Akamai Technologies Inc.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended March 31, 2002.

or

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

Commission file number 0-27275

Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)






Delaware (State or other jurisdiction of incorporation or organization)		04-3432319 (I.R.S. Employer Identification Number)

500 Technology Square

Cambridge, MA 02139

(617) 444-3000

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

Area Code, of Registrant’s Principal Executive Offices)

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

The number of shares outstanding of the registrant’s common stock as of May 8, 2002: 116,003,251 shares.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
	SIGNATURES

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2002

TABLE OF CONTENTS


		Page

PART I. Financial Information




	Item 1. Financial Statements		2




	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13




	Item 3. Quantitative and Qualitative Disclosures About Market Risk		28




PART II. Other Information




	Item 1. Legal Proceedings		29




	Item 6. Exhibits and Reports on Form 8-K		29




	Signatures		30

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AKAMAI TECHNOLGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
			2002			2001


			(In thousands, except share and
			per share data)
			(Unaudited)




Assets




Current assets:




	Cash and cash equivalents		$	63,809		$	78,774




	Marketable securities, including restricted securities of $8,710 and $11,166 at March 31, 2002 and December 31, 2001, respectively			100,313			113,906




	Accounts receivable, net of allowance for doubtful accounts of $2,523 and $3,832 at March 31, 2002 and December 31, 2001, respectively			17,294			20,067




	Prepaid expenses and other current assets			16,543			15,252

		Total current assets		197,959			227,999




Property and equipment, net				114,717			132,237




Marketable securities, including restricted securities of $7,603 and $17,831 at March 31, 2002 and December 31, 2001, respectively				7,603			17,831




Goodwill, net (Note 7)				4,938			3,979




Other intangible assets, net (Note 7)				9,166			15,372




Other assets				16,422			24,060

		Total assets	$	350,805		$	421,478

Liabilities and Stockholders’ (Deficit) Equity




Current liabilities:




	Accounts payable		$	28,209		$	32,076




	Accrued expenses			24,753			27,986




	Accrued interest payable			4,125			8,250




	Deferred revenue			5,335			4,948




	Current portion of obligations under capital lease and equipment loan			172			405




	Current portion of accrued restructuring (Note 10)			15,892			17,633

		Total current liabilities		78,486			91,298




Obligations under capital leases and equipment loan, net of current portion				79			113




Accrued restructuring, net of current portion (Note 10)				4,025			10,010




Other liabilities				3,096			2,823




Convertible notes				300,000			300,000

		Total liabilities		385,686			404,244

Contingencies (Note 11)				—			—




Stockholders’ (deficit) equity:




	Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at March 31, 2002 and December 31, 2001			—			—




	Common stock, $0.01 par value; 700,000,000 shares authorized; 115,722,889 shares issued and outstanding at March 31, 2002; 115,099,317 shares issued and outstanding at December 31, 2001			1,157			1,151




	Additional paid-in capital			3,437,867			3,438,706




	Deferred compensation			(30,801	)		(38,888	)




	Notes receivable from officers for stock			(3,374	)		(3,342	)




	Accumulated other comprehensive loss			(794	)		(515	)




	Accumulated deficit			(3,438,936	)		(3,379,878	)

		Total stockholders’ (deficit) equity		(34,881	)		17,234

		Total liabilities and stockholders’ (deficit) equity	$	350,805		$	421,478

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



			For the Three Months
			Ended March 31,

			2002			2001


			(In thousand, except
			per share data)
			(Unaudited)




Revenue:




	Service		$	34,917		$	32,264




	License			464			3,500




	Service and license from related parties (Note 8)			2,546			4,445

		Total revenue		37,927			40,209

Cost and operating expenses:




	Cost of service (excludes $11,807 and $9,312, respectively, of network-related depreciation included in depreciation below and excludes $155 and $72, respectively, of equity-related compensation disclosed separately below)			11,242			18,834




	Research and development (excludes $1,519 and $1,398, respectively, of equity-related compensation disclosed separately below)			4,869			11,284




	Sales and marketing (excludes $2,156 and $1,557, respectively, of equity-related compensation disclosed below)			14,856			24,328




	General and administrative (excludes $2,541 and $1,487, respectively, of equity-related compensation disclosed separately below)			13,966			22,622




	Depreciation			20,010			16,452




	Amortization of goodwill			—			234,639




	Amortization of other intangible assets			5,237			4,299




	Impairment of goodwill			—			1,912,840




	Equity-related compensation			6,371			4,514




	Restructuring charge (Note 10)			12,409			—

		Total cost and operating expenses		88,960			2,249,812

Loss from operations				(51,033	)		(2,209,603	)




Interest (expense) income, net				(3,574	)		581




Loss on investments (Note 6)				(4,328	)		(13,594	)

Loss before provision for income taxes				(58,935	)		(2,222,616	)




Provision for income taxes				123			164

		Net loss	$	(59,058	)	$	(2,222,780	)

Basic and diluted net loss per share			$	(0.54	)	$	(22.50	)

Weighted average common shares outstanding				109,693			98,780

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the Three Months
				Ended March 31,

				2002			2001


				(In thousands)
				(Unaudited)




Cash flows from operating activities:




	Net loss			$	(59,058	)	$	(2,222,780	)




	Adjustments to reconcile net loss to net cash used in operating activities:




		Depreciation, amortization and impairment of long-lived assets			26,838			2,168,968




		Equity-related compensation			6,371			4,514




		Interest income on notes receivable from officers for stock			(32	)		(81	)




		Loss on investments and disposal of property and equipment			4,438			13,594




		Changes in operating assets and liabilities:




			Accounts receivable, net		2,585			(3,195	)




			Prepaid expenses and other current assets		(1,439	)		(1,639	)




			Accounts payable, accrued expenses and other current liabilities		(12,463	)		(7,824	)




			Deferred revenue		537			1,666




			Other noncurrent assets and liabilities		(3,746	)		2,994

Net cash used in operating activities					(35,969	)		(43,783	)

Cash flows from investing activities:




	Additions to property and equipment				(2,789	)		(24,330	)




	Purchase of investments				—			(41,490	)




	Proceeds from the sale of property and equipment				189			—




	Proceeds from sales and maturities of investments				23,473			91,189

Net cash provided by investing activities					20,873			25,369

Cash flows from financing activities:




	Payments on capital leases and equipment financing loan				(267	)		(328	)




	Proceeds from the issuance of common stock under stock option and employee stock purchase plans				403			2,757

Net cash provided by financing activities					136			2,429

Effects of exchange rate translation on cash and cash equivalents					(5	)		1

Net decrease in cash and cash equivalents					(14,965	)		(15,984	)




Cash and cash equivalents, beginning of period					78,774			150,130

Cash and cash equivalents, end of period				$	63,809		$	134,146

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

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business:

Akamai Technologies, Inc. (“Akamai” or the “Company”) is a leading provider of secure, outsourced, e-business infrastructure services and software. These services and software enable enterprises to reduce the complexity and cost of deploying and operating a uniform Internet Protocol, or IP, infrastructure while ensuring unmatched performance, reliability, scalability and manageability. Akamai’s services provide its commercial customers a competitive advantage by providing a superior experience for their end user customers without the need to manage and deploy a complex internal infrastructure. Akamai’s intelligent edge platform for content, streaming media, and application delivery is comprised of more than 12,500 servers within over 1,000 networks in 66 countries. The Company was incorporated in Delaware in 1998 and has its corporate headquarters at 500 Technology Square, Cambridge, Massachusetts. Akamai operates in one business segment: outsourced e-business infrastructure services and software.

2. Basis of Presentation and Principles of Consolidation:

The accompanying interim condensed consolidated financial statements, together with the related notes, are unaudited and reflect all adjustments, consisting only of normal recurring adjustments, that in the opinion of management are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of the dates and for the periods presented. The interim condensed consolidated financial statements have been prepared in accordance with 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, 2001 for additional disclosures. Results of the interim periods are not necessarily indicative of results for the entire year.

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

3. Recent Accounting Pronouncements:

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” effective in January 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles to goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The Company adopted SFAS No. 142 in January 2002. See Note 7 for further discussion.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which will be effective in January 2003. SFAS No. 143 addresses financial accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has not yet completed its assessment of the potential impact on its financial statements of adopting SFAS No. 143.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective in January 2002. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business,

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” During the three months ended March 31, 2002, the Company recorded an impairment loss of $2.3 million related to other intangible assets in accordance with SFAS No. 144. See Note 7 for further discussion.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds several statements, including SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” The statement also makes several technical corrections to other existing authoritative pronouncements. SFAS No. 145 is effective in May 2002, except for the rescission of SFAS No. 4, which is effective in January 2003. The Company does not expect the adoption of SFAS No. 145 to have a significant impact on its consolidated financial statements.

4. Net Loss per Share:

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of stock options, warrants, unvested restricted common stock, convertible notes and contingently issuable common stock.

The following table sets forth the components of potential common stock excluded from the calculation of diluted net loss per share since their inclusion would be antidilutive:



	As of March 31,

	2002		2001

Stock options		13,832,361		17,109,160




Warrants		1,052,694		1,052,694




Unvested restricted common stock		4,587,507		9,167,672




Convertible notes		2,598,077		2,598,077




Contingently issuable common stock (Note 11)		2,500,000		1,167,883

5. Comprehensive Loss:

The following table presents the calculation of comprehensive loss and its components for the three months ended March 31, 2002 and 2001 (in thousands):



		For the Three Months
		Ended March 31,

		2002			2001

Net loss		$	(59,058	)	$	(2,222,780	)




Other comprehensive income (loss):




	Foreign currency translation adjustment		12			—




	Unrealized loss on investments		(291	)		(2,636	)




	Reclassification adjustment for investment losses included in net loss		—			8,637

Comprehensive loss		$	(59,337	)	$	(2,216,779	)

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated other comprehensive loss consists of (in thousands):


		As of			As of
		March 31,			December 31,

		2002			2001

Foreign currency translation adjustment		$	(438	)	$	(450	)




Unrealized loss on investments			(356	)		(65	)

	Total accumulated other comprehensive loss	$	(794	)	$	(515	)

6. Loss on Investments:

For the three months ended March 31, 2002, the Company recorded a loss of $4.3 million related to its investment in Netaxs, Inc. (“Netaxs”). In April 2002, FASTNET Corporation (“FASTNET”) acquired all of the outstanding capital stock of Netaxs in a merger transaction. As a result of the merger, the Company received total consideration of $278,000 in cash and FASTNET common stock in exchange for the Company’s equity holdings in Netaxs. In addition, prior to the completion of the merger, the Company settled the amounts due under an outstanding subordinated note issued by Netaxs for $400,000 in cash. The aggregate carrying amount of the investment and subordinated note prior to the sale was $5.0 million. As a result of the exchange of stock in the merger transaction and the settlement of the subordinated note, the Company recognized a loss of $4.3 million, which has been included in loss on investments in the statement of operations for the three months ended March 31, 2002. See Note 8 for further discussion.

For the three months ended March 31, 2001, the Company recorded a loss of $9.0 million to adjust the cost basis of its investments to fair value. Loss on investments for the three months ended March 31, 2001 also includes a realized loss of $2.7 million on the sale of an equity holding in a private company and $1.8 million of losses on investments accounted for under the equity method.

7. Goodwill and Other Intangible Assets:

The Company adopted SFAS No. 142 in January 2002. Prior to the adoption, the carrying amount of goodwill was $4.0 million. In accordance with the provisions of SFAS No. 142, the Company reclassified its assembled workforce intangible assets of $969,000 to goodwill. The Company has concluded that it currently has one reporting unit and has assigned the entire balance of goodwill to this reporting unit for purposes of performing a transitional impairment test as of January 1, 2002. The fair value of the reporting unit was determined using the Company’s market capitalization as of January 2, 2002. The fair value on January 2, 2002 exceeded the net assets of the reporting unit, including goodwill. Accordingly, the Company concluded that no impairment existed as of that date. Unless changes in events or circumstances indicate that an impairment test is required, the Company will next test goodwill for impairment on January 1, 2003.

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reconciles reported net loss to adjusted net loss, which excludes amortization of goodwill and assembled workforce, for the three months ended March 31, 2001 (in thousands, except loss per share amounts):


			For the Three Months
			Ended March 31, 2001

Reported net loss			$	(2,222,780	)




	Goodwill amortization			234,639




	Assembled workforce amortization			1,486

Adjusted net loss			$	(1,986,655	)

Basic and diluted net loss per share:




	Reported net loss per share		$	(22.50	)




		Goodwill amortization per share		2.38

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