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 SEPTEMBER 30, 2003.

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 November 7, 2003: 120,293,164 shares.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Unaudited 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
	Item 4. Controls and Procedures
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 September 30, 2003

TABLE OF CONTENTS


		Page

PART I Financial Information
Item 1.	Unaudited Financial Statements		2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		31
PART II Other Information
Item 1.	Legal Proceedings		32
Item 6.	Exhibits and Reports on Form 8-K		32
Signatures			33

PART I. FINANCIAL INFORMATION


Item 1.	*Unaudited Financial Statements*

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


			September 30,			December 31,
			2003			2002


			(In thousands,
			except share data)

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	83,896		$	111,262
	Marketable securities (including restricted securities of $726 and $3,161 at September 30, 2003 and December 31, 2002, respectively)			2,127			3,664
	Accounts receivable, net of allowance for doubtful accounts of $1,416 and $1,939 at September 30, 2003 and December 31, 2002, respectively			25,349			16,290
	Due from related parties (Note 12)			—			1,284
	Prepaid expenses and other current assets			5,966			9,183

		Total current assets		117,338			141,683
Property and equipment, net				29,287			63,159
Marketable securities (including restricted securities of $3,922 and $10,244 at September 30, 2003 and December 31, 2002, respectively)				12,942			10,244
Goodwill				4,937			4,937
Other intangible assets, net (Note 11)				251			2,473
Other assets				5,652			7,367

		Total assets	$	170,407		$	229,863

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	13,334		$	16,847
	Accrued expenses (Note 9)			27,124			37,062
	Deferred revenue			2,953			2,361
	Current portion of obligations under capital leases and vendor financing			912			1,207
	Current portion of accrued restructuring (Note 10)			3,063			23,622

		Total current liabilities		47,386			81,099
Obligations under capital leases and vendor financing, net of current portion				—			1,006
Accrued restructuring, net of current portion (Note 10)				4,015			13,994
Other liabilities				1,581			1,854
Convertible notes				300,000			300,000

		Total liabilities		352,982			397,953

Commitments, contingencies and guarantees (Note 15)
Stockholders’ deficit:
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 30, 2003 and December 31, 2002			—			—
	Common stock, $0.01 par value; 700,000,000 shares authorized; 119,424,348 shares issued and 119,145,117 shares outstanding at September 30, 2003; 117,660,254 shares issued and 117,385,254 shares outstanding at December 31, 2002			1,194			1,177
	Additional paid-in capital			3,430,512			3,428,434
	Deferred compensation			(2,804	)		(9,895	)
	Notes receivable for stock (Note 13)			(771	)		(3,473	)
	Accumulated other comprehensive income (loss)			811			(18	)
	Accumulated deficit			(3,611,517	)		(3,584,315	)

		Total stockholders’ deficit		(182,575	)		(168,090	)

		Total liabilities and stockholders’ deficit	$	170,407		$	229,863

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						For the Nine Months
			Ended September 30,						Ended September 30,

			2003			2002			2003			2002


			(In thousands, except per share data)

			(Unaudited)
Revenue:
	Service		$	41,493		$	30,617		$	113,932		$	96,785
	Software			274			2,212			2,021			5,193
	Service and software from related parties (Note 12)			—			2,546			137			7,646

		Total revenue		41,767			35,375			116,090			109,624

Cost and operating expenses:
	Cost of revenue			14,275			21,609			47,992			67,887
	Research and development			3,595			6,132			10,062			17,729
	Sales and marketing			11,787			16,887			34,925			50,518
	General and administrative			13,219			24,527			45,117			75,451
	Amortization of other intangible assets (Note 11)			12			2,231			2,222			9,699
	Restructuring charges (Note 10)			—			6,138			(8,521	)		19,149

		Total cost and operating expenses		42,888			77,524			131,797			240,433

Loss from operations				(1,121	)		(42,149	)		(15,707	)		(130,809	)
Interest expense, net				(4,343	)		(3,950	)		(12,839	)		(11,257	)
Gain (loss) on investments, net (Note 6)				1,637			(1,311	)		1,622			(6,398	)

Loss before provision for income taxes				(3,827	)		(47,410	)		(26,924	)		(148,464	)
Provision for income taxes				82			123			278			369

		Net loss	$	(3,909	)	$	(47,533	)	$	(27,202	)	$	(148,833	)

Basic and diluted net loss per share			$	(0.03	)	$	(0.42	)	$	(0.23	)	$	(1.33	)
Weighted average common shares outstanding				118,596			114,251			117,368			112,066

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the Nine Months
				Ended September 30,

				2003			2002


				(In thousands)

				(Unaudited)
Cash flows from operating activities:
	Net loss			$	(27,202	)	$	(148,833	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation, amortization and impairment of long-lived assets			42,834			76,346
		Equity-related compensation			8,295			15,633
		Interest income on notes receivable for stock			(73	)		(98	)
		Non-cash portion of restructuring charge			144			3,671
		(Gain) loss on investments, property and equipment and foreign currency			(2,663	)		6,994
		Changes in operating assets and liabilities:
			Accounts receivable, net		(7,295	)		3,929
			Prepaid expenses and other current assets		3,464			2,531
			Accounts payable, accrued expenses and other current liabilities		1,008			(5,877	)
			Accrued restructuring		(21,322	)		(16,439	)
			Deferred revenue		464			(1,857	)
			Other noncurrent assets and liabilities		(23,986	)		8,619

	Net cash used in operating activities				(26,332	)		(55,381	)

Cash flows from investing activities:
		Purchases of property and equipment and capitalization of internal-use software costs			(6,169	)		(13,303	)
		Purchase of investments			(10,071	)		(24,550	)
		Proceeds from sales of property and equipment			114			299
		Proceeds from sales and maturities of investments			10,639			136,611

	Net cash (used in) provided by investing activities				(5,487	)		99,057

Cash flows from financing activities:
		Payments on capital leases and vendor financing			(1,301	)		(1,349	)
		Proceeds from note receivable for stock (Note 13)			1,770			—
		Proceeds from the issuance of common stock under stock option and employee stock purchase plans			1,896			1,676

	Net cash provided by financing activities				2,365			327

Effects of exchange rate translation on cash and cash equivalents					2,088			717

Net (decrease) increase in cash and cash equivalents					(27,366	)		44,720
Cash and cash equivalents, beginning of period					111,262			78,774

Cash and cash equivalents, end of period				$	83,896		$	123,494

Supplemental disclosure of cash flow information:
	Cash paid for interest			$	16,645		$	16,630

Supplemental disclosure of non-cash financing activities:
	Assets acquired under capital lease obligations and vendor financing			$	—		$	3,332

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

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Akamai Technologies, Inc. (“Akamai” or the “Company”) provides services and software 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 14,400 servers in more than 1,100 networks in 71 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one business segment: providing e-business 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, 2002 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 consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All significant 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 November 2002, the Emerging Issues Task Force (the “EITF”) reached a consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses revenue recognition for revenue arrangements with multiple deliverables. The deliverables in these revenue arrangements should be divided into separate units of accounting when the individual deliverables have value to the customer on a stand-alone basis; there is objective and reliable evidence of the fair value of the undelivered elements; and, if the arrangement includes a general right to return the delivered element, delivery or performance of the undelivered element is considered probable. The relative fair value of each unit should be determined and the total consideration of the arrangement should be allocated among the individual units based on their relative fair value. The guidance in this issue is effective for revenue arrangements entered into by the Company after June 30, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s consolidated financial statements.

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued Interpretation 46, or FIN 46, “Consolidation of Variable Interest Entities — An Interpretation of Accounting Research Bulletin No. 51.” FIN 46 addresses consolidation of variable interest entities where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties and the equity investors lack one or more essential characteristics of a controlling financial interest. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is not currently an investor in any variable interest entities.

In October 2003, the FASB issued FASB Staff Position, or FSP 46-6, “Effective Date of FASB Interpretation 46, Consolidation of Variable Interest Entities.” This FSP deferred the effective date for

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

applying the provisions of FIN 46 for interests in variable interest entities or potential variable interest entities created before February 1, 2003. FSP 46-6 had no effect on the Company’s financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of debt that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective July 1, 2003. The adoption of the SFAS No. 150 did not impact the Company’s financial statements.

In August 2003, the EITF reached a consensus on Issue 03-05, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.” EITF 03-05 addresses the applicability of SOP 97-2 to non-software deliverables in an arrangement containing more-than-incidental software. In an arrangement that includes software that is more than incidental to the products or services as a whole, software and software-related elements are included within the scope of SOP 97-2. Software-related elements include software products and services, as well as any non-software deliverables for which a software deliverable is essential to its functionality. The adoption of EITF 03-05 did not have a material impact on the Company’s consolidated financial results.

3. Equity-Related Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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 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 SFAS No. 123, as amended by SFAS No. 148, through disclosure only for stock-based awards issued to employees. 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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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



		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,

		2003			2002			2003			2002

Net loss, as reported		$	(3,909	)	$	(47,533	)	$	(27,202	)	$	(148,833	)
	Add: stock-based employee compensation included in reported net loss		1,791			4,591			6,791			15,589
	Deduct: stock-based employee compensation expense determined under fair value method for all awards		(12,696	)		(12,770	)		(34,601	)		(39,226	)

Pro forma net loss		$	(14,814	)	$	(55,712	)	$	(55,012	)	$	(172,470	)

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