AKAMAI TECHNOLOGIES INC Q1 FY2022 earnings

AKAM's first quarter of fiscal 2022 produced revenue of $903.65 million, up 7.2% from the prior-year quarter. The company said total revenue would have risen 9% after adjusting for foreign exchange. Security and Compute products now account for the majority of revenue and grew 25% year over year, or 27% on a constant-currency basis. Delivery revenue declined 6% year over year, or 4% adjusted for foreign exchange. U.S. revenue rose 4%, while international revenue rose 11%, or 16% adjusted for foreign exchange. Management attributed the delivery weakness to competition, contract renewals, and moderating traffic growth as pandemic restrictions eased. Security growth came from products such as Bot Manager, Kona Site Defender, and Zero Trust solutions, plus Guardicore. Compute growth was driven by Linode and cloud optimization.

Profitability narrowed on a GAAP basis. GAAP operating income fell to $173.32 million, down 5.0% from the prior-year quarter. GAAP operating margin was 19.2%, down 2.5 percentage points. GAAP net income was $119.16 million, down 23.5%, and GAAP diluted EPS was $0.73, down 22.3%. Non-GAAP results held up better. Non-GAAP income from operations was $270 million, up 2%, with a non-GAAP operating margin of 30%, down 1 percentage point. Non-GAAP net income was $225 million, down 1%, and non-GAAP EPS was $1.39, up 1%. Adjusted EBITDA was $391 million, up 4%. The gap between GAAP and non-GAAP results reflects stock-based compensation, amortization of acquired intangibles, restructuring charges, acquisition-related costs, and a loss on investments.

Expense growth outpaced revenue growth in several areas. Cost of revenue increased as Akamai invested in its network to support current and anticipated traffic growth. That investment raised depreciation of network equipment, payroll and related costs, co-location costs, and network build-out and supporting services. Research and development expenses rose on higher payroll, stock-based compensation, and computer services. Sales and marketing expenses increased because of higher marketing programs and advertising spend. General and administrative expenses rose mainly from acquisition-related costs and professional service fees. Management said it plans to manage operating margins while continuing to invest in security and compute.

Cash generation and backlog offered mixed signals. Operating cash flow was $222.45 million, down 10.9% from the prior-year quarter. Capital expenditures were $51.00 million, down 41.5%. Deferred revenue, current portion, was $139.72 million, up 36.3%. Remaining performance obligations stood at $3.20 billion, up 10.3%. Akamai repurchased $103 million of stock in the quarter, or 0.9 million shares at an average price of $111.25. The company ended the period with 161 million shares outstanding. Effective January 2022, the board authorized a new $1.8 billion share repurchase program through December 31, 2024. As of March 31, 2022, $1.7 billion remained available under the prior authorization. Management also noted that it borrowed $75.0 million under its revolving credit facility in March 2022 and plans to repay that amount within 12 months.

Guidance commentary focused on costs and foreign exchange rather than a specific revenue or EPS range. The company did not provide a specific next-quarter or full-year revenue or EPS guidance range in the release. Its forward-looking commentary covered the remainder of fiscal 2022. Management expects the strengthening U.S. dollar to weigh on revenue for the remainder of 2022 and said delivery revenue challenges will continue. It also expects cost of revenue, research and development, sales and marketing, and general and administrative payroll costs to rise as it invests in the network and integrates recent acquisitions. The Linode acquisition closed in March 2022, and the Guardicore acquisition from October 2021 is expected to be dilutive to earnings per share at least through 2022. Akamai flagged macro-economic and geopolitical risks, including the war in Ukraine. About 1% of revenue comes from traffic served into Russia, Belarus, and Ukraine, and traffic in those countries has declined since the war began. Other named risks include inflation, rising interest rates, foreign currency fluctuations, supply chain constraints, competition and pricing pressure, and cyber-attacks. The company had 9,180 employees at March 31, 2022. In May 2022, it launched a FlexBase program that allows more than 90% of its workforce to choose whether to work from an Akamai office or a home office. Management said its current cash and marketable securities, along with forecasted cash flows, should cover foreseeable needs for at least the next 12 months.