Akamai Technologies, Inc. — Q2 2012 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 operating in approximately 80 countries. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the same periods in 2011, and presents one reportable operating segment.
Financial highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $331.3 million | $277.0 million | $650.8 million | $552.9 million |
| Income from operations | $67.0 million | $73.2 million | $138.6 million | $146.0 million |
| Net income | $44.2 million | $47.9 million | $87.5 million | $98.5 million |
| Diluted EPS | $0.24 | $0.25 | $0.48 | $0.52 |
| Operating cash flow | Not separately provided | Not separately provided | $242.1 million | $200.4 million |
Q2 revenue increased 20%, while six-month revenue increased 18%. Approximate Q2 gross margin was 67.6%, operating margin was 20.2%, and net margin was 13.4%. Six-month gross margin was approximately 67.7%, operating margin 21.3%, and net margin 13.4%.
- Revenue growth was led by Media & Entertainment, Commerce, Enterprise, High Tech, and Public Sector customers. Media & Entertainment contributed $22.7 million of Q2 year-over-year growth.
- Q2 cost of revenues rose 20% to $107.5 million, primarily from higher bandwidth, co-location, network depreciation, and internal-use software amortization costs.
- Research and development increased 59% in Q2 and 48% for the first six months, while sales and marketing increased 44% and 35%, respectively.
- Interest income declined to $1.6 million in Q2 and $3.3 million for the six months because of lower investment balances and yields.
- Adjusted EBITDA was $143.1 million in Q2 and $285.7 million for the six months, compared with $126.2 million and $255.3 million, respectively, in the prior-year periods.
Cash, liquidity, capital structure, and other metrics
- Cash and cash equivalents were $183.0 million at June 30, 2012, compared with $559.2 million at December 31, 2011.
- Marketable securities totaled $835.4 million, producing cash, cash equivalents, and marketable securities of approximately $1.018 billion.
- Management stated that available liquidity and forecast operating cash flow were expected to fund working capital and capital expenditures for at least the next 24 months.
- Six-month investing cash outflows were $555.4 million, including $291.6 million for the Blaze and Cotendo acquisitions, $98.9 million for property and equipment and internal-use software, and net purchases of marketable securities.
- Six-month financing cash outflows were $61.7 million, including $75.1 million of share repurchases and $24.2 million of employee tax payments related to equity awards.
- The balance sheet does not separately report outstanding debt; the filing text does not provide a clear value for debt borrowings.
- Total assets increased to $2.446 billion from $2.346 billion, principally reflecting the acquisitions and related goodwill and intangible assets. Goodwill increased to $709.7 million from $452.9 million.
- The company repurchased 2.4 million shares for $75.1 million during the first six months. Approximately $104.9 million remained available under the then-current repurchase authorization.
Material changes versus the prior comparable period
- Revenue growth did not translate into higher GAAP earnings: six-month operating income declined 5% and net income declined 11%, primarily because operating expenses grew faster than revenue.
- Stock-based compensation increased to $46.5 million for the first six months from $27.3 million. Unrecognized stock-based compensation was $158.3 million, expected to be recognized over a weighted-average period of 1.4 years.
- Akamai acquired Blaze for $19.3 million and Cotendo for $278.9 million in cash. Cotendo contributed $241.7 million of goodwill and $43.8 million of identifiable intangible assets.
- International operations represented 27% of Q2 revenue and 28% of six-month revenue, down from 30% in each comparable 2011 period. Resellers represented 21% of revenue, up from 19%.
- The effective tax rate for the first six months increased to 38.6% from 34.7%, reflecting stock-based compensation accounting, state taxes, changes in jurisdictional income mix, and the expiration of a federal research and development tax credit.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to remain profitable on a quarterly and annual basis during 2012, while cautioning that profitability was not assured.
- Management expected 2012 capital expenditures to be approximately 13% to 16% of revenue, funded through operating cash flow. Network depreciation, internal-use software amortization, research and development, sales and marketing, and general and administrative expenses were expected to increase during the remainder of 2012.
- Management expected continued traffic growth and lower bandwidth costs per unit to partly offset higher total bandwidth and co-location costs.
- Key operating risks include pricing pressure, customer cancellations or lower renewal rates, intense competition, traffic volatility and seasonality, network outages or cyberattacks, reliance on third-party bandwidth and co-location providers, foreign exchange exposure, acquisition integration, and rising operating expenses.
- Contractual obligations totaled approximately $274.0 million, including $90.4 million of bandwidth and co-location commitments, $141.2 million of real estate leases, and $42.4 million of open vendor purchase orders.
- Unrecognized tax benefits totaled $25.1 million, including approximately $5.3 million of interest and penalties. The company had $6.0 million of outstanding irrevocable letters of credit.
- A shareholder litigation matter was voluntarily dismissed in June 2012; management did not expect a material adverse effect and recorded no liability.
- Subsequent events included the resignation of a director and the announced departure of the SVP of Human Resources. The CEO’s employment agreement was also amended to eliminate an excise-tax gross-up related to change-in-control payments.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2012, with no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether revenue growth and traffic growth continued to offset price reductions and lost committed recurring revenue.
- Assess the effect of higher bandwidth, co-location, depreciation, amortization, headcount, and stock-based compensation costs on future margins.
- Review the integration and operating contribution of Cotendo and Blaze, including the significant goodwill and intangible asset balances.
- Reconcile liquidity after acquisitions, capital expenditures, marketable-security purchases, and continued share repurchases.
- Monitor the effective tax rate, unrecognized tax benefits, and potential discrete tax items.
- Review contractual commitments, letters of credit, litigation disclosures, and the risks associated with network availability, cybersecurity, foreign exchange, and third-party infrastructure providers.