Akamai Technologies, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Akamai provides security, delivery and compute solutions through a globally distributed platform of more than 350,000 servers in over 130 countries. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Akamai operates as one reportable segment.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $903.6 million | $842.7 million | 7.2% increase |
| Income from operations | $173.3 million | $182.4 million | 5.0% decrease |
| GAAP operating margin | 19.1% | 21.6% | Down approximately 2.5 points |
| Net income | $119.2 million | $155.7 million | 23.5% decrease |
| Diluted EPS | $0.73 | $0.94 | Decrease |
| Non-GAAP net income | $224.8 million | $227.8 million | 1.3% decrease |
| Non-GAAP diluted EPS | $1.39 | $1.38 | Increase |
| Adjusted EBITDA | $391.3 million | $375.4 million | 4.2% increase |
| Adjusted EBITDA margin | 43% | 45% | Down 2 points |
| Cash flow from operations | $222.5 million | $249.8 million | Decrease |
Revenue growth was led by security revenue of $381.6 million, up 23.0%, and compute revenue of $77.9 million, up 32.5%. Delivery revenue declined 6.2% to $444.1 million. International revenue increased 11.4% to $422.6 million, although foreign-exchange movements reduced reported revenue by approximately $17.7 million.
Cost of revenue increased 8.5% to $332.8 million, or 36.8% of revenue versus 36.4% in the prior-year quarter. Research and development increased 21.8% to $99.9 million, and general and administrative expense increased 12.1% to $153.3 million. Stock-based compensation was $56.2 million, compared with $54.3 million.
The effective tax rate increased to 21.2% from 7.1%, primarily due to an intercompany intellectual-property sale, global intangible low-taxed income and nondeductible stock-based compensation. Other expense included an $8.9 million investment impairment, and the company recorded a $7.6 million loss from its GO-NET equity-method investment.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $377.8 million at March 31, 2022, compared with $536.7 million at December 31, 2021.
- Marketable securities totaled approximately $915.8 million, producing cash, cash equivalents and marketable securities of approximately $1.3 billion.
- Operating cash flow was $222.5 million. Investing cash flow was negative $316.9 million, primarily because of the $872.1 million cash acquisition of Linode.
- Capital expenditures and capitalized internal-use software totaled $131.4 million.
- The company borrowed $75.0 million under its $500.0 million revolving credit facility; the borrowing was expected to be repaid within 12 months.
- Convertible senior notes had principal amounts of $1.15 billion due in 2025 and $1.15 billion due in 2027. The balance-sheet carrying value of the notes totaled approximately $2.28 billion after adoption of revised convertible-instrument accounting.
- A $1.8 billion share-repurchase program was authorized through December 31, 2024. Akamai repurchased 924,492 shares for $102.9 million during the quarter, leaving approximately $1.7 billion available under the program.
- Management expects cash, marketable securities and operating cash flow to satisfy foreseeable cash needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth shifted toward security and compute, while delivery revenue declined because of pricing pressure, competition and moderating traffic growth following the easing of pandemic restrictions.
- Operating profitability declined as network investment, depreciation, research and development, acquisition-related costs and other operating expenses increased faster than revenue.
- Net income declined substantially because of the higher tax rate, the investment impairment, the GO-NET loss and lower operating income.
- Interest expense fell to $2.7 million from $17.8 million after adoption of revised convertible-debt accounting eliminated most debt-discount amortization. The accounting adoption increased Q1 2022 basic and diluted EPS by $0.08.
- Akamai acquired Linode in March 2022 for $898.8 million in cash. The preliminary purchase allocation included $588.4 million of goodwill and $212.5 million of identifiable intangible assets.
- Goodwill increased to $2.75 billion from $2.16 billion at year-end 2021, primarily because of the Linode acquisition.
- The company recognized an $8.0 million restructuring charge, primarily for impairment of software associated with the planned suspension and liquidation of GO-NET.
Guidance, outlook, risks and unusual items
Management expects security and compute growth to continue, but anticipates ongoing challenges in delivery revenue during 2022. Traffic is expected to grow at a more moderate rate as pandemic-related restrictions recede. The strengthening U.S. dollar is expected to continue reducing reported revenue, and approximately 1% of revenue associated with traffic into Russia, Belarus and Ukraine has been affected by the war in Ukraine.
Management expects operating expenses, research and development, sales and marketing costs, depreciation and amortization to increase during the remainder of 2022 as Akamai invests in its network, integrates recent acquisitions and expands strategic initiatives. The company does not provide a clear numerical full-year revenue or earnings guidance figure in the filing text provided.
Principal risks include slower traffic and revenue growth, delivery pricing pressure, intense competition, customer migration to internal or multi-vendor solutions, integration of Linode and Guardicore, cybersecurity incidents, service outages, supply-chain constraints for servers and network equipment, rising energy and labor costs, foreign-exchange volatility, the war in Ukraine, privacy and data-localization regulation, tax disputes and potential dilution or cash requirements related to convertible notes.
The Massachusetts Department of Revenue appealed a favorable Massachusetts Appellate Tax Board ruling. Management believes it is more likely than not to prevail and has recorded no reserve for the matter. Routine litigation is not expected to have a material effect based on management's current assessment.
Akamai launched its FlexBase flexible-work program in May 2022. Additional facility-related charges may occur as management evaluates its future work environment, although the company does not currently expect remote-work costs to materially affect financial condition or results.
Important facts for investors to verify
- Whether security and compute growth can offset continued delivery declines and moderating network traffic growth.
- The pace and cost of integrating Linode and Guardicore, including the effect of acquired intangible amortization, goodwill and potential impairment.
- Progress toward restoring operating margins as network investment, labor, energy and acquisition-related costs rise.
- Cash requirements and refinancing or settlement capacity for the $2.3 billion principal amount of convertible notes and the $75.0 million revolving-credit borrowing.
- The effect of foreign-exchange movements, the war in Ukraine and broader macroeconomic conditions on international revenue.
- Execution of the $1.8 billion share-repurchase authorization relative to acquisition and investment needs.
- Outcome of the Massachusetts tax appeal and any related tax exposure.
- Potential dilution from convertible notes and warrants, notwithstanding the related note-hedge transactions.