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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-27275
AKAMAI TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3432319
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
500 TECHNOLOGY SQUARE
CAMBRIDGE, MA 02139
(617) 250-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of May
1, 2000: 104,287,946 shares.
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AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................... 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......... 22
Item 6. Exhibits and Reports on Form 8-K................... 22
Signatures.................................................. 24
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $269,554 $ 26,612
Short-term investments.................................... -- 198,554
Accounts receivable, net of allowance for doubtful
accounts of $70 and $205 as of December 31, 1999 and
March 31, 2000, respectively........................... 1,588 3,136
Prepaid expenses and other current assets................. 2,521 8,778
-------- --------
Total current assets................................... 273,663 237,080
Property and equipment, net............................... 23,875 43,475
Intangible assets, net.................................... 434 186,874
Other assets.............................................. 2,843 4,384
-------- --------
Total assets........................................... $300,815 $471,813
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,987 $ 17,071
Accrued expenses.......................................... 2,083 7,026
Accrued payroll and benefits.............................. 3,614 3,831
Deferred revenue.......................................... 698 3,586
Current portion of obligations under capital lease and
equipment loan......................................... 504 588
Current portion of long-term debt......................... 2,751 64
-------- --------
Total current liabilities.............................. 18,637 32,166
Obligations under capital leases and equipment loan, net of
current portion........................................... 733 682
-------- --------
Total liabilities...................................... 19,370 32,848
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1999 and March 31, 2000................... -- --
Common stock, $0.01 par value; 300,000,000 shares
authorized; 92,498,525 issued and outstanding at
December 31, 1999; 93,800,305 shares issued and
outstanding at March 31, 2000.......................... 925 938
Additional paid-in capital................................ 374,739 559,051
Notes receivable from officers for stock.................. (5,907) (6,220)
Deferred compensation..................................... (29,731) (27,541)
Accumulated other comprehensive income.................... -- 6,715
Accumulated deficit....................................... (58,581) (93,978)
-------- --------
Total stockholders' equity............................. 281,445 438,965
-------- --------
Total liabilities and stockholders' equity............. $300,815 $471,813
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31,
---------------------
1999 2000
-------- ---------
<S> <C> <C>
Revenue..................................................... $ -- $ 7,222
------- --------
Operating expenses:
Cost of service........................................... 186 6,636
Engineering and development (excludes $60 and $1,108,
respectively, of equity related compensation disclosed
separately below)...................................... 755 6,915
Sales, general and administrative (excludes $818 and
$1,082, respectively, of equity related compensation
disclosed separately below)............................ 1,090 21,504
Amortization of intangible assets......................... 11 9,000
Equity related compensation............................... 878 2,189
------- --------
Total operating expenses............................... 2,920 46,244
------- --------
Operating loss.............................................. (2,920) (39,022)
Interest income, net........................................ 33 3,625
------- --------
Net loss.................................................... (2,887) (35,397)
Dividends and accretion to preferred stock redemption
value..................................................... 4 --
------- --------
Net loss attributable to common stockholders................ $(2,891) $(35,397)
======= ========
Basic and diluted net loss per share........................ $ (0.17) $ (0.47)
Weighted average common shares outstanding.................. 17,045 75,029
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,887) $ (35,397)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 168 12,062
Amortization of deferred compensation................... 878 2,190
Interest on notes receivable from officers for stock.... -- (85)
Changes in operating assets and liabilities, net of
effects of acquisition of Network24:
Accounts receivable................................... -- (1,240)
Prepaid expenses and other assets..................... (428) (7,742)
Accounts payable and accrued expenses................. (144) 12,653
Deferred revenue...................................... -- 2,889
------- ---------
Net cash used in operating activities....................... (2,413) (14,670)
------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (955) (22,087)
Cash paid for acquisition of Network24, net of cash
received................................................ -- (11,716)
Purchase of investments................................... (475) (191,834)
------- ---------
Net cash used in investing activities....................... (1,430) (225,637)
------- ---------
Cash flows from financing activities:
Proceeds from equipment financing loan.................... 1,500 --
Payments on capital leases and equipment financing loan... (69) (126)
Payment on the senior subordinated notes.................. -- (2,687)
Proceeds from the exercise of stock options............... -- 184
Proceeds from the issuance of restricted common stock..... 293 --
------- ---------
Net cash provided by (used in) financing activities......... 1,724 (2,629)
------- ---------
Effects of translation on cash and cash equivalents......... -- (6)
------- ---------
Net decrease in cash and cash equivalents................... (2,119) (242,942)
Cash and cash equivalents, beginning of the period.......... 6,805 269,554
------- ---------
Cash and cash equivalents, end of the period................ $ 4,686 $ 26,612
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF BUSINESS
Akamai Technologies, Inc. ("Akamai" or the "Company") provides global
delivery services for Internet content, streaming media and applications that
improves Web site speed, quality, reliability and scaleability and protects
against Web site crashes due to demand overloads. Akamai markets its services to
large businesses and other businesses with an Internet focus. Akamai's services
deliver Akamai's customers' Web content and applications through a worldwide
server network by locating the content and applications geographically closer to
users.
The Company has a single operating segment, global delivery services for
Internet content, streaming media and applications. The Company has no
organizational structure dictated by product lines, geography or customer type.
Substantially all revenue earned to date has been generated from U.S. based
customers.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary for a
fair statement of the results for the interim periods. The consolidated
financial statements have been prepared in accordance with the regulations of
the Securities and Exchange Commission ("SEC"), but omit certain information and
footnote disclosure necessary to present the statements in accordance with
generally accepted accounting principles for annual financial statements.
Results for the interim periods are not necessarily indicative of results for
the entire fiscal year. These statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The consolidated financial statements include the accounts of Akamai and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
3. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
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 cost, which
approximates fair market value. Short-term investments consist of high quality
corporate and governmental securities with original maturities of more than
three months at the date of purchase. The Company considers such securities to
be classified as "available-for-sale" in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Short-term investments are carried at fair market value with
any unrealized gain or loss recorded as a separate element of stockholders'
equity.
4. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net loss per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of potential common stock. Potential common
stock consists of convertible preferred stock, unvested restricted common stock,
stock options and warrants. All potential common stock have been excluded from
the calculation of diluted loss per share since its inclusion would be
anti-dilutive.
5
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AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
The following table sets forth potential common stock excluded from the
calculation of earnings per share since its inclusion would be antidilutive:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Stock options............................................ 7,217,400 14,062,343
Unvested restricted common stock......................... 22,879,524 16,110,879
Convertible preferred stock.............................. 19,800,000 --
Warrants................................................. -- 2,033,621
</TABLE>
4. COMPREHENSIVE LOSS
The following table presents the calculation of comprehensive loss and its
components for the three months ended March 31, 1999 and 2000 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Net loss.................................................... $(2,887) $(35,397)
Other comprehensive income (loss):
Cumulative foreign currency translation adjustment........ -- (5)
Unrealized gain on investment............................. -- 6,720
------- --------
Comprehensive loss.......................................... $(2,887) $(28,682)
======= ========
</TABLE>
5. ACQUISITIONS
NETWORK24 COMMUNICATIONS, INC.
In February 2000, the Company acquired all of the outstanding common and
preferred stock of Network24 Communications Inc. ("Network24") in exchange for
599,152 shares of Akamai common stock and $12.5 million in cash. Akamai also
issued options and warrants exercisable for 195,862 shares of Akamai's common
stock in exchange for all outstanding options and warrants exercisable for
Network24 common stock. The value of the acquisition was approximately $198.2
million based on the fair value of the consideration paid plus direct
acquisition costs. The acquisition has been accounted for using the purchase
method. Accordingly, the results of operations of Network24 subsequent to
February 10, 2000 have been included in Akamai's statement of operations for the
three months ended March 31, 2000. Pro forma financial information combining the
results of operations of Akamai and Network24 as if the acquisition had occurred
at the beginning of the quarter ended March 31, 1999 and 2000 would not be
significantly different than the reported actual amounts.
INTERVU INC.
In April 2000, the Company acquired all of the outstanding common and
preferred stock of INTERVU Inc. ("INTERVU") in exchange for 9.9 million shares
of Akamai common stock. Akamai also assumed options and warrants exercisable for
2.1 million shares of Akamai's common stock. The value of the acquisition is
estimated to be approximately $2.8 billion based on the fair value of the
consideration paid plus direct acquisition costs. The acquisition will be
accounted for using the purchase method.
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AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
6. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A, which is effective no later than the
quarter ending June 30, 2000. SAB No. 101 clarifies the Securities and Exchange
Commission's views regarding the recognition of revenue. Akamai will adopt SAB
No. 101 in the second quarter of 2000. Akamai does not expect the application of
SAB No. 101 to have a material impact on their financial position or results of
operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN No. 44
primarily clarifies (a) the definition of an employee for purposes of applying
APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of previously fixed stock options or awards, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 is effective July 1, 2000, but certain conclusions in FIN No. 44 cover
specific events that occurred after either December 15, 1998 or January 12,
2000. Akamai does not expect the application of FIN No. 44 to have a material
impact on its financial position or results of operations.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those indicated in such
forward-looking statements as a result of certain factors including, but not
limited to, those set forth under the heading "Factors Affecting Future
Operating Results."
OVERVIEW
Akamai provides global delivery services for Internet content, streaming
media and applications that improve Web site speed, quality, reliability and
scaleability and protect against Web site crashes due to demand overloads.
Akamai markets its services to large businesses and other businesses with an
Internet focus. Akamai's services deliver Akamai's customers' Web content and
applications through a worldwide server network by locating the content and
applications geographically closer to users.
Since Akamai's inception, Akamai has incurred significant losses, and as of
March 31, 2000, Akamai had an accumulated deficit of $94.0 million. Akamai has
not achieved profitability on a quarterly or an annual basis, and anticipates
that it will continue to incur net losses. Akamai expects to incur significant
engineering and development and sales, general and administrative expenses and,
as a result, Akamai will need to generate significant revenue for it to achieve
and maintain profitability.
In the first quarter, Akamai entered into agreements to acquire all the
outstanding common and preferred stock of Network24 Communications, Inc.
("Network24") and INTERVU Inc. ("INTERVU"). Both of these companies were
acquired to accelerate market leadership in streaming media. The Network24
acquisition was consummated on February 10, 2000 in exchange for 599,152 shares
of Akamai common stock and $12.5 million in cash. The INTERVU acquisition was
consummated on April 20, 2000 in exchange of 9.9 million shares of Akamai common
stock. The results of operations of Network24 subsequent to February 10, 2000
have been included in Akamai's statement of operations for the three months
ended March 31, 2000. The INTERVU acquisition is not reflected in the
consolidated financial statements for the quarter ended March 31, 2000. Both
acquisitions are accounted for using the purchase method of accounting.
Akamai derives its revenue from the sale of its FreeFlow and FreeFlow
Streaming services and other services under contracts with terms typically
ranging from 12 to 36 months. Akamai recognizes revenue based on fees for the
amount of Internet content delivered through its services. These contracts also
provide for minimum monthly fees. Customers are typically billed monthly in
advance for minimums and monthly in arrears for usage above the minimums. Akamai
also derives revenue for implementation, installation, usage and other fees that
would be recognized over the period of the related contracts.
To date, substantially all of Akamai's revenue has been derived from
customers based in the United States. Akamai expects that revenue from customers
based outside the United States will increase in future periods. To date,
substantially all of Akamai's revenue has been derived from direct sales and
Akamai expects that revenue through indirect distribution channels will increase
in future periods. For the three months ended March 31, 2000, Apple Computer
accounted for 21% of Akamai's revenue. No other customers account for more than
5% of revenue for the quarter ended March 31, 2000.
Cost of services consists of depreciation of network equipment used in
providing Akamai's services, monthly fees paid to network providers for
bandwidth and colocation of Akamai's servers. Akamai enters into contracts with
third-party network providers with terms typically ranging from six months to
three years. These contracts may commit Akamai to minimum monthly fees plus
additional fees for bandwidth usage above Akamai's contracted level.
Engineering and development expenses consist primarily of salaries and
related personnel costs and costs related to the design, development, testing,
deployment and enhancement of Akamai's services and Akamai's
8
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network. Akamai has to date expensed its engineering and development costs as
incurred. Akamai believes that research and development is critical to its
strategic product development objectives and intends to continue to enhance its
technology to meet the changing requirements of the market demand. As a result,
Akamai expects its engineering and development expenses to increase in the
future.
Sales, general and administrative expenses consist primarily of salaries
and related costs of sales and marketing, operations and finance personnel and
recruiting expenses, professional fees and legal and accounting services. Akamai
expects that sales, general and administrative expenses will increase in the
future as Akamai hires additional personnel, expands its operations, initiates
additional marketing programs, establishes sales offices in new locations and
incurs additional costs related to the growth of its business and its operations
as a public company.
RESULTS OF OPERATIONS
Revenue. Akamai recorded no revenue for the three months ended March 31,
1999. Revenue for the three months ended March 31, 2000 was $7.2 million. The
increase in revenue was due to sales of services, which were commercially
introduced in April 1999. The revenue attributable to the acquisition of
Network24 was not significant for the quarter ended March 31, 2000.
Cost of Service. Cost of service expense was $186,000 for the three months
ended March 31, 1999 and represented 6.4% of total operating expenses. Cost of
service expense was $6.6 million for the three months ended March 31, 2000 and
represented 14.4% of total operating expenses for the three months ended March
31, 2000. The increase in cost of service expense was due to the commencement of
testing of Akamai's FreeFlow service in early 1999 and commercial introduction
of services in April 1999. Gross margins, defined as revenue less cost of
service, were negative for the three months ended March 31, 1999 largely due to
the fixed cost of building a global network of servers. Gross margins were
positive for the quarter ended March 31, 2000 due to an increase in the number
of customers and volume of revenue relative to the growth in network
infrastructure. The average selling price of Akamai's services as measured in
dollars per Mega bits per second, or Mbps, exceeds Akamai's average cost of
bandwidth as measured in dollars per Mbps. While gross margins are expected to
increase over time, fluctuations are possible as fixed costs increase due to the
rapid expansion of the Company's global network of servers.
Engineering and Development. Engineering and development expenses were
$755,000 for the three months ended March 31, 1999 and represented 25.9% of
total operating expenses in the three months ended March 31, 1999. Engineering
and development expenses were $6.9 million for the three months ended March 31,
2000 and represented 15.0% of total operating expenses for the three months
ended March 31, 2000. The increase was attributable to personnel and payroll
related expenses resulting from an increase in headcount. Akamai's West Coast
office had 49 research and development employees as of March 31, 2000.
Sales, General and Administrative. Sales, general and administrative
expenses were $1.1 million for the three months ended March 31, 1999 and
represented 37.3% of total operating expenses in the three months ended March
31, 1999. Sales, general and administrative expenses for the three months ended
March 31, 2000 were $21.5 million and represented 46.5% of total operating
expenses for the three months ended March 31, 2000. Approximately $8.2 million
of the increase was due to sales, general and administrative personnel and
payroll related expenses resulting from an increase in headcount. Approximately
$3.5 million of the increase was attributable to advertising campaigns initiated
during the period.
Amortization of Intangible Assets. Amortization of intangible assets for
the three months ended March 31, 2000 was $9.0 million and represented 19.5% of
total operating expenses for the three months ended March 31, 2000. The expense
primarily relates to the acquisition of Network24 and the associated
amortization of intangible assets acquired as part of the acquisition. These
intangible assets are being amortized on a straight-line basis over three years.
The Company expects amortization of intangible assets to increase by
approximately $125.0 million per quarter as a result of the acquisition of
INTERVU.
Equity Related Compensation. Equity related compensation expense consist of
the amortization of deferred compensation resulting from the grant of stock
options or shares of restricted stock at exercise or sale prices deemed to be
less than the fair value of the common stock on the grant date. At March 31,
2000, deferred compensation, which is a component of stockholders' equity, was
$27.5 million. This amount is being
9
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amortized ratably over the vesting periods of the applicable stock options and
restricted shares, typically four years, with 25% vesting on the first
anniversary of the grant date and the balance vesting 6.25% quarterly
thereafter. Akamai expects to incur equity related compensation expenses of at
least $8.7 million in 2000, $8.7 million in 2001, $8.7 million in 2002 and $3.6
million in 2003.
Interest Income, Net. Interest income, net was $33,000 and $3.6 million for
the three months ended March 31, 1999 and 2000, respectively. Interest income,
net consists of interest earned on Akamai's cash, cash equivalent and short-term
investment balances, net of interest expense. Interest income increased in 2000
due to interest on proceeds from the sale of preferred stock in several private
placements and the sale of common stock in Akamai's initial public offering
during 1999.
LIQUIDITY AND CAPITAL RESOURCES
Initially, Akamai financed its operations primarily through private sales
of its capital stock and issuance of senior subordinated notes. In November
1999, Akamai sold shares of common stock through an initial public offering. The
net proceeds to Akamai from the offering were $217.6 million after deducting an
aggregate of $16.4 million in underwriting discounts and commissions to the
underwriters. Akamai has also financed its operations through borrowings under
long-term debt agreements for the purchase of capital equipment in the amount of
$1.5 million. At March 31, 2000, cash, cash equivalents and short-term
investments totaled $225.2 million.
Cash used in operating activities was $2.4 million for the three months
ended March 31, 1999 and $14.7 million for the three months ended March 31,
2000. Net cash flows used in operating activities for the three months ended
March 31, 2000 reflects increasing net losses partially offset by increases in
accounts payable, depreciation and amortization and accrued expenses.
Cash used in investing activities was $1.4 million for the three months
ended March 31, 1999 and $225.6 million for the three months ended March 31,
2000. Net cash used for investing activities in the current period reflects
purchases of short-term investments. Purchases of property and equipment,
consisting primarily of servers for deployment and expansion of Akamai's
network, information systems used to operate the business, and facilities
improvements of $22.1 million. Also during the current quarter Akamai made a net
cash payment of $11.7 million for the acquisition of Network24. Akamai also
invested $5.0 million in the preferred stock of an Internet company which was
converted to common stock upon the completion of the company's initial public
offering.
Cash provided by financing activities was $1.7 million for the three months
ended March 31, 1999 and cash used in financing activities was $2.6 million for
the three months ended March 31, 2000. Cash provided by financing activities for
the three months ended March 31, 1999 was derived primarily from an equipment
line of credit of $1.5 million, collateralized by the property and equipment,
which bears interest at the greater of 7.0% per year or the current 36 month
treasury yield plus 275 basis points. At March 31, 2000, approximately $1.0
million was outstanding under this line of credit. In December 1999, Akamai
exercised its right to pay off outstanding 15% subordinated demand notes of
which $12.2 million was paid in December 1999. During the quarter ended March
31, 2000 $2.7 million was paid. As of March 31, 2000, $64,000 remained
outstanding and is expected to be paid off in the second quarter of fiscal 2000.
Akamai believes that the net proceeds from the initial public offering,
together with its current cash, cash equivalents and short-term investments,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. If cash generated from
operations is insufficient to satisfy Akamai's liquidity requirements, it may
seek to sell additional equity or debt securities. If additional funds are
raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to those accruing to holders of common
stock, and the term of this debt could impose restrictions on Akamai's
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to Akamai's stockholders, and Akamai cannot be
certain that additional financing will be available in amounts or on terms
acceptable to Akamai, if at all. If Akamai is unable to obtain this additional
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financing, it may be required to reduce the scope of its planned technology,
services or product development and sales and marketing efforts, which could
harm its business, financial condition and operating results.
Akamai has designed its services for use in the year 2000 and beyond and
believes it is year 2000 ready. While Akamai has not experienced any year 2000
issues to date, Akamai has developed a contingency plan to address situations
that may result if it experiences significant year 2000 problems. As part of
Akamai's contingency plan, it maintains a fully operational back-up site and
conducts network monitoring 24 hours per day. Akamai's back-up site is located
at one of its server sites and is equipped with power generation and
communication alternatives.
Akamai's services are used in conjunction with larger networks involving
sophisticated hardware and software products supplied by other vendors. Each of
Akamai's customers' networks involves different combinations of third-party
products. Akamai cannot evaluate whether all of these products are year 2000
ready. Akamai may face claims based on year 2000 problems in other companies'
products or based on issues arising from the integration of multiple products
within the overall network. Although no claims of this kind have been made,
Akamai may in the future be required to defend its services in legal proceedings
which could be expensive regardless of the merits of these claims.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A, which is effective no later than the
quarter ending June 30, 2000. SAB No. 101 clarifies the Securities and Exchange
Commission's views regarding the recognition of revenue. Akamai will adopt SAB
No. 101 in the second quarter of 2000. Akamai does not expect the application of
SAB No. 101 to have a material impact on their financial position or results of
operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN No. 44
primarily clarifies (a) the definition of an employee for purposes of applying
APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of previously fixed stock options or awards, (d) and the accounting
for an exchange of stock compensation awards in a business combination. FIN No.
44 is effective July 1, 2000, but certain conclusions in FIN No. 44 cover
specific events that occurred after either December 15, 1998 or January 12,
2000. Akamai does not expect the application of FIN No. 44 to have a material
impact on their financial position or results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among other things, could cause Akamai's
actual operating results to differ materially from those indicated or suggested
by forward-looking statements made in this Form 10-Q or presented elsewhere by
management from time to time.
AKAMAI'S BUSINESS IS DIFFICULT TO EVALUATE BECAUSE IT HAS A LIMITED OPERATING
HISTORY.
Akamai was founded in August 1998 and began offering its services
commercially in April 1999. Akamai has limited meaningful historical financial
data upon which to base planned operating expenses and upon which investors may
evaluate it and its prospects. In addition, Akamai's operating expenses are
largely based on anticipated revenue trends and a high percentage of its
expenses are and will continue to be fixed in the short-term. Risks and
difficulties are frequently encountered by companies like Akamai in a new and
rapidly evolving market. Akamai's ability to sell its services and the level of
success it achieves depends, among other things, on the level of demand for
delivery services for graphics, streaming media, applications and other Internet
content, which is a new and rapidly evolving market. Akamai's business strategy
may be unsuccessful, and it may not successfully address the risks it faces.
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AKAMAI IS ENTIRELY DEPENDENT ON ITS INTERNET CONTENT DELIVERY SERVICES AND ITS
FUTURE REVENUE DEPENDS ON THE COMMERCIAL SUCCESS OF ITS SERVICES.
Currently, Akamai's future growth depends on the commercial success of its
Internet content delivery services and other services and products it may
develop and/or offer. While Akamai has been selling its services commercially
since April 1999, sales may not continue in the future. Akamai's other services
and products under development may not achieve widespread market acceptance. The
future revenue growth of FreeFlow Streaming will also depend, in part, on
customer acceptance of a combined or integrated Akamai/INTERVU service offering.
Failure of Akamai's current and planned services to operate as expected could
hinder or prevent their adoption. If Akamai's target customers do not adopt,
purchase and successfully deploy Akamai's current and planned services, Akamai's
revenue will not grow significantly and its business, results of operations and
financial condition will be seriously harmed. In addition, to the extent Akamai
promotes any portion of its technology as an industry standard by making it
readily available to users for little or no charge, Akamai may not receive
revenue that it might otherwise have received.
THE INTERNET CONTENT DELIVERY MARKET IS NEW AND AKAMAI'S BUSINESS WILL SUFFER IF
IT DOES NOT DEVELOP AS AKAMAI EXPECTS.
The market for Internet content delivery services is new. Akamai cannot be
certain that a broad-based market for its service will emerge or be sustainable.
If this market does not develop, or develops more slowly than Akamai expects,
its business, results of operations and financial condition will be seriously
harmed.
ANY FAILURE OF AKAMAI'S NETWORK INFRASTRUCTURE COULD LEAD TO SIGNIFICANT COSTS
AND DISRUPTIONS WHICH COULD REDUCE AKAMAI'S REVENUE AND HARM ITS BUSINESS,
FINANCIAL RESULTS AND REPUTATION.
Akamai's business is dependent on providing its customers with fast,
efficient and reliable Internet content delivery services. To meet these
customer requirements Akamai must protect its network infrastructure against
damage from:
- sabotage and vandalism;
- human error;
- physical or electronic intrusion and security breaches;
- fire, earthquake, flood and other natural disasters;
- power loss; and
- similar events.
Despite the efforts of Akamai, its network infrastructure may come under
attack by sabotage or vandalism. In addition, the occurrence of a natural
disaster or other unanticipated problems at one or more of Akamai's servers
could result in service interruptions or significant damage to equipment. Akamai
currently provides a FreeFlow service guarantee that its networks will deliver
Internet content 24 hours a day, seven days a week, 365 days a year. If Akamai
does not provide this service, the customer does not pay for its services on
that day. Any widespread loss or interruption of services would reduce its
revenue, and could harm its business, financial results and reputation.
BECAUSE AKAMAI'S INTERNET CONTENT DELIVERY SERVICES ARE COMPLEX AND ARE DEPLOYED
IN COMPLEX ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT COULD SERIOUSLY
HARM ITS BUSINESS.
Akamai's Internet content delivery services are highly complex and are
designed to be deployed in and across numerous large and complex networks. As of
March 31, 2000, Akamai's network consisted of over 2,800 servers. Akamai and its
customers have also from time to time discovered errors and defects in Akamai's
software. In the future, there may be additional errors and defects in Akamai's
software that may adversely
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affect its services. If Akamai is unable to efficiently fix errors or other
problems that may be identified, Akamai could experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources;
- loss of credibility or damage to business reputation;
- increased service costs; and
- legal actions by Akamai's customers.
ANY FAILURE OF AKAMAI'S TELECOMMUNICATIONS AND NETWORK PROVIDERS TO PROVIDE
REQUIRED TRANSMISSION CAPACITY TO AKAMAI COULD RESULT IN INTERRUPTIONS IN
AKAMAI'S SERVICE.
Akamai's operations are dependent in part upon transmission capacity
provided by third-party telecommunications network providers. Any failure of
such network providers to provide the capacity Akamai requires may result in a
reduction in, or interruption of, service to Akamai's customers. This failure
may be a result of the telecommunications providers or Internet service
providers experiencing interruptions or other failures, failing to comply with
or terminating their existing agreements with Akamai, or otherwise denying or
interrupting service or not entering into relationships with Akamai at all or on
terms commercially acceptable to Akamai. If Akamai does not have access to
third-party transmission capacity, Akamai could lose customers. If Akamai is
unable to obtain such capacity on terms commercially acceptable to Akamai,
Akamai's business and financial results, could suffer.
THE MARKETS IN WHICH AKAMAI OPERATES ARE HIGHLY COMPETITIVE AND AKAMAI MAY BE
UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES
WITH GREATER RESOURCES.
Akamai competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Akamai has experienced and expects to continue
to experience increased competition. Many of Akamai's current competitors, as
well as a number of Akamai's potential competitors, have longer operating
histories, greater name recognition and substantially greater financial,
technical and marketing resources than Akamai does. Some of Akamai's current or
potential competitors have the financial resources to withstand substantial
price competition. Moreover, many of Akamai's competitors have more extensive
brand recognition, customer bases, broader customer relationships and broader
industry alliances that they could use to their advantage in competitive
situations, including relationships with many of Akamai's current and potential
customers. Akamai's competitors may be able to respond more quickly than Akamai
can to new or emerging technologies and changes in customer requirements. Some
of Akamai's current or potential competitors may bundle their services with
other services, software or hardware in a manner that may discourage Web site
owners from purchasing any service Akamai offers or Internet service providers
from installing Akamai's servers.
As competition in the Internet content delivery market continues to
intensify, new solutions will come to market. Akamai is aware of other companies
that are focusing or may in the future focus significant resources on developing
and marketing products and services that will compete with Akamai. Akamai also
believes that it may face competition from other providers of competing Internet
content delivery services, including networking hardware and software
manufacturers, content distribution providers, traditional hardware
manufacturers, telecommunications providers, software database companies, and
large diversified software and technology companies. Increased competition could
result in:
- price and revenue reductions and lower profit margins;
- increased cost of service from telecommunications providers;
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- loss of customers; and
- loss of market share.
Any one of these could materially and adversely affect Akamai's business,
financial condition and results of operations.
AS PART OF AKAMAI'S BUSINESS STRATEGY, AKAMAI HAS AND MAY ENTER INTO OR SEEK TO
ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS WHICH MAY BE DIFFICULT TO
INTEGRATE, DISRUPT AKAMAI'S BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
Akamai acquired Network24 in February 2000 and INTERVU in April 2000. As a
part of Akamai's business strategy, Akamai may enter into additional business
combinations and acquisitions. Acquisitions are typically accompanied by a
number of risks, including:
- the difficulty of integrating the operations and personnel of the
acquired companies;
- the maintenance of acceptable standards, controls, procedures and
policies;
- the potential disruption of Akamai's ongoing business and distraction of
management;
- the impairment of relationships with employees and customers as a result
of any integration of new management personnel;
- the difficulty of incorporation of acquired technology and rights into
Akamai's products and services;
- expenses related to the acquisition;
- potential unknown liabilities associated with acquired businesses; and
- unanticipated expenses related to acquired technology and its integration
into existing technology.
If Akamai is not successful in completing acquisitions that it may pursue
in the future, Akamai would be required to reevaluate its growth strategy and
may have incurred substantial expenses and spent significant management time and
resources in seeking to complete the acquisition. In addition, with future
acquisitions, Akamai could use substantial portions of its available cash as all
or a portion of the purchase price. Akamai could also issue additional
securities as consideration for these acquisitions, which could cause its
stockholders to suffer significant dilution. Akamai's acquisition of Network24,
and of INTERVU and any future acquisitions, may not generate any additional
revenue and may pose risks to Akamai.
A SIGNIFICANT DECLINE IN SALES TO APPLE COMPUTER COULD REDUCE AKAMAI'S REVENUE
AND CAUSE ITS BUSINESS AND FINANCIAL RESULTS TO SUFFER.
Akamai entered into a strategic alliance with Apple Computer, Inc.
effective as of April 1, 1999. Sales of its service to Apple Computer
represented approximately 21% of Akamai's revenue for the three months ended
March 31, 2000. Akamai expects that sales to Apple Computer as a percentage of
total sales will decrease, but that during calendar 2000 sales to Apple Computer
will continue to represent a significant portion of its revenue. Apple Computer
has the right to terminate the agreement on short notice if Akamai materially
breaches the agreement. A significant decline in sales to Apple Computer could
reduce Akamai's revenue and cause Akamai's business and financial results to
suffer.
IF ANY OF AKAMAI'S STRATEGIC ALLIANCES TERMINATES, THEN AKAMAI'S BUSINESS COULD
BE ADVERSELY AFFECTED.
Akamai entered into strategic alliances with Apple Computer effective as of
April 1, 1999, with Cisco Systems, Inc. in August 1999 and with Microsoft
Corporation in September 1999. Under each of these agreements, Akamai is seeking
to jointly develop technology, services and/or products with its strategic
alliance partners and Akamai may not be successful. The strategic alliance with
Cisco may be terminated by Cisco or Akamai on short notice for any reason. The
strategic alliance with Apple Computer may be terminated by Apple Computer or
Akamai if the other party materially breaches the agreement, and the strategic
alliance with Microsoft may be terminated by Microsoft or Akamai if the other
party materially
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breaches the agreement. A termination of, or significant adverse change in,
Akamai's relationship with Apple Computer, Cisco or Microsoft could have a
material adverse effect on Akamai's business.
AKAMAI'S BUSINESS WILL SUFFER IF IT IS UNABLE TO SCALE ITS NETWORK AS DEMAND
INCREASES.
Akamai's network may not be scalable to expected customer levels while
maintaining superior performance. Akamai cannot be certain that its network can
connect and manage a substantially larger number of customers at high
transmission speeds. In addition, as customers' usage of bandwidth increases,
Akamai will need to make additional investments in its infrastructure to
maintain adequate data transmission speeds. Akamai cannot ensure that it will be
able to make these investments successfully or at an acceptable or commercially
reasonable cost.
Upgrading Akamai's infrastructure may cause delays or failures in its
network. As a result, in the future Akamai's network may be unable to achieve or
maintain a sufficiently high transmission capacity. Akamai's failure to achieve
or maintain high capacity data transmission could significantly reduce demand
for Akamai service, reducing Akamai's revenue and causing its business and
financial results to suffer.
AKAMAI'S BUSINESS WILL SUFFER IF IT DOES NOT RESPOND RAPIDLY TO TECHNOLOGICAL
CHANGES.
The market for Internet content delivery services is likely to continue to
be characterized by rapid technological change, frequent new product and service
introductions and changes in customer requirements. Akamai may be unable to
respond quickly or effectively to these developments. If competitors introduce
products, services or technologies that are better than Akamai's or that gain
greater market acceptance, or if new industry standards emerge, Akamai's service
may become obsolete, which would materially and adversely affect its business,
results of operations and financial condition.
In developing its services, Akamai has made, and will continue to make,
assumptions about the standards that its customers and competitors may adopt. If
the standards adopted are different from those which Akamai may now or in the
future promote or support, market acceptance of Akamai's service may be
significantly reduced or delayed and its business will be seriously harmed. In
addition, the introduction of services or products incorporating new
technologies and the emergence of new industry standards could render Akamai's
existing service obsolete.
IF AKAMAI'S LICENSE AGREEMENT WITH MIT TERMINATES, THEN ITS BUSINESS COULD BE
ADVERSELY AFFECTED.
Akamai has licensed from MIT technology covered by various patent
applications and copyrights relating to Internet content delivery technology.
Some of Akamai's technology is based in part on the technology covered by these
patent applications and copyrights. MIT may terminate the license agreement if
Akamai ceases its business due to insolvency or if Akamai materially breaches
the terms of the license agreement. A termination of Akamai's license agreement
with MIT could have a material adverse effect on Akamai's business.
AKAMAI'S BUSINESS WILL BE ADVERSELY AFFECTED IF IT IS UNABLE TO PROTECT ITS
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES.
Akamai relies on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect its intellectual property
rights. These legal protections afford only limited protection; competitors may
gain access to Akamai's intellectual property which may result in the loss of
Akamai's customers.
Although Akamai has licensed technology covered by patent applications
filed with the United States Patent and Trademark Office with respect to
Internet content delivery services, Akamai has no patents issued with respect to
its FreeFlow content delivery services. Accordingly, neither Akamai's technology
nor technology licensed by Akamai is covered by patents that would preclude or
inhibit competitors from entering Akamai's market for its FreeFlow services.
Akamai's future patents, if any, and patents licensed by Akamai for its FreeFlow
services, may be successfully challenged or may not provide Akamai with any
competitive
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advantages. Moreover, although Akamai has filed international patent
applications, none of Akamai's technology is patented abroad. Akamai 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 Akamai. Monitoring unauthorized use of Akamai's service is
difficult and Akamai cannot be certain that the steps it has taken will prevent
unauthorized use of its technology, particularly in foreign countries where the
laws may not protect Akamai's proprietary rights as fully as in the United
States.
As a result of its recent INTERVU acquisition, Akamai acquired several
United States patents covering data delivery services. Such patents, however,
may not provide Akamai with any competitive advantage or restrict or limit any
third party competitor's ability to make, use or sell their data delivery
services in competition with Akamai.
AKAMAI'S FAILURE TO INCREASE ITS REVENUE WOULD PREVENT IT FROM ACHIEVING AND
MAINTAINING PROFITABILITY.
Akamai has never been profitable. Akamai has incurred significant losses
since inception and expects to continue to incur losses in the future. As of
March 31, 2000, Akamai had an accumulated deficit of $94.0 million. Akamai
cannot be certain that its revenue will continue to grow or that it will achieve
sufficient revenue to achieve profitability. Akamai's failure to significantly
increase its revenue would seriously harm its business and operating results.
Akamai has large fixed expenses, and it expects to continue to incur significant
and increasing sales and marketing, product development, administrative and
other expenses, including fees to obtain access to bandwidth for the transport
of data over its network. As a result, Akamai will need to generate
significantly higher revenues to achieve and maintain profitability. If Akamai's
revenue grows more slowly than Akamai anticipates or if its operating expenses
increase more than Akamai expects or cannot be reduced in the event of lower
revenue, Akamai's business will be materially and adversely affected.
THE VARIABLE SALES CYCLES FOR AKAMAI'S SERVICES MAY CAUSE REVENUE AND OPERATING
RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER WHICH COULD ADVERSELY
AFFECT AKAMAI'S STOCK PRICE.
At times, a customer's decision to purchase Akamai's Internet content
delivery service involves a lengthy evaluation process. Throughout the sales
cycle, Akamai spends considerable time and expense educating and providing
information to prospective customers about the use and benefits of its services.
Because of Akamai's limited operating history and the nature of Akamai business,
Akamai cannot predict these sales and deployment cycles. Long sales cycles may
cause Akamai's revenue and results of operations to vary significantly and
unexpectedly from quarter to quarter. If Akamai's operating results fall below
the expectations of securities analysts or investors in some future quarter or
quarters, the market price of its common stock could be adversely affected.
THE RATES AKAMAI CHARGES FOR ITS SERVICE MAY DECLINE OVER TIME WHICH WOULD
REDUCE ITS REVENUE AND COULD CAUSE ITS BUSINESS AND FINANCIAL RESULTS TO SUFFER.
Akamai expects that its cost to obtain bandwidth capacity for the transport
of data over its network will decline over time as a result of, among other
things, the large amount of capital currently being invested to build
infrastructure providing additional bandwidth and volume discounts available to
Akamai as its network usage increases. Akamai expects the prices it charges for
its services may also decline over time as a result of, among other things,
existing and new competition in the markets Akamai addresses. As a result,
Akamai's historical revenue rates may not be indicative of future revenue based
on comparable traffic volumes. If Akamai fails to accurately predict the decline
in costs of bandwidth or, in any event, if Akamai is unable to sell its service
at acceptable prices relative to its bandwidth costs, or if it fails to offer
additional services from which it can derive additional revenue, Akamai's
revenue will decrease and its business and financial results will suffer.
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AKAMAI'S BUSINESS AND PROSPECTS DEPEND ON DEMAND FOR AND MARKET ACCEPTANCE OF
THE INTERNET AND ITS INFRASTRUCTURE DEVELOPMENT.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only begun
to develop in recent years, and Akamai's success will depend in large part on
continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, speed, cost,
ease of access, quality of service, regulatory initiatives and necessary
increases in bandwidth availability, remain unresolved and are likely to affect
the development of the market for Akamai's services. The adoption of the
Internet for information retrieval and exchange, commerce and communications
generally will require the acceptance of a new medium of conducting business and
exchanging information. Demand for and market acceptance of the Internet are
subject to a high level of uncertainty and are dependent on a number of factors,
including:
- the growth in consumer access to and acceptance of new interactive
technologies;
- the development of technologies that facilitate interactive communication
between organizations; and
- increases in user bandwidth.
If the Internet as a commercial or business medium fails to develop or
develops more slowly than expected, Akamai's business and prospects will suffer.
AKAMAI'S BUSINESS WILL SUFFER IF IT DOES NOT ANTICIPATE AND MEET SPECIFIC
CUSTOMER REQUIREMENTS.
Akamai's current and prospective customers may require features and
capabilities that its current service offerings do not have. To achieve market
acceptance for Akamai's service, Akamai must effectively and timely anticipate
and adapt to customer requirements and offer services that meet customer
demands. Akamai's failure to offer services that satisfy customer requirements
would seriously harm its business, results of operations and financial
condition.
Akamai intends to continue to invest heavily in technology development. The
development of new or enhanced services and applications such as EdgeAdvantage,
is a complex and uncertain process that requires the accurate anticipation of
technological and market trends. Akamai may experience design, integration,
manufacturing, marketing and other difficulties that could delay or prevent the
development, introduction or marketing of new services as well as enhancements.
The introduction of new or enhanced services and applications also requires that
Akamai manage the transition from older services in order to ensure that Akamai
can deliver services to meet anticipated customer demand. Akamai's inability to
effectively manage this transition would materially adversely affect its
business, results of operations and financial condition.
AKAMAI HAS LIMITED SALES AND MARKETING EXPERIENCE; AKAMAI'S BUSINESS WILL SUFFER
IF IT DOES NOT EXPAND AKAMAI'S DIRECT AND INDIRECT SALES ORGANIZATIONS AND ITS
CUSTOMER SERVICE AND SUPPORT OPERATIONS.
Akamai currently has limited sales and marketing experience. Akamai's
limited experience may restrict its success gaining broad market acceptance of
its services or in commercializing its future services. Akamai's services
require a sophisticated sales effort targeted at a limited number of key people
within a prospective customer's organization. This sales effort requires the
efforts of trained sales personnel. Akamai needs to continue to expand its
marketing and sales organization in order to increase market awareness of its
service to a greater number of organizations and generate increased revenue.
Competition for these individuals is intense, and Akamai might not be able to
hire the kind and number of sales personnel it needs. In addition, Akamai
believes that its future success is dependent upon its ability to establish
successful relationships with a variety of distribution partners. If Akamai is
unable to expand its direct and indirect sales operations, it may not be able to
increase market awareness or sales of its service, which may prevent Akamai from
achieving and maintaining profitability.
Hiring personnel is very competitive in Akamai's industry because there is
a limited number of people available with the necessary technical skills and
understanding of Akamai's market. Once Akamai hires them, they require extensive
training in Akamai's Internet content delivery service. If Akamai is unable to
expand its
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customer service and support organization and train them as rapidly as
necessary, Akamai may not be able to increase sales of its service, which would
seriously harm its business.
AKAMAI'S BUSINESS WILL SUFFER IF IT FAILS TO MANAGE ITS GROWTH PROPERLY.
Akamai has expanded its operations rapidly since its inception. Akamai
continues to increase the scope of its operations and has grown its headcount
substantially. Akamai's total number of employees grew from 464 on February 11,
2000 to 861 on April 28, 2000. Akamai plans to continue to hire a significant
number of employees this year. This growth has placed, and Akamai's anticipated
growth in future operations will continue to place, a significant strain on its
management systems and resources. Akamai's ability to successfully offer its
services and implement its business plan in a rapidly evolving market requires
an effective planning and management process. Akamai expects that it will need
to continue to improve its financial and managerial controls, reporting systems
and procedures, and will need to continue to expand, train and manage its
workforce worldwide. Competition for highly skilled personnel is intense,
especially in New England and central and southern California. Akamai may fail
to attract, assimilate or retain qualified personnel to fulfill its current or
future needs. Akamai's planned rapid growth places a significant demand on
management and financial and operational resources. In order to grow and achieve
future success, Akamai must:
- retain existing personnel;
- successfully integrate Network24 and INTERVU personnel;
- hire, train, manage and retain additional qualified personnel; and
- effectively manage multiple relationships with its customers, suppliers
and other third parties.
Failure to do so would have a materially adverse effect on its business,
results of operations and financial condition.
AKAMAI DEPENDS ON ITS KEY PERSONNEL TO MANAGE ITS BUSINESS EFFECTIVELY IN A
RAPIDLY CHANGING MARKET AND IF AKAMAI IS UNABLE TO RETAIN ITS KEY EMPLOYEES,
AKAMAI'S ABILITY TO COMPETE COULD BE HARMED.
Akamai's future success depends upon the continued services of its
executive officers and other key technology, sales, marketing and support
personnel, who have critical industry experience and relationships that they
rely on in implementing Akamai's business plan. None of Akamai's officers or key
employees is bound by an employment agreement for any specific term. Akamai has
"key person" life insurance policies covering only the lives of F. Thomson
Leighton and Daniel M. Lewin. The loss of the services of any of Akamai's key
employees could delay the development and introduction of and negatively impact
its ability to sell its service. Akamai faces intense competition for qualified
personnel, including research and development, service and support and sales and
marketing personnel.
AKAMAI FACES RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM ITS
BUSINESS.
Akamai has expanded its international operations to Munich, Germany,
London, England and Paris, France. A key aspect of its business strategy is to
continue to expand its sales and support organizations internationally.
Therefore, Akamai expects to commit significant resources to expand its
international sales and marketing activities. However, Akamai may not be able to
maintain or increase market demand for its services which may harm its business.
Akamai is increasingly subject to a number of risks associated with
international business activities which may increase its costs, lengthen its
sales cycle and require significant management attention. These risks include:
- market acceptance of Akamai's products and services by countries outside
the United States;
- increased expenses associated with marketing services in foreign
countries;
- general economic conditions in international markets;
- currency exchange rate fluctuations;
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- unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable; and
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings.
AKAMAI FACES A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.
Akamai has attempted to assess and must continue to monitor year 2000
issues. While Akamai has not experienced any year 2000 issues to date, there can
be no assurance that Akamai has identified and remediated all material year 2000
related issues. If Akamai's systems do not operate properly with respect to date
calculations involving the year 2000 and subsequent dates, it could experience a
system failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
Akamai has designed its service for use in the year 2000 and beyond and
believes it is year 2000 ready. However, Akamai's service is used in conjunction
with larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of Akamai's customers' networks involves
different combinations of third-party products. Akamai cannot evaluate whether
all of its products are year 2000 ready. Akamai may face claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no claims
of this kind have been made, Akamai may in the future be required to defend its
service in legal proceedings which could be expensive regardless of the merits
of these claims.
AKAMAI COULD INCUR SUBSTANTIAL COSTS DEFENDING ITS INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Other companies or individuals, including Akamai's competitors, may obtain
patents or other proprietary rights that would prevent, limit or interfere with
Akamai's ability to make, use or sell its services. As a result, Akamai may be
found to infringe on the proprietary rights of others. In the event of a
successful claim of infringement against Akamai and its failure or inability to
license the infringed technology, its business and operating results would be
significantly harmed. Companies in the Internet market are increasingly bringing
suits alleging infringement of their proprietary rights, particularly patent
rights. Any litigation or claims, whether or not valid, could result in
substantial costs and diversion of resources. Intellectual property litigation
or claims could force Akamai to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms; and
- redesign products or services.
If Akamai is forced to take any of these actions, its business may be
seriously harmed. Although Akamai carries insurance, its insurance may not cover
potential claims of this type or may not be adequate to indemnify Akamai for all
liability that may be imposed.
INTERNET-RELATED LAWS COULD ADVERSELY AFFECT AKAMAI'S BUSINESS.
Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. A recent session of the United States
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
recently enacted its own privacy regulations, and is currently considering
copyright legislation that may extend the right of reproduction held by
copyright holders to include the right to make temporary copies for any reason.
The law of the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual
19
<PAGE> 21
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business online. The
adoption or modification of laws or regulations relating to the Internet, or
interpretations of existing law, could adversely affect Akamai's business.
AKAMAI MAY BE SUBJECT TO REGULATION, TAXATION, ENFORCEMENT OR OTHER LIABILITIES
IN UNEXPECTED JURISDICTIONS.
Akamai provides services to customers located throughout the United States
and in several foreign countries. As a result, Akamai may be required to qualify
to do business, or be subject to tax or other laws and regulations, in these
jurisdictions even if it does not have a physical presence, employees or
property in these jurisdictions. The application of these multiple sets of laws
and regulations is uncertain, but Akamai could find that it is subject to
regulation, taxation, enforcement or other liabilities in unexpected ways, which
could materially adversely affect its business, financial condition and results
of operations.
AKAMAI'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD
RESULT IN LITIGATION AGAINST AKAMAI.
The market price of Akamai's common stock has been extremely volatile and
has fluctuated significantly in the past. The following factors could cause the
market price of common stock to continue to fluctuate significantly:
- the addition or departure of key Akamai personnel;
- variations in Akamai's quarterly operating results;
- announcements by Akamai or its competitors of significant contracts, new
or enhanced products or service offerings, acquisitions, distribution
partnerships, joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
- Akamai's sales of common stock or other securities in the future;
- changes in market valuations of networking, Internet and
telecommunications companies;
- fluctuations in stock market prices and volumes; and
- changes in general economic conditions, including interest rate levels.
In the past, class action litigation has often been brought against
companies following periods of volatility in the market price of those
companies' common stock. Akamai may become involved in this type of litigation
in the future. Litigation is often expensive and diverts management's attention
and resources which could materially adversely affect its business and results
of operations.
INSIDERS HAVE SUBSTANTIAL CONTROL OVER AKAMAI WHICH COULD LIMIT OTHERS' ABILITY
TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS, INCLUDING CHANGES OF CONTROL.
The executive officers and directors, in the aggregate, beneficially own
approximately 54% of Akamai's outstanding common stock. These stockholders, if
acting together, are able to influence significantly all matters requiring
approval by Akamai's stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
PROVISIONS OF AKAMAI'S CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT
COULD PREVENT A CHANGE IN CONTROL EVEN IF THE CHANGE IN CONTROL WOULD BE
BENEFICIAL TO AKAMAI'S STOCKHOLDERS.
Provisions of Akamai's amended and restated certificate of incorporation,
by-laws, and Delaware law could make it more difficult for a third party to
acquire Akamai, even if doing so would be beneficial to Akamai's stockholders.
20
<PAGE> 22
THE UNPREDICTABILITY OF AKAMAI'S QUARTERLY RESULTS MAY ADVERSELY AFFECT THE
TRADING PRICE OF ITS COMMON STOCK.
Akamai's revenue and operating results will vary significantly from quarter
to quarter due to a number of factors, many of which are outside of its control
and any of which may cause its stock price to fluctuate. The primary factors
that may affect Akamai include the following:
- demand for Internet content delivery services and streaming services;
- the timing and size of sales of Akamai's services;
- the timing of recognizing revenue and deferred revenue;
- new product and service introductions and enhancements by Akamai's
competitors and itself;
- changes in Akamai's pricing policies or the pricing policies of Akamai's
competitors;
- Akamai's ability to develop, introduce and deliver new products, services
and enhancements that meet customer requirements in a timely manner;
- the length of the sales cycle for Akamai's services;
- increases in the prices of, and availability of, the products, services,
components or raw materials Akamai purchases, including bandwidth;
- Akamai's ability to attain and maintain quality levels for its services;
- expenses related to testing of Akamai's services;
- costs related to acquisitions of technology or businesses; and
- general economic conditions as well as those specific to the Internet and
related industries.
Akamai plans to increase significantly its operating expenses to fund
greater levels of engineering and development, expand its sales and marketing
operations, broaden its customer support capabilities, continue to develop new
distribution channels and continue to expand internationally. Akamai also plans
to expand its general and administrative functions to address the increased
reporting and other administrative demands and the increasing size of Akamai's
business.
Akamai's operating expenses are largely based on anticipated revenue trends
and a high percentage of its expenses are, and will continue to be, fixed in the
short term. As a result, a delay in generating or recognizing revenue for the
reasons set forth above, or for any other reason, could cause significant
variations in Akamai's operating results from quarter to quarter and could
result in substantial operating losses.
Due to the above factors, Akamai believes that quarter-to-quarter
comparisons of its operating results are not a good indication of its future
performance. It is likely that in some future quarters, Akamai's operating
results may be below the expectations of public market analysts and investors.
In this event, the price of Akamai's common stock will probably fall.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Akamai does not use derivative financial instruments. Akamai generally
places its marketable securities investments in high quality credit investments,
primarily United States Government obligations and corporate obligations with
contractual maturities of less than three months. Akamai does not expect any
material loss from its marketable securities investments and believes that its
potential interest rate exposure is not material.
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<PAGE> 23
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
In February 2000, Akamai issued approximately 599,152 shares of common
stock as partial consideration for the acquisition of Network24, a provider of
Internet broadcast applications services.
In connection with the acquisition of Network24, Akamai also assumed stock
options to purchase 136,903 shares of Akamai common stock.
(d) Use of Proceeds from Sales of Registered Securities
On November 3, 1999, Akamai sold 9,000,000 shares of its common stock in an
initial public offering at a price of $26.00 per share pursuant to a
Registration Statement on Form S-1 (the "Registration Statement") (Registration
No. 333-85679) that was declared effective by the Securities and Exchange
Commission on October 28, 1999. Morgan Stanley Dean Witter, Donaldson Lufkin &
Jenrette, Salomon Smith Barney and Thomas Weisel Partners LLC were the managing
underwriters of the offering. The aggregate proceeds to Akamai from the offering
were $217.6 million after deducting an aggregate of $16.4 million in
underwriting discounts and commission to the underwriters. None of the proceeds
of the offering was paid by Akamai, directly or indirectly, to any director,
officer or general partner of Akamai or any of their associates, or to any
persons owning ten percent or more of the outstanding stock of Akamai. In
addition to underwriting discounts and commissions, the expenses incurred in
connection with the offering were approximately $2.2 million, including $850,000
for Directors and Officers Insurance, $400,000 of legal costs, $460,000 of
accounting costs, $50,000 of printing costs, $188,000 of registration, filing
and listing costs, and other costs of approximately $300,000. During the period
from the offering to March 31, 2000, Akamai has used the proceeds as follows:
approximately $21.5 million for network equipment and computer equipment and
hardware, $14.9 million for the repayment of senior subordinated notes, $18.6
million for payroll and benefits, $5.8 million for advertising expenses and $4.9
million for bandwidth costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
*4.1 Stock Option Agreement, dated as of February 6, 2000,
between Akamai and INTERVU Inc.
*4.2 Form of Stockholder Voting Agreement, dated as of February
6, 2000, by and among Akamai and each of the Stockholders of
INTERVU Inc. named thereon.
**10.1 Agreement and Plan of Merger, dated as of January 14, 2000,
by and among Akamai, Aloha Merger Corporation and Network24
Communications, Inc.
***10.2 Agreement and Plan of Merger, dated as of February 6, 2000,
by and among Akamai, Alli Merger Corporation and INTERVU
Inc.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to Akamai's Form S-4 (File No. 333-31712), as
amended, filed with the Securities and Exchange Commission on March 3, 2000.
** Incorporated by reference to Akamai's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 8, 2000.
*** Incorporated by reference to Akamai's Schedule 13D filed with the Securities
and Exchange Commission on February 16, 2000.
22
<PAGE> 24
(b) Reports on Form 8-K
On February 8, 2000, Akamai filed a Current Report on Form 8-K under Item 2
(Acquisition or Disposition of Assets) to report the consummation of an
Agreement and Plan of Merger for the acquisition of Network24. On March 3, 2000,
Akamai filed Amendment No. 1 to Current Report on Form 8-K/A under Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits) to include
the financial statements required to be filed in connection with the acquisition
of Network24.
23
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKAMAI TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Date: May 15, 2000 By: /s/ TIMOTHY WELLER
-----------------------------------------
Timothy Weller
Chief Financial Officer and Treasurer
(Principal Financial Officer and Chief
Accounting Officer)
Date: May 15, 2000 By: /s/ ROBERT O. BALL III
-----------------------------------------
Robert O. Ball III
Vice President, General Counsel and
Secretary
</TABLE>
24
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<C> <S>
*4.1 Stock Option Agreement, dated as of February 6, 2000,
between Akamai and INTERVU Inc.
*4.2 Form of Stockholder Voting Agreement, dated as of February
6, 2000, by and among Akamai and each of the Stockholders of
INTERVU Inc. named thereon.
**10.1 Agreement and Plan of Merger, dated as of January 14, 2000,
by and among Akamai, Aloha Merger Corporation and Network24
Communications, Inc.
***10.2 Agreement and Plan of Merger, dated as of February 6, 2000,
by and among Akamai, Alli Merger Corporation and INTERVU
Inc.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to Akamai's Form S-4 (File No. 333-31712), as
amended, filed with the Securities and Exchange Commission on March 3, 2000.
** Incorporated by reference to Akamai's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 8, 2000.
*** Incorporated by reference to Akamai's Schedule 13D filed with the Securities
and Exchange Commission on February 16, 2000.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AKAMAI
TECHNOLOGIES, INC.'S CONSOLIDATED FINANCIAL STATEMENT FOR THE QUARTER ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 26,612
<SECURITIES> 0
<RECEIVABLES> 3,341
<ALLOWANCES> (205)
<INVENTORY> 0
<CURRENT-ASSETS> 237,080
<PP&E> 49,961
<DEPRECIATION> (6,486)
<TOTAL-ASSETS> 471,813
<CURRENT-LIABILITIES> 32,166
<BONDS> 682
0
0
<COMMON> 938
<OTHER-SE> 438,026
<TOTAL-LIABILITY-AND-EQUITY> 471,813
<SALES> 0
<TOTAL-REVENUES> 7,222
<CGS> 0
<TOTAL-COSTS> 6,636
<OTHER-EXPENSES> 39,608
<LOSS-PROVISION> 205
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (35,397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,397)
<EPS-BASIC> (.47)
<EPS-DILUTED> (.47)
</TABLE>
