Akamai Technologies, Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides security, delivery and compute solutions through Akamai Connected Cloud, a distributed platform with more than 4,100 edge points of presence in approximately 130 countries and nearly 750 cities. The company operates as one reportable segment. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $987.0 million | $915.7 million | 7.8% increase |
| Income from operations | $166.7 million | $126.6 million | 31.7% increase |
| GAAP operating margin | 16.9% | 13.8% | Up 3.1 percentage points |
| Net income | $175.4 million | $97.1 million | 80.6% increase |
| Net income margin | 17.8% | 10.6% | Up 7.2 percentage points |
| Diluted EPS | $1.11 | $0.62 | Increase |
| Non-GAAP operating margin | 29.6% | 28.8% | Up 0.8 percentage points |
| Adjusted EBITDA | $417.2 million | $375.7 million | 11.0% increase |
| Adjusted EBITDA margin | 42.3% | 41.0% | Up 1.3 percentage points |
| Cash flow from operations | $351.9 million | $233.5 million | 50.7% increase |
Revenue by solution category was $490.7 million from security, $351.8 million from delivery and $144.5 million from compute. Security represented the largest category and increased 21.0%; compute increased 24.9%; delivery declined 10.8%.
Cash, cash equivalents and marketable securities totaled approximately $2.3 billion at March 31, 2024, including $467.7 million of cash and cash equivalents and $1.8 billion of marketable securities. The company had $3.565 billion of convertible senior notes outstanding, with maturities from May 2025 through February 2029. No borrowings were outstanding under the $500 million revolving credit facility, and the company was in compliance with its covenants.
Capital expenditures and capitalized internal-use software costs totaled $173.8 million in Q1 2024, compared with $222.2 million in Q1 2023. Net cash used in investing activities was $151.6 million, while net cash used in financing activities was $216.0 million. The company repurchased 1.1 million shares for $125.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by security and compute, partially offset by continued weakness in delivery.
- Delivery revenue was affected by customer cost optimization, contract-renewal pricing pressure and reduced traffic from a large social media customer.
- Cost of revenue increased 9.3%, primarily from higher co-location fees, network-equipment depreciation and stock-based compensation associated with the compute infrastructure build-out. Cost of revenue rose to 40.0% of revenue from 39.5%.
- Research and development expense increased 27.3% to $116.9 million, reflecting headcount growth and higher stock-based compensation directed toward security and compute initiatives.
- Restructuring charges declined to $0.5 million from $44.7 million, substantially benefiting operating income and net income comparisons.
- Interest and marketable securities income increased to $27.8 million from $5.3 million, reflecting higher invested balances and interest rates following the 2023 convertible-notes issuance.
- The effective income tax rate declined to 6.8% from 23.5%, primarily due to higher excess tax benefits from stock-based compensation, lower global intangible low-taxed income and lower valuation allowances.
- Stock-based compensation increased to $93.3 million from $61.9 million, and diluted shares increased to 157.5 million from 156.1 million despite share repurchases.
- Foreign currency translation and investment movements produced a $21.3 million other comprehensive loss, compared with a $19.2 million gain in Q1 2023.
Guidance, Outlook, Commentary and Risks
Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase during the remainder of 2024, while continuing to manage operating margins. Investments will focus on security, compute infrastructure, network expansion and migration of selected third-party cloud services to Akamai Connected Cloud.
In May 2024, Akamai announced an agreement to acquire Noname Security for approximately $450 million, subject to cash acquired and post-closing adjustments. The transaction is expected to close in Q2 2024, be funded with cash and marketable securities, and be dilutive to earnings per share at least through 2024. The company expects additional amortization of acquired intangible assets following the acquisition.
Remaining performance obligations were $3.4 billion at March 31, 2024, with approximately 65% expected to be recognized as revenue over the following 12 months. Management expects existing cash, marketable securities and operating cash flow to fund foreseeable needs for at least the next 12 months, including capital expenditures, lease and purchase commitments, share repurchases and the Noname Security acquisition.
The board authorized a new $2.0 billion share-repurchase program in May 2024, effective through June 2027, in addition to $412.5 million remaining under the prior authorization at March 31, 2024. The company does not expect to pay cash dividends in the foreseeable future.
Principal risks include slowing revenue growth, continued delivery pricing and traffic pressure, intense competition in security and cloud computing, execution and spending risks associated with compute expansion, cybersecurity incidents, service disruptions, supply-chain and co-location constraints, foreign-currency volatility, geopolitical events, evolving privacy and internet regulations, tax-law changes, acquisition integration, employee retention and substantial convertible-debt obligations. A 100-basis-point increase in interest rates would have reduced the fair value of the available-for-sale investment portfolio by approximately $19.3 million based on March 31, 2024 holdings.
Management concluded that disclosure controls and procedures were effective as of March 31, 2024, and reported no material change in internal control over financial reporting during the quarter. Routine litigation is not currently expected to materially affect the company.
Important Facts for Investors to Verify
- Whether security and compute growth can continue to offset declining delivery revenue and pricing pressure.
- The magnitude and timing of the Noname Security acquisition, integration costs, purchase-accounting amortization and expected EPS dilution.
- The May 2025 maturity of $1.15 billion of convertible senior notes and the company’s planned funding or refinancing strategy.
- Whether compute infrastructure investment, co-location costs and depreciation will pressure future gross and operating margins.
- The sustainability of the unusually low 6.8% effective tax rate and the impact of global minimum-tax rules.
- The level and business impact of stock-based compensation, employee-tax withholding and future share dilution.
- Progress in migrating third-party cloud services to Akamai Connected Cloud and the associated cost savings.
- Customer concentration and the potential for additional large customers to reduce traffic, renew at lower prices or adopt internal alternatives.
- Exposure to cybersecurity incidents, service outages, geopolitical disruptions, foreign-exchange movements and changing privacy or internet regulations.