AKAMAI TECHNOLOGIES, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.

or

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

Commission file number 0-27275

Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)


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

8 Cambridge Center

Cambridge, MA 02142

(617) 444-3000

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

of Registrant’s Principal Executive Offices)

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

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

The number of shares outstanding of the registrant’s common stock as of May 6, 2004: 122,945,616 shares.

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

For the quarterly period ended March 31, 2004

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 2.	Changes in Securities and Use of Proceeds		27
Item 6.	Exhibits and Reports on Form 8-K		27
Signatures			28

PART I. FINANCIAL INFORMATION


Item 1.	*Consolidated Financial Statements*

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			December 31,
			2004			2003


			(In thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	132,853		$	160,074
	Restricted cash			—			5,000
	Marketable securities (including restricted securities of $826 and $726 at March 31, 2004 and December 31, 2003, respectively)			7,493			4,910
	Accounts receivable, net of allowance for doubtful accounts of $1,001 and $1,241 at March 31, 2004 and December 31, 2003, respectively			24,505			20,727
	Prepaid expenses and other current assets			9,206			11,705

		Total current assets		174,057			202,416
Property and equipment, net				20,879			23,878
Marketable securities (including restricted securities of $3,922 at March 31, 2004 and December 31, 2003)				36,702			38,371
Goodwill				4,937			4,937
Other intangible assets, net				227			239
Other assets				8,361			9,100

		Total assets	$	245,163		$	278,941

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	12,837		$	11,769
	Accrued expenses			27,172			30,462
	Deferred revenue			4,299			3,016
	Current portion of obligations under capital leases and vendor financing			500			775
	Current portion of accrued restructuring			1,538			1,638
	Current portion of 5 1/2% convertible subordinated notes			—			15,000

		Total current liabilities		46,346			62,660
Accrued restructuring, net of current portion				3,289			3,641
Obligations under capital leases and vendor financing, net of current portion				144			—
Other liabilities				1,992			1,994
1% convertible senior notes				200,000			175,000
5 1/2% convertible subordinated notes, net of current portion				163,127			211,000

		Total liabilities		414,898			454,295

Commitments, contingencies and guarantees
Stockholders’ deficit:
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at March 31, 2004 and December 31, 2003			—			—
	Common stock, $0.01 par value; 700,000,000 shares authorized; 122,815,772 shares issued and 122,711,541 shares outstanding at March 31, 2004; 122,154,517 shares issued and 121,875,286 shares outstanding at December 31, 2003			1,229			1,222
	Additional paid-in capital			3,439,393			3,437,186
	Deferred compensation			(1,045	)		(1,545	)
	Accumulated other comprehensive income			1,363			1,379
	Accumulated deficit			(3,610,675	)		(3,613,596	)

		Total stockholders’ deficit		(169,735	)		(175,354	)

		Total liabilities and stockholders’ deficit	$	245,163		$	278,941

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

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



			For the Three Months
			Ended March 31,

			2004			2003


			(In thousands, except
			per share data)
Revenues:
	Services		$	47,431		$	35,556
	Software and software-related			936			934
	Services and software from related parties			—			74

		Total revenues		48,367			36,564

Costs and operating expenses:
	Costs of revenues			12,215			17,885
	Research and development			2,694			3,472
	Sales and marketing			14,010			11,089
	General and administrative			11,266			16,071
	Amortization of other intangible assets			12			2,198
	Restructuring benefit			—			(9,820	)

		Total costs and operating expenses		40,197			40,895

Income (loss) from operations				8,170			(4,331	)
Interest income				598			357
Interest expense				(3,756	)		(4,585	)
Loss on early extinguishment of debt				(2,018	)		—
Gain (loss) on investments, net				11			(15	)

Income (loss) before provision for income taxes				3,005			(8,574	)
Provision for income taxes				84			73

		Net income (loss)	$	2,921		$	(8,647	)

Net income (loss) per share:
Basic			$	0.02		$	(0.07	)
Diluted			$	0.02		$	(0.07	)
Shares used in per share calculation:
Basic				122,104			116,398
Diluted				133,825			116,398

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

AKAMAI TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the Three Months
				Ended March 31,

				2004			2003


				(In thousands)
Cash flows from operating activities:
	Net income (loss)			$	2,921		$	(8,647	)
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Depreciation, amortization and impairment of long-lived assets			6,497			17,792
		Equity-related compensation			533			2,971
		Interest income on notes receivable for stock			—			(33	)
		Non-cash portion of loss on early extinguishment of debt			977			—
		Loss on investments, property and equipment and foreign currency, net			156			170
		Provision for doubtful accounts			(206	)		(700	)
		Changes in operating assets and liabilities:
			Accounts receivable, net		(3,333	)		(2,744	)
			Prepaid expenses and other current assets		2,474			2,729
			Accounts payable, accrued expenses and other current liabilities		(2,204	)		(13,031	)
			Accrued restructuring		(450	)		(12,002	)
			Deferred revenue		1,173			216
			Other noncurrent assets and liabilities		98			278

	Net cash provided by (used in) operating activities				8,636			(13,001	)

Cash flows from investing activities:
		Purchases of property and equipment and capitalization of internal-use software costs			(3,042	)		(2,202	)
		Purchase of investments			(12,468	)		—
		Proceeds from sales of property and equipment			9			44
		Proceeds from sales and maturities of investments			11,725			2,569
		Decrease in restricted cash held for note repurchases			5,000			—

	Net cash provided by investing activities				1,224			411

Cash flows from financing activities:
		Payments on capital leases			(131	)		(307	)
		Proceeds from the issuance of 1% convertible senior notes, net of financing costs			24,313			—
		Repurchase and retirement of 5 1/2% convertible subordinated notes			(62,873	)		—
		Proceeds from the issuance of common stock upon exercise of stock options			2,178			164

	Net cash used in financing activities				(36,513	)		(143	)

Effects of exchange rate translation on cash and cash equivalents					(568	)		103

Net decrease in cash and cash equivalents					(27,221	)		(12,630	)
Cash and cash equivalents, beginning of period					160,074			111,262

Cash and cash equivalents, end of period				$	132,853		$	98,632

Supplemental disclosure of cash flow information:
	Cash paid for interest			$	8,772		$	8,302

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

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS


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

Akamai Technologies, Inc. (“Akamai” or the “Company”) provides distributed computing services and solutions that are designed to enable enterprises to extend and control their e-business infrastructure to ensure superior performance, reliability, scalability and manageability. Akamai’s globally distributed platform comprises more than 14,000 servers in more than 1,000 networks in 69 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one business segment: providing e-business Internet-related infrastructure services and software.

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 accounting principles generally accepted in the United States of America for interim financial information. Consequently, these interim financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America for annual audited financial statements. Accordingly, reference should be made to the Company’s annual report on Form 10-K for the year ended December 31, 2003 for additional disclosures filed with the Securities and Exchange Commission. Results of the interim periods are not necessarily indicative of results for the entire year.

The accompanying condensed consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform to current year presentation.


2.	Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (the “FASB”) issued Interpretation 46R, or FIN 46R, “A Revision to FIN 46, Consolidation of Variable Interest Entities.” FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. Entities that have adopted FIN 46 prior to this effective date can continue to apply the provisions of FIN 46 until the effective date of FIN 46R. The Company is not currently an investor in any variable interest entities and, therefore, FIN 46R does not have an effect on the Company’s condensed consolidated financial statements.


3.	Equity-Related Compensation

Akamai accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recorded for stock-based awards issued to employees and directors in fixed amounts and with fixed exercise prices at least equal to the fair market value of the Company’s common stock at the date of grant. Akamai applies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation,” through disclosure only for stock-based awards issued to employees and directors. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

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



			For the
			Three Months Ended
			March 31,

			2004			2003

Net income (loss), as reported			$	2,921		$	(8,647	)
		Add: stock-based employee compensation included in reported net loss		491			2,964
		Deduct: stock-based employee compensation expense determined under fair value method for all awards		(10,803	)		(12,132	)

Pro forma net loss			$	(7,391	)	$	(17,815	)

Basic net income (loss) per share:
	As reported		$	0.02		$	(0.07	)
	Pro forma			(0.06	)		(0.15	)


4.	Net Income (Loss) per Share

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

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



					For the
					Three Months Ended
					March 31,

					2004		2003

Numerator:
	Net income (loss)				$	2,921	$	(8,647	)
Denominator:
	Denominator for basic net income (loss) per common share					122,104		116,398
		Effect of dilutive securities:
			Restricted common stock and deferred stock units			278		—
			Warrants			33		—
			Stock options			11,410		—

	Denominator for diluted net income (loss) per common share					133,825		116,398

				Basic net income (loss) per common share	$	0.02	$	(0.07	)
				Diluted net income (loss) per common share	$	0.02	$	(0.07	)

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

The following potential common shares have been excluded from the computation of diluted net income (loss) per share as of March 31, 2004 and 2003 because their effect would have been antidilutive (in thousands):



		As of March 31,

		2004		2003

Stock options			3,023		14,613
Restricted common stock and deferred stock units			—		1,276
Warrants			36		1,047
1% convertible senior notes			12,945		—
5 1/2% convertible subordinated notes			1,413		2,598

	Total		17,417		19,534


5.	Comprehensive Income (Loss)

The following table presents the calculation of comprehensive income (loss) and its components for the three-months ended March 31, 2004 and 2003 (in thousands):



		For the
		Three Months Ended
		March 31,

		2004			2003

Net income (loss)		$	2,921		$	(8,647	)
Other comprehensive income (loss):
	Foreign currency translation adjustment		(176	)		111
	Unrealized gain (loss) on investments, net		160			(30

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