Akamai Technologies, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results for the three months ended December 31, 2011. Akamai provides content delivery and cloud infrastructure services that improve the performance, scalability, security and reliability of Internet content and applications. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|
| Revenue | $1,158.5 million | $1,023.6 million | 13% |
| Operating income | $290.6 million | $254.3 million | 14% |
| Net income | $200.9 million | $171.2 million | 17% |
| Diluted EPS | $1.07 | $0.90 | 19% |
| Operating cash flow | $452.6 million | $402.5 million | 12% |
| Adjusted EBITDA | $525.3 million | $473.6 million | 11% |
- Operating margin was approximately 25.1%, compared with 24.8% in 2010. Net margin was approximately 17.3%, compared with 16.7%.
- Cost of revenues increased 23% to $374.5 million, or approximately 32.3% of revenue, driven by higher traffic, co-location costs, network depreciation and amortization of internal-use software.
- Research and development expense declined 4% to $52.3 million; sales and marketing expense was essentially flat at $227.3 million; general and administrative expense rose 14% to $191.7 million.
- Cash, cash equivalents and marketable securities totaled approximately $1.23 billion at year-end. Working capital was $973.6 million and total liabilities were $189.3 million.
- Akamai had no outstanding interest-bearing debt at December 31, 2011. Its $199.8 million of 1% convertible senior notes had been converted in 2010.
- Capital expenditures and capitalized internal-use software costs totaled approximately $182.9 million in cash investing outlays during 2011. Management expected 2012 capital expenditures to be approximately 15% of revenue.
- The company repurchased 12.3 million shares for $324.7 million during 2011, with $129.7 million remaining under the authorized repurchase program at year-end. No cash dividends were paid or expected in the foreseeable future.
Fourth-quarter 2011 results
| Metric | Q4 2011 | Q4 2010 | Year-over-year change |
|---|
| Revenue | $323.7 million | $284.7 million | 14% |
| Cost of revenues | $102.5 million | $86.3 million | 19% |
| Net income | $60.1 million | $52.5 million | 14% |
| Diluted EPS | $0.33 | $0.27 | 22% |
Material changes versus the prior comparable period
- Revenue growth slowed to 13% from 19% in 2010. Growth was led by commerce, media and entertainment, and enterprise customers, while pricing pressure—particularly in media—partially offset traffic growth.
- Management reported moderation in traffic growth for video and software download solutions during 2011.
- International revenue increased to 29% of total revenue from 28%; Europe represented 18% versus 17% in 2010. Resellers contributed 19% of revenue versus 18%.
- Operating cash flow improved by $50.1 million, while investing cash flow shifted to a $171.1 million inflow, primarily because securities matured or were sold without equivalent reinvestment.
- All remaining auction-rate securities were redeemed or sold during 2011, eliminating the prior liquidity restriction associated with those investments.
- The company recorded a $4.9 million restructuring charge related primarily to a workforce reduction of approximately 70 employees and vacated facilities. No restructuring charge was recorded in 2010.
- Other income, net was $6.1 million in 2011 compared with $2.5 million of other expense in 2010, primarily reflecting litigation settlement activity and foreign-exchange effects.
- Stock-based compensation expense declined to $61.3 million from $76.5 million, but $110.9 million of unrecognized compensation cost remained at year-end.
Guidance, outlook and management commentary
- Management expected continued revenue growth in 2012, but at a lower rate because of economic conditions, competition and pricing pressure.
- Management expected to remain profitable in 2012, while cautioning that profitability at recent levels was not assured.
- Expected 2012 cost pressures included higher bandwidth and co-location expenses, depreciation on network equipment, amortization of internal-use software, payroll, commissions and research and development spending.
- The annual effective tax rate was expected to increase in 2012 because the federal research and development tax credit expired at the end of 2011 and because of changes in the geographic mix of income.
- Management believed existing cash, investments and operating cash flow would be sufficient to meet working-capital and capital-expenditure needs for at least the next 24 months.
- On February 8, 2012, Akamai announced that CFO J. Donald Sherman would resign effective February 29, 2012, with James Benson succeeding him on March 1, 2012.
- In December 2011, Akamai announced an agreement to acquire Cotendo Inc.; the filing warns that acquisitions may require significant cash, distract management and create integration risks.
Risks, contingencies and unusual items
- Key risks include intense competition, price reductions, customer non-renewals, slower traffic growth, technology changes and the possibility that customers build or purchase competing infrastructure.
- Service interruptions, cybersecurity attacks, DDoS attacks, software defects, insufficient bandwidth or co-location capacity, and failures by third-party network providers could result in credits, lost revenue, liability and reputational damage.
- Long-term contractual obligations totaled $297.2 million, including $138.8 million of real-estate leases, $102.4 million of bandwidth and co-location commitments, and $56.0 million of open vendor purchase orders.
- The company had $5.5 million of outstanding letters of credit, primarily related to facility leases, and $17.2 million of unrecognized tax benefits including interest and penalties.
- Akamai was named as a nominal defendant in a Section 16(b) IPO-related lawsuit but stated it had no liability and did not expect a material adverse effect. Other litigation was described as routine or immaterial.
- Potentially material exposures include tax examinations, intellectual-property claims and broad indemnification obligations; the company had not accrued significant liabilities for these guarantees.
- Goodwill impairment testing performed at year-end indicated no impairment. Price volatility, foreign-exchange exposure, privacy regulation, IPv4 exhaustion and the transition to IPv6 remain relevant operating risks.
Important facts for investors to verify
- Whether revenue growth and traffic volumes offset ongoing unit-price declines, especially in media and software delivery.
- Whether rising co-location, bandwidth, depreciation and software-amortization costs pressure the approximately 25% operating margin.
- The effect of the expired federal research and development tax credit on the 2012 effective tax rate and cash taxes.
- 2012 capital expenditures relative to the stated expectation of approximately 15% of revenue and the resulting free-cash-flow profile.
- Completion, purchase price, funding and integration progress for the proposed Cotendo acquisition.
- The impact of the CFO transition and the continued execution of internal controls; management and PwC concluded controls were effective at December 31, 2011.
- Customer renewal rates, reseller concentration, international growth and exposure to third-party network providers.
