Akamai Reports Third Quarter 2006 Results

Akamai Technologies, Inc. (NASDAQ: AKAM), the leading global service provider for accelerating content and business processes online, today reported financial results for the third quarter ended September 30, 2006. Revenue for third quarter 2006 was $111.5 million, an 11 percent increase over second quarter 2006 revenue of $100.6 million, and a 47 percent increase over third quarter 2005 revenue of $75.7 million. Net income in accordance with United States Generally Accepted Accounting Principles, or GAAP, for the third quarter of 2006 was $14.0 million, or $0.08 per diluted share. GAAP net income in the third quarter included equity-related compensation charges of approximately $14.6 million, or $0.08 per diluted share, on a pre-tax basis, reflecting the Company’s adoption of Financial Accounting Standard 123R on January 1, 2006. GAAP net income also reflected a book tax rate of approximately 45 percent. The Company generated normalized net income(a) of $41.8 million, or $0.24 per normalized diluted share(a), in the third quarter of 2006, a 17 percent increase over second quarter 2006 normalized net income of $35.8 million, or $0.20 per diluted share, a 90 percent improvement over 2005 third quarter normalized earnings of $22.0 million, or $0.14 per diluted share. ((a)See Use of Non-GAAP Financial Measures below for definitions.) "We had another exceptionally strong quarter,” said Paul Sagan, president and CEO of Akamai. "We continued to experience healthy demand across our customer base, building on the momentum we achieved during the first half of the year. Key sectors, including media and entertainment, high technology, commerce, and public sector all posted solid results.” Adjusted EBITDA(a) for the third quarter of 2006 was $46.8 million, up 17 percent from $40.0 million in the prior quarter, and up from $27.7 million in the third quarter of 2005. Adjusted EBITDA as a percentage of revenue was 42 percent, up from 40 percent in the prior quarter, and up from 37 percent a year ago. ((a)See Use of Non-GAAP Financial Measures below for definitions.) Cash from operations was $48.5 million in the third quarter, as compared to $27.7 million in the second quarter 2006, and $19.5 million in the same period last year. Cash, cash equivalents and marketable securities totaled $416 million at the end of the period, up from $367 million at the end of the second quarter of 2006. The number of customers under long-term services contracts at the end of the third quarter increased by 84 to a record 2,144. Sales through resellers and sales outside the United States accounted for 20 percent and 22 percent, respectively, of revenue for the third quarter of 2006. At September 30, 2006, the Company had approximately 156.2 million shares of common stock outstanding. For purposes of year-over-year comparison of the Company’s GAAP results, net income for the three-month period that ended September 30, 2005, included a non-cash, non-recurring benefit of $255.3 million, or approximately $1.59 per diluted share, primarily related to the recognition of the Company’s net operating loss carryforward as a result of the release of a tax valuation allowance. Quarterly Conference Call Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-888-689-4521 (or 1-706-645-9202 for international calls). A live Webcast of the call may be accessed at www.akamai.com in the Investor section. In addition, a replay of the call will be available for one week following the conference through the Akamai Website or by calling 1-800-642-1687 (or 1-706-645-9291 for international calls) and using conference ID No. 7890805. About Akamai Akamai® is the leading global service provider for accelerating content and business processes online. Thousands of organizations have formed trusted relationships with Akamai, improving their revenue and reducing costs by maximizing the performance of their online businesses. Leveraging the Akamai EdgePlatform, these organizations gain business advantage today, and have the foundation for the emerging Web solutions of tomorrow. Akamai is "The Trusted Choice for Online Business.” For more information, visit www.akamai.com. Financial Statements Condensed Consolidated Balance Sheets (dollar amounts in thousands) (unaudited)   September 30, December 31, 2006  2005  Assets Cash and cash equivalents $ 99,123  $ 91,792  Marketable securities 177,531  199,886  Restricted marketable securities 1,053  730  Accounts receivable, net 67,375  52,162  Prepaid expenses and other current assets 14,386  10,428  Current assets 359,468  354,998  Marketable securities 135,273  17,896  Restricted marketable securities 3,102  3,825  Property and equipment, net 71,923  44,885  Goodwill and other intangible assets, net 129,007  136,786  Other assets 4,569  4,801  Deferred tax assets, net 324,353  328,308  Total assets $ 1,027,695  $ 891,499    Liabilities and stockholders' equity Accounts payable and accrued expenses $ 73,322  $ 54,471  Other current liabilities 8,297  7,405  Current liabilities 81,619  61,876  Other liabilities 4,381  5,409  Convertible notes 200,000  200,000  Total liabilities 286,000  267,285  Stockholders' equity 741,695  624,214  Total liabilities and stockholders' equity $ 1,027,695  $ 891,499    Condensed Consolidated Statements of Operations (amounts in thousands, except per share data) (unaudited)   Three Months Ended Nine Months Ended September 30, June 30, September 30, June 30, September 30, September 30, 2006  2006  2005  2005  2006  2005    Revenues $ 111,495  $ 100,649  $ 75,713  $ 64,649  $ 302,969  $ 200,458    Costs and operating expenses: Cost of revenues (b) (c) 24,984  21,195  15,295  12,752  65,495  39,571  Research and development (b) 8,862  8,373  4,953  4,507  23,961  13,089  Sales and marketing (b) 29,416  29,720  19,803  18,363  85,431  54,911  General and administrative (b) (c) 24,529  21,870  14,568  11,341  64,942  37,748  Amortization of other intangible assets 1,943  2,198  2,296  520  6,437  2,828  Total costs and operating expenses 89,734  83,356  56,915  47,483  246,266  148,147  Operating income 21,761  17,293  18,798  17,166  56,703  52,311    Interest (income) expense, net (3,970) (3,336) 567  770  (9,965) 2,350  Loss on early extinguishment of debt -  -  1,370  -  -  1,370  (Gain) loss on investments, net -  (2) 27  -  (259) 27  Other expense (income), net 448  (475) 63  (77) (213) 712  Income before provision for income taxes 25,283  21,106  16,771  16,473  67,140  47,852  Provision (benefit) for income taxes 11,264  9,842  (255,489) 573  30,362  (254,387) Net income $ 14,019  $ 11,264  $ 272,260  $ 15,900  $ 36,778  $ 302,239    Net income per share: Basic $ 0.09  $ 0.07  $ 1.96  $ 0.12  $ 0.24  $ 2.29  Diluted 0.08  $ 0.07  $ 1.71  $ 0.11  $ 0.22  $ 2.00    Shares used in per share calculations: Basic 155,739  154,702  139,204  130,119  154,753  132,125  Diluted 177,063  175,612  160,362  149,986  177,290  152,336    (b) Includes equity-related compensation (see supplemental table for figures) (c) Includes depreciation (see supplemental table for figures)     Three Months Ended Nine Months Ended September 30, June 30, September 30, June 30, September 30, September 30, 2006  2006  2005  2005  2006  2005  Supplemental financial data (in thousands):   Equity-related compensation: Cost of revenues $ 517  $ 533  $ -  $ -  $ 1,323  $ -  Research and development 3,037  3,332  360  129  8,026  495  Sales and marketing 4,781  5,040  234  129  12,410  410  General and administrative 6,179  4,270  789  399  13,017  1,362  Total equity-related compensation $ 14,514  $ 13,175  $ 1,383  $ 657  $ 34,776  $ 2,267    Depreciation and amortization: Network-related depreciation $ 7,144  $ 6,178  $ 4,361  $ 3,472  $ 18,678  $ 10,748  Capitalized equity-related compensation amortization 129  27  -  -  162  -  Other depreciation 1,306  1,164  881  860  3,505  2,680  Amortization of other intangible assets 1,943  2,198  2,296  520  6,437  2,828  Total depreciation and amortization $ 10,522  $ 9,567  $ 7,538  $ 4,852  $ 28,782  $ 16,256    Capital expenditures: Purchases of property and equipment $ 13,519  $ 10,733  $ 5,937  $ 7,584  $ 37,808  $ 21,119  Capitalized internal-use software 2,932  3,494  2,594  2,221  9,044  6,936  Capitalized equity-related compensation 1,058  1,242  -  -  2,822  -  Total capital expenditures $ 17,509  $ 15,469  $ 8,531  $ 9,805  $ 49,674  $ 28,055    Net increase (decrease) in cash, cash equivalents, marketable securities and restricted marketable securities   $ 48,600  $ 26,059  $ (44,213) $ 12,695  $ 101,953  $ (21,914)   End of period statistics: Number of customers under recurring contract 2,144  2,060  1,830  1,736  Number of employees 917  871  766  774  Number of deployed servers 21,864  20,836  18,092  17,500  Condensed Consolidated Statements of Cash Flows (amounts in thousands) (unaudited)   Three Months Ended Nine Months Ended September 30, June 30, September 30, June 30, September 30, September 30, 2006  2006  2005  2005  2006  2005    Cash flows from operating activities: Net income $ 14,019  $ 11,264  $ 272,260  $ 15,900  $ 36,778  $ 302,239  Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets and deferred financing costs 10,732  9,778  7,792  5,074  29,413  17,006  Equity-related compensation 14,514  13,175  1,383  657  34,776  2,267  Change in deferred tax assets, net, including release of deferred tax asset valuation allowance -  -  (255,345) -  -  (255,187) Non-cash portion of loss on early extinguishment of debt -  -  481  -  -  481  Utilization of tax NOLs/credits 11,154  9,178  -  -  29,096  -  Excess tax benefits from stock-based compensation (8,735) (5,467) -  -  (19,601) -  Loss (gain) on investments, property and equipment and foreign currency, net 64  (295) 161  319  (558) 707  Provision for doubtful accounts (164) 279  566  41  433  1,020  Changes in operating assets and liabilities: Accounts receivable, net (3,257) (7,338) (4,194) (1,837) (13,998) (10,792) Prepaid expenses and other current assets (495) (1,205) 2,567  (1,926) (4,813) 1,418  Accounts payable, accrued expenses and other current liabilities 12,097  (418) (6,818) (1,846) 18,519  (3,786) Accrued restructuring (458) (494) (710) (339) (1,506) (1,401) Deferred revenue (937) (602) 1,374  45  1,102  1,700  Other noncurrent assets and liabilities (44) (109) (18) 836  (244) (547) Net cash provided by operating activities: 48,490  27,746  19,499  16,924  109,397  55,125    Cash flows from investing activities: Cash acquired through business combination -  -  -  1,717  -  1,717  Purchases of property and equipment and capitalization of internal-use software and equity-related compensation (16,451) (14,227) (8,531) (9,805) (46,852) (28,055) Purchase of investments (87,778) (86,924) (6,534) (15,541) (279,707) (32,619) Proceeds from sales and maturities of investments 65,501  68,966  33,531  14,231  185,233  52,965  Decrease in restricted investments held for security deposits -  -  202  -  400  202  Net cash (used in) provided by investing activities (38,728) (32,185) 18,668  (9,398) (140,926) (5,790)   Cash flows from financing activities: Payments on capital leases -  -  (171) (93) -  (398) Repurchase and retirement of 5 1/2% covertible subordinated notes -  -  (56,614) -  -  (56,614) Proceeds from the issuance of common stock under stock option and employee stock purchase plans 7,186  6,822  1,933  4,145  18,651  7,721  Excess tax benefits from stock-based compensation 8,735  5,467  -  -  19,601  -  Net cash provided by (used in) financing activities 15,921  12,289  (54,852) 4,052  38,252  (49,291)   Effects of exchange rate translation on cash and cash equivalents (62) 630  (259) (431) 608  (1,278)   Net increase (decrease) in cash and cash equivalents 25,621  8,480  (16,944) 11,147  7,331  (1,234) Cash and cash equivalents, beginning of period 73,502  65,022  51,028  39,881  91,792  35,318  Cash and cash equivalents, end of period $ 99,123  $ 73,502  $ 34,084  $ 51,028  $ 99,123  $ 34,084  (a) Use of Non-GAAP Financial Measures In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Akamai has historically provided additional financial metrics that are not prepared in accordance with GAAP (non-GAAP). Recent legislative and regulatory changes discourage the use of and emphasis on non-GAAP financial metrics and require companies to explain why non-GAAP financial metrics are relevant to management and investors. We believe that the non-GAAP financial metrics we have included are useful to management and investors because they provide additional insight into our operations as well as help us assess and monitor developments in our business. Set forth below are definitions of the non-GAAP terms we use and explanations of some of the benefits provided by those metrics. Akamai defines "Adjusted EBITDA” as net income, before interest, taxes, depreciation and amortization of tangible and intangible assets, equity-related compensation, depreciation of capitalized equity-related compensation, certain gains and losses on equity investments, foreign exchange gains and losses, utilization of tax NOLs/credits and release of the deferred tax asset valuation allowance. Adjusted EBITDA eliminates items that are either not part of the Company’s core operations, such as investment gains and losses, foreign exchange gains and losses and net interest expense, or do not require a cash outlay, such as equity-related compensation and impairment of intangible assets. Adjusted EBITDA also excludes depreciation and amortization expense, which is based on the Company’s estimate of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historic cost incurred to build out the Company’s deployed network, and may not be indicative of current or future capital expenditures. Because Adjusted EBITDA eliminates these items, Akamai considers this financial measure to be an important indicator of the Company's operational strength and performance of its business and a good measure of the Company’s historical operating trend. Akamai defines "Adjusted EBITDA margin” as a percentage of adjusted EBITDA over revenue. Akamai considers Adjusted EBITDA margin to be an indicator of the Company’s operating trend and performance of its business in relation to its revenue growth. Akamai defines "capital expenditures” or "capex” as purchases of property and equipment and capitalization of internal-use software development costs. Capital expenditures or capex are disclosed in Akamai’s condensed consolidated statement of cash flows in the Company’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission. Akamai defines "normalized net income” as net income before amortization of intangible assets, equity-related compensation, depreciation of capitalized equity-related compensation, certain gains and losses on equity investments, utilization of tax NOLs/credits and release of the deferred tax asset valuation allowance. Akamai considers normalized net income to be another important indicator of the overall performance of the Company because it eliminates the effects of events that are either not part of the Company’s core operations or are non-cash. Akamai defines "normalized diluted share" as diluted common shares outstanding used in GAAP net income per share calculation, excluding the effect of FAS 123R under the treasury stock method. Akamai considers normalized diluted shares to be another important indicator of overall performance of the Company because it eliminates the effect of a non-cash item. Adjusted EBITDA and normalized net income should be considered in addition to, not as a substitute for, the Company's operating income and net income, as well as other measures of financial performance reported in accordance with GAAP. Reconciliation of Non-GAAP Financial Measures In accordance with the requirements of Regulation G issued by the Securities and Exchange Commission, the Company is presenting the most directly comparable GAAP financial measure and reconciling the non-GAAP financial metrics to the comparable GAAP measures.   Reconciliation of GAAP net income to normalized net income and Adjusted EBITDA (amounts in thousands, except per share data)   Three Months Ended Nine Months Ended September 30, June 30, September 30, June 30, September 30, September 30, 2006  2006  2005  2005  2006  2005    Net income $ 14,019  $ 11,264  $ 272,260  $ 15,900  $ 36,778  $ 302,239    Amortization of intangible assets 1,943  2,198  2,296  520  6,437  2,828  Equity-related compensation 14,514  13,175  1,383  657  34,776  2,267  Amortization of capitalized equity-related compensation 129  27  -  162  -  (Gain) loss on investments, net -  (2) 27  -  (259) 27  Utilization of tax NOLs/credits 11,154  9,178  -  29,096  -  Release of the deferred tax asset valuation allowance -  -  (255,345) -  -  (255,345) Loss on early extinguishment of debt -  -  1,370  -  -  1,370    Total normalized net income: 41,759  35,840  21,991  17,077  106,990  53,386    Interest (income) expense, net (3,970) (3,336) 567  770  (9,965) 2,350  Provision (benefit) for income taxes 110  664  (144) 573  1,266  958  Depreciation and amortization 8,450  7,342  5,242  4,332  22,183  13,428  Other expense (income), net 448  (475) 63  (77) (213) 712    Total Adjusted EBITDA: $ 46,797  $ 40,035  $ 27,719  $ 22,675  $ 120,261  $ 70,834    Normalized net income per share: Basic $ 0.27  $ 0.23  $ 0.16  $ 0.13  $ 0.69  $ 0.40  Diluted $ 0.24  $ 0.20  $ 0.14  $ 0.12  $ 0.61  $ 0.36    Shares used in normalized per share calculations: Basic 155,739  154,702  139,204  130,119  154,753  132,125  Diluted 179,563  178,358  159,994  149,986  178,700  152,336  Akamai Statement Under the Private Securities Litigation Reform Act The release contains information about future expectations, plans and prospects of Akamai's management that constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, including statements concerning the expected growth and development of our business and our ability to help our customers create profitable online business models. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, unexpected increases in Akamai’s use of funds, loss of significant customers, failure to increase our revenue and keep our expenses consistent with revenues, the effects of any attempts to intentionally disrupt our services or network by unauthorized users or others, failure to have available sufficient transmission or server capacity, a failure of Akamai's services or network infrastructure, failure to maintain the prices we charge for our services and other factors that are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, and subsequent quarterly reports on Form 10-Q, and other documents periodically filed with the SEC. In addition, the statements in this press release represent Akamai’s expectations and beliefs as of the date of this press release. Akamai anticipates that subsequent events and developments may cause these expectations and beliefs to change. However, while Akamai may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Akamai’s expectations or beliefs as of any date subsequent to the date of this press release.