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 consolidated financial statements included herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "forecasts," "if," "continues," "goal," "likely" or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See "Risk Factors" elsewhere in this quarterly report on Form 10-Q for a discussion of certain risks associated with our business. We disclaim any obligation to update forward-looking statements as a result of new information, future events or otherwise. Our management's discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted 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 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, 2020 for further discussion of our critical accounting policies and estimates.
Overview
We provide solutions for protecting and delivering content and business applications over the internet. 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 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 solutions have made a significant contribution
to revenue growth. We plan to continue to invest in this area with a focus on
further enhancing our product portfolio and extending our go-to-market
capabilities, particularly in certain markets and through our channel partners.
•Over the past few years, we have experienced increases in the amount of traffic
delivered for customers that use our solutions for video, gaming downloads and
social media. During 2020, we saw a dramatic increase in traffic growth on our
network related to the shutdowns and restrictions from the novel coronavirus, or
COVID-19, pandemic. Primarily as a result of the rollback of many
pandemic-related restrictions, we have seen the rate of traffic growth during
the first
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half of 2021, as compared to 2020, moderate. We expect year-over-year traffic
and associated revenue growth to continue to moderate during the remainder of
2021, assuming the restrictions experienced in 2020 continue to lessen.
•The prices paid by some of our customers have declined, particularly for
website and application delivery solutions, due to contract renewals and large
media consolidations, reflecting the impact of competition and volume discounts.
In the second quarter of 2021 as compared to the same period in 2020, we
experienced a decline in revenue from those solutions due to the above factors
and slowing media traffic growth. 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 website and application performance solutions to
continue during the remainder of 2021. In addition, there remains uncertainty
about the negative impacts of the COVID-19 pandemic on some of our customers and
how that uncertainty might impact purchases of our solutions.
•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
and cross-selling of incremental solutions. Because we publicly report in U.S.
dollars, if the dollar strengthens, our reported revenue results will be
negatively impacted. 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 (like the COVID-19 pandemic) 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:
•Our profitability improved in the first half of 2021 and the full year 2020 due
to higher overall revenue as well as the effects of cost savings and efficiency
initiatives we have undertaken. More recently, we have also benefited from lower
travel expenses because of pandemic-related shutdowns and restrictions. In order
to maintain our current levels of profitability, we will need to continue to
undertake efforts intended to improve the efficiency of operations and ensure
that our expense growth does not exceed our revenue growth.
•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 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. 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 recently 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.
•We expect to continue to manage our headcount and payroll costs in the future
to focus investments on certain areas of the business while maintaining
efficient operations in others. We plan to continue to hire employees in support
of our strategic initiatives but do not expect overall headcount to increase
significantly in 2021 unless we complete one or more significant acquisitions.
•Depreciation expense related to our network equipment also contributes to our
overall expense levels. During the first half of 2021, as compared to the same
period in 2020, we saw higher depreciation expense due to accelerated deployment
of equipment in 2020 to help meet the increased traffic demands arising during
the COVID-19 pandemic.
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We expect to see higher depreciation expense throughout 2021 to reflect such
deployment of equipment. We plan to continue to invest in our network in 2021,
although not at the same levels we experienced in 2020, which will further
increase our capital expenditures and resulting depreciation expense.
Effective on March 1, 2021 , we reorganized into two groups, both of which
utilize the Akamai Intelligent Edge Platform and our global sales organization:
the Security Technology Group and the Edge Technology Group . These groups are
aligned with our product offerings. Revenue from the Security Technology Group
was previously reported as revenue from Cloud Security Solutions, and revenue
from the Edge Technology Group was previously reported as revenue from content
delivery network (CDN) services and all other solutions. The Security Technology
Group includes solutions that are designed to keep infrastructure, websites,
applications and users safe, while the Edge Technology Group includes solutions
that enable business online, including media delivery, web performance and edge
computing solutions.
Nearly all of our employees are working remotely due to the COVID-19 pandemic,
and we are not requiring employees whose roles do not require in-person presence
to perform their jobs to return to offices before May 1, 2022 . We have
implemented a comprehensive evaluation process to determine whether offices in
different locations should be open or closed. 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
and reconfiguring work spaces to help ensure the safety and well-being of
employees accessing our locations, we do not currently believe those costs will
materially impact our financial condition or results of operations.
Results of Operations
The following table sets forth, as a percentage of revenue, consolidated statements of income data for the periods indicated:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
Revenue 100.0 % 100.0 % 100.0 % 100.0 %Costs and operating expenses: Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
37.5 34.8 37.0 35.0
Research and development 9.1 8.1 9.4 8.7
Sales and marketing 13.1 15.5 13.5 15.9
General and administrative 15.7 16.3 16.0 16.5
Amortization of acquired intangible assets 1.4 1.3 1.4 1.3
Restructuring (benefit) charge (0.2) - 0.3 0.7
Total costs and operating expenses 76.6 76.0 77.6 78.1
Income from operations 23.4 24.0 22.4 21.9
Interest income 0.6 1.2 0.5 1.1
Interest expense (2.1) (2.2) (2.1) (2.2)
Other expense, net (0.1) (0.2) (0.1) (0.4)
Income before provision for income taxes 21.8 22.8 20.7 20.4
Provision for income taxes (2.1) (2.3) (1.8) (2.1)
Loss from equity method investment (1.3) (0.1) (0.7) (0.1)
Net income 18.4 % 20.4 % 18.2 % 18.2 %
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Revenue
Revenue by product group during the periods presented was as follows (in
thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
% Change at % Change at
Constant Constant
2021 2020 % Change Currency 2021 2020 % Change Currency
Security Technology Group $ 325,128 $ 259,316 25.4 % 22.2 % $ 635,347 $ 499,616 27.2 % 24.3 %
Edge Technology Group 527,696 535,399 (1.4) (3.5) 1,060,185 1,059,401 0.1 (1.9)
Total revenue $ 852,824 $ 794,715 7.3 % 4.9 % $ 1,695,532 $ 1,559,017 8.8 % 6.5 %
During the three- and six-month periods ended June 30, 2021 , the increases in
our revenue as compared to the same periods in 2020 were primarily the result of
continued strong growth in sales of solutions offered by our Security Technology
Group .
The increases in Security Technology Group revenue for the three- and six-month
periods ended June 30, 2021 , as compared to the same periods in 2020, were due
to growth across our security products portfolio, including Bot Manager,
Prolexic and our Access Control Product Suite, as well as the performance of our
Asavie business, which we acquired in the fourth quarter of 2020.
The decrease in Edge Technology Group revenue for the three-month period ended
June 30, 2021 , as compared to the same period in 2020, was primarily due to
reductions in sales of application performance solutions, partially offset by
growth in edge application solutions. The increase in Edge Technology Group
revenue for the six-month period ended June 30, 2021 , as compared to the same
period in 2020, was primarily due to strong traffic growth, driven by over the
top, or OTT, video and gaming, as well as strong growth in our edge applications
solutions. These increases were partially offset by a reduction in sales of
website and application performance solutions.
Revenue derived in the
For the Three Months For the Six Months
Ended June 30, Ended June 30,
% Change at % Change at
Constant Constant
2021 2020 % Change Currency 2021 2020 % Change Currency
U.S. $ 449,553 $ 443,668 1.3 % 1.3 % $ 912,733 $ 872,598 4.6 % 4.6 %
International 403,271 351,047 14.9 9.3 782,799 686,419 14.0 8.9
Total revenue $ 852,824 $ 794,715 7.3 % 4.9 % $ 1,695,532 $ 1,559,017 8.8 % 6.5 %
For the three-month period ended June 30, 2021 , approximately 47.3% of our
revenue was derived from our operations located outside the U.S. , compared to
44.2% for the three-month period ended June 30, 2020 . For the six-month period
ended June 30, 2021 , approximately 46.2% of our revenue was derived from our
operations located outside the U.S. , compared to 44.0% for the six-month period
ended June 30, 2020 . We have seen strong revenue growth across all our
international regions, particularly in our EMEA (Europe , the Middle East and
Africa ) 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 favorable $19.4 million and $35.3 million during
the three- and six-month periods ended June 30, 2021 , respectively, as compared
to the same periods in 2020.
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Cost of Revenue
Cost of revenue consisted of the following for the periods presented (in
thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 % Change 2021 2020 % Change
Bandwidth fees $ 54,660 $ 52,076 5.0 % $ 107,890 $ 97,856 10.3 %
Co-location fees 43,734 37,013 18.2 86,277 72,402 19.2
Network build-out and
supporting services 40,822 33,296 22.6 77,256 63,857 21.0
Payroll and related costs 68,743 63,620 8.1 136,992 129,427 5.8
Stock-based compensation,
including amortization of
prior capitalized amounts 15,232 13,055 16.7 29,561 26,049 13.5
Depreciation of network
equipment 55,601 38,806 43.3 107,497 75,203 42.9
Amortization of internal-use
software 41,208 38,938 5.8 81,214 80,592 0.8
Total cost of revenue $ 320,000 $ 276,804 15.6 % $ 626,687 $ 545,386 14.9 %
As a percentage of revenue 37.5 % 34.8 % 37.0 % 35.0 %
The increases in cost of revenue for the three- and six-month periods ended
June 30, 2021 , as compared to the same periods in 2020, were primarily due to
increased investment in our network to support current and anticipated future
traffic growth, which resulted in increases to amounts paid for network
build-out and supporting services, higher depreciation costs of our network
equipment and increases to expenses related to our co-location facilities.
Bandwidth fees also increased during these periods due to growth in the amount
of traffic served on our network.
During the remainder of 2021, we anticipate depreciation of network equipment to
increase due to increased investments in our network to address expected traffic
increases as well as reflecting the impact of our equipment deployments in 2020.
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.
Research and Development Expenses
Research and development expenses consisted of the following for the periods
presented (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 % Change 2021 2020 % Change
Payroll and related costs $ 112,369 $ 98,655 13.9 % $ 225,789 $ 201,476 12.1 %
Stock-based compensation 15,937 11,549 38.0 34,306 23,614 45.3
Capitalized salaries and
related costs (54,475) (48,957) 11.3 (106,966) (95,257) 12.3
Other expenses 3,424 2,843 20.4 6,171 5,481 12.6
Total research and
development $ 77,255 $ 64,090 20.5 % $ 159,300 $ 135,314 17.7 %
As a percentage of revenue 9.1 % 8.1 % 9.4 % 8.7 %
The increases in research and development expenses during the three- and
six-month periods ended June 30, 2021 , as compared to the same periods in 2020,
were due to increased payroll and related costs, including stock-based
compensation, primarily due to headcount growth and the redeployment of some
employees to research and development functions from sales and marketing
activities as part of our March 2021 reorganization. These increases were
partially offset by increases in capitalized salaries and related costs due to
continued investment in internal-use software deployed on our network.
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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 endedJune 30, 2021 andJune 30, 2020 , we capitalized$8.4 million and$9.4 million , respectively, of stock-based compensation. During the six-month periods endedJune 30, 2021 andJune 30, 2020 , we capitalized$17.1 million and$17.5 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 2021 to support our innovation initiatives.
Sales and Marketing Expenses
Sales and marketing expenses consisted of the following for the periods presented (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 % Change 2021 2020 % Change
Payroll and related costs $ 87,955 $ 94,645 (7.1) % $ 181,514 $ 188,239 (3.6) %
Stock-based compensation 11,547 16,011 (27.9) 24,025 31,746 (24.3)
Marketing programs and related
costs 10,297 10,577 (2.6) 18,747 19,714 (4.9)
Other expenses 2,095 2,236 (6.3) 3,962 7,556 (47.6)
Total sales and marketing $ 111,894 $ 123,469 (9.4) % $ 228,248 $ 247,255 (7.7) %
As a percentage of revenue 13.1 % 15.5 % 13.5 % 15.9 %
During the three- and six-month periods ended June 30, 2021 , as compared to the
same periods in 2020, payroll and related costs, including stock-based
compensation, decreased as a result of headcount reductions and the redeployment
of some employees from sales and marketing functions to research and development
activities as a result of our March 2021 reorganization, which established a
single global sales organization. Additionally, restrictions associated with the
COVID-19 pandemic have resulted in the cancellation or postponement of in-person
marketing events and led to a decline in travel expenses such as airfare,
lodging and other costs related to in-person customer events and meetings; as a
result, we experienced a decrease in sales and marketing expenses during the
six-month period ended June 30, 2021 , as compared to the same period in 2020.
We expect sales and marketing costs to remain relatively consistent during the
remainder of 2021, as compared to the first half of 2021, as we plan to continue
to carefully manage costs in our efforts to refine and optimize our go-to-market
efforts and improve operating margins.
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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 For the Six Months
Ended June 30, Ended June 30,
2021 2020 % Change 2021 2020 % Change
Payroll and related costs $ 54,974 $ 49,475 11.1 % $ 111,424 $ 98,074 13.6 %
Stock-based compensation 16,123 15,377 4.9 32,485 29,334 10.7 Depreciation and amortization 20,489 20,654 (0.8) 41,398 41,119 0.7 Facilities-related costs 24,845 23,898 4.0 49,192 48,570 1.3 Provision for doubtful accounts 971 2,893 (66.4) 711 5,092 (86.0) Acquisition-related costs 140 62 125.8 204 138 47.8 Legal settlements - 275 - - 275 - Professional fees and other expenses 16,753 17,075 (1.9) 35,596 34,468 3.3
Total general and administrative
3.5 %$ 271,010 $ 257,070 5.4 % As a percentage of revenue 15.7 % 16.3 % 16.0 % 16.5 % The increases in general and administrative expenses for the three- and six-month periods endedJune 30, 2021 , as compared to the same periods in 2020, were primarily due to increased payroll and related costs, including stock-based compensation, as a result of annual merit increases and headcount growth, partially offset by changes in the provision for doubtful accounts. The provision for doubtful accounts for the three- and six-month periods endedJune 30, 2020 included an estimate of the expected impact of the COVID-19 pandemic on our customers' ability to pay us for services provided; this impact did not recur in the same periods in 2021. General and administrative expenses for the three- and six-month periods endedJune 30, 2021 and 2020 are broken out by category as follows (in thousands): For the Three Months For the Six Months Ended June 30, Ended June 30, 2021 2020 % Change 2021 2020 % Change Global functions$ 53,314 $ 46,818 13.9 %$ 109,113 $ 94,684 15.2 % As a percentage of revenue 6.3 % 5.9 % 6.4 % 6.1 % Infrastructure 79,878 79,677 0.3 160,987 156,897 2.6 As a percentage of revenue 9.4 % 10.0 % 9.5 % 10.1 % Other 1,103 3,214 (65.7) 910 5,489 (83.4) Total general and administrative$ 134,295 $ 129,709 3.5 %$ 271,010 $ 257,070 5.4 % As a percentage of revenue 15.7 % 16.3 % 16.0 % 16.5 % 33
-------------------------------------------------------------------------------- Table of Content 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 2021, we expect payroll and related costs of our general and administrative functions to increase as compared to 2020 as a result of headcount growth from 2020, but we plan to continue to carefully manage costs to maintain our current operating margin.
Amortization of Acquired Intangible Assets
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands) 2021 2020 % Change 2021 2020 % Change
Amortization of acquired
intangible assets $ 12,060 $ 10,381 16.2 % $ 23,487 $ 20,815 12.8 %
As a percentage of
revenue 1.4 % 1.3 % 1.4 % 1.3 %
The increases in amortization of acquired intangible assets for the three- and
six-month periods ended June 30, 2021 , as compared to the same periods in 2020,
were the result of amortization of assets related to our recent acquisitions.
Based on our intangible assets at June 30, 2021 , we expect amortization of
acquired intangible assets to be approximately $24.2 million for the remainder
of 2021, and $44.3 million , $36.9 million , $29.2 million and $23.7 million for
2022, 2023, 2024 and 2025, respectively.
Restructuring (Benefit) Charge
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands) 2021 2020 % Change 2021 2020 % Change
Restructuring (benefit) charge $ (2,114) $ (167) 1,165.9 % $ 5,002 $ 10,418 (52.0) %
As a percentage of revenue (0.2) % - % 0.3 % 0.7 %
The restructuring benefit for the three-month period ended June 30, 2021 , as
compared to the same period in 2020, primarily reflects the release of a lease
obligation for a facility previously exited as part of management actions
initiated in late 2019. The restructuring charge for the six-month period ended
June 30, 2021 , as compared to the same period in 2020, relates to management
actions initiated in the fourth quarter of 2020 to better position us to become
more agile in delivering our solutions, partially offset by the reduction of the
lease obligation. The restructuring charge for this 2020 action predominantly
consists of the costs severance payments and related benefits, as well as
internal-use software charges. We do not expect to incur any material additional
restructuring charges related to these actions.
The restructuring (benefit) charges for the three- and six-month periods ended
June 30, 2020 were primarily the result of management actions initiated in the
fourth quarter of 2019 to focus on investments having the potential to
accelerate revenue growth. The restructuring charges relate to certain headcount
reductions and an impairment of a right-of-use asset related to the exit of a
leased facility. We do not expect material additional restructuring charges
related to these actions.
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Non-Operating Income (Expense)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(in thousands) 2021 2020 % Change 2021 2020 % Change
Interest income $ 4,736 $ 9,502 (50.2) % $ 9,314 $ 16,545 (43.7) %
As a percentage of revenue 0.6 % 1.2 % 0.5 % 1.1 %
Interest expense $ (18,037) $ (17,249) 4.6 % $ (35,871) $ (34,454) 4.1 %
As a percentage of revenue (2.1) % (2.2) % (2.1) % (2.2) %
Other expense, net $ (811) $ (1,603) (49.4) % $ (1,628) $ (5,711) (71.5) %
As a percentage of revenue (0.1) % (0.2) % (0.1) % (0.4) %
For the periods presented, interest income primarily consisted of interest
earned on invested cash balances and marketable securities. The decreases in
interest income for the three- and six-month periods ended June 30, 2021 , as
compared to the same periods in 2020, were primarily the result of investing in
marketable securities at lower rates of return due to lower market interest
rates in 2021 as compared to the same periods in 2020.
Interest expense is related to our debt transactions, which are described in Note 7 to the consolidated financial statements.
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 fluctuation in other expense, net for the three- and six-month periods endedJune 30, 2021 , as compared to the same periods in 2020, is primarily due to the unfavorable impact of changes in foreign currency exchange rates. Provision for Income Taxes For the Three Months For the Six Months Ended June 30, Ended June 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Provision for income taxes$ (18,009) $ (18,671) (3.5) %$ (29,907) $ (32,963) (9.3) % As a percentage of revenue (2.1) % (2.3) % (1.8) % (2.1) % Effective income tax rate (9.7) % (10.3) % (8.5) % (10.3) % For the three- and six-month periods endedJune 30, 2021 , as compared to the same periods in 2020, our provision for income taxes decreased due to an increase in foreign income taxed at lower rates and the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations. These amounts were partially offset by an increase in profitability. For the three- and six-month periods endedJune 30, 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 non-deductible stock-based compensation and state taxes. For the three- and six-month periods endedJune 30, 2020 , 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 and the benefit ofU.S. federal, state and foreign research and development credits. These amounts were partially offset by 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. 35 -------------------------------------------------------------------------------- Table of Content Loss fromEquity Method Investment For the Three Months For the Six Months Ended June 30, Ended June 30, (in thousands) 2021 2020 % Change 2021 2020 % Change Loss from equity method investment$ (10,816) $ (493) 2,093.9 %$ (11,514) $ (1,115) 932.6 % As a percentage of revenue (1.3) % (0.1) % (0.7) % (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,Global Open Network, Inc. , or GO-NET. GO-NET operates a new blockchain-based online payment network. The increases in our share of GO-NET's losses during the three- and six-month periods endedJune 30, 2021 include our share of the long-lived asset impairment of certain technology recorded in the joint venture's financial statements. We expect to record additional losses in 2021 and beyond as GO-NET continues executing on the early stages of its business plan.
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. In addition, subsequent adjustments to our initial
estimated amounts of contingent consideration and indemnification associated
with specific acquisitions are
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included within acquisition-related costs. These amounts are impacted by the
timing and size of the acquisitions. We exclude acquisition-related costs from
our non-GAAP financial measures to provide a useful comparison of our operating
results to prior periods and to our 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 that are
included in our GAAP financial statements, primarily related to workforce
reductions and charges associated with exiting facility lease commitments. 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.
•Amortization of debt discount and issuance costs and amortization of
capitalized interest expense - In August 2019 , we issued $1,150 million of
convertible senior notes due 2027 with a coupon interest rate of 0.375%. In May
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 are required to be
separately accounted for as equity under GAAP, thereby reducing the carrying
values of the convertible debt instruments. The debt discounts are amortized as
interest expense together with the issuance costs of the debt. The interest
expense excluded from our non-GAAP results is comprised of these non-cash
components and is excluded from management's assessment of our operating
performance because management believes the non-cash 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 the Akamai
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 the Akamai
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.
•Transformation costs - We have incurred professional services fees associated
with internal transformation programs designed to improve operating margins and
that are part of a planned program intended to significantly change the manner
in which business is conducted. We believe excluding these amounts from our
non-GAAP financial measures is useful to investors as the types of events and
activities giving rise to them occur infrequently and are not representative of
our core business operations and ongoing operating performance.
•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.
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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 For the Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
Income from operations $ 199,434 $ 190,429 $ 381,798 $ 342,759
Amortization of acquired intangible assets 12,060 10,381 23,487 20,815
Stock-based compensation 50,481 49,191 104,786 96,684
Amortization of capitalized stock-based compensation and capitalized interest expense
9,840 8,038 18,438 16,627
Restructuring (benefit) charge (2,114) (167) 5,002 10,418
Acquisition-related costs 140 62 204 138
Legal settlements - 275 - 275
Non-GAAP income from operations $ 269,841 $ 258,209 $ 533,715 $ 487,716
GAAP operating margin 23 % 24 % 23 % 22 %
Non-GAAP operating margin 32 % 32 % 31 % 31 %
The following table reconciles GAAP net income to non-GAAP net income for the periods presented (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
Net income $ 156,497 $ 161,915 $ 312,192 $ 285,061
Amortization of acquired intangible assets 12,060 10,381 23,487 20,815
Stock-based compensation 50,481 49,191 104,786 96,684
Amortization of capitalized stock-based compensation and capitalized interest expense
9,840 8,038 18,438 16,627
Restructuring (benefit) charge (2,114) (167) 5,002 10,418
Acquisition-related costs 140 62 204 138
Legal settlements - 275 - 275
Amortization of debt discount and issuance costs 16,460 15,677 32,717 31,310
Loss from equity method investment 10,816 493 11,514 1,115
Income tax effect of above non-GAAP adjustments and
certain discrete tax items (21,428) (19,347) (47,774) (39,792)
Non-GAAP net income $ 232,752 $ 226,518 $ 460,566 $ 422,651
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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 For the Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
GAAP net income per diluted share $ 0.94 $ 0.98 $ 1.88 $ 1.74
Amortization of acquired intangible assets 0.07 0.06 0.14 0.13
Stock-based compensation 0.30 0.30 0.63 0.59
Amortization of capitalized stock-based compensation and capitalized interest expense
0.06 0.05 0.11 0.10
Restructuring (benefit) charge (0.01) - 0.03 0.06
Acquisition-related costs - - - -
Legal settlements - - - -
Amortization of debt discount and issuance costs 0.10 0.10 0.20 0.19
Loss from equity method investment 0.07 - 0.07 0.01
Income tax effect of above non-GAAP adjustments and certain discrete tax items
(0.13) (0.12) (0.29) (0.24)
Adjustment for shares(1) 0.02 0.01 0.03 0.01
Non-GAAP net income per diluted share (2) $ 1.42 $ 1.38 $ 2.80 $ 2.58 Shares used in GAAP per diluted share calculations 166,263
164,768 165,976 164,226
Impact of benefit from note hedge transactions(1) (1,782) (653) (1,369) (326)
Shares used in non-GAAP per diluted share
calculations(1) 164,481 164,115 164,607 163,900
(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; gains and losses on legal settlements; costs incurred
related to endowments to the Akamai Foundation ; transformation costs; 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.
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The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted
EBITDA margin for the periods presented (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2021 2020 2021 2020
Net income $ 156,497 $ 161,915 $ 312,192 $ 285,061
Interest income (4,736) (9,502) (9,314) (16,545)
Provision for income taxes 18,009 18,671 29,907 32,963
Depreciation and amortization 115,860 97,163 227,344 194,348Amortization of capitalized stock-based compensation and capitalized interest expense
9,840 8,038 18,438 16,627
Amortization of acquired intangible assets 12,060 10,381 23,487 20,815
Stock-based compensation 50,481 49,191 104,786 96,684
Restructuring (benefit) charge (2,114) (167) 5,002 10,418
Acquisition-related costs 140 62 204 138
Legal settlements - 275 - 275
Interest expense 18,037 17,249 35,871 34,454
Loss from equity method investment 10,816 493 11,514 1,115
Other expense, net 811 1,603 1,628 5,711
Adjusted EBITDA $ 385,701 $ 355,372 $ 761,059 $ 682,064
Adjusted EBITDA margin 45 % 45 % 45 % 44 %
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 ofJune 30, 2021 , our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds, totaled$2.6 billion . Factoring in the$2.3 billion in principal amount of convertible senior notes we have outstanding, our net cash atJune 30, 2021 was$281.1 million . 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. To date, we have not seen a material impact to our liquidity from events related to the COVID-19 pandemic; however, we are continuing to monitor our customers' ability to pay as some of them may be unable to 40 -------------------------------------------------------------------------------- Table of Content pay us for our services or may be unable to remit payments in a timely manner due to financial stresses the COVID-19 pandemic may have caused them. We believe that, particularly in situations like these, our strong balance sheet and cash position are important competitive differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times. As ofJune 30, 2021 , we had cash and cash equivalents of$401.0 million held in accounts outside theU.S. The Tax Cuts and Jobs Act 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 Six Months
Ended June 30,
(in thousands) 2021 2020
Net income $ 312,192 $ 285,061 Non-cash reconciling items included in net income 427,568 385,980
Changes in operating assets and liabilities (111,834) (149,107)
Net cash provided by operating activities $ 627,926 $521,934
The increase in cash provided by operating activities for the six-month period endedJune 30, 2021 , as compared to the same period in 2020, was primarily due to increased profitability and timing of payments from customers, partially offset by the timing of tax payments.
Cash Used in Investing Activities
For the Six Months
Ended June 30,
(in thousands) 2021 2020Cash (paid) received for business acquisition, net of cash acquired
$ (15,638) $ 106 Cash paid for asset acquisition - (36,376)
Purchases of property and equipment and capitalization of internal-use software development costs
(319,288) (335,668)
Net marketable securities activity 139,210 171,484
Other investing activity (212) 79
Net cash used in investing activities $
(195,928)
The decrease in cash used in investing activities during the six-month period endedJune 30, 2021 , as compared to the same period in 2020, was driven by a reduction in cash paid for acquisitions and a decrease in purchases of property and equipment as we slowed expansion of our network as compared to 2020. 41 -------------------------------------------------------------------------------- Table of Content Cash Used in Financing Activities For the Six Months Ended June 30, (in thousands) 2021 2020
Activity related to stock-based compensation
Repurchases of common stock (154,416) (107,880)
Other financing activities (67) -
Net cash used in financing activities $ (199,621) $(142,005)
The increase in cash used in financing activities during the six-month period endedJune 30, 2021 , as compared to the same period in 2020, was primarily the result of increased share repurchases. EffectiveNovember 2018 , our board of directors authorized a$1.1 billion share repurchase program throughDecember 2021 . Our goals for the share repurchase program are to offset the dilution created by our employee equity compensation programs and provide the flexibility to return capital to shareholders as business and market conditions warrant. As ofJune 30, 2021 ,$417.5 million remains available for future share repurchases under this repurchase program.
During the six-month period ended
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 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. There were no outstanding borrowings under the Credit Agreement as ofJune 30, 2021 . 42 -------------------------------------------------------------------------------- Table of Content 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, opportunistic business acquisitions, anticipated share repurchases, lease and purchase commitments 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 ofJune 30, 2021 , 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, 2020 , 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, 2020 for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during the six months endedJune 30, 2021 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, 2020 . 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, 2020 .
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