Akamai Reports Fourth Quarter 2006 and Full-Year 2006 Financial Results

Akamai Technologies, Inc. (NASDAQ: AKAM): Fourth quarter revenue grew to $125.7 million, up 13 percent from the prior quarter and 52 percent year-over-year, and annual revenue increased 51 percent year-over-year to $428.7 million Fourth quarter GAAP net income was $20.6 million, or $0.12 per diluted share, up 47 percent over the third quarter, and full-year GAAP net income was $57.4 million, or $0.34 per diluted share Fourth quarter normalized net income(1) increased 14 percent quarter-over-quarter to $47.5 million, or $0.27 per diluted share, and full-year normalized net income(1) increased 94 percent year-over-year to $154.5 million, or $0.88 per diluted share Akamai Technologies, Inc. (NASDAQ: AKAM), the leading global service provider for accelerating content and business processes online, today reported financial results for the fourth quarter and full-year ended December 31, 2006. Revenue for the fourth quarter 2006 was $125.7 million, a 13 percent increase over the previous quarter’s revenue of $111.5 million, and a 52 percent increase over fourth quarter 2005 revenue of $82.7 million. Total revenue for 2006 was $428.7 million, a 51 percent increase over 2005 revenue of $283.1 million. Akamai’s fourth quarter consolidated financial results include 18 days of activity from Nine Systems Corporation following the closing of Akamai’s acquisition of Nine Systems on December 13, 2006. Nine Systems contributed approximately $800,000 of revenue during the fourth quarter of 2006. "Akamai’s strong growth in the fourth quarter was fueled by increased demand for our services across our customer base, especially in the digital media and online commerce markets,” said Paul Sagan, president and CEO of Akamai. "With these fourth quarter results, we reached a run rate of more than half a billion dollars on the top line, a milestone on the way to our billion Dollar goal, while we continued to expand profitability.” Net income in accordance with United States Generally Accepted Accounting Principles, or GAAP, for the fourth quarter of 2006 was $20.6 million, or $0.12 per diluted share. Full-year GAAP net income for 2006 was $57.4 million, or $0.34 per diluted share. For purposes of year-over-year comparison of the Company’s GAAP results, net income for 2005 included a non-cash, non-recurring benefit of $258.8 million, or approximately $1.65 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. The Company generated normalized net income(1) of $47.5 million, or $0.27 per diluted share, in the fourth quarter of 2006, a 14 percent increase over prior quarter normalized net income of $41.8 million, or $0.24 per diluted share. Full-year normalized net income grew 94 percent year-over-year to $154.5 million, or $0.88 per diluted share. ((1)See Use of Non-GAAP Financial Measures below for definitions.) Adjusted EBITDA(1) for the fourth quarter of 2006 was $53.0 million, up from $46.8 million in the prior quarter, and $30.6 million in the fourth quarter of 2005. Adjusted EBITDA margin for the fourth quarter was 42 percent, a 5 point improvement over the fourth quarter of last year. For the full year, adjusted EBITDA was $173.3 million, up from $101.4 million in 2005. Full year Adjusted EBITDA margin improved to 40 percent, up from 36 percent in 2005. ((1)See Use of Non-GAAP Financial Measures below for definitions.) Full-year cash from operations was $132.0 million, or 31 percent of revenue, up 59 percent over the prior year. At year-end, the Company had approximately $434 million of cash, cash equivalents and marketable securities. The Company had approximately 160.1 million shares of common stock outstanding as of December 31, 2006. Customers Akamai added 78 net new customers under long-term services contracts during the fourth quarter of 2006, in addition to 125 recurring revenue customers from the Nine Systems acquisition, bringing Akamai’s total year-end number of customers under long-term services contracts to 2,347. Sales through resellers and sales outside the United States accounted for 20 percent and 22 percent, respectively, of revenue for full-year 2006. 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. 5848965. 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)   December 31, December 31, 2006  2005  Assets Cash and cash equivalents $ 80,595  $ 91,792  Marketable securities 188,141  199,886  Restricted marketable securities 1,105  730  Accounts receivable, net 86,232  52,162  Prepaid expenses and other current assets 18,600  10,428  Current assets 374,673  354,998  Marketable securities 161,511  17,896  Restricted marketable securities 3,102  3,825  Property and equipment, net 86,623  44,885  Goodwill and other intangible assets, net 298,263  136,786  Other assets 4,256  4,801  Deferred tax assets, net 319,504  328,308  Total assets $ 1,247,932  $ 891,499    Liabilities and stockholders' equity Accounts payable and accrued expenses $ 81,205  $ 54,471  Other current liabilities 8,059  7,405  Current liabilities 89,264  61,876  Other liabilities 3,975  5,409  Convertible notes 200,000  200,000  Total liabilities 293,239  267,285  Stockholders' equity 954,693  624,214  Total liabilities and stockholders' equity $ 1,247,932  $ 891,499  Condensed Consolidated Statements of Operations (amounts in thousands, except per share data) (unaudited)   Three Months Ended Twelve Months Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2006  2006  2005  2006  2005    Revenues $ 125,703  $ 111,495  $ 82,657  $ 428,672  $ 283,115    Costs and operating expenses: Cost of revenues (a)(b) 28,605  24,984  16,084  94,100  55,655  Research and development (a) 9,141  8,862  4,982  33,102  18,071  Sales and marketing (a) 34,258  29,416  22,965  119,689  77,876  General and administrative (a)(b) 25,249  24,529  15,266  90,191  53,014  Amortization of other intangible assets 2,047  1,943  2,296  8,484  5,124  Total costs and operating expenses 99,300  89,734  61,593  345,566  209,740  Operating income 26,403  21,761  21,064  83,106  73,375    Interest (income) expense, net (4,567) (3,970) (1,283) (14,532) 1,067  Loss on early extinguishment of debt -  -  -  -  1,370  (Gain) loss on investments, net (2) -  -  (261) 27  Other (income) expense, net (357) 448  (205) (570) 507  Income before provision for income taxes 31,329  25,283  22,552  98,469  70,404  Provision (benefit) for income taxes 10,706  11,264  (3,207) 41,068  (257,594) Net income $ 20,623  $ 14,019  $ 25,759  $ 57,401  $ 327,998    Net income per share: Basic $ 0.13  $ 0.09  $ 0.17  $ 0.37  $ 2.41  Diluted 0.12  0.08  $ 0.16  $ 0.34  $ 2.11    Shares used in per share calculations: Basic 157,206  155,739  148,293  155,366  136,167  Diluted 179,064  177,063  170,305  176,767  156,944    (a) Includes equity-related compensation (see supplemental table for figures)   (b) Includes depreciation and amortization (see supplemental table for figures)     Three Months Ended Twelve Months Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31 Dec. 31 2006  2006  2005  2006  2005  Supplemental financial data (in thousands):   Equity-related compensation: Cost of revenues $ 637  $ 517  $ -  $ 1,960  $ -  Research and development 3,409  3,037  538  11,435  1,033  Sales and marketing 5,993  4,781  226  18,403  636  General and administrative 4,753  6,179  818  17,770  2,180  Total equity-related compensation $ 14,792  $ 14,514  $ 1,582  $ 49,568  $ 3,849    Depreciation and amortization: Network-related depreciation $ 8,132  $ 7,144  $ 4,766  $ 26,810  $ 15,514  Capitalized equity-related compensation amortization 136  129  -  298  -  Other depreciation 1,487  1,306  892  4,992  3,572  Amortization of other intangible assets 2,047  1,943  2,296  8,484  5,124  Total depreciation and amortization $ 11,802  $ 10,522  $ 7,954  $ 40,584  $ 24,210    Capital expenditures: Purchases of property and equipment $ 18,944  $ 13,519  $ 5,828  $ 56,752  $ 26,947  Capitalized internal-use software 3,532  2,932  2,277  12,576  9,213  Capitalized equity-related compensation 1,471  1,058  -  4,293  -  Total capital expenditures $ 23,947  $ 17,509  $ 8,105  $ 73,621  $ 36,160    Net increase in cash, cash equivalents, marketable securities and restricted marketable securities $ 18,372  $ 48,600  $ 227,626  $ 120,325  $ 205,712    End of period statistics: Number of customers under recurring contract 2,347  2,144  1,910  Number of employees 1,058  917  784  Number of deployed servers 22,109  21,864  18,599  Condensed Consolidated Statements of Cash Flows (amounts in thousands) (unaudited)   Three Months Ended Twelve Months Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2006  2006  2005  2006  2005    Cash flows from operating activities: Net income $ 20,623  $ 14,019  $ 25,759  $ 57,401  $ 327,998  Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets and deferred financing costs 12,013  10,732  8,164  41,426  25,170  Equity-related compensation 14,792  14,514  1,582  49,556  3,849  Release of deferred tax asset valuation allowance -  -  (3,482) -  (258,827) Non-cash portion of loss on early extinguishment of debt -  -  -  -  481  Utilization of tax NOLs/credits and changes in deferred tax assets, net 9,414  11,154  -  38,510  158  Excess tax benefits from stock-based compensation (12,910) (8,735) -  (32,511) -    (Gain) loss on investments, property and equipment and foreign currency, net (438) 64  143  (984) 850  Provision for doubtful accounts 397  (164) 127  830  1,147  Changes in operating assets and liabilities: Accounts receivable, net (14,022) (3,257) (8,663) (28,020) (19,455) Prepaid expenses and other current assets (3,249) (495) 65  (8,062) 1,483  Accounts payable, accrued expenses and other current liabilities (3,137) 12,097  2,754  15,382  (1,032) Accrued restructuring (464) (458) (415) (1,970) (1,816) Deferred revenue (759) (937) 1,567  343  3,267  Other noncurrent assets and liabilities 310  (44) 72  66  (475) Net cash provided by operating activities: 22,570  48,490  27,673  131,967  82,798    Cash flows from investing activities: Business acquisitions, net of cash (used) acquired (5,127) -  -  (5,127) 1,717  Purchases of property and equipment and capitalization of internal-use software and equity-related compensation (22,476) (16,451) (8,105) (69,328) (36,160) Purchase of investments (116,164) (87,778) (183,014) (395,871) (215,633) Proceeds from sales and maturities of investments 79,075  65,501  13,134  264,308  66,099  Decrease in restricted investments held for security deposits -  -  -  400  202  Net cash used in investing activities (64,692) (38,728) (177,985) (205,618) (183,775)   Cash flows from financing activities: Payments on capital leases -  -  (420) -  (818) Repurchase and retirement of 5 1/2% convertible subordinated notes -  -  -  -  (56,614) Proceeds from equity offering, net of financing costs -  -  202,068  -  202,068  Proceeds from the issuance of common stock under stock option and employee stock purchase plans 9,267  7,186  6,741  27,918  14,462  Excess tax benefits from stock-based compensation 12,910  8,735  -  32,511  -  Net cash provided by financing activities 22,177  15,921  208,389  60,429  159,098    Effects of exchange rate translation on cash and cash equivalents 1,417  (62) (369) 2,025  (1,647)   Net (decrease) increase in cash and cash equivalents (18,528) 25,621  57,708  (11,197) 56,474  Cash and cash equivalents, beginning of period 99,123  73,502  34,084  91,792  35,318  Cash and cash equivalents, end of period $ 80,595  $ 99,123  $ 91,792  $ 80,595  $ 91,792  (1)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 inclusion of these non-GAAP financial measures in this press release helps investors to gain a meaningful understanding of our future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts. Our management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring our core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. This measure is also used by management in their financial and operational decision-making. There are limitations associated with reliance on these non-GAAP financial metrics because they are specific to our operations and financial performance, which makes comparisons with other companies’ financial results more challenging. By providing both GAAP and non-GAAP financial measures, we believe that investors are able to compare our GAAP results to those of other companies while also gaining a better understanding of our operating performance as evaluated by management. 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, restructuring charges and benefits, certain gains and losses on equity investments, foreign exchange gains and losses, loss on early extinguishment of debt, utilization of tax NOLs/credits and release of the deferred tax asset valuation allowance. Akamai considers Adjusted EBITDA 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. 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, early debt extinguishment 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. 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, restructuring charges and benefits, certain gains and losses on equity investments, loss on early extinguishment of debt, 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 shares” 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 measures 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 Twelve Months Ended Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, 2006  2006  2005  2006  2005    Net income $ 20,623  $ 14,019  $ 25,759  $ 57,401  $ 327,998    Amortization of intangible assets 2,047  1,943  2,296  8,484  5,124  Equity-related compensation 14,792  14,514  1,582  49,568  3,849  Amortization of capitalized equity-related compensation 136  129  -  298  -  (Gain) loss on investments, net (2) -  -  (261) 27  Utilization of tax NOLs/credits 9,924  11,154  -  39,020  -  Release of the deferred tax asset valuation allowance -  -  (3,482) -  (258,827) Loss on early extinguishment of debt -  -  -  -  1,370    Total normalized net income: 47,520  41,759  26,155  154,510  79,541  -  Interest (income) expense, net (4,567) (3,970) (1,283) (14,532) 1,067  Provision for income taxes 782  110  275  2,048  1,233  Depreciation and amortization 9,619  8,450  5,658  31,802  19,086  Other (income) expense, net (357) 448  (205) (570) 507    Total Adjusted EBITDA: $ 52,997  $ 46,797  $ 30,600  $ 173,258  $ 101,434    Normalized net income per share: Basic $ 0.30  $ 0.27  $ 0.18  $ 0.99  $ 0.58  Diluted $ 0.27  $ 0.24  $ 0.16  $ 0.88  $ 0.52    Shares used in normalized per share calculations: Basic 157,206  155,739  148,293  155,366  136,167  Diluted 181,332  179,563  170,305  179,470  156,944  Akamai Statement Under the Private Securities Litigation Reform Act This 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 expectations with respect to revenue. 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 capacity, a failure of Akamai's services or network infrastructure, failure to maintain the prices we charge for our services, inability to realize the benefits of our net operating loss carryforward, delay in developing or failure to develop new service offerings or functionalities, and if developed, lack of market acceptance of such service offerings and functionalities, unexpected expenses associated with the integration of Nine Systems, and other factors that are discussed in the Company's Annual Report on Form 10-K, 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.