e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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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
(State or Other
Jurisdiction of
Incorporation or Organization)
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04-3432319
(I.R.S. Employer
Identification No.)
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8 Cambridge Center, Cambridge,
MA
(Address of Principal
Executive Offices)
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02142
(Zip
Code)
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Registrants telephone number, including area
code: (617) 444-3000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $.01 par value
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NASDAQ Global Select Market
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Exchange Act
Rule 12b-2).
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 Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was approximately
$5,337.6 million based on the last reported sale price of the
common stock on the Nasdaq National Market on June 30, 2006.
The number of shares outstanding of the registrants Common
Stock, par value $0.01 per share, as of February 23,
2007: 161,034,883 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to
be filed with the Securities and Exchange Commission relative to
the registrants 2007 Annual Meeting of Stockholders to be
held on May 15, 2007 are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this
annual report on
Form 10-K.
AKAMAI
TECHNOLOGIES, INC.
ANNUAL
REPORT ON
FORM 10-K
For the
Fiscal Year Ended December 31, 2006
TABLE OF
CONTENTS
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PART I
This Annual Report on
Form 10-K
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 based on
information currently available to them. Use of words such as
believes, continues,
expects, anticipates,
intends, plans, estimates,
should, likely or similar expressions
indicates a forward-looking statement. Certain of the
information contained in this annual report on
Form 10-K
consists of forward-looking statements. Forward-looking
statements are not guarantees of future performance and involve
risks, uncertainties and assumptions. Important factors that
could cause actual results to differ materially from the
forward-looking statements include, but are not limited to,
those set forth under the heading Risk Factors. We
disclaim any obligation to update any forward-looking statements
as a result of new information, future events or otherwise.
Overview
Akamai provides services for accelerating and improving the
delivery of content and applications over the Internet from live
and on-demand streaming videos to conventional content on web
pages to tools that help people transact business. Our solutions
are designed to help businesses, government agencies and other
enterprises enhance their revenue streams and reduce costs by
maximizing the performance of their online businesses. By
advancing the performance and reliability of their websites, our
customers can improve visitor experiences and increase the
effectiveness of their Web-based campaigns and operations.
Through the Akamai EdgePlatform, the technological platform for
Akamais business solutions, our customers are able to
utilize Akamais infrastructure and reduce expenses
associated with internal infrastructure
build-ups.
We were incorporated in Delaware in 1998 and have our corporate
headquarters at 8 Cambridge Center, Cambridge, Massachusetts. We
have been offering content delivery services and streaming media
services since 1999. In subsequent years, we have introduced
technology that enables Web-based delivery of applications, such
as
store/dealer
locators and user registration, over our network; content
targeting technology; enhanced security features; and analytical
tools that provide our customers with information about visitors
to their websites. During 2005, we began commercial sales of our
Web Application Accelerator service, which is designed to
improve the performance of Web- and
IP-based
applications through a combination of dynamic caching,
compression of large packets, routing and connection
optimization.
Significant developments for us in 2006 included J.D. Sherman
becoming our Chief Financial Officer in March. In June 2006, we
formally introduced our suite of Dynamic Site Solutions, which
are designed to accelerate delivery of
business-to-consumer
websites that integrate rich, collaborative content and
applications into their online architecture. In December 2006,
we acquired Nine Systems Corporation, or Nine Systems, which has
allowed us to offer additional rich media management tools such
as publishing and digital rights management.
We are registered as a reporting company under the Securities
Exchange Act of 1934, as amended, which we refer to as the
Exchange Act. Accordingly, we file or furnish with the
Securities and Exchange Commission, or the Commission, annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
as required by the Exchange Act and the rules and regulations of
the Commission. We refer to these reports as Periodic Reports.
The public may read and copy any Periodic Reports or other
materials we file with the Commission at the Commissions
Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Information on the operation of the Public Reference Room is
available by calling
1-800-SEC-0330.
In addition, the Commission maintains an Internet website that
contains reports, proxy and information statements and other
information regarding issuers, such as Akamai, that file
electronically with the Commission. The address of this website
is http://www.sec.gov.
Our Internet website address is www.akamai.com. We make
available, free of charge, on or through our Internet website
our Periodic Reports and amendments to those Periodic Reports as
soon as reasonably practicable after we electronically file them
with the Commission. We are not, however, including the
information contained on our website, or information that may be
accessed through links on our website, as part of, or
incorporating it by reference into, this annual report on
Form 10-K.
1
Meeting
the Challenges of the Internet
The Internet plays a crucial role in the way companies,
government agencies and other entities conduct business and
reach the public. The Internet, however, is a complex system of
networks that was not originally created to accommodate the
volume or sophistication of todays communication demands.
As a result, information is frequently delayed or lost on its
way through the Internet due to many challenges, including:
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bandwidth constraints between an end user and the end
users network provider, such as an Internet Service
Provider, or ISP, cable provider or digital subscriber line
provider;
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Internet traffic exceeding the capacity of routing equipment;
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the increase in the transmission of rich content due to the
increasingly widespread use of broadband connectivity to the
Internet for videos, music and games;
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inefficient or nonfunctioning peering points, or points of
connection, between ISPs; and
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traffic congestion at data centers.
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In addition to the challenges inherent in the Internet,
companies and other entities face internal technology
challenges. Driven by competition, globalization and
cost-containment strategies, companies need an agile
Internet-facing infrastructure that cost-effectively meets
real-time strategic and business objectives. For example, many
companies use the Internet as a key marketing tool for product
launches, distribution of promotional videos or contests. These
one-time events may draw millions of visitors to a
companys website over a brief period of time so the
enterprise must have in place the capacity to deal with a flood
of visitors seeking to view content or use applications. At the
same time, budget limitations may preclude a company from
putting in place extensive internal infrastructure knowing that
it will handle less traffic during the rest of the year.
To address these challenges, we have developed solutions that
are designed to help companies, government agencies and other
enterprises increase revenues and reduce costs by improving the
performance, reliability and security of their Internet-facing
operations. We particularly seek to address the following market
needs:
Superior Performance. Commercial enterprises
invest in websites to attract customers, transact business and
provide information about themselves. If, however, a
companys Internet site fails to provide visitors with a
fast and dependable experience, they will likely abandon that
site, potentially leading to lost revenues and damage to the
enterprises reputation. Our solutions are designed to
reduce or eliminate downtime and poor performance of a
customers Website, digital media and applications. Through
a combination of people, processes and technology, we help our
customers improve the reliability, scalability and
predictability of their sites without the need for our customers
to spend a lot of money to develop their own Internet-related
infrastructure. Instead, we have a presence in nearly 1,000
networks around the world so that content can be delivered from
Akamai servers located closer to website visitors
from what we call, the edge of the Internet. We are
thus able to reduce the impact of traffic congestion, bandwidth
constraints and capacity limitations. At the same time, our
customers have access to control features to enable them to
provide content to end users that is current and customized for
visitors accessing the site from different parts of the world.
Scalability. We believe that scalability is
one of the keys to reliability. Many Akamai customers experience
seasonal or erratic demand for access to their websites and
almost all websites experience demand peaks at different points
during the day. With the proliferation of Internet video,
enterprises of all types must be able to cope with rapidly
increasing numbers of requests for bandwidth-intensive digital
media assets and the storage of them. In all of these instances,
it can be difficult and expensive to plan for, and deploy
solutions to meet such peaks and valleys. Leveraging more
than 20,000 servers deployed worldwide, our network is
designed with the robustness and flexibility to handle planned
and unplanned traffic peaks and related storage needs, without
additional hardware investment and configuration on the part of
our customers. As a result, we are able to provide an on demand
solution to address our customers capacity needs in the
face of unpredictable traffic spikes, which helps them avoid
expensive investment in a centralized infrastructure.
Security. Security may be the most significant
challenge facing use of the Internet for business and government
processes because security threats in the form of
attacks, viruses, worms and intrusions can
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impact every measure of performance, including information
security, speed, reliability and customer confidence. Unlike
traditional security strategies that can negatively impact
performance, Akamais EdgePlatform is designed to allow for
proactive monitoring and rapid response to security incidents
and anomalies. We rely on both built-in defense mechanisms and
the ability to route traffic around potential security issues so
performance is not compromised. Perhaps most significantly, our
distributed network of thousands of servers is designed to
eliminate a single point of failure and can reduce the impact of
security attacks.
Our
Solutions
We offer services and solutions for digital media distribution
and storage, content and application delivery, application
performance services, on demand managed services and website
intelligence. We have developed three business solutions to
offer our customers a comprehensive suite of services and to
meet their specific Internet-related goals: Digital Asset
Solutions, Dynamic Site Solutions and Application Performance
Solutions. In addition, our customers can also purchase
on-demand managed services, site intelligence offerings and
custom solutions designed for individual customer needs.
Digital
Asset Solutions
Akamais Digital Asset Solutions leverage the core content
delivery services that we have offered since the company was
formed. These services are designed to enable enterprises to
improve the end-user experience, boost reliability and
scalability and reduce the cost of Internet-related
infrastructure. Within the Digital Asset Solutions, customers
can choose from the following:
Akamai
Media Delivery Solution
We believe that the demand for Internet access to media of all
types music, movies, games, streaming news, sports
events, and social networking communities is growing
rapidly; however, there are many challenges to profitably
offering media assets online, particularly with respect to
user-generated content. In particular, media companies need
cost-effective means to deliver large files to millions of users
in different formats compatible with multiple end-user devices
and platforms. The Akamai Media Delivery Solution is designed to
provide a solution to many of the challenges of media delivery
over the Internet by helping media industry companies bypass
traditional server and bandwidth limitations to better handle
peak traffic conditions and large file sizes. We support all
major streaming formats, and our EdgePlatform provides capacity
levels that individual enterprises may not be able to
cost-effectively replicate on their own.
Our Akamai Media Delivery Solution is primarily used by
companies in the following industries: entertainment, including
television, radio, sports, music and media; gaming and social
networking; and Internet search/portal access. The solution can
accommodate the many different business models used by our
customers including
pay-per-view,
subscription, advertising and syndication.
Akamai
Electronic Software Delivery Solution
Due to the expanding prevalence of broadband access,
distribution of computer software is increasingly occurring over
the Internet. Internet traffic conditions and high loads can
dramatically impact software download speed and reliability.
Furthermore, surges in traffic from product launches or
distribution of security updates can overwhelm traditional
centralized software delivery infrastructure, impacting website
performance and causing users to be unable to download software.
Our Electronic Software Delivery Solution is designed to
leverage the Akamai EdgePlatform to provide capacity for large
surges in traffic related to software launches and other
distributions with a goal of improved customer experiences,
increased use of electronic delivery and successful product
launches. This solution is appropriate for software companies of
all types including consumer, enterprise, anti-virus and gaming.
Akamai
EdgeSuite Delivery Solution
Through our
EdgeSuite®
delivery service, we can accelerate the delivery of our
customers websites over the Internet by making their
content accessible across our international network of servers.
This distributed
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performance model is intended to provide our customers with a
more efficient way to implement and maintain a global Internet
presence. While site owners maintain a source copy of their
content and applications, EdgeSuite provides global delivery,
load balancing and storage of content and applications, enabling
businesses to focus valuable resources on strategic matters,
rather than technical infrastructure issues. This solution is
appropriate for any enterprise that has a website.
Customers of our Digital Asset Solutions also have access to
advanced service features such as:
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Secure Content Distribution distribution of
secure Internet-related content using Secure Sockets Layer
transport, a protocol to secure transmission of content over the
Internet, to ensure that content is distributed privately and
reliably between two communicating applications.
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Site Failover delivery of default content in
the event that the primary, or source, version of the website of
a customer becomes unavailable.
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Disaster Recovery a backup web presence if an
unforeseen event causes a website to crash.
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Net Storage an efficient solution for digital
storage needs for all content types.
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Content Targeting a feature that enables
content providers to deliver localized content, customized
store-fronts, targeted advertising and adaptive marketing.
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Dynamic
Site Solutions
Akamais Dynamic Site Solutions are designed for
accelerating
business-to-consumer
websites that integrate rich, collaborative content and
applications into their online architecture. In particular, our
services inter-operate with dynamic software applications such
as AJAX (Asynchronous JavaScript and XML) and Macromedia
Flash®.
Significant features of the Dynamic Site Solutions offering
include:
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Cache Optimization these features are
designed to enhance the cacheability of content including
setting
time-to-live
values, header modification, path modification and downstream
caching.
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Compression compression of content before it
is sent to an end user so as to reduce transfer times for users
on slow connections, particularly for transactional content.
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Capacity On-Demand offers dynamic
load-balancing decisions that are based on real-time analysis of
an end users location, Internet conditions and server and
data center infrastructure capacity and load.
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Our Dynamic Site Solutions are primarily purchased by retail and
travel companies for their commerce-related websites as well as
enterprises that rely on the Internet for brand-building through
research and discussion tools for their current and potential
customers.
Application
Performance Solutions
Akamais Application Performance Solutions combine services
and features that are designed to improve the performance of
highly dynamic content common on corporate extranets and wide
area networks. Traditionally, this market has been addressed
primarily by hardware and software products. We believe our
managed service approach offers a more cost-effective and
comprehensive solution in this area without requiring customers
to make significant infrastructure investments. In addition to
reducing infrastructure costs, our Application Performance
Solutions are designed to allow our customers to offer more
effective and reliable portal applications and other Web-based
systems for communicating with their customers, employees and
business partners.
Our Web Application Accelerator service is designed to improve
the performance of Web- and
IP-based
applications through a combination of dynamic caching,
compression, routing and connection optimization. This service
is appropriate for companies involved in technology, business
services, travel and leisure, manufacturing and other industries
where there is a movement to Internet-based communication with
remote customers, suppliers and franchisees. Enterprise
customers are using the Web Application Accelerator services to
run applications such as online airline reservations systems,
course planning tools, customer order processing and human
resources applications. By tying such applications to the Akamai
EdgePlatform, enterprise customers and their remote
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customers, suppliers and franchisees can enjoy improved
performance through connection and route optimization techniques
that avoid problem spots on the Internet and otherwise
accelerate delivery of applications without having to undertake
significant internal infrastructure build-out.
Other
Solutions
On
Demand Managed Services
Akamais on demand managed services, including our
EdgeComputing and on demand application offerings, enable
enterprises to reduce the need for an internal infrastructure to
handle unpredictable levels of Internet traffic. With access to
our network, customers are able to rapidly launch and deploy new
applications worldwide, with on demand availability and
scalability on a cost-effective basis. For example, Akamai On
Demand Events provides an on demand platform for running
promotional websites through Macromedia
Flash®
promotions, site search, sweepstakes, polls, regional offers or
other innovative applications that create a positive brand
experience.
Akamais EdgeComputing service enables enterprises to
deliver Java (J2EE) Web applications that scale on demand and
are designed to perform faster and more reliably worldwide than
a customers own internal information technology, or IT,
infrastructure. At the same time, our on demand services are
designed to accelerate the performance of customers
applications, which reduces the demands on our customers
IT infrastructures and simplifies their support requirements. By
enabling our customers Internet-based applications that
they rely on to improve promotion and sales, customer service,
and vendor and partner management, we can help them to be better
positioned to compete more effectively online and reduce
business costs.
Site
Intelligence Offerings
Akamais offerings in this area include our network data
feeds and our Web analytics offering, which provide customers
with real time data about the performance of their content and
applications over the Internet and on the EdgePlatform. In
addition, our business performance management services help
customers better understand their Web operations through
relevant, timely information with tools that measure all aspects
of an applications performance. For example, a customer
could use website data feeds from Akamais customer portal
to assist in managing costs and budget. The core of these
offerings lies in our EdgeControl tools, which provide
comprehensive reporting and management capabilities.
EdgeControl tools are web-portal based and can be integrated
with existing enterprise management systems, allowing our
customers to manage their distributed content and applications
via a common interface. EdgeControl also provides integration
with third party network management tools, including those
offered by IBM, Hewlett-Packard and BMC Software. Having created
one of the industrys first examples of a commercially
proven utility computing platform, Akamai now provides a global
network of servers that can be utilized by customers for
troubleshooting, monitoring and reporting, based on their
individual business requirements.
Custom
Solutions
In addition to our core commercial services, we are able to
leverage the expertise of our technology, networks and support
personnel to provide custom solutions to both commercial and
government customers. These solutions include replicating our
core technologies to facilitate content delivery behind the
firewall, combinations of our technology with that of other
providers to create unique solutions for specific customers and
support for mission-critical applications that rely on the
Internet and intranets. Additionally, numerous federal
government agencies rely on Akamai for information about traffic
conditions and activity on the Internet and tailored solutions
to their content delivery needs.
Our Core
Technology and Network
Our expansive network infrastructure and sophisticated
technology are the foundation of our services. We believe Akamai
has deployed the worlds largest globally distributed
computing platform, with more than 20,000 servers located in
nearly 1,000 networks around the world. Applying our proprietary
technology, we deliver our customers content and computing
applications across a system of widely distributed networks of
servers; the
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content and applications are then processed at the most
efficient places within the network. Servers are deployed in
networks ranging from large, backbone network providers to
medium and small ISPs to cable modem and satellite providers to
universities and other networks. We also have more than 500
peering relationships that provide us with direct paths to end
user networks, reducing data loss, while also giving us more
options for delivery during network congestion or failures.
To make this wide-reaching deployment effective, we use
specialized technologies, such as advanced routing, load
balancing, data collection and monitoring. Our intelligent
routing software is designed to ensure that website visitors
experience fast page loading, access to applications and content
assembly wherever they are on the Internet, regardless of global
or local traffic conditions. Dedicated professionals staff our
Network Operations Control Center on a 24/7 basis to monitor and
react to Internet traffic patterns and trends. We deploy
frequent enhancements to our software globally to introduce new
service offerings and to ensure that our network continues to
run effectively. Technology updates are replicated across the
system. Customers are also able to control the extent of their
use of Akamai services to scale on demand, using as much or as
little capacity of the global platform as they require, to
support widely varying traffic and rapid
e-business
growth without expensive and complex infrastructure build-out.
Business
Segments and Geographic Information
We operate in one business segment: providing services for
accelerating delivery of content and applications over the
Internet. For the years ended December 31, 2006, 2005 and
2004, approximately 22%, 21% and 19%, respectively, of our total
revenues was derived from our operations outside the United
States, of which 18%, 16% and 14% of overall revenues,
respectively, was derived from Europe. No single country outside
of the United States accounted for 10% or more of our revenues
in any of such years. For more segment and geographic
information, including revenue from customers, a measure of
profit or loss and total assets for each of the last three
fiscal years, see our consolidated financial statements included
in this annual report on
Form 10-K,
including Note 19 thereto.
Customers
Our customer base is centered on enterprises. As of
December 31, 2006, our customers included many of the
worlds leading corporations, including Apple Inc., Best
Buy.com, Inc., Clear Channel, FedEx Corporation, LOreal,
Microsoft Corporation, MTV Networks, Nintendo, Qantas Airways
Limited, Sony Ericsson Mobile Communications, Victorias
Secret and XM Satellite Radio. We also actively sell to
government agencies. As of December 31, 2006, our public
sector customers included American Red Cross, the Federal
Emergency Management Agency, the U.S. Air Force, the
U.S. Department of Defense, U.S. Department of Labor,
the U.S. Food and Drug Administration and the
U.S. Geological Surveys Earthquake Hazards Program.
No customer accounted for 10% or more of total revenues for the
years ended December 31, 2006 or 2005. For the year ended
December 31, 2004, Microsoft Corporation accounted for 10%
of total revenues. Less than 10% of our total revenues in each
of the years ended December 31, 2006, 2005 and 2004 was derived
from contracts or subcontracts terminable at the election of the
federal government, and we do not expect such contracts to
account for more than 10% of our total revenues in 2007.
Sales,
Service and Marketing
Our sales and service professionals are located in 11 offices in
the United States with additional locations in Europe and Asia.
We market and sell our services and solutions domestically and
internationally through our direct sales and services
organization and through more than 50 active resellers including
Electronic Data Systems Corporation, IBM Corporation, Verizon
and Telefonica Group. In addition to entering into agreements
with resellers, we have several other types of sales- and
marketing-focused alliances, with entities such as system
integrators, application service providers, sales agents and
referral partners. By aligning with these companies, we believe
we are better able to market our services and encourage
increased adoption of our technology throughout the industry.
Our sales and service organization includes employees in direct
and channel sales, professional services, account management and
technical consulting. As of December 31, 2006, we had
approximately 500 employees in
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our sales and support organization, including 103 direct sales
representatives whose performance is measured on the basis of
achievement of quota objectives. Our ability to achieve revenue
growth in the future will depend in large part on whether we
successfully recruit, train and retain sufficient sales,
technical and global services personnel, and how well we
establish and maintain our strategic alliances. We believe that
the complexity of our services will continue to require a number
of highly trained global sales and services personnel.
To support our sales efforts and promote the Akamai brand, we
conduct comprehensive marketing programs. Our marketing
strategies include an active public relations campaign, print
advertisements, on-line advertisements, participation at trade
shows, strategic alliances and on-going customer communication
programs. As of December 31, 2006, we had 52 employees in
our global marketing organization, which is a component of our
sales and support organization.
Research
and Development
Our research and development personnel are continuously
undertaking efforts to enhance and improve our existing
services, strengthen our network and create new services in
response to our customers needs and market demand. As of
December 31, 2006, we had approximately 250 research and
development engineers, many of whom hold advanced degrees in
their field. Our research and development expenses were
$33.1 million, $18.1 million and $12.1 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. In addition, for each of the years ended
December 31, 2006, 2005 and 2004, we capitalized
$11.7 million, $8.5 million and $7.5 million,
respectively, net of impairments, of external consulting and
payroll and payroll-related costs related to the development of
internal-use software used to deliver our services and operate
our network. Additionally, during the year ended
December 31, 2006, we capitalized $4.3 million of
stock-based compensation in connection with our adoption of
Statement of Financial Accounting Standards No. 123(R).
Competition
The market for our services is intensely competitive and
characterized by rapidly changing technology, evolving industry
standards and frequent new product and service installations. We
expect competition for our services to increase both from
existing competitors and new market entrants. We compete
primarily on the basis of:
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performance of services;
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return on investment in terms of cost savings and new revenue
opportunities for our customers;
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reduced infrastructure complexity;
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scalability;
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ease of implementation and use of service;
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customer support; and
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price.
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We compete primarily with companies offering products and
services that address Internet performance problems, including
companies that provide Internet content delivery and hosting
services, streaming content delivery services and
equipment-based solutions to Internet performance problems, such
as load balancers and server switches. Some of our competitors
also resell our services. Other companies have recently emerged
that offer online distribution of digital media assets through
advertising-based billing or revenue-sharing models that may
represent an alternative to our services. In addition, potential
customers may decide to purchase or develop their own hardware,
software and other technology solutions rather than rely on an
external managed services provider like Akamai.
We believe that we compete favorably with other companies in our
industry, as well as alternative approaches to content and
application delivery over the Internet, on the basis of price,
the quality of our offerings and our customer service.
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Proprietary
Rights and Licensing
Our success and ability to compete are dependent on our ability
to develop and maintain the proprietary aspects of our
technology and operate without infringing on the proprietary
rights of others. We rely on a combination of patent, trademark,
trade secret and copyright laws and contractual restrictions to
protect the proprietary aspects of our technology. We currently
have numerous issued United States and foreign-country patents
covering our content delivery technology, and we have numerous
additional patent applications pending. Our issued patents
extend to various dates between approximately 2015 and 2020. In
October 1998, we entered into a license agreement with the
Massachusetts Institute of Technology, or MIT, under which we
were granted a royalty-free, worldwide right to use and
sublicense the intellectual property rights of MIT under various
patent applications and copyrights relating to Internet content
delivery technology. Two of these patent applications have now
been issued. These patents will expire in 2018. We seek to limit
disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting
access to our source code.
Employees
As of December 31, 2006, we had a total of
1,058 full-time and part-time employees. Our future success
will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel for
whom competition is intense. Our employees are not represented
by any collective bargaining unit. We believe our relations with
our employees are good.
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 annual report on
Form 10-K
or presented elsewhere by management from time to time.
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. Some of our existing resellers
are potential competitors. If one or more resellers that
generate substantial revenues for us were to terminate our
relationship and become a competitor or a reseller for a
competitor, our business could be adversely affected. 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 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.
8
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. In
addition, our operating expenses have increased on an absolute
basis in each of 2004, 2005 and 2006. 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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market pressure to decrease 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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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.
On December 13, 2006, we completed our acquisition of Nine
Systems Corporation, or Nine Systems, and in June 2005, we
completed our acquisition of Speedera Networks, Inc., or
Speedera. On February 5, 2007, we announced that we had
entered into an agreement to acquire Netli, Inc., or Netli. If
attractive acquisition opportunities arise in the future, we may
seek to enter into additional business combinations or
purchases. 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 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 Nine Systems and Speedera acquisitions, dilutive
issuances of securities.
9
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 Statement of Financial Accounting
Standards No. 123(R) Share Based Payment, or
SFAS No. 123(R), we are required to account for our
stock-based awards as a compensation expense and, as a result,
our net income and net income per share in subsequent periods
has been significantly reduced. Previously, we recorded
stock-based compensation expense only in connection with option
grants that have an exercise price below fair market value at
the time they were granted.
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, unauthorized access to our
servers, 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.
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
10
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, intangible assets 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.
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.
11
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. Such lawsuits can be expensive and
require a significant amount of attention of our management and
technical personnel, and the outcomes are unpredictable. 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; 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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12
Any
failure to meet our debt obligations would damage our
business.
We have long-term debt. As of December 31, 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.
Our
stock price has been volatile.
The market price of our common stock has been volatile. Trading
prices may continue to fluctuate in response to a number of
events and factors, including the following:
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quarterly variations in operating results and announcements of
innovations;
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new products, services and strategic developments by us or our
competitors;
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business combinations and investments by us or our competitors;
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variations in our revenue, expenses or profitability;
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changes in financial estimates and recommendations by securities
analysts;
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failure to meet the expectations of public market analysts;
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performance by other companies in our industry; and
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geopolitical conditions such as acts of terrorism or military
conflicts.
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13
Any of these events may cause the price of our shares to fall.
In addition, the stock market in general and the market prices
for technology companies in particular have experienced
significant volatility that often has been unrelated to the
operating performance of such companies. These broad market and
industry fluctuations may adversely affect the market price of
our shares, regardless of our operating performance.
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.
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 this annual report on
Form 10-K
for the year ended December 31, 2006 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 1B.
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Unresolved
Staff Comments
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None.
Our headquarters are located in approximately
131,000 square feet of leased office space in Cambridge,
Massachusetts. Of this space, we have subleased approximately
12,000 square feet to another company. Our primary west
coast office is located in approximately 28,000 square feet
of leased office space in San Mateo, California. We
maintain offices in several other locations in the United
States, including in or near each of Los Angeles and
San Diego, California; Denver, Colorado; Atlanta, Georgia;
Chicago, Illinois; New York, New York; Dallas, Texas; Reston,
Virginia and Seattle, Washington. We also maintain offices in
Europe and Asia in or near the following cities: Bangalore,
India; Beijing, China; Munich, Germany; Paris, France; London,
England; Tokyo, Japan; Singapore; Madrid, Spain; and Sydney,
Australia. All of our facilities are leased. We believe our
facilities are sufficient to meet our needs for the foreseeable
future and, if needed, additional space will be available at a
reasonable cost.
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Item 3.
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Legal
Proceedings
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We are subject to legal proceedings, claims and litigation
arising in the ordinary course of business. We do not expect the
ultimate costs to resolve these matters to have a material
adverse effect on our consolidated financial
14
position, results of operations or cash flows. In addition to
ordinary-course litigation, we are a party to the lawsuit
described below.
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 us as well as against the underwriters of our
October 28, 1999 initial public offering of common stock.
The complaints were filed allegedly on behalf of persons who
purchased our 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, as amended, and the Securities Exchange
Act of 1934 primarily based on the allegation that the
underwriters received undisclosed compensation in connection
with our 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
Akamais 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, and the Court issued an order
preliminarily approving the settlement. On December 5,
2006, the United States Court of Appeals for the Second Circuit
overturned the District Courts certification of the class
of plaintiffs who are pursuing the claims that would be settled
in the settlement against the underwriter defendants. Plaintiffs
filed a Petition for Rehearing and Rehearing En Banc with the
Second Circuit on January 5, 2007 in response to the Second
Circuits decision and have informed the District Court
that they would like to be heard as to whether the settlement
may still be approved even if the decision of the Court of
Appeals is not reversed. The District Court indicated that it
would defer consideration of final approval of the settlement
pending plaintiffs request for further appellate review.
We believe that we have meritorious defenses to the claims made
in the complaint and, if the settlement is not finalized and
approved, we intend to contest the lawsuit vigorously. An
adverse resolution of the 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 not
presently able to estimate potential losses, if any, related to
this lawsuit if the settlement is not finalized and approved.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock, par value $0.01 per share, trades under
the symbol AKAM on The NASDAQ Global Select Market.
Prior to July 1, 2006, our common stock traded on the
NASDAQ National Market. The following
15
table sets forth, for the periods indicated, the high and low
sale price per share of the common stock on The NASDAQ Global
Select Market or The NASDAQ National Market, as applicable:
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High
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Low
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Fiscal 2005:
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First Quarter
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$
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13.32
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$
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10.64
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Second Quarter
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$
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14.80
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$
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11.14
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Third Quarter
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$
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16.00
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$
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13.02
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Fourth Quarter
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$
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22.25
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$
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15.20
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Fiscal 2006:
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First Quarter
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$
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33.17
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$
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19.57
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Second Quarter
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$
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36.94
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$
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27.14
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Third Quarter
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$
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50.90
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$
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29.28
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Fourth Quarter
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$
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56.80
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$
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44.77
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As of February 23, 2007, there were 713 holders of record
of our common stock.
We have never paid or declared any cash dividends on shares of
our common stock or other securities and do not anticipate
paying any cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use
in the operation of our business. We did not repurchase any
equity securities in 2006.
On December 13, 2006, we completed our acquisition of Nine
Systems by acquiring all of the outstanding common and preferred
stock, including vested and unvested stock options, of Nine
Systems in exchange for approximately 2.7 million shares of
our common stock, approximately $4.5 million in cash and
the assumption of options to purchase approximately
400,000 shares of our common stock. We issued the shares of
our common stock in the merger to persons who qualified as
accredited investors within the meaning of
Rule 501(a) of Regulation D under the Securities Act
of 1933, as amended, or the Securities Act. Each such person
represented to us that it was the intent to acquire the shares
of Akamai common stock for investment purposes for their own
account and that such person had adequate opportunity to obtain
from representatives of Akamai such information about us as was
necessary for such person to evaluate the merits and risks of
the acquisition of shares of Akamai common stock. No general
solicitation or general advertising was undertaken in connection
with the offering. All securities issued were endorsed with a
restrictive legend confirming that the securities could not be
resold without registration under the Act or an applicable
exemption from the registration requirements of the Act. We also
agreed to assume all outstanding vested and unvested options to
purchase common stock of Nine Systems. The options are now
exercisable for shares of our common stock pursuant to the terms
of the existing agreements governing such options after giving
effect to the common stock exchange ratio set forth in the
agreement and plan of merger between the parties.
On February 2, 2007, we entered into an agreement and plan
of merger for the acquisition of all of the outstanding capital
stock, options and warrants of Netli. Under the terms of the
agreement, we have agreed to issue approximately
3.2 million shares of our common stock to investors who
will qualify as accredited investors within the
meaning of Rule 501(a) of Regulation D and to fewer
than 35 unaccredited investors such that the securities will be
issued without registration under the Securities Act pursuant to
the exemptions set forth in Section 4(2) of the Securities
Act and Rule 506 of Regulation D. With respect to each
person considered to be an accredited investor, such person will
represent to us that it is the intent to acquire the shares of
Akamai common stock for investment purposes for their own
account and that such person had adequate opportunity to obtain
from representatives of Akamai such information about us as is
necessary for such person to evaluate the merits and risks of
the acquisition of shares of Akamai common stock. No general
solicitation or general advertising has or will be undertaken in
connection with the offering. All securities issued will be
endorsed with a restrictive legend confirming that the
securities could not be resold without registration under the
Act or an applicable exemption from the registration
requirements of the Act. We also agreed to assume all
outstanding vested and unvested options and warrants to purchase
shares of common stock of Netli. The options and warrants will
be exercisable for shares of our common stock pursuant to the
terms of the existing agreements governing such options and
warrants after giving effect to the common stock exchange ratio
set forth in the agreement and plan of merger between the
parties.
16
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this Annual Report on
Form 10-K.
The consolidated statement of operations data and balance sheet
data for all periods presented is derived from audited
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K
or in Annual Reports on
Form 10-K
for prior years on file with the Securities and Exchange
Commission.
Loss from continuing operations for the year ended
December 31, 2002 includes restructuring charges of
$45.8 million for actual and estimated termination and
modification costs related to non-cancelable facility leases and
employee severance.
Loss from continuing operations for the year ended
December 31, 2003 includes a restructuring credit of
$8.5 million for the reversal of previously accrued
restructuring liabilities and a loss on early extinguishment of
debt of $2.1 million. Income from continuing operations for
the years ended December 31, 2005 and 2004 includes a loss
on early extinguishment of debt of $1.4 million and
$6.8 million, respectively.
In 2005, we acquired Speedera Networks, Inc., which was
accounted for under the purchase method of accounting, for a
purchase price of $142.2 million, comprised primarily of
our common stock. We allocated $138.1 million of the cost
of this acquisition to goodwill and other intangible assets.
Income from continuing operations for the year ended
December 31, 2005 includes $5.1 million for the
amortization of other intangible assets related to this
acquisition.
In 2005, we released nearly all of our United States and foreign
deferred tax asset valuation allowance. Based upon our
cumulative operating results and an assessment of our expected
future results, we determined that is was more likely than not
that our deferred tax assets will be realized. During 2005, the
total valuation allowance release recorded as an income tax
benefit in the statement of operations was $285.8 million.
Additionally, in 2005, we completed an equity offering of
12,000,000 shares of our common stock at a price of
$16.855 per share for proceeds of $202.1 million, net
of offering expenses. We also redeemed all $56.6 million in
principal amount of our then-remaining outstanding
51/2% convertible
subordinated notes for total cash payments of $58.1 million
in 2005.
On January 1, 2006, we adopted, on a modified prospective
basis, the provisions of 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
stock-based compensation expense increased in 2006, causing our
net income to decrease significantly. For the year ended
December 31, 2006, our pre-tax stock compensation expense
was $49.6 million.
In 2006, we acquired Nine Systems for a purchase price of
$157.7 million, comprised primarily of our common stock.
This acquisition was accounted for under the purchase method of
accounting. We allocated $171.4 million of the cost of this
acquisition to goodwill and other intangible assets. Net income
from continuing operations for the
17
year ended December 31, 2006 includes $104,000 for the
amortization of other intangible assets related to this
acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
428,672
|
|
|
$
|
283,115
|
|
|
$
|
210,015
|
|
|
$
|
161,259
|
|
|
$
|
144,976
|
|
Total costs and operating expenses
|
|
|
345,566
|
|
|
|
209,740
|
|
|
|
161,048
|
|
|
|
172,370
|
|
|
|
327,580
|
|
Operating income (loss)
|
|
|
83,106
|
|
|
|
73,375
|
|
|
|
48,967
|
|
|
|
(11,111
|
)
|
|
|
(182,604
|
)
|
Net income (loss)
|
|
|
57,401
|
|
|
|
327,998
|
|
|
|
34,364
|
|
|
|
(29,281
|
)
|
|
|
(204,437
|
)
|
Net income (loss) per weighted
average share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
|
$
|
(0.25
|
)
|
|
$
|
(1.81
|
)
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
|
$
|
(0.25
|
)
|
|
$
|
(1.81
|
)
|
Weighted average shares used in
per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,366
|
|
|
|
136,167
|
|
|
|
124,407
|
|
|
|
118,075
|
|
|
|
112,766
|
|
Diluted
|
|
|
176,767
|
|
|
|
156,944
|
|
|
|
146,595
|
|
|
|
118,075
|
|
|
|
112,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
marketable securities
|
|
$
|
430,247
|
|
|
$
|
309,574
|
|
|
$
|
103,763
|
|
|
$
|
198,707
|
|
|
$
|
111,765
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
Restricted marketable securities
|
|
|
4,207
|
|
|
|
4,555
|
|
|
|
4,654
|
|
|
|
4,648
|
|
|
|
13,405
|
|
Working capital
|
|
|
285,409
|
|
|
|
293,122
|
|
|
|
61,903
|
|
|
|
139,756
|
|
|
|
60,584
|
|
Total assets
|
|
|
1,247,932
|
|
|
|
891,499
|
|
|
|
182,743
|
|
|
|
278,941
|
|
|
|
229,863
|
|
Current portion of obligations
under capital leases and equipment loans
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
775
|
|
|
|
1,207
|
|
Current portion of accrued
restructuring
|
|
|
1,820
|
|
|
|
1,749
|
|
|
|
1,393
|
|
|
|
1,638
|
|
|
|
23,622
|
|
Current portion of
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
Obligations under capital leases
and equipment loans, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,006
|
|
Accrued restructuring, net of
current portion
|
|
|
318
|
|
|
|
1,844
|
|
|
|
2,259
|
|
|
|
3,641
|
|
|
|
13,994
|
|
Other long-term liabilities
|
|
|
3,657
|
|
|
|
3,565
|
|
|
|
3,035
|
|
|
|
1,994
|
|
|
|
1,854
|
|
1% convertible senior notes
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
175,000
|
|
|
|
|
|
51/2% convertible
subordinated notes, net of current portion
|
|
|
|
|
|
|
|
|
|
|
56,614
|
|
|
|
211,000
|
|
|
|
300,000
|
|
Total stockholders equity
(deficit)
|
|
$
|
954,693
|
|
|
$
|
624,214
|
|
|
$
|
(125,931
|
)
|
|
$
|
(175,354
|
)
|
|
$
|
(168,090
|
)
|
18
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We provide services for accelerating and improving the delivery
of content and applications over the Internet. 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. In recent years, however, we
have entered into increasing numbers of customer contracts that
have minimum usage commitments that are based on twelve-month or
longer periods. Our goal of having a consistent and predictable
base level of income is important to our financial success.
Accordingly, to be successful, we must maintain our base of
recurring revenue contracts by eliminating or reducing lost
monthly or annual 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 functions our existing customers purchase. At the same time,
we must ensure that our expenses do not increase faster than, or
at the same rate as, our revenues. 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.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and notes
thereto which appear elsewhere in this Annual Report on
Form 10-K.
See Risk Factors elsewhere in this Annual Report on
Form 10-K
for a discussion of certain risks associated with our business.
The following discussion contains forward-looking statements.
The forward-looking statements do not include the potential
impact of any mergers, acquisitions, or divestitures of business
combinations that may be announced after the date hereof.
Recent
Events
On December 13, 2006, we acquired all of the outstanding
equity of Nine Systems in exchange for approximately
2.7 million shares of Akamai common stock and approximately
$4.5 million in cash, and we assumed options that had been
issued by Nine Systems Corporation that are exercisable for
approximately 400,000 shares of Akamai common stock. The
revenues and expenses generated from the acquisition date,
December 13, 2006, to December 31, 2006 were not
significant to our fiscal 2006 financial results reported in our
consolidated statement of operations included elsewhere in this
Annual Report on
Form 10-K.
On February 5, 2007, we announced that we had entered into
an Agreement and Plan of Merger to acquire Netli. Under the
terms of the Agreement and Plan of Merger, upon consummation, we
will acquire all of the outstanding equity of Netli in exchange
for approximately 3.2 million shares of Akamais
common stock, subject to certain closing adjustments.
19
Our improved financial results in 2006 as compared to 2005 and
2004 reflect the success of our efforts to increase our monthly
and annual recurring revenues while limiting the expenses needed
to support such growth. The following sets forth, as a
percentage of revenues, consolidated statements of operations
data for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
22
|
|
|
|
20
|
|
|
|
22
|
|
Research and development
|
|
|
8
|
|
|
|
6
|
|
|
|
6
|
|
Sales and marketing
|
|
|
28
|
|
|
|
28
|
|
|
|
27
|
|
General and administrative
|
|
|
21
|
|
|
|
19
|
|
|
|
22
|
|
Amortization of other intangible
assets
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
81
|
|
|
|
75
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19
|
|
|
|
25
|
|
|
|
23
|
|
Interest income
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
22
|
|
|
|
25
|
|
|
|
17
|
|
Provision (benefit) for income
taxes
|
|
|
9
|
|
|
|
(91
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13
|
%
|
|
|
116
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We were profitable for fiscal years 2006, 2005 and 2004;
however, we cannot guarantee continued profitability for any
period in 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 in 2006 and 2005, the dollar volume of new
recurring revenue contracts 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 in the future.
|
|
|
|
During 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.
|
|
|
|
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
stock-based compensation expense increased in 2006 as compared
to 2005, causing our net income to decrease significantly. For
the year ended December 31, 2006, our pre-tax stock-based
compensation expense was $49.6 million, as compared to
$3.8 million and $1.3 million for the years ended
December 31, 2005 and 2004, respectively. We expect that
stock-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 December 31, 2006, our total pre-tax
unrecognized compensation costs for stock-based awards were
$107.5 million, which we expect to recognize as expense
over a weighted average period of 1.5 years.
|
|
|
|
During 2006, revenues derived from customers outside the United
States accounted for 22% of our total revenues. We expect that
revenues from customers outside the United States as a
percentage of our total revenues will be between 20% and 25% in
2007.
|
|
|
|
During 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
|
20
|
|
|
|
|
costs increased during 2006. We believe that our overall
bandwidth costs will continue to increase as a result of
expected higher traffic levels, partially offset by continued
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 in 2007.
|
|
|
|
|
|
Depreciation expense related to our network equipment increased
in 2006 as compared to 2005 as we have increased our purchases
of servers during the year in an effort to expand our network
and improve the quality of our services. We expect this trend to
continue in 2007; accordingly, we believe that depreciation
expense related to our network equipment will continue to
increase. In addition, we expect to continue to enhance and add
functionality to our service offerings and, therefore, to
increase the amount of capitalized internal-use software costs,
which includes stock-based 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 in 2007.
|
|
|
|
During 2006, our effective tax rate, including discrete items,
was 41.5%. While we expect our annual effective tax rate to
remain relatively constant in 2007, we do not expect to make
significant cash tax payments due to the continued utilization
of our net operating loss carryforwards.
|
Based on our analysis of these identified trends and events, we
expect to continue to generate net income on a quarterly and
annual basis during 2007; however, our future results and our
ability to generate profits will be affected by many factors
identified below and in the section of this report entitled
Risk Factors, 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.
|
Given these uncertainties, there is no assurance that we will
achieve our expected financial objectives, including positive
net income.
Application
of Critical Accounting Policies and Estimates
Overview
Our managements discussion and analysis of our financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. These principles require us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, cash flow and
related disclosure of contingent assets and liabilities. Our
estimates include those related to revenue recognition, accounts
receivable and related reserves, capitalized internal-use
software costs, intangible assets and goodwill, income and other
taxes, impairment and useful lives of long-lived assets,
restructuring liabilities, loss contingencies and stock-based
compensation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable
under the circumstances at the time such estimates are made.
Actual results may differ from these estimates. For a complete
description of our significant accounting policies, see
Note 2 to our consolidated financial statements included in
this Annual Report on
Form 10-K.
Definitions
We define our critical accounting policies as those
accounting principles generally accepted in the
United States of America that require us to make subjective
estimates about matters that are uncertain and are likely to
have a material impact on our financial condition and results of
operations as well as the specific manner in which we apply
those principles. Our estimates are based upon assumptions and
judgments about matters that are
21
highly uncertain at the time the accounting estimate is made and
applied and require us to assess a range of potential outcomes.
Review
of Critical Accounting Policies and Estimates
Revenue
Recognition:
We recognize service revenue in accordance with the Securities
and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
the Financial Accounting Standards Board, or FASB, Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the
service is performed and collectibility of the resulting
receivable is reasonably assured.
At the inception of a customer contract for service, we make an
estimate as to that customers ability to pay for the
services provided. We base our estimate on a combination of
factors, including the successful completion of a credit check
or financial review, our payment history with the customer and
other forms of payment assurance. Upon the completion of these
steps, we recognize revenue monthly in accordance with our
revenue recognition policy. If we subsequently determine that
collection from the customer is not reasonably assured, we
record an allowance for doubtful accounts and bad debt expense
for all of that customers unpaid invoices and cease
recognizing revenue for continued services provided until cash
is received. Changes in our estimates and judgments about
whether collection is reasonably assured would change the timing
of revenue or amount of bad debt expense that we recognize.
We primarily derive income from the sale of services to
customers executing contracts with terms of one year or longer.
These contracts generally commit the customer to a minimum
monthly or annual level of usage and provide the rate at which
the customer must pay for actual usage above the monthly or
annual minimum. For these services, we recognize the monthly
minimum as revenue each month provided that an enforceable
contract has been signed by both parties, the service has been
delivered to the customer, the fee for the service is fixed or
determinable and collection is reasonably assured. Should a
customers usage of our service exceed the monthly minimum,
we recognize revenue for such excess usage in the period of the
usage. For annual revenue commitments, we recognize revenue
monthly based upon the customers usage in such period. We
typically charge the customer an installation fee when the
services are first activated. The installation fees are recorded
as deferred revenue and recognized as revenue ratably over the
estimated life of the customer arrangement. We also derive
income from services sold as discrete, non-recurring events or
based solely on usage. For these services, we recognize revenue
after an enforceable contract has been signed by both parties,
the fee is fixed or determinable, the event or usage has
occurred and collection is reasonably assured.
When more than one element is contained in a single arrangement,
we allocate revenue between the elements based on each
elements relative fair value, provided that each element
meets the criteria as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the
customer on a standalone basis and there is objective and
verifiable evidence of the fair value of the separate elements.
Fair value is generally determined based upon the price charged
when the element is sold separately. If the fair value of each
element cannot be objectively determined, the total value of the
arrangement is recognized ratably over the entire service period
to the extent that all services have begun to be provided at the
outset of the period. For most multi-element service
arrangements to date, the fair value of each element has not
been objectively determinable. Therefore, all revenue under
these arrangements has been recognized ratably over the related
service period to the extent that all services have begun to be
provided at the outset of the period.
We also license software under perpetual and term license
agreements. We apply the provisions of Statement of Position, or
SOP, 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modifications of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. As prescribed by this guidance, we apply the
residual method of accounting. The residual method requires that
the portion of the total arrangement fee attributable to
undelivered elements, as indicated by vendor specific objective
evidence of fair value, is deferred and subsequently recognized
when delivered. The difference between the total arrangement fee
and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements, if all
other revenue recognition criteria of
SOP 97-2
are met.
22
We also sell our services through a reseller channel. Assuming
all other revenue recognition criteria are met, we recognize
revenue from reseller arrangements based on the resellers
contracted non-refundable minimum purchase commitments over the
term of the contract, plus amounts sold by the reseller to its
customers in excess of the minimum commitments. These excess
commitments are recognized as revenue in the period in which the
service is provided.
We recognize revenue from fixed-fee arrangements and software
arrangements that require significant customization or
modification using the
percentage-of-completion
method in accordance with Accounting Research Bulletin, or ARB,
No. 45, Long-Term Construction-Type Contracts,
and with the applicable guidance provided by
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. We generally recognize
revenue under these arrangements based on the percentage of cost
incurred to date compared to the estimated total cost to
complete the project. In certain customer arrangements, we
recognize revenue based on the progress made towards achieving
milestones under the contract. The impact of any change in
estimate is recorded prospectively from the date of the change.
At the outset of a fixed-fee arrangement, if we are not able to
estimate the total
cost-to-complete,
nor able to measure progress towards the achievement of contract
milestones, we account for the arrangement using the
completed-contract method of accounting. Under this method, we
recognize revenue when the contract is complete and there are no
remaining costs or deliverables. In the event that the estimated
total cost on a fixed-fee contract indicates a loss, we will
record the loss immediately.
From time to time, we enter into contracts to sell our services
or license our technology to unrelated companies at or about the
same time we enter into contracts to purchase products or
services from the same companies. If we conclude that these
contracts were negotiated concurrently, we record as revenue
only the net cash received from the vendor, unless the product
or service received has a separate and identifiable benefit and
the fair value to us of the vendors product or service can
be objectively established.
We may from time to time resell licenses or services of third
parties. We record revenue for these transactions on a gross
basis when we have risk of loss related to the amounts purchased
from the third party and we add value to the license or service,
such as by providing maintenance or support for such license or
service. If these conditions are present, we recognize revenue
when all other revenue recognition criteria are satisfied.
Deferred revenue includes amounts billed to customers for which
revenue has not been recognized. Deferred revenue primarily
consists of the unearned portion of monthly billed service fees;
prepayments made by customers for future periods; deferred
installation and activation
set-up fees;
amounts billed under extended payment terms; and maintenance and
support fees charged under license arrangements.
Accounts
Receivable and Related Reserves:
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. In addition to trade accounts
receivable, our accounts receivable balance includes unbilled
accounts that represent revenue recorded for customers that is
typically billed within one month. We record reserves against
our accounts receivable balance. These reserves consist of
allowances for doubtful accounts, cash basis customers and
service credits. Increases and decreases in the allowance for
doubtful accounts are included as a component of general and
administrative expenses. The reserve for cash basis customers
increases as services are provided to customers for which
collection is no longer assured. The reserve decreases and
revenue is recognized when and if cash payments are received.
The reserve for service credits increases as a result of
specific service credits that are expected to be issued to
customers during the ordinary course of business, as well as for
billing disputes. These credits result in a reduction to
revenues. Decreases to the reserve for service credits are the
result of actual credits being issued to customers, causing a
corresponding reduction in accounts receivable.
Estimates are used in determining these reserves and are based
upon our review of outstanding balances on a customer-specific,
account-by-account
basis. The allowance for doubtful accounts is based upon a
review of customer receivables from prior sales with collection
issues where we no longer believe that the customer has the
ability to pay for prior services provided. We reserve for all
invoices that have been outstanding greater than one year. We
perform on-going credit evaluations of our customers. If such an
evaluation indicates that payment is no longer reasonably
assured for services provided, any future services provided to
that customer will result in creation of a cash basis reserve
until we receive consistent payments. In addition, we reserve a
portion of revenues as a
23
reserve for service credits. Reserves for service credits are
measured based on an analysis of revenue credits to be issued
after the month of billing and an estimate for future credits.
These credits typically relate to managements estimate of
the resolution of customer disputes and billing adjustments. We
do not have any off-balance sheet credit exposure related to our
customers.
Impairment
and Useful Lives of Long-Lived Assets:
We review our long-lived assets, such as fixed assets and
intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Events that would trigger an impairment
review include a change in the use of the asset or forecasted
negative cash flows related to the asset. When such events
occur, we compare the carrying amount of the asset to the
undiscounted expected future cash flows related to the asset. If
this comparison indicates that an impairment is present, the
amount of the impairment is calculated as the difference between
the carrying amount and the fair value of the asset. If a
readily determinable market price does not exist, fair value is
estimated using discounted expected cash flows attributable to
the asset. The estimates required to apply this accounting
policy include forecasted usage of the long-lived assets and the
useful lives of these assets and expected future cash flows.
Changes in these estimates could materially impact results from
operations.
Goodwill
and Other Intangible Assets
We test goodwill for impairments on an annual basis or more
frequently if events or changes in circumstances indicate that
the asset might be impaired. We performed an impairment test of
goodwill as of January 1, 2006 and January 1, 2007.
These tests did not result in an impairment of goodwill. Other
intangible assets consist of completed technologies, customer
relationships, trademarks and non-compete agreements arising
from acquisitions of businesses and acquired license rights.
Purchased intangible assets, other than goodwill, are amortized
over their estimated useful lives based upon the economic value
derived from the related intangible assets. Goodwill is carried
at its historical cost.
Restructuring
Liabilities Related to Facility Leases:
When we vacate a facility subject to a non-cancelable long-term
lease, we record a restructuring liability for either the
estimated costs to terminate the lease or the estimated costs
that will continue to be incurred under the lease for its
remaining term where there is no economic benefit to us. In the
latter case, we measure the amount of the restructuring
liability as the amount of contractual future lease payments
reduced by an estimate of sublease income. To date, we have
recorded a restructuring liability when our management approves
and commits us to a plan to terminate a lease, the plan
specifically identifies the actions to be taken, and the actions
are scheduled to begin soon after management approves the plan.
In accordance with Statement of Financial Accounting Standards,
or SFAS, No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, we record restructuring
liabilities, discounted at the appropriate rate, for a facility
lease only when we have both vacated the space and completed all
actions needed to make the space readily available for sublease.
As of December 31, 2006, we had approximately $900,000 in
accrued restructuring liabilities related to vacated facilities,
which we expect will be paid within 12 months.
Loss
Contingencies:
We define a loss contingency as a condition involving
uncertainty as to a possible loss related to a previous event
that will not be resolved until one or more future events occur
or fail to occur. Our primary loss contingencies relate to
pending or threatened litigation. We record a liability for a
loss contingency when we believe that it is probable that a loss
has been incurred and the amount of the loss can be reasonably
estimated. When we believe the likelihood of a loss is less than
probable and more than remote, we do not record a liability.
Material loss contingencies are disclosed in the notes to the
consolidated financial statements.
Tax
Reserves:
Our provision for income taxes is comprised of a current and a
deferred portion. The current income tax provision is calculated
as the estimated taxes payable or refundable on tax returns for
the current year. The deferred
24
income tax provision is calculated for the estimated future tax
effects attributable to temporary differences and carryforwards
using expected tax rates in effect in the years during which the
differences are expected to reverse.
We currently have significant deferred tax assets resulting from
net operating loss carryforwards, tax credit carryforwards and
deductible temporary differences. Our management periodically
weighs the positive and negative evidence to determine if it is
more likely than not that some or all of the deferred tax assets
will be realized. During 2005, our management determined it was
more likely than not that substantially all of the deferred tax
assets would be realized, and, accordingly released
substantially all of our valuation allowance. This decision was
based on our cumulative history of earnings before taxes for
financial reporting purposes over a
12-quarter
period and on the projections of expected future taxable income.
The tax assets estimated to be realized in future periods have
been calculated by applying a blended federal and state tax rate
of 39.1%, which is based upon the tax rates expected to be in
effect, apportioned by jurisdiction, in the periods during which
the attributes are expected to be utilized. Changes in this
blended rate in future periods could have a material effect on
both the tax provision in the period of change as well as the
net deferred tax asset carrying value.
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 taxing jurisdictions. Our estimate
of the value of these 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 costs of the ultimate tax liability or benefit
from these matters may be materially greater or less than the
amount that we estimated.
In November 2005, the FASB issued FASB Staff Position SFAS
No. 123(R)-3, Transition Election to Accounting for
the Tax Effect of Share-Based Payment Awards. We have
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, we 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 us
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
net operating loss carryforwards.
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-based compensation 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 SFAS No. 123, Share-Based
Payment in the notes to our financial statements. See
Note 16 to the Financial Statements included elsewhere in
this Annual Report on
Form 10-K.
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 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.
Capitalized
Internal-Use Software Costs:
We capitalize the salaries and payroll-related costs of
employees and consultants who devote time to the development of
internal-use software projects. If a project constitutes an
enhancement to previously developed software, we assess whether
the enhancement is significant and creates additional
functionality to the software, thus
25
qualifying the work incurred for capitalization. Once the
project is complete, we estimate the useful life of the
internal-use software, and we periodically assess whether the
software is impaired. Changes in our estimates related to
internal-use software would increase or decrease operating
expenses or amortization recorded during the period.
Results
of Operations
Revenues. Total revenues increased 51%, or
$145.6 million, to $428.7 million for the year ended
December 31, 2006 as compared to $283.1 million for
the year ended December 31, 2005. Total revenues increased
35%, or $73.1 million, to $283.1 million for the year
ended December 31, 2005 as compared to $210.0 million
for the year ended December 31, 2004. The increase in total
revenues for 2006 as compared to 2005 was attributable to an
increase in service revenue of $146.0 million. Service
revenue, which consists of revenue from our content and
application delivery services, increased 52%, to
$427.5 million for the year ended December 31, 2006 as
compared to $281.5 million for the year ended
December 31, 2005. Service revenue was $206.8 million
for the year ended December 31, 2004. The increases in
service revenue during the periods presented were primarily
attributable to increases in the number of customers under
recurring revenue contracts, as well as increases in traffic and
additional services sold to new and existing customers and
increases in the average revenue per customer. The increases in
service revenue 2006 and 2005 are attributable to greater market
acceptance of our services among new customers and improvements
in our ability to sell additional features to our existing
customers. Our delivery of streaming services for a number of
high-profile media events during 2006 also contributed to higher
service revenue. Also contributing to the increases in service
revenue for the year ended December 31, 2006 were revenues
generated from customers of Speedera, which we acquired in June
2005. As of December 31, 2006, we had 2,347 customers under
recurring revenue contracts as compared to 1,910 as of
December 31, 2005, and 1,310 as of December 31, 2004.
Software and software-related revenue decreased 27%, or
$449,000, to $1.2 million for the year ended
December 31, 2006 as compared to $1.6 million for the
year ended December 31, 2005. Software and software-related
revenue was $3.3 million for the year ended
December 31, 2004. Software and software-related revenue
includes sales of customized software projects and technology
licensing. The decreases in software and software-related
revenue over the periods presented reflect 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
in 2007.
For 2006 and 2005, 22% and 21%, respectively, of our total
revenues was derived from our operations located outside of the
United States, of which 18% and 16% of total revenues,
respectively, was derived from operations in Europe. For 2004,
19% of our total revenues was derived from our operations
located outside of the United States, of which 14% of total
revenues was derived from operations in Europe. No single
country accounted for 10% or more of revenues derived outside of
the United States during these periods. We do not expect
international sales to increase as a percentage of our overall
sales in 2007. Resellers accounted for 20% of revenues in 2006,
24% in 2005 and 27% in 2004. For 2006 and 2005, no single
customer accounted for 10% or more of total revenues. For 2004,
Microsoft Corporation accounted for 10% 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 stock-based 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
stock-based compensation.
Cost of revenues increased 69%, or $38.4 million, to
$94.1 million for the year ended December 31, 2006 as
compared to $55.7 million for the year ended
December 31, 2005. Cost of revenues increased 21%, or
$9.5 million, to $55.7 million for the year ended
December 31, 2005 compared to $46.2 million for the
year ended December 31, 2004. These increases were
primarily due to an increase in the 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 continue to
invest in our infrastructure. Additionally, cost of revenues
increased in 2006 due to an increase in stock-based compensation
expense resulting from our adoption of SFAS No. 123(R).
Cost of revenues during 2006, 2005 and 2004 also included
credits received of approximately $1.5 million,
$1.2 million and $1.0 million, respectively, from
settlements and renegotiations entered into in connection with
26
billing disputes related to bandwidth contracts. Credits of this
nature may occur in the future; however, the timing and amount
of future credits, if any, will vary.
Cost of revenues is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Bandwidth, co-location and storage
fees
|
|
$
|
59.1
|
|
|
$
|
35.6
|
|
|
$
|
27.7
|
|
Payroll and related costs of
network operations personnel
|
|
|
5.8
|
|
|
|
3.8
|
|
|
|
3.5
|
|
Stock-based compensation
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Cost of software licenses
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
1.0
|
|
Depreciation and impairment of
network equipment and
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization of internal-use
software and stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
27.1
|
|
|
|
15.6
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
94.1
|
|
|
$
|
55.7
|
|
|
$
|
46.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have long-term purchase commitments for bandwidth usage and
co-location with various networks and Internet service
providers. For the years ending December 31, 2007, 2008 and
2009, the minimum commitments related to bandwidth usage and
co-location services are approximately $20.0 million,
$8.4 million and $897,000, respectively.
We believe cost of revenues will increase 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 increased payroll and related costs, as we continue to make
investments in our network to service our customer base. Cost of
revenues is also expected to increase as we continue to expense
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 and
our network. Research and development costs are expensed as
incurred, except certain internal use software development costs
eligible for capitalization. During the years ended
December 31, 2006, 2005 and 2004, we capitalized software
development costs of $11.7 million, $8.5 million and
$7.5 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, for the year
ended December 31, 2006, we capitalized $4.3 million
of stock-based compensation in accordance with SFAS
No. 123(R). These capitalized internal-use software costs
are amortized to cost of revenues over their estimated useful
lives of two years.
Research and development expenses increased 83%, or
$15.0 million, to $33.1 million for the year ended
December 31, 2006 as compared to $18.1 million for the
year ended December 31, 2005. Research and development
expenses increased 49%, or $5.9 million, to $18.1 for the
year ended December 31, 2005 as compared to the year ended
December 31, 2004. Research and development expenses for
the year ended December 31, 2004 were $12.1 million.
Research and development expense increased in 2006 due to an
increase in stock-based compensation expense resulting from
SFAS No. 123(R). The increase in 2005 was due to an
increase in payroll and related costs due to an increase in
headcount.
27
The following table quantifies the net changes in research and
development expenses over periods presented (in millions):
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|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Research and Development Expenses
|
|
|
|
2006 to 2005
|
|
|
2005 to 2004
|
|
|
Payroll and related costs
|
|
$
|
5.9
|
|
|
$
|
5.0
|
|
Stock-based compensation
|
|
|
10.4
|
|
|
|
0.9
|
|
Capitalization of internal-use
software development costs and other
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
15.0
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
|
We believe that research and development expenses will increase
in 2007, as we continue to increase our hiring of development
personnel and make investments in our core technology and
refinements to our other service offerings. Additionally,
research and development expenses are expected to increase as a
result of expensing stock-based compensation in accordance with
SFAS No. 123(R).
Sales and Marketing. Sales and marketing
expenses consist primarily of payroll and related costs,
stock-based 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 54%, or
$41.8 million, to $119.7 million for the year ended
December 31, 2006 as compared to $77.9 million for the
year ended December 31, 2005. Sales and marketing expenses
increased 40%, or $22.2 million, to $77.9 million for
the year ended December 31, 2005 as compared to
$55.7 million for the year ended December 31, 2004.
The increase in sales and marketing expenses during these
periods was partially the result of higher payroll and related
costs, particularly commissions, for sales and marketing
personnel, due to revenue growth. Additionally, marketing and
related expense increased in 2006 due to an increase in
stock-based compensation expense as a result of SFAS
No. 123(R).
The following table quantifies the net changes in sales and
marketing expenses for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
|
|
Sales and Marketing
|
|
|
|
Expenses
|
|
|
|
2006 to 2005
|
|
|
2005 to 2004
|
|
|
Payroll and related costs
|
|
$
|
23.4
|
|
|
$
|
17.0
|
|
Stock-based compensation
|
|
|
17.8
|
|
|
|
0.1
|
|
Marketing and related costs
|
|
|
(0.4
|
)
|
|
|
2.4
|
|
Other expense
|
|
|
1.0
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
41.8
|
|
|
$
|
22.2
|
|
|
|
|
|
|
|
|
|
|
We believe that sales and marketing expenses will continue to
increase in 2007 due to an expected increase in commissions on
higher forecasted sales of our services, the expected increase
in hiring of sales and marketing personnel and additional
expected increases in other marketing costs such as advertising.
Additionally, sales and marketing expenses are expected to
increase as a result of expensing stock-based compensation in
accordance with SFAS No. 123(R).
General and Administrative. General and
administrative expenses consist primarily of the following
components:
|
|
|
|
|
payroll, stock-based compensation and other related costs,
including expenses for executive, finance, business
applications, internal network management, human resources and
other administrative personnel;
|
|
|
|
depreciation of property and equipment used by us internally;
|
|
|
|
fees for professional services;
|
28
|
|
|
|
|
non-income related taxes;
|
|
|
|
insurance costs;
|
|
|
|
the provision for doubtful accounts; and
|
|
|
|
rent and other facility-related expenditures for leased
properties.
|
General and administrative expenses increased 70%, or
$37.2 million, to $90.2 million for the year ended
December 31, 2006 as compared to $53.0 million for the
year ended December 31, 2005. General and administrative
expenses increased 13%, or $6.0 million, to
$53.0 million for the year ended December 31, 2005 as
compared to $47.1 million for the year ended
December 31, 2004. The increase in general and
administrative expenses during 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. The
increase in general and administrative expenses during 2005 was
primarily due to an increase in payroll and related costs as a
result of headcount growth, as well as stock-based compensation
expense. These increases were offset by a reduction in legal and
consulting costs associated with the dismissal of the lawsuits
between Akamai and Speedera as a result of our acquisition of
Speedera and a reduction in non-income taxes as a result of
settlements with state taxation authorities in 2005 that allowed
us to reduce the related accrual. These
one-time
savings resulted in higher non-income taxes in 2006 as compared
to the prior year.
The following table quantifies the net changes in general and
administrative expenses for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
|
|
General and Administrative
|
|
|
|
Expenses
|
|
|
|
2006 to 2005
|
|
|
2005 to 2004
|
|
|
Payroll and related costs
|
|
$
|
10.0
|
|
|
$
|
6.4
|
|
Stock-based compensation
|
|
|
15.6
|
|
|
|
1.6
|
|
Non-income taxes
|
|
|
3.7
|
|
|
|
(2.4
|
)
|
Facilities and related costs
|
|
|
1.2
|
|
|
|
0.3
|
|
Depreciation and amortization
|
|
|
1.4
|
|
|
|
(1.1
|
)
|
Provision for doubtful accounts
|
|
|
0.2
|
|
|
|
1.5
|
|
Consulting and advisory services
|
|
|
0.6
|
|
|
|
(2.6
|
)
|
Other expenses
|
|
|
4.5
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
37.2
|
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006 and 2005, we
capitalized software development costs of $889,000 and $718,000,
respectively, consisting of external consulting fees and payroll
and payroll-related costs associated with the development of
internally-used software applications. Once the projects are
completed, such costs will be amortized and included in general
and administrative expenses.
We expect general and administrative expenses to increase in
2007 due to increased payroll and related costs attributable to
increased hiring, an increase in non-income tax expense and an
increase in rent and facilities costs because we expanded leased
office space during 2006. Additionally, general and
administrative expenses are expected to increase as a result of
higher stock-based compensation expense as a result of
SFAS No. 123(R).
Amortization of Other Intangible
Assets. Amortization of other intangible assets
consists of the amortization of intangible assets acquired in
business combinations and amortization of acquired license
rights. Amortization of other intangible assets increased to
$8.5 million for the year ended December 31, 2006 as
compared to $5.1 million for the year ended
December 31, 2005. Amortization of other intangible assets
for the year ended December 31, 2004 was $48,000. The
increase in amortization of other intangible assets in 2006 was
due to the amortization of intangible assets of $3.4 million in
connection with the acquisition of Nine Systems in December 2006
and Speedera in June 2005. The increase in amortization of
intangible assets in 2005 as compared to 2004 was due to the
amortization of intangible assets of $5.1 million in
connection with our acquisition of Speedera. We expect to
amortize approximately $10.7 million, $10.2 million,
$9.2 million, $7.6 million and $6.4 million for
fiscal years
29
2007, 2008, 2009, 2010 and 2011, respectively, as a result of
the Nine Systems and Speedera acquisitions. In January 2007, we
announced a plan to acquire Netli, Inc. If this acquisition is
completed, we expect that amortization of other intangible
assets will increase in the future.
Interest Income. Interest income includes
interest earned on invested cash balances and marketable
securities. Interest income increased 315%, or
$13.4 million, to $17.7 million for the year ended
December 31, 2006 as compared to $4.3 million for the
year ended December 31, 2005. Interest income increased
98%, or $2.1 million, to $4.3 million for the year
ended December 31, 2005 as compared to $2.2 million
for the year ended December 31, 2004. The increase in
interest income in 2006 as compared to 2005 and 2004 was due to
an increase in our invested marketable securities period over
period, due to the investment of $202.1 million in net
proceeds we received from our public equity offering of
12.0 million shares of our common stock in November 2005,
as well as generating greater cash flows 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 41%, or
$2.2 million, to $3.2 million for the year ended
December 31, 2006 compared to $5.3 million for the
year ended December 31, 2005. Interest expense decreased
48%, or $4.9 million, to $5.3 million for the year
ended December 31, 2005 as compared to $10.2 million
for the year ended December 31, 2004. The decrease during
each of these periods was due to lower interest expense as a
result of redemptions and repurchases of our
51/2%
convertible subordinated notes. During 2005 and 2004, we
redeemed or repurchased $56.6 million and
$169.4 million, respectively, in aggregate principal amount
of our
51/2% convertible
subordinated notes. As of December 31, 2006, there was an
aggregate principal amount of $200 million of our
1.0% convertible senior notes outstanding. We believe that
interest expense on our debt obligations, including deferred
financing amortization, will not exceed $3.1 million in
2007.
Other Income (Expense), net. Other income
(expense), net primarily represents net foreign exchange gains
and losses incurred during the periods presented, as well as
gains and losses on legal settlements. Other net expense
decreased 212%, or $1.1 million, to other net income of
$570,000 for the year ended December 31, 2006 as compared
to other net expense of $507,000 for the year ended
December 31, 2005. Other net income was $1.1 million
for the year ended December 31, 2004. Other net income for
the year ended December 31, 2006 represented $90,000 of
foreign exchange gains and $480,000 of net gains on legal
settlements. Other net expense of $507,000 for the year ended
December 31, 2005 represented approximately
$1.5 million of foreign exchange losses, offset by
$1.0 million of net gains on legal settlements. For the
year ended December 31, 2004, other net income of
$1.1 million represented approximately $518,000 of gains on
legal settlements and $543,000 of foreign exchange gains. Other
net income (expense) may fluctuate in the future based upon
movements in foreign exchange rates, the outcome of legal
proceedings and other events.
Gain (Loss) on Investments, net. During the
year ended December 31, 2006, we recorded a net gain on
investments of $261,000 on the sale of marketable securities.
During the years ended December 31, 2005 and 2004, we
recorded a net loss on investments of $27,000 and $69,000,
respectively, from the sale of marketable securities. We do not
expect significant gains or losses on investments in 2007.
Loss on Early Extinguishment of Debt. We had
no loss on early extinguishment of debt during 2006 because we
did not redeem or repurchase any debt during the year. Loss on
early extinguishment of debt decreased to $1.4 million for
the year ended December 31, 2005 as compared to
$6.8 million for the year ended December 31, 2004. The
decrease in loss on early extinguishment of debt in 2005 is due
to costs incurred in connection with our redemption of
$56.6 million in aggregate principal amount of our
51/2% convertible
subordinated notes during 2005. This loss of $1.4 million
consists of $889,000 in premiums above par value paid to redeem
such notes and $481,000 of deferred financing costs associated
with redeeming such notes prior to their maturity. During 2004,
we repurchased $169.4 million in principal amount of our
51/2% convertible
subordinated notes which resulted in a loss on early
extinguishment of debt of $6.8 million.
Provision (Benefit) for Income
Taxes. Provision for income taxes increased to
$41.1 million for the year ended December 31, 2006 as
compared to a benefit for income taxes of $257.6 million
during the year ended December 31, 2005. Provision for
income taxes was $772,000 for the year ended December 31,
2004. During 2005, in connection with the release of our
deferred tax asset valuation allowance, we recorded an income
tax benefit of $285.8 million which was offset by provision
for income taxes primarily related to our alternative minimum
tax
30
obligations and income earned in profitable foreign
jurisdictions. As a result of the release of the deferred tax
asset valuation allowance in 2005, we recorded a provision for
income taxes of $41.1 million in 2006. The provision for
income taxes for 2004 was primarily related to our alternative
minimum tax payment obligations and income earned in foreign
jurisdictions where we were profitable.
As of December 31, 2004, our United States and foreign net
operating losses, or NOLs, and other deferred tax assets were
fully offset by a valuation allowance primarily because at the
time, pursuant to SFAS No. 109, Accounting for
Income Taxes, we did not have sufficient history of
taxable income to conclude that it was more likely than not that
we would be able to realize the tax benefits of those deferred
tax assets. Based upon our cumulative history of earnings over a
12-quarter
period and an assessment of our expected future results of
operations, during the third quarter of 2005, we determined that
it had become more likely than not that we would be able to
realize a substantial portion of our United States and foreign
NOL carryforward tax assets prior to their expiration and other
deferred tax assets. As a result, during 2005, we released a
total of $349.5 million of our United States and foreign
deferred tax asset valuation allowance. Of the
$349.5 million, $285.8 million of the valuation
release was recorded as an income tax benefit in our statement
of operations, $61.0 million of the valuation release was
attributable to stock option exercises, which was recorded as an
increase in additional paid-in capital on our balance sheet, and
approximately $2.7 million of the valuation release was
recorded as a reduction to acquired goodwill and intangible
assets.
As of December 31, 2006, we had a remaining valuation
allowance of $6.3 million. During the fourth quarter of
2006, we recorded additional deferred tax assets related to
acquired NOL carryforwards from Nine Systems. However, these
NOLs are subject to limitation pursuant to section 382 of
the Internal Revenue Code due to changes in ownership of more
than 50%. Because the realization of these deferred tax assets
does not meet the more likely than not criterion
under SFAS No. 109, we recorded a valuation allowance
of $4.4 million against the acquired NOLs. We continue to
maintain a valuation allowance of $1.9 million related to
certain state NOLs that we expect will expire unused.
While we expect our consolidated annualized effective tax rate
in 2007 to remain relatively consistent with 2006, this
expectation does not take into consideration the effect of
discrete items recorded as a result of our compliance with
SFAS No. 123(R). The effective tax rate including the
effect of discrete items could be materially different depending
on the nature and timing of the disposition of incentive and
other employee stock options.
Because of the availability of the NOLs discussed above, a
significant portion of our future provision for income taxes is
expected to be a non-cash expense; consequently, the amount of
cash paid with respect to 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 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.
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 taxing jurisdictions. Our estimate
of the value of these tax reserves reflects 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 from of
these matters may be materially greater or less than the amount
that we have estimated.
Liquidity
and Capital Resources
To date, we have financed our operations primarily through the
following transactions:
|
|
|
|
|
private sales of capital stock and subordinated notes, which
notes were repaid in 1999;
|
|
|
|
an initial public offering of our common stock in October 1999,
which generated net proceeds of $217.6 million;
|
31
|
|
|
|
|
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 repaid or redeemed in full between
December 2003 and September 2005;
|
|
|
|
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;
|
|
|
|
the public offering of 12.0 million shares of our common
stock in November 2005, which generated net proceeds of
$202.1 million;
|
|
|
|
proceeds from the exercise of stock awards; and
|
|
|
|
cash generated by operations.
|
As of December 31, 2006, cash, cash equivalents and
marketable securities totaled $434.5 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.
Cash provided by operating activities increased
$49.2 million to $132.0 million for the year ended
December 31, 2006 compared to $82.8 million for the
year ended December 31, 2005. Cash provided by operating
activities increased $31.6 million to $82.8 million
for the year ended December 31, 2005 compared to cash
provided by operating activities of $51.2 million for the
year ended December 31, 2004. The increase in cash provided
by operating activities for each of 2006 and 2005 as compared to
2004 was primarily due to increased service revenue 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 $205.6 million for
the year ended December 31, 2006, compared to
$183.8 million for the year ended December 31, 2005.
Cash provided by investing activities was $9.1 million for
the year ended December 31, 2004. Cash used in investing
activities for 2006 reflects net purchases of short and
long-term investments of $131.6 million and capital
expenditures of $69.3 million, consisting of the
capitalization of internal-use development costs related to our
current and future service offerings and purchases of network
infrastructure equipment. In addition, approximately
$5.1 million of cash, including transaction costs, was used
to acquire Nine Systems. These investments were offset by a
decrease of $400,000 in restricted investments previously held
for security deposits. Cash used in investing activities for the
year ended December 31, 2005 reflects net purchases of
marketable securities of $149.5 million primarily related
to the cash received from our equity financing in November 2005.
Additionally, cash used in investing activities for 2005
includes capital expenditures of $36.2 million. These
investments were offset by $1.7 million of cash acquired
through the Speedera acquisition and a decrease of $202,000 in
restricted investments previously held for security deposits.
Cash provided by investing activities for 2004 reflects proceeds
from net sales and maturities of investments of
$24.1 million, offset by capital expenditures of
$20.1 million. During 2004, cash provided by investing
activities also included a decrease of $5.0 million in
restricted cash to reflect our repurchase of $5.0 million
in principal amount of our
51/2%
convertible subordinated notes in early 2004 and a decrease of
$96,000 in restricted investments previously held for security
deposits. For 2007, we expect total capital expenditures, a
component of cash used in investing activities, to be
approximately the same percentage of revenues as 2006.
Cash provided by financing activities was $60.4 million for
the year ended December 31, 2006, compared to
$159.1 million for the year ended December 31, 2005.
Cash used in financing activities was $131.9 million for
the year ended December 31, 2004. Cash provided by
financing activities for the year ended December 31, 2006
included proceeds of $27.9 million from the issuance of
common stock upon the exercise of stock options and the sale of
shares under our employee stock purchase plan. Cash provided by
financing activities for the year ended December 31, 2006
also includes $32.5 million related to excess tax benefits
resulting from the exercise of stock options. Cash provided by
financing activities in 2005 reflects net proceeds from our
November 2005 equity offering of $202.1 million and
proceeds from issuances of common stock under our equity
compensation plans of
32
$14.5 million, offset by payments made to redeem $56.6
million in principal amount of our outstanding
51/2% convertible
subordinated notes and payments on capital lease obligations of
$818,000. Cash used in financing activities in 2004 reflects
payments for the repurchase of approximately $169.4 million
in aggregate principal amount of our
51/2%
convertible subordinated notes and payments on our capital
leases of $543,000, offset by net proceeds received from the
issuance of our 1% convertible senior notes of
$24.3 million and proceeds from issuances of common stock
under our equity compensation plans of $13.8 million.
Changes in cash, cash equivalents and marketable securities are
dependent upon changes in working capital items such as deferred
revenue, accounts payable, accounts receivable and various
accrued expenses, as well as changes in our capital and
financial structure, including 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash, cash equivalents and
marketable securities balance as of December 31, 2005, 2004
and 2003, respectively
|
|
$
|
314.1
|
|
|
$
|
108.4
|
|
|
$
|
208.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in cash, cash equivalents
and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipts from customers
|
|
|
412.3
|
|
|
|
271.7
|
|
|
|
206.2
|
|
Payments to vendors
|
|
|
(201.0
|
)
|
|
|
(135.1
|
)
|
|
|
(91.0
|
)
|
Payments for employee payroll
|
|
|
(134.6
|
)
|
|
|
(90.4
|
)
|
|
|
(68.4
|
)
|
Debt repurchases
|
|
|
|
|
|
|
(58.1
|
)
|
|
|
(169.4
|
)
|
Debt proceeds
|
|
|
|
|
|
|
|
|
|
|
24.3
|
|
Debt interest and premium payments
|
|
|
(2.0
|
)
|
|
|
(5.1
|
)
|
|
|
(18.1
|
)
|
Stock option exercises and
employee stock purchase plan issuances
|
|
|
27.9
|
|
|
|
14.5
|
|
|
|
13.8
|
|
Equity offering proceeds
|
|
|
|
|
|
|
202.1
|
|
|
|
|
|
Cash (used in) acquired through
business acquisitions
|
|
|
(4.5
|
)
|
|
|
3.9
|
|
|
|
|
|
Interest income
|
|
|
17.7
|
|
|
|
4.3
|
|
|
|
2.2
|
|
Other
|
|
|
4.6
|
|
|
|
(2.1
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
120.4
|
|
|
|
205.7
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
marketable securities balance as of December 31, 2006, 2005
and 2004, respectively
|
|
$
|
434.5
|
|
|
$
|
314.1
|
|
|
$
|
108.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe, based on our current business plan, that our cash,
cash equivalents and marketable securities of
$434.5 million as of December 31, 2006 and forecasted
cash flows from operations will be sufficient to meet our cash
needs for working capital and capital expenditures and
restructuring expenses 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
such debt could impose restrictions on our operations. The sale
of additional equity or convertible debt securities would also
result in additional dilution to our stockholders. See
Risk Factors elsewhere in this Annual Report on
Form 10-K
for further discussion of potential dilution.
33
Contractual
Obligations, Contingent Liabilities and Commercial
Commitments
The following table presents our contractual obligations and
commercial commitments as of December 31, 2006 over the
next five years and thereafter (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual
|
|
|
|
|
Less than
|
|
|
12 to 36
|
|
|
36 to 60
|
|
|
More than
|
|
Obligations
|
|
Total
|
|
|
12 Months
|
|
|
Months
|
|
|
Months
|
|
|
60 Months
|
|
|
1% convertible senior notes
|
|
$
|
200.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
200.0
|
|
Interest on convertible notes
outstanding assuming no early redemption or repurchases
|
|
|
54.0
|
|
|
|
2.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
44.0
|
|
Real estate operating leases
|
|
|
23.0
|
|
|
|
9.0
|
|
|
|
13.2
|
|
|
|
0.8
|
|
|
|
|
|
Bandwidth and co-location
agreements
|
|
|
29.3
|
|
|
|
20.0
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
Vendor equipment purchase
obligations
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open vendor purchase orders
|
|
|
12.5
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
319.3
|
|
|
$
|
44.0
|
|
|
$
|
26.5
|
|
|
$
|
4.8
|
|
|
$
|
244.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of Credit
As of December 31, 2006, we had outstanding
$4.2 million in irrevocable letters of credit issued by us
in favor of third-party beneficiaries, primarily related to
long-term 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 our consolidated balance sheet dated as
of December 31, 2006. The restrictions on these marketable
securities lapse as we fulfill our obligations or as such
obligations expire under the terms of the letters of credit.
These restrictions are expected to lapse at various times
through May 2011.
Off-Balance
Sheet Arrangements
We have entered into various indemnification arrangements with
third parties, including vendors, customers, landlords, our
officers and directors, stockholders of acquired companies,
joint venture partners and third parties to whom and from whom
we license technology. Generally, these indemnification
agreements require us to reimburse losses suffered by third
parties 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 FASB Interpretation 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. To date, we have not encountered material costs as
a result of such obligations and have not accrued any
liabilities related to such indemnification obligations in our
financial statements. See Note 11 to our consolidated
financial statements included in this Annual Report on
Form 10-K
for further discussion of these indemnification agreements.
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 Derivative Instruments and Hedging Activities, and are
accordingly not accounted for as derivatives for purposes of
SFAS No. 133. See Note 12 to our consolidated
financial statements for more information.
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. See Legal Proceedings elsewhere in this
annual report on
Form 10-K
for further discussion on litigation.
34
Recent
Accounting Pronouncements
In June 2006, the 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 be effective for us
beginning in 2007. We do not expect the implementation of
FIN No. 48 to have a material impact on our financial
statements.
In September 2006, the Securities and Exchange Commission, or
the SEC, released Staff Accounting Bulletin No. 108,
or SAB 108. SAB 108 expresses the SEC staffs
views regarding the process of quantifying financial statement
misstatements. 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.
The implementation of SAB 108 did not have a material
impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or 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.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates
relates primarily to our debt and investment portfolio. In our
investment portfolio we do not use derivative financial
instruments. 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 and municipal 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
December 31, 2006, the aggregate outstanding principal
amount and the fair value of the 1% convertible senior
notes were $200.0 million and $374.4 million,
respectively.
We have operations in Europe and Asia. 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, which may increase our exposure
to foreign exchange fluctuations. We do not have any foreign
hedge contracts.
35
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
AKAMAI
TECHNOLOGIES, INC.
Index to
Consolidated Financial Statements and Schedule
|
|
|
|
|
|
|
Page
|
|
|
|
|
37
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
Schedule:
|
|
|
|
|
|
|
|
S-1
|
|
36
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Akamai
Technologies, Inc.:
We have completed integrated audits of Akamai Technologies,
Inc.s consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2006 in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the accompanying index, present fairly, in all material
respects, the financial position of Akamai Technologies, Inc.
and its subsidiaries at December 31, 2006 and
December 31, 2005, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 16 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing on page 80 of this
Form 10-K,
that the Company maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made
37
only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 1, 2007
38
AKAMAI
TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
80,595
|
|
|
$
|
91,792
|
|
Marketable securities (including
restricted securities of $1,105 and $730 at December 31,
2006 and 2005, respectively)
|
|
|
189,246
|
|
|
|
200,616
|
|
Accounts receivable, net of
reserves of $7,866 and $7,994 at December 31, 2006 and
2005, respectively
|
|
|
86,232
|
|
|
|
52,162
|
|
Prepaid expense and other current
assets
|
|
|
13,252
|
|
|
|
6,462
|
|
Deferred income taxes
|
|
|
5,348
|
|
|
|
3,966
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
374,673
|
|
|
|
354,998
|
|
Property and equipment, net
|
|
|
86,623
|
|
|
|
44,885
|
|
Marketable securities (including
restricted securities of $3,102 and $3,825 at December 31,
2006 and 2005, respectively)
|
|
|
164,613
|
|
|
|
21,721
|
|
Goodwill
|
|
|
239,580
|
|
|
|
98,519
|
|
Other intangible assets, net
|
|
|
58,683
|
|
|
|
38,267
|
|
Deferred income taxes assets, net
|
|
|
319,504
|
|
|
|
328,308
|
|
Other assets
|
|
|
4,256
|
|
|
|
4,801
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,247,932
|
|
|
$
|
891,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
22,630
|
|
|
$
|
16,022
|
|
Accrued expenses
|
|
|
58,083
|
|
|
|
38,449
|
|
Deferred revenue
|
|
|
6,731
|
|
|
|
5,656
|
|
Current portion of accrued
restructuring
|
|
|
1,820
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,264
|
|
|
|
61,876
|
|
Accrued restructuring, net of
current portion
|
|
|
318
|
|
|
|
1,844
|
|
Other liabilities
|
|
|
3,657
|
|
|
|
3,565
|
|
1% convertible senior notes
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
293,239
|
|
|
|
267,285
|
|
|
|
|
|
|
|
|
|
|
Commitments, contingencies and
guarantees (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
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 December 31, 2006
and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 700,000,000 shares authorized;
160,298,922 shares issued and outstanding at
December 31, 2006; 152,922,092 shares issued and
outstanding at December 31, 2005
|
|
|
1,603
|
|
|
|
1,529
|
|
Additional paid-in capital
|
|
|
4,145,627
|
|
|
|
3,880,985
|
|
Deferred compensation
|
|
|
|
|
|
|
(7,537
|
)
|
Accumulated other comprehensive
income, net
|
|
|
1,296
|
|
|
|
471
|
|
Accumulated deficit
|
|
|
(3,193,833
|
)
|
|
|
(3,251,234
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
954,693
|
|
|
|
624,214
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,247,932
|
|
|
$
|
891,499
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
39
AKAMAI
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
427,474
|
|
|
$
|
281,468
|
|
|
$
|
206,762
|
|
Software and software-related
|
|
|
1,198
|
|
|
|
1,647
|
|
|
|
3,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
428,672
|
|
|
|
283,115
|
|
|
|
210,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
94,100
|
|
|
|
55,655
|
|
|
|
46,150
|
|
Research and development
|
|
|
33,102
|
|
|
|
18,071
|
|
|
|
12,132
|
|
Sales and marketing
|
|
|
119,689
|
|
|
|
77,876
|
|
|
|
55,663
|
|
General and administrative
|
|
|
90,191
|
|
|
|
53,014
|
|
|
|
47,055
|
|
Amortization of other intangible
assets
|
|
|
8,484
|
|
|
|
5,124
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and operating expenses
|
|
|
345,566
|
|
|
|
209,740
|
|
|
|
161,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
83,106
|
|
|
|
73,375
|
|
|
|
48,967
|
|
Interest income
|
|
|
17,703
|
|
|
|
4,263
|
|
|
|
2,158
|
|
Interest expense
|
|
|
(3,171
|
)
|
|
|
(5,330
|
)
|
|
|
(10,213
|
)
|
Other income (expense), net
|
|
|
570
|
|
|
|
(507
|
)
|
|
|
1,061
|
|
Gain (loss) on investments, net
|
|
|
261
|
|
|
|
(27
|
)
|
|
|
(69
|
)
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
(1,370
|
)
|
|
|
(6,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
98,469
|
|
|
|
70,404
|
|
|
|
35,136
|
|
Provision (benefit) for income
taxes
|
|
|
41,068
|
|
|
|
(257,594
|
)
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,401
|
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted average
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
Shares used in per share
calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
155,366
|
|
|
|
136,167
|
|
|
|
124,407
|
|
Diluted
|
|
|
176,767
|
|
|
|
156,944
|
|
|
|
146,595
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
40
AKAMAI
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,401
|
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
40,585
|
|
|
|
24,153
|
|
|
|
18,810
|
|
Amortization of deferred financing
costs
|
|
|
841
|
|
|
|
1,017
|
|
|
|
1,396
|
|
Stock-related compensation
|
|
|
49,556
|
|
|
|
3,849
|
|
|
|
1,292
|
|
Change in deferred income taxes,
net, including release of deferred tax asset valuation allowance
in 2005
|
|
|
38,510
|
|
|
|
(258,669
|
)
|
|
|
408
|
|
Provision for doubtful accounts
|
|
|
830
|
|
|
|
1,147
|
|
|
|
(231
|
)
|
Excess tax benefit from stock-based
compensation
|
|
|
(32,511
|
)
|
|
|
|
|
|
|
|
|
Non-cash portion of loss on early
extinguishment of debt
|
|
|
|
|
|
|
481
|
|
|
|
2,453
|
|
Foreign currency (gains) losses, net
|
|
|
(756
|
)
|
|
|
814
|
|
|
|
(377
|
)
|
(Gains) losses on investments and
disposal of property and equipment, net
|
|
|
(228
|
)
|
|
|
36
|
|
|
|
58
|
|
Changes in assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(28,020
|
)
|
|
|
(19,455
|
)
|
|
|
(8,516
|
)
|
Prepaid expenses and other current
assets
|
|
|
(8,062
|
)
|
|
|
1,483
|
|
|
|
3,053
|
|
Accounts payable, accrued expenses
and other current liabilities
|
|
|
15,382
|
|
|
|
(1,032
|
)
|
|
|
(130
|
)
|
Deferred revenue
|
|
|
343
|
|
|
|
3,267
|
|
|
|
(329
|
)
|
Accrued restructuring
|
|
|
(1,970
|
)
|
|
|
(1,816
|
)
|
|
|
(1,630
|
)
|
Other non-current assets and
liabilities
|
|
|
66
|
|
|
|
(475
|
)
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
131,967
|
|
|
|
82,798
|
|
|
|
51,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash
(used) acquired
|
|
|
(5,127
|
)
|
|
|
1,717
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(56,752
|
)
|
|
|
(26,947
|
)
|
|
|
(12,342
|
)
|
Capitalization of internal-use
software costs
|
|
|
(12,576
|
)
|
|
|
(9,213
|
)
|
|
|
(7,759
|
)
|
Purchases of short and long-term
available for sale securities
|
|
|
(395,871
|
)
|
|
|
(215,633
|
)
|
|
|
(187,674
|
)
|
Proceeds from sales and maturities
of short and long-term available for sale securities
|
|
|
264,308
|
|
|
|
66,099
|
|
|
|
211,753
|
|
Proceeds from sales of property and
equipment
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Decrease in restricted investments
held for security deposits
|
|
|
400
|
|
|
|
202
|
|
|
|
96
|
|
Decrease in restricted cash held
for note repurchases
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(205,618
|
)
|
|
|
(183,775
|
)
|
|
|
9,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
1% convertible senior notes, net of financing costs
|
|
|
|
|
|
|
|
|
|
|
24,313
|
|
Payments on capital leases
|
|
|
|
|
|
|
(818
|
)
|
|
|
(543
|
)
|
Repurchase of
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
(56,614
|
)
|
|
|
(169,386
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
32,511
|
|
|
|
|
|
|
|
|
|
Proceeds from equity offering, net
of issuance costs
|
|
|
|
|
|
|
202,068
|
|
|
|
|
|
Proceeds from the issuance of
common stock under stock option and employee stock purchase plans
|
|
|
27,918
|
|
|
|
14,462
|
|
|
|
13,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
60,429
|
|
|
|
159,098
|
|
|
|
(131,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate translation
on cash and cash equivalents
|
|
|
2,025
|
|
|
|
(1,647
|
)
|
|
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(11,197
|
)
|
|
|
56,474
|
|
|
|
(70,334
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
91,792
|
|
|
|
35,318
|
|
|
|
105,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
80,595
|
|
|
$
|
91,792
|
|
|
$
|
35,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,005
|
|
|
$
|
5,704
|
|
|
$
|
15,341
|
|
Cash paid for income taxes
|
|
|
3,455
|
|
|
|
1,494
|
|
|
|
|
|
Non-cash financing and investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of stock-based
compensation, net of impairments
|
|
$
|
4,262
|
|
|
$
|
|
|
|
$
|
|
|
Acquisition of equipment through
capital leases
|
|
|
|
|
|
|
586
|
|
|
|
|
|
Common stock and vested common
stock options issued in connection with acquisition of a business
|
|
|
152,560
|
|
|
|
130,510
|
|
|
|
|
|
Value of deferred compensation
recorded for issuance of deferred stock units and restricted
stock
|
|
|
|
|
|
|
930
|
|
|
|
601
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
41
AKAMAI
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2006, 2005 and
2004
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in-
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Income
|
|
|
Balance at December 31, 2003
|
|
|
122,154,517
|
|
|
$
|
1,222
|
|
|
$
|
3,437,186
|
|
|
$
|
(1,545
|
)
|
|
$
|
1,379
|
|
|
$
|
(3,613,596
|
)
|
|
$
|
(175,354
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,364
|
|
|
|
34,364
|
|
|
$
|
34,364
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
375
|
|
|
|
375
|
|
Change in market value of
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
(362
|
)
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and warrants
|
|
|
3,019,198
|
|
|
|
30
|
|
|
|
8,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,002
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
1,598,947
|
|
|
|
16
|
|
|
|
4,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,752
|
|
|
|
|
|
Deferred compensation for the
issuance of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of
restricted stock due to employee terminations
|
|
|
(863
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration of restricted stock
vesting and fair value of non-employee options
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
126,771,799
|
|
|
|
1,268
|
|
|
|
3,451,578
|
|
|
|
(937
|
)
|
|
|
1,392
|
|
|
|
(3,579,232
|
)
|
|
|
(125,931
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,998
|
|
|
|
327,998
|
|
|
$
|
327,998
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)
|
|
|
|
|
|
|
(855
|
)
|
|
|
(855
|
)
|
Change in market value of
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
327,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and vesting of deferred stock units
|
|
|
3,086,158
|
|
|
|
31
|
|
|
|
9,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,846
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
475,776
|
|
|
|
5
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
|
|
|
|
Deferred compensation for the
issuance of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
930
|
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of
restricted stock due to employee terminations
|
|
|
(250
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for
acquisition of a business
|
|
|
10,588,609
|
|
|
|
105
|
|
|
|
121,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,536
|
|
|
|
|
|
Stock options issued in acquisition
of a business
|
|
|
|
|
|
|
|
|
|
|
18,239
|
|
|
|
(9,265
|
)
|
|
|
|
|
|
|
|
|
|
|
8,974
|
|
|
|
|
|
Acceleration of employee stock
option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
Issuance of common stock in equity
offering, net of offering costs
|
|
|
12,000,000
|
|
|
|
120
|
|
|
|
201,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,068
|
|
|
|
|
|
Stock-based compensation to
non-employees for services rendered
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
Release of deferred tax asset
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
72,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,179
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,411
|
|
|
|
|
|
|
|
|
|
|
|
3,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
152,922,092
|
|
|
|
1,529
|
|
|
|
3,880,985
|
|
|
|
(7,537
|
)
|
|
|
471
|
|
|
|
(3,251,234
|
)
|
|
|
624,214
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,401
|
|
|
|
57,401
|
|
|
$
|
57,401
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
756
|
|
|
|
756
|
|
Change in market value of
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and vesting of deferred stock units
|
|
|
4,182,931
|
|
|
|
42
|
|
|
|
21,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,425
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
295,113
|
|
|
|
3
|
|
|
|
6,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,493
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
53,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,338
|
|
|
|
|
|
Issuance of common stock for
acquisition of a business
|
|
|
2,664,650
|
|
|
|
27
|
|
|
|
133,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,490
|
|
|
|
|
|
Stock options issued in acquisition
of a business
|
|
|
|
|
|
|
|
|
|
|
19,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,070
|
|
|
|
|
|
Other
|
|
|
234,136
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
compensation to additional paid-in capital upon adoption of
FAS123(R)
|
|
|
|
|
|
|
|
|
|
|
(7,537
|
)
|
|
|
7,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from the exercise of
stock options
|
|
|
|
|
|
|
|
|
|
|
37,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,944
|
|
|
|
|
|
Stock-based compensation issued to
non-employees for services rendered
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
160,298,922
|
|
|
$
|
1,603
|
|
|
$
|
4,145,627
|
|
|
$
|
|
|
|
$
|
1,296
|
|
|
$
|
(3,193,833
|
)
|
|
$
|
954,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
42
AKAMAI
TECHNOLOGIES, INC.
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Nature of
Business and Basis of Presentation:
|
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
thousands of servers in hundreds of 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 the delivery of content and
applications over the Internet.
The accompanying consolidated financial statements include the
accounts of Akamai and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
|
|
2.
|
Summary
of Significant Accounting Policies:
|
Use of
Estimates
The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America. These principles require management to
make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses,
together with amounts disclosed in the related notes to the
consolidated financial statements. Actual results and outcomes
may differ from managements estimates, judgments and
assumptions. Significant estimates used in these financial
statements include, but are not limited to, revenues, accounts
receivable and related reserves, restructuring reserves,
contingencies, useful lives and realizability of long-term
assets and goodwill, capitalized software, income and other
taxes and the fair value of stock-based compensation. Estimates
are periodically reviewed in light of changes in circumstances,
facts and experience. The effects of material revisions in
estimates are reflected in the consolidated financial statements
prospectively from the date of the change in estimate.
Revenue
Recognition
The Company recognizes service revenues in accordance with the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
the Financial Accounting Standards Boards
(FASB) Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the
service is performed and collectibility of the resulting
receivable is reasonably assured.
At the inception of a customer contract for service, the Company
makes an assessment as to that customers ability to pay
for the services provided. The Company bases its assessment on a
combination of factors, including the successful completion of a
credit check or financial review, its payment history with the
customer and other forms of payment assurance. Upon the
completion of these steps, the Company recognizes revenue
monthly in accordance with its revenue recognition policy. If
the Company subsequently determines that collection from the
customer is not reasonably assured, the Company records an
allowance for doubtful accounts and bad debt expense for all of
that customers unpaid invoices and ceases recognizing
revenue for continued services provided until cash is received.
Changes in the Companys estimates and judgments about
whether collection is reasonably assured would change the timing
of revenue or amount of bad debt expense that the Company
recognizes.
Akamai primarily derives income from the sale of services to
customers executing contracts having terms of one year or
longer. These contracts generally commit the customer to a
minimum monthly or annual level of usage and provide the rate at
which the customer must pay for actual usage above the monthly
or annual minimum. For these services, Akamai recognizes the
monthly minimum as revenue each month provided that an
enforceable contract has been signed by both parties, the
service has been delivered to the customer, the fee for the
service is fixed or determinable and collection is reasonably
assured. Should a customers usage of Akamai services
exceed the monthly or annual minimum, Akamai recognizes revenue
for such excess in the period of the usage. For annual revenue
commitments, the Company recognizes revenue monthly based upon
the customers usage in such period.
43
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company typically charges the customer an installation fee
when the services are first activated. The installation fees are
recorded as deferred revenue and recognized as revenue ratably
over the estimated life of the customer arrangement. The Company
also derives revenue from services sold as discrete,
non-recurring events or based solely on usage. For these
services, the Company recognizes revenue after an enforceable
contract has been signed by both parties, the fee is fixed or
determinable, the event or usage has occurred and collection is
reasonably assured.
When more than one element is contained in a single arrangement,
the Company allocates revenue between the elements based on each
elements relative fair value, provided that each element
meets the criteria as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the
customer on a standalone basis and there is objective and
verifiable evidence of the fair value of the separate element.
Fair value is generally determined based upon the price charged
when the element is sold separately. If the fair value of each
element cannot be objectively determined, the total value of the
arrangement is recognized ratably over the entire service period
to the extent that all services have begun to be provided at the
outset of the period. For most multi-element service
arrangements to date, the fair value of each element has not
been objectively determinable. Therefore, all revenue under
these arrangements has been recognized ratably over the
applicable service period to the extent that all services have
begun to be provided at the outset of the period.
The Company also licenses software under perpetual and term
license agreements. The Company applies the provisions of
Statement of Position (SOP)
97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modifications of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. As prescribed by this guidance, the Company
applies the residual method of accounting. The residual method
requires that the portion of the total arrangement fee
attributable to undelivered elements, as indicated by vendor
specific objective evidence of fair value, is deferred and
subsequently recognized when delivered. The difference between
the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the
delivered elements, if all other revenue recognition criteria of
SOP 97-2
are met.
The Company also sells its services through a reseller channel.
Assuming all other revenue recognition criteria are met, the
Company recognizes revenue from reseller arrangements based on
the resellers contracted non-refundable minimum purchase
commitments over the term of the contract, plus amounts sold by
the reseller to its customers in excess of the minimum
commitments. These excess minimum commitments are recognized as
revenue in the period in which the service is provided.
Akamai recognizes revenue from fixed-fee arrangements and
software arrangements that require significant customization or
modification using the
percentage-of-completion
method in accordance with Accounting Research Bulletin
(ARB) No. 45, Long-Term Construction-Type
Contracts, and with the applicable guidance provided by
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. The Company generally
recognizes revenue under these arrangements based on the
percentage of cost incurred to date compared to the estimated
total cost to complete the project. In certain customer
arrangements, the Company recognizes revenue based on the
progress made toward achieving milestones under the contract.
The impact of any change in estimate is recorded prospectively
from the date of the change. At the outset of a fixed-fee
arrangement, if the Company is not able to estimate the total
cost-to-complete,
nor able to measure progress towards the achievement of contract
milestones, the Company accounts for the arrangement using the
completed-contract method of accounting. Under this method, the
Company recognizes revenue when the contract is complete and
there are no remaining costs or deliverables. In the event that
the estimated total cost on a fixed-fee contract indicates a
loss, the Company will record the loss immediately.
From time to time, the Company enters into contracts to sell its
services or license its technology to unrelated enterprises at
or about the same time that it enters into contracts to purchase
products or services from the same enterprise. If the Company
concludes that these contracts were negotiated concurrently, the
Company records as revenue only the net cash received from the
vendor, unless the product or service received has a separate
identifiable benefit and the fair value to the Company of the
vendors product or service can be established objectively.
44
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company may from time to time resell licenses or services of
third parties. The Company records revenue for these
transactions on a gross basis when the Company has risk of loss
related to the amounts purchased from the third party and the
Company adds value to the license or service, such as by
providing maintenance or support for such license or service. If
these conditions are present, the Company recognizes revenue
when all other revenue recognition criteria are satisfied.
Deferred revenue includes amounts billed to customers for which
revenue has not been recognized. Deferred revenue primarily
consists of the unearned portion of monthly billed service fees;
prepayments made by customers for future periods; deferred
installation and activation
set-up fees;
amounts billed under extended payment terms; and maintenance and
support fees charged under license arrangements.
Cost
of Revenues
Cost of revenues consists primarily of fees paid to network
providers for bandwidth and for housing servers in third-party
network data centers, also known as co-location costs. Cost of
revenues also includes network operation employee costs, network
storage costs, cost of software licenses, depreciation of
network equipment used to deliver the Companys services,
amortization of network-related internal-use software and costs
for the production of live on-line events. The Company enters
into contracts for bandwidth with third-party network providers
with terms typically ranging from several months to two years.
These contracts generally commit Akamai to pay minimum monthly
fees plus additional fees for bandwidth usage above the
contracted level. In some circumstances, Internet service
providers (ISPs) make available to Akamai rack space
for the Companys servers and access to their bandwidth at
discounted or no cost. In exchange, the ISP and its customers
benefit by receiving content through a local Akamai server
resulting in better content delivery. The Company does not
consider these relationships to represent the culmination of an
earnings process. Accordingly, the Company does not recognize as
revenue the value to the ISPs associated with the use of
Akamais servers nor does the Company recognize as expense
the value of the rack space and bandwidth received at discounted
or no cost.
Accounting
for Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123R,
Share-Based Payment
(FAS No. 123R). The standard requires
recognizing compensation costs for all share-based payment
awards made to employees and directors based upon the
awards estimated grant date fair value. The standard
covers employee stock options, restricted stock, restricted
stock units, deferred stock units and employee stock purchases
related to the Companys employee stock purchase plan.
Additionally, the Company applied the provisions of the
SECs Staff Accounting Bulletin No. 107 on
Share-Based Payment to the Companys adoption of
FAS No. 123R. Previously, the Company elected to
account for these share-based payment awards under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and
elected to only disclose the impact of expensing the fair value
of stock options in the notes to the financial statements.
The Company adopted FAS No. 123R using the modified
prospective transition method which requires applying the
standard as of January 1, 2006 (the adoption
date). The modified prospective transition method does not
result in the restatement of results from prior periods and,
accordingly, the results of operations for 2006 and future
periods will not be comparable to the Companys historical
results of operations.
Under the modified prospective transition method,
FAS No. 123R applies to new equity awards and to
equity awards modified, repurchased or canceled after the
adoption date. Additionally, compensation cost for the portion
of awards granted prior to the adoption date for which the
requisite service has not been rendered as of the adoption date
shall be recognized as the requisite service is rendered. The
compensation cost for that portion of awards shall be based on
the grant-date fair value of those awards as calculated in the
prior period pro forma disclosures under FAS No. 123,
Accounting for Stock-Based Compensation
(FAS No. 123). Changes to the grant-date
fair value of equity awards granted before the effective date
are precluded. The compensation cost for those earlier awards
45
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shall be attributed to periods beginning on or after the
adoption date using the attribution method that was used under
FAS No. 123, which was the straight-line method. The
Company estimates an expected forfeiture rate which is factored
in to determine the Companys quarterly expense. Deferred
compensation which related to those earlier awards has been
eliminated against additional paid-in capital.
FAS No. 123R also changes the reporting of tax-related
amounts within the statement of cash flows. The excess amount of
windfall tax benefits resulting from stock-based compensation
will be reported as financing inflows.
For stock options, the Company has selected the Black-Scholes
option-pricing model to determine the fair value of stock option
awards. For stock options, restricted stock, restricted stock
units and deferred stock units, the Company recognizes
compensation cost on a straight-line basis over the awards
vesting periods for those awards that contain a service vesting
feature. For awards with a performance condition vesting
feature, the Company recognizes compensation cost on a
straight-line basis over the awards expected vesting
periods.
Research
and Development Costs
Research and development costs consist primarily of payroll and
related personnel costs for the design, development, deployment,
testing, operation and enhancement of the Companys
services and network. Costs incurred in the development of the
Companys services are expensed as incurred, except certain
software development costs eligible for capitalization. Costs
associated with the development of software to be marketed
externally are expensed prior to the establishment of
technological feasibility as defined by SFAS No. 86,
Accounting for the Cost of Computer Software to be Sold,
Leased, or Otherwise Marketed, and capitalized thereafter
until the general release of the software. To date, the
Companys development of software to be sold externally has
been completed concurrently with the establishment of
technological feasibility and, accordingly, all associated costs
have been charged to expense as incurred in the accompanying
consolidated financial statements.
Costs incurred during the application development stage of
internal-use software projects are capitalized in accordance
with
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Capitalized costs include
external consulting fees and payroll and payroll-related costs
for employees in the Companys development and information
technology groups who are directly associated with, and who
devote time to, the Companys internal-use software
projects during the application development stage.
Capitalization begins when the planning stage is complete and
the Company commits resources to the software project.
Capitalization ceases when the software has been tested and is
ready for its intended use. Amortization of the asset commences
when the software is complete and placed in service. The Company
amortizes completed internal-use software to cost of revenues
over an estimated life of two years. Costs incurred during the
planning, training and post implementation stages of the
software development life-cycle are expensed as incurred. Costs
related to upgrades and enhancements of existing internal-use
software that increase the functionality of the software are
also capitalized.
Concentrations
of Credit Risk and Fair Value of Financial
Instruments
The amounts reflected in the consolidated balance sheets for
cash and cash equivalents, accounts receivable and accounts
payable approximate their fair value due to their short-term
maturities. The fair value and the carrying amount of the
Companys 1% convertible senior notes were
$347.4 million and $200.0 million, respectively, as of
December 31, 2006. The fair value is based upon the trading
price of the debt. The Company maintains the majority of its
cash, cash equivalents and marketable securities balances
principally with domestic financial institutions that the
Company believes to be of high credit standing. Concentrations
of credit risk with respect to accounts receivable are primarily
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. For the years ended
December 31, 2006 and 2005, no customer accounted for more
than 10% of total revenues. For the year ended December 31,
2004,
46
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
one customer accounted for 10% of total revenues. As of
December 31, 2006, no customer had an account receivable
balance greater than 10% of total accounts receivable. As of
December 31, 2005, one customer had an account receivable
balance of 13% of the Companys total accounts receivable.
The Company believes that, as of December 31, 2006,
concentration of credit risk related to accounts receivable was
not significant.
Taxes
The Companys provision for income taxes is comprised of a
current and a deferred portion. The current income tax provision
is calculated as the estimated taxes payable or refundable on
tax returns for the current year. The deferred income tax
provision is calculated for the estimated future tax effects
attributable to temporary differences and carryforwards using
expected tax rates in effect in the years during which the
differences are expected to reverse or the carryforwards are
expected to be realized.
The Company currently has significant deferred tax assets,
resulting from net operating loss carryforwards, tax credit
carryforwards and deductible temporary differences. Management
periodically weighs the positive and negative evidence to
determine if it is more likely than not that some or all of the
deferred tax assets will be realized. During 2005, management
determined it was more likely than not that substantially all of
the deferred tax assets would be realized, and, accordingly
released substantially all of its valuation allowance. This
decision was based on the Companys cumulative history of
earnings before taxes for financial reporting purposes over a
12-quarter
period and on the projections of expected future taxable income.
The tax assets estimated to be realized in future periods have
been calculated by applying a blended federal and state tax rate
of 39.1%, which is based upon the tax rates expected to be in
effect, apportioned by jurisdiction, in the periods during which
the attributes are expected to be utilized. Changes in this
blended rate in future periods could have a material effect on
both the tax provision in the period of change as well as the
net deferred tax asset carrying value.
The Company has recorded certain tax reserves to address
potential exposures involving 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 taxing 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 costs of the
ultimate tax liability or benefit from these matters may be
materially greater or less than the amount that the Company
estimated.
In November 2005, the FASB issued FASB Staff Position
SFAS 123(R)-3, Transition Election to Accounting for
the Tax Effect 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 net operating loss (NOL)
carryforwards.
Foreign
Currency Translation
Akamai has determined that the functional currency of its
foreign subsidiaries is each respective subsidiarys local
currency. The assets and liabilities of these subsidiaries are
translated at the applicable exchange rate as of the balance
sheet date and revenues and expenses are translated at an
average rate over the period. Currency translation adjustments
are recorded as a component of other comprehensive income. Gains
and losses on inter-company transactions are recorded in other
income (expense), net. For the years ended December 31,
2006, 2005 and 2004, the Company recorded foreign currency gain
(loss) of $90,000, ($1.5) million and $543,000 respectively.
47
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash,
Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash held in bank deposit
accounts and short-term, highly liquid investments with original
maturities of three months or less at the date of purchase. Cash
equivalents are carried at amortized cost plus accrued interest,
which approximates fair value. Total cash and cash equivalents
were $434.5 million and $314.1 million at
December 31, 2006 and 2005, respectively.
Short-term marketable securities consist of high quality
corporate and government securities with original maturities of
more than three months at the date of purchase and less than one
year from the date of the balance sheet. Long-term marketable
securities consist of high quality corporate and government
securities with maturities of more than one year from the date
of the balance sheet. Short-term and long-term marketable
securities include investments that are restricted as to use. As
of December 31, 2006 and 2005, the Company had
$4.2 million and $4.5 million, respectively, of
restricted marketable securities generally representing security
for irrevocable letters of credit related to facility leases.
The Company classifies all debt securities and equity securities
with readily determinable market values as available for
sale in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. These investments are classified as marketable
securities on the consolidated balance sheet and are carried at
fair market value with unrealized gains and losses considered to
be temporary in nature reported as a separate component of other
comprehensive income (loss). Investments in securities of
private companies are initially carried at cost. The Company
reviews all investments for reductions in fair value that are
other-than-temporary.
When such reductions occur, the cost of the investment is
adjusted to fair value through loss on investments on the
consolidated statement of operations. Gains and losses on
investments are calculated on the basis of specific
identification.
Accounts
Receivable and Related Reserves
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. In addition to trade accounts
receivable, the Companys accounts receivable balance
includes unbilled accounts that represent revenues recorded for
customers that are typically billed within one month. The
Company records reserves against its accounts receivable
balance. These reserves consist of allowances for doubtful
accounts, cash basis customers and service credits. Increases
and decreases in the allowance for doubtful accounts are
included as a component of general and administrative expenses.
The Companys reserve for cash basis customers increases as
services are provided to customers where collection is no longer
assured. The reserve decreases and revenue is recognized when
and if cash payments are received. The Companys reserve
for service credits increases as a result of specific service
credits that are expected to be issued to customers during the
ordinary course of business, as well as for billing disputes.
These credits result in a reduction to revenues. Decreases to
the reserve for service credits are the result of actual credits
being issued to customers, causing a corresponding reduction in
accounts receivable.
Estimates are used in determining these reserves and are based
upon the Companys review of outstanding balances on a
customer-specific,
account-by-account
basis. The allowance for doubtful accounts is based upon a
review of customer receivables from prior sales with collection
issues where the Company no longer believes that the customer
has the ability to pay for services provided. The Company
reserves for all invoices that have been outstanding greater
than one year. The Company performs on-going credit evaluations
of its customers. If such an evaluation indicates that payment
is no longer reasonably assured for services provided, any
future services provided to that customer will result in the
creation of a cash basis reserve until the Company receives
consistent payments. In addition, the Company reserves a portion
of revenues as a reserve for service credits. Reserves for
service credits are measured based on an analysis of revenue
credits to be issued after the month of billing and an estimate
for future credits. These credits typically relate to
managements estimate of the resolution of customer
disputes and billing adjustments. The Company does not have any
off-balance sheet credit exposure related to its customers.
48
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation and amortization. Property and equipment includes
purchases of items with a per unit value greater than $1,000 and
a useful life greater than one year. In certain instances, the
Company has capitalized equipment purchases, such as laptop
computers, that have a per unit value less than $1,000, because
their useful lives are three years. Depreciation and
amortization are computed on a straight-line basis over the
estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of related
lease terms or their estimated useful lives. Property and
equipment acquired under capital leases are depreciated over the
shorter of the related lease terms or the useful lives of the
assets. The Company periodically reviews the estimated useful
lives of property and equipment. Changes to the estimated useful
lives are recorded prospectively from the date of the change.
Upon retirement or sale, the cost of the assets disposed of and
the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in income
(loss) from operations. Repairs and maintenance costs are
expensed as incurred.
Goodwill
and Other Intangible Assets
The Company tests goodwill for impairments on an annual basis or
more frequently if events or changes in circumstances indicate
that the asset might be impaired. The Company performed an
impairment test of goodwill as of January 1, 2006 and 2007.
These tests did not result in an impairment to goodwill. Other
intangible assets consist of completed technologies, customer
relationships, trademarks and non-compete agreements arising
from acquisitions of businesses and acquired license rights.
Purchased intangible assets, other than goodwill, are amortized
over their estimated useful lives based upon the economic value
derived from the related intangible asset. Goodwill is carried
at its historical cost.
Valuation
of Other Long-Lived Assets
Long-lived assets are reviewed for impairment under the guidance
of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Under
SFAS No. 144, long-lived assets are reviewed for
impairment whenever events or changes in circumstances, such as
service discontinuance, technological obsolescence, a change in
the Companys market capitalization, facility closure or
work-force reductions indicate that the carrying amount of the
long-lived asset may not be recoverable. When such events occur,
the Company compares the carrying amount of the asset to the
undiscounted expected future cash flows related to the asset. If
this comparison indicates that an impairment is present, the
amount of the impairment is calculated as the difference between
the carrying amount and the fair value of the asset. If a
readily determinable market price does not exist, fair value is
estimated using discounted expected cash flows attributable to
the asset.
Restructuring
Charges
A restructuring liability related to employee terminations is
recorded by the Company when a one-time benefit arrangement is
communicated to an employee who is involuntarily terminated as
part of a company-wide reorganization and the amount of the
termination benefit is known, provided that the employee is not
required to render future services in order to receive the
termination benefit.
The Company previously recorded real-property related
restructuring expenses and liabilities when management approved
and committed the Company to a plan to exit a facility lease,
the plan specifically identified the actions to be taken and the
actions were scheduled to begin soon after management approved
the plan. Beginning in 2003, in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, the Company records
restructuring liabilities, discounted at the appropriate rate,
for facility leases only when the space is both vacated and all
actions needed to make the space readily available for sublease
have been completed. The Company records restructuring
liabilities for estimated costs to terminate a facility lease
before the end of its
49
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contractual term or for estimated costs that will continue to be
incurred under the lease for its remaining term where there is
no economic benefit to the Company, net of an estimate of
sublease income.
Litigation
The Company is currently involved in certain legal proceedings.
The Company estimates the range of liability related to pending
litigation where the amount and range of loss can be estimated.
The Company records its best estimate of a loss when the loss is
considered probable. Where a liability is probable and there is
a range of estimated loss with no best estimate in the range,
the Company records the minimum estimated liability related to
the claim. As additional information becomes available, the
Company reassesses the potential liability related to the
Companys pending litigation and revises its estimate.
Advertising
Expense
The Company recognizes advertising expense as incurred. The
Company recognized total advertising expense of $450,000,
$879,000 and $130,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
Recent
Accounting Pronouncements
In June 2006, the 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 is
effective for the Company beginning in 2007. The Company does
not expect the implementation of FIN No. 48 to have a
material impact on its financial statements.
In September 2006, the Securities and Exchange Commission, or
the SEC, released Staff Accounting Bulletin No. 108,
(SAB 108). SAB 108 expresses the SEC
staffs views regarding the process of quantifying and
recording 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. The implementation of SAB 108 did not have a material
impact on the Companys financial statements.
In September 2006, the FASB issued SFAS 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
50
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 is currently evaluating
the potential impact of SFAS 157 on the Companys
financial position and results of operations.
|
|
3.
|
Business
Acquisitions:
|
Nine
Systems Corporation
On December 13, 2006, the Company acquired all of the
outstanding common and preferred stock, including vested and
unvested stock options, of Nine Systems Corporation (Nine
Systems) in exchange for approximately 2.7 million
shares of Akamai common stock, approximately $4.5 million
in cash and options to purchase approximately
400,000 shares of Akamai common stock. The purchase of Nine
Systems is intended to increase the quantity and types of rich
media management tools sold by the Company.
The aggregate purchase price, net of cash received, was
approximately $157.7 million, which consisted of
$133.5 million in shares of Akamai common stock,
$19.1 million in fair value of the Companys stock
options, $4.5 million in cash and approximately $600,000 of
transaction costs, which primarily consisted of fees for
financial advisory and legal services. The fair value of the
Companys stock options issued to Nine Systems employees
was estimated using a Black-Scholes option pricing model with
the following weighted-average assumptions:
|
|
|
|
|
Expected life (years)
|
|
|
|
|
Risk-free interest rate
|
|
|
5.2
|
%
|
Expected volatility
|
|
|
67.4
|
%
|
Dividend yield
|
|
|
|
|
The acquisition was accounted for using the purchase method of
accounting and the results of operations of the acquired
business since December 13, 2006, the date of acquisition,
are included in the consolidated financial statements of the
Company for the year ended December 31, 2006. The results
of operations from this acquired business were insignificant to
the consolidated statement of operations for 2006. 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 management and, with
respect to identified intangible assets, by management with the
assistance of an appraisal provided by a third-party valuation
firm. The purchase price allocation is preliminary and a final
determination of purchase accounting adjustments will be made
upon the finalization of the Companys integration
activities. 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 Nine Systems customers; a trained
technical workforce in place in the United States; an existing
sales pipeline and a trained sales force; and cost synergies
expected to be realized. In accordance with current accounting
standards, goodwill associated with Nine Systems 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 9).
51
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table represents the preliminary allocation of the
purchase price:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Total consideration:
|
|
|
|
|
Common stock issued
|
|
$
|
133,490
|
|
Cash paid
|
|
|
4,462
|
|
Fair value of stock options
|
|
|
19,070
|
|
Transaction costs
|
|
|
634
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
157,656
|
|
|
|
|
|
|
Allocation of the purchase
consideration
|
|
|
|
|
Current assets
|
|
$
|
4,614
|
|
Fixed assets
|
|
|
944
|
|
Deferred tax assets
|
|
|
2,900
|
|
Identifiable intangible assets
|
|
|
28,900
|
|
Goodwill
|
|
|
142,519
|
|
|
|
|
|
|
Total assets acquired
|
|
|
179,877
|
|
Deferred tax liabilities
|
|
|
(11,293
|
)
|
Fair value of other liabilities
assumed, including deferred revenue of $375
|
|
|
(10,928
|
)
|
|
|
|
|
|
|
|
$
|
157,656
|
|
|
|
|
|
|
The following are identified intangible assets acquired and the
respective estimated periods over which the assets will be
amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Amount
|
|
|
Useful Life
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Completed technologies
|
|
$
|
3,400
|
|
|
|
1.7
|
|
Customer relationships
|
|
|
25,000
|
|
|
|
4.5
|
|
Trademarks
|
|
|
500
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In determining the purchase price allocation, the Company
considered, among other factors, the Companys intention to
use the acquired assets and historical and estimated future
demand of Nine Systems services. The fair value of intangible
assets was based upon the income approach. The rate used to
discount the net cash flows to their present values was based
upon a weighted average cost of capital of 18%. The discount
rate was determined after consideration of market rates of
return on debt and equity capital, the weighted average return
on invested capital and the risk associated with achieving
forecasted sales related to the technology and assets acquired
from Nine Systems.
The customer relationships were valued using the income
approach. The key assumptions used in valuing the customer
relationships are as follows: discount rate 18%, tax rate 40%
and estimated average economic life of nine years. The customer
relationships, trademarks and completed technology are being
amortized based upon the expected benefit to be realized over
each intangibles estimated economic life. The values of
the intangible assets acquired were determined using projections
of revenues and expenses specifically attributed to the
intangible assets. The income streams were then discounted to
present value using estimated risk adjusted discount rates.
The relief-from-royalty method was used to value the completed
technologies. The relief-from-royalty method is used to estimate
the cost savings that accrue to the owner of an intangible asset
that would otherwise be required
52
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to pay royalties or license fees on revenues earned through the
use of the asset. The royalty rate used is based on an analysis
of empirical, market-derived royalty rates for guideline
intangible assets. Typically, revenue is projected over the
expected remaining useful life of the intangible asset. The
market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in valuing the
completed technologies are as follows: royalty rate 10.5%,
discount rate 18%, tax rate 40% and estimated average economic
life of four years.
The relief-from-royalty method was used to value trademarks. The
relief-from-royalty method recognizes that the current value of
an asset may be premised upon the expected receipt of future
economic benefit in the use of trademarks and domain names.
These benefits are generally considered to be higher income
resulting from the avoidance of a loss in revenue that would
likely occur without the specific trademarks and domain names.
The key assumptions used in valuing trademarks are as follows:
royalty rate 1%, discount rate 18%, tax rate 40% and estimated
average economic life of five years.
The total weighted average amortization period for the
intangible assets is 4.1 years. The intangible assets are
being amortized based upon the pattern in which the economic
benefit of the intangible assets are being utilized, which in
general reflects the cash flows generated from such assets. None
of the goodwill is deductible for income tax purposes.
In connection with the acquisition of Nine Systems, the Company
commenced integration activities, which have resulted in
recognizing approximately $500,000 in liabilities for employee
termination benefits. We expect to pay the liabilities
associated with the employee termination benefits throughout
2007. Management is in the process of determining whether
additional liabilities relating to employee termination benefits
or other contractual obligations are required to be recorded.
The impact of Nine Systems operating results, assuming the
acquisition had occurred on January 1, 2006, on a
consolidated basis would not be significant to the operations of
the Company.
Speedera
Networks, Inc.
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
$142.2 million, which consisted of $121.5 million in
shares of common stock based on the closing price on
June 10, 2005, $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 fair value of the
Companys stock options issued to Speedera employees was
estimated using a Black-Scholes option pricing model with the
following weighted-average assumptions:
|
|
|
|
|
Expected life (years)
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
3.8
|
%
|
Expected volatility
|
|
|
83.6
|
%
|
Dividend yield
|
|
|
|
|
The intrinsic value allocated to the unvested options issued in
the acquisition that had yet to be earned as of the acquisition
date was $9.3 million and has been recorded as deferred
compensation in the purchase price allocation.
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
management and, with respect to identified intangible assets, by
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
53
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
opportunities of providing Akamai services to Speedera
customers; trained technical workforce in place in the United
States and India; existing sales pipeline and 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 (See Note 9).
The following table represents the allocation of the purchase
price:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Total consideration:
|
|
|
|
|
Common stock issued
|
|
$
|
121,536
|
|
Fair value of stock options
|
|
|
18,239
|
|
Transaction costs paid
|
|
|
2,459
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
142,234
|
|
|
|
|
|
|
Allocation of the purchase
consideration
|
|
|
|
|
Current assets, including cash of
$3,914
|
|
$
|
10,587
|
|
Fixed assets
|
|
|
2,760
|
|
Long-term assets, including
deferred tax assets
|
|
|
1,397
|
|
Identifiable intangible assets
|
|
|
43,200
|
|
Goodwill
|
|
|
94,862
|
|
|
|
|
|
|
Total assets acquired
|
|
|
152,806
|
|
Fair value of liabilities assumed,
including deferred revenue of $450
|
|
|
(19,837
|
)
|
Deferred compensation
|
|
|
9,265
|
|
|
|
|
|
|
|
|
$
|
142,234
|
|
|
|
|
|
|
The following are identified intangible assets acquired and the
respective estimated periods over which the assets will be
amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Completed technologies
|
|
$
|
1,000
|
|
|
|
1-4
|
|
Customer relationships
|
|
|
40,900
|
|
|
|
8
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The customer relationships were valued using the income
approach. The key assumptions used in valuing the customer
relationships are as follows: discount rate 18%, tax rate 40%
and estimated average economic life of eight years. The
customer relationships are being amortized at the ratio that
current revenues generated from those customer relationships
bear to the total estimated revenues to be generated from those
relationships from the date of acquisition. The completed
technologies and non-compete agreements are being amortized
using the straight-line method over their respective remaining
lives. The values of the intangible assets acquired were
determined using projections of revenues and expenses
specifically attributed to the intangible assets. The income
streams were then discounted to present value using estimated
risk adjusted discount rates.
The relief-from-royalty method was used to value the completed
technologies. The relief-from-royalty method is used to estimate
the cost savings that accrue to the owner of an intangible asset
that would otherwise be required to pay royalties or license
fees on revenues earned through the use of the asset. The
royalty rate used is based on an analysis of empirical,
market-derived royalty rates for guideline intangible assets.
Typically, revenue is projected
54
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the expected remaining useful life of the intangible asset.
The market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in valuing the
completed technologies are as follows: royalty rate 5%, discount
rate 18.0%, tax rate 40% and estimated average economic life of
one to four years.
The lost profits method was used to value the non-compete
agreements entered into by Akamai and three founders of
Speedera. The lost profits method recognizes that the current
value of an asset may be premised upon the expected receipt of
future economic benefits protected by clauses within an
agreement. These benefits are generally considered to be higher
income resulting from the avoidance of a loss in revenue that
would likely occur without an agreement. The key assumptions
used in valuing the non-compete agreements are as follows:
discount rate 18%, tax rate 40% and estimated average economic
life of three years.
The following table reflects unaudited pro forma results of
operations of the Company for the years ended December 31,
2005 and 2004 assuming that the Speedera acquisition had
occurred on January 1, 2005 and January 1, 2004,
respectively (in thousands, expect per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
302,220
|
|
|
$
|
237,523
|
|
Net income
|
|
$
|
326,031
|
|
|
$
|
22,954
|
|
Net income per weighted average
common share
|
|
$
|
2.23
|
|
|
$
|
0.17
|
|
Net income per weighted average
diluted share
|
|
$
|
1.97
|
|
|
$
|
0.16
|
|
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, deferred stock units, warrants, restricted stock
units and convertible notes.
55
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
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 Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,401
|
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
Add back of interest expense on
1% convertible senior notes
|
|
|
2,841
|
|
|
|
2,841
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income
|
|
$
|
60,242
|
|
|
$
|
330,839
|
|
|
$
|
37,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per common share
|
|
|
155,366
|
|
|
|
136,167
|
|
|
|
124,407
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
7,704
|
|
|
|
7,691
|
|
|
|
9,162
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Restricted stock units, deferred
stock units and restricted common stock
|
|
|
752
|
|
|
|
141
|
|
|
|
109
|
|
Assumed conversion of
1% convertible senior notes
|
|
|
12,945
|
|
|
|
12,945
|
|
|
|
12,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per common share
|
|
|
176,767
|
|
|
|
156,944
|
|
|
|
146,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.37
|
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
Diluted net income per common share
|
|
$
|
0.34
|
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Stock options
|
|
|
489
|
|
|
|
4,415
|
|
|
|
3,078
|
|
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
489
|
|
|
|
4,415
|
|
|
|
3,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to acquire 489,000, 4.4 million and
3.1 million shares of common stock as of December 31,
2006, 2005 and 2004, respectively, were excluded from the
calculation of diluted earnings per share as a result of the
exercise prices for these stock options being greater than the
average market price of the Companys common stock during
the respective periods. The effect of the Companys
51/2% convertible
subordinated notes on the calculation of diluted net income per
weighted average share for the year ended December 31, 2004
was calculated using the if converted method. The
51/2% convertible
subordinated notes were excluded from the calculation of diluted
earnings per share in 2004 because of its antidilutive effect.
All of the
51/2% convertible
subordinated notes were purchased or redeemed during 2004 and
2005. Additionally, 2,332,593 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 December 31, 2006.
In connection with the Companys adoption of
SFAS No. 123(R), the calculation of assumed proceeds
used to determine the diluted weighted average shares
outstanding under the treasury stock method in 2006 was adjusted
by tax windfalls and shortfalls associated with all of the
Companys outstanding stock awards. Windfalls and
shortfalls are computed by comparing the tax deductible amount
of outstanding stock awards to their grant date fair values and
multiplying the result by the applicable statutory tax rate. A
positive result creates a windfall, which increases the assumed
proceeds and a negative result creates a shortfall, which
reduces the assumed proceeds.
56
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Accumulated
Other Comprehensive Income:
|
Accumulated other comprehensive income for all periods is equal
to net income adjusted for unrealized gains and losses on
investments and foreign currency translation adjustments.
Accumulated other comprehensive income consisted of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net unrealized loss on investments
|
|
$
|
(397
|
)
|
|
$
|
(466
|
)
|
Foreign currency translation
adjustments
|
|
|
1,693
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income
|
|
$
|
1,296
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Marketable
Securities and Investments:
|
The following is a summary of marketable securities held by the
Company at December 31, 2006 (in thousands). Fair value was
determined based upon quoted market prices for the security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
1,377
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,377
|
|
Commercial paper
|
|
|
100,302
|
|
|
|
15
|
|
|
|
(168
|
)
|
|
|
100,149
|
|
U.S. government agency
obligations
|
|
|
106,153
|
|
|
|
19
|
|
|
|
(151
|
)
|
|
|
106,021
|
|
U.S. corporate debt securities
|
|
|
52,410
|
|
|
|
63
|
|
|
|
(161
|
)
|
|
|
52,312
|
|
Municipal obligations
|
|
|
94,000
|
|
|
|
|
|
|
|
|
|
|
|
94,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
354,242
|
|
|
$
|
97
|
|
|
$
|
(480
|
)
|
|
$
|
353,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of marketable securities held by the
Company at December 31, 2005 (in thousands). Fair value was
determined based upon quoted market prices for the security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
3,627
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
3,622
|
|
Commercial paper
|
|
|
20,643
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
20,595
|
|
U.S. government agency
obligations
|
|
|
32,745
|
|
|
|
30
|
|
|
|
(333
|
)
|
|
|
32,442
|
|
U.S. corporate debt securities
|
|
|
17,188
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
17,078
|
|
Municipal obligations
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
222,803
|
|
|
$
|
30
|
|
|
$
|
(496
|
)
|
|
$
|
222,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates investments with unrealized losses to
determine if the losses are other than temporary. The gross
unrealized losses were due to changes in interest rates. The
Company has determined that the gross unrealized losses at
December 31, 2006 are temporary. In making this
determination, the Company considered the financial condition
and near-term prospects of the issuers, the magnitude of the
losses compared to the investments cost, the length of
time the investments have been in an unrealized loss position
and the Companys ability to hold the investment to
maturity.
57
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Available-for-sale
securities by contractual maturity were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Due in one year or less
|
|
$
|
192,348
|
|
|
$
|
204,441
|
|
Due after 1 year through
5 years
|
|
|
161,511
|
|
|
|
17,896
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
353,859
|
|
|
$
|
222,337
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $4.2 million of the
Companys marketable securities were classified as
restricted. These securities primarily represent security for
irrevocable letters of credit in favor of third-party
beneficiaries, mostly 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 consolidated balance
sheets. The restrictions on these marketable securities lapse as
the Company fulfills its obligations or such obligations expire
under the terms of the letters of credit. These restrictions are
expected to lapse at various times through May 2011.
For the year ended December 31, 2006, the Company recorded
net gains on investments of $261,000 on sales of marketable
securities. For the years ended December 31, 2005 and 2004,
the Company recorded net losses on investments of $27,000 and
$69,000, respectively, on sales of marketable securities.
Net accounts receivable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Trade accounts receivable
|
|
$
|
75,771
|
|
|
$
|
51,019
|
|
Unbilled accounts
|
|
|
18,327
|
|
|
|
9,137
|
|
|
|
|
|
|
|
|
|
|
Total gross accounts receivable
|
|
|
94,098
|
|
|
|
60,156
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(3,228
|
)
|
|
|
(2,277
|
)
|
Reserve for cash basis customers
|
|
|
(2,240
|
)
|
|
|
(2,539
|
)
|
Reserve for service credits
|
|
|
(2,398
|
)
|
|
|
(3,178
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable reserves
|
|
|
(7,866
|
)
|
|
|
(7,994
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
86,232
|
|
|
$
|
52,162
|
|
|
|
|
|
|
|
|
|
|
58
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Property
and Equipment:
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Estimated Useful
|
|
|
|
2006
|
|
|
2005
|
|
|
Lives in Years
|
|
|
Computer and networking equipment
|
|
$
|
208,237
|
|
|
$
|
169,690
|
|
|
|
3
|
|
Purchased software
|
|
|
29,412
|
|
|
|
29,534
|
|
|
|
3
|
|
Furniture and fixtures
|
|
|
4,960
|
|
|
|
4,355
|
|
|
|
5
|
|
Office equipment
|
|
|
3,697
|
|
|
|
3,664
|
|
|
|
3
|
|
Leasehold improvements
|
|
|
7,243
|
|
|
|
5,569
|
|
|
|
5-7
|
|
Internal-use software
|
|
|
48,211
|
|
|
|
31,371
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
301,760
|
|
|
|
244,183
|
|
|
|
|
|
Accumulated depreciation and
amortization
|
|
|
(215,137
|
)
|
|
|
(199,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,623
|
|
|
$
|
44,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
and capitalized software costs for the years ended
December 31, 2006, 2005 and 2004 was $32.1 million,
$19.1 million and $18.8 million, respectively.
During the years ended December 31, 2006 and 2005, the
Company wrote off $17.0 million and $11.4 million,
respectively, of long lived asset costs, with accumulated
depreciation and amortization costs of $16.3 million and
$11.2 million, respectively. These write offs represent
purchased software and computer and networking equipment that
are no longer in use.
During the years ended December 31, 2006 and 2005, the
Company capitalized $12.6 million and $9.2 million,
net of impairments, respectively, of external consulting fees
and payroll and payroll-related costs for the development and
enhancement of internal-use software applications. Additionally,
during the year ended December 31, 2006, the Company
capitalized $4.3 million of equity-related compensation
related to employees who developed and enhanced internal-use
software applications. The internal-use software is used by the
Company primarily to operate, manage and monitor its deployed
network and deliver its services. The Company amortizes
completed internal-use software over an estimated life of two
years.
The following table summarizes capitalized internal-use software
costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Total costs capitalized
|
|
$
|
49,204
|
|
|
$
|
31,856
|
|
Less: impairments
|
|
|
(993
|
)
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
48,211
|
|
|
|
31,371
|
|
Less: accumulated amortization
|
|
|
(26,723
|
)
|
|
|
(18,598
|
)
|
|
|
|
|
|
|
|
|
|
Net book value of capitalized
internal-use software
|
|
$
|
21,488
|
|
|
$
|
12,773
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Goodwill
and Other Intangible Assets:
|
The Company acquired goodwill and other intangible assets
through business acquisitions during 2000, 2005 and 2006. The
Company also acquired license rights from the Massachusetts
Institute of Technology in 1999. During the year ended
December 31, 2006, the Company recorded goodwill of
$142.5 million and acquired intangible assets of
$28.9 million as a result of the acquisition of Nine
Systems. In 2005, the Company recorded goodwill of
$96.3 million and acquired intangible assets of
$43.2 million as a result of the acquisition of Speedera.
During 2006, the Company made purchase accounting adjustments to
reflect the deferred tax assets and liabilities
59
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded as a result of filing the final pre-acquisition income
tax return for Speedera. As a result, the Company increased its
net deferred taxes by $1.5 million mainly due to an
increase in the federal and state research and development
credits, which resulted in a reduction of goodwill. The changes
in the carrying amount of goodwill for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
In thousands
|
|
|
Ending balance, December 31,
2004
|
|
$
|
4,937
|
|
Purchase price allocation
associated with Speedera
|
|
|
96,319
|
|
Deferred tax asset valuation
release
|
|
|
(2,737
|
)
|
|
|
|
|
|
Ending balance, December 31,
2005
|
|
|
98,519
|
|
Purchase price allocation
associated with Nine Systems
|
|
|
142,519
|
|
Finalization of purchase price
allocations related to Speedera acquisition
|
|
|
(1,458
|
)
|
|
|
|
|
|
Ending balance, December 31,
2006
|
|
$
|
239,580
|
|
|
|
|
|
|
The Company reviews goodwill and other intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may exceed their fair
value. SFAS No. 142, Goodwill and Other
Intangible Assets, requires the Company to test goodwill
for impairment at least annually. 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 and
2007 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
and 2007. The fair value on January 1, 2006 and 2007
exceeded the net assets of the reporting unit, including
goodwill, as of both dates. Accordingly, the Company concluded
that no impairment existed as of these dates. Unless changes in
events or circumstances indicate that an impairment test is
required, the Company will next test goodwill for impairment on
January 1, 2008.
Other intangible assets that are subject to amortization consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Completed technology
|
|
$
|
4,400
|
|
|
$
|
(863
|
)
|
|
$
|
3,537
|
|
Customer relationships
|
|
|
65,900
|
|
|
|
(11,970
|
)
|
|
|
53,930
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
(674
|
)
|
|
|
626
|
|
Trademarks
|
|
|
500
|
|
|
|
(5
|
)
|
|
|
495
|
|
Acquired license rights
|
|
|
490
|
|
|
|
(395
|
)
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,590
|
|
|
$
|
(13,907
|
)
|
|
$
|
58,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate expense related to amortization of other intangible
assets was $8.5 million, $5.1 million and $48,000 for
the years ended December 31, 2006, 2005 and 2004,
respectively, based on current circumstances. Amortization
expense is expected to be approximately $10.7 million,
$10.2 million, $9.2 million, $7.6 million and
$6.4 million for fiscal years 2007, 2008, 2009, 2010 and
2011, respectively. In January 2007, the Company announced a
plan to acquire Netli, Inc. If this acquisition is completed,
the cost and amortization of other intangible assets will
increase in the future.
Accrued expenses consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payroll and other related benefits
|
|
$
|
31,429
|
|
|
$
|
14,374
|
|
Interest
|
|
|
83
|
|
|
|
83
|
|
Bandwidth and colocation
|
|
|
9,628
|
|
|
|
7,781
|
|
Property, use and other taxes
|
|
|
13,636
|
|
|
|
13,314
|
|
Legal professional fees
|
|
|
1,100
|
|
|
|
679
|
|
Other
|
|
|
2,207
|
|
|
|
2,218
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,083
|
|
|
$
|
38,449
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Commitments,
Contingencies and Guarantees:
|
Operating
Lease Commitments
The Company leases its facilities under non-cancelable operating
leases. These operating leases expire at various dates through
August 2011 and generally require the payment of real estate
taxes, insurance, maintenance and operating costs. The minimum
aggregate future obligations under non-cancelable leases as of
December 31, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2007
|
|
$
|
9,016
|
|
2008
|
|
|
6,740
|
|
2009
|
|
|
4,309
|
|
2010
|
|
|
2,198
|
|
2011
|
|
|
735
|
|
|
|
|
|
|
Total
|
|
$
|
22,998
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2006, 2005
and 2004 was $6.6 million, $5.7 million and
$5.6 million, respectively.
The Company has issued letters of credit in the amount of
$4.2 million related to certain of its real estate leases.
These letters of credit are collateralized by marketable
securities that have been restricted as to use (see
Note 6). The letters of credit expire as the Company
fulfills its operating lease obligations. Certain of the
Companys facility leases include rent escalation clauses.
The Company normalizes rent expense on a straight-line basis
over the term of the lease for known changes in lease payments
over the life of the lease. In the event that the landlord
provided funding for lease improvements to leased facilities,
the Company would amortize such amount as part of rent expense
on a straight-line basis over the life of the lease.
61
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchase
Commitments
The Company has long-term commitments for bandwidth usage and
co-location with various networks and ISPs. For the years ending
December 31, 2007, 2008 and 2009, the minimum commitments
are approximately $20.0 million, $8.4 million and
$897,000, respectively. Additionally, as of December 31,
2006, the Company had entered into purchase orders with various
vendors for aggregate purchase commitments of $12.5 million
which are expected to be paid in 2007.
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 Akamais 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 which 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, and the Court issued an order
preliminarily approving the settlement. On December 5,
2006, the United States Court of Appeals for the Second Circuit
overturned the District Courts certification of the class
of plaintiffs who are pursuing the claims that would be settled
in the settlement against the underwriter defendants. Plaintiffs
filed a Petition for Rehearing and Rehearing En Banc with the
Second Circuit on January 5, 2007 in response to the Second
Circuits decision and have informed the District Court
that they would like to be heard as to whether the settlement
may still be approved even if the decision of the Court of
Appeals is not reversed. The District Court indicated that it
would defer consideration of final approval of the settlement
pending plaintiffs request for further appellate review.
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 if
the settlement is not finalized and approved.
The Company and Speedera were involved in lawsuits against each
other regarding patent infringement and false advertising and
trade secrets claims. Upon completion of the acquisition of
Speedera, all lawsuits between Akamai and Speedera were
dismissed.
The Company is party to various litigation matters that
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 the guarantees described below as
disclosable 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
62
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rescission of FASB Interpretation No. 34. The Company
evaluates estimated 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 of an unfavorable outcome
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 guarantees in its financial statements.
As permitted under Delaware law, the Companys Certificate
of Incorporation provides that Akamai indemnify each of its
officers and directors during his or her lifetime for certain
events or occurrences that happen by reason of the fact that the
officer or director is or was or has agreed to serve as an
officer or director of the Company. The maximum potential amount
of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the
Company has a Director and Officer insurance policy that limits
its exposure and would enable the Company to recover a portion
of certain future amounts paid.
The Company enters into standard indemnification agreements in
the ordinary course of business. Pursuant to these agreements,
the Company agrees to indemnify, hold harmless, and reimburse
the indemnified party for losses suffered or incurred by the
indemnified party, generally Akamais business partners or
customers, in connection with Akamais provision of its
services and software. Generally, these obligations are limited
to claims relating to infringement of a U.S. patent, or any
copyright or other intellectual property or the Companys
negligence, willful misconduct or violation of the law (provided
that there is not gross negligence or willful misconduct on the
part of the other party). Subject to applicable statutes of
limitation, the term of these indemnification agreements is
generally perpetual from the time of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited; however, the Company carries insurance that covers
certain third party claims relating to its services and could
limit the Companys exposure.
The Company acquired all of the stock of three companies in
2000, as well as all of the stock of two other companies in 2005
and 2006. As part of those acquisitions, the Company assumed the
liability for undisclosed claims and losses previously incurred
by such companies. Subject to applicable statutes of
limitations, these obligations are generally perpetual from the
time of execution of the agreement. The maximum potential amount
of future payments the Company could be required to make in
connection with these obligations is unlimited. The Company does
not currently expect the costs of defending lawsuits or settling
claims related to these acquired companies to be material.
The Company leases space in certain buildings, including a
corporate headquarters building, under operating leases. The
Company has standard indemnification arrangements under those
leases that require it to indemnify the landlord against losses,
liabilities, and claims incurred in connection with the premises
covered by the Company leases, its use of the premises, property
damage or personal injury, and breach of the lease agreement, as
well as occurrences arising from the Companys negligence
or willful misconduct. The Company also subleases certain space
and agrees to indemnify the sublessee for losses caused by the
Companys employees on the premises. Subject to applicable
statutes of limitation, the term of these indemnification
agreements is generally perpetual from the time of execution of
the agreement. The maximum potential amount of future payments
the Company could be required to make under these
indemnification agreements is unlimited. The Company has never
incurred costs to defend lawsuits or settle claims related to
these indemnification agreements.
The Company entered into three joint ventures in 2001 and 2002,
which have since terminated. The terms of the joint venture
agreements generally provide that the Company indemnify the
joint venture partner against property damage or bodily injury
arising from the Companys negligence or willful
misconduct; third party claims of copyright infringement or
trade secret theft associated with the software or marks
licensed from the Company by the partner; and losses arising
from any breach by the Company of its representations and
warranties. Subject to applicable statutes of limitation, the
term of these indemnification agreements is generally perpetual
from the time of execution of the agreement. The maximum
potential amount of future payments the Company could be
required
63
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to make under these indemnification agreements is unlimited. The
Company has never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements.
The Company leases certain equipment under operating leases that
require it to indemnify the lessor against losses, liabilities
and claims in connection with the lease agreement, possession or
use of the leased equipment, and in some cases certain tax
issues. Subject to applicable statutes of limitation, the term
of these indemnification agreements is generally perpetual from
the time of execution of the agreement. The maximum potential
amount of future payments the Company could be required to make
under these indemnification agreements is unlimited. The Company
has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements.
The Company licenses technology to certain third parties under
license agreements that provide for Akamai to indemnify the
third parties against claims of patent and copyright
infringement. This indemnity does not apply in the case where
the licensed technology has been modified by the third party or
combined with other technology, hardware, or data that the
Company has not approved. Subject to applicable statutes of
limitation, the term of these indemnification agreements is
generally perpetual from the time of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited. The Company has never incurred costs to defend
lawsuits or settle claims related to these indemnification
agreements.
The Company licenses technology from third parties under
agreements that contain standard indemnification provisions that
require the Company to indemnify the third party against losses,
liabilities and claims arising from the Companys
unauthorized use or modification of the licensed technology.
Subject to applicable statutes of limitation, the term of these
indemnification agreements is generally perpetual from the time
of execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under
these indemnification agreements is unlimited. The Company has
never incurred costs to defend lawsuits or settle claims related
to these indemnification agreements.
1% Convertible
Senior Notes
In January 2004 and December 2003, Akamai issued
$200.0 million in aggregate principal amount of
1% convertible senior notes due December 15, 2033 for
aggregate proceeds of $194.1 million, net of an initial
purchasers discount and offering expenses of
$5.9 million. 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). The notes
may be converted at the option of the holder in the following
circumstances:
|
|
|
|
|
during any calendar quarter commencing after March 31,
2004, if the closing sale price of the common stock for at least
20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the preceding calendar quarter
is more than 120% of the conversion price in effect on such last
trading day;
|
|
|
|
if the convertible notes are called for redemption;
|
|
|
|
if the Company makes specified distributions on its common stock
or engages in specified transactions; and
|
|
|
|
during the five trading day period immediately following any
ten-consecutive trading day period in which the trading price
per $1,000 principal amount of the convertible notes for each
day of such
ten-day
period is less than 95% of the product of the closing sale price
per share of the Companys common stock on that day
multiplied by the number of shares of its common stock issuable
upon conversion of $1,000 principal amount of the convertible
notes.
|
Since December 2005, the first conversion term discussed above
has been met; however, no notes had been converted as of
December 31, 2006. The Company may 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
64
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest. Conversely, holders of the 1% convertible senior notes
may require the Company to repurchase the notes at par value 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. Deferred financing costs of
$5.9 million, including 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
$841,000 for each of the years ended December 31, 2006 and
2005 and $839,000 for the year ended December 31, 2004. The
Company records the amortization of deferred financing costs
using the interest method as interest expense in the
consolidated statement of operations.
51/2% Convertible
Subordinated Notes
During the year ended December 31, 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 redemption price was $1,015.71 for each
$1,000 in principal amount repurchased. The Company charged the
outstanding deferred financing costs relating to these
repurchased notes and premium paid of $481,000 and $889,000,
respectively, for the year ended December 31, 2005, to loss
on early extinguishment of debt. For the years ended
December 31, 2005 and 2004, amortization of deferred
financing costs was approximately $175,000 and $543,000,
respectively.
During the year ended December 31, 2004, in individually
negotiated transactions, the Company repurchased an aggregate of
$131.5 million in aggregate principal amount of its
outstanding
51/2% convertible
subordinated notes for total cash payments of
$133.9 million. The purchase prices ranged between
$1,018.00 and $1,023.57 for each $1,000 in principal amount
repurchased. Additionally, in February 2004, the Company
commenced a tender offer to repurchase up to $101.0 million
in aggregate principal amount of its outstanding
51/2% convertible
subordinated notes at a purchase price between $1,000 and $1,005
for each $1,000 of principal amount tendered. In March 2004, the
Company amended the tender offer to increase the maximum price
at which it was willing to repurchase the
51/2% convertible
subordinated notes to $1,012.50 per $1,000 principal amount of
the notes. Pursuant to the tender offer, in March 2004, the
Company repurchased $37.9 million in aggregate principal
amount of the
51/2% convertible
subordinated notes for a total cash payment of
$38.3 million. The purchase price was $1,012.50 for each
$1,000 of principal amount tendered. For the year ended
December 31, 2004, the Company charged the outstanding
deferred financing costs relating to the repurchased notes and
the premium paid of $2.5 million and $2.8 million,
respectively, to loss on early extinguishment of debt.
Additionally, the Company incurred $1.5 million of advisory
services and offering expenses in connection with the tender
offer and repurchases, which is included in loss on early
extinguishment of debt.
|
|
13.
|
Restructurings
and Lease Terminations:
|
As of December 31, 2006, the Company had $2.1 million
of accrued restructuring liabilities. As part of the Speedera
and Nine System acquisitions, the Companys management
committed to plans to exit certain activities of these entities.
In accordance with EITF
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, the Company recorded a liability of
$1.8 million and $500,000 related to workforce reductions
during the years ended December 31, 2005 and 2006,
respectively. These liabilities primarily consisted of employee
severance and outplacement costs. The Company expects that these
liabilities will be fully paid by June 2008.
65
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the accrual and usage of the
restructuring charges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Severance
|
|
|
Total
|
|
|
Ending balance, December 31,
2003
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
5.2
|
|
Cash payments
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2004
|
|
|
3.6
|
|
|
|
|
|
|
|
3.6
|
|
Accrual recorded in purchase
accounting
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Cash payments
|
|
|
(1.3
|
)
|
|
|
(0.5
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2005
|
|
|
2.3
|
|
|
|
1.3
|
|
|
|
3.6
|
|
Accrual recorded in purchase
accounting
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Cash payments
|
|
|
(1.4
|
)
|
|
|
(0.6
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2006
|
|
$
|
0.9
|
|
|
$
|
1.2
|
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of accrued
restructuring
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of accrued
restructuring
|
|
$
|
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All existing lease restructuring liabilities will be fully paid
by 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.
|
|
14.
|
Rights
Plan and Series A Junior Participating Preferred
Stock:
|
On September 10, 2002, the Board of Directors of the
Company (the Board of Directors) declared a dividend
of one preferred stock purchase right for each outstanding share
of the Companys common stock held by stockholders of
record at the close of business on September 23, 2002. To
implement the rights plan, the Board of Directors designated
700,000 shares of the Companys 5.0 million
authorized shares of undesignated preferred stock as
Series A Junior Participating Preferred Stock, par value
$.01 per share. Each right entitles the registered holder
to purchase from the Company one one-thousandth of a share of
preferred stock at a purchase price of $9.00 in cash, subject to
adjustment. No shares of Series A Junior Participating
Preferred Stock are outstanding as of December 31, 2006. In
January 2004, the Board of Directors of the Company approved an
amendment to the rights plan in which the purchase price of each
right issued under the plan increased from $9.00 per share
to $65.00 per share.
|
|
15.
|
Stockholders
Equity:
|
Common
Stock
Holders of the Companys common stock are entitled to one
vote per share. At December 31, 2006, the Company had
reserved approximately 27.2 million shares of common stock
for issuance under its 1999 Employee Stock Purchase Plan (the
1999 ESPP) and upon the exercise of options and
vesting of deferred stock units and restricted stock units under
its other stock incentive plans.
Equity
Offering
In November 2005, the Company completed an equity offering of
12.0 million shares of its common stock at a price of
$16.855 per share for proceeds of $202.1 million, net
of offering expenses.
66
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Stock-Based
Compensation:
|
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. As of
December 31, 2006, no stock options or other equity
incentive awards had 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 of the
Board of Directors. 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 issued 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 years ended December 31, 2006, 2005
and 2004, the Company issued 295,113, 475,776 and
1,598,947 shares under the 1999 ESPP, respectively, with a
weighted average purchase price per share of $22.00, $9.70 and
$3.17, respectively. Total cash proceeds from the purchase of
shares under the 1999 ESPP in 2006, 2005 and 2004 were
$6.5 million, $4.6 million and $4.7 million,
67
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. As of December 31, 2006, $1.0 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 year ended December 31, 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 each of
June 1, 2006 and December 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
January 1, 2006 based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS No. 123; and stock options, deferred stock units
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 year
ended December 31, 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 December 31, 2006; as of
and prior to December 31, 2005, it was carried as a
separate line item entitled deferred 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
excess windfall tax 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.
68
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of recording stock-based compensation in accordance
with SFAS No. 123(R) for the year ended
December 31, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Stock-based compensation expense
by type of award:
|
|
|
|
|
Stock options
|
|
$
|
24,572
|
|
Deferred stock units
|
|
|
1,976
|
|
Restricted stock units
|
|
|
25,410
|
|
Shares issued under the 1999 ESPP
|
|
|
1,903
|
|
Amounts capitalized as
internal-use software
|
|
|
(4,293
|
)
|
|
|
|
|
|
Total stock-based compensation
before income taxes
|
|
|
49,568
|
|
Less: Income tax benefit
|
|
|
(16,011
|
)
|
|
|
|
|
|
Total stock-based compensation,
net of tax
|
|
$
|
33,557
|
|
|
|
|
|
|
Effect of stock-based compensation
on income by line item:
|
|
|
|
|
Cost of revenues
|
|
$
|
1,960
|
|
Research and development expense
|
|
|
11,435
|
|
Sales and marketing expense
|
|
|
18,403
|
|
General and administrative expense
|
|
|
17,770
|
|
Provision for income taxes
|
|
|
(16,011
|
)
|
|
|
|
|
|
Total cost related to stock-based
compensation
|
|
$
|
33,557
|
|
|
|
|
|
|
The fair value of Akamais stock option awards granted
during the year ended December 31, 2006 is estimated on the
date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
|
|
|
|
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Expected life (years)
|
|
|
3.9
|
|
Risk-free interest rate(%)
|
|
|
4.7
|
|
Expected volatility(%)
|
|
|
67.5
|
|
Dividend yield(%)
|
|
|
|
|
Weighted average fair value per
share at grant date
|
|
$
|
18.10
|
|
69
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of Akamais ESPP awards granted during year
ended December 31, 2006 is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate(%)
|
|
|
4.1
|
|
Expected volatility(%)
|
|
|
76.6
|
|
Dividend yield(%)
|
|
|
|
|
Weighted average fair value per
share of shares purchased
|
|
$
|
5.65
|
|
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 December 31, 2006, total pre-tax unrecognized
compensation cost for stock options, restricted stock units,
deferred stock units and the 1999 ESPP awards was
$107.5 million. This non-cash expense will be recognized
through 2014 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 year ended
December 31, 2006 was $7.5 million lower 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 year ended
December 31, 2006 was $4.4 million lower than if the
Company had continued to account for share-based compensation
under APB No. 25. Basic and diluted earnings per share for
the year ended December 31, 2006 would have been $0.40 and
$0.36, respectively, had the Company not adopted
SFAS No. 123(R), compared to reported basic and
diluted earnings per share of $0.37 and $0.34, respectively, for
such period.
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 $32.5 million in excess
windfall tax benefit classified as a financing cash inflow for
2006 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 (loss)
per weighted average share calculated as if the Company had
adopted the fair value recognition provisions of
SFAS No. 123 for the years ended December 31,
70
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005 and 2004 to the Companys reported net income (loss)
per weighted average share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
Add: stock-based employee
compensation costs, net of tax included in reported net income
|
|
|
3,219
|
|
|
|
1,200
|
|
Deduct: stock-based employee
compensation costs, net of tax determined under fair value
method for all awards
|
|
|
(31,288
|
)
|
|
|
(55,461
|
)
|
|
|
|
|
|
|
|
|
|
Incremental stock option expense
per SFAS No. 123
|
|
|
(28,069
|
)
|
|
|
(54,261
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
299,929
|
|
|
$
|
(19,897
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per weighted
average share, basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
Pro forma
|
|
$
|
2.20
|
|
|
$
|
(0.16
|
)
|
Net income (loss) per weighted
average share, diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
Pro forma
|
|
$
|
1.93
|
|
|
$
|
(0.16
|
)
|
Effect of stock-based compensation
on income by line item:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
4
|
|
Research and development expenses
|
|
|
1,034
|
|
|
|
118
|
|
Sales and marketing expenses
|
|
|
636
|
|
|
|
549
|
|
General and administrative expenses
|
|
|
2,179
|
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
Total cost related to stock-based
compensation
|
|
$
|
3,849
|
|
|
$
|
1,292
|
|
|
|
|
|
|
|
|
|
|
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 1999 ESPP awards granted during
the years ended December 31, 2005 and 2004 was estimated on
the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (years)
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
Risk-free interest rate(%)
|
|
|
2.1
|
|
|
|
1.9
|
|
Expected Volatility(%)
|
|
|
103.2
|
|
|
|
129.2
|
|
Dividend yield(%)
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share of shares purchased
|
|
$
|
5.12
|
|
|
$
|
1.76
|
|
71
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of Akamais stock-option awards granted
during the years ended December 31, 2005 and 2004 was
estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate(%)
|
|
|
4.0
|
|
|
|
3.0
|
|
Volatility(%)
|
|
|
72.8
|
|
|
|
98.9
|
|
Dividend yield(%)
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share at grant date
|
|
$
|
8.86
|
|
|
$
|
10.90
|
|
Stock
Options
Options to purchase common stock are granted at the discretion
of the Board of Directors, or a committee thereof or other
designee. 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.
The following tables summarize the stock option activity under
all equity plans for the years ended December 31, 2006,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at December 31,
2003
|
|
|
15,359,000
|
|
|
$
|
4.68
|
|
Granted
|
|
|
3,009,000
|
|
|
|
14.51
|
|
Exercised
|
|
|
(3,012,000
|
)
|
|
|
2.99
|
|
Forfeited and expired
|
|
|
(1,230,000
|
)
|
|
|
7.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
14,126,000
|
|
|
|
6.92
|
|
Granted and assumed in business
combination
|
|
|
6,345,000
|
|
|
|
10.67
|
|
Exercised
|
|
|
(3,029,000
|
)
|
|
|
3.28
|
|
Forfeited and expired
|
|
|
(1,166,000
|
)
|
|
|
12.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
16,276,000
|
|
|
|
8.65
|
|
Granted and assumed in business
combination
|
|
|
1,932,000
|
|
|
|
26.96
|
|
Exercised
|
|
|
(4,153,000
|
)
|
|
|
5.18
|
|
Forfeited and expired
|
|
|
(808,000
|
)
|
|
|
12.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
13,247,000
|
|
|
|
12.33
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
6,876,000
|
|
|
|
7.28
|
|
The total pre-tax intrinsic value of options exercised during
the years ended December 31, 2006, 2005 and 2004 was $131.6
million, $35.9 million and $34.4 million, respectively. The
total fair value of options vested for the years ended
December 31, 2006, 2005 and 2004 was $20.3 million,
$25.5 million and $50.1 million, respectively. The fair value of
vested stock options for the year ended December 31, 2006
was calculated net of capitalized equity-related compensation of
$4.3 million. Cash proceeds from the exercise of stock
options were $21.4 million, $9.8 million and $9.0 million for
the years ended December 31, 2006, 2005 and 2004,
respectively. Income tax benefits realized from the exercise of
stock options during the years ended December 31, 2006,
2005 and 2004 were $103.3 million, $27.9 million and $42.2
million, respectively.
72
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock options that are
outstanding and expected to vest and stock options exercisable
at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Expected to Vest
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Range of
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
Exercise Price ($)
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Intrinsic Value
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
0.01-0.90
|
|
|
1,031,749
|
|
|
|
5.5
|
|
|
$
|
0.69
|
|
|
$
|
54,099
|
|
|
|
909,915
|
|
|
|
5.3
|
|
|
$
|
0.73
|
|
|
$
|
47,669
|
|
0.96-1.65
|
|
|
1,356,365
|
|
|
|
5.7
|
|
|
|
1.40
|
|
|
|
70,150
|
|
|
|
1,350,546
|
|
|
|
5.7
|
|
|
|
1.40
|
|
|
|
69,850
|
|
1.93-4.08
|
|
|
749,255
|
|
|
|
5.0
|
|
|
|
3.17
|
|
|
|