e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2006 |
or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
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For the transition period
from to |
Commission file number 0-27275
Akamai Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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04-3432319 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
8 Cambridge Center
Cambridge, MA 02142
(617) 444-3000
(Address, Including Zip Code, and Telephone Number, Including
Area Code,
of Registrants 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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
The number of shares outstanding of the registrants common
stock as of May 5, 2006: 154,512,987 shares.
AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
For the quarterly period ended March 31, 2006
TABLE OF CONTENTS
PART I. FINANCIAL
INFORMATION
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Item 1. |
Financial Statements |
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, | |
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December 31, | |
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2006 | |
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2005 | |
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(In thousands, except share data) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
65,022 |
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$ |
91,792 |
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Marketable securities (including restricted securities of $330
at March 31, 2006 and $730 at December 31, 2005)
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219,923 |
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200,616 |
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Accounts receivable, net of reserves of $9,881 at March 31,
2006 and $7,994 at December 31, 2005, respectively
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55,798 |
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52,162 |
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Prepaid expenses and other current assets
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13,450 |
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10,428 |
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Total current assets
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354,193 |
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354,998 |
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Property and equipment, net
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54,939 |
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44,885 |
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Marketable securities (including restricted securities of $3,825
at March 31, 2006 and December 31, 2005, respectively)
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56,478 |
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21,721 |
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Goodwill
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98,347 |
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98,519 |
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Other intangible assets, net
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35,971 |
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38,267 |
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Deferred tax assets, net
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326,609 |
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328,308 |
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Other assets
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4,729 |
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4,801 |
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Total assets
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$ |
931,266 |
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$ |
891,499 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
18,411 |
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$ |
16,022 |
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Accrued expenses
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42,891 |
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38,449 |
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Deferred revenue
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8,820 |
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5,656 |
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Current portion of accrued restructuring
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1,533 |
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1,749 |
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Total current liabilities
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71,655 |
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61,876 |
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Accrued restructuring, net of current portion
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1,505 |
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1,844 |
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Other liabilities
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3,100 |
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3,565 |
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1% convertible senior notes
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200,000 |
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200,000 |
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Total liabilities
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276,260 |
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267,285 |
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Commitments, contingencies and guarantees (Note 15)
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Stockholders equity:
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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, 2006 and December 31, 2005
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Common stock, $0.01 par value; 700,000,000 shares
authorized; 154,245,298 shares issued and outstanding at
March 31, 2006; 152,922,092 shares issued and
outstanding at December 31, 2005
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1,542 |
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1,529 |
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Additional paid-in capital
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3,892,680 |
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3,880,985 |
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Deferred stock compensation
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(7,537 |
) |
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Accumulated other comprehensive income, net
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524 |
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471 |
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Accumulated deficit
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(3,239,740 |
) |
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(3,251,234 |
) |
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Total stockholders equity
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655,006 |
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624,214 |
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Total liabilities and stockholders equity
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$ |
931,266 |
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$ |
891,499 |
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
1
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the Three Months | |
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Ended March 31, | |
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2006 | |
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2005 | |
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(In thousands, except per | |
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share data) | |
Revenues:
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Services
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$ |
90,799 |
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$ |
59,579 |
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Software and software-related
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26 |
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517 |
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Total revenues
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90,825 |
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60,096 |
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Costs and operating expenses:
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Cost of revenues
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19,316 |
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11,524 |
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Research and development
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6,726 |
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3,629 |
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Sales and marketing
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26,295 |
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16,745 |
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General and administrative
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18,543 |
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11,839 |
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Amortization of other intangible assets
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2,296 |
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12 |
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Total costs and operating expenses
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73,176 |
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43,749 |
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Income from operations
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17,649 |
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16,347 |
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Interest income
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3,430 |
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|
598 |
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Interest expense
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(772 |
) |
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(1,611 |
) |
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Other income (expense), net
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186 |
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(726 |
) |
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Gain on investments, net
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257 |
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Income before provision for income taxes
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20,750 |
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14,608 |
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Provision for income taxes
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9,255 |
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529 |
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Net income
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$ |
11,495 |
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$ |
14,079 |
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Net income per weighted average share:
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Basic
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$ |
0.07 |
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$ |
0.11 |
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Diluted
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$ |
0.07 |
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$ |
0.10 |
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Shares used in per weighted average share calculations:
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Basic
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153,819 |
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127,051 |
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Diluted
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173,811 |
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147,282 |
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
2
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Three Months | |
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Ended March 31, | |
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2006 | |
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2005 | |
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(In thousands) | |
Cash flows from operating activities:
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Net income
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$ |
11,495 |
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$ |
14,079 |
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|
Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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8,693 |
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3,866 |
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Amortization of deferred financing costs
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|
210 |
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274 |
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Stock-based compensation
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7,087 |
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227 |
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Utilization of tax NOL carryforward
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8,764 |
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Deferred taxes
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|
158 |
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Provision for doubtful accounts
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|
318 |
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|
413 |
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Excess tax benefits from stock-based compensation
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(5,399 |
) |
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(Gain)loss on investments, property and equipment and foreign
currency, net
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(327 |
) |
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227 |
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Changes in operating assets and liabilities:
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|
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Accounts receivable
|
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|
(3,403 |
) |
|
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(4,761 |
) |
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Prepaid expenses and other current assets
|
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|
(3,113 |
) |
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|
777 |
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Accounts payable, accrued expenses and other current liabilities
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|
6,840 |
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|
4,878 |
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Deferred revenue
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|
2,641 |
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|
281 |
|
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Accrued restructuring
|
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(554 |
) |
|
|
(352 |
) |
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Other non-current assets and liabilities
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|
|
(91 |
) |
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(1,365 |
) |
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Net cash provided by operating activities
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|
33,161 |
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|
18,702 |
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Cash flows from investing activities:
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Purchases of property and equipment
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|
(13,556 |
) |
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(7,598 |
) |
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Capitalization of internal-use software costs
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(2,618 |
) |
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(2,121 |
) |
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Purchases of available for sale securities
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(105,005 |
) |
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(10,544 |
) |
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Proceeds from sales and maturities of available for sale
securities
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|
50,766 |
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|
5,203 |
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Decrease in restricted investments held for security deposits
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|
400 |
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|
|
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Net cash used in investing activities
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|
(70,013 |
) |
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|
(15,060 |
) |
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Cash flows from financing activities:
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|
|
|
|
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Payments on capital leases
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(134 |
) |
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Excess tax benefits from stock-based compensation
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|
5,399 |
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Proceeds from the issuance of common stock under stock option
plans
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|
|
4,643 |
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|
|
1,643 |
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|
|
|
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|
|
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Net cash provided by financing activities
|
|
|
10,042 |
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|
|
1,509 |
|
|
|
|
|
|
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Effects of exchange rate changes on cash and cash equivalents
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40 |
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|
(588 |
) |
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|
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Net (decrease) increase in cash and cash equivalents
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|
(26,770 |
) |
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|
4,563 |
|
Cash and cash equivalents at beginning of period
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|
91,792 |
|
|
|
35,318 |
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Cash and cash equivalents at end of period
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$ |
65,022 |
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$ |
39,881 |
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Supplemental disclosure of cash flow information:
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Cash paid for interest
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$ |
1 |
|
|
$ |
1,570 |
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|
Cash paid for income taxes
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|
264 |
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|
229 |
|
Non-cash investing activities:
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|
|
|
|
|
|
|
|
Capitalization of stock-based compensation
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|
$ |
492 |
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|
$ |
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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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 applications over the
Internet. Akamais globally distributed platform comprises
more than 19,000 servers in more than 950 networks in
71 countries. The Company was incorporated in Delaware in
1998 and is headquartered in Cambridge, Massachusetts. Akamai
currently operates in one business segment: providing services
for accelerating and improving delivery of content and
applications over the Internet.
The accompanying interim condensed consolidated financial
statements are unaudited and have been prepared in accordance
with the Accounting Principles Generally Accepted in the United
States of America for interim financial information. 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 information and footnote disclosures
normally included in the Companys annual consolidated
financial statements have been condensed or omitted.
The results of operations presented in this Quarterly Report on
Form 10-Q are not
necessarily indicative of the results that may be expected for
future periods. 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
statement of the results of all interim periods reported herein.
These condensed consolidated financial statements should be read
in conjunction with the condensed consolidated financial
statements and accompanying notes included in Akamais
Annual Report on
Form 10-K for the
year ended December 31, 2005.
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2. |
Restricted Marketable Securities |
As of March 31, 2006, $4.2 million of the
Companys marketable securities were classified as
restricted. These securities primarily represent security for
irrevocable letters of credit in favor of third-party
beneficiaries, mostly related to facility leases. The letters of
credit are collateralized by restricted marketable securities,
of which $3.8 million are classified as long-term
marketable securities and $330,000 are classified as short-term
marketable securities on the unaudited condensed consolidated
balance sheet as of March 31, 2006. The restrictions on
these marketable securities lapse as the Company fulfills its
obligations or as such obligations expire as provided by the
letters of credit. These restrictions are expected to lapse at
various times through May 2011.
4
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Net accounts receivable consists of the following (in thousands):
|
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|
|
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|
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|
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As of | |
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As of | |
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Trade accounts receivable
|
|
$ |
56,939 |
|
|
$ |
51,019 |
|
Unbilled accounts
|
|
|
8,740 |
|
|
|
9,137 |
|
|
|
|
|
|
|
|
|
Total gross accounts receivable
|
|
|
65,679 |
|
|
|
60,156 |
|
Allowance for doubtful accounts
|
|
|
(2,436 |
) |
|
|
(2,277 |
) |
Reserve for cash basis customers
|
|
|
(2,538 |
) |
|
|
(2,539 |
) |
Reserve for service credits
|
|
|
(4,907 |
) |
|
|
(3,178 |
) |
|
|
|
|
|
|
|
|
Total accounts receivable reserves
|
|
|
(9,881 |
) |
|
|
(7,994 |
) |
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$ |
55,798 |
|
|
$ |
52,162 |
|
|
|
|
|
|
|
|
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Payroll and other related benefits
|
|
$ |
16,061 |
|
|
$ |
14,374 |
|
Property, use and other taxes
|
|
|
13,886 |
|
|
|
13,314 |
|
Bandwidth and co-location
|
|
|
10,103 |
|
|
|
7,781 |
|
Legal professional fees
|
|
|
453 |
|
|
|
679 |
|
Interest
|
|
|
583 |
|
|
|
83 |
|
Other
|
|
|
1,805 |
|
|
|
2,218 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
42,891 |
|
|
$ |
38,449 |
|
|
|
|
|
|
|
|
|
|
5. |
Stock-Based Compensation |
Effective January 1, 2006, the Company adopted on a
modified prospective basis the provisions of Financial
Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment
(SFAS No. 123(R)), which requires the
measurement and recognition of compensation expense based on
estimated fair values for all share-based payment awards made to
employees and directors including employee stock options,
restricted stock units, deferred stock units and employee stock
purchases related to Akamais 1999 Employee Stock Purchase
Plan (the 1999 ESPP). Accordingly, stock-based
compensation costs are measured at grant date, based on the fair
value of the award, and is recognized as expense over the
employees requisite service period. Additionally, the
Company applied the provisions of the SECs Staff
Accounting Bulletin No. 107 on share-based payment to
its adoption of SFAS No. 123(R).
In 1998, the Companys Board of Directors (the Board
of Directors) adopted the 1998 Stock Incentive Plan (the
1998 Plan) for the issuance of incentive and
nonqualified stock options, restricted stock awards
5
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
and other types of equity awards. Options to purchase common
stock and other equity awards are granted at the discretion of
the Board of Directors or a committee thereof. In October 2005,
the Board of Directors delegated to the Companys Chief
Executive Officer the authority to grant equity incentive awards
to employees of the Company below the level of Vice President
subject to certain specified limitations. In December 2001, the
Board of Directors adopted the 2001 Stock Incentive Plan (the
2001 Plan) for the issuance of nonqualified stock
options, restricted stock and other types of equity awards. The
total number of shares of common stock reserved for issuance
under the 1998 Plan and the 2001 Plan is 48,255,600 and
5,000,000 shares, respectively. Equity incentive awards may
not be issued to the Companys directors or executive
officers under the 2001 Plan.
Under the terms of the 1998 Plan, the exercise price of
incentive stock options may not be less than 100% (110% in
certain cases) of the fair market value of the common stock on
the date of grant, as determined by the Board of Directors.
Incentive stock options may not be issued under the 2001 Plan.
The exercise price of nonqualified stock options issued under
the 1998 Plan and the 2001 Plan may be less than the fair market
value of the common stock on the date of grant, as determined by
the Board of Directors, but in no case may the exercise price be
less than the statutory minimum. Stock option vesting is
typically four years, and options are granted at the discretion
of the Board of Directors. The term of options granted may not
exceed ten years, or five years for incentive stock options
granted to holders of more than 10% of the Companys voting
stock.
The Company has assumed certain stock option plans and the
outstanding stock options of companies that it has acquired
(Assumed Plans). Stock options under the Assumed
Plans have been exchanged for the Companys stock options
and adjusted to reflect the appropriate conversion ratio as
specified by the applicable acquisition agreement, but are
otherwise administered in accordance with the terms of the
Assumed Plans. Stock options under the Assumed Plans generally
vest over four years and expire ten years from the date of
grant. No additional stock options have been or will be granted
under the Assumed Plans.
In August 1999, the Board of Directors adopted the 1999 ESPP.
The Company reserved 3,100,000 shares of common stock for
issuance under the 1999 ESPP. In May 2002, the stockholders of
the Company approved an amendment to the 1999 ESPP that allows
for an automatic increase in the number of shares of common
stock available under the 1999 ESPP each June 1 and
December 1 to restore the number of shares available for
issuance to 1,500,000 shares, provided that the aggregate
number of shares issuable under the 1999 ESPP shall not exceed
20,000,000. In April 2005, the Companys Board of Directors
approved amendments to the 1999 ESPP as follows: the duration of
the offering periods was decreased from 24 months to six
months; the number of times a participant may elect to change
his or her percentage was changed from four times to two times;
the definition of compensation was amended to
clarify that it includes cash bonuses and other cash incentive
programs; and a provision was added to clarify that upon
termination of an offering period, each eligible participant
will be automatically enrolled in the next offering period.
These amendments became effective in June 2005. The 1999 ESPP
allows participants to purchase shares of common stock at a 15%
discount from the fair market value of the stock as determined
on specific dates at six-month intervals. During the three-month
periods ended March 31, 2006 and 2005, the Company issued
no shares under the 1999 ESPP. As of March 31, 2006,
$2.2 million had been withheld from employees for future
purchases under the 1999 ESPP.
|
|
|
Impact of the adoption of SFAS No. 123(R) |
The Company adopted SFAS No. 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard as of January 1, 2006, the first
day of Akamais fiscal year 2006. Under this transition
method, stock-based compensation expense recognized during the
quarter ended March 31, 2006 includes: ESPP awards with the
offering period commencing on December 1, 2005, based on
the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123; stock options
6
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
and deferred stock units granted prior to, but not yet vested as
of December 31, 2005, based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and stock options and restricted stock
units granted, subsequent to December 31, 2005, based on
the grant-date fair value, in accordance with the provisions of
SFAS No. 123(R). Under the modified prospective
transition method, results for prior periods are not restated,
and accordingly, the results of operations for the three months
ended March 31, 2006 and future periods will not be
comparable to the Companys historical results.
Akamai has selected the Black-Scholes option pricing model to
determine the estimated fair value of stock option awards. The
estimated fair value of Akamais stock-based awards, less
expected forfeitures, is amortized over the awards vesting
period on a straight-line basis. Deferred compensation related
to awards granted prior to January 1, 2006 has been
included in additional paid-in capital.
SFAS No. 123(R) also changes the reporting of
tax-related amounts within the statement of cash flows. The
gross amount of windfall tax benefits resulting from stock-based
compensation will be reported as cash flows from financing
activities.
The effect of recording stock-based compensation in accordance
with SFAS No. 123(R) for the three month period ended
March 31, 2006 was as follows (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
|
| |
Stock-based compensation expense by type of award:
|
|
|
|
|
|
Stock options
|
|
$ |
5,083 |
|
|
Deferred stock units
|
|
|
242 |
|
|
Restricted stock units
|
|
|
1,758 |
|
|
1999 ESPP
|
|
|
496 |
|
|
Amounts capitalized as internal-use software
|
|
|
(492 |
) |
|
|
|
|
Total stock-based compensation before income taxes
|
|
|
7,087 |
|
|
Less: Income tax benefit
|
|
|
(1,801 |
) |
|
|
|
|
Total stock-based compensation, net of tax
|
|
$ |
5,286 |
|
|
|
|
|
Effect of stock-based compensation on income by line item:
|
|
|
|
|
|
Cost of revenues
|
|
$ |
273 |
|
|
Research and development expense
|
|
|
1,657 |
|
|
Sales and marketing expense
|
|
|
2,589 |
|
|
General and administrative expense
|
|
|
2,568 |
|
|
Provision for income taxes
|
|
|
(1,801 |
) |
|
|
|
|
|
|
Total cost related to stock-based compensation
|
|
$ |
5,286 |
|
|
|
|
|
The fair value of Akamais stock-option awards granted
during the three months ended March 31, 2006 was estimated
using the following weighted-average assumptions:
|
|
|
|
|
|
|
Options | |
|
|
| |
Expected life (years)
|
|
|
3.7 |
|
Risk-free interest rate(%)
|
|
|
4.6 |
|
Expected Volatility(%)
|
|
|
66.4 |
|
Dividend yield(%)
|
|
|
|
|
Weighted average fair value at grant date
|
|
$ |
13.25 |
|
7
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Expected volatilities are based on the Companys historical
volatility and implied volatility from traded options in its
stock. The Company uses historical data to estimate the expected
term of options granted within the valuation model. The
risk-free rate for periods within the expected term of the
option is based on the U.S. Treasury yield rate in effect
at the time of grant.
As of March 31, 2006, total unrecognized compensation costs
for stock options, restricted stock units, deferred stock units
and the 1999 ESPP was $87.3 million. This non-cash expense
will be recognized through 2009 with a weighted average period
of 1.7 years.
As a result of adopting SFAS No. 123(R), the
Companys income before taxes and net income for the three
months ended March 31, 2006 is $3.7 million and
$2.1 million lower, respectively, than if the Company had
continued to account for share-based compensation under
Accounting Principles Bulletin No. 25, Account
for Stock Issued to Employees (APB
No. 25). Basic and diluted earnings per share for the
three months ended March 31, 2006 would have been $0.09 and
$0.08, respectively, if the Company had not adopted
SFAS No. 123(R), compared to reported basic and
diluted earnings per share of $0.07 and $0.07 each.
Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits of deductions resulting from
exercises of stock options as operating cash flows in the
consolidated statement of cash flows. SFAS No. 123(R)
requires the cash flows resulting from excess tax benefits to be
classified as financing cash flows, rather than as operating
cash flows. The $5.4 million in excess tax benefit
classified as a financing cash inflow would have been classified
as an operating cash inflow, if the Company had not adopted
SFAS No. 123(R).
|
|
|
Prior to the adoption of SFAS No. 123(R) |
Prior to January 1, 2006, the Company accounted for
stock-based awards under the provisions of APB No. 25
and FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25 and provided the
required pro forma disclosures of SFAS No. 123,
Accounting for Stock-Based Compensation 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 (SFAS No. 123).
The following is a reconciliation of pro forma net income per
weighted average share calculated as if the Company had adopted
the fair value recognition provisions of SFAS No. 123
for the three months ended March 31, 2005 and the
Companys reported net income per weighted average share
(in thousands, except per share data):
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2005 | |
|
|
| |
Net income, as reported
|
|
$ |
14,079 |
|
|
Add: stock-based employee compensation included in reported net
income
|
|
|
221 |
|
|
Deduct: stock-based employee compensation expense determined
under fair value method for all awards
|
|
|
(7,527 |
) |
|
|
|
|
Incremental stock option expense per SFAS No. 123
|
|
|
(7,306 |
) |
|
|
|
|
Pro forma net income
|
|
$ |
6,773 |
|
|
|
|
|
8
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2005 | |
|
|
| |
Net income per weighted average share, basic:
|
|
|
|
|
|
As reported
|
|
$ |
0.11 |
|
|
Pro forma
|
|
$ |
0.05 |
|
Net income per weighted average share, diluted:
|
|
|
|
|
|
As reported
|
|
$ |
0.10 |
|
|
Pro forma
|
|
$ |
0.05 |
|
Effect of employee stock-based compensation on income by line
item:
|
|
|
|
|
|
Cost of revenues
|
|
$ |
|
|
|
Research and development expense
|
|
|
|
|
|
Sales and marketing expense
|
|
|
47 |
|
|
General and administrative expense
|
|
|
174 |
|
|
|
|
|
|
|
Total cost related to stock-based compensation
|
|
$ |
221 |
|
|
|
|
|
The stock-based compensation expense of $221,000 above excludes
$6,000 of compensation expense related to equity awards held by
non-employees that was recorded during the three months ended
March 31, 2005.
The fair value of Akamais stock options issued prior to
the adoption of SFAS No. 123(R) was estimated using a
Black-Scholes option pricing model. This model requires the
input of subjective assumptions, including expected stock price
volatility and estimated life of each award. The fair values of
these options was estimated assuming no expected dividends and
the estimated life of each award, volatility and risk-free
interest rate at the time of grant.
The fair value of Akamais stock-option awards granted
during the three months ended March 31, 2005 was estimated
using the following weighted-average assumptions:
|
|
|
|
|
|
|
Options | |
|
|
| |
Expected life (years)
|
|
|
5.0 |
|
Risk-free interest rate(%)
|
|
|
3.8 |
|
Volatility(%)
|
|
|
81.9 |
|
Dividend yield(%)
|
|
|
|
|
Weighted average fair value at grant date
|
|
$ |
8.12 |
|
Options to purchase common stock are granted at the discretion
of the Board of Directors or a committee thereof. Options
granted generally have a contractual life of ten years and
typically vest 25% one year from date of grant, and the
remaining 75% vest in twelve equal quarterly installments so
that all options are vested at the end of four years.
9
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following tables summarize the stock option activity for the
three months ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at January 1, 2006
|
|
|
16,275,852 |
|
|
$ |
8.65 |
|
|
Granted
|
|
|
773,650 |
|
|
|
25.36 |
|
|
Exercised
|
|
|
(1,322,667 |
) |
|
|
3.53 |
|
|
Forfeited
|
|
|
(318,530 |
) |
|
|
10.15 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
15,408,305 |
|
|
|
9.93 |
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006
|
|
|
7,218,359 |
|
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at January 1, 2005
|
|
|
14,126,204 |
|
|
$ |
6.92 |
|
|
Granted
|
|
|
827,500 |
|
|
|
12.06 |
|
|
Exercised
|
|
|
(628,255 |
) |
|
|
2.62 |
|
|
Forfeited
|
|
|
(366,166 |
) |
|
|
15.34 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2005
|
|
|
13,959,283 |
|
|
|
7.20 |
|
|
|
|
|
|
|
|
Exercisable at March 31, 2005
|
|
|
7,011,903 |
|
|
|
5.93 |
|
The total pre-tax intrinsic value of options exercised during
the three months ended March 31, 2006 and 2005 was
$28.8 million and $5.9 million, respectively. The
total fair value of options vested for the three months ended
March 31, 2006 and 2005 was $4.3 million and
$6.6 million, respectively. The fair value of vested stock
options for the three months ended March 31, 2006 was
calculated net of capitalized equity-related compensation of
$492,000. Cash proceeds from the exercise of stock options were
$4.6 million and $1.6 million for the three months
ended March 31, 2006 and 2005, respectively. Income tax
benefits realized from the exercise of stock options during the
three months ended March 31, 2006 and 2005 were
$7.0 million and $1.8 million, respectively.
10
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table summarizes significant ranges of outstanding
and exercisable options as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Expected to Vest | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Remaining | |
|
Average | |
|
|
|
|
|
Average | |
|
|
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Aggregate | |
|
Number of | |
|
Exercise | |
|
Aggregate | |
Range of Exercise Price ($) |
|
Options | |
|
Life | |
|
Price | |
|
Intrinsic Value | |
|
Options | |
|
Price | |
|
Intrinsic Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(in years) | |
|
|
|
(in thousands) | |
|
|
|
|
|
(in thousands) | |
0.01-0.90
|
|
|
1,587,013 |
|
|
|
6.3 |
|
|
$ |
0.55 |
|
|
$ |
51,325 |
|
|
|
1,217,749 |
|
|
$ |
0.61 |
|
|
$ |
39,306 |
|
0.96-1.65
|
|
|
1,627,583 |
|
|
|
6.4 |
|
|
|
1.42 |
|
|
|
51,216 |
|
|
|
1,559,574 |
|
|
|
1.43 |
|
|
|
49,066 |
|
2.27-4.08
|
|
|
951,440 |
|
|
|
5.6 |
|
|
|
3.13 |
|
|
|
28,319 |
|
|
|
939,777 |
|
|
|
3.12 |
|
|
|
27,977 |
|
4.10-5.13
|
|
|
2,223,434 |
|
|
|
6.6 |
|
|
|
4.87 |
|
|
|
62,308 |
|
|
|
1,786,728 |
|
|
|
4.84 |
|
|
|
50,119 |
|
5.44-12.90
|
|
|
1,201,737 |
|
|
|
8.1 |
|
|
|
11.19 |
|
|
|
26,075 |
|
|
|
474,145 |
|
|
|
9.93 |
|
|
|
10,886 |
|
13.03-14.06
|
|
|
723,055 |
|
|
|
5.9 |
|
|
|
13.33 |
|
|
|
14,145 |
|
|
|
484,932 |
|
|
|
13.16 |
|
|
|
9,566 |
|
14.37
|
|
|
1,053,686 |
|
|
|
8.0 |
|
|
|
14.37 |
|
|
|
19,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14.46-14.86
|
|
|
2,501,629 |
|
|
|
9.3 |
|
|
|
14.48 |
|
|
|
46,062 |
|
|
|
53,322 |
|
|
|
14.84 |
|
|
|
962 |
|
15.22-19.21
|
|
|
840,228 |
|
|
|
6.1 |
|
|
|
15.92 |
|
|
|
14,257 |
|
|
|
535,025 |
|
|
|
15.28 |
|
|
|
9,423 |
|
19.80-35.05
|
|
|
793,647 |
|
|
|
9.3 |
|
|
|
24.98 |
|
|
|
6,292 |
|
|
|
71,082 |
|
|
|
25.78 |
|
|
|
518 |
|
36.06-39.44
|
|
|
41,400 |
|
|
|
4.4 |
|
|
|
36.64 |
|
|
|
|
|
|
|
41,400 |
|
|
|
36.64 |
|
|
|
|
|
61.94-93.94
|
|
|
52,875 |
|
|
|
4.0 |
|
|
|
78.34 |
|
|
|
|
|
|
|
52,875 |
|
|
|
78.34 |
|
|
|
|
|
197.50
|
|
|
1,750 |
|
|
|
2.5 |
|
|
|
197.50 |
|
|
|
|
|
|
|
1,750 |
|
|
|
197.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,599,477 |
|
|
|
7.3 |
|
|
|
9.61 |
|
|
$ |
319,513 |
|
|
|
7,218,359 |
|
|
|
5.88 |
|
|
$ |
197,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected forfeitures
|
|
|
1,808,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding
|
|
|
15,408,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents
the total intrinsic value, based on Akamais closing stock
price of $32.89 as of March 31, 2006, that would have been
received by the option holders had all option holders exercised
their options as of that date. The total number of shares
related to in-the-money
options exercisable as of March 31, 2006 was
7.1 million.
During 2003, 2004 and 2005, the Company granted an aggregate of
259,876 deferred stock units (DSUs) to non-employee
members of its Board of Directors and to the Companys
Executive Chairman. Each DSU represents the right to receive one
share of the Companys common stock upon vesting. The
holder may elect to defer receipt of all or a portion of the
vested shares of stock represented by the DSU for a period for
at least one year but not more than ten years from the grant
date. The DSUs typically vest 50% upon the first anniversary of
grant date with the remaining 50% vesting in equal installments
of 12.5% each quarter thereafter.
11
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table summarizes the DSU activity for the three
months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant Date Fair | |
|
|
Shares | |
|
Value | |
|
|
| |
|
| |
Outstanding at January 1, 2006
|
|
|
194,284 |
|
|
$ |
9.34 |
|
|
Vested and distributed
|
|
|
(932 |
) |
|
|
15.38 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
193,352 |
|
|
|
9.31 |
|
|
|
|
|
|
|
|
The grant date fair value is calculated based upon the
Companys closing stock price on the date of grant. As of
January 1, 2005 and March 31, 2005, the Company had
189,062 outstanding DSUs. As of March 31, 2006,
125,700 shares of DSUs were unvested, with a weighted
average intrinsic value of $9.63 and a weighted average
remaining contractual life of approximately 8.4 years.
These units are expected to vest through May 2007. All DSUs vest
upon fulfilling service conditions.
During the three months ended March 31, 2006, the Company
granted an aggregate of 797,281 restricted stock units
(RSUs) to its employees. These RSUs vest in three
equal annual installments over the three-year period following
the grant date. Each RSU represents the right to receive one
share of the Companys common stock upon vesting. The fair
value of these RSUs was calculated based upon the Companys
closing stock price on date of grant, and the equity-related
compensation expense is being recognized over the vesting period
of three years.
Additionally, in connection with the original grant of RSUs
noted above, the Company also granted performance-based RSUs to
its employees. These performance-based RSUs will only vest to
the extent that the Company exceeds specified cumulative revenue
and earnings per share targets for fiscal years 2006, 2007 and
2008. The maximum number of performance-based RSUs that may vest
is equal to 300% of the number of non-performance-based RSUs
granted on the same date; such maximum vesting would only occur
if the Company meets or exceeds 110% of both its cumulative
revenue and earnings per share targets for fiscal years 2006,
2007 and 2008. No performance-based RSUs will vest if the
Company fails to exceed the applicable targets. If the
Companys cumulative revenue and/or earnings per share
results for the applicable years is between 100% and 110% of the
targets, the holder would receive between zero performance-based
RSUs and the maximum deliverable amount set forth above. For the
three months ended March 31, 2006, management measured
compensation expense for these performance-based RSUs based upon
a review of the Companys expected achievement of future
cumulative performance. Such compensation cost is being
recognized over three years. Management will continue to review
the Companys expected performance and adjust the
compensation cost, if needed, at such time.
On March 3, 2006, the Company granted 25,000 RSUs to its
Chief Financial Officer. This award vests 34% upon the first
anniversary of grant date with the remaining 66% vesting in
equal installments of 8.25% each quarter thereafter for the next
two years.
The following table summarizes the RSU activity for the three
months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant Date Fair | |
|
|
Shares | |
|
Value | |
|
|
| |
|
| |
|
Granted
|
|
|
822,281 |
|
|
$ |
25.43 |
|
|
Forfeited
|
|
|
(2,275 |
) |
|
|
25.54 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
820,006 |
|
|
|
25.43 |
|
|
|
|
|
|
|
|
12
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The grant date fair value is calculated based upon the
Companys closing stock price on the date of grant. As of
January 1, 2005 and March 31, 2005, no RSUs were
outstanding. As of March 31, 2006, 820,006 shares of
RSUs were outstanding and unvested, with an aggregate intrinsic
value of $25.43 and a weighted average remaining contractual
life of approximately 9.87 years. These units are expected
to vest through March 2009. These RSUs vest upon fulfilling
performance and service conditions as described above.
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, DSUs,
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, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
11,495 |
|
|
$ |
14,079 |
|
|
Add back of interest expense on 1% convertible senior notes
|
|
|
710 |
|
|
|
710 |
|
|
|
|
|
|
|
|
Numerator for diluted net income
|
|
$ |
12,205 |
|
|
$ |
14,789 |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per common share
|
|
|
153,819 |
|
|
|
127,051 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
6,876 |
|
|
|
7,154 |
|
|
Restricted common stock, restricted stock units and deferred
stock units
|
|
|
171 |
|
|
|
132 |
|
|
Assumed conversion of 1% convertible senior notes
|
|
|
12,945 |
|
|
|
12,945 |
|
|
|
|
|
|
|
|
Denominator for diluted net income per common share
|
|
|
173,811 |
|
|
|
147,282 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$ |
0.07 |
|
|
$ |
0.11 |
|
|
|
Diluted net income per common share
|
|
$ |
0.07 |
|
|
$ |
0.10 |
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Stock options
|
|
|
1,350 |
|
|
|
4,527 |
|
Restricted stock units
|
|
|
2,385 |
|
|
|
|
|
51/2
% convertible subordinated notes
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,735 |
|
|
|
5,017 |
|
|
|
|
|
|
|
|
13
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table presents the calculation of comprehensive
income and its components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Net income
|
|
$ |
11,495 |
|
|
$ |
14,079 |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
84 |
|
|
|
(223 |
) |
|
Unrealized (loss) gain on investments
|
|
|
(31 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
53 |
|
|
|
(523 |
) |
Income tax expense related to items of other comprehensive income
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
11,524 |
|
|
$ |
13,556 |
|
|
|
|
|
|
|
|
For the periods presented, accumulated other comprehensive
income consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Foreign currency translation adjustment
|
|
$ |
1,021 |
|
|
$ |
937 |
|
Net unrealized loss on investments
|
|
|
(497 |
) |
|
|
(466 |
) |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$ |
524 |
|
|
$ |
471 |
|
|
|
|
|
|
|
|
In June 2005, the Company acquired all of the outstanding common
and preferred stock, including vested and unvested stock
options, of Speedera Networks, Inc. (Speedera) in
exchange for 10.6 million shares of Akamai common stock and
options to purchase 1.7 million shares of Akamai
common stock. Speedera provided distributed content delivery
services. The purchase of Speedera is intended to enable Akamai
to better compete against larger managed services vendors and
other content delivery providers by expanding its customer base
and providing customers with a broader suite of services.
The aggregate purchase price, net of cash received, was
$142.2 million, which consisted of $121.5 million in
shares of common stock, $18.2 million in fair value of the
Companys stock options and transaction costs of
$2.5 million, which primarily consisted of fees for
financial advisory and legal services. The acquisition was
accounted for using the purchase method of accounting. The total
purchase consideration was allocated to the assets acquired and
liabilities assumed at their estimated fair values as of the
date of acquisition, as determined by management and, with
respect to identified intangible assets, by management with the
assistance of an appraisal provided by a third-party valuation
firm. The excess of the purchase price over the amounts
allocated to assets acquired and liabilities assumed has been
recorded as goodwill. The value of the goodwill from this
acquisition can be attributed to a number of business factors
including, but not limited to, potential sales opportunities of
providing Akamai services to Speedera customers; trained
technical workforce in place in the United States and India;
existing sales pipeline and trained sales force; and cost
synergies to be realized. In accordance with current accounting
standards, the goodwill will not be amortized and will be tested
for impairment at least annually as required by
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142) (See
Note 9).
14
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
9. |
Goodwill and Other Intangible Assets |
The Company recorded goodwill and acquired other intangible
assets as a result of business acquisitions during 2000 and
2005. The Company also acquired license rights from the
Massachusetts Institute of Technology in 1999. In 2005, the
Company recorded goodwill of $96.3 million and acquired
intangible assets of $43.2 million as a result of the
acquisition of Speedera. The change in the carrying amount of
goodwill recorded as a result of the Speedera acquisition during
the three months ended March 31, 2006 was as follows:
|
|
|
|
|
|
|
|
(In thousands) | |
|
|
| |
Ending balance, December 31, 2005
|
|
$ |
98,519 |
|
|
Finalization of purchase price allocations
|
|
|
(172 |
) |
|
|
|
|
Ending balance, March 31, 2006
|
|
$ |
98,347 |
|
|
|
|
|
The Company reviews goodwill and other intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may exceed their fair
value. The Company concluded that it had one reporting unit and
assigned the entire balance of goodwill to this reporting unit
as of January 1, 2006 for purposes of performing an
impairment test. The fair value of the reporting unit was
determined using the Companys market capitalization as of
January 1, 2006. The fair value on January 1, 2006
exceeded the net assets of the reporting unit, including
goodwill. The carrying value of goodwill, including goodwill
recorded as a result of the Speedera acquisition, will next be
tested for impairment at January 1, 2007, unless events or
changes in circumstances suggest a significant reduction in
value prior thereto.
Other intangible assets subject to amortization consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
Completed technology
|
|
$ |
1,000 |
|
|
$ |
(624 |
) |
|
$ |
376 |
|
Customer relationships
|
|
|
40,900 |
|
|
|
(6,386 |
) |
|
|
34,514 |
|
Non-compete agreements
|
|
|
1,300 |
|
|
|
(349 |
) |
|
|
951 |
|
Acquired license rights
|
|
|
490 |
|
|
|
(360 |
) |
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
43,690 |
|
|
$ |
(7,719 |
) |
|
$ |
35,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
Completed technology
|
|
$ |
1,000 |
|
|
$ |
(431 |
) |
|
$ |
569 |
|
Customer relationships
|
|
|
40,900 |
|
|
|
(4,404 |
) |
|
|
36,496 |
|
Non-compete agreements
|
|
|
1,300 |
|
|
|
(241 |
) |
|
|
1,059 |
|
Acquired license rights
|
|
|
490 |
|
|
|
(347 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
43,690 |
|
|
$ |
(5,423 |
) |
|
$ |
38,267 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate expense related to amortization of other intangible
assets for the three months ended March 31, 2006 and 2005
was $2.3 million and $12,000, respectively. Aggregate
expense related to amortization of other intangible assets is
expected to be $6.1 million for the remainder of 2006 and
$7.4 million, $6.1 million, $4.8 million and
$4.1 million for fiscal years 2007, 2008, 2009 and 2010,
respectively.
15
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10. |
Concentration of Credit Risk |
Financial instruments that subject the Company to credit risk
consist of cash and cash equivalents, marketable securities and
accounts receivable. The Company maintains the majority of its
cash, cash equivalents and marketable securities balances
principally with domestic financial institutions that the
Company believes are of high credit standing. Concentrations of
credit risk with respect to accounts receivable are limited to
certain customers to which the Company makes substantial sales.
The Companys customer base consists of a large number of
geographically dispersed customers diversified across several
industries. To reduce risk, the Company routinely assesses the
financial strength of its customers. Based on such assessments,
the Company believes that its accounts receivable credit risk
exposure is limited. No customer accounted for 10% or more of
accounts receivable as of March 31, 2006. As of
December 31, 2005, one customer had an accounts receivable
balance of 13% of total accounts receivable. The Company
believes that concentration of credit risk related to accounts
receivable is not significant.
|
|
11. |
Restructurings and Lease Terminations |
As of March 31, 2006, the Company had approximately
$3.0 million of accrued restructuring liabilities. As part
of the Speedera acquisition in June 2005, the Companys
management committed to a plan to exit certain activities of the
Company. In accordance with Emerging Issues Task Force
No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination, the Company recorded
a liability of $1.8 million related to a workforce
reduction of approximately 30 employees from Speedera. This
liability primarily consisted of employee severance and
outplacement costs. The Company expects that this liability will
be fully paid by June 2008. For the period from June 10,
2005, the date of acquisition, through March 31, 2006,
$700,000 in payments were charged against the severance accrual.
The following table summarizes the restructuring activity for
the three months ended March 31, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases | |
|
Severance | |
|
Total | |
|
|
| |
|
| |
|
| |
Ending balance, December 31, 2005
|
|
$ |
2.3 |
|
|
$ |
1.3 |
|
|
$ |
3.6 |
|
|
Cash payments during the three months ended March 31, 2006
|
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2006
|
|
$ |
1.9 |
|
|
$ |
1.1 |
|
|
$ |
3.0 |
|
Current portion of accrued restructuring liabilities
|
|
$ |
1.3 |
|
|
$ |
0.2 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of accrued restructuring liabilities
|
|
$ |
0.6 |
|
|
$ |
0.9 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
All existing lease restructuring liabilities will be fully paid
through August 2007. The amount of restructuring liabilities
associated with facility leases has been estimated based on the
most recent available market data and discussions with the
Companys lessors and real estate advisors as to the
likelihood that the Company will be able to partially offset its
obligations with sublease income.
|
|
|
51/2% Convertible
Subordinated Notes |
For the three months ended March 31, 2005, amortization of
deferred financing costs of the Companys
51/2% convertible
subordinated notes was approximately $60,000. As of
December 31, 2005, these
51/2
% convertible subordinated notes were no longer
outstanding.
16
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
1% Convertible Senior Notes |
In December 2003 and January 2004, Akamai issued
$200.0 million in aggregate principal amount of
1% convertible senior notes due December 15, 2033 (the
1% convertible senior notes) for aggregate
proceeds of $194.1 million, net of an initial
purchasers discount and offering expenses of
$5.9 million. The initial conversion price of the
1% convertible senior notes is $15.45 per share
(equivalent to 64.7249 shares of common stock per $1,000
principal amount of 1% convertible senior notes), subject
to adjustment in certain events. The Company may redeem the
1% convertible senior notes on or after December 15,
2010 at the Companys option at 100% of the principal
amount together with accrued and unpaid interest. Conversely,
holders of the 1% convertible senior notes may require the
Company to repurchase the notes at 100% of the principal amount
plus accrued and unpaid interest on certain specified dates
beginning on December 15, 2010. In the event of a change of
control, the holders may require Akamai to repurchase their
1% convertible senior notes at a repurchase price of 100%
of the principal amount plus accrued interest. Interest on the
1% convertible senior notes began to accrue as of the issue
date and is payable semiannually on June 15 and December 15 of
each year. The 1% convertible senior notes are senior
unsecured obligations and are the same rank as all existing and
future senior indebtedness of Akamai. The 1% convertible
senior notes rank senior to all of the Companys
subordinated indebtedness. Deferred financing costs of
$5.9 million, including the initial purchasers
discount and other offering expenses, for the
1% convertible senior notes are being amortized over the
first seven years of the term of the notes to reflect the put
and call rights discussed above. Amortization of deferred
financing costs of the 1% convertible senior notes was
$210,000 for each of the three-month periods ended
March 31, 2006 and 2005. Using the interest method, the
Company records the amortization of deferred financing costs as
interest expense in the condensed consolidated statement of
operations.
|
|
13. |
Segment and Enterprise-Wide Disclosure |
Akamais chief decision-maker, as defined under
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, is the Chief Executive
Officer and the executive management team. As of March 31,
2006, Akamai operated in one business segment: providing
services for accelerating and improving the delivery of content
and applications over the Internet.
The Company deploys its servers into networks worldwide. As of
March 31, 2006, the Company had $44.5 million and
$10.4 million of property and equipment, net of accumulated
depreciation, located in the United States and foreign
locations, respectively. As of December 31, 2005, the
Company had $36.3 million and $8.6 million of property
and equipment, net of accumulated depreciation, located in the
United States and foreign locations, respectively. Akamai sells
its services and licenses certain software through a direct
sales force located both in the United States and abroad. For
the three months ended March 31, 2006, 23% of revenues was
derived from the Companys operations outside the United
States, including 18% from Europe. For the three months ended
March 31, 2005, 20% of revenues was derived from the
Companys operations outside the United States, including
16% from Europe. No single country accounted for 10% or more of
revenues derived outside the United States during these periods.
For each of the three-month periods ended March 31, 2006
and 2005, no customer accounted for more than 10% of total
revenues.
At September 30, 2005, the Company released a significant
portion of its U.S. and foreign deferred tax asset valuation
allowance. At March 31, 2006, a valuation allowance of
$6.9 million remains, which relates to certain state net
operating losses (NOLs) that the Company expects
will expire without being utilized.
17
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Companys effective tax rate, including discrete items,
was 44.7% and 3.62% for the three months ended March 31,
2006 and 2005, respectively. The effective income tax rate is
based upon the estimated income for the year, the composition of
the income in different countries, and adjustments, if any, for
the potential tax consequences, benefits or resolutions for tax
audits. The discrete items include the tax effect of
disqualifying disposition of incentive stock options as required
by SFAS No. 123(R). For the three months ended
March 31, 2006, the effective tax rate varied from the
statutory tax rate mainly due to the effects of
SFAS No. 123(R). For the three months ended
March 31, 2005, the effective tax rate varied from the
statutory tax rate mainly due to the benefit related to the
valuation allowance that existed at that time.
The Company has recorded certain non-income tax reserves as of
March 31, 2006, to address potential exposures related to
its sales and use and franchise tax positions. These potential
tax liabilities result from the varying application of statutes,
rules, regulations and interpretations by different
jurisdictions. The Companys estimate of the value of its
tax reserves contains assumptions based on past experiences and
judgments about the interpretation of statutes, rules and
regulations by taxing jurisdictions. It is possible that the
ultimate resolution of these matters may be greater or less than
the amount that the Company estimated.
On November 10, 2005, the FASB issued FASB Staff Position
SFAS 123(R)-3, Transition Election to Accounting for
the Tax Effects of Share-Based Payment Awards. The Company
has elected to adopt the modified prospective transition method
for calculating the tax effects of stock-based compensation
pursuant to SFAS No. 123(R). Under the modified
prospective method, no adjustment is made to the deferred tax
balances associated with share-based payments that continue to
be classified as equity awards. Additionally, the Company
elected to use the long-form method, as provided in
paragraph 81 of SFAS No. 123(R) to determine the
pool of windfall tax benefits. The long-form method requires the
Company to analyze the book and tax compensation for each award
separately as if it had been issued following the recognition
provisions of SFAS No. 123, subject to adjustments for
NOL carrryforwards.
|
|
15. |
Commitments, Contingencies and Guarantees |
|
|
|
Operating Leases Commitments |
The Company leases its facilities under non-cancelable operating
leases. These operating leases expire at various dates through
June 2013 and generally require the payment of real estate
taxes, insurance, maintenance and operating costs. The minimum
aggregate future obligations under non-cancelable leases as of
March 31, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
Operating | |
|
|
Leases | |
|
|
| |
Remaining 2006
|
|
$ |
5,361 |
|
2007
|
|
|
6,292 |
|
2008
|
|
|
5,002 |
|
2009
|
|
|
3,064 |
|
2010
|
|
|
1,342 |
|
Thereafter
|
|
|
198 |
|
|
|
|
|
Total
|
|
$ |
21,259 |
|
|
|
|
|
The Company has entered into a sublease agreement with a tenant
of its Cambridge, Massachusetts property. The contracted amounts
payable to the Company by this sublease tenant are $122,000,
$208,000, $208,000 and $87,000 for the remainder of 2006 and for
the years ended December 31, 2007, 2008 and 2009,
respectively.
18
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Company has long-term purchase commitments for bandwidth
usage and co-location with various network and Internet service
providers. For the remainder of 2006 and for the years ended
December 31, 2007, 2008 and 2009, the minimum commitments
are approximately $6.6 million, $1.3 million, $150,000
and $38,000, respectively. The Company had an equipment purchase
commitment of approximately $500,000 as of March 31, 2006.
This purchase commitment expires in August 2006. Additionally,
as of March 31, 2006, the Company had entered into purchase
orders with various vendors for aggregate purchase commitments
of $7.5 million, which are expected to be paid during the
remainder of 2006.
Between July 2, 2001 and November 7, 2001, purported
class action lawsuits seeking monetary damages were filed in the
United States District Court for the Southern District of New
York against the Company as well as against the underwriters of
its October 28, 1999 initial public offering of common
stock. The complaints were filed allegedly on behalf of persons
who purchased the Companys common stock during different
time periods, all beginning on October 28, 1999 and ending
on various dates. The complaints are similar and allege
violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 primarily based on the allegation that the
underwriters received undisclosed compensation in connection
with the Companys initial public offering. On
April 19, 2002, a single consolidated amended complaint was
filed, reiterating in one pleading the allegations contained in
the previously filed separate actions. The consolidated amended
complaint defines the alleged class period as October 28,
1999 through December 6, 2000. A Special Litigation
Committee of the Board of Directors authorized management to
negotiate a settlement of the pending claims substantially
consistent with a Memorandum of Understanding that was
negotiated among class plaintiffs, all issuer defendants and
their insurers. The parties negotiated a settlement that is
subject to approval by the Court. On February 15, 2005, the
Court issued an Opinion and Order preliminarily approving the
settlement, provided that the defendants and plaintiffs agree to
a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to a
modification narrowing the scope of the bar order, and on
August 31, 2005, the Court issued an order preliminarily
approving the settlement. The Company believes that it has
meritorious defenses to the claims made in the complaint and, if
the settlement is not finalized and approved, it intends to
contest the lawsuit vigorously. An adverse resolution of the
action could have a material adverse effect on the
Companys financial condition and results of operations in
the period in which the lawsuit is resolved. The Company is not
presently able to estimate potential losses, if any, related to
this lawsuit.
The Company is party to various litigation matters which
management considers routine and incidental to its business.
Management does not expect the results of any of these actions
to have a material adverse effect on the Companys
business, results of operations or financial condition.
The Company has identified guarantees in accordance with FASB
Interpretation 45, or FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others an interpretation
of FASB Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including
loan guarantees such as standby letters of credit. FIN 45
also clarifies that at the time an entity issues a guarantee,
the entity must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and
annual financial statements. The Company evaluates losses for
guarantees under SFAS No. 5, Accounting for
Contingencies, as Interpreted by FIN 45. The Company
considers such factors as the degree of probability of
19
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. To date, the Company has not
encountered material costs as a result of such obligations and
has not accrued any liabilities related to such indemnification
obligations in its financial statements. The fair value of the
Companys guarantees issued or modified during the three
months ended March 31, 2006 was determined to be immaterial.
20
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
This quarterly report on
Form 10-Q,
particularly Managements Discussion and Analysis of
Financial Condition and Results of Operations set forth below,
contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are
based on the beliefs and assumptions of our management as of the
date hereof based on information currently available to our
management. Use of words such as believes,
expects, anticipates,
intends, plans, estimates,
should, forecasts, likely or
similar expressions, indicate a forward-looking statement.
Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions.
Actual results may differ materially from the forward-looking
statements we make. See Risk Factors elsewhere in
this quarterly report on
Form 10-Q for a
discussion of certain risks associated with our business. We
disclaim any obligation to update forward-looking statements as
a result of new information, future events or otherwise.
We primarily derive income from the sale of services to
customers executing contracts with terms of one year or longer,
which we refer to as recurring revenue contracts or long-term
contracts. These contracts generally commit the customer to a
minimum monthly level of usage with additional charges
applicable for actual usage above the monthly minimum. Having a
consistent and predictable base level of income is important to
our financial success. Accordingly, to be successful, we must
maintain our base of recurring revenue contracts by eliminating
or reducing lost monthly recurring revenue due to customer
cancellations or terminations and build on that base by adding
new customers and increasing the number of services, features
and functions our customers purchase. Accomplishing these goals
requires that we compete effectively in the marketplace on the
basis of price, quality and the attractiveness of our services
and technology.
The following sets forth, as a percentage of revenues,
consolidated statements of operations data, for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues
|
|
|
21.3 |
|
|
|
19.2 |
|
Research and development expense
|
|
|
7.4 |
|
|
|
6.0 |
|
Sales and marketing expense
|
|
|
29.0 |
|
|
|
27.9 |
|
General and administrative expense
|
|
|
20.4 |
|
|
|
19.7 |
|
Amortization of other intangible assets
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and operating expenses
|
|
|
80.7 |
|
|
|
72.8 |
|
Income from operations
|
|
|
19.3 |
|
|
|
27.2 |
|
Interest income
|
|
|
3.8 |
|
|
|
1.0 |
|
Interest expense
|
|
|
(0.8 |
) |
|
|
(2.7 |
) |
Other income (expense), net
|
|
|
0.2 |
|
|
|
(1.2 |
) |
Gain on investments, net
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
22.8 |
|
|
|
24.3 |
|
Provision for income taxes
|
|
|
10.1 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.7 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
|
We were profitable for the fiscal year 2005 and for the three
months ended March 31, 2006; however, we cannot guarantee
continued profitability or profitability at the levels we have
recently experienced for any
21
period in the future. We have observed the following trends and
events that are likely to have an impact on our financial
condition and results of operations in the foreseeable future:
|
|
|
|
|
During each quarter of 2005 and for the first quarter of 2006,
the dollar volume of new recurring revenue contracts that we
booked exceeded the dollar volume of the contracts we lost
through cancellations, terminations and non-payment. A
continuation of this trend would lead to increased revenues. |
|
|
|
During the first quarter of 2006, we continued to reduce our
network bandwidth costs per unit by entering into new supplier
contracts with lower pricing and amending existing contracts to
take advantage of price reductions offered by our existing
suppliers. However, due to increased traffic delivered over our
network, our total bandwidth costs have increased during the
first quarter of 2006. We believe that our overall bandwidth
costs will continue to increase as a result of expected higher
traffic levels, partially offset by continued reductions in
bandwidth costs per unit. If we do not experience lower per unit
bandwidth pricing and we are unsuccessful at effectively routing
traffic over our network through lower cost providers, network
bandwidth costs could increase in excess of our expectations for
the remainder of 2006. |
|
|
|
During the first quarter of 2006, no customer accounted for 10%
or more of our total revenues. We expect that customer
concentration levels will continue to decline compared to those
in prior years if our customer base continues to grow. |
|
|
|
During the quarter ended March 31, 2006, revenues derived
from customers outside the United States accounted for 23% of
our total revenues. We expect revenues from such customers as a
percentage of our total revenues to be between 20% and 25% for
the remainder of 2006. |
|
|
|
As of January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment
(revised 2004), or SFAS No. 123(R), which
requires us to record compensation expense for employee stock
awards at fair value at the time of grant. As a result, our
equity-based compensation expense increased, causing our net
income to decrease significantly. For the first quarter of 2006,
our equity-compensation expense was $7.1 million as
compared to $1.6 million in the fourth quarter of 2005 and
$227,000 in the first quarter of 2005. We expect that
equity-based compensation expense will continue to increase in
the future as we have a significant number of unvested employee
options outstanding and plan to continue to grant equity-based
compensation in the future. As of March 31, 2006, our total
unrecognized compensation costs for equity-based awards was
$87.3 million, which we expect to recognize as expense over
a weighted average period of 1.7 years. |
|
|
|
Depreciation expense related to our network equipment increased
during the first quarter of 2006 as compared to the fourth
quarter of 2005. Due to additional purchases in the first
quarter of 2006, as well as expected future purchases of network
equipment during the remainder of this year, we believe that
depreciation expense related to our network will continue to
increase, on a quarterly basis, during the remainder of 2006. We
expect to continue to enhance and add functionality to our
service offerings and capitalize equity-related compensation
expense attributable to employees working on such projects as a
result of our adoption of SFAS No. 123(R), which will
increase the amount of capitalized internal-use software costs.
As a result, we believe that the amortization of internal-use
software development costs, which we include in cost of
revenues, will increase during the remainder of 2006. |
|
|
|
During the first quarter of 2006, our effective tax rate,
including discrete items, was 44.7%. While we expect our annual
effective tax rate to remain relatively constant for the
remainder of 2006, we do not expect to make significant cash tax
payments due to the utilization of our deferred tax asset. |
Based on our analysis of, among other things, the aforementioned
trends and events, we expect to continue to generate net income
on a quarterly basis during the remainder of 2006 and in 2007;
however, our
22
future results will be affected by many factors identified in
the section captioned Risk Factors in this quarterly
report on
Form 10-Q,
including our ability to:
|
|
|
|
|
increase our revenue by adding customers through long-term
contracts and limiting customer cancellations and terminations; |
|
|
|
maintain the prices we charge for our services; |
|
|
|
prevent disruptions to our services and network due to accidents
or intentional attacks; and |
|
|
|
maintain our network bandwidth costs and other operating
expenses consistent with our revenues. |
As a result, there is no assurance that we will achieve our
expected financial objectives, including a positive net income
in 2006 or 2007.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based upon our unaudited
condensed consolidated financial statements included elsewhere
in this quarterly report on
Form 10-Q, which
have been prepared by us in accordance with accounting
principles generally accepted in the United States of America.
The preparation of these unaudited condensed consolidated
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses and related items, including, but not
limited to, accounts receivable reserves, investments,
intangible assets, capitalized internal-use software costs,
income and other taxes, depreciable lives of property and
equipment, stock-based compensation costs, restructuring
accruals and contingent obligations. We base our estimates and
judgments on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates. See
the section entitled Application of Critical Accounting
Policies and Estimates in our annual report on
Form 10-K for the
year ended December 31, 2005 for further discussion of
these critical accounting policies and estimates.
|
|
|
Accounting for Stock-Based Compensation |
We account for stock-based compensation in accordance with
SFAS No. 123(R). Under the fair value recognition
provisions of this statement, stock-based compensation cost is
measured at the grant date based on the value of the award and
is recognized as expense over the vesting period. We have
selected the Black-Scholes option pricing model to determine
fair value of stock option awards. Determining the fair value of
share-based awards at the grant date requires judgment,
including estimating the expected life of the stock awards and
the volatility of the underlying common stock. Our quarterly
assumptions may differ from those used in prior periods because
we have made refinements to the calculation of such assumptions
based upon the guidance of SFAS No. 123(R) and Staff
Accounting Bulletin No. 107, Share-Based
Payments. Changes to the assumptions may have a
significant impact on the fair value of stock options, which
could have a material impact on our financial statements. In
addition, judgment is also required in estimating the amount of
stock-based awards that are expected to be forfeited. Should our
actual forfeitures differ significantly from our estimates,
stock-based compensation expense and our results of operations
could be materially impacted.
Results of Operations
Revenues. Total revenues increased 51%, or
$30.7 million, to $90.8 million for the three months
ended March 31, 2006 as compared to $60.1 million for
the three months ended March 31, 2005. The increase in
total revenues for the three months ended March 31, 2006 as
compared to the same period in the prior year was primarily
attributable to an increase in service revenue of
$31.2 million. Service revenue, which consists of revenue
from our content and application delivery services, increased
52% for the three months ended March 31, 2006 as compared
to the same period in the prior year. The increase in service
revenue was primarily attributable to an increase in the number
of customers under recurring revenue contracts, as well as
23
an increase in traffic and additional services sold to new and
existing customers and increases in the average revenue per
customer. Our delivery of streaming services for a number of
high-profile media events in the first quarter contributed to
higher service revenue. Also contributing to the increase in
service revenue for the three months ended March 31, 2006
were revenues generated through the acquisition of Speedera. As
of March 31, 2006, we had 1,981 customers under recurring
revenue contracts as compared to 1,360 as of March 31, 2005.
For the three months ended March 31, 2006, software and
software-related revenues decreased 95% as compared to the same
period in the prior year. Software and software-related revenues
includes sales of customized software projects and technology
licensing. The decrease in software and software-related
revenues over the period presented reflects a reduction in the
number of customized software projects that we undertook for
customers and a decrease in the number of software licenses
executed with customers. We do not expect software and
software-related revenue to increase as a percentage of revenues
for the remainder of 2006.
For the three months ended March 31, 2006 and 2005, 23% and
20%, respectively, of our total revenues were derived from our
operations located outside of the United States, including 18%
and 16%, respectively, derived from Europe. No single country
outside of the United States accounted for 10% or more of
revenues during these periods. Resellers accounted for 23% of
total revenues for the three months ended March 31, 2006,
as compared to 25% of revenues for the three months ended
March 31, 2005. For the three month periods ended
March 31, 2006 and March 31, 2005, no customer
accounted for 10% or more of total revenues.
Cost of Revenues. Cost of revenues includes fees paid to
network providers for bandwidth and co-location of our network
equipment. Cost of revenues also includes payroll and related
costs and equity-related compensation for network operations
personnel, cost of software licenses, depreciation of network
equipment used to deliver our services, amortization of
internal-use software and amortization of capitalized
equity-related compensation.
Cost of revenues increased 67%, or $7.8 million, to
$19.3 million for the three months ended March 31,
2006 as compared to $11.5 million for the three months
ended March 31, 2005. These increases were primarily due to
an increase in amounts paid to network suppliers due to higher
traffic levels, partially offset by reduced bandwidth costs per
unit, and an increase in depreciation expense of network
equipment as we continue to invest in our infrastructure. These
increases were offset by a reduction in cost of software
licenses as a result of a decrease in the number of software
licenses executed during the three months ended March 31,
2006. Additionally, during the three months ended March 31,
2006, cost of revenues includes equity-related compensation
expense of $273,000 resulting from our adoption of
SFAS No. 123(R).
Cost of revenues during the three months ended March 31,
2006 also included credits received of approximately $488,000,
as a result of settlements and renegotiations entered into in
connection with billing disputes related to bandwidth contracts.
During the three months ended March 31, 2005, cost of
revenues included credits of $456,000. Credits of this nature
may occur in the future; however, the timing and amount of
future credits, if any, will vary.
Cost of revenues is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Bandwidth, co-location and storage fees
|
|
$ |
12,160 |
|
|
$ |
7,412 |
|
Payroll and related costs of network operations personnel
|
|
|
1,518 |
|
|
|
881 |
|
Stock-based compensation
|
|
|
273 |
|
|
|
|
|
Cost of software licenses
|
|
|
3 |
|
|
|
316 |
|
Depreciation and impairment of network equipment and
amortization of internal-use software and equity-related
compensation
|
|
|
5,362 |
|
|
|
2,915 |
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
19,316 |
|
|
$ |
11,524 |
|
|
|
|
|
|
|
|
24
We have long-term purchase commitments for bandwidth usage and
co-location with various network and Internet service providers.
For the remainder of 2006 and for the years ending
December 31, 2007, 2008 and 2009, the minimum commitments
related to bandwidth usage and co-location services are
approximately $6.6 million, $1.3 million, $150,000 and
$38,000, respectively.
We expect that cost of revenues will increase during the
remainder of 2006. We expect to deliver more traffic on our
network, which would result in higher expenses associated with
the increased traffic; however, such costs are likely to be
partially offset by lower bandwidth costs per unit.
Additionally, we expect increases in depreciation expense
related to our network equipment and amortization of
internal-use software development costs, along with payroll and
related costs, as we continue to make investments in our network
to service our expanding customer base. Expenses are also
expected to increase as a result of expensing employee stock
awards at fair value in accordance with
SFAS No. 123(R). Our adoption of
SFAS No. 123(R) will also result in additional expense
associated with the amortization of stock-based compensation.
Research and Development. Research and development
expenses consist primarily of payroll and related costs and
stock-based compensation for research and development personnel
who design, develop, test and enhance our services and our
network. Research and development costs are expensed as
incurred, except certain internal-use software development costs
requiring capitalization. During the three months ended
March 31, 2006 and 2005, we capitalized software
development costs of $2.3 million and $2.1 million,
respectively, net of impairments. These development costs
consisted of external consulting and payroll and payroll-related
costs for personnel involved in the development of internal-use
software used to deliver our services and operate our network.
Additionally, during the three months ended March 31, 2006,
we capitalized $492,000 of stock-based compensation in
connection with our adoption of SFAS No. 123(R). These
capitalized internal-use software costs are amortized to costs
of revenues over their estimated useful lives of two years.
Research and development expenses increased 85%, or
$3.1 million, to $6.7 million for the three months
ended March 31, 2006, as compared to $3.6 million for
the three months ended March 31, 2005. The increase in
research and development expenses was due to an increase in
payroll and related costs due to an increase in headcount, as
well as additional stock-based compensation expense. The
following table quantifies the increase in the various
components of our research and development expenses for the
periods presented (in millions):
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
|
as Compared to 2005 | |
|
|
| |
Payroll and related costs
|
|
$ |
1.5 |
|
Stock-based compensation
|
|
|
1.6 |
|
|
|
|
|
|
Total net increase
|
|
$ |
3.1 |
|
|
|
|
|
We believe that research and development expenses will continue
to increase for the remainder of 2006, as we continue to
increase hiring of development personnel and make investments in
our core technology and refinements to our other service
offerings. Additionally, expenses are expected to increase as a
result of expensing employee stock awards at fair value in
accordance with our adoption of SFAS No. 123(R).
Sales and Marketing. Sales and marketing expenses consist
primarily of payroll and related costs, equity-related
compensation and commissions for personnel engaged in marketing,
sales and service support functions, as well as advertising and
promotional expenses.
Sales and marketing expenses increased 57%, or
$9.6 million, to $26.3 million for the three months
ended March 31, 2006, as compared to $16.7 million for
the three months ended March 31, 2005. The increase in
sales and marketing expenses was primarily due to higher payroll
and related costs, particularly commissions, for sales and
marketing personnel due to revenue growth. Additionally, during
the three months ended March 31, 2006, marketing and
related costs increased due stock-based compensation expense,
offset by a
25
slight reduction in advertising and promotional costs. The
following table quantifies the net increase in the various
components of our sales and marketing expenses for the periods
presented (in millions):
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
|
as Compared to 2005 | |
|
|
| |
Payroll and related costs
|
|
$ |
6.8 |
|
Stock-based compensation
|
|
|
2.5 |
|
Marketing and related costs
|
|
|
(0.2 |
) |
Other expenses
|
|
|
0.5 |
|
|
|
|
|
|
Total net increase
|
|
$ |
9.6 |
|
|
|
|
|
We believe that sales and marketing expenses will continue to
increase during the remainder of 2006 due to an expected
increase in commissions on higher forecasted sales, the expected
increase in hiring of sales and marketing personnel, and
expected increases in other marketing costs such as advertising.
Additionally, expenses are expected to increase as a result of
expensing employee stock awards at fair value in accordance with
our adoption of SFAS No. 123(R).
General and Administrative. General and administrative
expenses consist primarily of the following components:
|
|
|
|
|
depreciation of property and equipment we use internally; |
|
|
|
payroll and related costs, including related expenses for
executive, finance, business applications, network management,
human resources and other administrative personnel; |
|
|
|
stock-based compensation; |
|
|
|
fees for professional services; |
|
|
|
non-income related taxes; |
|
|
|
the provision for doubtful accounts; and |
|
|
|
rent and other facility-related expenditures for leased
properties. |
General and administrative expenses increased 57%, or
$6.7 million, to $18.5 million for the three months
ended March 31, 2006 as compared to $11.8 million for
the three months ended March 31, 2005. The increase in
general and administrative expenses was primarily due to an
increase in payroll and related costs as a result of headcount
growth, as well as stock-based compensation expense. This
increase was offset by a reduction in expense related to legal
and consulting costs, which is included in consulting and
advisory services, associated with the dismissal of the lawsuits
between Akamai and Speedera as a result of our acquisition of
Speedera in June 2005. The following table quantifies the net
increase in general and administrative expenses for the periods
presented (in millions):
|
|
|
|
|
|
|
|
For the | |
|
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
|
as Compared to 2005 | |
|
|
| |
Payroll and related costs
|
|
$ |
2.3 |
|
Stock-based compensation
|
|
|
2.4 |
|
Non-income taxes
|
|
|
1.2 |
|
Depreciation and amortization
|
|
|
0.1 |
|
Facilities and related costs
|
|
|
0.2 |
|
Consulting and advisory services
|
|
|
(0.9 |
) |
Provision for doubtful accounts
|
|
|
(0.1 |
) |
Other expenses
|
|
|
1.5 |
|
|
|
|
|
|
Total net increase
|
|
$ |
6.7 |
|
|
|
|
|
26
During the three months ended March 31, 2006 and 2005, we
capitalized software development costs of approximately $342,000
and $50,000, respectively, consisting of external consulting
costs and payroll and payroll-related costs for personnel
involved in the development of internally-used software
applications. Once the projects are completed, such costs will
be amortized and included in general and administrative expenses.
During the remainder of 2006, we expect general and
administrative expenses to increase due to increased payroll and
related costs attributable to increased hiring, an increase in
non-income tax expense and an increase in rent and facility
costs associated with the expansion of our office space in 2005.
Additionally, expenses are expected to increase as a result of
expensing employee stock awards at fair value in accordance with
our adoption of SFAS No. 123(R).
Amortization of Other Intangible Assets. Amortization of
other intangible assets consists of amortization of intangible
assets acquired in business combinations and amortization of
acquired license rights. Amortization of other intangible assets
increased to $2.3 million for the three months ended
March 31, 2006 as compared to $12,000 for the three months
ended March 31, 2005. The increase in amortization of other
intangible assets was due to the amortization of intangible
assets from the acquisition of Speedera in June 2005. We expect
to amortize approximately $6.1 million for the remainder of
2006, and $7.4 million, $6.1 million,
$4.8 million and $4.1 million for fiscal years 2007,
2008, 2009 and 2010, respectively.
Interest Income. Interest income includes interest earned
on invested cash balances and marketable securities. Interest
income increased 474%, or $2.8 million, to
$3.4 million for the three months ended March 31, 2006
as compared to $598,000 for the three months ended
March 31, 2005. The increase was due to an increase in our
invested marketable securities period over period, due to
investment of the $202.1 million in proceeds received from
our public equity offering of 12.0 million shares of our
common stock in November 2005, as well as generating more cash
from operations. We also experienced an increase in interest
rates earned on our investments.
Interest Expense. Interest expense includes interest paid
on our debt obligations as well as amortization of deferred
financing costs. Interest expense decreased 52%, or $839,000, to
$772,000 for the three months ended March 31, 2006 as
compared to $1.6 million for the three months ended
March 31, 2005. The decrease was a result of our redemption
of our
51/2
% convertible subordinated notes, offset by interest
payable on our 1% convertible senior notes. We believe that
interest expense on our debt obligations, including deferred
financing amortization, will not exceed $3.1 million in the
aggregate for fiscal year 2006.
Other Income (Expense), net. Other income, net represents
net foreign exchange gains and losses incurred. Other income,
net for the three months ended March 31, 2006 was $186,000
as compared to other expense, net of $726,000 for the three
months ended March 31, 2005. This change was due to
exchange rate fluctuations. Other income (expense), net may
fluctuate in the future based upon movements in foreign exchange
rates.
Gain on Investments, net. During the three months ended
March 31, 2006, we recorded a net gain on investments of
$257,000 on the sale of marketable securities. During the three
months ended March 31, 2005, we did not record any gains or
losses from the sales of marketable securities. We do not expect
significant gains or losses on investments for the remainder of
2006.
Provision for Income Taxes. During the three months ended
March 31, 2006 and 2005, our effective tax rate including
discrete items was 44.7% and 3.62%, respectively. The effective
income tax rate is based upon the estimated income for the year,
the composition of the income in different countries, and
adjustments, if any, for the potential tax consequences,
benefits or resolutions for tax audits. At September 30,
2005, we released a significant portion of our U.S. and foreign
deferred tax asset valuation allowance, which was the primary
factor in the increase in our effective tax rate between the
first quarter of 2005 and 2006. At March 31, 2006, we had a
$6.8 million valuation allowance, which relates to certain
state net operating losses, or NOLs, that we expect will expire
without being utilized.
While we expect our annual effective tax rate for the remaining
quarters of 2006 to remain relatively consistent with the first
quarters rate, this expectation does not take into
consideration the effect of discrete
27
items recorded as a result of the adoption of
SFAS No. 123(R). The effective tax rate including the
discrete items could be volatile depending of the nature and
timing of the dispositions of incentive stock options and the
exercise of nonqualified stock options.
Because of the availability of the NOLs referred to above, a
significant portion of our future provision for income taxes is
expected to be a non-cash expense; consequently, the amount of
cash paid in respect of income taxes is expected to be a
relatively small portion of the total annualized tax expense
during periods in which the NOL are utilized. In determining our
net deferred tax assets and valuation allowances, and
projections of our future provision for income taxes, annualized
effective tax rates, and cash paid for income taxes, management
is required to make judgments and estimates about domestic and
foreign profitability, the timing and extent of the utilization
of NOL carryforwards, applicable tax rates, transfer pricing
methodologies and tax planning strategies. Judgments and
estimates related to our projections and assumptions are
inherently uncertain; therefore, actual results could differ
materially from our projections.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the
following transactions:
|
|
|
|
|
private sales of capital stock and subordinated notes in 1998
and 1999, which notes were repaid in 1999; |
|
|
|
an initial public offering of our common stock in October 1999,
generating net proceeds of $217.6 million after
underwriters discounts and commissions; |
|
|
|
the sale in June 2000 of an aggregate of $300 million in
principal amount of our
51/2
% convertible subordinated notes, which generated
net proceeds of $290.2 million and were retired in full
between December 2003 and September 2005; |
|
|
|
the sale in December 2003 and January 2004 of an aggregate of
$200 million in principal amount of our 1% convertible
senior notes, which generated net proceeds of
$194.1 million; |
|
|
|
the public offering of 12.0 million of our common stock in
November 2005, which generated net proceeds of
$202.1 million; and |
|
|
|
cash generated by operations. |
As of March 31, 2006, cash, cash equivalents and marketable
securities totaled $341.4 million, of which
$4.2 million is subject to restrictions limiting our
ability to withdraw or otherwise use such cash, cash equivalents
and marketable securities. See Letters of Credit
below.
Net cash provided by operating activities was $33.2 million
for the three months ended March 31, 2006 compared to
$18.7 million for the three months ended March 31,
2005. The increase in cash provided by operating activities was
primarily due to an increase in service revenue during the three
months ended March 31, 2006, as well as increases in
accrued expenses and deferred revenue, offset by a reduction
related to excess tax benefits from the exercise of stock
options We expect that cash provided by operating activities
will continue to increase as a result of an upward trend in cash
collections related to higher revenues, partially offset by an
expected increase in operating expenses that require cash
outlays such as salaries in connection with expected increases
in headcount. The timing and amount of future working capital
changes and our ability to manage our days sales outstanding
will also affect the future amount of cash used in or provided
by operating activities.
Cash used in investing activities was $70.0 million for the
three months ended March 31, 2006 compared to
$15.1 million for the three months ended March 31,
2005. Cash used in investing activities for the three months
ended March 31, 2006 reflects net purchases of investments
of $54.2 million and capital expenditures of
$16.2 million, consisting of the capitalization of
internal-use software development costs related to our current
and future service offerings and purchase of network
infrastructure equipment. These investments were offset by a
decrease in restricted investments held for security deposits of
$400,000. Cash used in investing activities for the three months
ended March 31, 2005 reflects net purchases of investments
of
28
$5.3 million and capital expenditures of $9.7 million.
For fiscal year 2006, we expect capital expenditures, a
component of cash used in investing activities, to be
approximately the same percentage of revenues as 2005.
Cash provided by financing activities was $10.0 million for
the three months ended March 31, 2006, as compared to
$1.5 million for the three months ended March 31,
2005. Cash provided by financing activities during the three
months ended March 31, 2006 includes $5.4 million
related to excess tax benefits resulting from the exercise of
stock options and proceeds of $4.6 million from the
issuance of common stock upon exercises of stock options. Cash
provided by financing activities for the three months ended
March 31, 2005 reflects $1.6 million in proceeds
received from the issuance of common stock upon exercises of
stock options under our equity compensation plans, offset by
payments on capital lease obligations of $134,000.
Changes in cash, cash equivalents and marketable securities are
dependent upon changes in working capital items such as deferred
revenues, accounts payable, accounts receivable and various
accrued expenses, as well as changes in our capital and
financial structure due to debt repurchases and issuances, stock
option exercises, sales of equity investments and similar events.
The following table represents the net inflows and outflows of
cash, cash equivalents and marketable securities for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
For the | |
|
|
Three Months Ended | |
|
Three Months Ended | |
|
|
March 31, 2006 | |
|
March 31, 2005 | |
|
|
| |
|
| |
Cash, cash equivalents and marketable securities balance as of
December 31, 2005 and 2004, respectively
|
|
$ |
314.1 |
|
|
$ |
108.4 |
|
|
|
|
|
|
|
|
Changes in cash, cash equivalents and marketable securities:
|
|
|
|
|
|
|
|
|
|
Receipts from customers
|
|
|
93.2 |
|
|
|
56.5 |
|
|
Payments to vendors
|
|
|
(44.5 |
) |
|
|
(26.7 |
) |
|
Payments for employee payroll
|
|
|
(31.4 |
) |
|
|
(20.0 |
) |
|
Debt interest and premium payments
|
|
|
|
|
|
|
(1.6 |
) |
|
Stock option exercises
|
|
|
4.6 |
|
|
|
1.6 |
|
|
Interest Income
|
|
|
3.4 |
|
|
|
|
|
|
Other
|
|
|
2.0 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Net increase
|
|
|
27.3 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities balance as of
March 31, 2006 and 2005, respectively
|
|
$ |
341.4 |
|
|
$ |
118.0 |
|
|
|
|
|
|
|
|
We believe, based on our present business plan, that our current
cash, cash equivalents and marketable securities of
$341.4 million and forecasted cash flows from operations
will be sufficient to meet our cash needs for working capital
and capital expenditures for at least the next 24 months.
If the assumptions underlying our business plan regarding future
revenue and expenses change or if unexpected opportunities or
needs arise, we may seek to raise additional cash by selling
equity or debt securities. If additional funds are raised
through the issuance of equity or debt securities, these
securities could have rights, preferences and privileges senior
to those accruing to holders of common stock, and the terms of
such debt could impose restrictions on our operations. The sale
of additional equity or convertible debt securities could result
in additional dilution to our existing stockholders. See
Risk Factors elsewhere in this quarterly report on
Form 10-Q for a
discussion of additional factors that could affect our liquidity.
29
Contractual Obligations and Commercial Commitments
The following table presents our contractual obligations and
commercial commitments, as of March 31, 2006 over the next
five years and thereafter (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
Contractual Obligations |
|
|
|
Less than | |
|
12-36 | |
|
36-60 | |
|
More than | |
as of March 31, 2006 |
|
Total | |
|
12 Months | |
|
Months | |
|
Months | |
|
60 Months | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
1% convertible senior notes
|
|
$ |
200.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
200.0 |
|
Interest on convertible notes outstanding
|
|
|
56.0 |
|
|
|
2.0 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
46.0 |
|
Bandwidth and co-location agreements
|
|
|
8.1 |
|
|
|
7.1 |
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
|
|
Real estate operating leases
|
|
|
21.3 |
|
|
|
7.1 |
|
|
|
10.8 |
|
|
|
3.3 |
|
|
|
0.1 |
|
Vendor equipment purchase obligations
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Open vendor purchase orders
|
|
|
7.5 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
293.4 |
|
|
$ |
24.2 |
|
|
$ |
15.6 |
|
|
$ |
7.5 |
|
|
$ |
246.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
As of March 31, 2006, we had outstanding $4.2 million
in irrevocable letters of credit in favor of third-party
beneficiaries, primarily related to facility leases. The letters
of credit are collateralized by restricted marketable
securities, of which $3.8 million are classified as
long-term marketable securities and $330,000 are classified as
short-term marketable securities on the condensed consolidated
balance sheet dated as of March 31, 2006. The restrictions
on these marketable securities lapse as we fulfill our
obligations or as such obligations expire as provided by the
letters of credit. These restrictions are expected to lapse
through May 2011.
Off-Balance Sheet Arrangements
We have entered into indemnification agreements with third
parties, including vendors, customers, landlords, our officers
and directors, shareholders of acquired companies, joint venture
partners and third parties to whom we license technology.
Generally, these indemnification agreements require us to
reimburse losses suffered by the third party due to various
events, such as lawsuits arising from patent or copyright
infringement or our negligence. These indemnification
obligations are considered off-balance sheet arrangements in
accordance with Financial Accounting Standards Board, or FASB,
Interpretation 45, or FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. See
Guarantees in the footnotes to our consolidated
financial statements included in our annual report on
Form 10-K for the
year ended December 31, 2005 for further discussion of
these indemnification agreements. The fair value of guarantees
issued or modified during the three months ended March 31,
2006 was determined to be immaterial. As of March 31, 2006,
we do not have any additional off-balance sheet arrangements,
except for operating leases, and have not entered into
transactions with special purpose entities.
The conversion features of our 1% convertible senior notes
are equity-linked derivatives. As such, we recognize these
instruments as off-balance sheet arrangements. The conversion
features associated with these notes would be accounted for as
derivative instruments, except that they are indexed to our
common stock and classified in stockholders equity.
Therefore these instruments meet the scope exception of
paragraph 11(a) of SFAS No. 133, Accounting
for Derivatives Instruments and Hedging Activities, and
are accordingly not accounted for as derivatives for purposes of
SFAS No. 133.
Litigation
We are party to litigation which we consider routine and
incidental to our business. Management does not expect the
results of any of these actions to have a material adverse
effect on our business, results of operations or financial
condition.
30
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
Our exposure to market risk for changes in interest rates
relates primarily to our debt and investment portfolio. We do
not hold derivative financial instruments in our investment
portfolio. We place our investments with high quality issuers
and, by policy, limit the amount of risk by investing primarily
in money market funds, United States Treasury obligations,
high-quality corporate obligations and certificates of deposit.
Our 1% convertible senior notes are subject to changes in
market value. Under certain conditions, the holders of our
1% convertible senior notes may require us to redeem the
notes on or after December 15, 2010. As of March 31,
2006, the carrying amount and fair value of the
1% convertible senior notes were $200.0 million and
$431.5 million, respectively.
We have operations in Europe, Asia and India. As a result, we
are exposed to fluctuations in foreign exchange rates.
Additionally, we may continue to expand our operations globally
and sell to customers in foreign locations, which may increase
our exposure to foreign exchange fluctuations. We do not have
any foreign hedge contracts.
|
|
Item 4. |
Controls and Procedures |
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of March 31,
2006. The term disclosure controls and procedures,
as defined in
Rules 13a-15(e)
and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company
that are designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs
rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management,
including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives,
and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and
procedures. Based on the evaluation of our disclosure controls
and procedures as of March 31, 2006, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective at
the reasonable assurance level.
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended
March 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
31
PART II. OTHER
INFORMATION
|
|
Item 1. |
Legal Proceedings |
See Item 3 of part I of our annual report on
Form 10-K for the
year ended December 31, 2005 for a discussion of legal
proceedings. There were no material developments in such legal
proceedings during the quarter ended March 31, 2006.
The following are certain of the important factors that could
cause our actual operating results to differ materially from
those indicated or suggested by forward-looking statements made
in this quarterly report on
Form 10-Q or
presented elsewhere by management from time to time. We have not
made any material changes in the risk factors previously
disclosed in our annual report on
Form 10-K for the
year ended December 31, 2005.
|
|
|
The markets in which we operate are highly competitive,
and we may be unable to compete successfully against new
entrants with innovative approaches and established companies
with greater resources. |
We compete in markets that are intensely competitive, highly
fragmented and rapidly changing. We have experienced and expect
to continue to experience increased competition. Many of our
current competitors, as well as a number of our potential
competitors, have longer operating histories, greater name
recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and
marketing resources than we do. Other competitors may attract
customers by offering less-sophisticated versions of services
than we provide at lower prices than those we charge. Our
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements. Some of our current or potential competitors may
bundle their offerings with other services, software or hardware
in a manner that may discourage website owners from purchasing
any service we offer. Increased competition could result in
price and revenue reductions, loss of customers and loss of
market share, which could materially and adversely affect our
business, financial condition and results of operations.
In addition, potential customers may decide to purchase or
develop their own hardware, software and other technology
solutions rather than rely on an external provider like Akamai.
As a result, our competitors include hardware manufacturers,
software companies and other entities that offer
Internet-related solutions that are not service-based. It is an
important component of our growth strategy to educate
enterprises and government agencies about our services and
convince them to entrust their content and applications to an
external service provider, and Akamai in particular. If we are
unsuccessful in such efforts, our business, financial condition
and results of operations could suffer.
|
|
|
If we are unable to sell our services at acceptable prices
relative to our costs, our business and financial results are
likely to suffer. |
Prices we have been charging for some of our services have
declined in recent years. We expect that this decline may
continue in the future as a result of, among other things,
existing and new competition in the markets we serve.
Consequently, our historical revenue rates may not be indicative
of future revenues based on comparable traffic volumes. If we
are unable to sell our services at acceptable prices relative to
our costs or if we are unsuccessful with our strategy of selling
additional services and features to our existing content
delivery customers, our revenues and gross margins will
decrease, and our business and financial results will suffer.
|
|
|
Failure to increase our revenues and keep our expenses
consistent with revenues could prevent us from maintaining
profitability at recent levels or at all. |
The year ended December 31, 2004 was the first fiscal year
during which we achieved profitability as measured in accordance
with accounting principles generally accepted in the United
States of America. We have large fixed expenses, and we expect
to continue to incur significant bandwidth, sales and marketing,
product development, administrative and other expenses.
Therefore, we will need to generate higher revenues
32
to maintain profitability at recent levels or at all. There are
numerous factors that could, alone or in combination with other
factors, impede our ability to increase revenues and/or moderate
expenses, including:
|
|
|
|
|
failure to increase sales of our core services; |
|
|
|
significant increases in bandwidth costs or other operating
expenses; |
|
|
|
inability to maintain our prices; |
|
|
|
any failure of our current and planned services and software to
operate as expected; |
|
|
|
loss of any significant customers or loss of customers at a rate
greater than we increase our number of customers or our sales to
existing customers; |
|
|
|
unauthorized use or access to content delivered over our network
or network failures; |
|
|
|
failure of a significant number of customers to pay our fees on
a timely basis or at all or failure to continue to purchase our
services in accordance with their contractual
commitments; and |
|
|
|
inability to attract high-quality customers to purchase and
implement our current and planned services. |
|
|
|
Future changes in financial accounting standards may
adversely affect our reported results of operations. |
A change in accounting standards can have a significant effect
on our reported results. New accounting pronouncements and
interpretations of accounting pronouncements have occurred and
may occur in the future. These new accounting pronouncements may
adversely affect our reported financial results. For example,
beginning in 2006, under SFAS No. 123(R), we are
required to account for our stock-based awards as a compensation
expense. As a result, our net income and net income per share
were significantly lower in the period covered by this report
than they otherwise would have been. Previously, we recorded
stock-based compensation expense only in connection with option
grants that have an exercise price below fair market value. For
option grants that have an exercise price at fair market value,
we calculated compensation expense and disclosed their impact on
net income (loss) and net income (loss) per share, as well as
the impact of all stock-based compensation expense in a footnote
to the consolidated financial statements.
SFAS No. 123(R) now requires us to expense stock-based
awards, including shares issued under our employee stock
purchase plan, stock options, restricted stock and stock
appreciation rights, as compensation cost.
|
|
|
If we are unable to develop new services and enhancements
to existing services, or if we fail to predict and respond to
emerging technological trends and customers changing
needs, our operating results may suffer. |
The market for our services is characterized by rapidly changing
technology, evolving industry standards and new product and
service introductions. Our operating results depend on our
ability to develop and introduce new services into existing and
emerging markets. The process of developing new technologies is
complex and uncertain; we must commit significant resources to
developing new services or enhancements to our existing services
before knowing whether our investments will result in services
the market will accept. Furthermore, we may not execute
successfully our technology initiatives because of errors in
planning or timing, technical hurdles that we fail to overcome
in a timely fashion, misunderstandings about market demand or a
lack of appropriate resources. Failures in execution or market
acceptance of new services we introduce could result in
competitors providing those solutions before we do and,
consequently, causing us to lose market share, revenues and
earnings.
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Any unplanned interruption in the functioning of our
network or services could lead to significant costs and
disruptions that could reduce our revenues and harm our
business, financial results and reputation. |
Our business is dependent on providing our customers with fast,
efficient and reliable distribution of application and content
delivery services over the Internet. For our core services, we
currently provide a standard guarantee that our networks will
deliver Internet content 24 hours a day, 7 days a
week, 365 days a
33
year. If we do not meet this standard, our customer does not pay
for all or a part of its services on that day. Our network or
services could be disrupted by numerous events, including
natural disasters, failure or refusal of our third-party network
providers to provide the necessary capacity, power losses and
intentional disruptions of our services, such as disruptions
caused by software viruses or attacks by unauthorized users.
Although we have taken steps to prevent such disruptions, there
can be no assurance that attacks by unauthorized users will not
be attempted in the future, that our enhanced security measures
will be effective or that a successful attack would not be
damaging. Any widespread interruption of the functioning of our
network or services would reduce our revenues and could harm our
business, financial results and reputation.
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As part of our business strategy, we have entered into and
may enter into or seek to enter into business combinations and
acquisitions that may be difficult to integrate, disrupt our
business, dilute stockholder value or divert management
attention. |
In June 2005, we completed our acquisition of Speedera. We may
seek to enter into additional business combinations or
acquisitions in the future. Acquisitions are typically
accompanied by a number of risks, including the difficulty of
integrating the operations and personnel of the acquired
companies, the potential disruption of our ongoing business, the
potential distraction of management, expenses related to the
acquisition and potential unknown liabilities associated with
acquired businesses. Any inability to integrate completed
acquisitions in an efficient and timely manner could have an
adverse impact on our results of operation. If we are not
successful in completing acquisitions that we may pursue in the
future, we may be required to reevaluate our business strategy,
and we may incur substantial expenses and devote significant
management time and resources without a productive result. In
addition, with future acquisitions, we could use substantial
portions of our available cash or, as in the Speedera
acquisition, make dilutive issuances of securities. Future
acquisitions or attempted acquisitions could have an adverse
effect on our ability to remain profitable.
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Because our services are complex and are deployed in
complex environments, they may have errors or defects that could
seriously harm our business. |
Our services are highly complex and are designed to be deployed
in and across numerous large and complex networks. From time to
time, we have needed to correct errors and defects in our
software. In the future, there may be additional errors and
defects in our software that may adversely affect our services.
We may not have in place adequate quality assurance procedures
to ensure that we detect errors in our software in a timely
manner. If we are unable to efficiently fix errors or other
problems that may be identified, or if there are unidentified
errors that allow persons to improperly access our services, we
could experience loss of revenues and market share, damage to
our reputation, increased expenses and legal actions by our
customers.
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We may have insufficient transmission and server capacity,
which could result in interruptions in our services and loss of
revenues. |
Our operations are dependent in part upon transmission capacity
provided by third-party telecommunications network providers. In
addition, our distributed network must be sufficiently robust to
handle all of our customers traffic. We believe that we
have access to adequate capacity to provide our services;
however, there can be no assurance that we are adequately
prepared for unexpected increases in bandwidth demands by our
customers. In addition, the bandwidth we have contracted to
purchase may become unavailable for a variety of reasons
including due to payment disputes or network providers going out
of business. Any failure of these network providers to provide
the capacity we require, due to financial or other reasons, may
result in a reduction in, or interruption of, service to our
customers. If we do not have access to third-party transmission
capacity, we could lose customers. If we are unable to obtain
transmission capacity on terms commercially acceptable to us or
at all, our business and financial results could suffer. We may
not be able to deploy on a timely basis enough servers to meet
the needs of our customer base or effectively manage the
functioning of those servers. In addition, damage or destruction
of, or other denial of access to, a facility where our servers
are housed could result in a reduction in, or interruption of,
service to our customers.
34
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If the estimates we make, and the assumptions on which we
rely, in preparing our financial statements prove inaccurate,
our actual results may be adversely affected. |
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments about, among other things,
taxes, revenue recognition, capitalization of internal-use
software, contingent obligations, doubtful accounts and
restructuring charges. These estimates and judgments affect the
reported amounts of our assets, liabilities, revenues and
expenses, the amounts of charges accrued by us, such as those
made in connection with our restructuring charges, and related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. If our estimates or the assumptions underlying
them are not correct, we may need to accrue additional charges
that could adversely affect our results of operations, which in
turn could adversely affect our stock price.
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If we are unable to retain our key employees and hire
qualified sales and technical personnel, our ability to compete
could be harmed. |
Our future success depends upon the continued services of our
executive officers and other key technology, sales, marketing
and support personnel who have critical industry experience and
relationships that they rely on in implementing our business
plan. There is increasing competition for talented individuals
in the areas in which our primary offices are located. This
affects both our ability to retain key employees and hire new
ones. None of our officers or key employees is bound by an
employment agreement for any specific term. The loss of the
services of any of our key employees could delay the development
and introduction of, and negatively impact our ability to sell,
our services.
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If our license agreement with MIT terminates, our business
could be adversely affected. |
We have licensed technology from MIT covered by various patents,
patent applications and copyrights relating to Internet content
delivery technology. Some of our core technology is based in
part on the technology covered by these patents, patent
applications and copyrights. Our license is effective for the
life of the patents and patent applications; however, under
limited circumstances, such as a cessation of our operations due
to our insolvency or our material breach of the terms of the
license agreement, MIT has the right to terminate our license. A
termination of our license agreement with MIT could have a
material adverse effect on our business.
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We may need to defend our intellectual property and
processes against patent or copyright infringement claims, which
would cause us to incur substantial costs. |
Other companies or individuals, including our competitors, may
hold or obtain patents or other proprietary rights that would
prevent, limit or interfere with our ability to make, use or
sell our services or develop new services, which could make it
more difficult for us to increase revenues and improve or
maintain profitability. Companies holding Internet-related
patents or other intellectual property rights are increasingly
bringing suits alleging infringement of such rights. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of resources and require us to
do one or more of the following:
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cease selling, incorporating or using products or services that
incorporate the challenged intellectual property; |
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pay substantial damages; |
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obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms or at all; or |
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redesign products or services. |
35
If we are forced to take any of these actions, our business may
be seriously harmed. In the event of a successful claim of
infringement against us and our failure or inability to obtain a
license to the infringed technology, our business and operating
results could be materially adversely affected.
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Our business will be adversely affected if we are unable
to protect our intellectual property rights from unauthorized
use or infringement by third parties. |
We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We have previously brought
lawsuits against entities that we believe are infringing on our
intellectual property rights. These legal protections afford
only limited protection. Monitoring unauthorized use of our
services is difficult and we cannot be certain that the steps we
have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
Although we have licensed from other parties proprietary
technology covered by patents, we cannot be certain that any
such patents will not be challenged, invalidated or
circumvented. Furthermore, we cannot be certain that any pending
or future patent applications will be granted, that any future
patent will not be challenged, invalidated or circumvented, or
that rights granted under any patent that may be issued will
provide competitive advantages to us.
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We face risks associated with international operations
that could harm our business. |
We have operations in several foreign countries and may continue
to expand our sales and support organizations internationally.
Such expansion could require us to make significant
expenditures. We are increasingly subject to a number of risks
associated with international business activities that may
increase our costs, lengthen our sales cycle and require
significant management attention. These risks include:
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increased expenses associated with marketing services in foreign
countries; |
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currency exchange rate fluctuations; |
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unexpected changes in regulatory requirements resulting in
unanticipated costs and delays; |
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interpretations of laws or regulations that would subject us to
regulatory supervision or, in the alternative, require us to
exit a country, which could have a negative impact on the
quality of our services or our results of operations; |
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longer accounts receivable payment cycles and difficulties in
collecting accounts receivable; and |
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potentially adverse tax consequences. |
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Any failure to meet our debt obligations would damage our
business. |
We have long-term debt. As of March 31, 2006, our total
long-term debt was $200.0 million. If we are unable to
remain profitable or if we use more cash than we generate in the
future, our level of indebtedness could adversely affect our
future operations by increasing our vulnerability to adverse
changes in general economic and industry conditions and by
limiting or prohibiting our ability to obtain additional
financing for future capital expenditures, acquisitions and
general corporate and other purposes. In addition, if we are
unable to make interest or principal payments when due, we would
be in default under the terms of our notes, which would result
in all principal and interest becoming due and payable which, in
turn, would seriously harm our business.
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If we are required to seek additional funding, such
funding may not be available on acceptable terms or at
all. |
If our revenues decrease or grow more slowly than we anticipate,
if our operating expenses increase more than we expect or cannot
be reduced in the event of lower revenues, or if we seek to
acquire significant businesses or technologies, we may need to
obtain funding from outside sources. If we are unable to obtain
this funding, our business would be materially and adversely
affected. In addition, even if we were to find outside funding
sources, we might be required to issue securities with greater
rights than the securities we have
36
outstanding today. We might also be required to take other
actions that could lessen the value of our common stock,
including borrowing money on terms that are not favorable to us.
In addition, we may not be able to raise any additional capital.
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Internet-related and other laws could adversely affect our
business. |
Laws and regulations that apply to communications and commerce
over the Internet are becoming more prevalent. In particular,
the growth and development of the market for online commerce has
prompted calls for more stringent tax, consumer protection and
privacy laws, both in the United States and abroad, that may
impose additional burdens on companies conducting business
online or providing Internet-related services such as ours. This
could negatively affect both our business directly as well as
the businesses of our customers, which could reduce their demand
for our services. Tax laws that might apply to our servers,
which are located in many different jurisdictions, could require
us to pay additional taxes that would adversely affect our
continued profitability. We have recorded certain tax reserves
to address potential exposures involving our sales and use and
franchise tax positions. These potential tax liabilities result
from the varying application of statutes, rules, regulations and
interpretations by different jurisdictions. Our reserves,
however, may not be adequate to reflect our total actual
liability. Internet-related laws remain largely unsettled, even
in areas where there has been some legislative action. The
adoption or modification of laws or regulations relating to the
Internet or our operations, or interpretations of existing law,
could adversely affect our business.
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Provisions of our charter documents, our stockholder
rights plan and Delaware law may have anti-takeover effects that
could prevent a change in control even if the change in control
would be beneficial to our stockholders. |
Provisions of our amended and restated certificate of
incorporation, amended and restated by-laws and Delaware law
could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In
addition, our Board of Directors has adopted a stockholder
rights plan the provisions of which could make it more difficult
for a potential acquirer of Akamai to consummate an acquisition
transaction without the approval of our Board of Directors.
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A class action lawsuit has been filed against us and an
adverse resolution of such action could have a material adverse
effect on our financial condition and results of operation in
the period in which the lawsuit is resolved. |
We are named as a defendant in a purported class action lawsuit
filed in 2001 alleging that the underwriters of our initial
public offering received undisclosed compensation in connection
with our initial public offering of common stock in violation of
the Securities Act of 1933, as amended, and the Exchange Act.
See Item 3 of Part I of our annual report on
Form 10-K for the
year ended December 31, 2005 for more information. Any
conclusion of these matters in a manner adverse to us could have
a material adverse affect on our financial position and results
of operations.
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We may become involved in other litigation that may
adversely affect us. |
In the ordinary course of business, we may become involved in
litigation, administrative proceedings and governmental
proceedings. Such matters can be time-consuming, divert
managements attention and resources and cause us to incur
significant expenses. Furthermore, there can be no assurance
that the results of any of these actions will not have a
material adverse effect on our business, results of operations
or financial condition.
The exhibits filed as part of this quarterly report on
Form 10-Q are
listed in the exhibit index immediately preceding the exhibits
and are incorporated herein.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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Akamai Technologies, Inc.
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By: |
/s/ J. Donald Sherman
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J. Donald Sherman, |
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Chief Financial Officer |
May 10, 2006
38
EXHIBIT INDEX
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Exhibit 3.1(A)
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Amended and Restated Certificate of Incorporation of the
Registrant |
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Exhibit 3.2(B)
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Amended and Restated By-Laws of the Registrant |
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Exhibit 3.3(C)
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Certificate of Designations of Series A Junior
Participating Preferred Stock of the Registrant |
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Exhibit 4.1(B)
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Specimen common stock certificate |
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Exhibit 4.2(D)
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Indenture, dated as of December 12, 2003 by and between the
Registrant and U.S. Bank National Association |
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Exhibit 4.4(D)
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Rights Agreement, dated September 10, 2002, by and between
the Registrant and Equiserve Trust Company, N.A. |
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Exhibit 4.5(E)
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Amendment No. 1, dated as of January 29, 2004, to the
Rights Agreement, dated as of September 10, 2002, between
Akamai Technologies, Inc. and EquiServe Trust Company, N.A., as
Rights Agent |
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Exhibit 31.1
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Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/ Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended |
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Exhibit 31.2
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Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/ Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended |
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Exhibit 32.1
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Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.2
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Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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(A) |
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Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q filed
with the Securities and Exchange Commission (the
Commission) on August 14, 2000. |
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(B) |
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Incorporated by reference to the Registrants
Form S-1 (File
No. 333-85679), as
amended, filed with the Securities and Exchange Commission on
August 21, 1999. |
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(C) |
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Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q filed
with the Commission on November 14, 2002. |
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(D) |
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Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Commission on September 11, 2002. |
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(E) |
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Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Commission on February 2, 2004. |
39
exv31w1
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul Sagan, certify that:
1. |
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I have reviewed this Quarterly Report on Form 10-Q of Akamai Technologies, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
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d) |
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
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b) |
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Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
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Date: May 10, 2006 |
/s/ Paul Sagan
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Paul Sagan, Chief Executive Officer |
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exv31w2
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, J. Donald Sherman, certify that:
1. |
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I have reviewed this Quarterly Report on Form 10-Q of Akamai Technologies, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
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d) |
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
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b) |
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Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
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Date: May 10, 2006 |
/s/ J. Donald Sherman
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J. Donald Sherman, Chief Financial Officer |
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exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Akamai Technologies, Inc. (the
Company) for the period ended March 31, 2006 as filed with the Securities and Exchange Commission
on the date hereof (the Report), the undersigned, Paul Sagan, Chief Executive Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Dated: May 10, 2006 |
/s/ Paul Sagan
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Paul Sagan |
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Chief Executive Officer |
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A signed original of this written statement required by Section 906 has been provided to Akamai
Technologies, In. and will be retained by Akamai Technologies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Akamai Technologies, Inc. (the
Company) for the period ended March 31, 2006 as filed with the Securities and Exchange Commission
on the date hereof (the Report), the undersigned, J. Donald Sherman, Chief Financial Officer of
the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Dated: May 10, 2006 |
/s/ J. Donald Sherman
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J. Donald Sherman |
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Chief Financial Officer |
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A signed original of this written statement required by Section 906 has been provided to Akamai
Technologies, In. and will be retained by Akamai Technologies, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.