Akamai Technologies, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Akamai provides security, delivery and compute solutions through its Akamai Connected Cloud platform, operating in one reportable segment across more than 4,100 locations in over 130 countries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $935.7 million | $903.3 million | $1.851 billion | $1.807 billion |
| Revenue growth | 3.6% | — | 2.5% | — |
| Income from operations | $149.8 million | $175.0 million | $276.4 million | $348.4 million |
| GAAP operating margin | 16.0% | 19.4% | 14.9% | 19.3% |
| Net income | $128.8 million | $137.8 million | $225.9 million | $271.2 million |
| Diluted EPS | $0.84 | $0.85 | $1.46 | $1.67 |
| Operating cash flow | Not separately provided | Not separately provided | $599.8 million | $563.9 million |
| Adjusted EBITDA | $388.2 million | $388.3 million | $764.0 million | $779.5 million |
| Adjusted EBITDA margin | 41.5% | 43.0% | 41.3% | 43.1% |
Revenue mix shifted toward security and compute. Q2 security revenue increased 13.7% to $432.9 million, compute increased 16.1% to $123.1 million, and delivery declined 8.9% to $379.7 million. For the first six months, security increased 10.0%, compute increased 29.9%, and delivery declined 10.1%.
Cost of revenue increased 7.7% in Q2 and represented 39.9% of revenue, compared with 38.4% in the prior-year quarter. The increase reflected higher co-location, network build-out, payroll and stock-based compensation costs. Depreciation of network equipment declined following the extension of server useful lives from five to six years.
Cash, cash equivalents and marketable securities totaled approximately $1.0 billion at June 30, 2023. Cash and cash equivalents were $298.6 million, compared with $542.3 million at December 31, 2022. Total assets were $8.346 billion and total stockholders’ equity was $4.289 billion.
Debt included $2.3 billion of convertible senior notes, consisting of $1.15 billion due in 2025 and $1.15 billion due in 2027. The Company had $20.0 million outstanding under its $500 million revolving credit facility at June 30, 2023; that borrowing was repaid in July 2023. The Company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was modest because security and compute growth was partly offset by delivery pricing pressure and lower traffic growth among certain large customers.
- GAAP operating margin declined 340 basis points in Q2 and 440 basis points for the first half, primarily due to increased infrastructure investment, restructuring charges and stock-based compensation.
- Six-month net income declined 16.7%, while operating cash flow increased 6.4% to $599.8 million.
- Capital investment increased: purchases of property and equipment plus capitalized internal-use software were $398.5 million for the first six months, compared with $249.5 million in 2022.
- The Company repurchased 6.2 million shares for $486.0 million during the first half, leaving approximately $0.7 billion available under its $1.8 billion authorization through December 2024.
- Stock-based compensation increased to $149.3 million for the first six months from $108.1 million, partly due to redesigned incentive programs and a program tied to migrating applications to Akamai Connected Cloud.
- Akamai acquired StorageOS for $20.6 million in March and Neosec for $91.5 million in May. Management expects these acquisitions to be slightly dilutive to EPS at least through 2023.
- The Company revised previously issued 2022 interim financial information to correct an income-tax accounting error related to an intercompany intellectual-property sale. The Company stated that the error was not material to previously issued financial statements.
Guidance, outlook, risks and unusual items
- Management expects traffic growth rates to improve for the remainder of 2023 compared with 2022, but delivery revenue remains exposed to pricing pressure and customer traffic variability.
- Management expects continued investment in compute infrastructure and higher co-location costs, while migrating workloads from third-party cloud providers to Akamai Connected Cloud to improve cost efficiency over time.
- 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 costs to support margins.
- Restructuring charges were $54.1 million for the first six months, including facility-related FlexBase charges and workforce-reduction costs. Additional FlexBase charges are expected into early 2024, but the Company does not expect material additional charges from the 2023 workforce action.
- The change in server useful lives reduced depreciation expense by $15.9 million in Q2 and $32.6 million for the first half, increasing net income by $13.3 million and $27.3 million, respectively. This accounting estimate change materially benefited reported earnings.
- Remaining performance obligations were $3.3 billion at June 30, 2023; approximately 70% is expected to be recognized as revenue within the next 12 months.
- Management believes existing cash, marketable securities and forecast operating cash flow will meet foreseeable cash needs for at least the next 12 months.
- Key risks include slowing revenue growth, delivery commoditization and pricing pressure, intense competition in cloud computing and security, macroeconomic and geopolitical uncertainty, foreign exchange movements, cybersecurity incidents, service disruptions, supply and co-location constraints, acquisition integration, regulatory and privacy changes, and potential tax liabilities.
- Disclosure controls were not effective because a material weakness in income-tax-related internal controls continued as of June 30, 2023. Management has implemented remediation steps, but the weakness will not be considered remediated until controls operate effectively for a sufficient period and testing is completed.
Facts investors should verify
- Whether security and compute growth can offset continued delivery revenue declines and pricing pressure.
- The sustainability of margins after adjusting for the favorable server useful-life change, elevated stock-based compensation and restructuring charges.
- The pace and return on compute infrastructure spending, including co-location commitments and migration from third-party cloud providers.
- Cash requirements for the 2025 convertible notes, future acquisitions, capital expenditures and share repurchases.
- Integration progress and financial contribution from StorageOS and Neosec, including the expected near-term EPS dilution.
- Remediation of the income-tax internal-control material weakness and whether further financial statement revisions are required.
- Exposure to interest-rate-related unrealized losses in the investment portfolio, foreign exchange movements, cybersecurity events and evolving privacy or internet regulations.