Investing.com -- S&P Global Ratings has revised Akamai Technologies Inc (NASDAQ: AKAM ).’s outlook to negative from stable, citing increased leverage. The ’BBB+’ rating of the company, however, remains affirmed. The leverage of Akamai Technologies rose to 1.8x at the end of 2024 due to increased debt levels, acquisitions, and capital expenditures, coupled with limited EBITDA growth. This surpasses the 1.5x threshold set by S&P for the current ’BBB+’ rating.

Akamai’s more profitable delivery business has seen ongoing declines, and the company’s growing investment needs for compute have created a risk that leverage will remain over 1.5x for a sustained period. The negative outlook reflects expectations that the company’s elevated capital investment needs, significant share buybacks, and appetite for mergers and acquisitions (M&A), along with revenue challenges in the Content Delivery Network (CDN) segment, may cause Akamai’s leverage to stay above 1.5x for the next 12-18 months.

In 2024, Akamai’s leverage reached 1.8x due to higher debt levels, restructuring costs, acquisitions, and elevated capital expenditures. The company’s gross reported debt increased to $3.5 billion in fiscal 2024, up from $1.8 billion in 2019. The increase in debt was to provide capital for strategic initiatives, doubling its funded debt levels over the past five years.

Akamai also incurred about $100 million in restructuring costs in 2024, associated with workforce reductions and severance payments. These costs were part of its strategic realignment to focus on its rapidly growing compute and security segments, which negatively impacted its profitability. As a result, EBITDA margins declined to 39.0% in 2024 from 39.8% in 2023.

Despite the financial risks, Akamai’s strategic positioning in the cloud and security markets provides support for long-term business growth. The company has been transitioning from a traditional CDN provider to a more diversified portfolio focused on higher-growth security and cloud/edge computing segments over the past decade.

The company’s management has established financial goals for the next three to five years, aiming for overall revenue growth of more than 10%. They also anticipate modest improvements in operating margins, expected to come from leveraging operational and platform synergies, implementing cost-saving initiatives, and focusing on higher-margin products such as enterprise security and application programming interfaces (API) management solutions.

S&P Global Ratings could lower its rating on Akamai if the company adopts a more-aggressive financial policy or increases its leverage to fund acquisitions or shareholder returns such that it sustains leverage of more than 1.5x. The rating could also be lowered if Akamai fails to maintain its market share in the CDN business or expand its security and compute offerings, causing its consolidated revenue and profitability to decline.

The outlook could be revised to stable if the company improves leverage by executing solid performance while maintaining disciplines in its investments, M&A, and share repurchases such that its leverage declines and sustains below 1.5x. The company would also need to continue to expand revenues in high-growth security and computing segments, stabilize the CDN business, improve margins over time through scale and better product mix, and generate sustained strong cash flow after intensive capex needs.

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