Akamai Technologies, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Akamai provides cloud services for delivering, optimizing, and securing online content and business applications through a platform of more than 175,000 servers across over 1,300 networks in more than 100 countries. The unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Financial Results and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $526.5 million | $453.5 million | 16.1% increase; 19.9% at constant currency |
| Income from operations | $121.5 million | $120.8 million | 0.6% increase |
| GAAP operating margin | 23.0% | 26.6% | Down 3.6 percentage points |
| Net income | $77.7 million | $72.8 million | 6.8% increase |
| Diluted EPS | $0.43 | $0.40 | 7.5% increase |
| Operating cash flow | $99.7 million | $89.0 million | 12.0% increase |
| Adjusted EBITDA | $223.4 million | $203.6 million | 9.7% increase |
| Adjusted EBITDA margin | 42% | 45% | Down 3 percentage points |
Revenue growth was broad-based. Media Delivery Solutions revenue increased 12.0% to $241.8 million, Performance and Security Solutions increased 21.2% to $245.0 million, and Service and Support Solutions increased 12.1% to $39.7 million. Cloud Security Solutions revenue increased from $30.2 million to $55.0 million.
Cost of revenue increased 21.3% to $169.3 million, or 32.2% of revenue versus 30.8% in the prior-year quarter. Research and development, sales and marketing, and general and administrative expenses increased 26.9%, 27.6%, and 17.6%, respectively, reflecting hiring, network expansion, product development, geographic expansion, and infrastructure investments. Stock-based compensation was $29.7 million, compared with $25.1 million.
As of March 31, 2015, cash and cash equivalents were $332.6 million and marketable securities totaled approximately $1.18 billion. Management reported total cash, cash equivalents, and marketable securities of approximately $1.5 billion and net cash after convertible senior notes of $825.1 million. The company had $690.0 million principal amount of zero-coupon convertible senior notes due 2019, carried at $609.6 million net of discount.
Capital expenditures and capitalized internal-use software costs totaled $137.1 million. Investing activities generated $57.1 million of cash, primarily because marketable-security maturities exceeded purchases. Financing activities used $56.2 million, including $62.7 million for repurchases of 932,131 shares at an average price of $67.24.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16.1%, although foreign currency movements reduced reported revenue by $17.2 million; constant-currency growth was 19.9%.
- International revenue increased only 7.2% as reported, versus 20.6% at constant currency. International revenue represented approximately 26% of total revenue, compared with 28% in Q1 2014.
- GAAP operating margin declined because operating expenses grew faster than revenue, particularly network costs, payroll, depreciation, software amortization, research and development, and sales and marketing.
- Net income benefited from a lower effective tax rate of 35.0%, compared with 39.2% in Q1 2014.
- Interest expense increased to $4.6 million from $1.9 million because of amortization associated with the 2014 convertible notes.
- Operating cash flow improved, while infrastructure spending increased substantially to support network capacity and expected traffic growth.
- The company acquired Xerocole, Inc. on February 27, 2015, adding approximately $12.9 million of goodwill. On April 6, 2015, after quarter-end, it acquired Codemate A/S and Octoshape ApS for $107.5 million in cash, subject to post-closing adjustments.
Guidance, Outlook, Risks, and Unusual Items
No specific numerical revenue or earnings guidance is provided in the filing. Management expects absolute costs for network operations, research and development, sales and marketing, and general and administrative activities to increase during the remaining quarters of 2015 because of additional hiring, network deployment, facility expansion, information-technology investment, and product development. Management expects capital expenditures and capitalized software spending not to continue at the same rate as Q1.
Management expects the effective tax rate to decrease slightly during the remaining quarters of 2015 because of known discrete items, although quarterly tax rates may fluctuate. The company believes existing cash, marketable securities, and operating cash flows will be sufficient to meet foreseeable cash needs for at least the next 12 months, including capital expenditures, hiring, commitments, share repurchases, acquisitions, and strategic investments.
A material contingency is an internal investigation, assisted by outside counsel, concerning sales practices in a non-U.S. country that represented less than 1% of revenue. Akamai voluntarily notified the SEC and Department of Justice in February 2015 and is cooperating. The outcome cannot be predicted, and no provision has been recorded.
Principal business risks include intense competition and pricing pressure, customer cancellations or lower renewal rates, cybersecurity incidents and service interruptions, dependence on third-party bandwidth and co-location providers, foreign-currency volatility, international regulatory and anti-corruption exposure, acquisition integration risk, tax uncertainty, and obligations associated with the convertible notes. The company also highlighted risks from increasing network and SSL costs, evolving privacy and Internet regulations, and the need to maintain technological innovation.
The company adopted no material accounting change during the quarter. It is evaluating the new revenue-recognition standard effective January 1, 2017. A new debt-issuance-cost presentation standard will require an estimated $6.2 million reclassification from other assets to convertible senior notes beginning January 1, 2016, with no effect on earnings or cash flows.
Most Important Facts for Investors to Verify
- Whether revenue growth and Cloud Security momentum offset pricing pressure, foreign-currency headwinds, and seasonal variability.
- Whether operating-margin compression persists as network investment, hiring, stock compensation, and software amortization increase.
- The cash requirements and dilution implications of the $690.0 million convertible notes, including potential conversion into approximately 7.7 million shares and related warrants.
- The remaining authorization and future pace of the $750.0 million share-repurchase program.
- The outcome and potential financial, regulatory, or reputational consequences of the SEC and DOJ-related internal investigation.
- Integration and financial effects of the Xerocole and post-quarter-end Octoshape acquisitions.
- Whether operating cash flow remains sufficient to fund infrastructure investment, acquisitions, share repurchases, and other strategic uses.
- The effect of currency movements, competition, customer renewals, cybersecurity events, and third-party network costs on future results.