Akamai Technologies, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Akamai provides edge, cloud computing, security and content-delivery solutions through a distributed platform spanning more than 4,200 locations in over 130 countries. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Results are unaudited. The company reports one operating segment.
The March 31, 2022 comparative results were revised for an income-tax accounting error related to an intercompany intellectual-property sale. The revision increased Q1 2022 net income by $14.2 million to $133.4 million.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $915.7 million | $903.6 million | 1.3% reported; 3.6% constant currency |
| Income from operations | $126.6 million | $173.3 million | Down 27.0% |
| GAAP operating margin | 13.8% | 19.2% | Down 5.4 percentage points |
| Net income | $97.1 million | $133.4 million | Down 27.2% |
| Net margin | 10.6% | 14.8% | Down 4.2 percentage points |
| Diluted EPS | $0.62 | $0.82 | Down $0.20 |
| Adjusted EBITDA | $375.7 million | $391.3 million | Down 4.0% |
| Adjusted EBITDA margin | 41.0% | 43.3% | Down 2.3 percentage points |
| Cash flow from operations | $233.5 million | $222.5 million | Up 5.0% |
Revenue by solution category was $405.6 million from security, $394.4 million from delivery and $115.8 million from compute. Security revenue increased 6.3%, compute revenue increased 48.5%, and delivery revenue declined 11.2%. International revenue increased 4.5% to $441.9 million, while U.S. revenue declined 1.4% to $473.8 million. Foreign exchange reduced year-over-year reported revenue by approximately $20.8 million.
Cost of revenue increased 8.6% to $361.3 million, reducing the implied gross margin to approximately 60.5% from 63.2%. Higher co-location, network build-out, supporting-service and payroll costs were partly offset by lower depreciation expense. The company extended the expected average server life from five to six years, reducing depreciation expense by $16.7 million and increasing net income by $14.0 million, or $0.09 per share.
Cash, cash equivalents and marketable securities totaled approximately $1.1 billion at March 31, 2023, including $298.8 million of cash and cash equivalents and $751.8 million of marketable securities. Cash, cash equivalents and restricted cash declined to $301.6 million from $543.0 million at December 31, 2022, primarily because of share repurchases and capital investment.
Capital expenditures and capitalized internal-use software costs totaled $222.2 million. Investing cash flow was a use of $119.9 million, including $20.1 million for the StorageOS acquisition. Financing cash flow was a use of $357.3 million, including $348.6 million for share repurchases.
Debt consisted principally of $1.15 billion principal amount of convertible senior notes due 2025 and $1.15 billion due 2027, with a combined net carrying amount of approximately $2.29 billion. There were no borrowings under the $500 million revolving credit facility at March 31, 2023; the company borrowed $90 million under the facility in April 2023.
Material changes versus the prior comparable period
- Revenue growth was modest because security and compute growth was largely offset by delivery declines caused by lower traffic growth and pricing pressure on renewals.
- Operating profitability declined as cost of revenue and restructuring charges increased faster than revenue.
- Q1 2023 restructuring charges were $44.7 million, compared with $8.0 million in Q1 2022. The 2023 charge primarily reflected workforce reductions and FlexBase-related facility impairments.
- Research and development expense declined 8.1% to $91.9 million, primarily because more development costs were capitalized.
- General and administrative expense declined 4.6% to $146.1 million, primarily due to lower acquisition-related and facilities costs.
- The effective tax rate increased to 23.5% from 12.3%, reflecting lower stock-based compensation tax benefits, higher valuation allowances and foreign-tax effects.
- Operating cash flow increased despite lower net income, primarily due to lower annual bonus payments and improved collections.
- The company repurchased 4.6 million shares at an average price of $76.52 per share. Approximately $843.4 million remained available under the $1.8 billion repurchase authorization at March 31, 2023.
Guidance, outlook, commentary, risks and unusual items
Management expects traffic growth to improve during the remainder of 2023 compared with the prior year, but continues to expect elongated sales cycles and pressure from macroeconomic uncertainty, inflation, higher interest rates, foreign exchange movements, supply-chain constraints and geopolitical conditions.
The company expects continued investment in security, compute and cloud infrastructure. Cost of revenue, research and development, sales and marketing and general and administrative expenses are expected to increase during the remainder of 2023, although management intends to manage spending to support operating margins. Co-location costs are expected to rise as compute capacity expands, while migration from third-party cloud services to Akamai’s own cloud solutions may reduce costs over time.
Remaining performance obligations were $3.3 billion at March 31, 2023, with approximately 70% expected to be recognized as revenue over the next 12 months. The company states that existing cash, marketable securities and expected operating cash flow should fund foreseeable needs for at least the next 12 months.
StorageOS was acquired in March 2023 for $20.6 million in cash. Neosec was acquired in May 2023 for approximately $86.7 million, net of cash acquired; the filing states that both acquisitions are expected to be slightly dilutive to earnings per share, and that Neosec will increase future amortization expense.
A material weakness in internal control over financial reporting related to the adoption and application of new income-tax accounting standards remained outstanding at March 31, 2023. Management is implementing remediation procedures, but the weakness will not be considered remediated until controls operate effectively for a sufficient period and testing is completed.
Key risks include slowing delivery demand and pricing pressure, reliance on successful security and compute execution, intense competition, cybersecurity incidents, service outages, dependence on third-party bandwidth and co-location capacity, supply-chain constraints, foreign currency exposure, acquisitions and integration, evolving privacy and internet regulations, tax uncertainty, and the company’s ability to refinance or fund its convertible debt obligations.
Most important facts for investors to verify
- Whether security and compute growth can offset continuing delivery revenue declines and pricing pressure.
- Whether the server-life extension benefit is sustainable and how much future depreciation will result from compute infrastructure expansion.
- The effect of restructuring, FlexBase costs and higher stock-based compensation on GAAP and cash profitability.
- Progress in remediating the material weakness in income-tax controls and whether additional revisions or control deficiencies arise.
- Future cash requirements for the 2025 convertible notes, share repurchases, capital expenditures, leases and acquisitions.
- The integration, earnings impact and purchase-price accounting for StorageOS and Neosec.
- Exposure to macroeconomic conditions, foreign exchange, cybersecurity threats, supply-chain constraints and co-location commitments.