Akamai Technologies, Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides cloud solutions for delivering, optimizing and securing content and business applications over the Internet through a globally distributed platform of more than 200,000 servers in over 130 countries. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $706.5 million | $668.7 million | 5.7% reported; 7.9% constant currency |
| Income from operations | $134.5 million | $68.6 million | 96.2% |
| GAAP operating margin | 18.9% | 10.3% | Up 8.6 percentage points |
| Net income | $107.1 million | $53.7 million | 99.4% |
| Diluted EPS | $0.65 | $0.31 | 109.7% |
| Non-GAAP operating margin | 30% | 25% | Up 5 percentage points |
| Adjusted EBITDA | $299.1 million | $256.5 million | 16.6% |
| Adjusted EBITDA margin | 42% | 38% | Up 4 percentage points |
| Cash flow from operations | $160.9 million | $192.0 million | Down $31.2 million |
Cloud Security Solutions revenue increased 26.7% to $190.1 million. Web Division revenue rose 6.5% and Media and Carrier Division revenue rose 4.7%. International revenue increased 17.5% to $288.3 million, while U.S. revenue declined 1.2% to $418.2 million. International operations represented approximately 40.8% of revenue.
At March 31, 2019, cash and cash equivalents were $688.7 million, and total marketable securities were $531.4 million. Cash, cash equivalents and marketable securities totaled approximately $1.2 billion. The company reported net cash of approximately $70.1 million after considering $1.2 billion of convertible senior notes at par value.
Capital expenditures were $69.8 million, and capitalized internal-use software development costs were $72.7 million. The company repaid $690.0 million of convertible notes due in 2019 during February 2019. It had $1.15 billion of convertible senior notes due in 2025 and no borrowings under its $500.0 million revolving credit facility.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially, primarily because of revenue growth, cost savings and efficiency initiatives.
- General and administrative expense declined 20.4%, mainly because Q1 2018 included $14.9 million related to the Limelight litigation settlement and other non-routine stockholder matter costs.
- Restructuring charges declined to $6.4 million from $14.9 million. Management does not expect significant additional charges from the current restructuring action.
- Cost of revenue increased 2.5%, but declined to 34.1% of revenue from 35.1%. Lower network-equipment depreciation partly offset higher internal-use software amortization.
- The company extended the expected average useful life of network assets from four years to five years, reducing depreciation expense by approximately $7.5 million and increasing Q1 2019 net income by approximately $6.3 million, or $0.04 per share.
- Operating cash flow declined because of higher bonus payments, higher income-tax payments and working-capital timing, despite higher profitability.
- Akamai acquired Janrain for $123.6 million in cash in January 2019 and invested $40.2 million in a 20% equity-method interest in the GO-NET joint venture with Mitsubishi UFJ Financial Group.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets of approximately $358.6 million and operating lease liabilities totaling approximately $394.9 million at March 31, 2019.
Guidance, Outlook, Risks and Unusual Items
- Management expects slower revenue growth in 2019, particularly because of pressure on commerce customers, large customer renewals and fewer large media-driven events than in 2018.
- Management expects overall profitability to improve in 2019 versus 2018, although at a lower rate of improvement than in 2018, with potential for additional improvement in 2020.
- Management expects research and development expense to increase in 2019 but not as a percentage of revenue. It expects internal-use software amortization and professional-services payroll costs to increase, while cost of revenue as a percentage of revenue is not expected to increase.
- Remaining performance obligations were approximately $2.3 billion at March 31, 2019; more than 70% is expected to be recognized as revenue over the following 12 months.
- The company expects approximately $38.4 million of acquired-intangible amortization during the remainder of 2019 and additional amortization in subsequent years.
- Key risks include pricing pressure and competition, slower customer demand, variable media traffic, cybersecurity incidents, service disruptions, foreign-currency exposure, international regulation, acquisition integration, restructuring disruption, tax audits and litigation.
- A Massachusetts tax controversy could result in an estimated tax charge of approximately $30.0 million if resolved adversely. The company believes it is more likely than not to prevail and has not recorded a reserve for the matter.
- The company has additional operating leases not yet commenced totaling approximately $553.2 million, primarily for facilities, with most terms of approximately 15 years.
- The Board authorized a $1.1 billion share-repurchase program through December 2021. The company repurchased 491,950 shares for $34.9 million in Q1 2019, leaving approximately $1.065 billion available.
Most Important Facts for Investors to Verify
- Whether security revenue growth can offset slower Web Performance growth, pricing pressure and fewer large media events.
- Whether reported margin expansion is sustainable after considering the $6.3 million benefit from the network-asset useful-life change and the unusually low prior-year comparison.
- Cash generation after acquisitions, capital expenditures, software capitalization, lease commitments and share repurchases.
- Future dilution and cash requirements associated with the $1.15 billion 2025 convertible notes, related warrants and note hedge transactions.
- Integration progress and performance of Janrain and the strategic rationale and economics of the GO-NET investment.
- The outcome of the Massachusetts tax appeal and other tax audits, including the potential approximately $30.0 million adverse charge.
- The company’s ability to manage long-term bandwidth, co-location and facility commitments, including approximately $553.2 million of leases not yet commenced.
- Exposure to cybersecurity, service availability, privacy regulation, foreign exchange and competitive pricing risks.