Akamai Technologies, Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
Akamai provides cloud solutions for protecting and delivering content and business applications through a globally distributed platform of more than 325,000 servers in over 130 countries. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Effective March 1, 2021, Akamai reorganized into the Security Technology Group and Edge Technology Group, supported by a unified global sales organization.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $842.7 million | $764.3 million | 10.3% increase |
| Income from operations | $182.4 million | $152.3 million | 19.7% increase |
| GAAP operating margin | 21.7% | 19.9% | Up 1.8 percentage points |
| Net income | $155.7 million | $123.1 million | 26.4% increase |
| Diluted EPS | $0.94 | $0.75 | 25.3% increase |
| Non-GAAP operating margin | 31% | 30% | Up 1 percentage point |
| Adjusted EBITDA | $375.4 million | $326.7 million | 14.9% increase |
| Adjusted EBITDA margin | 45% | 43% | Up 2 percentage points |
| Cash flow from operations | $249.8 million | $223.2 million | 11.9% increase |
Security Technology Group revenue increased 29.1% to $310.2 million, while Edge Technology Group revenue increased 1.6% to $532.5 million. International revenue increased 13.2% to $379.5 million and represented approximately 45.0% of total revenue; reported international growth benefited from foreign exchange.
Cost of revenue increased 14.2% to $306.7 million, or 36.4% of revenue versus 35.1% in the prior-year quarter. Higher bandwidth, co-location, network build-out and network equipment depreciation costs reflected investment to support traffic growth. Research and development increased 15.2%, while sales and marketing declined 6.0%, partly because of lower travel and event spending during the pandemic.
At March 31, 2021, cash and cash equivalents were $456.8 million and marketable securities totaled approximately $2.0 billion. Total assets were $7.8 billion and total liabilities were $3.5 billion. Convertible senior notes had a combined principal amount of $2.3 billion, with a carrying amount of $1.9 billion. No borrowings were outstanding under the $500 million revolving credit facility, which expires in May 2023. Management reported net cash of approximately $153.6 million after deducting convertible-note principal.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by strong security sales, OTT video and gaming traffic, and stronger European traffic. Growth in pandemic-related traffic is expected to moderate during 2021.
- Website and application performance revenue continued to decline because of competition, pricing pressure and financial stress among customers, particularly in commerce and travel and hospitality.
- Profitability improved because of higher revenue, cost-savings initiatives and lower travel and marketing expenses, partly offset by higher network depreciation and infrastructure costs.
- Operating cash flow increased to $249.8 million. Investing cash use declined to $36.3 million from $110.7 million, primarily because of lower capital spending and acquisition-related cash payments.
- Akamai paid $15.6 million for the February 2021 acquisition of Inverse, Inc., intended to enhance Internet-of-Things security and zero-trust and secure-access offerings.
- The company repurchased 591,963 shares for $58.2 million at an average price of $98.39 per share. Approximately $513.7 million remained available under the $1.1 billion repurchase authorization.
- Restructuring charges declined to $7.1 million from $10.6 million. Management did not expect material additional charges from the disclosed restructuring actions.
Guidance, outlook, risks and unusual items
Management expects current cash, cash equivalents, marketable securities and forecast operating cash flow to fund foreseeable cash needs for at least the next 12 months. Expected uses include capital expenditures, information technology investments, acquisitions, share repurchases, leases and other long-term obligations.
- Traffic and related revenue growth is expected to moderate from pandemic-boosted 2020 levels.
- Network depreciation is expected to remain higher during 2021 because of accelerated equipment deployment in 2020. Capital expenditures are expected to continue, but at lower levels than in 2020.
- Research and development spending is expected to increase, while travel and marketing expenses are expected to remain comparatively low while pandemic restrictions continue.
- Employees were primarily working remotely, and the company did not generally require office-based employees to return before January 1, 2022. Management did not believe remote work had materially disrupted operations.
- A Massachusetts tax dispute remains subject to potential appeal. An adverse outcome could create an estimated gross tax charge of approximately $42 million, potentially partially offset by approximately $29 million of state tax credits.
- Key risks include slowing traffic or security growth, pricing pressure and customer insourcing, competition, cybersecurity incidents, service disruptions, bandwidth and server availability, foreign exchange, privacy and other regulation, acquisitions, restructuring, tax exposures and the ability to meet convertible-note obligations.
- The filing states that routine litigation is not expected to have a material effect, and that no material changes occurred to previously disclosed risk factors.
Most important facts for investors to verify
- Whether security revenue growth can offset moderation in pandemic-related media and gaming traffic and continued weakness in website and application performance offerings.
- Whether network investment, bandwidth, co-location and depreciation costs cause further pressure on gross and operating margins.
- The conversion, refinancing or cash-repayment implications of the $2.3 billion principal amount of convertible senior notes due in 2025 and 2027.
- Progress integrating Inverse and the company’s ability to realize benefits from additional acquisitions.
- The outcome of the Massachusetts tax appeal and other tax audits.
- Whether cybersecurity, privacy, service reliability, supply-chain and international operating risks result in material costs, liabilities or customer losses.
- Reconciliation of non-GAAP measures to GAAP results, particularly the substantial adjustments for stock-based compensation, debt discount amortization, acquired-intangible amortization and restructuring charges.