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Akamai Reports First Quarter 2018 Financial Results

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Akamai Reports First Quarter 2018 Financial Results

Record first quarter revenue of $669 million, up 11% year-over-year

Cloud Security Solutions revenue grew 36%, now at $600 million annualized run rate

GAAP EPS of $0.31 and non-GAAP EPS of $0.79

PR Newswire

CAMBRIDGE, Mass., April 30, 2018 /PRNewswire/ -- Akamai Technologies, Inc. (NASDAQ:AKAM), the world's largest and most trusted cloud delivery platform, today reported financial results for the first quarter ended March 31, 2018.

Akamai Technologies logo. (PRNewsFoto/AKAMAI TECHNOLOGIES) (PRNewsfoto/Akamai Technologies, Inc.)

"We are very pleased with the results of our first quarter performance, which featured continued outstanding growth in our security business, substantial improvement in our media business, margin expansion and accelerated revenue growth overall," said Dr. Tom Leighton, Chief Executive Officer.

Akamai delivered the following financial results for the first quarter ended March 31, 2018.

Revenue: Revenue was $669 million, an 11% increase over first quarter 2017 revenue of $600 million and a 9% increase when adjusted for foreign exchange.*

Revenue by Division(1):

  • Web Division revenue was $353 million, up 16% year-over-year and up 13% when adjusted for foreign exchange*
  • Media and Carrier Division revenue was $316 million, up 6% year-over-year and up 4% when adjusted for foreign exchange*

Revenue from Cloud Security Solutions(2):

  • Cloud Security Solutions revenue was $149 million, up 36% year-over-year and up 32% when adjusted for foreign exchange*

Revenue from Internet Platform Customers(3):

  • Revenue from Internet Platform Customers was $44 million, down 14% year-over-year and when adjusted for foreign exchange*
  • Revenue excluding Internet Platform Customers was $624 million, up 14% year-over-year and up 11% when adjusted for foreign exchange*

Revenue by Geography:

  • U.S. revenue was $423 million, up 6% year-over-year
  • International revenue was $245 million, up 22% year-over-year and up 14% when adjusted for foreign exchange*

Income from operations: GAAP income from operations was $69 million, a 35% decrease from first quarter 2017. GAAP operating margin for the first quarter was 10%, down 8 percentage points from the same period last year.  The first quarter of 2018 was impacted by a $15 million restructuring charge and $23 million for legal settlements and non-recurring professional advisory fees associated with a non-routine stockholder matter.

Non-GAAP income from operations* was $167 million, a 5% increase from fourth quarter 2017 and a 7% increase from first quarter 2017. Non-GAAP operating margin* for the first quarter was 25%, up 1 percentage point from the fourth quarter of 2017 due to operational efficiency improvements, but down 1 percentage point from the same period last year due to two acquisitions that were completed subsequent to the first quarter of 2017.

Net income: GAAP net income was $54 million, a 28% decrease from first quarter 2017. Non-GAAP net income* was $136 million, a 19% increase from first quarter 2017.

EPS: GAAP EPS was $0.31 per diluted share, a 28% decrease from first quarter 2017 and a 33% decrease when adjusted for foreign exchange.*  Non-GAAP EPS was $0.79 per diluted share, a 22% increase from first quarter 2017 and a 17% increase when adjusted for foreign exchange.*

Adjusted EBITDA*: Adjusted EBITDA was $256 million, an 11% increase from first quarter 2017. Adjusted EBITDA margin* was 38%, flat compared to the first quarter of 2017.

Other first quarter 2018 results:

  • Cash from operations was $192 million, or 29% of revenue
  • Cash, cash equivalents and marketable securities was $1.3 billion as of March 31, 2018
  • The Company spent $20 million to repurchase 0.3 million shares of its common stock at an average price of $67.38 per share
  • The Company had approximately 171 million shares of common stock outstanding as of March 31, 2018

Adoption of new revenue recognition standard: Prior period results have been revised for the adoption of the new revenue recognition standard.  Under this standard, the way revenue is recognized changed for some of Akamai's customers and primarily impacts the revenue timing of a small number of licensed software customers.  The way Akamai recognizes revenue for its core Web and Media products is substantially unchanged.  Akamai will also begin capitalizing certain commission and incentive payments.  The revisions as a result of the new standard did not have a material impact on Akamai's annual revenue or results of operations, but did cause quarter-to-quarter fluctuations.  For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

*      See Use of Non-GAAP Financial Measures below for definitions

(1)

Revenue by Division – A customer-focused reporting view that reflects revenue from customers that are managed by the division. As of January 1, 2018, Akamai now reports its revenue in two divisions compared to the three divisions reported in 2017; the Media Division and Enterprise and Carrier Division were combined to form the new Media and Carrier Division. In addition, as the purchasing patterns and required account expertise of customers changes over time, Akamai may reassign a customer's division from one to another. In 2018 Akamai reassigned some of its customers from the Media and Carrier Division to the Web Division and revised historical results in order to reflect the most recent categorization and to provide a comparable view for all periods presented.

(2)

Revenue from Cloud Security Solutions – A product-focused reporting view that illustrates revenue from Cloud Security Solutions separately from all other solution categories.  During 2018, Akamai updated its methodology for allocating revenue to specific solutions when solutions are sold as a bundle.  During 2018, Akamai reassigned amounts from CDN and other solutions revenue to Cloud Security Solutions revenue and revised historical results in order to reflect the most recent allocation methodologies and to provide a comparable view for all periods presented.

(3)

Revenue from Internet Platform Customers – Revenue from six customers that are large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix.

Quarterly Conference Call
Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-844-578-9671 (or 1-508-637-5655 for international calls) and using passcode 4695086. A live webcast of the call may be accessed at www.akamai.com in the Investor section. In addition, a replay of the call will be available for two weeks following the conference by calling 1-855-859-2056 (or 1-404-537-3406 for international calls) and using passcode 4695086. The archived webcast of this event may be accessed through the Akamai website.

About Akamai
As the world's largest and most trusted cloud delivery platform, Akamai makes it easier for its customers to provide the best and most secure digital experiences on any device, anytime, anywhere.  Akamai's massively distributed platform is unparalleled in scale with over 200,000 servers across 130 countries, giving customers superior performance and threat protection. Akamai's portfolio of web and mobile performance, cloud security, enterprise access, and video delivery solutions are supported by exceptional customer service and 24/7 monitoring.  To learn why the top financial institutions, e-commerce leaders, media & entertainment providers, and government organizations trust Akamai please visit www.akamai.com, blogs.akamai.com, or @Akamai on Twitter.

 

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands)

March 31,
 2018


December 31,
2017 (1)

ASSETS




Current assets:




Cash and cash equivalents

$

363,703



$

313,382


Marketable securities

447,850



398,554


Accounts receivable, net

484,617



461,457


Prepaid expenses and other current assets

163,556



172,853


Total current assets

1,459,726



1,346,246


Property and equipment, net

845,118



862,535


Marketable securities

512,270



567,592


Goodwill

1,498,906



1,498,688


Acquired intangible assets, net

193,228



201,259


Deferred income tax assets

44,490



36,231


Other assets

133,166



136,365


Total assets

$

4,686,904



$

4,648,916


LIABILITIES AND STOCKHOLDERS' EQUITY




Current liabilities:




Accounts payable

$

81,239



$

80,278


Accrued expenses

253,075



283,743


Deferred revenue

95,490



70,495


Convertible senior notes

668,745




Other current liabilities

32,046



22,178


Total current liabilities

1,130,595



456,694


Deferred revenue

7,049



6,062


Deferred income tax liabilities

17,675



17,823


Convertible senior notes



662,913


Other liabilities

145,328



142,955


Total liabilities

1,300,647



1,286,447


Total stockholders' equity

3,386,257



3,362,469


Total liabilities and stockholders' equity

$

4,686,904



$

4,648,916




(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  Akamai will also begin capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

 

 

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME




Three Months Ended

(in thousands, except per share data)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Revenue

$

668,724



$

658,470



$

600,293


Costs and operating expenses:






Cost of revenue(2) (3)

234,825



229,940



205,727


Research and development(2)

65,065



59,673



52,162


Sales and marketing(2)

122,553



131,223



114,492


General and administrative(2) (3)

154,385



146,115



115,009


Amortization of acquired intangible assets

8,431



7,829



7,569


Restructuring charges

14,908



51,581




Total costs and operating expenses

600,167



626,361



494,959


Income from operations

68,557



32,109



105,334


Interest income

3,965



4,487



4,624


Interest expense

(4,850)



(4,850)



(4,597)


Other income (expense), net

21



473



(684)


Income before provision for income taxes

67,693



32,219



104,677


Provision for income taxes

13,979



4,699



30,094


Net income

$

53,714



$

27,520



$

74,583








Net income per share:






Basic

$

0.32



$

0.16



$

0.43


Diluted

$

0.31



$

0.16



$

0.43








Shares used in per share calculations:






Basic

170,116



169,429



173,158


Diluted

172,004



170,727



175,171




(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  Akamai will also begin capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

(2)

Includes stock-based compensation (see supplemental table for figures)

(3)

Includes depreciation and amortization (see supplemental table for figures)


 

 

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Cash flows from operating activities:






Net income

$

53,714



$

27,520



$

74,583


Adjustments to reconcile net income to net cash provided by operating activities:






Depreciation and amortization

104,095



99,396



86,533


Stock-based compensation

44,686



42,205



38,986


(Benefit) provision for deferred income taxes

(7,814)



(30,378)



28,425


Amortization of debt discount and issuance costs

4,850



4,850



4,597


Restructuring-related software charges

2,818



31,965




Other non-cash reconciling items, net

4,379



6,413



(129)


Changes in operating assets and liabilities, net of effects of acquisitions:






Accounts receivable

(18,419)



(40,631)



(19,876)


Prepaid expenses and other current assets

(4,927)



7,612



(47,172)


Accounts payable and accrued expenses

(31,312)



11,082



(23,940)


Deferred revenue

25,243



1,410



10,043


Other current liabilities

13,701



12,727



3,516


Other non-current assets and liabilities

996



23,270



(12,948)


Net cash provided by operating activities

192,010



197,441



142,618


Cash flows from investing activities:






Cash paid for acquired businesses, net of cash acquired

(79)



(171,872)



(10)


Purchases of property and equipment and capitalization of internal-use software development costs

(113,075)



(106,852)



(91,181)


Purchases of short- and long-term marketable securities

(73,352)



(77,399)



(92,306)


Proceeds from sales and maturities of short- and long-term marketable securities

75,736



154,390



324,138


Other non-current assets and liabilities

(715)



(420)



(335)


Net cash used in (provided by) investing activities

(111,485)



(202,153)



140,306


Cash flows from financing activities:






Proceeds from the issuance of common stock under stock plans

22,738



13,940



17,530


Employee taxes paid related to net share settlement of stock-based awards

(29,714)



(10,273)



(33,921)


Repurchases of common stock

(19,785)



(54,565)



(72,467)


Other non-current assets and liabilities

(3,900)






Net cash used in financing activities

(30,661)



(50,898)



(88,858)


Effects of exchange rate changes on cash, cash equivalents and restricted cash

1,165



631



5,019


Net increase (decrease) in cash, cash equivalents and restricted cash

51,029



(54,979)



199,085


Cash, cash equivalents and restricted cash at beginning of period

314,429



369,408



324,626


Cash, cash equivalents and restricted cash at end of period

$

365,458



$

314,429



$

523,711




(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  Akamai will also begin capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.




On January 1, 2018, Akamai also adopted Accounting Standards Update No. 2016-18, Statement of Cash Flows. Under this standard, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period cash on the statement of cash flows. Akamai retrospectively adopted this standard and revised cash flows from investing activities by ($0.2) million and $0.8 million for the three months ended December 31, 2017 and March 31, 2017, respectively, with a corresponding revision to total cash, cash equivalents and restricted cash.


 

 

AKAMAI TECHNOLOGIES, INC.

SUPPLEMENTAL REVENUE DATA – REVENUE BY DIVISION




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Web Division

$

352,837



$

354,821



$

303,488


Media and Carrier Division

315,887



303,649



296,805


Total revenue

$

668,724



$

658,470



$

600,293


Revenue growth rates year-over-year:






Web Division

16

%


16

%


13

%

Media and Carrier Division

6





(2)


Total revenue

11

%


8

%


5

%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):






Web Division

13

%


15

%


14

%

Media and Carrier Division

4



(1)



(1)


Total revenue

9

%


7

%


6

%

 

 

AKAMAI TECHNOLOGIES, INC.

SUPPLEMENTAL REVENUE DATA – REVENUE FROM CLOUD SECURITY SOLUTIONS




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Cloud Security Solutions

$

149,205



$

135,842



$

110,006


CDN and other solutions

519,519



522,628



490,287


Total revenue

$

668,724



$

658,470



$

600,293


Revenue growth rates year-over-year:






Cloud Security Solutions

36

%


34

%


34

%

CDN and other solutions

6



3




Total revenue

11

%


8

%


5

%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):






Cloud Security Solutions

32

%


33

%


36

%

CDN and other solutions

3



2



1


Total revenue

9

%


7

%


6

%



(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

(2)

See Use of Non-GAAP Financial Measures below for a definition

 

 

AKAMAI TECHNOLOGIES, INC.

SUPPLEMENTAL REVENUE DATA – REVENUE FROM INTERNET PLATFORM CUSTOMERS




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017(1)


March 31,
2017(1)

Revenue from Internet Platform Customers

$

44,391



$

49,992



$

51,391


Revenue excluding Internet Platform Customers

624,333



608,478



548,902


Total revenue

$

668,724



$

658,470



$

600,293


Revenue growth rates year-over-year:






Revenue from Internet Platform Customers

(14)

%


(14)

%


(29)

%

Revenue excluding Internet Platform Customers

14



10



10


Total revenue

11

%


8

%


5

%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):






Revenue from Internet Platform Customers

(14)

%


(14)

%


(29)

%

Revenue excluding Internet Platform Customers

11



9



11


Total revenue

9

%


7

%


6

%

 

 

AKAMAI TECHNOLOGIES, INC.

SUPPLEMENTAL REVENUE DATA – REVENUE BY GEOGRAPHY




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

U.S.

$

423,339



$

425,744



$

398,870


International

245,385



232,726



201,423


Total revenue

$

668,724



$

658,470



$

600,293


Revenue growth rates year-over-year:






U.S.

6

%


2

%


%

International

22



22



19


Total revenue

11

%


8

%


5

%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):






U.S.

6

%


2

%


%

International

14



18



21


Total revenue

9

%


7

%


6

%



(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

(2)

See Use of Non-GAAP Financial Measures below for a definition


 

 

AKAMAI TECHNOLOGIES, INC.

SUPPLEMENTAL OPERATING EXPENSE DATA




Three Months Ended

(in thousands)

March 31,
2018


December 31,
2017


March 31,
2017

General and administrative expenses:






Payroll and related costs

$

51,894



$

50,187



$

44,891


Stock-based compensation

12,922



11,359



10,115


Depreciation and amortization

19,888



19,845



18,528


Facilities-related costs

21,795



21,071



18,798


Provision for doubtful accounts

521



805



153


Acquisition-related costs

1,143



19,995



(209)


Legal and stockholder matter costs

23,091






License of patent

(4,215)



(4,169)



(4,035)


Professional and other expenses

27,346



27,022



26,768


Total general and administrative expenses

$

154,385



$

146,115



$

115,009








General and administrative expenses–functional(1):






Global functions

$

55,653



$

52,818



$

48,727


As a percentage of revenue

8

%


8

%


8

%

Infrastructure

78,192



76,666



70,373


As a percentage of revenue

12

%


12

%


12

%

Other

20,540



16,631



(4,091)


Total general and administrative expenses

$

154,385



$

146,115



$

115,009


As a percentage of revenue

23

%


22

%


19

%







Stock-based compensation:






Cost of revenue

$

5,296



$

5,259



$

4,685


Research and development

10,509



10,121



9,029


Sales and marketing

15,959



15,466



15,157


General and administrative

12,922



11,359



10,115


Total stock-based compensation

$

44,686



$

42,205



$

38,986




(1)

Global functions expense includes payroll, stock-based compensation and other employee-related costs for administrative functions, including finance, purchasing, order entry, human resources, legal, information technology and executive personnel, as well as third-party professional service fees. Infrastructure expense includes payroll, stock-based compensation and other employee-related costs for our network infrastructure functions, as well as facility rent expense, depreciation and amortization of facility and IT-related assets, software and software-related costs, business insurance and taxes. Our network infrastructure function is responsible for network planning, sourcing, architecture evaluation and platform security. Other expenses includes acquisition-related costs, provision for doubtful accounts, the license of a patent and legal and stockholder matter costs.


 

 

AKAMAI TECHNOLOGIES, INC.

OTHER SUPPLEMENTAL DATA




Three Months Ended

(in thousands, except end of period statistics)

March 31,
2018


December 31,
2017


March 31,
2017

Depreciation and amortization:






Network-related depreciation

$

38,235



$

37,223



$

35,255


Capitalized internal-use software development amortization

31,668



29,096



21,589


Other depreciation and amortization

19,498



19,498



18,209


Depreciation of property and equipment

89,401



85,817



75,053


Capitalized stock-based compensation amortization

5,569



5,029



3,471


Capitalized interest expense amortization

694



721



440


Amortization of acquired intangible assets

8,431



7,829



7,569


Total depreciation and amortization

$

104,095



$

99,396



$

86,533








Capital expenditures, excluding stock-based compensation and interest expense(1)(2):






Purchases of property and equipment

$

26,597



$

50,716



$

56,500


Capitalized internal-use software development costs

49,257



43,074



37,085


Total capital expenditures, excluding stock-based compensation and interest expense

$

75,854



$

93,790



$

93,585








End of period statistics:






Number of employees

7,454



7,650



6,672




(1)

Capital expenditures presented in this table are reported on an accrual basis, which differs from the cash-basis presentation in the statements of cash flows.  The primary difference between the two is the change in purchases of property and equipment and capitalization of internal-use software development costs accrued for, but not paid, at period end.

(2)

See Use of Non-GAAP Financial Measures below for a definition


 

 

AKAMAI TECHNOLOGIES, INC.

RECONCILIATION OF GAAP TO NON-GAAP INCOME FROM OPERATIONS, NET INCOME AND NET INCOME PER DILUTED SHARE




Three Months Ended

(in thousands, except per share data)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Income from operations

$

68,557



$

32,109



$

105,334


GAAP operating margin

10

%


5

%


18

%

Amortization of acquired intangible assets

8,431



7,829



7,569


Stock-based compensation

44,686



42,205



38,986


Amortization of capitalized stock-based compensation and capitalized interest expense

6,263



5,750



3,911


Restructuring charges

14,908



51,581




Acquisition-related costs

1,143



19,995



(208)


Legal and stockholder matter costs

23,091






Operating adjustments

98,522



127,360



50,258


Non-GAAP income from operations

$

167,079



$

159,469



$

155,592


Non-GAAP operating margin

25

%


24

%


26

%







Net income

$

53,714



$

27,520



$

74,583


Operating adjustments (from above)

98,522



127,360



50,258


Amortization of debt discount and issuance costs

4,850



4,850



4,597


Gain on investments



(450)




Income tax-effect of above non-GAAP adjustments and certain discrete tax items

(21,283)



(38,574)



(15,467)


Non-GAAP net income

$

135,803



$

120,706



$

113,971








GAAP net income per diluted share

$

0.31



$

0.16



$

0.43


Amortization of acquired intangible assets

0.05



0.05



0.04


Stock-based compensation

0.25



0.25



0.22


Amortization of capitalized stock-based compensation and capitalized interest expense

0.04



0.03



0.02


Restructuring charges

0.09



0.30




Acquisition-related costs

0.01



0.12




Legal and stockholder matter costs

0.13






Amortization of debt discount and issuance costs

0.03



0.03



0.03


Gain on investments






Income tax effect of above non-GAAP adjustments and certain discrete tax items

(0.12)



(0.23)



(0.09)


Non-GAAP net income per diluted share

$

0.79



$

0.71



$

0.65








Shares used in diluted per share calculations

172,004



170,727



175,171




(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  Akamai will also begin capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.

 

 

AKAMAI TECHNOLOGIES, INC.

RECONCILIATION OF GAAP NET INCOME TO ADJUSTED EBITDA




Three Months Ended

(in thousands, except per share data)

March 31,
2018


December 31,
2017 (1)


March 31,
2017 (1)

Net income

$

53,714



$

27,520



$

74,583


Interest income

(3,965)



(4,487)



(4,624)


Provision for income taxes

13,979



4,699



30,094


Depreciation and amortization

89,401



85,817



75,053


Amortization of capitalized stock-based compensation and capitalized interest expense

6,263



5,750



3,911


Amortization of acquired intangible assets

8,431



7,829



7,569


Stock-based compensation

44,686



42,205



38,986


Restructuring charges

14,908



51,581




Acquisition-related costs

1,143



19,995



(208)


Legal and stockholder matter costs

23,091






Amortization of debt discount and issuance costs

4,850



4,850



4,597


Gain on investments



(450)




Other (income) expense, net

(21)



(23)



684


Adjusted EBITDA

$

256,480



$

245,286



$

230,645


Adjusted EBITDA margin

38

%


37

%


38

%



(1)

Prior period information has been restated for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which Akamai adopted retrospectively on January 1, 2018. Under this standard, the way revenue is recognized changed for some of Akamai's contracts with customers.  Akamai will also begin capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. For more information, see the posted revisions to the consolidated statements of income and other key disaggregated revenue amounts in the Investor Relations section of Akamai's website at www.akamai.com.


 

Use of Non-GAAP Financial Measures

In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Akamai provides additional financial metrics that are not prepared in accordance with GAAP (non-GAAP). Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, to measure executive compensation and to evaluate Akamai's financial performance. These non-GAAP financial measures are non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per share, Adjusted EBITDA, Adjusted EBITDA margin, capital expenditures and impact of foreign currency exchange rates, as discussed below.

Management believes that these non-GAAP financial measures reflect Akamai's ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate Akamai's operating results and future prospects in the same manner as management. These non-GAAP financial measures may exclude expenses and gains that may be unusual in nature, infrequent or not reflective of Akamai's ongoing operating results.

The non-GAAP financial measures do not replace the presentation of Akamai's GAAP financial results and should only be used as a supplement to, not as a substitute for, Akamai's financial results presented in accordance with GAAP. Akamai has provided a reconciliation of each non-GAAP financial measure used in its financial reporting and investor presentations to the most directly comparable GAAP financial measure. This reconciliation captioned "Reconciliation of GAAP to Non-GAAP Financial Measures" can be found on the Investor Relations section of Akamai's website.

The non-GAAP adjustments, and Akamai's basis for excluding them from non-GAAP financial measures, are outlined below:

  • Amortization of acquired intangible assets – Akamai has incurred amortization of intangible assets, included in its GAAP financial statements, related to various acquisitions Akamai has made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, Akamai excludes amortization of acquired intangible assets from its non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.

  • Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to Akamai's employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of Akamai's current financial results to previous and future periods difficult to interpret; therefore, Akamai believes it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from its non-GAAP financial measures in order to highlight the performance of Akamai's core business and to be consistent with the way many investors evaluate its performance and compare its operating results to peer companies.

  • Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to Akamai's initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. Akamai excludes acquisition-related costs from its non-GAAP financial measures to provide a useful comparison of Akamai's operating results to prior periods and to its peer companies because such amounts vary significantly based on the magnitude of the acquisition transactions and do not reflect Akamai's core operations.

  • Restructuring charges – Akamai has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and estimated costs of exiting facility lease commitments. Akamai excludes these items from its non-GAAP financial measures when evaluating its continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of its business.

  • Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In February 2014, Akamai issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rate of the convertible senior notes was approximately 3.2%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity under GAAP, thereby reducing the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. All of Akamai's interest expense is comprised of these non-cash components and is excluded from management's assessment of the company's operating performance because management believes the non-cash expense is not representative of ongoing operating performance.

  • Legal and stockholder matter costs –Akamai has incurred losses related to the settlement of legal matters, costs from professional service providers related to a non-routine stockholder matter and costs with respect to its internal U.S. Foreign Corrupt Practices Act ("FCPA") investigation. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of Akamai's core business operations.

  • Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. Akamai believes that applying the non GAAP adjustments and their related income tax effect allows Akamai to highlight income attributable to its core operations.

Akamai's definitions of its non-GAAP financial measures are outlined below:

Non-GAAP income from operations – GAAP income from operations adjusted for the following items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; amortization of capitalized interest expense; acquisition-related costs; restructuring charges; benefit from adoption of software development activities; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred with respect to Akamai's internal FCPA investigation; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP operating margin – Non-GAAP income from operations stated as a percentage of revenue.

Non-GAAP net income – GAAP net income adjusted for the following tax-affected items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; benefit from adoption of software development activities; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred with respect to Akamai's internal FCPA investigation; loss on early extinguishment of debt; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP net income per share – Non-GAAP net income divided by basic weighted average or diluted common shares outstanding. Basic weighted average shares outstanding are those used in GAAP net income per share calculations. Diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to Akamai pursuant to the note hedge transaction entered into in connection with the issuance of $690 million of convertible senior notes due 2019. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, the company would receive a benefit from the note hedge transaction and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of operating performance. Unless and until Akamai's weighted average stock price is greater than $89.56, the initial conversion price, there will be no difference between GAAP and non-GAAP diluted weighted average common shares outstanding.

Adjusted EBITDA – GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; benefit from adoption of software development activities; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred with respect to Akamai's internal FCPA investigation; foreign exchange gains and losses; loss on early extinguishment of debt; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; and other non-recurring or unusual items that may arise from time to time.

Adjusted EBITDA margin – Adjusted EBITDA stated as a percentage of revenue.

Capital expenditures, or capex, excluding stock-based compensation and interest expense – Purchases of property and equipment and capitalization of internal-use software development costs presented on an accrual basis, which differs from the cash-basis presentation included in the statements of cash flows. The primary difference between the two is the change in purchases of property and equipment and capitalization of internal-use software development costs accrued for, but not paid, at period end.

Impact of Foreign Currency Exchange Rates – Revenue and earnings from international operations have historically been an important contributor to Akamai's financial results. Consequently, Akamai's financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount.  The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.

Akamai Statement Under the Private Securities Litigation Reform Act

This release and/or our quarterly earnings conference call scheduled for later today contain information about future expectations, plans and prospects of Akamai's management that constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, including statements about expected revenue growth and future profitability levels. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, failure of our investments in innovation to generate solutions that are accepted in the market; inability to increase our revenue at the same rate as in the past and keep our expenses from increasing at a greater rate than our revenues; delay in developing or failure to develop new service offerings or functionalities, and if developed, lack of market acceptance of such service offerings and functionalities or failure of such solutions to operate as expected, and other factors that are discussed in the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and other documents periodically filed with the SEC.

In addition, the statements in this press release and on such call represent Akamai's expectations and beliefs as of the date of this press release. Akamai anticipates that subsequent events and developments may cause these expectations and beliefs to change. However, while Akamai may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Akamai's expectations or beliefs as of any date subsequent to the date of this press release.

Contacts:

Chris Nicholson





Tom Barth

Media Relations





Investor Relations

Akamai Technologies





Akamai Technologies

617-444-2987





617-274-7130

cnichols@akamai.com





tbarth@akamai.com

 

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SOURCE Akamai Technologies, Inc.

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