Akamai Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Akamai provides cloud services for delivering, optimizing, and securing online content and business applications through a globally distributed platform. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014, compared primarily with the corresponding 2013 periods.
Financial performance and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $476.0 million | $378.1 million | $929.5 million | $746.2 million |
| Revenue growth | 25.9% | 24.6% | ||
| Income from operations | $112.4 million | $97.5 million | $233.2 million | $198.7 million |
| GAAP operating margin | 23.6% | 25.9% | 25.1% | 26.7% |
| Net income | $72.9 million | $61.9 million | $145.7 million | $133.4 million |
| Diluted EPS | $0.40 | $0.34 | $0.80 | $0.73 |
| Operating cash flow | $289.2 million | $234.3 million | ||
| Adjusted EBITDA | $204.1 million | $165.8 million | $407.7 million | $331.8 million |
| Adjusted EBITDA margin | 43% | 44% | 44% | 44% |
Performance and Security Solutions revenue increased 29.5% in the quarter and 28.0% year to date, partly reflecting Prolexic. Media Delivery Solutions increased 20.5% and 19.5%, respectively, while Service and Support Solutions increased 35.1% and 41.2%.
At June 30, 2014, cash and cash equivalents were $254.2 million and marketable securities were $1.24 billion, for total cash, cash equivalents, and marketable securities of approximately $1.5 billion. The company reported $595.4 million of net convertible-note debt, representing $690.0 million par value due in 2019. Total assets were $3.77 billion and total stockholders’ equity was $2.77 billion.
Capital spending and internal-use software capitalization totaled $154.5 million during the first six months. Investing cash outflow was $864.5 million, including $386.5 million for acquired businesses and $325.5 million of net marketable-security purchases. Financing cash inflow was $493.5 million, primarily from the convertible-note offering, partially offset by $187.5 million of share repurchases. Ending cash and cash equivalents declined by $79.7 million to $254.2 million.
Material changes versus the prior comparable period
- Revenue increased 25.9% in Q2 and 24.6% for the first six months, driven by broad demand across solutions and geographies.
- GAAP operating margin declined to 23.6% from 25.9% in Q2 and to 25.1% from 26.7% year to date, as research and development, sales and marketing, and general and administrative expenses grew faster than revenue.
- The company hired approximately 650 employees during the first half of 2014, including approximately 200 from Prolexic, increasing payroll and infrastructure costs.
- Prolexic was acquired on February 18, 2014, for approximately $392.1 million in cash and assumed unvested options. The acquisition added $291.7 million of goodwill and $87.0 million of identifiable intangible assets. Prolexic revenue and earnings were not material in the reported periods, and management expected the acquisition to be slightly dilutive to EPS in its first full year.
- In February 2014, Akamai issued $690.0 million of 0% convertible senior notes due 2019. The notes had an effective interest rate of 3.2%, a carrying value of $595.4 million at June 30, and potential conversion into approximately 7.7 million shares. Related note hedges and warrants generally raised the effective conversion price to approximately $104.49 per share.
- Share repurchases increased to $187.5 million for the first six months, compared with $82.8 million in the prior-year period. The remaining authorization under the repurchase program was approximately $514.8 million at June 30.
- Foreign operations represented approximately 28% of revenue. Foreign-currency movements increased reported revenue by $3.0 million in Q2 and $1.3 million for the first six months versus the comparable periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected operating cash flow to increase for full-year 2014, while also expecting higher capital expenditures, network investment, facility build-outs, information-technology spending, hiring, and operating expenses.
- Management expected cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars during the remainder of 2014.
- The company stated that current cash, marketable securities, and forecast operating cash flow should satisfy foreseeable cash needs for at least the next 24 months.
- Q2 restructuring charges were $0.6 million, primarily related to Prolexic severance and a contract termination fee. Six-month acquisition-related costs were $4.2 million, and acquired-intangible amortization was $15.3 million.
- The effective tax rate was 36.2% for the first six months, compared with 34.0% in 2013. Management expected the rate to decline during the remainder of 2014, although discrete tax items could cause volatility.
- The company is exposed to competition and pricing pressure, customer non-renewals, lower renewal rates, seasonal traffic fluctuations, dependence on third-party bandwidth and co-location providers, service outages, cybersecurity attacks, international and foreign-currency risks, intellectual-property claims, tax uncertainty, and acquisition-integration risks.
- Legal proceedings were described as routine and incidental, with no expected material adverse effect. No material changes were reported to previously disclosed risk factors, contractual obligations, or off-balance-sheet arrangements.
- A new revenue-recognition standard issued in May 2014 will be effective for Akamai on January 1, 2017. The company was evaluating its impact.
- Management concluded that disclosure controls were effective as of June 30, 2014, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sustained revenue growth, particularly in Performance and Security Solutions, offsets continued expense growth and the decline in GAAP operating margin.
- Prolexic’s post-acquisition revenue contribution, profitability, integration progress, and any resulting goodwill or intangible-asset impairment risk.
- Use of convertible-note proceeds, future dilution exposure, note-hedge effectiveness, and the company’s ability to meet or refinance the 2019 maturity.
- Actual capital expenditures, network and facility investment, and operating cash flow relative to management’s 2014 expectations.
- Customer renewal rates, pricing trends, reseller concentration, seasonal effects, and dependence on large traffic-generating customers.
- Foreign-exchange effects, tax-rate volatility, outstanding tax reserves, and potential changes from adoption of the new revenue-recognition standard.