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
September 30, 2006
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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
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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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, par value $0.01 per share, as of November 7,
2006: 156,428,630 shares.
AKAMAI
TECHNOLOGIES, INC.
FORM 10-Q
For the
quarterly period ended September 30, 2006
TABLE OF
CONTENTS
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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AKAMAI
TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2006
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2005
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(In thousands, except share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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99,123
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$
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91,792
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Marketable securities (including
restricted securities of $1,053 at September 30, 2006 and
$730 at December 31, 2005)
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178,584
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200,616
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Accounts receivable, net of
reserves of $7,503 at September 30, 2006 and $7,994 at
December 31, 2005
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67,375
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52,162
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Prepaid expenses and other current
assets
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14,386
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10,428
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Total current assets
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359,468
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354,998
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Property and equipment, net
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71,923
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44,885
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Marketable securities (including
restricted securities of $3,102 at September 30, 2006 and
$3,825 at December 31, 2005)
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138,375
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21,721
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Goodwill
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97,177
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98,519
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Other intangible assets, net
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31,830
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38,267
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Deferred tax assets, net
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324,353
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328,308
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Other assets
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4,569
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4,801
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Total assets
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$
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1,027,695
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$
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891,499
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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19,926
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$
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16,022
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Accrued expenses
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53,396
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38,449
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Deferred revenue
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7,049
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5,656
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Current portion of accrued
restructuring
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1,248
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1,749
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Total current liabilities
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81,619
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61,876
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Accrued restructuring, net of
current portion
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868
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1,844
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Other liabilities
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3,513
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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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286,000
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267,285
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Commitments, contingencies and
guarantees (Note 16)
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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 September 30,
2006 and December 31, 2005
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Common stock, $0.01 par value;
700,000,000 shares authorized; 156,223,608 shares
issued and outstanding at September 30, 2006;
152,922,092 shares issued and outstanding at
December 31, 2005
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1,562
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1,529
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Additional paid-in capital
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3,953,477
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3,880,985
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Deferred stock compensation
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(7,537
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)
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Accumulated other comprehensive
income, net
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1,112
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471
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Accumulated deficit
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(3,214,456
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)
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(3,251,234
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)
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Total stockholders equity
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741,695
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624,214
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Total liabilities and
stockholders equity
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$
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1,027,695
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$
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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
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For the
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2006
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2005
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2006
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2005
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(In thousands, except per share data)
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Revenues:
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Services
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$
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111,147
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$
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75,602
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$
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302,225
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$
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198,858
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Software and software-related
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348
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111
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744
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1,600
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Total revenues
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111,495
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75,713
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302,969
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200,458
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Costs and operating expenses:
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Cost of revenues
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24,984
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15,295
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65,495
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39,571
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Research and development
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8,862
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4,953
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23,961
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13,089
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Sales and marketing
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29,416
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19,803
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85,431
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54,911
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General and administrative
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24,529
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14,568
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64,942
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37,748
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Amortization of other intangible
assets
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1,943
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|
|
|
2,296
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6,437
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2,828
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|
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Total costs and operating expenses
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89,734
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56,915
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246,266
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148,147
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Income from operations
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21,761
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18,798
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56,703
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|
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52,311
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Interest income
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|
4,826
|
|
|
|
816
|
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|
|
12,365
|
|
|
|
2,218
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Interest expense
|
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|
(856
|
)
|
|
|
(1,383
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)
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|
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(2,401
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)
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|
|
(4,568
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)
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Loss on early extinguishment of
debt
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|
|
|
|
|
|
(1,370
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)
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|
|
|
|
|
|
(1,370
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)
|
Other (expense) income, net
|
|
|
(448
|
)
|
|
|
(63
|
)
|
|
|
213
|
|
|
|
(712
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)
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(Loss) gain on investments, net
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|
|
|
|
|
|
(27
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)
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|
|
259
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|
|
|
(27
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
25,283
|
|
|
|
16,771
|
|
|
|
67,139
|
|
|
|
47,852
|
|
Provision (benefit) for income
taxes
|
|
|
11,264
|
|
|
|
(255,489
|
)
|
|
|
30,361
|
|
|
|
(254,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
14,019
|
|
|
$
|
272,260
|
|
|
$
|
36,778
|
|
|
$
|
302,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
1.96
|
|
|
$
|
0.24
|
|
|
$
|
2.29
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
1.71
|
|
|
$
|
0.22
|
|
|
$
|
2.00
|
|
Shares used in per weighted
average share calculations:
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Basic
|
|
|
155,739
|
|
|
|
139,204
|
|
|
|
154,753
|
|
|
|
132,125
|
|
Diluted
|
|
|
177,063
|
|
|
|
160,362
|
|
|
|
177,290
|
|
|
|
152,336
|
|
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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|
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For the
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36,778
|
|
|
$
|
302,239
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
28,782
|
|
|
|
16,199
|
|
Amortization of deferred financing
costs
|
|
|
631
|
|
|
|
807
|
|
Stock-based compensation
|
|
|
34,776
|
|
|
|
2,267
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(19,601
|
)
|
|
|
|
|
Change in deferred tax assets, net,
including release of deferred tax asset valuation allowance
|
|
|
|
|
|
|
(255,187
|
)
|
Utilization of tax net operating
loss carryforward
|
|
|
29,096
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
433
|
|
|
|
1,020
|
|
Non-cash portion of loss on early
extinguishment of debt
|
|
|
|
|
|
|
481
|
|
(Gain) loss on investments,
disposal of property and equipment and foreign currency, net
|
|
|
(557
|
)
|
|
|
707
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(13,998
|
)
|
|
|
(10,792
|
)
|
Prepaid expenses and other current
assets
|
|
|
(4,814
|
)
|
|
|
1,418
|
|
Accounts payable, accrued expenses
and other current liabilities
|
|
|
18,518
|
|
|
|
(3,786
|
)
|
Deferred revenue
|
|
|
1,102
|
|
|
|
1,700
|
|
Accrued restructuring
|
|
|
(1,506
|
)
|
|
|
(1,401
|
)
|
Other non-current assets and
liabilities
|
|
|
(243
|
)
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
109,397
|
|
|
|
55,125
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(37,808
|
)
|
|
|
(21,119
|
)
|
Capitalization of internal-use
software costs
|
|
|
(9,044
|
)
|
|
|
(6,936
|
)
|
Purchases of short and long-term
available for sale securities
|
|
|
(279,707
|
)
|
|
|
(32,619
|
)
|
Proceeds from sales and maturities
of short and long-term available for sale securities
|
|
|
185,233
|
|
|
|
52,965
|
|
Cash acquired in business
acquisition, net
|
|
|
|
|
|
|
1,717
|
|
Decrease in restricted investments
held for security deposits
|
|
|
400
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(140,926
|
)
|
|
|
(5,790
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Payments on capital leases
|
|
|
|
|
|
|
(398
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
19,601
|
|
|
|
|
|
Payments on repurchase of
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
(56,614
|
)
|
Proceeds from the issuance of
common stock under stock option and employee stock purchase plans
|
|
|
18,651
|
|
|
|
7,721
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
38,252
|
|
|
|
(49,291
|
)
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on
cash and cash equivalents
|
|
|
608
|
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
7,331
|
|
|
|
(1,234
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
91,792
|
|
|
|
35,318
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
99,123
|
|
|
$
|
34,084
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,004
|
|
|
$
|
4,702
|
|
Cash paid for income taxes
|
|
|
2,115
|
|
|
|
606
|
|
Non-cash financing and investing
activities:
|
|
|
|
|
|
|
|
|
Capitalization of stock-based
compensation, net of impairments
|
|
$
|
2,792
|
|
|
$
|
|
|
Acquisition of equipment through
capital leases
|
|
|
|
|
|
|
586
|
|
Common stock and vested stock
options issued and accrued transaction costs for acquisition of
a business
|
|
|
|
|
|
|
131,211
|
|
Value of deferred compensation
recorded for issuance of deferred stock units
|
|
|
|
|
|
|
930
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
3
AKAMAI
TECHNOLOGIES, INC.
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 21,000 servers in more than 900 networks in
approximately 70 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 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. All
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.
Accordingly, these condensed consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in
Akamais Annual Report on
Form 10-K
for the year ended December 31, 2005.
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 condensed consolidated financial statements include
all adjustments and accruals, consisting only of normal
recurring adjustments, that are necessary for a fair statement
of the results as of and for the three and nine month periods
ended September 30, 2006 and 2005.
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2.
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New
Accounting Pronouncements
|
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN No. 48 prescribes a
two-step process to determine the amount of tax benefit to be
recognized. First, the tax position must be evaluated to
determine the likelihood that it will be sustained upon external
examination. If the tax position is deemed more-likely-than-not
to be sustained, the tax position is then assessed to determine
the amount of benefit to recognize in the financial statements.
The amount of the benefit that may be recognized is the largest
amount that has a greater than 50 percent likelihood of
being realized upon ultimate settlement. FIN No. 48
will be effective for the Company beginning in 2007. Management
is currently evaluating the potential impact of
FIN No. 48 on the Companys financial position
and results of operations.
In September 2006, the Securities and Exchange Commission
(SEC) released Staff Accounting
Bulletin No. 108 (SAB 108).
SAB 108 expresses the SEC staffs views regarding the
process of quantifying financial statement misstatements. These
interpretations were issued to address diversity in practice and
the potential under current practice for the build up of
improper amounts on the balance sheet. SAB 108 expresses
the SEC staffs view that a registrants materiality
evaluation of an identified unadjusted error should quantify the
effects of the error on each financial statement and related
financial statement disclosures and that prior year
misstatements should be considered in quantifying misstatements
in current year financial statements. SAB 108 also states
that correcting prior year financial statements for immaterial
errors would not require previously filed reports to be amended.
Such correction may be made the next time the registrant files
the prior year financial statements. Registrants electing not to
restate prior periods should reflect the effects of initially
applying the guidance in SAB 108 in their annual financial
statements covering the first fiscal year ending after
November 15, 2006. The cumulative effect of the initial
application should be reported in the carrying amounts of assets
and liabilities as of the beginning of that fiscal year and the
offsetting adjustment should be made to the opening balance of
retained earnings for that year. Registrants should disclose the
nature and amount of each individual error being corrected in
the cumulative
4
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
adjustment. The disclosure should also include when and how each
error arose and the fact that the errors had previously been
considered immaterial. The SEC staff encourages early
application of the guidance in SAB 108 for interim periods
of the first fiscal year ending after November 15, 2006.
The Company does not expect the implementation of SAB 108
to have a material impact on its financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does
not require any new fair value measurements but may change
current practice for some entities. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those years.
The Company does not expect the implementation of SAB 157
to have a material impact on its financial statements.
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3.
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Restricted
Marketable Securities
|
As of September 30, 2006, $4.2 million of the
Companys marketable securities were classified as
restricted. These securities primarily represent collateral for
irrevocable letters of credit in favor of third-party
beneficiaries, mostly related to facility leases;
$3.1 million of these securities are classified as
long-term and $1.1 million are classified as short-term on
the unaudited condensed consolidated balance sheet as of
September 30, 2006. The restrictions on these marketable
securities lapse as the Company fulfills its obligations or as
such obligations expire as provided by the letters of credit.
These restrictions are expected to lapse at various times
through May 2011.
Net accounts receivable consists of the following (in thousands):
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As of
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As of
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September 30,
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December 31,
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2006
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2005
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Trade accounts receivable
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$
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56,379
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$
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51,019
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Unbilled accounts
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18,499
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9,137
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Total gross accounts receivable
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74,878
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60,156
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Allowance for doubtful accounts
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(2,581
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)
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(2,277
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)
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Reserve for cash basis customers
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(1,947
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)
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(2,539
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)
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Reserve for service credits
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(2,975
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)
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(3,178
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)
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Total accounts receivable reserves
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(7,503
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)
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(7,994
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)
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Total accounts receivable, net
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$
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67,375
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$
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52,162
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5
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following (in thousands):
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As of
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As of
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September 30,
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December 31,
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2006
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2005
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Payroll and other related benefits
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$
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27,636
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$
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14,374
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Property, use and other taxes
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13,428
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13,314
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Bandwidth and co-location
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9,222
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7,781
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Legal professional fees
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|
654
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|
679
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Interest
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583
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83
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Other
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1,873
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2,218
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Total
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$
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53,396
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$
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38,449
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6.
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Stock-Based
Compensation
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Effective January 1, 2006, the Company adopted, on a
modified prospective basis, the provisions of FASB Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment
(SFAS No. 123(R)), which requires the
measurement and recognition of stock-based compensation expense
based on estimated fair values for all share-based payment
awards made to employees, consultants, and directors, including
employee stock options, restricted stock units, restricted stock
awards, 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 the grant date, based on the fair value of
the award, and are recognized as expense over the
employees expected service period. Additionally, in
applying SFAS No. 123(R), the Company applies the
provisions of SEC Staff Accounting Bulletin No. 107
(SAB 107) on share-based payments.
Equity
Plans
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 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 awards and other types of equity
awards. In March 2006, the Board of Directors adopted the Akamai
Technologies, Inc. 2006 Stock Incentive Plan (the 2006
Plan) for the issuance of incentive and nonqualified stock
options, restricted stock awards, restricted stock units and
other types of equity awards. The stockholders of the Company
approved the adoption of the 2006 Plan in May 2006. The total
number of shares of common stock reserved for issuance under the
1998 Plan, the 2001 Plan and the 2006 Plan is 48,255,600,
5,000,000 and 7,500,000 shares, respectively. Equity
incentive awards may not be issued to the Companys
directors or executive officers under the 2001 Plan. To date, no
stock options or other equity incentive awards have been issued
under the 2006 Plan.
Under the terms of the 1998 Plan and the 2006 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. Incentive stock options may not be issued
under the 2001 Plan. The exercise price of nonqualified stock
options issued under the 1998 Plan, the 2001 Plan and the 2006
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 under all
of the plans, and options are granted at the discretion
6
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
of the Board of Directors or a committee thereof. Under the 1998
Plan and 2001 Plan, 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.
Under the 2006 Plan, the term of options granted may not exceed
seven years.
The Company has assumed certain stock option plans and the
outstanding stock options of companies that it has acquired
(Assumed Plans). Stock options outstanding as of the
date of acquisition 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 during an offering period 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 nine-month periods ended
September 30, 2006 and 2005, the Company issued 165,934 and
279,926 shares under the 1999 ESPP, respectively. As of
September 30, 2006, $2.5 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 the modified
prospective transition method, stock-based compensation expense
recognized during the three and nine months ended
September 30, 2006 includes: shares issued under the 1999
ESPP during 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; shares
issued under the 1999 ESPP during the offering period commencing
on June 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of
SFAS No. 123(R); stock options 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, deferred stock units,
restricted stock and restricted stock units granted after
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; accordingly, the results of
operations for the three and nine months ended
September 30, 2006 and future periods will not be
comparable to the Companys historical results.
For stock options, Akamai has selected the Black-Scholes option
pricing model to determine the fair value of the Companys
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 on the balance sheet at September 30, 2006; as of
and prior to December 31, 2005, it was carried as a
separate line item entitled deferred stock
compensation in the stockholders equity portion of
the balance sheet. SFAS No. 123(R) also changes the
reporting of tax-related amounts within the statement of cash
flows. The gross amount of excess windfall tax
7
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
benefits resulting from stock-based compensation has been
reported as a separate line item entitled excess tax
benefits from stock-based compensation in the consolidated
statement of cash flows.
The effect of recording stock-based compensation in accordance
with SFAS No. 123(R) for the three and nine month
periods ended September 30, 2006 was as follows (in
thousands):
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For the
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For the
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Three Months
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Nine Months
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Ended September
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Ended September
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30, 2006
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30, 2006
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Stock-based compensation expense
by type of award:
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Stock options
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$
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6,690
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$
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17,491
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Deferred stock units
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1,457
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1,976
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Restricted stock units
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6,233
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16,081
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Shares issued under the 1999 ESPP
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1,192
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2,020
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Amounts capitalized as
internal-use software
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(1,058
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)
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|
(2,792
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)
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Total stock-based compensation
before income taxes
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14,514
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34,776
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Less: Income tax benefit
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(4,765
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)
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(11,499
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)
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Total stock-based compensation,
net of tax
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$
|
9,749
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$
|
23,277
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Effect of stock-based compensation
on income by line item:
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Cost of revenues
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$
|
517
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$
|
1,323
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Research and development expense
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|
3,037
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|
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|
8,026
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Sales and marketing expense
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|
4,781
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|
|
|
12,410
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General and administrative expense
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|
|
6,179
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|
|
|
13,017
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|
Benefit to income taxes
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|
(4,765
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)
|
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|
(11,499
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)
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|
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Total cost related to stock-based
compensation
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|
$
|
9,749
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$
|
23,277
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The fair value of Akamais stock option awards granted
during the three and nine months ended September 30, 2006
is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
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For the
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For the
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|
Three Months
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|
Nine Months
|
|
|
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Ended September
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|
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Ended September
|
|
|
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30, 2006
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|
30, 2006
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Expected life (years)
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|
4.2
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|
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|
3.9
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Risk-free interest rate(%)
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|
4.9
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|
|
4.7
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Expected volatility(%)
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|
70.4
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|
67.4
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Dividend yield(%)
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Weighted average fair value per
share at grant date
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$
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22.10
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$
|
15.55
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8
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
The fair value of 1999 ESPP awards granted during nine months
ended September 30, 2006 is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
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|
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For the
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|
|
|
Nine Months
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|
|
|
Ended September
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|
|
|
30, 2006
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|
Expected life (years)
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|
0.5
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Risk-free interest rate(%)
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|
|
4.7
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|
Expected volatility(%)
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|
66.9
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Dividend yield(%)
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|
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Weighted average fair value per
share of shares purchased
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$
|
17.89
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|
During the three months ended September 30, 2006, no ESPP
awards were granted.
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
life of options granted within the valuation model. The
risk-free interest rate for periods commensurate with the
expected life of the option is based on the U.S. Treasury
yield rate in effect at the time of grant.
As of September 30, 2006, total unrecognized compensation
cost for stock options, restricted stock units, deferred stock
units and the 1999 ESPP awards was $97.7 million. This
non-cash expense will be recognized through 2009 over a weighted
average period of 1.5 years. Nearly all of the
Companys employees have received grants through these
equity compensation programs.
As a result of adopting SFAS No. 123(R), the
Companys income before taxes for the three and nine months
ended September 30, 2006 was $213,000 and $6.9 million
lower, respectively, than if the Company had continued to
account for share-based compensation under Accounting Principles
Bulletin No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Net income for
the three and nine months ended September 30, 2006 was
$117,000 and $3.8 million lower, respectively, than if the
Company had continued to account for share-based compensation
under APB No. 25. Basic and diluted earnings per share for
the nine months ended September 30, 2006 would have been
$0.25 and $0.23, respectively, had the Company not adopted
SFAS No. 123(R), compared to reported basic and
diluted earnings per share of $0.24 and $0.22, respectively, for
such periods. The Companys adoption of
SFAS No. 123(R) did not, however, have any impact on
basic and diluted earnings per share for the three months ended
September 30, 2006.
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 windfall tax
benefits to be classified as financing cash flows, rather than
as operating cash flows. The $19.6 million in excess
windfall tax benefit classified as a financing cash inflow would
have been classified as an operating cash inflow had the Company
not adopted SFAS No. 123(R).
Prior
to the Adoption of SFAS No. 123(R)
For periods prior to 2006, the Company elected to apply APB
No. 25 and related interpretations in accounting for its
stock-based compensation.
The following is a reconciliation of pro forma net income per
weighted average diluted share calculated as if the Company had
adopted the fair value recognition provisions of
SFAS No. 123 for the three and nine months
9
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
ended September 30, 2005 to the Companys reported net
income per weighted average diluted share (in thousands, except
per share data):
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For the
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|
For the
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Three Months
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|
Nine Months
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Ended September
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Ended September
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|
|
30, 2005
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|
|
30, 2005
|
|
|
Net income, as reported
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|
$
|
272,260
|
|
|
$
|
302,239
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|
Add: stock-based employee
compensation costs, net of tax included in reported net income
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|
|
1,301
|
|
|
|
2,137
|
|
Deduct: stock-based employee
compensation costs, net of tax determined under fair value
method for all awards
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|
|
(8,233
|
)
|
|
|
(22,315
|
)
|
|
|
|
|
|
|
|
|
|
Incremental stock option expense
per SFAS No. 123
|
|
|
(6,932
|
)
|
|
|
(20,178
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
265,328
|
|
|
$
|
282,061
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average
share, basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.96
|
|
|
$
|
2.29
|
|
Pro forma
|
|
$
|
1.91
|
|
|
$
|
2.13
|
|
Net income per weighted average
share, diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.71
|
|
|
$
|
2.00
|
|
Pro forma
|
|
$
|
1.66
|
|
|
$
|
1.87
|
|
Effect of employee stock-based
compensation on income by line item:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
|
|
Research and development expense
|
|
|
360
|
|
|
|
495
|
|
Sales and marketing expense
|
|
|
234
|
|
|
|
410
|
|
General and administrative expense
|
|
|
789
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
Total cost related to stock-based
compensation
|
|
$
|
1,383
|
|
|
$
|
2,267
|
|
|
|
|
|
|
|
|
|
|
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 and nine months ended September 30, 2005
was estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
30, 2005
|
|
|
30, 2005
|
|
|
Expected life (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate(%)
|
|
|
4.0
|
|
|
|
3.9
|
|
Volatility(%)
|
|
|
70.0
|
|
|
|
73.0
|
|
Dividend yield(%)
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share at grant date
|
|
$
|
8.78
|
|
|
$
|
8.65
|
|
10
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
The fair value of 1999 ESPP awards granted during the nine
months ended September 30, 2005 was estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months
|
|
|
|
Ended September
|
|
|
|
30, 2005
|
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate(%)
|
|
|
2.1
|
|
Expected Volatility(%)
|
|
|
101.9
|
|
Dividend yield(%)
|
|
|
|
|
Weighted average fair value per
share of shares purchased
|
|
$
|
8.13
|
|
During the three months ended September 30, 2005, no ESPP
awards were granted.
Stock
Options
Options to purchase common stock are granted at the discretion
of the Board of Directors, a committee thereof or, in limited
circumstances, the Companys Chief Executive Officer.
Options granted to date 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. Options to
be granted under the 2006 Plan will have a contractual life of
seven years.
The following tables summarize the stock option activity under
all equity plans for the three and nine months ended
September 30, 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
|
|
Granted
|
|
|
248,360
|
|
|
|
31.73
|
|
Exercised
|
|
|
(849,011
|
)
|
|
|
4.39
|
|
Forfeited
|
|
|
(239,946
|
)
|
|
|
11.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
14,567,708
|
|
|
|
10.62
|
|
Granted
|
|
|
181,750
|
|
|
|
38.49
|
|
Exercised
|
|
|
(917,198
|
)
|
|
|
7.83
|
|
Forfeited
|
|
|
(80,931
|
)
|
|
|
16.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
13,751,329
|
|
|
|
11.14
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
2006
|
|
|
7,035,762
|
|
|
|
6.75
|
|
11
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Granted
|
|
|
241,500
|
|
|
|
12.79
|
|
Exercised
|
|
|
(505,953
|
)
|
|
|
3.69
|
|
Forfeited
|
|
|
(228,919
|
)
|
|
|
10.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005
|
|
|
13,465,911
|
|
|
|
7.38
|
|
Granted and assumed in business
combination
|
|
|
4,929,916
|
|
|
|
9.77
|
|
Exercised
|
|
|
(761,336
|
)
|
|
|
2.54
|
|
Forfeited
|
|
|
(242,774
|
)
|
|
|
8.06
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2005
|
|
|
17,391,717
|
|
|
|
8.26
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
2005
|
|
|
8,447,463
|
|
|
|
5.36
|
|
The total pre-tax intrinsic value of options exercised during
the three months ended September 30, 2006 and 2005 was
$29.8 million and $8.8 million, respectively. For the
nine months ended September 30, 2006 and 2005, the total
pre-tax intrinsic value of options exercised was
$81.6 million and $19.3 million, respectively. The
total fair value of options vested for the three months ended
September 30, 2006 and 2005 was $5.6 million and
$6.3 million, respectively; and for the nine months ended
September 30, 2006 and 2005 was $14.2 million and
$18.3 million, respectively. The fair value of vested stock
options for the three and nine months ended September 30,
2006 was calculated net of capitalized equity-related
compensation of $1.1 million and $2.8 million,
respectively. Cash proceeds from the exercise of stock options
were $7.2 million and $1.9 million for the three
months ended September 30, 2006 and 2005, respectively; and
$15.7 million and $5.4 million for the nine months
ended September 30, 2006 and 2005, respectively. Income tax
benefits realized from the exercise of stock options during the
three months ended September 30, 2006 and 2005 were
$10.3 million and $3.3 million, respectively. For the
nine months ended September 30, 2006 and 2005, income tax
benefits realized from the exercise of stock options were
$23.8 million and $7.0 million, respectively.
12
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock options that are
outstanding and expected to vest and stock options exercisable
at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Expected to Vest
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Range of Exercise Price ($)
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Value
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
(In
|
|
|
|
|
|
(In
|
|
|
|
|
|
(In
|
|
|
|
|
|
(In
|
|
|
|
|
|
|
years)
|
|
|
|
|
|
thousands)
|
|
|
|
|
|
years)
|
|
|
|
|
|
thousands)
|
|
|
0.01-0.90
|
|
|
1,240,177
|
|
|
|
5.4
|
|
|
$
|
0.59
|
|
|
$
|
61,270
|
|
|
|
1,135,920
|
|
|
|
5.1
|
|
|
$
|
0.63
|
|
|
$
|
56,068
|
|
0.96-1.65
|
|
|
1,424,644
|
|
|
|
5.9
|
|
|
|
1.41
|
|
|
|
69,212
|
|
|
|
1,413,601
|
|
|
|
5.9
|
|
|
|
1.41
|
|
|
|
68,672
|
|
2.27-4.08
|
|
|
742,462
|
|
|
|
5.8
|
|
|
|
3.25
|
|
|
|
34,704
|
|
|
|
727,130
|
|
|
|
5.7
|
|
|
|
3.25
|
|
|
|
33,984
|
|
4.10-5.44
|
|
|
1,851,975
|
|
|
|
6.1
|
|
|
|
4.87
|
|
|
|
83,560
|
|
|
|
1,573,742
|
|
|
|
5.9
|
|
|
|
4.86
|
|
|
|
71,022
|
|
5.49-6.35
|
|
|
72,389
|
|
|
|
5.3
|
|
|
|
5.78
|
|
|
|
3,200
|
|
|
|
69,672
|
|
|
|
5.2
|
|
|
|
5.80
|
|
|
|
3,079
|
|
8.55-12.81
|
|
|
832,443
|
|
|
|
7.7
|
|
|
|
11.68
|
|
|
|
31,887
|
|
|
|
430,453
|
|
|
|
7.2
|
|
|
|
11.33
|
|
|
|
16,642
|
|
12.85-14.86
|
|
|
3,954,027
|
|
|
|
8.0
|
|
|
|
14.24
|
|
|
|
141,349
|
|
|
|
1,061,937
|
|
|
|
7.1
|
|
|
|
13.96
|
|
|
|
38,260
|
|
15.22-22.47
|
|
|
876,773
|
|
|
|
6.2
|
|
|
|
16.94
|
|
|
|
28,973
|
|
|
|
498,950
|
|
|
|
4.3
|
|
|
|
15.50
|
|
|
|
17,207
|
|
22.97-32.92
|
|
|
788,776
|
|
|
|
9.3
|
|
|
|
27.16
|
|
|
|
18,007
|
|
|
|
24,500
|
|
|
|
4.3
|
|
|
|
31.69
|
|
|
|
448
|
|
35.05-46.17
|
|
|
189,262
|
|
|
|
8.4
|
|
|
|
39.21
|
|
|
|
2,039
|
|
|
|
45,232
|
|
|
|
3.7
|
|
|
|
36.45
|
|
|
|
612
|
|
61.94-85.00
|
|
|
51,125
|
|
|
|
3.5
|
|
|
|
77.81
|
|
|
|
|
|
|
|
51,125
|
|
|
|
3.5
|
|
|
|
77.81
|
|
|
|
|
|
93.94
|
|
|
1,750
|
|
|
|
3.7
|
|
|
|
93.94
|
|
|
|
|
|
|
|
1,750
|
|
|
|
3.7
|
|
|
|
93.94
|
|
|
|
|
|
197.50
|
|
|
1,750
|
|
|
|
2.0
|
|
|
|
197.50
|
|
|
|
|
|
|
|
1,750
|
|
|
|
2.0
|
|
|
|
197.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,027,553
|
|
|
|
6.9
|
|
|
|
10.71
|
|
|
$
|
474,201
|
|
|
|
7,035,762
|
|
|
|
5.9
|
|
|
|
6.75
|
|
|
$
|
305,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected forfeitures
|
|
|
1,723,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding
|
|
|
13,751,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents
the total intrinsic value, based on Akamais closing stock
price of $49.99 on September 30, 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 September 30, 2006 was
approximately 7.0 million.
Deferred
Stock Units
On May 23, 2006, the Company granted an aggregate of 33,545
deferred stock units (DSUs) under the Companys
1998 Plan to non-employee members of its Board of Directors and
its Executive Chairman. During 2003, 2004 and 2005, the Company
granted an aggregate of 259,876 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.
On September 20, 2006, the Companys Board of
Directors adopted a policy (the Policy) with respect
to the payment of compensation to a director in good standing
upon such directors departure from the Board. Pursuant to
the Policy, upon a directors departure from the Board,
such director will receive a cash payment equal to the annual
cash retainer payable to such director under our non-employee
director compensation plan pro-rated through the date of
departure and 100% of the unvested shares underlying DSUs held
by such director will accelerate at the time of departure and
become exercisable in full. In addition, if a director has
completed three years of Board service at
13
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
the time of departure, 100% of the unvested options initially
granted to such director upon joining the Board will accelerate
at the time of departure and become exercisable in full. As a
result of the adoption of the Policy, the Company accelerated
the remaining unamortized compensation expense related to
options and DSUs issued to non-employee directors of
$1.2 million during the three months ended
September 30, 2006.
The following table summarizes the DSU activity for the three
and nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair 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
|
|
Granted
|
|
|
33,545
|
|
|
|
31.15
|
|
Vested and distributed
|
|
|
(6,439
|
)
|
|
|
13.77
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
220,458
|
|
|
|
12.50
|
|
Vested and distributed
|
|
|
(11,021
|
)
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
209,437
|
|
|
|
12.90
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the DSU activity for the three
and nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Outstanding at January 1, 2005
|
|
|
189,062
|
|
|
$
|
6.43
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested and distributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2005
|
|
|
189,062
|
|
|
|
6.43
|
|
Granted
|
|
|
58,366
|
|
|
|
12.85
|
|
Vested and distributed
|
|
|
(3,728
|
)
|
|
|
15.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005
|
|
|
243,700
|
|
|
|
7.83
|
|
Granted
|
|
|
12,448
|
|
|
|
14.46
|
|
Vested and distributed
|
|
|
(60,932
|
)
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2005
|
|
|
195,216
|
|
|
|
9.36
|
|
|
|
|
|
|
|
|
|
|
The total fair value of DSUs that vested during the nine months
ended September 30, 2005 and 2006 was $318,000 and
$157,000, respectively. The grant date fair value of DSUs is
calculated based upon the Companys closing stock price on
the date of grant. As of September 30, 2006,
60,106 shares of DSUs were unvested, with an aggregate
intrinsic value of $3.0 million and a weighted average
remaining contractual life of approximately 9.2 years.
These units are expected to vest through May 2008. All DSUs vest
as directors continue their service on the Board or upon a
directors departure from the Board.
Restricted
Stock Units
During the three and nine months ended September 30, 2006,
the Company granted an aggregate of 1,800 and 824,081 restricted
stock units (RSUs), respectively, to its employees.
These RSUs generally vest in three equal annual installments
over the three-year period following the grant date. Each RSU
represents the right to receive one
14
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
share of the Companys common stock upon vesting. The fair
value of these RSUs was calculated based upon the Companys
closing stock price on the date of grant, and the equity-related
compensation expense is recognized over the vesting period of
three years.
Additionally, in connection with the original grants of RSUs
noted in the preceding paragraph, 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 and nine months ended
September 30, 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 in relation to the
applicable targets and adjust the compensation cost, if needed,
at each reporting period. During the three and nine months
ended September 30, 2006, the Company granted 5,400 and
2,397,243 performance-based RSUs, respectively, to its employees.
The following table summarizes the RSU activity for the three
and nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Granted
|
|
|
3,214,124
|
|
|
$
|
25.43
|
|
Forfeited
|
|
|
(9,100
|
)
|
|
|
25.54
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
3,205,024
|
|
|
|
25.43
|
|
Forfeited
|
|
|
(38,500
|
)
|
|
|
25.54
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
3,166,524
|
|
|
|
25.40
|
|
Granted
|
|
|
7,200
|
|
|
|
34.72
|
|
Forfeited
|
|
|
(35,100
|
)
|
|
|
25.54
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
3,138,624
|
|
|
|
25.43
|
|
|
|
|
|
|
|
|
|
|
The grant date fair value of each RSU is calculated based upon
the Companys closing stock price on the date of grant. As
of January 1, 2005, September 30, 2005 and
January 1, 2006 no RSUs were outstanding. As of
September 30, 2006, 3,138,624 RSUs were outstanding and
unvested, with an aggregate intrinsic value of
$156.9 million and a weighted average remaining contractual
life of approximately 9.37 years. These RSUs are expected
to vest through March 2009.
Basic net income per weighted average share is computed using
the weighted average number of common shares outstanding during
the applicable period. Diluted net income per weighted average
share is computed using the weighted average number of common
shares outstanding during the period, plus the dilutive effect
of potential common stock. Potential common stock consists of
stock options, DSUs, RSUs, unvested restricted common stock and
convertible notes.
15
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
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
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported, basic
|
|
$
|
14,019
|
|
|
$
|
272,260
|
|
|
$
|
36,778
|
|
|
$
|
302,239
|
|
Add back of interest expense on
1% convertible senior notes
|
|
|
710
|
|
|
|
1,325
|
|
|
|
2,131
|
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income
|
|
$
|
14,729
|
|
|
$
|
273,585
|
|
|
$
|
38,909
|
|
|
$
|
304,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per common share
|
|
|
155,739
|
|
|
|
139,204
|
|
|
|
154,753
|
|
|
|
132,125
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
7,813
|
|
|
|
7,697
|
|
|
|
8,925
|
|
|
|
7,150
|
|
Restricted common stock,
restricted stock units and deferred stock units
|
|
|
566
|
|
|
|
148
|
|
|
|
667
|
|
|
|
116
|
|
Assumed conversion of 5
1/2% convertible
subordinated notes
|
|
|
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
Assumed conversion of
1% convertible senior notes
|
|
|
12,945
|
|
|
|
12,945
|
|
|
|
12,945
|
|
|
|
12,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per common share
|
|
|
177,063
|
|
|
|
160,362
|
|
|
|
177,290
|
|
|
|
152,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.09
|
|
|
$
|
1.96
|
|
|
$
|
0.24
|
|
|
$
|
2.29
|
|
Diluted net income per common share
|
|
$
|
0.08
|
|
|
$
|
1.71
|
|
|
$
|
0.22
|
|
|
$
|
2.00
|
|
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
|
|
For the
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Stock options
|
|
|
112
|
|
|
|
5,869
|
|
|
|
295
|
|
|
|
6,700
|
|
Additionally, for each of the three and nine months ended
September 30, 2006, 2,335,203 shares issuable in
respect of restricted stock units have been excluded from the
computation of diluted net income per share because the
performance conditions had not been met as of September 30,
2006.
16
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
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
14,019
|
|
|
$
|
272,260
|
|
|
$
|
36,778
|
|
|
$
|
302,239
|
|
Other comprehensive income, net of
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(211
|
)
|
|
|
(148
|
)
|
|
|
331
|
|
|
|
(693
|
)
|
Unrealized gain (loss) on
investments
|
|
|
703
|
|
|
|
(43
|
)
|
|
|
310
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
492
|
|
|
|
(191
|
)
|
|
|
641
|
|
|
|
(798
|
)
|
Income tax expense related to
items of other comprehensive income
|
|
|
(219
|
)
|
|
|
|
|
|
|
(290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
14,292
|
|
|
$
|
272,069
|
|
|
$
|
37,129
|
|
|
$
|
301,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the periods presented, accumulated other comprehensive
income, net consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Foreign currency translation
adjustment
|
|
$
|
1,268
|
|
|
$
|
937
|
|
Net unrealized loss on investments
|
|
|
(156
|
)
|
|
|
(466
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income, net
|
|
$
|
1,112
|
|
|
$
|
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 Company acquired Speedera because Akamai believed it would
enable the Company 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 valued
at the date of closing at $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 Akamais management and, with respect to
identified intangible assets, by Akamais 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; a trained
technical workforce in place in the United States and India; an
existing sales pipeline and a trained sales force; and cost
synergies expected 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 10).
17
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Goodwill
and Other Intangible Assets
|
The Company recorded goodwill and 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 other intangible assets of
$43.2 million as a result of the acquisition of Speedera.
During the three months ended September 30, 2006, the
Company made a purchase accounting adjustment to reflect the
deferred tax assets and liabilities recorded as a result of
filing the final pre-acquisition income tax return for Speedera.
As a result, the Company increased its net deferred tax assets
by $1.1 million mainly due to an increase in the federal
and state research and development credits, which resulted in a
reduction of goodwill.
The change in the carrying amount of goodwill recorded as a
result of the Speedera acquisition during the three and nine
months ended September 30, 2006 was as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Ending balance, December 31,
2005
|
|
$
|
98,519
|
|
Adjustment to purchase price
allocations
|
|
|
(172
|
)
|
|
|
|
|
|
Ending balance, March 31, 2006
|
|
$
|
98,347
|
|
Adjustment to purchase price
allocations
|
|
|
(43
|
)
|
|
|
|
|
|
Ending balance, June 30, 2006
|
|
$
|
98,304
|
|
Adjustment to purchase price
allocations
|
|
|
(1,127
|
)
|
|
|
|
|
|
Ending balance, September 30,
2006
|
|
$
|
97,177
|
|
|
|
|
|
|
The Company reviews goodwill and other intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amounts 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 fair value of 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 to that date.
Other intangible assets subject to amortization consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Completed technology
|
|
$
|
1,000
|
|
|
$
|
(798
|
)
|
|
$
|
202
|
|
Customer relationships
|
|
|
40,900
|
|
|
|
(10,110
|
)
|
|
|
30,790
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
(565
|
)
|
|
|
735
|
|
Acquired license rights
|
|
|
490
|
|
|
|
(387
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,690
|
|
|
$
|
(11,860
|
)
|
|
$
|
31,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2006 and
2005 was $1.9 million and $2.3 million, respectively.
For the nine months ended September 30, 2006 and 2005
aggregate expense related to amortization of other intangible
assets was $6.4 million and $2.8 million,
respectively. Aggregate expense related to amortization of other
intangible assets is expected to be $2.0 million for the
remainder of fiscal 2006 and $7.4 million,
$6.1 million, $4.8 million and $4.1 million for
fiscal years 2007, 2008, 2009 and 2010, respectively.
|
|
11.
|
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 September 30, 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.
|
|
12.
|
Restructurings
and Lease Terminations
|
As of September 30, 2006, the Company had approximately
$2.1 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 September 30, 2006,
approximately $900,000 in payments were charged against the
severance accrual.
19
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
The following table summarizes the restructuring activity for
the nine months ended September 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Severance
|
|
|
Total
|
|
|
Ending balance, December 31,
2005
|
|
$
|
2.3
|
|
|
$
|
1.3
|
|
|
$
|
3.6
|
|
Cash payments during the nine
months ended September 30, 2006
|
|
|
(1.1
|
)
|
|
|
(0.4
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30,
2006
|
|
$
|
1.2
|
|
|
$
|
0.9
|
|
|
$
|
2.1
|
|
Current portion of accrued
restructuring liabilities
|
|
$
|
1.2
|
|
|
$
|
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of accrued
restructuring liabilities
|
|
$
|
|
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the restructuring activity for
the nine months ended September 30, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Severance
|
|
|
Total
|
|
|
Ending balance, December 31,
2004
|
|
$
|
3.6
|
|
|
$
|
|
|
|
$
|
3.6
|
|
Accrual recorded in purchase
accounting
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Cash payments during the nine
months ended September 30, 2005
|
|
|
(1.0
|
)
|
|
|
(0.4
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30,
2005
|
|
$
|
2.6
|
|
|
$
|
1.4
|
|
|
$
|
4.0
|
|
Current portion of accrued
restructuring liabilities
|
|
$
|
1.4
|
|
|
$
|
0.4
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of accrued
restructuring liabilities
|
|
$
|
1.2
|
|
|
$
|
1.0
|
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects that 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
During the three months ended September 30, 2005, the
Company redeemed an aggregate of $56.6 million in principal
amount of its remaining outstanding
51/2% convertible
subordinated notes due 2007 (the
51/2% convertible
subordinated notes) for total cash payments of
$58.1 million. The purchase price was $1,015.71 for each
$1,000 in principal amount of
51/2% convertible
subordinated notes repurchased. The Company recorded the
outstanding deferred financing costs relating to these
repurchased notes and premium paid of $481,000 and $889,000,
respectively, for the three months ended September 30,
2005, to loss on early extinguishment of debt. For the three and
nine months ended September 30, 2005, amortization of
deferred financing costs of the Companys
51/2% convertible
subordinated notes was approximately $44,000 and $175,000,
respectively. As of December 31, 2005, all of the
51/2% convertible
subordinated notes were fully redeemed by the Company and no
longer outstanding.
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. As of September 30, 2006, the carrying
amount and fair value of the 1% convertible senior notes were
$200.0 million and $326.9 million, respectively. 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
20
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
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 unsecured indebtedness of Akamai.
The 1% convertible senior notes rank senior to all of the
Companys subordinated indebtedness. Deferred financing
costs of $5.9 million, which consisted of 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
September 30, 2006 and 2005. For each of the nine-month
periods ended September 30, 2006 and 2005, amortization of
deferred financing costs of the 1% convertible senior notes
was approximately $631,000. Using the interest method, the
Company records the amortization of deferred financing costs as
interest expense in the condensed consolidated statement of
operations.
|
|
14.
|
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
September 30, 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
September 30, 2006, the Company had $57.4 million and
$14.5 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
each of the three- and nine-month periods ended
September 30, 2006, approximately 22% of revenues was
derived from the Companys operations outside the United
States, including 18% from Europe during each of such periods.
For the three- and nine-month periods ended September 30,
2005, approximately 20% and 21%, respectively, of revenues was
derived from the Companys operations outside the United
States, including 15% and 16%, respectively, 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- and nine-month periods ended September 30, 2006 and
September 30, 2005, no customer accounted for more than 10%
of total revenues.
At September 30, 2005, the Company released a significant
portion of its United States and foreign deferred tax asset
valuation allowance. At September 30, 2006, a valuation
allowance of $6.9 million remained, which relates to
certain state net operating losses (NOLs), that the
Company expects will expire without being utilized.
The Companys effective tax rate, including discrete items,
was 44.6% and 45.2% for the three and nine months ended
September 30, 2006, respectively. For the three and nine
months ended September 30, 2005, the effective tax rate,
not including the discrete tax benefit of $255.3 million
from the release of the valuation allowance, was (0.9)% and 2%,
respectively. The effective income tax rate is based upon the
estimated income for the year, and 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 dispositions of incentive stock options and shares
purchased under the 1999 ESPP as required by
SFAS No. 123(R)
21
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
and adjustments, if any, for the potential tax consequences,
benefits or resolutions for tax audits. For the three and nine
months ended September 30, 2006, the effective tax rate
varied from the statutory tax rate mainly due to the effects of
accounting for stock-based compensation in accordance with
SFAS No. 123(R). For the three and nine months ended
September 30, 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
September 30, 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 tax liability or benefit resulting from these matters
may be materially 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 transition method, no adjustment is made to the
deferred tax balances associated with stock-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 carryforwards.
|
|
16.
|
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 expected
minimum aggregate future obligations under non-cancelable leases
as of September 30, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
|
Remaining 2006
|
|
$
|
2,200
|
|
2007
|
|
|
8,304
|
|
2008
|
|
|
6,629
|
|
2009
|
|
|
4,195
|
|
2010
|
|
|
2,106
|
|
Thereafter
|
|
|
713
|
|
|
|
|
|
|
Total
|
|
$
|
24,147
|
|
|
|
|
|
|
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 $52,000,
$208,000, $208,000 and $87,000 for the remainder of 2006 and for
the years ending December 31, 2007, 2008 and 2009,
respectively.
Purchase
Commitments
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 ending
December 31, 2007, 2008 and 2009, the minimum commitments
pursuant to contracts currently in effect are approximately
$5.3 million,
22
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
$8.6 million, $3.9 million and $156,000, respectively.
The Company had an equipment purchase commitment of
approximately $500,000 as of September 30, 2006. This
purchase commitment expires in August 2007 in accordance with
the terms of the applicable agreement. Additionally, as of
September 30, 2006, the Company had entered into purchase
orders with various vendors for aggregate purchase commitments
of $2.9 million, which are expected to be paid during the
remainder of 2006.
Litigation
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.
Guarantees
The Company has identified guarantees in accordance with FASB
Interpretation 45 (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 that the Company would be
required to satisfy the liability associated with the guarantee
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 obligations in its financial statements. The
fair value of the Companys guarantees issued or modified
during the three months ended September 30, 2006 was
determined to be immaterial.
23
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This quarterly report on
Form 10-Q,
including 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,
continues, goal, 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. We have
structured these contracts with the goal of having a consistent
and predictable base level of income, which we consider
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 functionalities our existing 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
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
22.4
|
|
|
|
20.2
|
|
|
|
21.6
|
|
|
|
19.7
|
|
Research and development expense
|
|
|
7.9
|
|
|
|
6.5
|
|
|
|
8.0
|
|
|
|
6.5
|
|
Sales and marketing expense
|
|
|
26.4
|
|
|
|
26.2
|
|
|
|
28.2
|
|
|
|
27.3
|
|
General and administrative expense
|
|
|
22.0
|
|
|
|
19.2
|
|
|
|
21.4
|
|
|
|
18.8
|
|
Amortization of other intangible
assets
|
|
|
1.7
|
|
|
|
3.0
|
|
|
|
2.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and operating expenses
|
|
|
80.4
|
|
|
|
75.1
|
|
|
|
81.3
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19.6
|
|
|
|
24.9
|
|
|
|
18.7
|
|
|
|
26.3
|
|
Interest income
|
|
|
4.3
|
|
|
|
1.1
|
|
|
|
4.1
|
|
|
|
1.1
|
|
Interest expense
|
|
|
(0.8
|
)
|
|
|
(1.8
|
)
|
|
|
(0.8
|
)
|
|
|
(2.3
|
)
|
Other (expense) income, net
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.4
|
)
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
(0.7
|
)
|
(Loss) gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
22.7
|
|
|
|
22.3
|
|
|
|
22.1
|
|
|
|
24.0
|
|
Provision (benefit) for income
taxes
|
|
|
10.1
|
|
|
|
(337.4
|
)
|
|
|
10.0
|
|
|
|
(126.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.6
|
%
|
|
|
359.7
|
%
|
|
|
12.1
|
%
|
|
|
150.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We were profitable for the fiscal year 2005 and for the nine
months ended September 30, 2006; however, we cannot
guarantee continued profitability or profitability at the levels
we have recently experienced for any period in
24
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 three quarters 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 three quarters 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 these periods. We believe that our overall bandwidth
costs will continue to increase as a result of expected higher
traffic levels, partially offset by the reductions in bandwidth
costs per unit that we have realized and may continue to realize
in the future. 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 and in 2007.
|
|
|
|
During each of the first three quarters 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 prior years if our customer base continues to grow.
|
|
|
|
During the quarter ended September 30, 2006, revenues
derived from customers outside the United States accounted for
22% 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 and in 2007.
|
|
|
|
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 three and nine months
ended September 30, 2006, our pre-tax equity-compensation
expense was $14.5 million and $34.8 million,
respectively, as compared to $1.4 million and
$2.3 million for the three and nine months ended
September 30, 2005, respectively. We expect that
equity-based compensation expense will continue at the current
rate, or slightly increase in the future, because we have a
significant number of unvested employee awards outstanding and
plan to continue to grant equity-based compensation in the
future. As of September 30, 2006, our total unrecognized
compensation costs for equity-based awards were
$97.7 million, which we expect to recognize as expense over
a weighted average period of 1.5 years.
|
|
|
|
Depreciation expense related to our network equipment increased
during the third quarter of 2006 as compared to the first and
second quarters of 2006 as we have increased our purchases of
servers in an effort to expand our network and improve the
quality of our services. We expect this trend to continue during
the remainder of 2006 and in 2007; accordingly, we believe that
depreciation expense related to our network will continue to
increase, on a quarterly basis, during those periods. In
addition, we expect to continue to enhance and add functionality
to our service offerings and, therefore, to increase the amount
of our capitalized internal-use software costs, which includes
equity-related compensation expense attributable to employees
working on such projects. As a result, we believe that the
amortization of internal-use software development costs, which
we include in cost of revenues, will increase on a quarterly
basis during the fourth quarter of 2006 and in 2007.
|
|
|
|
During the nine months ended September 30 2006, our
effective tax rate, including discrete items, was 45.2%. While
we expect our annual effective tax rate to remain relatively
constant on a quarterly basis during the fourth quarter of 2006
and in 2007, we do not expect to make significant cash tax
payments due to the continued utilization of our deferred tax
assets.
|
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 future results will
25
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 generating positive net
income in 2006 or 2007.
Critical
Accounting Policies and Estimates
Overview
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
for interim periods. 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 at the time
made and 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
Since January 1, 2006, we have accounted for stock-based
compensation in accordance with SFAS No. 123(R).
Historically, we recognized stock option costs pursuant to
Accounting Principles Bulletin No. 25,
Accounting for Stock Issued to Employees, and
elected to disclose the impact of expensing stock options
pursuant to Statement of Financial Accounting Standards
No. 123, Share-Based Payment in the notes to
our financial statements. (See Note 6 to the Financial
Statements included in this quarterly report on
Form 10-Q).
Under the fair value recognition provisions of
SFAS No. 123(R), 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
stock-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
of adjustments to the calculation of such assumptions based upon
the guidance of SFAS No. 123(R) and Staff Accounting
Bulletin No. 107, Share-Based Payment.
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 forfeiture rates
differ significantly from our estimates, our stock-based
compensation expense and results of operations could be
materially impacted.
Results
of Operations
Revenues. Total revenues increased 47%, or
$35.8 million, to $111.5 million for the three months
ended September 30, 2006 as compared to $75.7 million
for the three months ended September 30, 2005. For the nine
months ended September 30, 2006, total revenues increased
51%, or $102.5 million, to $303.0 million as compared
to $200.5 million for the nine months ended
September 30, 2005. The increase in total revenues for the
three months
26
ended September 30, 2006 as compared to the same period in
the prior year was primarily attributable to an increase in
service revenue of $35.5 million. Service revenue, which
consists of revenue from our content and application delivery
services, increased 47% for the three months ended
September 30, 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 an increase in traffic
and additional services sold to new and existing customers and
increases in the average revenue per customer. The increase in
total revenues for the nine months ended September 30, 2006
as compared to the same period in the prior year was primarily
attributable to an increase in service revenue of
$103.4 million. Our delivery of streaming services for a
number of high-profile media events during the nine months ended
September 30, 2006 also contributed to higher service
revenue. Also contributing to the increase in service revenue
for the nine months ended September 30, 2006 were revenues
generated through the acquisition of Speedera. As of
September 30, 2006, we had approximately 2,100 customers
under recurring revenue contracts as compared to approximately
1,800 as of September 30, 2005.
For the three months ended September 30, 2006, software and
software-related revenues increased $0.2 million, or 214%,
as compared to the same period in the prior year. For the nine
months ended September 30, 2006, software and
software-related revenues decreased $0.9 million, or 54%,
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 nine month 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 September 30, 2006 and 2005, 22%
and 20%, respectively, of our total revenues were derived from
our operations located outside of the United States, including
18% and 15%, respectively, derived from Europe. For the nine
months ended September 30, 2006 and 2005, 22% and 21%,
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.
For the three and nine months ended September 30, 2006,
resellers accounted for 20% and 22%, respectively, of total
revenues, as compared to 24% of revenues for each of the three
and nine months ended September 30, 2005. For each of the
three and nine month periods ended September 30, 2006 and
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 63%, or $9.7 million, to
$25.0 million for the three months ended September 30,
2006 as compared to $15.3 million for the three months
ended September 30, 2005. For the nine months ended
September 30, 2006, cost of revenues increased 66%, or
$25.9 million, to $65.5 million as compared to
$39.6 million for the nine months ended September 30,
2005. These increases were primarily due to an increase in
amounts paid to network providers due to higher traffic levels,
partially offset by reduced bandwidth costs per unit, and an
increase in depreciation expense of network equipment as we
continued to invest in our infrastructure. Additionally, during
the three and nine months ended September 30, 2006, cost of
revenues includes equity-related compensation expense of
$517,000 and $1.3 million, respectively, resulting from our
adoption of SFAS No. 123(R).
Cost of revenues during the three- and nine-month periods ended
September 30, 2006 also included credits received of
approximately $450,000 and $1.3 million, respectively, from
settlements and renegotiations entered into in connection with
billing disputes related to bandwidth contracts. During the
three and nine months ended September 30, 2005, cost of
revenues included similar credits of approximately $326,000 and
$916,000, respectively. Credits of this nature may occur in the
future; however, the timing and amount of future credits, if
any, will vary.
27
Cost of revenues is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Bandwidth, co-location and storage
fees
|
|
$
|
15.7
|
|
|
$
|
9.9
|
|
|
$
|
41.0
|
|
|
$
|
25.4
|
|
Payroll and related costs of
network operations personnel
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
4.3
|
|
|
|
2.8
|
|
Stock-based compensation
|
|
|
0.5
|
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
Cost of software licenses
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.6
|
|
Depreciation and impairment of
network equipment and amortization of internal-use software and
stock-based compensation
|
|
|
7.3
|
|
|
|
4.4
|
|
|
|
18.9
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
25.0
|
|
|
$
|
15.3
|
|
|
$
|
65.5
|
|
|
$
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 under
agreements currently in effect are approximately
$5.3 million, $8.6 million, $3.9 million and
$156,000, respectively.
We expect that cost of revenues will increase on a quarterly
basis during the fourth quarter of 2006 and in 2007. 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 anticipate 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 expect to continue to make
investments in our network to service our expanding customer
base. Cost of revenues is also expected to increase as a result
of expensing employee stock awards at fair value in accordance
with SFAS No. 123(R). The 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,
network and software. Research and development costs are
expensed as incurred, except certain internal-use software
development costs requiring capitalization. During the three and
nine months ended September 30, 2006, we capitalized
software development costs of $2.8 million and
$8.3 million, respectively, net of impairments. During the
three and nine months ended September 30, 2005, we
capitalized software development costs of $2.2 million and
$6.4 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
and nine months ended September 30, 2006, we capitalized
$1.1 million and $2.8 million, respectively, 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.
28
Research and development expenses increased 79%, or
$3.9 million, to $8.9 million for the three months
ended September 30, 2006, as compared to $5.0 million
for the three months ended September 30, 2005. For the nine
months ended September 30, 2006, research and development
expenses increased 83%, or $10.9 million, to
$24.0 million, as compared to $13.1 million for the
nine months ended September 30, 2005. The increase in
research and development expenses in the three- and nine-month
periods ended September 30, 2006 as compared to the same
periods in the prior year 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 net increase in research and development expenses
for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
30, 2006
|
|
|
30, 2006
|
|
|
|
as Compared
|
|
|
as Compared
|
|
|
|
to 2005
|
|
|
to 2005
|
|
|
Payroll and related costs
|
|
$
|
1.5
|
|
|
$
|
3.9
|
|
Stock-based compensation
|
|
|
2.7
|
|
|
|
7.7
|
|
Capitalized salaries and other
expenses
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
3.9
|
|
|
$
|
10.9
|
|
|
|
|
|
|
|
|
|
|
We believe that research and development expenses will continue
to increase on a quarterly basis in the fourth quarter of 2006
and in 2007, as we anticipate continued increases in 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-based compensation at fair value in
accordance with the 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 49%, or
$9.6 million, to $29.4 million for the three months
ended September 30, 2006, as compared to $19.8 million
for the three months ended September 30, 2005. For the nine
months ended September 30, 2006, sales and marketing
expenses increased 56%, or $30.5 million, to
$85.4 million, as compared to $54.9 million for the
nine months ended September 30, 2005. The increase in sales
and marketing expenses in the three- and nine-month periods
ended September 30, 2006 as compared to the same periods in
the prior year was primarily due to higher payroll and related
costs, particularly commissions for sales and marketing
personnel, due to revenue growth. Additionally, during the three
and nine months ended September 30, 2006, marketing and
related costs increased as compared to the same periods in 2005
due to an increase in stock-based compensation expense as a
result of the adoption of SFAS No. 123(R), offset by a slight
reduction in advertising and promotional costs. The following
table quantifies the net increase in sales and marketing
expenses for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
30, 2006
|
|
|
30, 2006
|
|
|
|
as Compared
|
|
|
as Compared
|
|
|
|
to 2005
|
|
|
to 2005
|
|
|
Payroll and related costs
|
|
$
|
5.4
|
|
|
$
|
18.2
|
|
Stock-based compensation
|
|
|
4.5
|
|
|
|
12.0
|
|
Marketing and related costs
|
|
|
|
|
|
|
(0.4
|
)
|
Other expenses
|
|
|
(0.3
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
9.6
|
|
|
$
|
30.5
|
|
|
|
|
|
|
|
|
|
|
We believe that sales and marketing expenses will continue to
increase on a quarterly basis during the remainder of 2006 and
in 2007 due to an expected increase in commissions on higher
forecasted sales, the expected increase in hiring of sales and
marketing personnel, and anticipated increases in other
marketing costs such as
29
advertising. Additionally, sales and marketing expenses are
expected to increase as a result of expensing employee
stock-based compensation at fair value in accordance with the
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, stock-based compensation and other related costs,
including related expenses for executive, finance, business
applications, internal network management, human resources and
other administrative personnel;
|
|
|
|
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 68%, or
$10.0 million, to $24.5 million for the three months
ended September 30, 2006 as compared to $14.6 million
for the three months ended September 30, 2005. For the nine
months ended September 30, 2006, general and administrative
expenses increased 72%, or $27.2 million, to
$64.9 million as compared to $37.7 million for the
nine months ended September 30, 2005. The increase in
general and administrative expenses in both the three and nine
months ended September 30, 2006 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 slight reduction in provision for
doubtful accounts. The following table quantifies the net
increase in general and administrative expenses for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September
|
|
|
Ended September
|
|
|
|
30, 2006
|
|
|
30, 2006
|
|
|
|
as Compared
|
|
|
as Compared
|
|
|
|
to 2005
|
|
|
to 2005
|
|
|
Payroll and related costs
|
|
$
|
2.1
|
|
|
$
|
7.8
|
|
Stock-based compensation
|
|
|
5.4
|
|
|
|
11.5
|
|
Non-income taxes
|
|
|
0.4
|
|
|
|
3.1
|
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
0.9
|
|
Facilities and related costs
|
|
|
0.3
|
|
|
|
0.8
|
|
Consulting and advisory services
|
|
|
0.5
|
|
|
|
0.1
|
|
Provision for doubtful accounts
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
Other expenses
|
|
|
1.2
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
10.0
|
|
|
$
|
27.2
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2006,
we capitalized software development costs of approximately
$129,000 and $712,000, respectively, consisting of external
consulting costs and payroll and payroll-related costs for
personnel involved in the development of internally-used
software applications. During the three and nine months ended
September 30, 2005, we capitalized approximately $322,000
and $525,000, respectively, of similar software development
costs. 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 on a quarterly basis due to
anticipated 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 and 2006. Additionally,
general and administrative expenses are expected to increase as
a result of expensing stock-based compensation at fair value in
accordance with the 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
30
other intangible assets decreased 15%, or $353,000, to
$1.9 million for the three months ended September 30,
2006 as compared to $2.3 million for the three months ended
September 30, 2005. For the nine months ended
September 30, 2006, amortization of intangible assets
increased 128%, or $3.6 million, to $6.4 million, as
compared to $2.8 million for the nine months ended
September 30, 2005. The increase in amortization of other
intangible assets during the nine months ended
September 30, 2006 as compared to the same period in the
prior year was due to the amortization of intangible assets from
the acquisition of Speedera in June 2005. We expect to amortize
approximately $2.0 million of intangible assets 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 491%, or
$4.0 million, to $4.8 million for the three months
ended September 30, 2006 as compared to $816,000 for the
three months ended September 30, 2005. For the nine months
ended September 30, 2006, interest income increased 457%,
or $10.1 million, to $12.4 million as compared to
$2.2 million for the nine months ended September 30,
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 38%, or
$527,000, to $856,000 for the three months ended
September 30, 2006 as compared to $1.4 million for the
three months ended September 30, 2005. For the nine months
ended September 30, 2006, interest expense decreased 47%,
or $2.2 million, to $2.4 million as compared to
$4.6 million for the nine months ended September 30,
2005. The decrease in interest expense in the three- and nine-
month periods ended September 30, 2006 compared to the same
periods in the prior year was a result of our redemption of our
51/2% convertible
subordinated notes. We believe that interest expense on our debt
obligations, including deferred financing amortization, will not
exceed $3.2 million in the aggregate for fiscal year 2006.
Loss on Early Extinguishment of Debt. During
the three and nine months ended September 30, 2005, we
recorded a loss on early extinguishment of debt of
$1.4 million as a result of our redemption of our remaining
51/2% convertible
subordinated notes. This loss of $1.4 million consists of a
reduction of $480,000 of deferred financing costs associated
with repurchases of notes prior to their maturity and $890,000
in premiums above par value paid to repurchase such notes. There
have been no similar losses recorded in 2006.
Other (Expense) Income, net. Other (expense)
income, net primarily represents net foreign exchange gains and
losses incurred. Other expense, net for the three months ended
September 30, 2006 increased to $448,000 as compared to
$63,000 for the three months ended September 30, 2005.
Other income, net for the nine months ended September 30,
2006 was $213,000 as compared to other expense, net of $712,000
for the nine months ended September 30, 2005. Theses
changes during the three and nine months ended
September 30, 2006 as compared to prior periods were due to
exchange rate fluctuations. Additionally, during the nine months
ended September 30, 2005, other expense, net includes
$518,000 of gains on legal settlements. Other (expense) income,
net may fluctuate in the future based upon movements in foreign
exchange rates or other events.
(Loss) Gain on Investments, net. During the
nine months ended September 30, 2006, we recorded a net
gain on investments of $259,000, on the sale of marketable
securities. During each of the three and nine months ended
September 30, 2005, we recorded a loss from the sale of
marketable securities of $27,000. We do not expect significant
gains or losses on investments for the remainder of 2006.
Provision (Benefit) for Income Taxes. During
the three and nine months ended September 30, 2006, our
effective tax rate including discrete items was 44.6% and 45.2%,
respectively. For the three and nine months ended
September 30, 2005, the effective tax rate, not including
the discrete tax benefit of $255.3 million from the release
of the deferred tax asset valuation allowance, was (0.9)% and
2%, respectively. The effective income tax rate is based upon
the estimated income for the year, and the composition of the
income in different countries. At September 30, 2005, we
released a significant portion of our United States and foreign
deferred tax asset valuation allowance, which was the primary
factor in the increase in our effective tax rate between the
third quarter of 2005 and 2006. At September 30, 2006, we
had a $6.9 million valuation allowance, which relates to
certain state net operating losses, or NOLs, that we expect will
expire without being utilized.
31
While we expect our annual effective tax rate for the fourth
quarter of 2006 and in 2007 to remain relatively consistent,
this expectation does not take into consideration the effect of
discrete 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 other
employee stock options.
Because of the availability of the NOLs, 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 NOLs 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, among other things, 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:
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private sales of capital stock and subordinated notes in 1998
and 1999, which notes were repaid in 1999;
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an initial public offering of our common stock in October 1999,
generating net proceeds of $217.6 million after
underwriters discounts and commissions;
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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;
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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;
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the public offering of 12 million shares of our common
stock in November 2005, which generated net proceeds of
$202.1 million; and
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cash generated by operations.
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As of September 30, 2006, cash, cash equivalents and
marketable securities totaled $416.1 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
$109.4 million for the nine months ended September 30,
2006 compared to $55.1 million for the nine months ended
September 30, 2005. The increase in cash provided by
operating activities was primarily due to an increase in service
revenue during the nine months ended September 30, 2006, as
well as increases in accounts payable and accrued expenses. 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 $140.9 million for
the nine months ended September 30, 2006 compared to
$5.8 million for the nine months ended September 30,
2005. Cash used in investing activities for the nine months
ended September 30, 2006 reflects net purchases of short-
and long-term investments of $94.4 million and capital
expenditures of $46.9 million, consisting of the
capitalization of internal-use software development costs
related to our current and future service offerings and
purchases 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 nine months ended September 30, 2005 reflects net
sales and maturities of investments of $20.3 million and
$1.7 million of cash acquired through the Speedera
acquisition, offset by capital expenditures of
$28.1 million. For
32
fiscal year 2006, we expect capital expenditures, a component of
cash used in investing activities, to be slightly higher as a
percentage of revenues than in fiscal year 2005.
Cash provided by financing activities was $38.3 million for
the nine months ended September 30, 2006, as compared to
cash used in financing activities of $49.3 million for the
nine months ended September 30, 2005. Cash provided by
financing activities during the nine months ended
September 30, 2006 includes $19.6 million related to
excess tax benefits resulting from the exercise of stock options
and proceeds of $18.7 million from the issuance of common
stock upon exercises of stock options. Cash used in financing
activities for the nine months ended September 30, 2005
reflects $7.7 million in proceeds received from the
issuance of common stock upon exercises of stock options under
our equity compensation plans, offset by repurchases of
$56.6 million in principal amount of our outstanding
51/2% convertible
subordinated notes and payments on capital lease obligations of
$398,000.
Changes in cash, cash equivalents and marketable securities are
dependent upon changes in, among other things, working capital
items such as deferred revenues, accounts payable, accounts
receivable and various accrued expenses, as well as changes in
our capital and financial structure due to debt repurchases and
issuances, stock option exercises, sales of equity investments
and similar events.
The following table represents the net inflows and outflows of
cash, cash equivalents and marketable securities for the periods
presented (in millions):
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For the
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For the
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Nine Months
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Nine Months
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Ended September
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Ended September
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30, 2006
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30, 2005
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Cash, cash equivalents and
marketable securities balance as of December 31, 2005 and
2004, respectively
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$
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314.1
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$
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108.4
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Changes in cash, cash equivalents
and marketable securities:
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Receipts from customers
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301.3
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193.4
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Payments to vendors
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(142.0
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)
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(100.7
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)
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Payments for employee payroll
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(91.9
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)
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(66.0
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)
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Debt repurchases
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(58.1
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)
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Debt interest and premium payments
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(1.0
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)
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(4.1
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)
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Stock option exercises
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18.7
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7.7
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Cash acquired in business
acquisition
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3.9
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Interest income
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12.3
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2.2
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Other
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4.6
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(0.2
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)
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Net increase (decrease)
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102.0
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(21.9
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)
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Cash, cash equivalents and
marketable securities balance as of September 30, 2006 and
2005, respectively
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$
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416.1
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$
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86.5
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We believe, based on our present business plan, that our current
cash, cash equivalents and marketable securities 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 any 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.
33
Contractual
Obligations and Commercial Commitments
The following table presents our contractual obligations and
commercial commitments, as of September 30, 2006 over the
next five years and thereafter (in millions):
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Payments Due by Period
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Less
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More
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than
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than
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Contractual Obligations
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12
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12-36
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36-60
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60
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as of September 30, 2006
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Total
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Months
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Months
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Months
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Months
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1% convertible senior notes
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$
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200.0
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$
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$
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$
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$
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200.0
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Interest on 1% convertible
senior notes
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55.0
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2.0
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4.0
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4.0
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45.0
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Bandwidth and co-location
agreements
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17.9
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12.5
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5.4
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Real estate operating leases
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24.2
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8.8
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12.0
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3.4
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Vendor equipment purchase
obligations
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0.5
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0.5
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Open vendor purchase orders
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2.9
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2.9
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Total
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$
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300.5
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$
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26.7
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$
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21.4
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$
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7.4
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|
$
|
245.0
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Letters
of Credit
As of September 30, 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 $3.1 million are classified
as long-term marketable securities and $1.1 million are
classified as short-term marketable securities on the condensed
consolidated balance sheet at September 30, 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 also
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 nine months ended
September 30, 2006 was determined to be immaterial. As of
September 30, 2006, we did 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.
34
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109, or FIN No. 48.
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN No. 48
prescribes a two-step process to determine the amount of tax
benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained
upon external examination. If the tax position is deemed
more-likely-than-not to be sustained, the tax position is then
assessed to determine the amount of benefit to recognize in the
financial statements. The amount of the benefit that may be
recognized is the largest amount that has a greater than
50 percent likelihood of being realized upon ultimate
settlement. FIN No. 48 will effective for us beginning
in 2007. We are currently evaluating the potential impact of
FIN No. 48 on our financial position and results of
operations.
In September 2006, the Securities and Exchange Commission, or
the SEC, released Staff Accounting Bulletin No. 108,
which we refer to as SAB 108. SAB 108 expresses the
SEC staffs views regarding the process of quantifying
financial statement misstatements. These interpretations were
issued to address diversity in practice and the potential under
current practice for the build up of improper amounts on the
balance sheet. SAB 108 expresses the SEC staffs view
that a registrants materiality evaluation of an identified
unadjusted error should quantify the effects of the error on
each financial statement and related financial statement
disclosures and that prior year misstatements should be
considered in quantifying misstatements in current year
financial statements. SAB 108 also states that correcting
prior year financial statements for immaterial errors would not
require previously filed reports to be amended. Such correction
may be made the next time the registrant files the prior year
financial statements. Registrants electing not to restate prior
periods should reflect the effects of initially applying the
guidance in SAB 108 in their annual financial statements
covering the first fiscal year ending after November 15,
2006. The cumulative effect of the initial application should be
reported in the carrying amounts of assets and liabilities as of
the beginning of that fiscal year and the offsetting adjustment
should be made to the opening balance of retained earnings for
that year. Registrants should disclose the nature and amount of
each individual error being corrected in the cumulative
adjustment. The disclosure should also include when and how each
error arose and the fact that the errors had previously been
considered immaterial. The SEC staff encourages early
application of the guidance in SAB 108 for interim periods
of the first fiscal year ending after November 15, 2006. We
do not expect the implementation of SAB 108 to have a
material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, which we refer to as SFAS 157.
SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements but may change current practice for some entities.
SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods
within those years. We do not expect the implementation of
SAB 157 to have a material impact on our financial
statements.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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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
September 30, 2006, the carrying amount and fair value of
the 1% convertible senior notes were $200.0 million
and $326.9 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,
35
which may increase our exposure to foreign exchange
fluctuations. We do not have any foreign currency hedge
contracts.
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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
September 30, 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 September 30,
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
September 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
PART II.
OTHER INFORMATION
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|
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 September 30,
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. We have, however,
provided information regarding long-term debt outstanding as of
September 30, 2006 instead of December 31, 2005 in the
risk factor captioned Any failure to meet our debt
obligations would damage our business. In addition, we
have added stock-based compensation costs as an example of items
as to which we must make judgments or estimates in the risk
factor captioned 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.
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
36
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 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:
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failure to increase sales of our core services;
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significant increases in bandwidth costs or other operating
expenses;
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inability to maintain our prices;
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any failure of our current and planned services and software to
operate as expected;
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loss of any significant customers or loss of existing customers
at a rate greater than we increase our number of new customers
or our sales to existing customers;
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unauthorized use or access to content delivered over our network
or network failures;
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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
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inability to attract high-quality customers to purchase and
implement our current and planned services.
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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 and our net income and net income per share is
significantly reduced. Previously, we recorded stock-based
compensation expense only in connection with option grants that
have an exercise price below fair market value.
37
For option grants that have an exercise price at fair market
value, we calculated compensation expense and disclosed its
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) required us to adopt the new
accounting provisions beginning in our first quarter of 2006,
and requires us to expense stock-based awards, including shares
issued under our employee stock purchase plan, stock options,
restricted stock, deferred stock units and restricted stock
units, as compensation cost. As a result, our earnings per share
is likely to be significantly lower in the future even if our
revenues increase.
If we
are unable to develop new services and enhancements to existing
services, and 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, loss of market share, revenues and earnings.
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 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.
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 operations. 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, future acquisitions could require use of substantial
portions of our available cash or, as in the Speedera
acquisition, dilutive issuances of securities. Future
acquisitions or attempted acquisitions could also have an
adverse effect on our ability to remain profitable.
38
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.
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 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.
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, stock-based compensation costs,
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 and at the time they are
made. 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.
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.
39
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.
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.
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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.
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.
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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40
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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 September 30, 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 long-term debt obligations,
which would result in all principal and interest becoming due
and payable which, in turn, would seriously harm our business.
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.
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.
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 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.
41
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 operations 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 Securities
Exchange Act of 1934, as amended. 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.
We may
become involved in other litigation that may adversely affect
us.
In the ordinary course of business, we are or 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.
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Item 5.
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Other
Information
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None
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.
42
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.
Akamai Technologies, Inc.
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By:
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/s/ J.
Donald Sherman
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J. Donald Sherman,
Chief Financial Officer
November 9, 2006
43
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 10.32@
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Summary of Registrants
Compensatory Arrangements with Non-Employee Directors
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Exhibit 10.38@
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Amendment to Employment Agreement
dated August 9, 2006 between the Registrant and Paul Sagan
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Exhibit 10.39@
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Akamai Technologies, Inc. Policy
on Departing Director Compensation
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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. |
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(F) |
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Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed with the Commission on May 26, 2006. |
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@ |
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Management contract or compensatory plan or arrangement. |
44
Exhibit 10.32
SUMMARY OF COMPENSATION FOR THE EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS
AND THE NON-EMPLOYEE MEMBERS OF THE BOARD OF DIRECTORS
OF AKAMAI TECHNOLOGIES, INC. ("AKAMAI" OR THE "COMPANY")
REVISED AS OF SEPTEMBER 2006
The Executive Chairman and each non-employee director are issued a number
of deferred stock units ("DSUs") having a value of $120,000 based on the closing
sale price of Akamai's common stock on the date of its annual meeting of
stockholders. In addition, Akamai's Executive Chairman and its Lead Director are
entitled to $40,000 of additional compensation, of which $20,000 is paid in cash
and $20,000 is paid in DSUs. Chairs of the Audit Committee and the Compensation
Committee are entitled to $25,000 in additional compensation, of which $5,000 in
paid in cash and $20,000 is paid in DSUs. The Chair of the Nominating and
Corporate Governance Committee is entitled to $10,000 of additional
compensation, of which $5,000 is paid in cash and $5,000 is paid in DSUs. Each
non-employee director is eligible to receive fair market value options to
purchase 25,000 shares of its common stock when he or she joins the Board of
Directors. Akamai also reimburses directors for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors.
Under the terms of the Company's Policy on Non-Employee Director
Compensation Payable Upon Departure From the Board, upon a non-employee
director's departure from the Board, such director, if he or she has completed
one year of Board service, will receive a cash payment equal to the pro-rated
annual cash retainer payable to such director under Akamai's non-employee
director compensation plan and 100% of the unvested shares underlying deferred
stock units held by such director will accelerate at the time of departure and
become exercisable in full. In addition, if a director has completed three years
of Board service at the time of departure, 100% of the unvested options
initially granted to such director upon joining the Board will accelerate at the
time of departure and become exercisable in full.
EXHIBIT 10.38
July 18, 2006
Mr. Paul Sagan
[address]
Re: Amendment to Employment Agreement
Dear Paul:
In accordance with Section 9 of your January 4, 2005 Employment Agreement
with Akamai Technologies, Inc. (the "Company"), the following sets forth an
amendment thereto.
Section 5, second paragraph, is hereby amended in its entirety to read as
follows:
5. Termination of Employment.
If you terminate your employment for "Good Reason" following a
"Change of Control" as those terms are defined in the Initial Option
Agreement and any Additional Option Agreement (together, the "Option
Agreements"), in addition to any rights you have under the Option Agreements,
vesting of all outstanding unvested options held by you as of the termination
date shall automatically accelerate in full. You shall also be entitled to
lump sum cash payments equal to: two (2) years of your then-current
annualized base salary and an award equal to two (2) times your
then-applicable annual incentive bonus at target. For purposes of this
paragraph 5, "bonus at target" shall be as set forth in the terms of the
then-applicable annual incentive bonus plan. Provisions in restricted stock
unit agreements you have entered into with the Company that relate to the
effect of a termination of employment are not amended by this Section 5 and
shall continue in effect.
Except as set forth herein, the terms of the Employment Agreement, as
previously amended, remain in full force and effect, without amendment. Please
sign below to indicate your acceptance of the terms of this amendment to your
Employment Agreement.
Very truly yours,
AKAMAI TECHNOLOGIES, INC.
By: /s/ George H. Conrades
-------------------------------------------
George H. Conrades, Executive Chairman
I accept the foregoing amendment to my Employment Agreement with the
Company.
/s/ Paul Sagan
------------------------------------------------
Paul Sagan
Date: August 9, 2006
EXHIBIT 10.39
AKAMAI TECHNOLOGIES, INC.
POLICY ON DIRECTOR COMPENSATION PAYABLE UPON DEPARTURE FROM THE BOARD
Adopted September 20, 2006
Upon the departure from the Board of Directors of a non-employee Director
who is in good standing at the time of his or her departure(1), such Director
shall be entitled to the cash payments and accelerated vesting of equity awards
as set forth below:
Annual Cash Retainer
The Director will receive a cash payment equal to the annual cash retainer
payable to the Director under Akamai's non-employee director compensation plan
pro-rated based on the number of months lapsed since the most recent annual
meeting of the company's stockholders.
Equity Compensation Vesting
If the Director has completed one year of Board service at the time of
departure, 100% of the unvested deferred stock units (or similar full-value
equity awards granted to him or her) held by the Director shall vest as of the
time of departure and become distributable in accordance with their terms or the
Director's prior election.
If the Director has completed three years of Board service at the time of
departure, 100% of the unvested options initially granted to such Director upon
joining the Board shall vest as of the time of departure and become exercisable
in full.
- -----------------
(1) A Director shall be considered to be in good standing unless a majority of
the Board of Directors otherwise so determines on or about the time of
such Director's departure.
exv31w1
Exhibit 31.1
CERTIFICATION OF CHIEF EXCECUTIVE 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; |
|
|
b) |
|
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) |
|
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) |
|
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. 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):
|
a) |
|
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 |
|
|
b) |
|
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: November 9, 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. |
|
I have reviewed this Quarterly Report on Form 10-Q of Akamai Technologies, Inc.; |
|
2. |
|
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; |
|
3. |
|
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; |
|
4. |
|
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: |
|
a) |
|
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; |
|
|
b) |
|
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. |
|
|
c) |
|
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 |
|
|
d) |
|
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. 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):
|
a) |
|
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 |
|
|
b) |
|
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. |
|
|
|
|
|
|
|
|
Date: November 9, 2006 |
/s/ J. Donald Sherman
|
|
|
J. Donald Sherman, Chief Financial Officer |
|
|
|
|
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 September 30, 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.
|
|
|
|
|
|
|
|
|
/s/ Paul Sagan
|
|
Dated: November 9, 2006 |
Paul Sagan |
|
|
Chief Executive Officer |
|
|
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
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 September 30, 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.
|
|
|
|
|
|
|
|
|
/s/ J. Donald Sherman
|
|
Dated: November 9, 2006 |
J. Donald Sherman |
|
|
Chief Financial Officer |
|
|
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.