Akamai Technologies, Inc. — Q1 2012 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 unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Akamai operated as one reportable business segment. Approximately 28% of Q1 2012 revenue was generated outside the United States, including 17% from Europe.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $319.4 million | $276.0 million | +16% |
| Gross profit | $216.9 million | $186.9 million | +16% |
| Gross margin | 67.9% | 67.7% | +0.2 percentage points |
| Income from operations | $71.6 million | $72.7 million | -2% |
| Operating margin | 22.4% | 26.4% | -4.0 percentage points |
| Net income | $43.2 million | $50.6 million | -15% |
| Net margin | 13.5% | 18.3% | -4.8 percentage points |
| Diluted EPS | $0.24 | $0.26 | -8% |
| Adjusted EBITDA | $142.6 million | $129.2 million | +10% |
| Normalized net income | $75.2 million | $72.2 million | +4% |
Revenue growth was led by Media and Entertainment, Commerce, Enterprise, and High Tech customers. Resellers represented 21% of revenue versus 18% in the prior-year quarter. No customer represented at least 10% of revenue.
Operating expenses increased faster than revenue, primarily because of higher research and development, sales and marketing, general and administrative, acquisition-related, and stock-based compensation costs. The effective tax rate increased to 40.6% from 32.2%, contributing to the decline in GAAP net income.
Cash flow, liquidity, capital structure, and balance sheet
- Cash provided by operating activities was $92.5 million, compared with $88.5 million in Q1 2011.
- Investing cash outflow was $498.2 million, including $291.6 million for acquisitions, $43.3 million for property and equipment and capitalized internal-use software, and net marketable-security purchases of approximately $163.2 million.
- Financing cash outflow was $9.1 million, including $7.9 million of share repurchases and $21.7 million of employee tax payments related to net share settlements, partially offset by stock-option proceeds and excess tax benefits.
- Cash and cash equivalents declined to $144.7 million from $559.2 million at December 31, 2011. Cash, cash equivalents, and marketable securities totaled $978.7 million at March 31, 2012.
- Total assets were $2.41 billion and total liabilities were $212.9 million at March 31, 2012. Stockholders’ equity was $2.20 billion.
- The filing does not present a debt balance or identify material outstanding borrowings. Liquidity was primarily supported by cash, marketable securities, and operating cash flow.
- Management stated that existing cash, marketable securities, and forecasted operating cash flow should fund working capital and capital expenditures for at least the next 24 months, based on its current business plan.
- 2012 capital expenditures were expected to equal approximately 13% to 16% of annual revenue.
Material changes versus the prior comparable period
- Revenue increased 16%, but operating income declined 2% and net income declined 15% because operating expenses and the tax rate increased substantially.
- Research and development expense increased 39% to $17.5 million; sales and marketing increased 26% to $67.3 million; and general and administrative expense increased 27% to $55.7 million.
- Stock-based compensation increased to $20.9 million from $15.7 million. Unrecognized compensation cost was $168.4 million, expected to be recognized over a weighted-average period of 1.5 years.
- Akamai acquired Blaze Software for $19.3 million and Cotendo for $278.9 million in cash and assumed unvested options. The acquisitions added $256.7 million of goodwill and $48.9 million of intangible assets and generated $4.5 million of acquisition-related costs in the quarter.
- Goodwill increased to $709.6 million from $452.9 million at year-end 2011, and net other intangible assets increased to $89.5 million from $45.4 million.
- Share repurchases fell to $7.9 million for 0.2 million shares from $42.8 million for 1.0 million shares in Q1 2011. A new authorization for up to $150 million of repurchases began in May 2012.
- Cash, cash equivalents, and marketable securities decreased by approximately $251.3 million during the quarter, primarily because of the acquisitions and investments in marketable securities.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to remain profitable on a quarterly and annual basis during 2012, while cautioning that profitability was not assured.
- Management expected continued traffic growth, particularly in video and software downloads, but identified customer cancellations, renewal pricing pressure, competition, and lower unit prices as risks to revenue and margins.
- Bandwidth, co-location, depreciation, internal-use software amortization, hiring, and sales commissions were expected to increase during the remaining quarters of 2012. Lower bandwidth costs per unit were expected to partially offset these increases.
- Acquisition-related costs were expected to decline after Q1, while general and administrative expenses were expected to increase because of hiring and facility costs.
- Expected remaining 2012 amortization of acquired intangible assets was $16.9 million, followed by $22.4 million in 2013 and $16.1 million in 2014.
- Contractual obligations totaled approximately $329.8 million, including $95.1 million of bandwidth and co-location commitments, $147.2 million of operating leases, and $87.5 million of open vendor purchase orders. Obligations due within 12 months totaled approximately $195.2 million.
- The company had $24.2 million of unrecognized tax benefits, including approximately $5.0 million of accrued interest and penalties, and $5.9 million of outstanding irrevocable letters of credit.
- The company disclosed risks relating to intense competition, pricing pressure, customer retention, network interruptions, cybersecurity, dependence on third-party bandwidth and co-location providers, acquisitions and integration, international operations, foreign exchange, taxation, intellectual property, privacy regulation, and macroeconomic conditions.
- Paul Sagan announced plans to transition out of the President and CEO roles by the end of 2013, remaining in those roles until a successor is named.
- A shareholder litigation matter involving alleged Section 16(b) claims was remanded by the U.S. Supreme Court; management did not expect a material adverse effect and recorded no liability.
- Disclosure controls and procedures were assessed as effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and higher traffic continue to offset pricing pressure, customer churn, and seasonal weakness.
- Whether rising network, co-location, depreciation, personnel, and stock-based compensation costs compress operating margins further.
- Integration progress and financial contribution from the Blaze and Cotendo acquisitions, including the substantial increase in goodwill and intangible assets.
- Actual 2012 capital expenditures versus the 13%–16% of revenue expectation and the effect on cash balances.
- The sustainability of management’s profitability expectation given the higher effective tax rate and elevated operating expenses.
- Future share repurchases under the $150 million authorization and their effect on cash and diluted share count.
- Potential exposure from contractual commitments, unrecognized tax benefits, litigation, network disruptions, cybersecurity incidents, and foreign currency movements.