Akamai Reports Fourth Quarter 2019 and Full-year 2019 Financial Results

Akamai Technologies, Inc. (NASDAQ: AKAM), the intelligent edge platform for securing and delivering digital experiences, today reported financial results for the fourth quarter and full-year ended December 31, 2019.

"We were very pleased with our 2019 performance. Both revenue and earnings exceeded our expectations due to the rapid growth of our cloud security business, robust seasonal traffic on our network and our continued focus on operational excellence," said Dr. Tom Leighton, Chief Executive Officer of Akamai. “As a result, we achieved another year of strong revenue growth and operating margin expansion, and we believe that we are well-positioned to achieve our 30% non-GAAP operating margin goal in 2020, as we continue to invest in innovation and new products to drive future growth."

Akamai delivered the following results for the fourth quarter and full-year ended December 31, 2019:

Revenue: Revenue for the fourth quarter was $772 million, an 8% increase over fourth quarter 2018 revenue of $713 million and a 9% increase when adjusted for foreign exchange.* Total revenue for 2019 was $2.894 billion compared to $2.714 billion for 2018, up 7% year-over-year and up 8% when adjusted for foreign exchange.*

Revenue by Division^(1):

• Web Division revenue for the fourth quarter was $420 million, up 9% year-over-year and when adjusted for foreign exchange.* Web Division revenue for 2019 was $1.566 billion, up 8% year-over-year and up 9% when adjusted for foreign exchange.*
• Media and Carrier Division revenue for the fourth quarter was $353 million, up 8% year-over-year and when adjusted for foreign exchange.* Media and Carrier Division revenue for 2019 was $1.327 billion, up 5% year-over-year and up 6% when adjusted for foreign exchange.*

Revenue from Cloud Security Solutions⁽²⁾:

• Cloud Security Solutions revenue for the fourth quarter was $238 million, up 29% year-over-year and when adjusted for foreign exchange.* Cloud Security Solutions revenue for 2019 was $849 million, up 29% year-over-year and up 30% when adjusted for foreign exchange.*

Revenue from Internet Platform Customers⁽³⁾:

• Revenue from Internet Platform Customers for the fourth quarter was $52 million, up 20% year-over-year and when adjusted for foreign exchange.* Internet Platform Customers revenue for 2019 was $189 million, up 8% year-over-year and when adjusted for foreign exchange.*
• Revenue excluding Internet Platform Customers for the fourth quarter was $720 million, up 7% year-over-year and up 8% when adjusted for foreign exchange.* Revenue excluding Internet Platform Customers for 2019 was $2.704 billion, up 6% year-over-year and up 8% when adjusted for foreign exchange.*

Revenue by Geography:

• U.S. revenue for the fourth quarter was $446 million, up 3% year-over-year. U.S. revenue for 2019 was $1.694 billion, up 1% year-over-year.
• International revenue for the fourth quarter was $326 million, up 17% year-over-year and up 18% when adjusted for foreign exchange.* International revenue for 2019 was $1.199 billion, up 16% year-over-year and up 20% when adjusted for foreign exchange.*

2019 items: Effective January 1, 2019, the expected average useful life of our network assets, primarily servers, increased from four years to five years, due to software and hardware initiatives undertaken to manage our global network more efficiently. As a result, fourth quarter year-over-year growth rates for GAAP and non-GAAP income from operations, net income and EPS in the paragraphs below were benefited by $7 million, or $6 million net of tax and $0.04 per share. Full-year growth rates for GAAP and non-GAAP income from operations, net income and EPS in the paragraphs below were benefited by $32 million, or $26 million net of tax and $0.16 per share.

Full-year GAAP growth rates were also impacted by a one-time $50 million endowment to the Akamai Foundation recognized in the second quarter of 2018, which did not recur in 2019.

Income from operations: GAAP income from operations for the fourth quarter was $135 million, a 12% increase from fourth quarter 2018 income from operations of $120 million. GAAP operating margin for the fourth quarter was 18%, up 1 percentage point from the same period last year. GAAP income from operations for 2019 was $549 million, a 51% increase from the prior year's GAAP income from operations of $362 million. Full-year GAAP operating margin was 19%, up 6 percentage points from the same period last year.

Non-GAAP income from operations* for the fourth quarter was $222 million, a 10% increase from fourth quarter 2018 non-GAAP income from operations of $201 million. Non-GAAP operating margin* for the fourth quarter was 29%, up 1 percentage point from the same period last year. Non-GAAP income from operations* for 2019 was $844 million, a 17% increase from the prior year's non-GAAP income from operations of $720 million. Full year non-GAAP operating margin* was 29%, up 2 percentage points from the same period last year.

Net income: GAAP net income for the fourth quarter was $119 million, a 27% increase from fourth quarter 2018 GAAP net income of $94 million. GAAP net income for 2019 was $478 million, a 60% increase from the prior year's GAAP net income of $298 million.

Non-GAAP net income* for the fourth quarter was $202 million, a 15% increase from fourth quarter 2018 non-GAAP net income of $176 million. Non-GAAP net income* for 2019 was $739 million, a 21% increase from the prior year's non-GAAP net income of $612 million.

EPS: GAAP EPS for the fourth quarter was $0.73 per diluted share, a 28% increase from fourth quarter 2018 GAAP EPS of $0.57 and a 29% increase when adjusted for foreign exchange.* GAAP EPS for 2019 was $2.90 per diluted share, a 65% increase from prior year's GAAP EPS of $1.76 per diluted share and a 69% increase when adjusted for foreign exchange.*

Non-GAAP EPS* for the fourth quarter was $1.23 per diluted share, a 15% increase from fourth quarter 2018 non-GAAP EPS of $1.07 and a 16% increase when adjusted for foreign exchange.* Non-GAAP EPS* for 2019 was $4.49 per diluted share, a 24% increase from prior year's non-GAAP EPS of $3.62 per diluted share and a 26% increase when adjusted for foreign exchange.*

Adjusted EBITDA*: Adjusted EBITDA* for the fourth quarter was $319 million, a 6% increase from fourth quarter 2018 Adjusted EBITDA of $301 million. Adjusted EBITDA margin* for the fourth quarter was 41%, down 1 percentage point from the same period last year. Adjusted EBITDA* for 2019 was $1.211 billion, an 11% increase from the prior year's Adjusted EBITDA of $1.092 billion. Adjusted EBITDA margin* was 42%, up 2 percentage points from the same period last year.

Supplemental cash information: Cash from operations for the quarter was $282 million, or 37% of revenue. Cash from operations for 2019 was $1.058 billion, or 37% of revenue. Cash, cash equivalents and marketable securities was $2.4 billion as of December 31, 2019.

Share repurchases: The Company spent $43 million in the fourth quarter to repurchase 0.5 million shares of its common stock at an average price of $88.48 per share. For the full-year, the Company spent $335 million to repurchase 4.0 million shares of its common stock at an average price of $82.90 per share. The Company had 162 million shares of common stock outstanding as of December 31, 2019.

Quarterly Conference Call

Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-844-578-9671 (or 1-508-637-5655 for international calls) and using passcode 7619277. A live webcast of the call may be accessed at www.akamai.comin the Investor section. In addition, a replay of the call will be available for two weeks following the conference by calling 1-855-859-2056 (or 1-404-537-3406 for international calls) and using passcode 7619277. The archived webcast of this event may be accessed through the Akamai website.

Use of Non-GAAP Financial Measures

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

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

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

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

• Amortization of acquired intangible assets – Akamai has incurred amortization of intangible assets, included in its GAAP financial statements, related to various acquisitions Akamai has made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and are unique to each acquisition; therefore, Akamai excludes amortization of acquired intangible assets from its non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.
• Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to Akamai's employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of Akamai's current financial results to previous and future periods difficult to interpret; therefore, Akamai believes it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from its non-GAAP financial measures in order to highlight the performance of Akamai's core business and to be consistent with the way many investors evaluate its performance and compare its operating results to peer companies.
• Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to Akamai's initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. Akamai excludes acquisition-related costs from its non-GAAP financial measures to provide a useful comparison of Akamai's operating results to prior periods and to its peer companies because such amounts vary significantly based on the magnitude of the acquisition transactions and do not reflect Akamai's core operations.
• Restructuring charges – Akamai has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and estimated costs of exiting facility lease commitments. Akamai excludes these items from its non-GAAP financial measures when evaluating its continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of its business.
• Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In August 2019, Akamai issued $1,150 million of convertible senior notes due 2027 with a coupon interest rate of 0.375%. In May 2018, Akamai issued $1,150 million of convertible senior notes due 2025 with a coupon interest rate of 0.125%. In February 2014, Akamai issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rates of these convertible senior notes were 3.10%, 4.26% and 3.20%, 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 value 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 Akamai's non-GAAP results is comprised of these non-cash components and is excluded from management's assessment of the company's operating performance because management believes the non-cash expense is not representative of ongoing operating performance.
• Gains and losses on investments – Akamai has recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of Akamai's core business operations and ongoing operating performance.
• Legal and stockholder matter costs – Akamai has incurred losses related to the settlement of legal matters and costs from professional service providers related to a non-routine stockholder matter. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of Akamai's core business operations.
• Endowment of Akamai Foundation – During the second quarter of 2018, Akamai incurred a charge to endow the Akamai Foundation. Akamai believes excluding this amount from non-GAAP financial measures is useful to investors as this one-time expense is not representative of its core business operations.
• Transformation costs – Akamai has incurred professional services fees associated with internal transformation programs designed to improve its operating margins and that are part of a planned program intended to significantly change the manner in which business in conducted. Akamai believes excluding these amounts from its 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 Akamai's core business operations and ongoing operating performance.
• Income and losses from equity method investment – Akamai records income or losses on its share of earnings and losses of its equity method investment. Akamai excludes such income and losses because it lacks control over the operations of the investment and the related income and losses are not representative of its core business operations.
• Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. Akamai believes that applying the non-GAAP adjustments and their related income tax effect allows Akamai to highlight income attributable to its core operations.

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

Non-GAAP income from operations – GAAP income from operations adjusted for the following items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; amortization of capitalized interest expense; acquisition-related costs; restructuring charges; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; transformation costs; and other non-recurring or unusual items that may arise from time to time.

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

Non-GAAP net income – GAAP net income adjusted for the following tax-affected items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; transformation costs; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; income and losses from equity method investment; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP net income per share – Non-GAAP net income divided by basic weighted average or diluted common shares outstanding. Basic weighted average shares outstanding are those used in GAAP net income per share calculations. Diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to Akamai pursuant to the note hedge transactions entered into in connection with the issuances of $1,150 million of convertible senior notes due 2027 and 2025. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, the company would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of operating performance. With respect to the convertible senior notes due in each of 2027 and 2025, unless and until Akamai's weighted average stock price is greater than $116.18 and $95.10, respectively, the initial conversion price, there will be no difference between GAAP and non-GAAP diluted weighted average common shares outstanding.

Adjusted EBITDA – GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment 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 – Adjusted EBITDA stated as a percentage of revenue.

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

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

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

Akamai Statement Under the Private Securities Litigation Reform Act

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

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