Akamai Technologies, Inc. 2022 Form 10-K Summary
Business context and reporting period
Akamai provides cloud security, content delivery and cloud computing services through its globally distributed Akamai Connected Cloud platform. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. Akamai operated as one reportable segment and had more than 9,800 employees, over 350,000 servers and more than 4,100 locations.
In March 2022, Akamai acquired Linode for approximately $898.5 million in cash to expand its cloud computing platform. Linode contributed $103.5 million of revenue from acquisition through year-end. The company also continued integrating Guardicore, acquired in October 2021, into its security portfolio.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $3.617 billion | $3.461 billion | Up 4.5%; 8.0% at constant currency |
| Security revenue | $1.542 billion | $1.335 billion | Up 15.5%; 19.7% at constant currency |
| Delivery revenue | $1.669 billion | $1.873 billion | Down 10.9% |
| Compute revenue | $405.5 million | $253.1 million | Up 60.2% |
| GAAP operating income | $676.3 million | $783.1 million | Down 13.7% |
| GAAP operating margin | 18.7% | 22.6% | Down 3.9 percentage points |
| GAAP net income | $523.7 million | $651.6 million | Down 19.6% |
| Net income margin | 14.5% | 18.8% | Down 4.3 percentage points |
| Diluted EPS | $3.26 | $3.93 | Down 17.0% |
| Adjusted EBITDA | $1.530 billion | $1.561 billion | Down 2.0% |
| Adjusted EBITDA margin | 42.3% | 45.1% | Down 2.8 percentage points |
Fourth-quarter 2022 revenue was $927.8 million, compared with $905.4 million in the fourth quarter of 2021. Fourth-quarter net income was $128.8 million, or $0.82 diluted EPS, compared with $160.5 million, or $0.97 diluted EPS, in the prior-year quarter.
Cost of revenue increased to $1.384 billion, or 38.3% of revenue, from $1.269 billion, or 36.7%, primarily due to network expansion, co-location and energy costs, higher depreciation, increased supporting services and Linode-related headcount. Research and development expense rose 16.7% to $391.4 million, while sales and marketing expense rose 8.8% to $502.4 million. General and administrative expense rose 5.6% to $584.2 million.
Cash provided by operating activities was $1.275 billion, down from $1.405 billion in 2021. Capital expenditures and capitalized internal-use software totaled $458.3 million. Cash paid for acquisitions was $872.1 million, primarily for Linode. Share repurchases totaled $608.0 million for 6.4 million shares.
Liquidity, debt and capital resources
- Cash, cash equivalents and marketable securities totaled approximately $1.4 billion at December 31, 2022, including $542.3 million of cash and cash equivalents and $883.5 million of marketable securities.
- Convertible senior notes had aggregate principal of $2.3 billion: $1.15 billion due in 2025 and $1.15 billion due in 2027. The notes carried fixed coupons of 0.125% and 0.375%, respectively.
- A new $500 million revolving credit facility was established in November 2022 and may be increased to $1.0 billion under specified conditions. There were no borrowings outstanding at year-end.
- Total contractual obligations were approximately $3.879 billion, including operating leases, bandwidth commitments, purchase orders and convertible notes.
- Management expects existing liquidity and forecast operating cash flow to fund foreseeable needs for at least the next 12 months.
- The company does not pay a cash dividend and does not expect to do so in the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth shifted toward security and compute. Security revenue increased 15.5% and compute revenue increased 60.2%, while delivery revenue declined 10.9%.
- The delivery decline reflected slower traffic growth after the COVID-19 surge, pricing pressure and large customer renewals. Approximately 1% of 2021 revenue had been generated from traffic into Russia, Belarus and Ukraine; that traffic declined in 2022 following the war in Ukraine.
- The stronger U.S. dollar reduced reported 2022 revenue by approximately $122.1 million compared with 2021.
- Profitability declined as infrastructure investment, operating costs, taxes and acquisition-related amortization increased. The effective tax rate rose to 19.3% from 8.6%, partly due to an intercompany intellectual-property transaction, higher global intangible low-taxed income and lower foreign earnings taxed at lower rates.
- A $13.5 million restructuring charge included impairment related to the suspended GO-NET joint venture and facility-related impairments associated with the FlexBase workplace program.
- Akamai adopted new convertible-instrument accounting guidance on January 1, 2022. The change eliminated separate equity accounting for the conversion feature and reduced interest expense; management estimated that it increased 2022 diluted EPS by $0.32.
Guidance, outlook, management commentary and risks
The filing does not provide a clear numerical 2023 revenue or earnings guidance range. Management expects traffic growth to continue but at a more moderate pace, with delivery pricing pressure and customer sales cycles affected by macroeconomic uncertainty. Management expects 2023 cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase as Akamai invests in compute, security, network capacity and go-to-market activities.
Akamai plans to expand core and distributed cloud computing sites, connect Linode capabilities to its private backbone, shift workloads from third-party cloud providers to its own cloud platform and change the estimated useful life of network servers from five to six years. The expected useful-life change is intended to partially offset higher depreciation from continued network investment.
- Key risks include intensified competition from hyperscale cloud providers, security vendors, content delivery networks and customers’ internal or do-it-yourself solutions.
- Cybersecurity incidents, software defects, service outages or misuse of compute products could result in customer losses, service credits, litigation, regulatory action and reputational damage.
- Supply-chain constraints, co-location availability, energy costs and bandwidth commitments could limit network expansion or pressure margins.
- Privacy, data-localization, content, export-control, tax and other evolving regulations may increase compliance costs or restrict operations.
- Foreign-exchange movements, inflation, higher interest rates, recession risks and geopolitical events may continue to affect revenue, expenses and customer demand.
- The company recorded a $7.6 million loss related to the GO-NET investment after MUFG suspended operations and began liquidating the joint venture. Akamai no longer provided services to GO-NET after June 30, 2022.
Investor verification checklist
- Verify the pace and profitability of security and compute growth, including the enterprise adoption and integration economics of Linode.
- Assess whether delivery revenue stabilizes despite slower traffic growth, pricing pressure and post-pandemic normalization.
- Reconcile GAAP margins with non-GAAP measures, particularly the effects of $217.2 million of stock-based compensation, $65.0 million of acquired-intangible amortization and $29.0 million of acquisition-related costs.
- Monitor cash generation after capital expenditures, acquisitions, lease commitments and share repurchases.
- Evaluate the company’s ability to fund or refinance the $1.15 billion of convertible notes due in 2025 and manage potential conversion-related dilution.
- Track remediation of the material weakness in income-tax controls. The weakness resulted in revisions to interim 2022 financial statements, although management concluded the errors were immaterial to previously issued financial statements.
- Review tax audits, $38.3 million of unrecognized tax benefits, regulatory developments and any additional FlexBase or restructuring charges.