Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AKAM > SEC Filings for AKAM > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for AKAMAI TECHNOLOGIES INC

Form 10-Q for AKAMAI TECHNOLOGIES INC


11-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q, particularly Management's Discussion and Analysis of Financial Condition and Results of Operations set forth below, and notes to our unaudited consolidated financial statements included herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "forecasts," "if," "continues," "goal," "likely" or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See "Risk Factors" elsewhere in this quarterly report on Form 10-Q for a discussion of certain risks associated with our business. We disclaim any obligation to update forward-looking statements as a result of new information, future events or otherwise.

Our management's discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related items, including, but not limited to, revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, goodwill and acquired intangible assets, capitalized internal-use software costs, impairment and useful lives of long-lived assets, income tax, and stock-based compensation. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time they are made. Actual results may differ from our estimates. See the section entitled "Application of Critical Accounting Policies and Estimates" in our annual report on Form 10-K for the year ended December 31, 2013 for further discussion of our critical accounting policies and estimates.

Overview

We provide cloud services for delivering, optimizing and securing online content and business applications. We primarily derive income from sales of services to customers executing contracts with terms of one year or longer. We believe that this emphasis on longer-term contracts generally allows us to have a consistent and predictable base level of revenue which is important to our financial success. Accordingly, to be successful, we must maintain our base of recurring revenue contracts by minimizing customer cancellations or terminations and limiting the impact of price reductions reflected in contract renewals and build on that base by adding new customers and increasing the amount and value of services, features and functionalities that our existing customers purchase. Accomplishing these goals requires that we compete effectively in the marketplace on the basis of quality, price and overall attractiveness of our services and technology.

Our revenue is impacted by a number of factors, including our ability to maintain our base of committed recurring revenues, the timing and variability of customer-specific one-time events, the prices we are able to charge for our services, the amount of traffic we serve on our network and the impact of seasonal variations on our business. We have observed the following trends related to our revenue in recent years:

On a consistent basis, we have been able to offset lost committed recurring revenue by adding new customers and increasing sales of incremental services to our existing customers. We have also experienced increases in the rate of traffic delivered to our customers that use our solutions for video, gaming, social media and software downloads.

The unit prices paid by some of our customers have declined, reflecting the impact of competition. These price reductions have primarily impacted customers for which we deliver high volumes of traffic over our network, such as media customers.

We have experienced variations in certain types of revenue from quarter to quarter; in particular, we experience higher revenue in the fourth quarter of the year for some of our solutions as a result of the holiday season. We also experience lower revenue in the summer months, particularly in Europe, from both e-commerce and media customers because overall Internet use declines during that time. In addition, we experience quarterly variations in revenue attributable to the nature and timing of software and gaming releases by our customers using our software download solutions.


Table of Contents

Our profitability is also impacted by our expense levels, including direct costs to support our revenue, such as co-location and bandwidth costs, and expenses incurred to support strategic initiatives that we anticipate will generate revenue in the future. We have observed the following trends in recent years:

We have increased headcount to support our revenue growth and strategic initiatives, and as a result, our payroll and related compensation costs have increased. We increased our headcount by more than 800 employees in 2013 to 3,908 employees at year end, which is net of approximately 70 employees who were part of the divestiture of our Advertising Decision Solutions, or ADS, business in the first quarter of 2013. We hired an additional 650 employees during the first half of 2014, including approximately 200 employees who were part of the acquisition of Prolexic Technologies, Inc., or Prolexic. We expect to continue to hire additional employees and expand globally in support of our strategic initiatives.

We have continued to reduce our network bandwidth costs per unit and to invest in internal-use software development with the goal of improving the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels, but we believe such costs would be partially offset by anticipated continued reductions in bandwidth costs per unit. To achieve these lower bandwidth costs per unit, we must effectively route traffic over our network through lower cost providers and continue to reduce our overall bandwidth pricing.

Co-location costs are a significant percentage of total cost of revenue. By improving our internal-use software and managing our hardware deployments to enable us to use servers more efficiently, we have been able to manage the growth of co-location costs. We expect to continue to scale our network in the future and will need to manage our co-location costs to maintain current levels of profitability.

In February 2014, we completed the acquisition of Prolexic. Prolexic is expected to be slightly dilutive to our earnings per share in its first full year. Revenues and expenses from the acquisition have been included in our earnings since the acquisition date of February 18, 2014. Also in February 2014, we completed an offering of $690.0 million par value of convertible senior notes. The notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature.

Results of Operations

The following table sets forth, as a percentage of revenue, consolidated
statements of operations data for the periods indicated:

                                              For the Three Months          For the Six Months
                                                 Ended June 30,               Ended June 30,
                                               2014           2013          2014           2013
Revenue                                       100.0  %        100.0 %      100.0  %        100.0 %
Cost of revenue                                31.4            33.0         31.1            32.8
Research and development expense                6.7             5.4          6.5             5.7
Sales and marketing expense                    19.2            17.9         18.6            17.5
General and administrative expense             17.2            16.2         17.0            15.6
Amortization of acquired intangible assets      1.8             1.5          1.6             1.6
Restructuring charges                           0.1             0.1          0.1             0.1
Total costs and operating expenses             76.4            74.1         74.9            73.3
Income from operations                         23.6            25.9         25.1            26.7
Interest income                                 0.4             0.4          0.4             0.4
Interest expense                               (0.9 )             -         (0.7 )             -
Other (expense) income, net                    (0.2 )           0.1         (0.2 )             -
Income before provision for income taxes       22.9            26.4         24.6            27.1
Provision for income taxes                      7.5             9.9          8.9             9.2
Net income                                     15.4  %         16.5 %       15.7  %         17.9 %


Table of Contents

Revenue

Revenue during the periods presented was as follows (in thousands):

               For the Three Months                   For the Six Months
                  Ended June 30,                        Ended June 30,
           2014         2013      % Change       2014         2013      % Change
Revenue $ 476,035    $ 378,106       25.9 %   $ 929,537    $ 746,152       24.6 %

During the three- and six-month periods ended June 30, 2014, the increase in our revenue as compared to the same periods in 2013 was driven by continued strong demand for our services across all of our solutions and geographies. For the three- and six-month periods ended June 30, 2014 and 2013, no single customer accounted for 10% or more of revenue.

For each of the three- and six-month periods ended June 30, 2014 and 2013, approximately 28% of our revenue was derived from our operations located outside of the United States. No single country outside of the United States accounted for 10% or more of revenue during any of these periods.

During the first half of 2014, we experienced strong revenue growth from our operations in the Asia Pacific region and continued improvement in revenue growth from our operations in Europe, the Middle East and Africa, primarily driven by strength in our Performance and Security Solutions. Changes in foreign currency exchange rates positively impacted our revenue by $3.0 million and $1.3 million during the three- and six-month periods ended June 30, 2014, respectively, as compared to the same periods in 2013.

For the three- and six-month periods ended June 30, 2014, resellers accounted for 25% and 24%, respectively, of revenue as compared to 20% of revenue for the same periods in 2013. The increase in revenue from resellers was attributable to continued traction with our carrier channel partners, as well as contributions from Prolexic's reseller relationships.

The following table quantifies the contribution to revenue during the periods presented from our solution categories (in thousands):

                                For the Three Months                       For the Six Months
                                   Ended June 30,                            Ended June 30,
                          2014          2013        % Change        2014          2013        % Change
Media Delivery
Solutions              $ 216,174     $ 179,418         20.5  %   $ 431,007     $ 360,606         19.5  %
Performance and
Security Solutions       217,415       167,881         29.5        415,392       324,523         28.0
Service and Support
Solutions                 42,446        31,429         35.1         83,138        58,894         41.2
Advertising Decision
Solutions and other            -          (622 )     (100.0 )            -         2,129       (100.0 )
Total revenue          $ 476,035     $ 378,106         25.9  %   $ 929,537     $ 746,152         24.6  %

The increase in Media Delivery Solutions revenue for the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was due to strong demand across most of our customer base. We experienced particularly strong growth from our software download, gaming, video and social media customers.

The increase in Performance and Security Solutions revenue for the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was partially due to increased revenue attributable to Prolexic. Additionally, there was an increase in demand for our web performance and cloud security solutions.

The increase in the Service and Support Solutions revenue for the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was due to increases in sales of our services and support offerings due to strong service attachment rates for customers of our Media Delivery and Performance and Security Solutions.

The ADS business was divested in the first quarter of 2013.


Table of Contents

Cost of Revenue

Cost of revenue consisted of the following for the periods presented (in
thousands):

                                For the Three Months                      For the Six Months
                                   Ended June 30,                           Ended June 30,
                          2014          2013        % Change       2014          2013        % Change
Bandwidth fees         $  29,411     $  25,996         13.1 %   $  58,247     $  50,710         14.9 %
Co-location fees          28,874        27,972          3.2        56,894        55,442          2.6
Network build-out and
supporting services       11,250         8,333         35.0        21,297        17,948         18.7
Payroll and related
costs                     36,274        27,521         31.8        67,692        52,748         28.3
Stock-based
compensation,
including amortization
of prior capitalized
amounts                    4,995         4,584          9.0         9,620         9,031          6.5
Depreciation of
network equipment         25,660        20,026         28.1        50,451        38,497         31.1
Amortization of
internal-use software     12,854        10,273         25.1        24,729        20,721         19.3
Total cost of revenue  $ 149,318     $ 124,705         19.7 %   $ 288,930     $ 245,097         17.9 %
As a percentage of

revenue 31.4 % 33.0 % 31.1 % 32.8 %

The increase in total cost of revenue for the three- and six-month periods ended June 30, 2014 as compared to the same periods in 2013 was primarily due to increases in:

          payroll and related costs of service personnel due to headcount growth
           to support our Service and Support Solutions revenue growth, as well
           as headcount growth to support our other solution categories;


          amounts paid to network providers for bandwidth fees to support the
           increase in traffic served on our network; and


          depreciation and amortization of network equipment and internal-use
           software as we continued to invest in our infrastructure.

In recent years, we have reduced our network bandwidth costs per unit and have successfully managed our co-location fees, which contributed to the decrease in our cost of revenue as a percentage of revenue during the three- and six-month periods ended June 30, 2014 as compared to the same periods in 2013.

We have long-term purchase commitments for bandwidth usage and co-location services with various network and Internet service providers. Our minimum commitments related to bandwidth usage and co-location services may vary from period to period depending on the timing and length of contract renewals with our service providers. There have been no significant changes to the commitments reported in our annual report on Form 10-K for the year ended December 31, 2013, other than normal period to period variations.

We believe that cost of revenue will increase during the remainder of 2014 as compared to the first six months of 2014, primarily because we expect to deploy more servers and deliver more traffic on our network, which will result in higher expenses associated with the increased traffic and additional co-location fees. Such costs are likely to be partially offset by lower bandwidth costs per unit and continued efficiency in network deployment. Additionally, for the remaining quarters of 2014, we anticipate amortization of internal-use software development costs to increase, along with higher payroll and related costs associated with an increase in headcount of our network and professional services personnel. We plan to continue to make investments in our network in the expectation that our customer base and sales of services to our existing customers will continue to grow.


Table of Contents

Research and Development Expenses

Research and development expenses consisted of the following for the periods
presented (in thousands):

                                For the Three Months                      For the Six Months
                                   Ended June 30,                           Ended June 30,
                          2014          2013        % Change       2014          2013        % Change
Payroll and related
costs                  $  46,373     $  32,482         42.8 %   $  88,804     $  64,304         38.1 %
Stock-based
compensation               5,061         3,867         30.9         9,538         8,237         15.8
Capitalized salaries
and related costs        (22,056 )     (16,950 )       30.1       (42,056 )     (32,446 )       29.6
Other expenses             2,674         1,198        123.2         4,000         2,407         66.2
Total research and
development            $  32,052     $  20,597         55.6 %   $  60,286     $  42,502         41.8 %
As a percentage of
revenue                      6.7 %         5.4 %                      6.5 %         5.7 %

The increase in research and development expenses during the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was due to increases in payroll and related costs as a result of continued growth in headcount to support investments in new product development, partially offset by increases in capitalized salaries and related costs.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. These development costs consist of external consulting expenses and payroll and related costs for personnel involved in the development of internal-use software used to deliver our services and operate our network. During the three- and six-month periods ended June 30, 2014, we capitalized $3.5 million and $6.9 million, respectively, of stock-based compensation. During the three- and six-month periods ended June 30, 2013, we capitalized $3.1 million and $5.9 million, respectively, of stock-based compensation. These capitalized internal-use software costs are amortized to cost of revenue over their estimated useful lives of two years.

We believe that research and development expenses will increase in absolute dollars during the remainder of 2014 as we expect to continue to hire additional development personnel in order to make improvements to our core technology and develop new and enhanced services.

Sales and Marketing Expenses

Sales and marketing expenses consisted of the following for the periods
presented (in thousands):

                                For the Three Months                      For the Six Months
                                   Ended June 30,                           Ended June 30,
                          2014          2013        % Change       2014          2013        % Change
Payroll and related
costs                  $  62,093     $  44,124         40.7 %   $ 116,777     $  85,198         37.1 %
Stock-based
compensation              12,796         9,799         30.6        23,328        19,230         21.3
Marketing programs and
related costs              7,259         6,514         11.4        17,779        14,361         23.8
Other expenses             9,314         7,388         26.1        14,643        11,726         24.9
Total sales and
marketing              $  91,462     $  67,825         34.8 %   $ 172,527     $ 130,515         32.2 %
As a percentage of

revenue 19.2 % 17.9 % 18.6 % 17.5 %

The increase in sales and marketing expenses during the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was primarily due to higher payroll and related costs, as we invested in our sales and marketing organization, and an increase in marketing programs and related costs in support of our go-to-market strategy and ongoing geographic expansion.

We believe that sales and marketing expenses will increase in absolute dollars during the remainder of 2014 as compared to the first six months of 2014 due to an expected increase in payroll and related costs as a result of continued headcount growth in our sales and marketing organization.


Table of Contents

General and Administrative Expenses

General and administrative expenses consisted of the following for the periods
presented (in thousands):
                                For the Three Months                       For the Six Months
                                   Ended June 30,                            Ended June 30,
                          2014          2013        % Change        2014          2013        % Change
Payroll and related
costs                  $  35,714     $  24,569         45.4  %   $  68,024     $  48,398         40.6  %
Stock-based
compensation              10,745         8,417         27.7         18,055        14,921         21.0
Depreciation and
amortization               9,876         6,228         58.6         18,049        11,804         52.9
Facilities-related
costs                     12,478        10,315         21.0         25,472        19,937         27.8
Provision for doubtful
accounts                     274           167         64.1            171           530        (67.7 )
Acquisition-related
costs                        444        (1,073 )      141.4          3,836          (736 )      621.2
Professional and other
fees                      12,349        12,728         (3.0 )       24,434        21,877         11.7
Total general and
administrative         $  81,880     $  61,351         33.5  %   $ 158,041     $ 116,731         35.4  %
As a percentage of

revenue 17.2 % 16.2 % 17.0 % 15.6 %

The increase in general and administrative expenses for the three- and six-month periods ended June 30, 2014, as compared to the same periods in 2013, was primarily due to the expansion of company infrastructure to support investments in engineering, go-to-market capacity and enterprise expansion initiatives. In particular, we increased general and administrative headcount and our facility footprint, which increased payroll and related costs, facilities-related costs and depreciation and amortization. In addition, acquisition-related costs increased for the six-month period ended June 30, 2014 due to the acquisition of Prolexic.

During the remainder of 2014, we expect general and administrative expenses to increase in absolute dollars as compared to the first six months of 2014 due to anticipated higher payroll and related costs and facilities-related costs attributable to increased hiring, investment in information technology and planned facility expansion.

Amortization of Acquired Intangible Assets

                                For the Three Months                      For the Six Months
                                   Ended June 30,                           Ended June 30,
(in thousands)            2014          2013        % Change       2014          2013        % Change
Amortization of
acquired intangible
assets                 $   8,403     $   5,734         46.5 %   $  15,251     $  11,794         29.3 %
As a percentage of

revenue 1.8 % 1.5 % 1.6 % 1.6 %

The increase in amortization of acquired intangible assets for the three- and six-month periods ended June 30, 2014 as compared to the same periods in 2013 was primarily due to the amortization of assets related to the acquisition of Prolexic. Based on our intangible assets at June 30, 2014, we expect amortization of acquired intangible assets to be approximately $16.8 million for the remainder of 2014, and $26.8 million, $25.2 million, $23.1 million and $16.2 million for 2015, 2016, 2017 and 2018, respectively.

Restructuring Charges

                                 For the Three Months               For the Six Months
                                    Ended June 30,                    Ended June 30,
(in thousands)                2014       2013     % Change      2014       2013     % Change
Restructuring charges      $   569      $ 391        45.5 %   $ 1,304     $ 822        58.6 %

As a percentage of revenue 0.1 % 0.1 % 0.1 % 0.1 %


Table of Contents

The restructuring charges for the three- and six-month periods ended June 30, 2014 consisted of severance and related expenses as a result of the acquisition of Prolexic, in addition to a contract termination fee during the three months ended June 30, 2014. The charges for the three- and six-month periods ended June 30, 2013 consisted of pending workforce claims prior to 2013.

Interest Income

                                 For the Three Months                 For the Six Months
                                    Ended June 30,                      Ended June 30,
(in thousands)               2014        2013      % Change      2014        2013      % Change
Interest income            $ 1,740     $ 1,477        17.8 %   $ 3,379     $ 3,085        9.5 %
As a percentage of revenue     0.4 %       0.4 %                   0.4 %       0.4 %

For the periods presented, interest income consists of interest earned on . . .

  Add AKAM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AKAM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.