Akamai Reports Second Quarter 2008 Financial Results

Akamai Technologies, Inc. (NASDAQ: AKAM), the leader in powering rich media, dynamic transactions and enterprise applications online, today reported financial results for the second quarter ended June 30, 2008. Revenue for the second quarter 2008 was $194.0 million, a 27 percent increase over second quarter 2007 revenue of $152.7 million, and a four percent increase over first quarter 2008 revenue of $187.0 million. Net income in accordance with United States Generally Accepted Accounting Principles, or GAAP, for the second quarter of 2008 was $34.3 million, or $0.19 per diluted share. The Company generated normalized net income(1) of $76.5 million, or $0.41 per normalized diluted share(1), in the second quarter of 2008, a 38 percent improvement over 2007 second quarter normalized earnings of $55.4 million, or $0.30 per diluted share, which was roughly consistent with the first quarter 2008 normalized net income of $75.6 million, or $0.41 per diluted share. ((1)See Use of Non-GAAP Financial Measures below for definitions.) "We delivered solid results in a challenging environment,” said Paul Sagan, president and CEO of Akamai. "We continued to benefit from the diversity of our enterprise-class customer base and increasingly broad portfolio of value-added solutions that have gained significant acceptance in the marketplace.” Adjusted EBITDA(1) for the second quarter of 2008 was $92.7 million, a 41 percent increase over second quarter 2007 adjusted EBITDA of $65.6 million, and a six percent increase over first quarter 2008 adjusted EBITDA of $87.2 million. Adjusted EBITDA margin(1) for the second quarter was 48 percent, a five point improvement over the second quarter of last year. ((1)See Use of Non-GAAP Financial Measures below for definitions.) Cash from operations was $69.8 million in the second quarter of 2008. Year to date cash from operations was $157.8 million, up 78 percent over the first half of 2007 cash from operations of $88.6 million. At the end of the second quarter of 2008, the Company had approximately $745 million in cash, cash equivalents and marketable securities. The Company had approximately 168.9 million shares of common stock outstanding as of June 30, 2008. Customers The number of customers under long-term services contracts at the end of the second quarter increased by 53 to a record 2,725. Sales through resellers and sales outside the United States accounted for 16 percent and 26 percent, respectively, of revenue for the second quarter 2008. Quarterly Conference Call Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-866-831-6234 (or 1-617-213-8854 for international calls) and using passcode No. 88451641. 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 1-888-286-8010 (or 1-617-801-6888 for international calls) and using passcode No. 93394260. The Akamai Difference Akamai® provides market-leading managed services for powering rich media, dynamic transactions, and enterprise applications online. Having pioneered the content delivery market one decade ago, Akamai's services have been adopted by the world's most recognized brands across diverse industries. The alternative to centralized Web infrastructure, Akamai's global network of tens of thousands of distributed servers provides the scale, reliability, insight and performance for businesses to succeed online. An S&P 500 and Nasdaq 100 company, Akamai has transformed the Internet into a more viable place to inform, entertain, interact, and collaborate. To experience The Akamai Difference, visit www.akamai.com. Condensed Consolidated Balance Sheets (dollar amounts in thousands) (unaudited)   June 30, 2008 December 31, 2007 Assets Cash and cash equivalents $ 165,417 $ 145,078 Marketable securities 122,820 400,580 Restricted marketable securities 3,460 511 Accounts receivable, net 125,765 118,944 Prepaid expenses and other current assets   36,755   29,929 Current assets 454,217 695,042 Marketable securities 453,792 84,237 Restricted marketable securities 153 3,102 Property and equipment, net 158,067 134,546 Goodwill and other intangible assets, net 442,064 449,137 Other assets 5,503 4,520 Deferred tax assets, net   241,621   285,463 Total assets $ 1,755,417 $ 1,656,047   Liabilities and stockholders' equity Accounts payable and accrued expenses $ 67,286 $ 74,773 Other current liabilities   14,056   13,602 Current liabilities 81,342 88,375 Other liabilities 11,623 9,265 Convertible notes   199,855   199,855 Total liabilities 292,820 297,495 Stockholders' equity   1,462,597   1,358,552 Total liabilities and stockholders' equity $ 1,755,417 $ 1,656,047 Condensed Consolidated Statements of Operations (amounts in thousands, except per share data) (unaudited)             Three Months Ended Six Months Ended June 30, March 31, June 30, June 30, June 30, 2008 2008 2007 2008 2007   Revenues $ 194,004 $ 187,019 $ 152,654 $ 381,023 $ 291,928   Costs and operating expenses: Cost of revenues (a) (b) 53,688 51,575 39,759 105,263 74,239 Research and development (a) 9,519 9,304 11,663 18,823 22,267 Sales and marketing (a) 41,188 35,944 37,739 77,132 74,488 General and administrative (a) (b) 33,803 33,266 29,779 67,069 57,257 Amortization of other intangible assets 3,491 3,590 2,932 7,081 5,744 Restructuring benefit   -     -     (178 )   -     (178 ) Total costs and operating expenses   141,689     133,679     121,694     275,368     233,817   Operating income 52,315 53,340 30,960 105,655 58,111   Interest income, net (4,780 ) (7,331 ) (5,243 ) (12,111 ) (9,975 ) Loss on early extinguishment of debt - - - - 1 Gain on investments, net (64 ) (208 ) - (272 ) - Other expense (income), net   970     (476 )   572     494     776   Income before provision for income taxes 56,189 61,355 35,631 117,544 67,309 Provision for income taxes   21,855     24,444     13,985     46,299     26,484   Net income $ 34,334   $ 36,911   $ 21,646   $ 71,245   $ 40,825     Net income per share: Basic $ 0.21 $ 0.22 $ 0.13 $ 0.43 $ 0.25 Diluted $ 0.19 $ 0.20 $ 0.12 $ 0.38 $ 0.23   Shares used in per share calculations: Basic 167,417 165,959 164,798 166,688 163,184 Diluted 187,641 185,744 185,601 187,493 184,648   (a) Includes stock-related compensation (see supplemental table for figures) (b) Includes depreciation and amortization (see supplemental table for figures)   Three Months Ended   Six Months Ended June 30,   March 31,   June 30, June 30,     June 30, 2008 2008 2007 2008 2007 Supplemental financial data (in thousands):   Stock-related compensation: Cost of revenues $ 599 $ 566 $ 847 $ 1,165 $ 1,586 Research and development 2,662 2,448 3,944 5,110 7,920 Sales and marketing 7,104 4,949 6,471 12,053 13,298 General and administrative   6,632   3,288   5,946   9,920   11,234 Total stock-related compensation $ 16,997 $ 11,251 $ 17,208 $ 28,248 $ 34,038   Depreciation and amortization: Network-related depreciation $ 16,719 $ 15,399 $ 12,277 $ 32,118 $ 22,455 Capitalized stock-related compensation amortization 1,014 861 401 1,875 589 Other depreciation and amortization 2,187 2,797 1,967 4,984 3,638 Amortization of other intangible assets   3,491   3,590   2,932   7,081   5,744 Total depreciation and amortization $ 23,411 $ 22,647 $ 17,577 $ 46,058 $ 32,426   Capital expenditures: Purchases of property and equipment $ 24,032 $ 21,911 $ 25,579 $ 45,943 $ 53,121 Capitalized internal-use software 6,278 6,301 4,113 12,579 8,114 Capitalized stock-related compensation   1,920   1,671   1,427   3,591   2,811 Total capital expenditures $ 32,230 $ 29,883 $ 31,119 $ 62,113 $ 64,046   Net increase in cash, cash equivalents, marketable securities and restricted marketable securities $ 58,548 $ 53,586 $ 23,895 $ 112,134 $ 69,472   End of period statistics: Number of customers under recurring contract 2,725 2,672 2,555 Number of employees 1,471 1,394 1,261 Number of deployed servers 36,148 34,551 27,322 Condensed Consolidated Statements of Cash Flows (amounts in thousands) (unaudited)             Three Months Ended   Six Months Ended June 30,   March 31,   June 30, June 30,   June 30, 2008 2008 2007 2008 2007   Cash flows from operating activities: Net income $ 34,334 $ 36,911 $ 21,646 $ 71,245 $ 40,825 Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization of intangible assets and deferred financing costs 23,621 22,857 17,788 46,478 32,847 Stock-related compensation 16,997 11,251 17,208 28,248 34,038 Provision for deferred tax assets, net 20,735 23,217 13,437 43,952 25,138 Excess tax benefits from stock-related compensation (7,005 ) (3,277 ) (4,618 ) (10,282 ) (15,973 ) (Gains) losses on investments, property and equipment and foreign currency, net (32 ) (271 ) 14 (303 ) 40 Provision for doubtful accounts 383 353 594 736 1,109 Non-cash portion of loss on early extinguishment of debt - - - - 1 Non-cash portion of restructuring benefit - - (178 ) - (178 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (3,636 ) (2,072 ) (12,156 ) (5,708 ) (11,497 ) Prepaid expenses and other current assets (6,684 ) (2,131 ) (307 ) (8,815 ) (5,433 ) Accounts payable, accrued expenses and other current liabilities (7,179 ) (928 ) (15,797 ) (8,107 ) (15,103 ) Accrued restructuring (379 ) (164 ) (818 ) (543 ) (1,496 ) Deferred revenue (1,423 ) 2,522 (1,003 ) 1,099 3,114 Other noncurrent assets and liabilities   62     (259 )   (35 )   (197 )   1,216   Net cash provided by operating activities   69,794     88,009     35,775     157,803     88,648     Cash flows from investing activities: Cash of acquired business - - 2,440 - 7,875 Purchases of property and equipment and capitalization of internal-use software costs (30,310 ) (28,212 ) (29,692 ) (58,522 ) (61,235 ) Proceeds from sales and maturities of investments 95,349 154,466 104,414 249,815 156,083 Purchases of investments (198,277 ) (160,182 ) (152,831 ) (358,459 ) (206,110 ) Proceeds from sale of property and equipment   7     67     -     74     -   Net cash used in investing activities   (133,231 )   (33,861 )   (75,669 )   (167,092 )   (103,387 )   Cash flows from financing activities: Proceeds from the issuance of common stock under stock option and employee stock purchase plans 13,623 4,509 11,059 18,132 17,751 Excess tax benefits from stock-related compensation 7,005 3,277 4,618 10,282 15,973 Payments on capital leases   -     -     (23 )   -     (23 ) Net cash provided by financing activities   20,628     7,786     15,654     28,414     33,701     Effects of exchange rate translation on cash and cash equivalents   (269 )   1,483     157     1,214     605     Net (decrease) increase in cash and cash equivalents (43,078 ) 63,417 (24,083 ) 20,339 19,567 Cash and cash equivalents, beginning of period   208,495     145,078     124,245     145,078     80,595   Cash and cash equivalents, end of period $ 165,417   $ 208,495   $ 100,162   $ 165,417   $ 100,162   (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 past performance and 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. These measures are also used by management in its 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, stock-related compensation expense, amortization of capitalized stock-related compensation, restructuring charges and benefits, certain gains and losses on 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 stock-related compensation. 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 as a percentage of revenues. 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, capitalization of internal-use software development costs and capitalization of stock-related compensation. 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 other intangible assets, stock-related compensation expense, amortization of capitalized stock-related compensation, restructuring charges and benefits, certain gains and losses on 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 "diluted shares used in normalized net income per share calculation” 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 net income 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 Six Months Ended June 30, March 31, June 30, June 30, June 30, 2008   2008 2007 2008 2007     Net income $ 34,334 $ 36,911 $ 21,646 $ 71,245 $ 40,825   Amortization of intangible assets 3,491 3,590 2,932 7,081 5,744 Stock-related compensation 16,997 11,251 17,208 28,248 34,038 Amortization of capitalized stock-related compensation 1,014 861 401 1,875 589 Gain on investments, net (64 ) (208 ) - (272 ) - Utilization of tax NOLs/credits 20,735 23,217 13,437 43,952 25,138 Loss on early extinguishment of debt - - - - 1 Restructuring benefit   -     -     (178 )   -     (178 )   Total normalized net income: 76,507 75,622 55,446 152,129 106,157   Interest income, net (4,780 ) (7,331 ) (5,243 ) (12,111 ) (9,975 ) Provision for income taxes 1,120 1,227 548 2,347 1,346 Depreciation and amortization 18,906 18,196 14,244 37,102 26,093 Other expense (income), net   970     (476 )   572     494     776     Total Adjusted EBITDA: $ 92,723   $ 87,238   $ 65,567   $ 179,961   $ 124,397     Normalized net income per share: Basic $ 0.46 $ 0.46 $ 0.34 $ 0.91 $ 0.65 Diluted $ 0.41 $ 0.41 $ 0.30 $ 0.81 $ 0.58   Shares used in normalized per share calculations: Basic 167,417 165,959 164,798 166,688 163,184 Diluted 188,970 186,826 187,432 188,835 186,320 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, failure to maintain the prices we charge for our services, deteriorating macroeconomic conditions, 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, 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, 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.