Akamai Technologies, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Akamai provides security, delivery and compute solutions through its Akamai Connected Cloud platform, operating across more than 4,100 locations in approximately 130 countries. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the same periods in 2022. Akamai reports one operating segment.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $965.5 million | $881.9 million | $2.817 billion | $2.689 billion |
| Revenue growth | 9.5% | — | 4.8% | — |
| Income from operations | $176.1 million | $160.4 million | $452.6 million | $508.8 million |
| GAAP operating margin | 18.2% | 18.2% | 16.1% | 18.9% |
| Net income | $160.5 million | $123.7 million | $386.5 million | $394.9 million |
| Diluted EPS | $1.04 | $0.78 | $2.50 | $2.45 |
| Operating cash flow | — | — | $959.2 million | $933.2 million |
| Adjusted EBITDA | $417.6 million | $368.5 million | $1.182 billion | $1.148 billion |
| Adjusted EBITDA margin | 43.3% | 41.8% | 41.9% | 42.7% |
Q3 revenue growth was led by security revenue of $455.8 million, up 20.1%, and compute revenue of $130.4 million, up 19.5%. Delivery revenue declined 3.5% to $379.3 million. For the nine months, security revenue increased 13.4% and compute revenue increased 26.0%, while delivery revenue decreased 8.0%.
Q3 cost of revenue was $383.1 million, or 39.7% of revenue, compared with 39.3% in the prior-year quarter. Nine-month cost of revenue was $1.118 billion, or 39.7% of revenue, compared with 38.2%. Stock-based compensation increased to $87.0 million in Q3 and $236.3 million for the nine months, compared with $50.7 million and $158.8 million, respectively.
At September 30, 2023, cash and cash equivalents were $459.9 million and total marketable securities were approximately $1.688 billion. Cash, cash equivalents and marketable securities totaled approximately $2.1 billion. Accounts receivable were $713.4 million. Total assets were $9.582 billion and total liabilities were $5.258 billion.
Convertible senior notes had total principal of $3.565 billion and a net carrying value of $3.536 billion, consisting of $1.150 billion due in 2025, $1.150 billion due in 2027 and $1.265 billion due in 2029. The company had no borrowings under its $500 million revolving credit facility and was in compliance with its covenants.
Material changes versus the prior comparable period
- Revenue increased 9.5% in Q3, primarily from security growth, compute expansion and pricing increases for certain compute offerings. Nine-month growth was 4.8%.
- GAAP net income increased 29.8% in Q3, but declined 2.1% for the nine months. Q3 results benefited from higher revenue, lower taxes and increased interest income.
- Nine-month operating income and margin declined because of $56.7 million of restructuring charges, higher infrastructure and compensation costs, and continued investment in compute capacity.
- In August 2023, Akamai issued $1.265 billion of 1.125% convertible senior notes due 2029, receiving net proceeds of $1.247 billion, and entered into related note hedge and warrant transactions.
- Capital expenditures and capitalized internal-use software totaled $596.2 million for the nine months, compared with $347.5 million in the prior-year period.
- Akamai repurchased 7.3 million shares for $599.2 million during the nine months, including 1.1 million shares for $113.2 million in Q3. Approximately $592.8 million remained available under the repurchase authorization at September 30.
- Server useful lives were extended from five to six years beginning January 1, 2023, reducing depreciation expense by $15.3 million in Q3 and $48.0 million for the nine months. Management estimated the change increased net income by $12.8 million and $40.1 million, respectively.
- Prior-year interim financial statements were revised for an income-tax accounting error related to an intercompany intellectual-property sale. Management determined the error was not material to previously issued financial statements.
Guidance, outlook, risks and unusual items
- The filing does not provide a clear quantitative revenue or earnings outlook. Management expects traffic growth to improve during the remainder of 2023 compared with the prior year and expects continued investment in security, compute infrastructure and go-to-market activities.
- Management expects cost of revenue, particularly co-location and transition-service costs, to increase during the remainder of 2023. It also expects research and development, sales and marketing, and general and administrative expenses to increase, while continuing to target operating-margin improvement.
- Customer contract acquisitions from StackPath and Lumen are expected to add approximately 200 customers and $17 million to $20 million of revenue during the remainder of 2023, but are expected to be slightly dilutive to EPS at least through 2023. The Lumen acquisition occurred in October 2023.
- Restructuring charges were $56.7 million for the nine months, including workforce reductions and FlexBase-related facility impairments. The company does not expect material additional charges from the workforce action, although some FlexBase charges may continue into early 2024.
- Remaining performance obligations were $3.2 billion at September 30, 2023, with approximately 65% expected to be recognized over the next 12 months. This excludes anticipated renewals and certain variable usage-based amounts.
- Management expects existing cash, marketable securities and operating cash flow to fund foreseeable needs for at least the next 12 months. Foreseeable uses include capital expenditures, acquisitions, repurchases, leases and other commitments.
- Principal risks include delivery pricing pressure and traffic volatility, intense competition in compute and security, cybersecurity incidents, reliance on third-party bandwidth and co-location providers, foreign exchange exposure, macroeconomic and geopolitical conditions, acquisitions and integration, regulatory and privacy requirements, and potential tax liabilities.
- A material weakness in internal control over financial reporting related to the adoption and application of income-tax accounting standards remained outstanding at September 30, 2023. Disclosure controls and procedures were therefore concluded to be ineffective. Management has implemented remediation steps, but the weakness will not be remediated until controls operate effectively for a sufficient period and are validated through testing.
- The company identified no material impact from routine litigation and no additional material off-balance-sheet arrangements. Interest-rate sensitivity analysis indicated that a 100-basis-point increase could reduce the fair value of available-for-sale investments by approximately $18.2 million.
Important facts for investors to verify
- Whether security and compute growth can offset continued delivery declines caused by pricing pressure and lower traffic growth.
- The sustainability of margins as Akamai expands co-location capacity, migrates applications to its own cloud and absorbs higher stock-based compensation.
- Cash requirements and refinancing or repayment plans for the $1.150 billion of convertible notes due in 2025.
- Execution and financial impact of the compute build-out, StackPath and Lumen customer migrations, and recent acquisitions.
- Progress and eventual resolution of the material weakness in income-tax controls, including whether further revisions or restatements become necessary.
- The effect of geopolitical developments, including the Israel-Hamas War, on personnel, operations and security initiatives.
- The company’s use of non-GAAP measures, particularly the significant adjustments for stock-based compensation, restructuring, amortization and acquisition-related costs.