Akamai Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Akamai provides cloud solutions for delivering, optimizing and securing content and business applications over the Internet through a globally distributed platform of more than 200,000 servers in over 130 countries. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $709.9 million | $669.6 million | $2.121 billion | $2.001 billion |
| Income from operations | $143.3 million | $116.5 million | $413.6 million | $242.2 million |
| Net income | $137.9 million | $107.6 million | $358.9 million | $204.4 million |
| Diluted EPS | $0.84 | $0.64 | $2.18 | $1.20 |
| Operating cash flow | Not separately provided | Not separately provided | $776.2 million | $722.2 million |
| Adjusted EBITDA | $300.6 million | $273.2 million | $892.3 million | $791.3 million |
- Revenue increased 6.0% year over year in both the quarter and first nine months. Constant-currency growth was 6.8% and 7.6%, respectively.
- GAAP operating margin was 20.2% in Q3 and 19.5% for the nine months, versus 17.4% and 12.1% in the comparable periods. Adjusted EBITDA margin was 42% in both 2019 periods, compared with 41% and 40% in 2018.
- Approximate GAAP net margin was 19.4% in Q3 and 16.9% for the nine months, compared with 16.1% and 10.2% in 2018.
- Cloud Security Solutions revenue increased 28.0% to $215.9 million in Q3 and 28.9% to $610.8 million for the nine months.
- International revenue grew 15.5% in Q3 and 16.1% for the nine months, while U.S. revenue was essentially flat. International revenue represented approximately 41.8% and 41.2% of total revenue, respectively.
- Operating cash flow increased 7.5% year over year. Investing cash use was $1.078 billion, including $428.4 million for property, equipment and internal-use software, $121.4 million for acquisitions and $494.2 million of net marketable-securities purchases.
- Cash, cash equivalents and marketable securities totaled approximately $2.3 billion at September 30, 2019. Convertible debt had $2.3 billion of principal outstanding, producing reported net cash of approximately $4.3 million.
- Cash and cash equivalents were $738.5 million, and marketable securities were approximately $1.566 billion. No borrowings were outstanding under the $500 million revolving credit facility.
Material changes versus the prior comparable period
- Profitability improved substantially, primarily from revenue growth, cost savings and efficiency initiatives, lower depreciation from extending the expected life of network assets from four to five years, and the absence of significant 2018 legal, stockholder-matter and Akamai Foundation charges.
- General and administrative expense declined 17.6% for the nine months, reflecting the absence of the $50 million Foundation endowment, 2018 Limelight-related settlement costs and non-routine stockholder-matter expenses.
- Cost of revenue increased more slowly than revenue, falling to 34.4% of revenue from 35.5%. Lower network-equipment depreciation offset higher internal-use software amortization and bandwidth costs.
- In August 2019, Akamai issued $1.15 billion of 0.375% convertible senior notes due 2027. Proceeds supported liquidity, share repurchases, acquisitions and general corporate purposes. The company also paid $312.2 million for note hedges and received $185.2 million from related warrants.
- The company repaid $690 million of convertible notes due 2019 in February 2019 and repurchased 3.6 million shares for $291.8 million during the first nine months. Approximately $808.2 million remained available under the repurchase authorization at September 30.
- Akamai acquired Janrain for $123.6 million in cash and invested $36.0 million for a 20% stake in GO-NET, recognizing a $1.4 million equity-method loss in the quarter and nine months.
- Adoption of the new lease standard resulted in recognition of operating lease right-of-use assets of $349.2 million and operating lease liabilities of $383.7 million at September 30. The adoption did not affect reported earnings or cash flows.
Guidance, outlook, commentary, risks and unusual items
- Management expects current cash, marketable securities and operating cash flows to fund foreseeable needs for at least the next 12 months, including capital expenditures, facility expansion, acquisitions, repurchases, lease obligations and other commitments.
- Management expects continued profitability improvement in 2019 versus 2018 and in 2020 versus 2019 if revenue growth continues to exceed expense growth. No specific revenue or EPS guidance is provided in the filing text.
- Fourth-quarter revenue is less predictable because of holiday-season traffic, gaming and software releases, media events and other usage-based activity. Management expects increased expenses associated with moving to the new headquarters in late 2019.
- Remaining customer performance obligations totaled approximately $2.3 billion at September 30, 2019, with more than 70% expected to be recognized as revenue over the following 12 months.
- Key risks include slowing growth, pricing pressure and competition in content delivery and Web Performance, dependence on traffic volumes and customer spending, cybersecurity incidents, service disruptions, bandwidth and co-location availability, foreign-exchange volatility, acquisitions and integration, privacy and regulatory requirements, and technology execution.
- The company is subject to tax audits and litigation, including a Massachusetts tax controversy. An unfavorable ruling could result in an estimated tax charge of approximately $15 million.
- Additional unusual or non-recurring items include $6.9 million of restructuring charges for the nine months, $1.2 million of acquisition-related costs, a $1.4 million GO-NET loss and an $11.2 million valuation allowance against certain state tax-credit deferred tax assets.
- Operating leases not yet commenced totaled approximately $553 million, primarily for real estate, with most expected to begin in late 2019 and run for 15 years.
Facts investors should verify
- Whether Cloud Security growth and international expansion offset slower growth, pricing pressure and potential commoditization in traditional delivery and Web Performance offerings.
- The sustainability of the improved GAAP operating margin after the network useful-life change, restructuring benefits and non-recurring 2018 expense reductions.
- Future cash requirements and potential dilution associated with the 2025 and 2027 convertible notes, related warrants, note hedges and share repurchases.
- Capital spending, internal-use software capitalization, new headquarters costs and the substantial lease commitments beginning in late 2019.
- Integration and return prospects for Janrain, GO-NET and subsequent acquisitions, including ChameleonX and Exceda announced or completed after the reporting date.
- Developments in tax audits, the Massachusetts tax controversy, cybersecurity and privacy matters, litigation, foreign-exchange exposure and the company’s ability to maintain effective controls.