Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.

OR

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 0-27275

AKAMAI TECHNOLOGIES, INC.

500 Technology Square

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 

     The number of shares outstanding of the registrant’s common stock as of May 4, 2001: 109,074,489 shares.

Table of Contents

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

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

2

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

3

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

4

Table of Contents

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Business:

      Akamai Technologies, Inc. (“Akamai” or the “Company”) was formed in August 1998 and is a provider of global content delivery services. Akamai’s services improve the speed, quality, reliability and scalability of Web sites by delivering customers’ Internet content, streaming media and applications through a distributed worldwide network of servers that locate content and applications geographically closer to users.

2.  Basis of Presentation and Principles of Consolidation:

      The accompanying interim consolidated financial statements, together with the related notes, are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, that in the opinion of management are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of the dates and for the periods presented. The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Consequently, these interim financial statements do not include all disclosures normally required by generally accepted accounting principles for annual financial statements. Accordingly, reference should be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 for additional disclosures. Results of the interim periods are not necessarily indicative of results for the entire year.

      The interim consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made to conform with current period presentation.

3.  Recent Accounting Pronouncements:

      In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which replaces Statement of Financial Accounting Standards No. 125 (“SFAS 125”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125’s provisions without reconsideration. SFAS 140 is effective for transfers and servicing of assets and extinguishments of liabilities occurring after March 31, 2001. The Company does not believe that the adoption of SFAS 140 will have a significant impact on its financial position, results of operations or cash flows.

4.  Net Loss per Share:

      In accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of stock options, warrants, unvested restricted common stock, convertible subordinated notes and contingently issuable common stock. All potential common stock has been excluded from diluted net loss per share as its inclusion would be anti-dilutive for all periods presented.

5

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table sets forth potential common stock excluded from the calculation of earnings per share:

5.  Comprehensive Loss:

      The following table presents the calculation of comprehensive loss and its components for the three months ended March 31, 2001 and 2000 (in thousands):

6.  Loss on Investments:

      In accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company reviews its investment holdings for reductions in market value below cost basis that, in the opinion of the Company, represent a permanent or other-than-temporary impairment. As of March 31, 2001, the Company had determined that the market value of certain of its equity investments had declined below cost for a period of time that was other than temporary. The Company considered all available evidence to evaluate the realizable value of these investments, including the length of time and extent to which the market value had been less than the cost basis and the financial condition of the issuer. Accordingly, the Company recorded a loss of $9.0 million in the consolidated statement of operations for the three months ended March 31, 2001 to adjust the cost basis of the investments to fair value as of March 31, 2001. Loss on investments also includes a realized loss of $2.7 million on an exchange of an equity holding in a private company as a result of its merger with an unrelated company.

7.  Impairment of Goodwill:

      In accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” the Company reviews goodwill and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may exceed their fair value. The Company considers several factors in determining whether an impairment may have occurred, including the Company’s market capitalization compared to its book value per share, the overall business climate and current estimates for operating results of acquired businesses. A review of these factors as of March 31, 2001 indicated that an impairment

6

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assessment was required for long-lived assets of acquired businesses. The Company grouped all long-lived assets for acquired businesses, including goodwill and other intangible assets, and estimated the future discounted cash flows related to these long-lived assets. The discount rate used was based on the risks associated with the acquired businesses. As a result of this analysis, the Company recorded an impairment charge of $1,912.8 million for the three months ended March 31, 2001 to adjust the carrying amount of goodwill arising from the acquisitions of Network24 Communications, Inc. and InterVU Inc. (“InterVu”) to its fair value as of March 31, 2001.

8.  Related Party Transactions:

      (a)  In the fourth quarter of 2000, Akamai formed Arriva! Networks, Inc. (“Arriva”) as a wholly-owned subsidiary and contributed certain technology in exchange for all outstanding capital stock of Arriva. Arriva provides Internet traffic management services. On January 8, 2001, Akamai deconsolidated Arriva concurrently with the sale by Arriva of a majority interest to outside investors in return for $28 million in cash. Akamai received no cash proceeds from Arriva’s sale of its capital stock, and Akamai’s equity interest in Arriva was reduced to approximately 40%. In addition, Akamai entered into a five-year renewable license agreement with Arriva for additional technology that requires Arriva to pay to Akamai a minimum monthly license fee of $1 million plus royalties based on the level of Arriva’s revenues derived from using the technology. In the first quarter of 2001, licensing fees payable by Arriva to Akamai were $2.2 million. This amount is included as accounts receivable on the consolidated balance sheet as of March 31, 2001. In addition, during the three months ended March 31, 2001, Arriva paid Akamai $2.2 million for technology development work performed by Akamai.

      Subsequent to the deconsolidation, Akamai has adopted the equity method to account for its investment in Arriva in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” For the three months ended March 31, 2001, Akamai’s share of Arriva’s losses were $1.8 million, which is recorded in equity in losses of affiliate on the consolidated statement of operations.

      (b)  In the first quarter of 2001, the Company invested $5.0 million in a company in which a senior manager of Akamai holds a minority ownership interest. The investment has been recorded in other assets on the consolidated balance sheet. Akamai purchased approximately $360,000 of bandwidth and co-location space from this company during the three months ended March 31, 2001.

9.  Contingencies:

      The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. Management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

      On September 13, 2000, the Company, together with the Massachusetts Institute of Technology, filed suit in Massachusetts federal court against Digital Island, Inc. for infringing an MIT patent licensed exclusively to Akamai (the “Massachusetts Action”). On September 19, 2000, that suit was amended to include a count seeking a declaratory judgment that Akamai did not infringe a Digital Island patent. The Company is seeking monetary damages and injunctive relief. On September 19, 2000, Digital Island filed suit against the Company in federal court in California alleging infringement of the same patent (the “California Action”). The California Action was dismissed in March 2001 and will be heard with the suit filed by the Company against Digital Island. The Massachusetts Action has also been amended to include a count that Digital Island infringes a patent the Company acquired as a result of its acquisition of InterVu. The case is set for trial in September 2001. Digital Island is seeking monetary damages and injunctive relief. The Company intends to aggressively defend against the allegation that it infringes Digital Island’s patent.

7

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On September 21, 2000, the Company filed a lawsuit against Digital Island in federal court in California for false advertising, unfair competition, intentional interference with contractual relationships and intentional interference with business advantage. Akamai is seeking damages and injunctive relief. On October 26, 2000, Digital Island filed a counterclaim against the Company alleging that distribution of certain marketing materials and statements constituted false advertising, unfair competition, intentional interference with contractual relationships and intentional interference with business advantage. Digital Island is seeking monetary damages and injunctive relief. Akamai intends to aggressively defend the counterclaim and to prosecute vigorously the false advertising suit that it had previously filed against Digital Island.

      Although the Company cannot be assured that it will prevail in these actions, it believes that it has meritorious defenses to the claims asserted by Digital Island. The Company does not believe that the resolution of these claims will have a material adverse effect on its financial condition or results of operation.

      In January 2000, a former employee of InterVu filed an action against InterVu alleging that InterVu had breached two restricted stock purchase agreements by failing to deliver certain shares of stock after the employee’s resignation. The plaintiff sought specific performance and monetary damages. A bench trial was held in March 2001, and in April 2001 the court ruled in favor of the plaintiff. The court directed the plaintiff to prepare a Statement of Decision but has yet to assess damages. Although the exact amount of damages is not determinable at this time, the Company has accrued a reasonable estimate of the potential loss, which has been included in the purchase price allocation of InterVu. The Company is considering an appeal of the trial court’s decision in this case.

      In October 2000, a former employee of InterVu filed an action against InterVu and the Company, as InterVu’s successor-in-interest, alleging breach of contract and breach of fiduciary duty. The plaintiff asserts that he is entitled to stock options that he claims should have vested upon his resignation from InterVu in November 1999. The Company believes that the plaintiff’s assertions against the Company are without merit; however, given the inherent uncertainty of litigation, there can be no assurance that the Company will prevail in this action.

10.  Subsequent Events:

  Exchange Offer

      In April 2001, the Company communicated to its employees an offer to exchange (the “Exchange Offer”) certain employee stock options having an exercise price of more than $13 per share previously granted to them in return for restricted shares of Akamai common stock at an exchange ratio of two options for one share of restricted stock. Certain options granted in February 2001 were eligible to be exchanged at a ratio of one option for two shares of restricted stock. Employees who accepted the Exchange Offer with respect to any of their stock options were required to exchange any option granted to them after November 3, 2000 (whether or not the exercise price of any such option was more than $13 per share) and to forfeit certain options granted to them in October 2000. Until the restricted stock vests, such shares are subject to forfeiture for up to three years in the event the employee leaves the Company. Generally, 25% of the shares vest after six months and the remaining 75% of the shares vest quarterly thereafter until the third anniversary date of the effective date of the Exchange Offer. The Company filed the Exchange Offer as a tender offer with the Securities and Exchange Commission in accordance with Rule 13e-4 of the Securities Exchange Act of 1934, as amended, on April 4, 2001. The Exchange Offer was effective on May 5, 2001, and the Company accepted all options tendered.

      In accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25,” the Company will record approximately $36 million as deferred compensation for the intrinsic value of the restricted stock on the effective date the Exchange Offer, calculated using the closing price of the Company’s common stock on Friday, May 4, 2001.

8

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The deferred compensation will be amortized to equity-related compensation expense over the vesting period of the restricted stock. The Company does not intend to grant options during the six-month period following the effective date of the Exchange Offer to employees who participate in the Exchange Offer. Accordingly, the Company does not expect that the Exchange Offer will require variable plan accounting.

  Akamai Technologies Japan KK

      In April 2001, Akamai and SOFTBANK Broadmedia Corporation (“SBBM”), a subsidiary of SOFTBANK Group, formed a joint venture to create Akamai Technologies Japan KK (“Akamai Japan”). Akamai Japan will act as the exclusive provider of Akamai’s services in Japan. Akamai Japan is owned 60% by SBBM and 40% by Akamai. Akamai Japan’s board of directors is comprised of five seats, three of which are controlled by SBBM and two of which are controlled by Akamai. Akamai will account for its investment in Akamai Japan using the equity method in accordance with APB 18 and related interpretations. Akamai will resell its services through Akamai Japan.

  Restructuring

      In April 2001, management approved and committed the Company to a restructuring plan (the “Restructuring Plan”). As a result of the Restructuring Plan, the Company expects to record a restructuring charge of approximately $20 million to $23 million for the three months ended June 30, 2001. The Restructuring Plan includes involuntary terminations and the consolidation and subleasing of certain excess office space. The Restructuring Plan was approved in response to changes in the general economic environment and is intended to improve productivity per employee by consolidating operations and reducing employee head count. In April 2001, the Company communicated severance arrangements to approximately 150 affected employees, which represented approximately 12% of the Company’s employee base and included employees from all areas of the Company. In accordance with EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” the Company will record a restructuring charge of approximately $2 million in the three months ended June 30, 2001 to reflect the cost of the severance arrangements. Also as part of the Restructuring Plan, the Company will either vacate or delay occupancy of certain excess office space that it leases under long-term, non-cancelable leases. The Company will record a restructuring charge of approximately $18 million to $21 million for the three months ended June 30, 2001 to reflect the estimated amount of rent due under these leases, less anticipated sublease income.

9

Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those indicated in such forward-looking statements as a result of certain factors including, but not limited to, those set forth under the heading “Factors Affecting Future Operating Results.”

Overview

      Akamai provides global Internet content delivery services. We were formed in August 1998 and began selling our services commercially in April 1999. We market our services worldwide through a direct sales force and a reseller channel. Our services improve the speed, quality, availability, reliability and scalability of Web sites and deliver our customers’ Internet content, streaming media and applications through a distributed worldwide network of over 9,700 servers in 56 countries, which locates content geographically closer to users.

      For each of the quarters ended March 31, 2001 and 2000, over 90% of our revenue was derived from customers located in the United States. For the quarter ended March 31, 2001, one customer, Arriva! Networks, Inc., or Arriva, accounted for 11% of total revenue. For the same period in the prior year, one customer, Apple Computer, accounted for 21% of total revenue. No other customer accounted for more than 10% of revenue for these periods. In April 2001, we re-signed Apple Computer to a one-year contract. We do not expect that revenue from Apple Computer will exceed 10% of total revenue for the current fiscal year.

      Although our revenue has consistently increased from quarter to quarter, we have incurred significant costs to develop our technology, build out our worldwide network, sell and market our services and support our operations. We have also incurred significant amortization expense from the acquisition of businesses. Since our inception, we have incurred significant losses and negative cash flows from operations. We have not achieved profitability on a quarterly or annual basis, and we anticipate that we will continue to incur net losses in the future. We believe that our success is dependent on increasing our customer base, developing new services and expanding our worldwide network. In order to achieve these goals, we expect to incur significant sales, marketing, engineering and development and general and administrative costs in the future. In addition, we will incur significant non-cash expenses in the future, including the amortization of deferred compensation and goodwill and other intangible assets.

Arriva! Networks, Inc.

      As described in Note 8 to our interim consolidated financial statements included in this Form 10-Q, we deconsolidated Arriva in January 2001. At that time, we adopted the equity-method of accounting for our investment in Arriva. We have a five-year renewable agreement with Arriva under which Arriva will license from Akamai certain technology to be used in its products and services. Also during the three months ended March 31, 2001, we entered into a development agreement with Arriva under which Akamai agreed to develop a specific component of additional technology that will be integrated by Arriva into its products and services. For the three months ended March 31, 2001, we recognized a total of $4.4 million of revenue derived from the agreements with Arriva.

Akamai Technologies Japan KK

      As described in Note 10 to our interim consolidated financial statements included in this Form 10-Q, in April 2001, Akamai and SOFTBANK Broadmedia Corporation, a subsidiary of SOFTBANK Group, formed a joint venture to create Akamai Technologies Japan KK. The joint venture will act as the exclusive provider of our services in the Japanese market. We own a 40% interest in the joint venture.

10

Table of Contents

Restructuring

      In April 2001, management approved and committed us to a restructuring plan, which we refer to as the Restructuring Plan. The Restructuring Plan includes involuntary employee terminations and the consolidation and subleasing of certain excess office space. The Restructuring Plan was approved in response to changes in the general economic environment and is intended to improve productivity per employee by consolidating operations and reducing employee head count. In April 2001, we communicated severance arrangements to approximately 150 affected employees, which represented approximately 12% of our employee base and included employees from all areas of our company. In accordance with EITF 94-3, we will record a restructuring charge of approximately $2 million in the three months ended June 30, 2001 to reflect the cost of the severance arrangements. As a result of the severance arrangements, we expect annual savings of approximately $15 million on salaries and benefits. Also as part of the Restructuring Plan, we will either vacate or delay occupation of certain excess office space that we lease under long-term, non-cancelable leases. We will record a restructuring charge of approximately $18 million to $21 million for the three months ended June 30, 2001 to reflect the estimated amount of rent due under these leases, less anticipated sublease income over the next three years.

Results of Operations

      Revenue. We derive revenue primarily from the sale of our services under contracts with typical terms of 12 to 24 months. We also provide streaming services on an individual live-event basis. In addition, we recognize revenue from licensed technology, streaming-related services, interactive portal fees, and professional services. During the quarter ended March 31, 2001, we recognized revenue under a technology license and a technology development agreement with Arriva, an affiliate of Akamai. See Note 8 to our interim consolidated financial statements included in this Form 10-Q for further discussion of Arriva.

      We recognize revenue from our content delivery and streaming services as the services are provided based on the amount of data delivered through our network, including minimum monthly usage commitments. We record installation and set-up fees as deferred revenue and recognize these fees ratably over the life of the customer contract. We recognize revenue from licensed technology when delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured and a written license agreement has been signed by us and our customer. We recognize revenue from streaming-related services, such as encoding and production, when the services are performed. We recognize revenue from our interactive portal based on monthly contracted fees paid by our portal technology partners for their participation in the portal. We recognize revenue from professional services when these services are performed.

      From time to time, we purchase products or services from our customers in transactions negotiated at or about the same time as sales to these customers. We record all elements of these transactions at fair value, as determined by similar historical transactions for cash or other consideration that is readily convertible to cash. The amount of revenue recognized from these transactions was less than 10% of total revenue for all periods presented.

      Revenue increased 457% to $40.2 million for the three months ended March 31, 2001 compared to $7.2 million for the same period in 2000. Revenue increased primarily due to the significant growth of our content provider customer base, the introduction of new services and an increase in license revenue. Resellers accounted for 19% and 6% of total revenue for the respective periods. We expect revenue to increase in the future as we add new customers and introduce new services.

      Cost of Revenue. Cost of revenue consists primarily of fees paid to network providers for bandwidth and monthly fees for housing our servers in third-party network data centers. We include the depreciation on our network equipment used to deliver our services under the heading “Depreciation” on the consolidated statement of operations included in this Form 10-Q. Cost of revenue also includes network storage costs; live event costs including costs for production, encoding and signal acquisition; and cost of professional services. We enter into contracts for bandwidth with third-party network providers with terms typically ranging from

11

Table of Contents

      Cost of revenue, excluding network-related depreciation, increased 221% to $16.2 million for the three months ended March 31, 2001 compared to $5.0 million for the same period in 2000. Cost of revenue increased primarily due to increased bandwidth costs as we expanded our network and increased content provided over our network. Gross margins were 59.8% for the three months ended March 31, 2001 compared to 30.4% in the same period in 2000. Gross margins increased in the three months ended March 31, 2001 due to a decline in the ratio of bandwidth costs to our content-delivery prices and an increase in licensing revenue.

      Engineering and Development. Engineering and development expenses consist primarily of salaries and payroll-related expenses and costs related to the design, development, testing, deployment and enhancement of our services and our network. To date, we have expensed engineering and development costs as incurred. We believe that product development is critical to our future objectives and we intend to continue to enhance our technology to meet the challenging requirements of market demand. Engineering and development expenses increased 169% to $18.6 million for the three months ended March 31, 2001 compared to $6.9 million for the same period in 2000. Engineering and development expenses increased in the current period primarily due to increased personnel and payroll-related expenses as a result of increased headcount.

      Sales, General and Administrative. Sales, general and administrative expenses consist primarily of salaries and related personnel costs for marketing, sales, operations and finance personnel, sales commissions, fees for professional services, advertising costs, and rent expense for leased properties. Sales, general and administrative expenses increased 111% to $42.3 million for the three months ended March 31, 2001 compared to $20.0 million for the same period in 2000. Sales, general and administrative expenses increased in the current period primarily due to increased personnel and payroll-related expenses, as a result of increased head count, and increased sales commissions.

      Depreciation. Depreciation expense consists of depreciation of our network equipment and of internal-use property and equipment. Depreciation increased 437% to $16.5 million for the three months ended March 31, 2001 compared to $3.1 million for the same period in 2000. Depreciation increased primarily due to the expansion of our network. We expect deprecia