Akamai Technologies, Inc. — Fiscal 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter information is included only where disclosed.
Business Context
Akamai provides cloud solutions that power and protect digital experiences through its globally distributed Intelligent Edge Platform, which had more than 350,000 servers across more than 130 countries. Operations are managed as one reportable segment, with offerings organized into the Security Technology Group and Edge Technology Group.
- Security: Web application and API protection, bot management, DDoS mitigation, identity and access management, zero-trust solutions, micro-segmentation and related services.
- Edge: Media delivery, web and mobile performance, edge computing, carrier services and related support.
- As of December 31, 2021, Akamai had more than 8,700 employees in over 30 countries, with approximately 60% located outside the United States.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $3.461 billion | $3.198 billion | 8.2% increase |
| Security Technology Group revenue | $1.335 billion | $1.062 billion | 25.7% increase |
| Edge Technology Group revenue | $2.126 billion | $2.137 billion | 0.5% decrease |
| Income from operations | $783.1 million | $658.5 million | 18.9% increase |
| GAAP operating margin | 22.6% | 20.6% | Improved |
| Net income | $651.6 million | $557.1 million | 17.0% increase |
| Net income margin | 18.9% | 17.4% | Improved |
| Diluted EPS | $3.93 | $3.37 | 16.6% increase |
| Non-GAAP operating margin | 32% | 31% | Improved |
| Adjusted EBITDA | $1.561 billion | $1.397 billion | 11.7% increase |
| Adjusted EBITDA margin | 45% | 44% | Improved |
International revenue increased 14.3% to $1.624 billion and represented approximately 47% of total revenue, compared with 44% in 2020. Foreign exchange movements increased reported 2021 revenue by $28.8 million versus 2020.
Cost of revenue increased 12.0% to $1.269 billion, or 36.7% of revenue, primarily due to network investment, higher depreciation, co-location costs and network build-out expenses. Research and development increased 24.5% to $335.4 million, while sales and marketing declined 9.5% to $462.0 million following the 2021 reorganization. General and administrative expense was $553.0 million, broadly unchanged from 2020.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $1.405 billion, up from $1.215 billion in 2020.
- Cash used in investing activities was $646.9 million, including $598.8 million for acquisitions and $545.2 million for property, equipment and capitalized internal-use software.
- Cash used in financing activities was $562.0 million, including $522.3 million of share repurchases.
- Cash, cash equivalents and marketable securities totaled approximately $2.2 billion at year-end. Cash and cash equivalents alone were $536.7 million.
- Convertible senior notes had aggregate principal of $2.3 billion, consisting of $1.15 billion due in 2025 and $1.15 billion due in 2027. Net cash, after considering the notes, was negative $133.8 million.
- The company had no borrowings under its $500 million revolving credit facility, which can be increased to $1.0 billion under specified conditions.
- Contractual obligations totaled $3.771 billion, including operating leases, bandwidth commitments, purchase orders and convertible notes.
- A new $1.8 billion share repurchase authorization became effective January 1, 2022 through December 31, 2024.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by security solutions, while Edge Technology Group revenue declined modestly as application performance revenue weakened and pandemic-related media traffic growth moderated.
- Management reported continuing pricing pressure and revenue declines in web performance solutions, particularly in the U.S. commerce vertical.
- The March 2021 reorganization created separate security and edge groups and a unified global sales force. It reduced sales and marketing expense but increased research and development expense as personnel were redeployed.
- Akamai acquired Inverse for $17.1 million and Guardicore for $610.4 million in cash. Guardicore contributed micro-segmentation technology and resulted in $479.1 million of goodwill and $123.6 million of identifiable intangible assets.
- Restructuring expense declined to $10.7 million from $37.3 million, but included $3.8 million related to the FlexBase workplace program.
- Share repurchases increased substantially to $522.3 million from $193.6 million, and shares outstanding declined to 160.5 million at year-end from 162.7 million.
- Adoption of new convertible-debt accounting guidance on January 1, 2022 is expected to increase reported debt by $304.7 million, increase deferred tax assets by $74.0 million and reduce additional paid-in capital by $375.4 million, with a net increase to retained earnings. It is also expected to reduce interest expense but may reduce diluted EPS through revised conversion accounting.
Outlook, Commentary, Risks and Unusual Items
- Management expects 2022 revenue challenges in website and application performance solutions to continue, while continuing to invest in security, edge computing, research and development and network capacity.
- Akamai announced an intended acquisition of Linode for approximately $900 million, net of cash acquired, expected to close in March 2022. Management expected the acquisition to be accretive to 2022 EPS, while Guardicore was expected to remain dilutive at least through 2022.
- 2022 expenses are expected to increase in several areas, including research and development, sales and marketing, depreciation, amortization and payroll, due to network investments and acquisitions. Management did not expect overall headcount to increase significantly, excluding strategic hiring and acquired employees.
- Akamai expects current liquidity and operating cash flow to fund foreseeable needs for at least 12 months, including the Linode acquisition, capital expenditures, share repurchases, leases and other commitments.
- The company plans to launch FlexBase in May 2022, allowing more than 90% of employees designated as flexible to choose office or home working. Additional facility-related restructuring charges may occur.
- GO-NET, a blockchain-based payment-network joint venture, generated a $14.0 million equity-method loss in 2021. Following MUFG’s February 2022 announcement that operations were being prepared for suspension, Akamai expected additional 2022 losses, capped by its remaining $7.5 million investment.
- A Massachusetts tax appeal remains unresolved. An adverse outcome could result in an estimated gross income-tax charge of approximately $49 million, potentially offset in part by $32 million of state tax credits.
- Key risks include slowing media and web-performance demand, pricing pressure, intense competition, cybersecurity incidents, service outages, supply-chain constraints, privacy and data-localization regulation, foreign exchange, acquisition integration, employee retention and substantial convertible-note obligations.
- During summer 2021, service incidents interrupted availability of some customer websites. Customer contracts generally contain service-level commitments that can require credits, refunds or termination rights if performance standards are not met.
Investor Verification Checklist
- Verify the distinction between the full-year 10-K results and standalone fourth-quarter results; the filing does not provide a complete Q4 income statement in the supplied text.
- Assess whether security growth can offset continued declines and pricing pressure in web-performance and other Edge offerings.
- Review the cash funding, integration assumptions and expected EPS impact of the Linode acquisition, as well as Guardicore’s ongoing dilution.
- Reconcile reported liquidity with $2.3 billion of convertible-note principal, 2025 and 2027 maturities, and the planned $900 million Linode cash payment.
- Evaluate the sustainability of margins given higher network depreciation, co-location and bandwidth costs, stock-based compensation and acquisition-related expenses.
- Monitor the Massachusetts tax appeal, GO-NET wind-down losses and any additional FlexBase restructuring charges.
- Review potential dilution or cash requirements from convertible notes, warrants, equity compensation and the company’s cash-settlement election.
- Consider cybersecurity, service reliability, supply-chain and regulatory developments that could affect customer retention, costs and revenue.