Akamai Technologies, Inc. — 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. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $281.9 million | $253.6 million | $834.8 million | $738.9 million |
| Income from operations | $65.3 million | $59.0 million | $211.3 million | $181.9 million |
| Net income | $42.3 million | $39.7 million | $140.8 million | $118.7 million |
| Diluted EPS | $0.23 | $0.21 | $0.74 | $0.63 |
| Operating cash flow | Not separately provided | Not separately provided | $316.6 million | $292.1 million |
- Revenue increased 11% in Q3 and 13% for the first nine months.
- GAAP operating margin was 23.2% in Q3 versus 23.3% and 25.3% for nine months versus 24.6%.
- GAAP net margin was 15.0% in Q3 versus 15.7% and 16.8% for nine months versus 16.1%.
- Adjusted EBITDA was $122.4 million in Q3 and $377.7 million for nine months, compared with $114.1 million and $344.4 million, respectively, in 2010.
- Cash and cash equivalents were $355.6 million at September 30, 2011. Total cash, cash equivalents and marketable securities were approximately $1.2 billion, versus $1.243 billion at December 31, 2010.
- Total assets were $2.302 billion and total liabilities were $179.9 million. The filing indicates no outstanding indebtedness requiring interest payments during the nine months ended September 30, 2011.
- Capital expenditures, including capitalized internal-use software, were $136.3 million for the nine months. Management expected full-year 2011 capital expenditures to be approximately 16% of revenue.
- The company repurchased 9.4 million shares for $248.4 million during the nine months and had approximately $206.0 million remaining under the then-current authorization at September 30, 2011.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by increased sales of value-added services in the commerce and enterprise verticals, higher media and entertainment traffic, and new public-sector contracts.
- Cost of revenues increased 25% for the nine months, faster than revenue, primarily because of higher co-location costs, network depreciation, internal-use software amortization and bandwidth usage. Gross margin declined to 67.4% from 70.6% for the nine-month comparison.
- Research and development expense declined 9% for the nine months because more development costs were capitalized and stock-based compensation decreased.
- General and administrative expense increased 12% for the nine months, reflecting higher payroll, facilities and legal costs.
- Stock-based compensation declined to $42.5 million from $58.0 million for the nine months, primarily because certain performance-based restricted stock units were assessed as unlikely to vest.
- Interest expense was eliminated after the company had no interest-bearing debt requiring payment in 2011; 2010 included interest on convertible notes and a $0.3 million loss on early extinguishment of debt.
Outlook, commentary, risks and unusual items
- Management expected to remain profitable on a quarterly and annual basis during 2011 and 2012, but provided no formal revenue or earnings-per-share guidance in the filing.
- Management expected fourth-quarter cost of revenues, research and development, sales and marketing, and general and administrative expenses to increase, driven by network expansion, hiring, commissions, depreciation, co-location and software amortization.
- Unit pricing declined for some new and existing customers, particularly high-volume digital media customers. Management noted that continued price pressure, slower traffic growth and higher co-location costs could reduce revenue and margins.
- Seasonality typically produces stronger fourth-quarter revenue because of retail e-commerce activity.
- Auction-rate securities had a September 30 fair value of $118.8 million and par value of approximately $135.4 million. Auctions had failed since 2008, making these investments illiquid. The company recorded a cumulative temporary unrealized loss of $16.6 million in accumulated other comprehensive loss and expected to hold the securities until liquidity returned, maturity or another redemption event.
- Contractual obligations included $148.6 million of operating leases, $97.3 million of bandwidth and co-location commitments, and $50.6 million of open vendor purchase orders. The company also had $5.4 million of outstanding letters of credit.
- Unrecognized tax benefits totaled $17.5 million, including approximately $4.9 million of interest and penalties. Management expected cash tax payments to increase after substantially using available tax credit carryforwards in 2011.
- The company recorded a $0.2 million restructuring charge for an excess facility lease. David W. Kenny resigned as president and director on October 24, 2011; Paul Sagan became president while retaining his CEO and director roles.
- Key risks include intense competition and pricing pressure, slower traffic growth, network outages or security attacks, reliance on third-party bandwidth and co-location providers, international and foreign-currency exposure, privacy and regulatory changes, intellectual-property claims, and the potential for additional impairment of auction-rate securities.
Important facts for investors to verify
- Whether revenue growth and value-added service sales continue to offset customer cancellations, contract repricing and slower volume growth.
- Whether gross-margin pressure from co-location, bandwidth, depreciation and software amortization persists.
- The liquidity, valuation assumptions and eventual recovery of the auction-rate securities portfolio.
- The pace and valuation impact of continued share repurchases, including the remaining authorization.
- Actual full-year capital expenditures and operating cash flow relative to management’s expectations.
- Developments in the outstanding IPO-related litigation and any effect on legal expenses or contingencies.
- Changes in cash taxes as net operating losses and tax credit carryforwards are substantially utilized.