AKAMAI TECHNOLOGIES, INC. 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 condensed consolidated financial statements included herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. 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," "could," "expects," "anticipates," "intends," "plans," "projects," "estimates," "forecasts," "if," "continues," "goal," "likely," "may," "will" 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, including the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof. Our management's discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted inthe 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 condensed 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 development costs, impairment and useful lives of long-lived assets, income taxes 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-endedDecember 31, 2021 for further discussion of our critical accounting policies and estimates. Overview We provide solutions to power and protect life online. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our security and performance offerings, increase media traffic on our network, effectively manage the prices we charge for our solutions, develop new products and carefully manage our capital spending and other expenses. The purpose of this discussion and analysis section is to provide material information relevant to an assessment of our financial condition and results of operations from management's perspective, including to describe and explain key trends, events and other factors that impacted our reported results and that are likely to impact our future performance.
Revenue
For most of our solutions, our customers commit to contracts having terms of a year or longer, which allows us to have a consistent and predictable base level of revenue. In addition to a base level of revenue, we are also dependent on media customers where usage of our solutions is more variable. As a result, our revenue is impacted by the amount of media and software download traffic we serve on our network, the rate of adoption of gaming, social media and video platform offerings, the timing and variability of customer-specific one-time events and geopolitical, economic and other developments that impact our customers' businesses. Seasonal variations that impact traffic on our network, such as holiday-related activities, can cause revenue fluctuations from quarter to quarter. Over the longer term, our ability to expand our product portfolio and to effectively manage the prices we charge for our solutions are key factors impacting our revenue growth.
We have observed the following trends related to our revenue in recent years:
•Increased sales of our security, and more recently, compute solutions have made
a significant contribution to revenue growth. We plan to continue to invest in
these areas with a focus on further enhancing our product portfolios and
extending our go-to-market capabilities, particularly in certain markets and
through our channel partners.
•We have experienced increases in the amount of traffic delivered for customers
that use our delivery solutions for video, gaming downloads and social media.
During 2020 and in early 2021, we saw a dramatic increase in traffic
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growth on our network related to the shutdowns and restrictions related to the
novel coronavirus, or COVID-19, pandemic. Primarily as a result of the rollback
of many pandemic-related restrictions, we saw the rate of traffic growth
moderate during 2021 and the first three months of 2022. We do not expect the
events related to the COVID-19 pandemic, and its impact to our revenue growth
rates, to repeat in the foreseeable future. We expect traffic delivered for our
customers to continue to grow, but anticipate growth rates will moderate.
•The prices paid by some of our customers have declined due to competition and
contract renewals. During the first quarter of 2022 as compared to 2021, we
experienced a decline in revenue from our delivery solutions due to the above
factors. While we have increased committed recurring revenue from our solutions
by upselling incremental solutions to our existing customers and adding new
customers to offset the negative trends, we expect revenue challenges from our
delivery solutions to continue in 2022.
•Revenue from our international operations has been growing at a faster pace
than from our U.S. operations, particularly in terms of new customer
acquisition, increases in traffic and cross-selling of incremental solutions.
Because we publicly report in U.S. dollars, and due to the strengthening U.S.
dollar, our reported revenue results have been negatively impacted during the
first quarter of 2022. We expect to continue to be impacted by the strengthening
U.S. dollar during the remainder of 2022. However, conversely, a weaker dollar
would benefit our reported results.
•We have experienced variations in certain types of revenue from quarter to
quarter. In particular, we typically experience higher revenue in the fourth
quarter of each year for some of our solutions as a result of holiday season
activity. In addition, we experience quarterly variations in revenue
attributable to, among other things, the nature and timing of software and
gaming releases by our customers; whether there are large live sporting or other
events or situations that impact the amount of media traffic on our network; and
the frequency and timing of purchases of custom solutions or licensed software.
Expenses
Our level of profitability is also impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs. We have observed the following trends related to our profitability in recent years: •Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels and serving more traffic from higher cost regions. We will need to continue to effectively manage our bandwidth costs to maintain current levels of profitability. •Co-location costs, which include the costs of energy to power our network, are also a significant portion of our 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, including combating the rise of energy costs, particularly inEurope . We expect to continue to scale our network in the future and will need to continue to effectively manage our co-location costs to maintain current levels of profitability. •Network build-out and supporting service costs represent another significant portion of our cost of revenue. These costs include maintenance and supporting services incurred as we continue to build-out our global network. We have seen these costs increase in recent years, as a result of our network expansion and pricing pressure from vendors. As we continue to invest in our network, we will need to effectively manage our network build-out and supporting costs. •Our employees are core to the operations of our business, and payroll and related costs, including stock-based compensation, is one of our largest expenses. It is important to the success of operations that we offer competitive compensation packages. However, we need to ensure we continue to focus on the right investments and maintain operational efficiencies to mitigate the rising cost of talent. We plan to continue to hire employees in support of our strategic initiatives, but do not expect overall headcount to increase significantly in 2022. •Depreciation expense related to our network equipment also contributes to our overall expense levels, and we expect to continue to invest in our network in 2022, which will increase our capital expenditures and resulting depreciation expense. 27 -------------------------------------------------------------------------------- Table of Contents Recent Acquisitions InMarch 2022 , we acquired all of the outstanding equity interests ofLinode Limited Liability Company , orLinode , for$898.8 million .Linode is an infrastructure-as-a-service platform provider that allows for developer-friendly cloud computing capabilities. The acquisition is intended to enhance our computing services by creating a unique cloud platform to build, run and secure applications from the cloud to the edge.Linode has approximately 250 employees. InOctober 2021 , we acquiredGuardicore Ltd. , orGuardicore , for$610.4 million in cash.Guardicore's micro-segmentation solution is designed to limit user access to only those applications that are authorized to communicate with each other, thereby limiting the spread of malware and protecting the flow of enterprise data across the network.Guardicore has approximately 270 employees, and the acquisition is expected to be dilutive to our earnings per share at least through 2022.
Remote Work
As ofMay 2022 , all of our offices are open for employees who would prefer to work from one of our offices. We have a rigorous process for assessing whether any office can remain open based on local government regulations, local health trends and business needs. Except for employees whose job responsibilities require in-office work, none of our employees are required to fully return to the office, even those that are currently open. In addition, we launched our FlexBase program inMay 2022 , which allows the more than 90% of our workforce designated as flexible to choose whether they want to work from an Akamai office or their home office, even after we decide it is safe to open all of our offices in light of the COVID-19 pandemic. Our operations have not been significantly disrupted by the shift to remote working. While we have incurred and expect to continue to incur expenses associated with enabling remote work, reconfiguring work spaces to help ensure the safety and well-being of employees accessing our locations and re-thinking our facility footprint and the way we utilize office space, we do not currently believe those costs will materially impact our financial condition or results of operations. Global Developments During the first quarter of 2022, several global macro-economic and geopolitical developments have emerged. These developments did not have a significant impact on our results of operations during the first quarter of 2022, but we anticipate they may in the remainder of 2022. We experienced the strengthening of theU.S. dollar, which is expected to have a negative impact on our revenue for the remainder of 2022. We have also experienced a decline in revenue related to the war inUkraine . Approximately 1% of our revenue is generated from traffic we serve intoRussia ,Belarus andUkraine . We have seen a decrease in traffic in these countries since the war began and expect to continue to experience a decline in 2022 as compared to 2021. Our board of directors is continuing to oversee risks related to macro-economic and geopolitical developments, including the war inUkraine , and management is monitoring these developments, including the potential impact from the war on our business. As a result of overall macro-economic trends, concerns of a potential recession and future projections of traffic consumption that suggest traffic growth will moderate as restrictions related to the COVID-19 pandemic are lifted, we anticipate our traffic will grow, but at a more moderate pace than we have experienced previously. 28 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth, as a percentage of revenue, condensed consolidated statements of income data for the periods indicated:
For the Three Months
Ended March 31,
2022 2021
Revenue 100.0 % 100.0 %
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets
shown below) 36.8 36.4
Research and development 11.1 9.7
Sales and marketing 13.6 13.8
General and administrative 17.0 16.2
Amortization of acquired intangible assets 1.5 1.4
Restructuring charge 0.9 0.8
Total costs and operating expenses 80.9 78.3
Income from operations 19.1 21.7
Interest and marketable securities (loss) income, net - 0.5
Interest expense (0.3) (2.1)
Other expense, net (1.1) (0.1)
Income before provision for income taxes 17.7 20.0
Provision for income taxes (3.8) (1.4)
Loss from equity method investment (0.8) (0.1)
Net income 13.1 % 18.5 %
Revenue
Revenue by solution was previously reported by product group: Security
Technology Group and Edge Technology Group . Revenue from security solutions was
previously presented as Security Technology Group revenue. Revenue from delivery
and compute solutions was previously presented as Edge Technology Group revenue.
Revenue by solution category during the periods presented was as follows (in
thousands):
For the Three Months
Ended March 31,
2022 2021 % Change % Change at Constant Currency
Security $ 381,567 $ 310,219 23.0 % 25.5 %
Delivery 444,148 473,669 (6.2) (4.4)
Compute 77,932 58,820 32.5 34.8
Total revenue $ 903,647 $ 842,708 7.2 % 9.3 %
During the three-month period ended March 31, 2022 , the increase in our revenue
as compared to the same period in 2021 was primarily the result of continued
strong growth in sales of solutions offered by our security solutions, in
addition to growth in sales of our compute solutions. However, these increases
were impacted by the significant strengthening of the U.S. dollar.
The increase in security solutions revenue for the three-month period ended
March 31, 2022 , as compared to the same period in 2021, was due to growth across
our security products portfolio, including Bot Manager, Kona Site Defender and
our Zero Trust security solutions as well as strong performance from Guardicore
solutions.
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The decrease in delivery solutions revenue for the three-month period ended
March 31, 2022 , as compared to the same period in 2021, was primarily due to
reductions in sales of application performance solutions, partially offset by
moderate growth in over-the-top, or OTT.
The increase in compute solutions revenue for the three-month period ended
March 31, 2022 , as compared to the same period in 2021, was primarily due to
strong growth in compute products, including through the acquisition of Linode
in 2022, and continued growth in cloud optimization solutions.
Revenue derived in the U.S. and internationally during the periods presented was
as follows (in thousands):
For the Three Months
Ended March 31,
2022 2021 % Change % Change at Constant Currency
U.S. $ 481,007 $ 463,180 3.8 % 3.8 %
International 422,640 379,528 11.4 16.1
Total revenue $ 903,647 $ 842,708 7.2 % 9.3 %
For the three-month period ended March 31, 2022 , approximately 46.8% of our
revenue was derived from our operations located outside the U.S. , compared to
45.0% for the three-month period ended March 31, 2021 . We have seen strong
revenue growth across all our international regions, particularly in the Asia
Pacific region. No single country outside the U.S. accounted for 10% or more of
revenue during either of these periods. Changes in foreign currency exchange
rates impacted our revenue by a unfavorable $17.7 million during the three-month
period ended March 31, 2022 , as compared to the same period in 2021. We expect
to continue to be impacted by the significant strengthening of the U.S. dollar
in 2022.
Cost of Revenue
Cost of revenue consisted of the following for the periods presented (in
thousands):
For the Three Months
Ended March 31,
2022 2021 % Change
Bandwidth fees $ 51,082 $ 53,230 (4.0) %
Co-location fees 48,498 42,543 14.0
Network build-out and supporting services 42,919 36,434 17.8
Payroll and related costs 74,481 68,249 9.1
Acquisition-related costs 175 - 100.0Stock-based compensation, including amortization of prior capitalized amounts
13,458 14,329 (6.1)
Depreciation of network equipment 61,386 51,896 18.3
Amortization of internal-use software 40,753 40,006 1.9
Total cost of revenue $ 332,752 $ 306,687 8.5 %
As a percentage of revenue 36.8 % 36.4 %
The increase in cost of revenue for the three-month period ended March 31, 2022 ,
as compared to the same period in 2021, was primarily due to increased
investment in our network to support current and anticipated future traffic
growth, which resulted in higher depreciation costs of our network equipment,
increases in payroll and related costs, increases to amounts paid for network
build-out and supporting services and increases to expenses related to our
co-location facilities.
During the remainder of 2022, we anticipate cost of revenues to increase, in
particular amortization of internal-use software, depreciation of network
equipment and payroll and related costs, due to continued investments in our
network, as well as our recent acquisitions. We plan to continue to focus our
efforts on managing our operating margins, including continuing to manage our
bandwidth, co-location and network build-out costs.
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Research and Development Expenses
Research and development expenses consisted of the following for the periods
presented (in thousands):
For the Three Months
Ended March 31,
2022 2021 % Change
Payroll and related costs $ 122,248 $ 113,420 7.8 %
Stock-based compensation 20,232 18,369 10.1
Capitalized salaries and related costs (48,670) (52,491) (7.3)
Acquisition-related costs 76 - 100.0
Other expenses 6,049 2,747 120.2
Total research and development $ 99,935 $ 82,045 21.8 %
As a percentage of revenue 11.1 % 9.7 %
The increase in research and development expenses during the three-month period
ended March 31, 2022 , as compared to the same period in 2021, was due to
increased payroll and related costs, including stock-based compensation,
primarily due to headcount growth to support our strategic initiatives and from
our recent acquisitions. This increase was also impacted by an increase in other
expenses which was mainly related to increased computer services.
Research and development costs are expensed as incurred, other than certain
internal-use software development costs eligible for capitalization. Capitalized
development costs consist of payroll and related costs for personnel and
external consulting expenses involved in the development of internal-use
software used to deliver our services and operate our network. During the
three-month periods ended March 31, 2022 and 2021, we capitalized $7.2 million
and $8.7 million , respectively, of stock-based compensation. These capitalized
internal-use software development costs are amortized to cost of revenue over
their estimated useful lives, which is generally two years, but can be up to
seven years based on the software developed and its expected useful life.
We expect research and development costs to increase in the remainder of 2022 to
support our innovation initiatives and incremental headcount due to hiring for
our strategic investments and our employees acquired through our recent
acquisitions.
Sales and Marketing Expenses
Sales and marketing expenses consisted of the following for the periods
presented (in thousands):
For the Three Months
Ended March 31,
2022 2021 % Change
Payroll and related costs $ 94,861 $ 93,559 1.4 %
Stock-based compensation 12,326 12,478 (1.2)
Marketing programs and related costs 11,558 8,450 36.8
Acquisition-related costs 76 - 100.0
Other expenses 3,898 1,867 108.8
Total sales and marketing $ 122,719 $ 116,354 5.5 %
As a percentage of revenue 13.6 % 13.8 %
The increase in sales and marketing expenses during the three-month period ended
March 31, 2022 , as compared to the same period in 2021, was due to increased
marketing programs and related costs due to increased marketing and advertising
spend in anticipation for upcoming events.
We expect sales and marketing costs to increase in the remainder of 2022. However, we plan to continue to carefully manage costs in an effort to manage our operating margins and to refine and optimize our go-to-market efforts.
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General and Administrative Expenses
General and administrative expenses consisted of the following for the periods
presented (in thousands):
For the Three Months
Ended March 31,
2022 2021 % Change
Payroll and related costs $ 53,317 $ 56,450 (5.6) %
Stock-based compensation 17,436 16,362 6.6
Depreciation and amortization 19,678 20,909 (5.9)
Facilities-related costs 26,579 24,347 9.2
Provision (benefit) for doubtful accounts 1,288 (260) 595.4
Acquisition-related costs 10,616 64 16,487.5
Other expenses 24,348 18,843 29.2
Total general and administrative $ 153,262 $ 136,715 12.1 %
As a percentage of revenue 17.0 % 16.2 %
The increase in general and administrative expenses for the three-month period
ended March 31, 2022 , as compared to the same period in 2021, was primarily due
to acquisition-related costs from our acquisition of Linode and other expenses
due to an increase in professional service fees.
General and administrative expenses for the three-month periods ended
For the Three Months
Ended March 31,
2022 2021 % Change
Global functions $ 56,131 $ 55,799 0.6 %
As a percentage of revenue 6.2 % 6.6 %
Infrastructure 85,199 81,109 5.0
As a percentage of revenue 9.4 % 9.6 %
Other 11,932 (193) 6,282.4
Total general and administrative $ 153,262 $ 136,715 12.1 %
As a percentage of revenue 17.0 % 16.2 %
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 expense includes
acquisition-related costs and provision for doubtful accounts.
During the remainder of 2022, we expect payroll and related costs of our general and administrative functions to increase as compared to 2021 as a result of headcount growth to support the operations of the business, but we plan to continue to carefully manage costs in an effort to manage our operating margins.
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Amortization of Acquired Intangible Assets
For the Three Months
Ended March 31,
(in thousands) 2022 2021 % Change
Amortization of acquired intangible assets $ 13,644 $ 11,427 19.4 %
As a percentage of revenue 1.5 % 1.4 %
The increase in amortization of acquired intangible assets for the three-month
period ended March 31, 2022 , as compared to the same period in 2021, was the
result of amortization of assets related to our recent acquisitions. Based on
our intangible assets at March 31, 2022 , we expect amortization of acquired
intangible assets to be $50.4 million for the remainder of 2022, and $61.3
million , $65.8 million , $66.2 million and $59.9 million for 2023, 2024, 2025 and
2026, respectively.
Restructuring Charge
For the Three Months
Ended March 31,
(in thousands) 2022 2021 % Change
Restructuring charge $ 8,016 $ 7,116 12.6 %
As a percentage of revenue 0.9 % 0.8 %
The restructuring charge for the three-month period ended March 31, 2022 was
primarily related to software impairment charges related to the suspension of
Global Open Network, Inc. , or GO-NET. See Note 8 to the condensed consolidated
financial statements for additional information. We do not expect to incur any
material additional restructuring charges related to these actions.
The restructuring charge for the three-month period ended March 31, 2021 was
primarily the result of management actions initiated in late 2020 to better
position us to become more agile in delivering our solutions. The restructuring
charge for this 2020 action predominately consists of certain severance and
related benefits. We do not expect to incur any material additional
restructuring charges related to these actions.
Non-Operating (Expense) Income
For the Three Months
Ended March 31,
(in thousands) 2022 2021 % Change
Interest and marketable securities (loss) income, net
4,578 (104.6) % As a percentage of revenue - % 0.5 % Interest expense$ (2,695) $ (17,834) (84.9) % As a percentage of revenue (0.3) % (2.1) % Other expense, net$ (9,565) $ (817) 1,070.7 % As a percentage of revenue (1.1) % (0.1) % Interest and marketable securities (loss) income, net consists of interest earned on invested cash balances, marketable securities and income and losses on mutual funds that are associated with our employee non-qualified deferred compensation plan. The decrease for the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, was due to increased losses associated with the non-qualified deferred compensation plan, which was partially offset by interest earned on invested cash balances and marketable securities. Interest expense is related to our debt transactions, which are described in Note 7 to the condensed consolidated financial statements. The decrease in interest expense for the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, was primarily the result of the adoption of the new guidance for accounting for convertible senior notes onJanuary 1, 2022 which resulted in the elimination of the amortization of debt discounts. 33
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Other expense, net primarily represents net foreign exchange gains and losses mainly due to foreign exchange rate fluctuations on intercompany transactions and other non-operating expense and income items. The three-month period endedMarch 31, 2022 , as compared to the same period in 2021, includes a$8.9 million impairment from an equity investment in 2022, partially offset by a favorable impact of changes in foreign currency exchange rates.
Provision for Income Taxes
For the Three Months
Ended March 31,
(in thousands) 2022 2021 % Change
Provision for income taxes
For the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, our provision for income taxes increased due to an increase in the tax on global intangible low taxed income, an intercompany sale of intellectual property and a decrease in foreign income taxed at lower rates. These amounts were partially offset by equity method earnings and a decrease in profitability. For the three-month period endedMarch 31, 2022 , our effective income tax rate was higher than the federal statutory tax rate due to an intercompany sale of intellectual property, tax on global intangible low taxed income and non-deductible stock based compensation. These amounts were partially offset by foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit ofU.S. federal, state and foreign research and development credits. For the three-month period endedMarch 31, 2021 , our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation, the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations and the benefit ofU.S. federal, state and foreign research and development credits. These amounts were partially offset by the impact of the valuation allowance recorded against deferred tax assets related to state tax credits, non-deductible stock-based compensation and state taxes. In determining our net deferred tax assets and valuation allowances, annualized effective income tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.
Loss from
For the Three Months
Ended March 31,
(in thousands) 2022 2021 % Change
Loss from equity method investment $ (7,635) $ (698) 993.8 %
As a percentage of revenue (0.8) % (0.1) %
The amounts reflected in loss from equity method investment relate to
recognition of our share of losses from our investment with Mitsubishi UFJ
Financial Group in a joint venture, GO-NET. GO-NET intended to operate a
blockchain-based online payment network. In February 2022 , MUFG, the majority
owner of GO-NET, announced it was preparing to suspend the operations of GO-NET
and to ultimately liquidate it. The increase in the loss from equity method
investments during the three-month period ended March 31, 2022 is the result of
our impairment of our investment in GO-NET since the operations are planning to
wind down and no longer generate future income. We do not expect additional
material impacts related to this investment.
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Non-GAAP Financial Measures
In addition to providing financial measurements based on GAAP, we provide
additional financial metrics that are not prepared in accordance with GAAP, or
non-GAAP financial measures. 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 our 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 our ongoing
business in a manner that allows for meaningful comparisons and analysis of
trends in the business, as they facilitate comparison of financial results
across accounting periods and to those of our peer companies. Management also
believes that these non-GAAP financial measures enable investors to evaluate our
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 our ongoing operating results.
The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.
The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:
•Amortization of acquired intangible assets - We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have 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, we exclude amortization of acquired intangible assets from our 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 our 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 our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our 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, as well as certain additional compensation costs payable to employees acquired from theLinode acquisition if employed for a certain period of time. The additional compensation cost was initiated by and determined by the seller and is in addition to normal levels of compensation, including retention programs, offered by Akamai. Acquisition-related costs are impacted by the timing and size of the acquisitions, and we exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of operating results to prior periods and to peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions and do not reflect our core operations. •Restructuring charges - We have incurred restructuring charges from programs that have significantly changed either the scope of the business undertaken by us or the manner in which that business is conducted. These charges include severance and related expenses for workforce reductions, impairments of long-lived assets that will no longer be used in operations (including right-of-use assets, other facility-related property and equipment and internal-use software) and termination fees for any contracts cancelled as part of these programs. We exclude these items from our non-GAAP financial measures when evaluating our 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 our business. 35 -------------------------------------------------------------------------------- Table of Contents •Amortization of debt discount and issuance costs and amortization of capitalized interest expense - InAugust 2019 , we issued$1,150 million of convertible senior notes due 2027 with a coupon interest rate of 0.375%. InMay 2018 , we issued$1,150 million of convertible senior notes due 2025 with a coupon interest rate of 0.125%. The imputed interest rates of these convertible senior notes were 3.10% and 4.26%, respectively. This is a result of the debt discounts recorded for the conversion features that, prior toJanuary 1, 2022 , were required to be separately accounted for as equity under GAAP, thereby reducing the carrying values of the convertible debt instruments. The debt discounts were amortized as interest expense. OnJanuary 1, 2022 , we adopted the new guidance for accounting for convertible instruments, which eliminated separate accounting for the equity portion, and thus the amortization of the debt discount that was recorded as interest expense. Prior toJanuary 1, 2022 , we excluded this non-cash interest expense from our non-GAAP results because it was not representative of ongoing operating performance. AfterJanuary 1, 2022 , this interest expense is no longer included in or excluded from GAAP or non-GAAP results. Additionally, the issuance costs of the convertible senior notes are amortized as interest expense and are also excluded from our non-GAAP results because management believes the non-cash amortization expense is not representative of ongoing operating performance. •Gains and losses on investments - We have recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to these gains and losses are not representative of our core business operations and ongoing operating performance. •Legal settlements - We have incurred losses related to the settlement of legal matters. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations. •Endowment of Akamai Foundation - We have incurred expenses to endow theAkamai Foundation , a private corporate foundation dedicated to encouraging the next generation of technology innovators by supporting math and science education. Our first endowment was in 2018 to enable a permanent endowment for theAkamai Foundation to allow it to expand its reach. In the fourth quarter of 2020 we supplemented the endowment to enable specific initiatives to increase diversity in the technology industry. We believe excluding these amounts from non-GAAP financial measures is useful to investors as these infrequent expenses are not representative of our core business operations. •Income and losses from equity method investment - We record income or losses on our share of earnings and losses from our equity method investment. We exclude such income and losses because we do not direct control over the operations of the investment and the related income and losses are not representative of our 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. We believe that applying the non-GAAP adjustments and their related income tax effect allows us to highlight income attributable to our core operations. 36
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The following table reconciles GAAP income from operations to non-GAAP income
from operations and non-GAAP operating margin for the periods presented (in
thousands):
For the Three Months
Ended March 31,
2022 2021
Income from operations $ 173,319 $ 182,364
Amortization of acquired intangible assets 13,644 11,427
Stock-based compensation 56,227 54,305
Amortization of capitalized stock-based compensation and capitalized interest
expense 7,947 8,598
Restructuring charge 8,016 7,116
Acquisition-related costs 10,943 64
Non-GAAP income from operations GAAP operating margin 19 % 22 % Non-GAAP operating margin 30 % 31 %
The following table reconciles GAAP net income to non-GAAP net income for the periods presented (in thousands):
For the Three Months
Ended March 31,
2022 2021
Net income $ 119,163 $ 155,695
Amortization of acquired intangible assets 13,644 11,427
Stock-based compensation 56,227 54,305
Amortization of capitalized stock-based compensation and capitalized interest
expense 7,947 8,598
Restructuring charge 8,016 7,116
Acquisition-related costs 10,943 64
Amortization of debt discount and issuance costs 1,119 16,257
Loss on investments 8,901 -
Loss from equity method investment 7,635 698
Income tax effect of above non-GAAP adjustments and certain discrete tax
items (8,800) (26,346)
Non-GAAP net income $ 224,795 $ 227,814
37
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The following table reconciles GAAP net income per diluted share to non-GAAP net
income per diluted share for the periods presented (in thousands, except per
share data):
For the Three Months
Ended March 31,
2022 2021
GAAP net income per diluted share $ 0.73 $ 0.94
Amortization of acquired intangible assets 0.08 0.07
Stock-based compensation 0.34 0.33
Amortization of capitalized stock-based compensation and capitalized interest
expense 0.05 0.05
Restructuring charge 0.05 0.04
Acquisition-related costs 0.07 -
Amortization of debt discount and issuance costs 0.01 0.10
Loss on investments 0.05 -
Loss from equity method investment 0.05 -
Income tax effect of above non-GAAP adjustments and certain discrete tax items
(0.05) (0.16)
Adjustment for shares(1) 0.02 0.01
Non-GAAP net income per diluted share (2) Shares used in GAAP per diluted share calculations 163,637 165,688 Impact of benefit from note hedge transactions(1) (1,822) (954) Shares used in non-GAAP per diluted share calculations(1) 161,815 164,734 (1) Shares used in non-GAAP per diluted share calculations have been adjusted for the periods presented for the benefit of our note hedge transactions. During the periods presented Akamai's average stock price was in excess of$95.10 , which is the initial conversion price of our convertible senior notes due in 2025. See further definition below. (2) Amounts may not foot due to rounding. Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by diluted weighted average common shares outstanding. GAAP diluted weighted average common shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of our convertible senior notes. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of net income per share. Unless our weighted average stock price is greater than$95.10 , the initial conversion price of the convertible senior notes due 2025, or$116.18 , the initial conversion price of the convertible senior notes due 2027, there will be no difference between our GAAP and non-GAAP diluted weighted average common shares outstanding. We consider Adjusted EBITDA to be another important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that we do not consider to be part of our core operations. We define Adjusted EBITDA as GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses on equity method investment; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue. 38 -------------------------------------------------------------------------------- Table of Contents The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the periods presented (in thousands): For the Three Months Ended March 31, 2022 2021 Net income$ 119,163 $ 155,695 Interest and marketable securities (loss) income, net 211 (4,578) Provision for income taxes 34,050 11,898 Depreciation and amortization 121,188 111,484
Amortization of capitalized stock-based compensation and capitalized interest expense
7,947 8,598
Amortization of acquired intangible assets 13,644 11,427
Stock-based compensation 56,227 54,305
Restructuring charge 8,016 7,116
Acquisition-related costs 10,943 64
Interest expense 2,695 17,834
Loss on investments 8,901 -
Loss from equity method investment 7,635 698
Other expense, net 664 817
Adjusted EBITDA $ 391,284 $ 375,358
Net income margin 13 % 18 %
Adjusted EBITDA margin 43 % 45 %
Impact of Foreign Currency Exchange Rates
Revenue and earnings from our international operations have historically been important contributors to our financial results. Consequently, our 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, generally our consolidated results stated inU.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.
Liquidity and Capital Resources
To date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As ofMarch 31, 2022 , our cash, cash equivalents and marketable securities, which consisted of corporate bonds andU.S. government agency obligations, totaled$1.3 billion . We place our cash investments in instruments that meet high-quality credit standards, as specified in our investment policy. Our investment policy is also designed to limit the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity at all times. Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as accounts receivable, deferred revenues, accounts payable and various accrued expenses, as well as changes in our capital and financial structure due to common stock repurchases, debt repayments and issuances, purchases and sales of marketable securities and similar events. We believe our strong balance sheet and cash position are important competitive 39 -------------------------------------------------------------------------------- Table of Contents differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business. As ofMarch 31, 2022 , we had cash and cash equivalents of$264.9 million held in accounts outside theU.S. The TCJA establishes a territorial tax system in theU.S. , which provides companies with the potential ability to repatriate earnings with minimalU.S. federal income tax impact. As a result, our liquidity is not expected to be materially impacted by the amount of cash and cash equivalents held in accounts outside theU.S.
Cash Provided by Operating Activities
For the Three Months
Ended March 31,
(in thousands) 2022 2021
Net income $ 119,163 $ 155,695 Non-cash reconciling items included in net income 215,496
205,023
Changes in operating assets and liabilities (112,208) (110,925)
Net cash provided by operating activities $ 222,451 The decrease in cash provided by operating activities for the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, was primarily due to timing of income tax payments.
Cash Used in Investing Activities
For the Three Months
Ended March 31,
(in thousands) 2022 2021
Cash paid for acquisitions, net of cash acquired $
(872,099)
Purchases of property and equipment and capitalization of internal-use software development costs
(131,359) (164,719)
Net marketable securities activity 691,802 143,870
Other investing activity (5,242) 179
Net cash used in investing activities $
(316,898)
The increase in cash used in investing activities during the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, was driven by cash paid for the acquisition ofLinode , offset by an increase in net marketable securities activities in anticipation of needing to fund our acquisition ofLinode , partially inMarch 2022 . 40 -------------------------------------------------------------------------------- Table of Contents Cash Used in Financing Activities For the Three Months Ended March 31, (in thousands) 2022 2021
Proceeds from borrowings under revolving credit facility
$ -
Activity related to stock-based compensation (32,878) (42,536) Repurchases of common stock (102,853) (58,241) Other financing activities (104) - Net cash used in financing activities$ (60,835)
The decrease in cash used in financing activities during the three-month period endedMarch 31, 2022 , as compared to the same period in 2021, was primarily the result of borrowings under the revolving credit facility, which was partially offset by increases in share repurchases. EffectiveJanuary 2022 , our board of directors authorized a new$1.8 billion share repurchase program throughDecember 31, 2024 . As ofMarch 31, 2022 ,$1.7 billion remained available for future share repurchases under the prior authorization. Our goal for the share repurchase program is to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to shareholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities. During the three-month period endedMarch 31, 2022 , we repurchased 0.9 million shares of common stock at a weighted average price of$111.25 per share for an aggregate of$102.9 million . The timing and amount of any future share repurchases will be determined by our management based on its evaluation of market conditions and other factors.
Convertible Senior Notes
InAugust 2019 , we issued$1,150.0 million in principal amount of convertible senior notes due 2027 and entered into related convertible note hedge and warrant transactions. We intend to use the net proceeds of the offering for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions. InMay 2018 , we issued$1,150.0 million in principal amount of convertible senior notes due 2025 and entered into related convertible note hedge and warrant transactions. We used a portion of the net proceeds to repay at maturity all of our$690.0 million outstanding aggregate principal amount of convertible senior notes due in 2019. The terms of the notes and hedge transactions are discussed more fully in Note 7 to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
Revolving Credit Facility
InMay 2018 , we entered into a$500.0 million , five-year revolving credit agreement, or the Credit Agreement. Borrowings under the facility may be used to finance working capital needs and for general corporate purposes. The facility provides for an initial$500.0 million in revolving loans. Under specified circumstances, the facility can be increased to up to$1.0 billion in aggregate principal amount. Borrowings under the Credit Agreement bear interest, at our option, at a base rate plus a spread of 0.00% to 0.25% or an adjusted LIBOR rate plus a spread of 0.875% to 1.25%, in each case with such spread being determined based on our consolidated leverage ratio specified in the Credit Agreement. Regardless of what amounts, if any, are outstanding under the Credit Agreement, we are also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.075% to 0.15%, with such rate being based on our consolidated leverage ratio specified in the Credit Agreement. The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. InMarch 2022 , we borrowed$75.0 million under the Credit Agreement, and as ofMarch 31, 2022 ,$75.0 million remains outstanding. We plan to repay amounts outstanding in less than 12 months. 41 -------------------------------------------------------------------------------- Table of Contents Liquidity Outlook Based on our present business plan, we expect our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations to be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology, other strategic acquisitions, anticipated share repurchases, lease and purchase commitments, repayment of amounts outstanding under our Credit Agreement and settlements of other long-term liabilities.
Contractual Obligations
Our principal commitments consist of service agreements with various vendors for bandwidth usage, obligations under leases with co-location facilities for data center capacity, obligations under leases for office space and open vendor purchase orders. Our minimum commitments related to bandwidth usage and co-location leases may vary from period to period depending on the timing and length of contract renewals with our vendors. As ofMarch 31, 2022 , there have been no significant changes in our future non-cancelable minimum payments under these commitments from those reported in our annual report on Form 10-K for the year endedDecember 31, 2021 , other than normal period-to-period variations.
Off-Balance Sheet Arrangements
We have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor's accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See also Note 13 to our consolidated financial statements included in our annual report on Form 10-K for the year endedDecember 31, 2021 for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during the three months endedMarch 31, 2022 was determined to be immaterial.
As of
Significant Accounting Policies and Estimates
See Note 2 to our consolidated financial statements included in our annual report on Form 10-K for the year endedDecember 31, 2021 . There have been no material changes to our significant accounting policies and estimates from those reported in our annual report on Form 10-K for the year endedDecember 31, 2021 .
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