AKAMAI TECHNOLOGIES INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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		04-3432319
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

8 Cambridge Center

Cambridge, MA 02142

(617) 444-3000

(Address, Including Zip Code, and Telephone Number, Including Area Code,

of Registrant’s Principal Executive Offices)

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 (the “Exchange Act”) 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares outstanding of the registrant’s common stock as of May 6, 2005: 127,675,753 shares.

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

For the quarterly period ended March 31, 2005

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 6.	Exhibits		31
SIGNATURES			32
Ex-31.1 Section 302 Certification of C.E.O.
Ex-31.2 Section 302 Certification of C.F.O.
Ex-32.1 Section 906 Certification of C.E.O.
Ex-32.2 Section 906 Certification of C.F.O.

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
			2005			2004

			(In thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	39,881		$	35,318
	Marketable securities (including restricted securities of $932 at March 31, 2005 and December 31, 2004, respectively)			44,534			35,312
		Accounts receivable (net of reserves of $4,371 and $5,422 at March 31, 2005 and December 31, 2004, respectively)		34,285			30,333
		Prepaid expenses and other current assets		6,337			7,706

		Total current assets		125,037			108,669
Property and equipment, net				31,007			25,242
Marketable securities				29,884			34,065
Restricted marketable securities				3,722			3,722
Goodwill				4,937			4,937
Other intangible assets, net				179			191
Other assets				6,844			5,917

		Total assets	$	201,610		$	182,743


LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	13,202		$	10,349
	Accrued expenses			32,903			32,097
	Deferred revenue			2,816			2,695
	Current portion of obligations under capital leases and vendor financing			98			232
	Current portion of accrued restructuring			1,380			1,393

		Total current liabilities		50,399			46,766
Accrued restructuring, net of current portion				1,920			2,259
Other liabilities				3,180			3,035
1% convertible senior notes				200,000			200,000
5¹/2% convertible subordinated notes				56,614			56,614

		Total liabilities		312,113			308,674

Commitments, contingencies and guarantees (Note 16)
Stockholders’ deficit:
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding at March 31, 2005 and December 31, 2004			—			—
	Common stock, $0.01 par value; 700,000,000 shares authorized; 127,399,804 shares issued and outstanding at March 31, 2005; 126,771,799 shares issued and outstanding at December 31, 2004			1,274			1,268
	Additional paid-in capital			3,453,220			3,451,578
	Deferred compensation			(713	)		(937	)
	Accumulated other comprehensive income			869			1,392
	Accumulated deficit			(3,565,153	)		(3,579,232	)

		Total stockholders’ deficit		(110,503	)		(125,931	)

		Total liabilities and stockholders’ deficit	$	201,610		$	182,743

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


			For the Three Months
			Ended March 31,

			2005			2004

			(In thousands, except per
			share data)
Revenues:
	Services		$	59,579		$	47,431
	Software and software-related			517			936

		Total revenues		60,096			48,367

Cost and operating expenses:
	Cost of revenues			11,524			12,146
	Research and development			3,629			2,694
	Sales and marketing			16,745			14,010
	General and administrative			11,839			11,197
	Amortization of other intangible assets			12			12

		Total cost and operating expenses		43,749			40,059

Income from operations				16,347			8,308
Interest income				598			598
Interest expense				(1,611	)		(3,756	)
Other expense, net				(726	)		(138	)
Loss on early extinguishment of debt				—			(2,018	)
Gain on investments, net				—			11

Income before provision for income taxes				14,608			3,005
Provision for income taxes				529			84

		Net income	$	14,079		$	2,921

Net income per share:
Basic			$	0.11		$	0.02
Diluted			$	0.10		$	0.02
Shares used in per share calculation:
Basic				127,051			122,104
Diluted				147,282			133,825

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


				For the Three Months
				Ended March 31,

				2005			2004

				(In thousands)
Cash flows from operating activities:
	Net income			$	14,079		$	2,921
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			4,140			6,497
		Equity-related compensation			227			533
		Deferred taxes			158			30
		Non-cash portion of loss on early extinguishment of debt			—			977
		Loss on investments, property and equipment and foreign currency, net			227			156
		Provision for doubtful accounts			413			(206	)
		Changes in operating assets and liabilities:
			Accounts receivable, net		(4,761	)		(3,333	)
			Prepaid expenses and other current assets		777			2,474
			Accounts payable and accrued expenses		4,878			(2,204	)
			Accrued restructuring		(352	)		(450	)
			Deferred revenue		281			1,173
			Other noncurrent assets and liabilities		(1,365	)		68

	Net cash provided by operating activities				18,702			8,636

Cash flows from investing activities:
		Purchases of property and equipment			(7,598	)		(1,288	)
		Capitalization of internal-use software costs			(2,121	)		(1,754	)
		Proceeds from sales of property and equipment			—			9
		Purchases of investments			(10,544	)		(121,418	)
		Proceeds from sales and maturities of investments			5,203			171,725
		Decrease in restricted cash held for note repurchases			—			5,000

	Net cash (used in) provided by investing activities				(15,060	)		52,274

Cash flows from financing activities:
		Payments on capital leases			(134	)		(131	)
		Proceeds from the issuance of 1% convertible senior notes, net of financing costs			—			24,313
		Repurchase and retirement of 5¹/2% convertible subordinated notes			—			(62,873	)
		Proceeds from the issuance of common stock under stock option plans			1,643			2,178

	Net cash provided by (used in) financing activities				1,509			(36,513	)

Effects of exchange rate translation on cash and cash equivalents					(588	)		(568	)

Net increase in cash and cash equivalents					4,563			23,829
Cash and cash equivalents, beginning of period					35,318			105,652

Cash and cash equivalents, end of period				$	39,881		$	129,481

Supplemental disclosure of cash flow information:
		Cash paid for taxes		$	229		$	—
		Cash paid for interest		$	1,570		$	8,772

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS


1.	Nature of Business, Basis of Presentation and Principles of Consolidation

Akamai Technologies, Inc. (“Akamai” or the “Company”) provides services for accelerating and improving the delivery of content and business processes over the Internet. Akamai’s globally distributed platform comprises more than 16,000 servers in nearly 1,000 networks in 69 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one business segment: providing global services for accelerating and improving delivery of content and business processes over the Internet.

The accompanying condensed consolidated financial statements of Akamai have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2004, has been prepared without audit. The condensed consolidated balance sheet at December 31, 2004 has been derived from, but does not include all the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2004. In the opinion of management, these unaudited statements include all adjustments and accruals consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of all interim periods reported herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in Akamai’s Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for future periods.

The accompanying condensed consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform to current year presentation. In connection with the preparation of the accompanying condensed consolidated financial statements, the Company concluded that it was appropriate to classify its investments in auction rate securities as short-term available-for-sale investments. Previously, such investments were classified as cash and cash equivalents. Accordingly, the Company has made revisions to the accompanying condensed consolidated statement of cash flows to reflect the gross purchases and sales of these securities as investing activities. As a result, cash used in investing activities increased by $51.1 million for the three months ended March 31, 2004. This revision in classification does not affect previously reported cash flows from operations or from financing activities for any period.


2.	Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 123R, “Share-Based Payment (revised 2004),” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123R is effective for the first annual period beginning after June 15, 2005. The Company expects to adopt this standard as of the beginning of fiscal year 2006 under the modified prospective transition method. Under this method, a company records compensation expense for all new awards and awards modified, repurchased, or cancelled after the required effective date. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosure in accordance with the provisions of SFAS No. 123. The Company is currently assessing the impact of adopting

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

SFAS No. 123R to its consolidated results of operations but expects that the adoption will have a material impact. The pro forma information included in Note 3 reflects what the impact of applying SFAS No. 123R would have been for periods presented.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment.” SAB No. 107 was issued to assist preparers by providing guidance regarding the application of SFAS No. 123R. SAB No. 107 describes the Staff’s views on share-based payment transactions with non-employees and covers key topics including valuation models, expected volatility and expected term. The Company will apply the principles of SAB No. 107 in conjunction with its adoption of SFAS No. 123R during the first quarter of 2006.


3.	Equity-Related Compensation

Akamai accounts for stock-based awards to employees using the intrinsic value method as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recorded for stock-based awards issued to employees and directors in fixed amounts and with fixed exercise prices at least equal to the fair market value of the Company’s common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period for restricted stock grants, deferred stock units and stock options granted where the exercise price is below the market price on the date of grant. Akamai applies the provisions of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation,” through disclosure only for stock-based awards issued to employees and directors. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.

The following table illustrates the effect on net income and net income per share if the Company had accounted for stock options issued to employees and directors under the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148 (in thousands, except per share data):


			For the
			Three Months Ended
			March 31,

			2005			2004

Net income, as reported			$	14,079		$	2,921
		Add: stock-based employee compensation included in reported net income		221			491
		Deduct: stock-based employee compensation expense determined under fair value method for all awards		(7,527	)		(10,803	)

Pro forma net income (loss)			$	6,773		$	(7,391	)

Basic net income (loss) per share:
	As reported		$	0.11		$	0.02
	Pro forma		$	0.05		$	(0.06	)
Diluted net income (loss) per share:
	As reported		$	0.10		$	0.02
	Pro forma		$	0.05		$	(0.06	)

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

The fair value of each option granted during the three months ended March 31, 2005 and 2004 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	For the
	Three Months Ended
	March 31,

	2005		2004

Expected life (years)		5.0		5.0
Risk-free interest rate (%)		3.8		2.9
Volatility (%)		81.9		100.0
Dividend yield (%)		—		—

During the three months ended March 31, 2005 and 2004, the weighted average fair value of options granted at market value on the date of grant was $8.12 and $10.92, respectively, per share.


4.	Net Income per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable quarter. Diluted net income per share is computed using the weighted average number of common shares outstanding during the quarter, plus the dilutive effect of potential common stock. Potential common stock consists of stock options, deferred stock units, warrants, unvested restricted common stock and convertible notes.

The following table sets forth the components used in the computation of basic and diluted net income per common share (in thousands, except per share data):


					For the
					Three Months Ended
					March 31,

					2005		2004

Numerator:
	Net income				$	14,079	$	2,291
	Add back of interest expense on 1% convertible senior notes					710		—

Numerator for diluted net income					$	14,789	$	2,291

Denominator:
	Denominator for basic net income per common share					127,051		122,104
		Effect of dilutive securities:
			Stock options			7,154		278
			Warrants			—		33
			Restricted common stock and deferred stock units			132		11,410
			1% convertible senior notes			12,945		—

	Denominator for diluted net income per common share					147,282		133,825

				Basic net income per common share	$	0.11	$	0.02
				Diluted net income per common share	$	0.10	$	0.02

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

The following potential common shares have been excluded from the computation of diluted net income per share for the periods presented because their effect would have been antidilutive (in thousands):


		As of
		March 31,

		2005		2004

Stock options			4,527		3,023
Warrants			—		36
1% convertible senior notes			—		12,945
5¹/2% convertible subordinated notes			490		1,413

	Total		5,017		17,417


5.	Comprehensive Income

The following table presents the calculation of comprehensive income and its components (in thousands):


		For the
		Three Months Ended
		March 31,

		2005			2004

Net income		$	14,079		$	2,921
Other comprehensive income:
	Foreign currency translation adjustment		(223	)		(176	)
	Unrealized (loss) gain on investments		(300	)		160

Comprehensive income		$	13,556		$	2,905

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