SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2002 | |
| or |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Commission file number 0-27275 |
Akamai Technologies, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of incorporation or organization) |
04-3432319 (I.R.S. Employer Identification Number) |
8 Cambridge Center
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
The number of shares outstanding of the registrant’s common stock as of November 11, 2002: 116,655,482 shares.
AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2002
TABLE OF CONTENTS
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
|
Item 1.
|
Financial Statements | 2 | ||||
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
|
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk | 36 | ||||
|
Item 4.
|
Controls and Procedures | 36 | ||||
| PART II. OTHER INFORMATION | ||||||
|
Item 1.
|
Legal Proceedings | 37 | ||||
|
Item 2.
|
Changes in Securities and Use of Proceeds | 38 | ||||
|
Item 6.
|
Exhibits and Reports on Form 8-K | 39 | ||||
| Signatures | 40 | |||||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| (In thousands, except share | ||||||||||
| and per share data) | ||||||||||
| (Unaudited) | ||||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 123,494 | $ | 78,774 | ||||||
|
Marketable securities (including restricted
securities of $12,748 and $11,166 at September 30, 2002 and
December 31, 2001, respectively)
|
13,416 | 113,906 | ||||||||
|
Accounts receivable, net of allowance for
doubtful accounts of $2,376 and $3,832 at September 30,
2002 and December 31, 2001, respectively
|
16,059 | 20,067 | ||||||||
|
Prepaid expenses and other current assets
|
9,406 | 15,252 | ||||||||
|
Total current assets
|
162,375 | 227,999 | ||||||||
|
Property and equipment, net
|
81,273 | 132,237 | ||||||||
|
Restricted marketable securities
|
5,072 | 17,831 | ||||||||
|
Goodwill (Note 8)
|
4,937 | 3,979 | ||||||||
|
Other intangible assets, net (Note 8)
|
4,704 | 15,372 | ||||||||
|
Other assets
|
8,023 | 24,060 | ||||||||
|
Total assets
|
$ | 266,384 | $ | 421,478 | ||||||
|
Liabilities and Stockholders’ (Deficit)
Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 25,406 | $ | 32,076 | ||||||
|
Accrued expenses
|
25,040 | 27,986 | ||||||||
|
Accrued interest payable
|
4,125 | 8,250 | ||||||||
|
Deferred revenue
|
3,079 | 4,948 | ||||||||
|
Current portion of obligations under capital
leases and vendor financing
|
1,199 | 405 | ||||||||
|
Current portion of accrued restructuring
(Note 11)
|
13,354 | 17,633 | ||||||||
|
Total current liabilities
|
72,203 | 91,298 | ||||||||
|
Obligations under capital leases and vendor
financing, net of current portion
|
1,303 | 113 | ||||||||
|
Accrued restructuring, net of current portion
(Note 11)
|
4,620 | 10,010 | ||||||||
|
Other liabilities
|
1,069 | 2,823 | ||||||||
|
Convertible notes
|
300,000 | 300,000 | ||||||||
|
Total liabilities
|
379,195 | 404,244 | ||||||||
|
Commitments and contingencies (Note 12)
|
||||||||||
|
Stockholders’ (deficit) equity:
|
||||||||||
|
Preferred stock, $0.01 par value; 5,000,000
shares authorized (Note 10); no shares issued or
outstanding at September 30, 2002 and December 31, 2001
|
— | — | ||||||||
|
Common stock, $0.01 par value; 700,000,000 shares
authorized; 116,642,224 shares issued and outstanding at
September 30, 2002; 115,099,317 shares issued and
outstanding at December 31, 2001
|
1,166 | 1,151 | ||||||||
|
Additional paid-in capital
|
3,436,962 | 3,438,706 | ||||||||
|
Deferred compensation
|
(18,781 | ) | (38,888 | ) | ||||||
|
Notes receivable from officers for stock
|
(3,440 | ) | (3,342 | ) | ||||||
|
Accumulated other comprehensive loss
|
(7 | ) | (515 | ) | ||||||
|
Accumulated deficit
|
(3,528,711 | ) | (3,379,878 | ) | ||||||
|
Total stockholders’ (deficit) equity
|
(112,811 | ) | 17,234 | |||||||
|
Total liabilities and stockholders’
(deficit) equity
|
$ | 266,384 | $ | 421,478 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months | For the Nine Months | ||||||||||||||||||
| Ended September 30, | Ended September 30, | ||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| (Unaudited) | |||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||
|
Service
|
$ | 30,617 | $ | 33,680 | $ | 96,785 | $ | 101,513 | |||||||||||
|
License and other
|
2,212 | 4,324 | 5,193 | 10,146 | |||||||||||||||
|
Service and license from related parties
(Note 9)
|
2,546 | 4,750 | 7,646 | 14,445 | |||||||||||||||
|
Total revenue
|
35,375 | 42,754 | 109,624 | 126,104 | |||||||||||||||
|
Cost and operating expenses:
|
|||||||||||||||||||
|
Cost of service (excludes $11,484, $10,991,
$35,228 and $30,579, respectively, of network-related
depreciation included in depreciation below)(1)
|
9,580 | 15,870 | 31,768 | 51,143 | |||||||||||||||
|
Research and development(1)
|
4,820 | 7,626 | 14,313 | 28,505 | |||||||||||||||
|
Sales and marketing(1)
|
15,632 | 19,250 | 45,571 | 64,663 | |||||||||||||||
|
General and administrative(1)
|
13,772 | 18,396 | 42,953 | 65,550 | |||||||||||||||
|
Depreciation
|
20,735 | 19,116 | 61,347 | 53,908 | |||||||||||||||
|
Amortization of goodwill
|
— | 793 | — | 236,525 | |||||||||||||||
|
Amortization of other intangible assets
|
2,231 | 6,647 | 9,699 | 15,245 | |||||||||||||||
|
Impairment of goodwill
|
— | — | — | 1,912,840 | |||||||||||||||
|
Equity-related compensation
|
4,616 | 8,717 | 15,633 | 24,269 | |||||||||||||||
|
Restructuring charge (Note 11)
|
6,138 | — | 19,149 | 26,194 | |||||||||||||||
|
Total cost and operating expenses
|
77,524 | 96,415 | 240,433 | 2,478,842 | |||||||||||||||
|
Loss from operations
|
(42,149 | ) | (53,661 | ) | (130,809 | ) | (2,352,738 | ) | |||||||||||
|
Interest expense, net
|
(3,950 | ) | (2,210 | ) | (11,257 | ) | (3,266 | ) | |||||||||||
|
Other income
|
— | 1,002 | — | 1,002 | |||||||||||||||
|
Loss on investments, net (Note 6)
|
(1,311 | ) | (213 | ) | (6,398 | ) | (14,960 | ) | |||||||||||
|
Loss before provision for income taxes
|
(47,410 | ) | (55,082 | ) | (148,464 | ) | (2,369,962 | ) | |||||||||||
|
Provision for income taxes
|
123 | 277 | 369 | 785 | |||||||||||||||
|
Net loss
|
$ | (47,533 | ) | $ | (55,359 | ) | $ | (148,833 | ) | $ | (2,370,747 | ) | |||||||
|
Basic and diluted net loss per share
|
$ | (0.42 | ) | $ | (0.53 | ) | $ | (1.33 | ) | $ | (23.35 | ) | |||||||
|
Weighted average common shares outstanding
|
114,251 | 104,166 | 112,066 | 101,525 | |||||||||||||||
| (1) Excludes non-cash equity-related compensation presented separately as follows: | |||||||||||||||||||
|
Cost of service
|
$ | 164 | $ | 149 | $ | 491 | $ | 416 | |||||||||||
|
Research and development
|
1,312 | 2,706 | 3,416 | 7,533 | |||||||||||||||
|
Sales and marketing
|
1,262 | 3,724 | 4,954 | 10,368 | |||||||||||||||
|
General and administrative
|
1,878 | 2,138 | 6,772 | 5,952 | |||||||||||||||
| $ | 4,616 | $ | 8,717 | $ | 15,633 | $ | 24,269 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months | |||||||||||
| Ended September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (In thousands) | |||||||||||
| (Unaudited) | |||||||||||
|
Cash flows from operating activities:
|
|||||||||||
|
Net loss
|
$ | (148,833 | ) | $ | (2,370,747 | ) | |||||
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|||||||||||
|
Depreciation, amortization and impairment of
long-lived assets
|
76,346 | 2,223,782 | |||||||||
|
Equity-related compensation
|
15,633 | 24,269 | |||||||||
|
Interest income on notes receivable from officers
for stock
|
(98 | ) | (248 | ) | |||||||
|
Non-cash portion of restructuring charge
|
3,671 | — | |||||||||
|
Loss on investments and disposal of property and
equipment
|
6,994 | 14,960 | |||||||||
|
Changes in operating assets and liabilities:
|
|||||||||||
|
Accounts receivable, net
|
3,929 | 1,121 | |||||||||
|
Prepaid expenses and other current assets
|
2,531 | 5,492 | |||||||||
|
Accounts payable, accrued expenses and other
current liabilities
|
(11,425 | ) | (2,082 | ) | |||||||
|
Deferred revenue
|
(1,857 | ) | 959 | ||||||||
|
Other noncurrent assets and liabilities
|
(2,272 | ) | 16,837 | ||||||||
|
Net cash used in operating activities
|
(55,381 | ) | (85,657 | ) | |||||||
|
Cash flows from investing activities:
|
|||||||||||
|
Purchases of property and equipment and additions
to internal-use software
|
(13,303 | ) | (57,291 | ) | |||||||
|
Purchases of investments
|
(24,550 | ) | (66,188 | ) | |||||||
|
Proceeds from sales of property and equipment
|
299 | — | |||||||||
|
Proceeds from sales and maturities of investments
|
136,611 | 155,392 | |||||||||
|
Net cash provided by investing activities
|
99,057 | 31,913 | |||||||||
|
Cash flows from financing activities:
|
|||||||||||
|
Payments on capital leases and equipment
financing loan
|
(1,349 | ) | (895 | ) | |||||||
|
Proceeds from the issuance of common stock under
stock option and employee stock purchase plans
|
1,676 | 5,044 | |||||||||
|
Net cash provided by financing activities
|
327 | 4,149 | |||||||||
|
Effects of exchange rate translation on cash and
cash equivalents
|
717 | 119 | |||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
44,720 | (49,476 | ) | ||||||||
|
Cash and cash equivalents, beginning of period
|
78,774 | 150,130 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 123,494 | $ | 100,654 | |||||||
|
Supplemental disclosure of cash flows information:
|
|||||||||||
|
Cash paid for interest
|
$ | 16,630 | $ | 17,050 | |||||||
|
Assets acquired under capital lease obligations
and vendor financing
|
$ | 3,332 | $ | 141 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AKAMAI TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business:
Akamai Technologies, Inc. (“Akamai” or the “Company”) provides secure, outsourced, e-business infrastructure services and software. These services and software enable enterprises to reduce the complexity and cost of deploying and operating a uniform Internet Protocol, or IP, infrastructure while ensuring superior performance, reliability, scalability and manageability. Akamai’s globally distributed edge computing platform comprises more than 12,900 servers in more than 1,100 networks in 66 countries, ensuring the highest levels of availability, reliability and performance. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one business segment: outsourced e-business infrastructure services and software.
2. Basis of Presentation and Principles of Consolidation:
The accompanying interim condensed consolidated financial statements, together with the related notes, are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, that in the opinion of management are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of the dates and for the periods presented. The interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these interim financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America for annual audited financial statements. Accordingly, reference should be made to the Company’s annual report on Form 10-K for the year ended December 31, 2001 which was filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2002. Results of the interim periods are not necessarily indicative of results for the entire year.
The interim condensed consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made to conform with current period presentation.
3. Recent Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which will be effective in January 2003. SFAS No. 143 addresses financial accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company does not expect the adoption of SFAS No. 143 to have a significant impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” Among other things, SFAS No. 145 rescinds Statement No. 4, “Reporting Gains and Losses from Extinguishments of Debt” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” The provision of SFAS No. 145 related to the rescission of Statement No. 4 are effective in 2003. Early application of the provisions of this Statement is encouraged. The Company does not expect the adoption of SFAS No. 145 to have a significant impact on its results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability be recognized when it is incurred and should initially
5
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
be measured and recorded at fair value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002 and the adoption is not expected to have a material impact on the financial statements of the Company.
4. Net Loss per Share:
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of stock options, warrants, unvested restricted common stock, convertible notes and contingently issuable common stock.
The following table sets forth the components of potential common stock excluded from the calculation of diluted net loss per share because their inclusion would be antidilutive: