Akamai Technologies, Inc. — 2015 Q2 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing and securing online content and business applications through approximately 190,000 servers across more than 1,400 networks in over 110 countries. The filing covers the quarter and six months ended June 30, 2015; financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Year-over-year change | Six months ended June 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $540.7 million | 13.6% | $1.067 billion | 14.8% |
| Income from operations | $106.3 million | Down from $112.4 million | $227.8 million | Down from $233.2 million |
| GAAP operating margin | 19.7% | Down from 23.6% | 21.4% | Down from 25.1% |
| Net income | $67.2 million | Down from $72.9 million | $144.9 million | Down from $145.7 million |
| Diluted EPS | $0.37 | Down from $0.40 | $0.80 | Unchanged |
| Adjusted EBITDA | $213.9 million | Up from $204.1 million | $437.3 million | Up from $407.7 million |
| Adjusted EBITDA margin | 40% | Down from 43% | 41% | Down from 44% |
At constant currency, revenue growth was 17.9% for the quarter and 18.9% for the six-month period. Foreign exchange reduced reported revenue by $20.6 million and $37.8 million, respectively.
- Revenue mix: Six-month Media Delivery Solutions revenue was $485.3 million, Performance and Security Solutions revenue was $501.0 million, and Service and Support Solutions revenue was $80.9 million.
- Cloud security: Revenue was $61.0 million in the quarter and $116.0 million for the six months, compared with $43.7 million and $73.9 million in the prior-year periods.
- Cash flow: Six-month operating cash flow was $363.8 million, compared with $289.2 million in 2014. Investing cash flow was negative $234.2 million, including $122.9 million for acquisitions and $233.1 million for property and equipment plus capitalized internal-use software. Financing cash flow was negative $107.4 million, primarily reflecting $126.1 million of share repurchases.
- Liquidity: Cash and cash equivalents were $257.4 million and marketable securities totaled approximately $1.267 billion at June 30, 2015. Management reported approximately $1.5 billion of cash, cash equivalents and marketable securities and net cash of approximately $835.0 million after convertible senior notes.
- Debt: Convertible senior notes had $690.0 million of principal and a $614.5 million carrying value. The notes mature in 2019, bear no regular interest, and had estimated fair value of $720.9 million at June 30, 2015.
- Balance sheet: Total assets were $4.131 billion and total liabilities were $1.086 billion. Property and equipment increased to $704.6 million from $601.6 million at December 31, 2014.
Material changes versus the prior comparable period
- Revenue growth was strong across solutions and geographies, led particularly by Cloud Security Solutions, but reported growth was reduced by currency depreciation.
- Cost of revenue increased 20.5% in the quarter and 20.9% for the six months, causing cost of revenue to rise to 33.3% and 32.7% of revenue from 31.4% and 31.1%. Higher bandwidth, network build-out, payroll, depreciation and software amortization costs reflected network expansion and increased traffic.
- Sales and marketing expense increased 21.9% in the quarter and 24.6% for the six months, while general and administrative expense increased 21.1% and 19.4%, respectively, primarily due to hiring, infrastructure, facilities and strategic investments.
- The company hired 620 employees during the first six months of 2015 and completed acquisitions of Xerocole for $16.6 million and Octoshape for approximately $107.5 million. The acquisitions were not material individually or in aggregate to consolidated results, but increased expenses and added $82.8 million of goodwill.
- Operating margin and net income declined despite revenue growth, reflecting increased investment and operating costs. The effective tax rate for the six months declined to 34.8% from 36.2%.
- Akamai repurchased 1.8 million shares for $126.1 million during the six months, including 855,185 shares for $63.4 million during the second quarter. Approximately $307.6 million remained available under the repurchase authorization at June 30, 2015.
Guidance, outlook, commentary and risks
- Management expected cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in the remaining quarters of 2015, although hiring growth was expected to slow. Planned network capacity investments were expected to support future OTT video and traffic growth.
- Management expected the effective tax rate to remain relatively consistent with the first half of 2015, subject to discrete tax events.
- Management believed existing cash, marketable securities and forecast operating cash flow would be sufficient for foreseeable needs for at least the next 12 months, including capital expenditures, hiring, facilities, share repurchases, commitments and potential acquisitions.
- The company was conducting an internal investigation, with outside counsel, into sales practices in a country representing less than 1% of revenue. The investigation involved potential Foreign Corrupt Practices Act and other legal compliance issues; the SEC and Department of Justice had been notified, and no provision had been recorded because the outcome could not be predicted.
- Principal risks include competition and pricing pressure, customer cancellations or lower renewal rates, cybersecurity and service interruptions, reliance on third-party bandwidth and co-location providers, foreign-currency exposure, acquisition integration, regulatory and privacy changes, intellectual-property disputes, tax uncertainties and the ability to refinance or settle the convertible notes.
- The company identified no material changes to the risk factors previously reported in its 2014 Form 10-K. Management concluded that disclosure controls and procedures were effective as of June 30, 2015.
- New revenue-recognition guidance was expected to become effective January 1, 2018, subject to the proposed deferral, and the company was evaluating its impact. Debt issuance costs were expected to be reclassified as a reduction of convertible debt beginning January 1, 2016, with an estimated $6.2 million reclassification and no effect on earnings or cash flows.
Important facts for investors to verify
- Whether revenue growth, particularly Cloud Security and international growth, continues to offset pricing pressure and foreign-exchange headwinds.
- Whether network expansion, bandwidth, co-location, hiring and infrastructure costs stabilize sufficiently to restore operating and EBITDA margins.
- The cash economics and integration progress of Xerocole and Octoshape, including the finalization of certain Octoshape purchase-price allocation items.
- The outcome and potential financial, legal or regulatory consequences of the SEC and DOJ-related sales-practices investigation.
- Future cash deployment among capital expenditures, share repurchases, acquisitions and potential obligations associated with the 2019 convertible notes.
- The impact of currency movements, customer concentration in accounts receivable, and the company’s ability to maintain adequate network capacity and service reliability.