| AKAMAI TECHNOLOGIES INC Item 1A Risk Factors The following are certain of the important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this annual report on Form 10-K or presented elsewhere by management from time to time |
| 7 _________________________________________________________________ [66]Table of Contents The markets in which we operate are highly competitive, and we may be unable to compete successfully against new entrants with innovative approaches and established companies with greater resources |
| We compete in markets that are intensely competitive, highly fragmented and rapidly changing |
| We have experienced and expect to continue to experience increased competition |
| Many of our current competitors, as well as a number of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do |
| Other competitors may attract customers by offering less-sophisticated versions of services than we provide at lower prices than those we charge |
| Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements |
| Some of our current or potential competitors may bundle their offerings with other services, software or hardware in a manner that may discourage website owners from purchasing any service we offer |
| Increased competition could result in price and revenue reductions, loss of customers and loss of market share, which could materially and adversely affect our business, financial condition and results of operations |
| In addition, potential customers may decide to purchase or develop their own hardware, software and other technology solutions rather than rely on an external provider like Akamai |
| As a result, our competitors include hardware manufacturers, software companies and other entities that offer Internet-related solutions that are not service-based competitors |
| It is an important component of our growth strategy to educate enterprises and government agencies about our services and convince them to entrust their content and applications to an external service provider, and Akamai in particular |
| If we are unsuccessful in such efforts, our business, financial condition and results of operations could suffer |
| If we are unable to sell our services at acceptable prices relative to our costs, our business and financial results are likely to suffer |
| Prices we have been charging for some of our services have declined in recent years |
| We expect that this decline may continue in the future as a result of, among other things, existing and new competition in the markets we serve |
| Consequently, our historical revenue rates may not be indicative of future revenues based on comparable traffic volumes |
| If we are unable to sell our services at acceptable prices relative to our costs or if we are unsuccessful with our strategy of selling additional services and features to our existing content delivery customers, our revenues and gross margins will decrease, and our business and financial results will suffer |
| Failure to increase our revenues and keep our expenses consistent with revenues could prevent us from maintaining profitability at recent levels or at all |
| The year ended December 31, 2004 was the first fiscal year during which we achieved profitability as measured in accordance with accounting principles generally accepted in the United States of America |
| We have large fixed expenses, and we expect to continue to incur significant bandwidth, sales and marketing, product development, administrative and other expenses |
| Therefore, we will need to generate higher revenues to maintain profitability at recent levels or at all |
| There are numerous factors that could, alone or in combination with other factors, impede our ability to increase revenues and/or moderate expenses, including: • failure to increase sales of our core services; • significant increases in bandwidth costs or other operating expenses; • inability to maintain our prices; • any failure of our current and planned services and software to operate as expected; • loss of any significant customers or loss of customers at a rate greater than we increase our number of customers or our sales to existing customers; • unauthorized use or access to content delivered over our network or network failures; • failure of a significant number of customers to pay our fees on a timely basis or at all or failure to continue to purchase our services in accordance with their contractual commitments; and 8 _________________________________________________________________ [67]Table of Contents • inability to attract high-quality customers to purchase and implement our current and planned services |
| Future changes in financial accounting standards may adversely affect our reported results of operations |
| A change in accounting standards can have a significant effect on our reported results |
| New accounting pronouncements and interpretations of accounting pronouncements have occurred and may occur in the future |
| These new accounting pronouncements may adversely affect our reported financial results |
| For example, beginning in 2006, under Statement of Financial Accounting Standards Nodtta 123R, or SFAS Nodtta 123R, we will be required to account for our stock-based awards as a compensation expense and our net income and net income per share will be significantly reduced |
| Previously, we have recorded compensation expense only in connection with option grants that have an exercise price below fair market value |
| For option grants that have an exercise price at fair market value, we calculated compensation expense and disclosed their impact on net income (loss) and net income (loss) per share, as well as the impact of all stock-based compensation expense in a footnote to the consolidated financial statements |
| SFAS Nodtta 123R requires us to adopt the new accounting provisions beginning in our first quarter of 2006, and will require us to expense stock-based awards, including shares issued under our employee stock purchase plan, stock options, restricted stock and stock appreciation rights, as compensation cost |
| As a result, our earnings per share is likely to be significantly lower even if our revenues increase |
| If we are unable to develop new services and enhancements to existing services, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results may suffer |
| The market for our services is characterized by rapidly changing technology, evolving industry standards and new product and service introductions |
| Our operating results depend on our ability to develop and introduce new services into existing and emerging markets |
| The process of developing new technologies is complex and uncertain; we must commit significant resources to developing new services or enhancements to our existing services before knowing whether our investments will result in services the market will accept |
| Furthermore, we may not execute successfully our technology initiatives because of errors in planning or timing, technical hurdles that we fail to overcome in a timely fashion, misunderstandings about market demand or a lack of appropriate resources |
| Failures in execution or market acceptance of new services we introduce could result in competitors providing those solutions before we do and, consequently, loss of market share, revenues and earnings |
| Any unplanned interruption in the functioning of our network or services could lead to significant costs and disruptions that could reduce our revenues and harm our business, financial results and reputation |
| Our business is dependent on providing our customers with fast, efficient and reliable distribution of application and content delivery services over the Internet |
| For our core services, we currently provide a standard guarantee that our networks will deliver Internet content 24 hours a day, 7 days a week, 365 days a year |
| If we do not meet this standard, our customer does not pay for all or a part of its services on that day |
| Our network or services could be disrupted by numerous events, including natural disasters, failure or refusal of our third-party network providers to provide the necessary capacity, power losses, and intentional disruptions of our services, such as disruptions caused by software viruses or attacks by unauthorized users |
| Although we have taken steps to prevent such disruptions, there can be no assurance that attacks by unauthorized users will not be attempted in the future, that our enhanced security measures will be effective or that a successful attack would not be damaging |
| Any widespread interruption of the functioning our network or services would reduce our revenues and could harm our business, financial results and reputation |
| As part of our business strategy, we have entered into and may enter into or seek to enter into business combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention |
| In June 2005, we completed our acquisition of Speedera |
| We may seek to enter into additional business combinations or acquisitions in the future |
| Acquisitions are typically accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of our ongoing business, the potential distraction of management, expenses related to the acquisition and potential 9 _________________________________________________________________ [68]Table of Contents unknown liabilities associated with acquired businesses |
| Any inability to integrate completed acquisitions in an efficient and timely manner could have an adverse impact on our results of operation |
| If we are not successful in completing acquisitions that we may pursue in the future, we may be required to reevaluate our business strategy, and we may incur substantial expenses and devote significant management time and resources without a productive result |
| In addition, with future acquisitions, we could use substantial portions of our available cash or, as in the Speedera acquisition, make dilutive issuances of securities |
| Future acquisitions or attempted acquisitions could also have an adverse effect on our ability to remain profitable |
| Because our services are complex and are deployed in complex environments, they may have errors or defects that could seriously harm our business |
| Our services are highly complex and are designed to be deployed in and across numerous large and complex networks |
| In the future, there may be additional errors and defects in our software that may adversely affect our services |
| We may not have in place adequate quality assurance procedures to ensure that we detect errors in our software in a timely manner |
| If we are unable to efficiently fix errors or other problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers |
| We may have insufficient transmission and server capacity, which could result in interruptions in our services and loss of revenues |
| Our operations are dependent in part upon transmission capacity provided by third-party telecommunications network providers |
| In addition, our distributed network must be sufficiently robust to handle all of our customers’ traffic |
| We believe that we have access to adequate capacity to provide our services; however, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers |
| In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons including due to payment disputes or network providers going out of business |
| Any failure of these network providers to provide the capacity we require, due to financial or other reasons, may result in a reduction in, or interruption of, service to our customers |
| If we do not have access to third-party transmission capacity, we could lose customers |
| If we are unable to obtain transmission capacity on terms commercially acceptable to us or at all, our business and financial results could suffer |
| We may not be able to deploy on a timely basis enough servers to meet the needs of our customer base or effectively manage the functioning of those servers |
| In addition, damage or destruction of, or other denial of access to, a facility where our servers are housed could result in a reduction in, or interruption of, service to our customers |
| If the estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected |
| Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America |
| The preparation of these financial statements requires us to make estimates and judgments about, among other things, taxes, revenue recognition, capitalization of internal-use software, contingent obligations, doubtful accounts and restructuring charges |
| These estimates and judgments affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us, such as those made in connection with our restructuring charges, and related disclosure of contingent assets and liabilities |
| We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances |
| If our estimates or the assumptions underlying them are not correct, we may need to accrue additional charges that could adversely affect our results of operations, which in turn could adversely affect our stock price |
| If we are unable to retain our key employees and hire qualified sales and technical personnel, our ability to compete could be harmed |
| Our future success depends upon the continued services of our executive officers and other key technology, sales, marketing and support personnel who have critical industry experience and relationships that they rely on in 10 _________________________________________________________________ [69]Table of Contents implementing our business plan |
| There is increasing competition for talented individuals in the areas in which our primary offices are located |
| This affects both our ability to retain key employees and hire new ones |
| None of our officers or key employees is bound by an employment agreement for any specific term |
| The loss of the services of any of our key employees could delay the development and introduction of, and negatively impact our ability to sell, our services |
| If our license agreement with MIT terminates, our business could be adversely affected |
| We have licensed technology from MIT covered by various patents, patent applications and copyrights relating to Internet content delivery technology |
| Some of our core technology is based in part on the technology covered by these patents, patent applications and copyrights |
| Our license is effective for the life of the patents and patent applications; however, under limited circumstances, such as a cessation of our operations due to our insolvency or our material breach of the terms of the license agreement, MIT has the right to terminate our license |
| A termination of our license agreement with MIT could have a material adverse effect on our business |
| We may need to defend our intellectual property and processes against patent or copyright infringement claims, which would cause us to incur substantial costs |
| Other companies or individuals, including our competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our services or develop new services, which could make it more difficult for us to increase revenues and improve profitability |
| Companies holding Internet-related patents or other intellectual property rights are increasingly bringing suits alleging infringement of such rights |
| Any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and require us to do one or more of the following: • cease selling, incorporating or using products or services that incorporate the challenged intellectual property; • pay substantial damages; • obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or • redesign products or services |
| In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business and operating results could be materially adversely affected |
| Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties |
| We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights |
| We have brought numerous lawsuits against entities that we believe are infringing on our intellectual property rights |
| These legal protections afford only limited protection |
| Monitoring unauthorized use of our services is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States |
| Although we have licensed from other parties proprietary technology covered by patents, we cannot be certain that any such patents will not be challenged, invalidated or circumvented |
| Furthermore, we cannot be certain that any pending or future patent applications will be granted, that any future patent will not be challenged, invalidated or circumvented, or that rights granted under any patent that may be issued will provide competitive advantages to us |
| We face risks associated with international operations that could harm our business |
| We have operations in several foreign countries and may continue to expand our sales and support organizations internationally |
| Such expansion could require us to make significant expenditures |
| We are increasingly 11 _________________________________________________________________ [70]Table of Contents subject to a number of risks associated with international business activities that may increase our costs, lengthen our sales cycle and require significant management attention |
| These risks include: • increased expenses associated with marketing services in foreign countries; • currency exchange rate fluctuations; • unexpected changes in regulatory requirements resulting in unanticipated costs and delays; • interpretations of laws or regulations that would subject us to regulatory supervision or, in the alternative, require us to exit a country which could have a negative impact on the quality of our services or our results of operations; • longer accounts receivable payment cycles and difficulties in collecting accounts receivable; and • potentially adverse tax consequences |
| Any failure to meet our debt obligations would damage our business |
| We have long-term debt |
| As of December 31, 2005, our total long-term debt was dlra200dtta0 million |
| If we are unable to remain profitable or if we use more cash than we generate in the future, our level of indebtedness could adversely affect our future operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for future capital expenditures, acquisitions and general corporate and other purposes |
| In addition, if we are unable to make interest or principal payments when due, we would be in default under the terms of our notes, which would result in all principal and interest becoming due and payable which, in turn, would seriously harm our business |
| If we are required to seek additional funding, such funding may not be available on acceptable terms or at all |
| If our revenues decrease or grow more slowly than we anticipate, if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenues, or if we seek to acquire significant businesses or technologies, we may need to obtain funding from outside sources |
| If we are unable to obtain this funding, our business would be materially and adversely affected |
| In addition, even if we were to find outside funding sources, we might be required to issue securities with greater rights than the securities we have outstanding today |
| We might also be required to take other actions that could lessen the value of our common stock, including borrowing money on terms that are not favorable to us |
| In addition, we may not be able to raise any additional capital |
| Internet-related and other laws could adversely affect our business |
| Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent |
| In particular, the growth and development of the market for online commerce has prompted calls for more stringent tax, consumer protection and privacy laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online or providing Internet-related services such as ours |
| This could negatively affect both our business directly as well as the businesses of our customers, which could reduce their demand for our services |
| Tax laws that might apply to our servers, which are located in many different jurisdictions, could require us to pay additional taxes that would adversely affect our continued profitability |
| We have recorded certain tax reserves to address potential exposures involving our sales and use and franchise tax positions |
| These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different jurisdictions |
| Our reserves, however, may not be adequate to reflect our total actual liability |
| Internet-related laws remain largely unsettled, even in areas where there has been some legislative action |
| The adoption or modification of laws or regulations relating to the Internet or our operations, or interpretations of existing law, could adversely affect our business |
| 12 _________________________________________________________________ [71]Table of Contents Provisions of our charter documents, our stockholder rights plan and Delaware law may have anti-takeover effects that could prevent a change in control even if the change in control would be beneficial to our stockholders |
| Provisions of our amended and restated certificate of incorporation, amended and restated by-laws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| In addition, our Board of Directors has adopted a shareholder rights plan the provisions of which could make it more difficult for a potential acquirer of Akamai to consummate an acquisition transaction without the approval of our Board of Directors |
| A class action lawsuit has been filed against us and an adverse resolution of such action could have a material adverse effect on our financial condition and results of operation in the period in which the lawsuit is resolved |
| We are named as a defendant in a purported class action lawsuit filed in 2001 alleging that the underwriters of our initial public offering received undisclosed compensation in connection with our initial public offering of common stock in violation of the Securities Act and the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act |
| Any conclusion of these matters in a manner adverse to us could have a material adverse affect on our financial position and results of operations |
| We may become involved in other litigation that may adversely affect us |
| In the ordinary course of business, we may become involved in litigation, administrative proceedings and governmental proceedings |
| Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses |
| Furthermore, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition |