, Risks and Unusual Items
- Management expected to remain profitable on a quarterly and annual basis in 2012, but stated that future profitability was not assured.
- Management expected fourth-quarter cost of revenues, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as network capacity, hiring, commissions and product development continued.
- 2012 capital expenditures were expected to be approximately 16% of revenue, funded through operating cash flow. Management believed existing liquidity and forecast operating cash flows were sufficient for at least the next 24 months.
- Management cited pricing pressure, customer cancellations or renewals at lower rates, competition, traffic growth, bandwidth and co-location costs, service interruptions, cybersecurity, technology execution, acquisition integration and international exposure as significant risks.
- Unrecognized stock-based compensation was $141.0 million at September 30, 2012, expected to be recognized over a weighted-average period of 1.3 years.
- Contractual commitments totaled approximately $302.9 million, including bandwidth and co-location agreements, real estate leases and open vendor purchase orders. Unrecognized tax benefits totaled $26.0 million, including approximately $5.6 million of interest and penalties.
- The company had $6.0 million of outstanding irrevocable letters of credit, primarily related to facility leases. Routine litigation was not expected to have a material effect, and no material changes to previously disclosed risk factors were reported.
- The CEO planned to transition out of the CEO and president roles by the end of 2013, and a replacement search was underway.
Most Important Facts to Verify
- Whether revenue growth and traffic expansion continue to offset customer churn, contract repricing and competitive price pressure.
- Whether rising sales, marketing, research and development, depreciation, amortization and stock-based compensation costs compress operating and net margins.
- The contribution, integration progress and impairment risk associated with the Blaze, Cotendo and FastSoft acquisitions, particularly the significant goodwill balance.
- Actual 2012 capital expenditures and the effect of network expansion on operating cash flow and liquidity.
- Future share repurchases and their effect on cash balances, share count and per-share results.
- Changes in the effective tax rate, unrecognized tax benefits and the availability of tax credits.
- Exposure to service outages, cybersecurity incidents, intellectual-property claims, bandwidth or co-location constraints and international currency or regulatory risks.