10-K 1 akam10k123116.htm FORM 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016
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)
Delaware
 
04-3432319
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

150 Broadway
Cambridge, Massachusetts 02142
(Address of principle executive offices) (Zip Code)

Registrant’s telephone number, including area code: (617) 444-3000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  þ

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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  o (Do not check if smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $9,531.0 million based on the last reported sale price of the Common Stock on the NASDAQ Global Select Market on June 30, 2016.

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share, as of February 22, 2017: 173,190,922 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relative to the registrant’s 2017 Annual Meeting of Stockholders to be held on May 17, 2017 are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this annual report on Form 10-K.




AKAMAI TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

TABLE OF CONTENTS
 
PART I
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
 
 
 
Item 15.
Item 16.
 
 



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Forward-Looking Statements

This annual report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management based on information currently available to them. Use of words such as “believes,” "continues," “expects,” “anticipates,” “intends,” “plans,” “estimates,” “forecasts,” “should,” “may,” “could,” “likely” or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, those set forth under the heading “Risk Factors,” elsewhere in this Annual Report on Form 10-K. We disclaim any obligation to update any forward-looking statements as a result of new information, future events or otherwise.

PART I

Item 1. Business

Akamai provides cloud services for delivering, optimizing and securing content and business applications over the Internet. As a global leader in content delivery network, or CDN, services, our goal is to make the Internet fast, reliable and secure for our customers.

Our Strategy – Addressing the Needs of our Customers in the Internet Age

The Internet plays a crucial role in the way companies, government agencies and other enterprises conduct business and reach the public, but the world around us is rapidly evolving. In recent years, we have seen a dramatic increase in the use of social media for sharing photos, videos and ideas. More consumers are "cutting the cord" and consuming entertainment over the Internet rather than through traditional cable. Web pages are more complex with advertisements, videos, graphics and other third party content, causing speed and reliability to suffer. Online transactions and media are increasingly moving to mobile devices. More and more, government agencies want citizens to pay their taxes, submit applications and request information online. Security threats have grown more complex and arise more frequently. Enterprise applications are moving from behind the firewall to the cloud. Smart enterprises want to take advantage of these trends safely, profitably and intelligently.

What our customers want to do:

provide consumers with superior online experiences when they access websites and applications from all types of devices from anywhere in the world;
handle transactions securely and protect sensitive information;
affordably present vibrant and engaging streaming content, including high definition, or HD, video, music and games;
leverage the growth in the use of mobile devices to reach more consumers and provide dynamic experiences;
scale and secure the enterprise network; and
receive data about usage of their websites and applications.

What makes it difficult to achieve those goals:

doing it yourself – building out data centers, coping with the technology changes, and dealing with sudden traffic spikes – is difficult and expensive;
lack of a coordinated security system to protect against hackers, bots and other malefactors that want to steal assets and disrupt the functioning of the web;
mobile networks tend to be slower and less reliable than the fixed line Internet and present other challenges;
traffic congestion at data centers and between networks;
it can be difficult to understand actual user experiences given myriad devices and locations; and
coping with “last mile” issues – such as bandwidth constraints between consumers and their Internet access provider.



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How Akamai helps:

Our strategy is to bridge the gap between our customers' online goals and the difficulty of leveraging the Internet by providing technology that optimizes and secures the delivery of online content and applications. We deliver a wide spectrum of content, from media and software downloads to dynamic and personalized data for many of the world’s most important applications. We offer online solutions for delivery, acceleration, and security services to the owners of major websites and applications. We are trusted by a large fraction of the world’s most important brands, including many media companies, e-retailers, major governments, financial institutions, and other leading enterprises. Across all of these customers, our mission is to make the Internet fast, reliable and secure.

At the core of this mission is the Akamai Intelligent Platform, a globally-distributed computing platform, comprising more than 200,000 servers deployed in more than 1,600 networks and 131 countries around the world, tied together with sophisticated software and algorithms. Our software also resides on over 100 million end user devices, as part of our work on client-assisted delivery for large media files. This platform is architected to enable us to constantly monitor Internet conditions to:

identify, absorb and block security threats;
efficiently route traffic away from Internet trouble spots;
detect what devices individuals are using and optimize delivery to them;
provide our customers with business and technical insights into their online operations; and
understand different types of traffic visiting websites so that customers can deal with them as desired.

We believe that our unique technology leveraging a virtual Internet on top of the real Internet, our ability to efficiently manage a platform with millions of components, our high-quality intellectual property portfolio, our strong relationships with over 1,600 leading telecommunications carriers and thousands of major brands on the web, and our relentless and personalized attention to customer and partner needs create significant value for shareholders and provide a meaningful edge against the many competitors that desire to acquire a share of our business.

Our Solutions

Performance and Security Solutions

Web and Mobile Performance Solutions

The ultimate goal of our web and mobile performance business is to make dynamic websites and applications have instant response times, no matter where the user is, what device or browser they are using, or how they are connected to the Internet. This is accomplished through a variety of advanced technologies embedded into our platform, which can be thought of as a virtual Internet overlaying the real Internet. Key offerings include:

Ion Ion is a situational performance solution that consists of an integrated suite of web delivery, acceleration and optimization technologies that make real-time optimization decisions based on the requirements of the device, network location and browser. Ion is designed to simplify increasingly complex web delivery and enable a faster website experience that is highly available, secure and scalable to meet peak capacity demands.

Dynamic Site Accelerator – Dynamic Site Accelerator is designed to help customers experience globally consistent and faster website performance, handling the specific requirements of dynamically-generated content. Our platform continuously pulls and caches fresh site content onto Akamai servers, automatically directs content requests to an optimal server, routes the request via the most reliable path to data centers to retrieve and deliver dynamic interactive content.

IP Application Accelerator – IP Application Accelerator is designed to enable enterprises to deliver Internet Protocol-based applications to globally-distributed users quickly, securely and reliably without the expense of building out and supporting dedicated IT infrastructure. These applications include real-time interactive web conferencing and virtualized applications and desktops, in addition to supporting hosting and software as a service, or SaaS, providers in the delivery of remote desktop management, hosted email, archiving and other applications.

Global Traffic Management – Global Traffic Management is designed to ensure responsiveness to end user requests by leveraging our global load balancing technology. Unlike traditional hardware-based solutions that reside within the data center, our Global Traffic Management service is a fault-tolerant solution that makes intelligent routing decisions


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based on real-time data center performance health and global Internet conditions to help ensure user requests are routed to the most appropriate data center for that user at that moment.

Image Manager – To help our customers cope with the multitude of devices used by their consumers and varying connection quality, Image Manager automatically optimizes online images for the best combination of size, quality, and file format suited for each image and device and offloads the artistic transformation of derivative assets to the cloud.

Cloudlets – Cloudlets are applications that provide our customers with self-serviceable controls and capabilities designed to help simplify web operations and improve user experiences. Examples include Visitor Prioritization for managing potentially overloaded applications, Image Converter to improve delivery of images particularly to mobile devices and IP/Geo Access to handle access restrictions.

Cloud Security Solutions

Our Cloud Security Solutions are designed to defend websites, applications and data centers against a multitude of cyber attacks through solutions such as:

Kona Site Defender – Kona Site Defender is a cloud computing security solution that defends against network and application layer distributed denial of service, or DDoS, attacks, web application attacks and direct-to-origin attacks. By leveraging our distributed network and proprietary technology, Akamai can absorb traffic targeted at the application layer, deflect DDoS traffic targeted at the network layer, such as SYN Floods or UDP Floods, and authenticate valid traffic at the network edge.

Bot Manager – As websites attract users, they also place business information where it can be easily accessed by other entities – often using automated tools known as “bots.” Our Bot Manager offering provides organizations with a flexible framework to better manage the wide array of bots accessing their website every day. It offers the ability to identify bots as they first arrive, categorize different types of bots, and apply the most appropriate management policy for each category.

Fast DNS – The Domain Name System, or DNS, translates human-readable domain names into numerical IP addresses to enable individuals who type in a website name to reach the desired location on the Internet. Our Fast DNS offering is a DNS resolution solution that is designed to quickly and dependably direct individuals to our customers' websites. Importantly, we have architected this service to protect against DNS-based DDoS attacks.

Prolexic Routed – Prolexic Routed is designed to protect web- and IP-based applications in data centers from the threat of DDoS attacks by preventing attacks before they reach the data center. It provides protection against high-bandwidth, sustained web attacks as well as potentially crippling DDoS attacks that target specific applications and services.
 
Client Reputation – Client Reputation provides an additional layer of protection against DDoS and web application attacks by allowing customers to automatically block requests from IP addresses. Client Reputation leverages advanced algorithms to compute a risk score based on prior behavior as observed over the Akamai network. The algorithms use both legitimate and attack traffic to profile the behavior of attacks, clients and applications. Based on this information, Akamai assigns risk scores to each IP address and allows customers to choose which actions they wish to have Kona Site Defender perform on an IP address with specific risk scores.

Enterprise Solutions

Our Enterprise offerings are designed to help customers boost productivity by facilitating third-party access to applications, accelerating those applications, reducing bandwidth costs and extending the Internet and public clouds into private wide area networks, or WANs. Our key enterprise solutions offerings include:

Enterprise Application Access – Using technology gained through our acquisition of Soha Systems, Inc., this offering enables remote access to applications behind the firewall without providing users access to the entire network without external hardware or software.

Akamai Cloud Connect – By combining WAN optimization and intelligent caching directly into a Cisco router in enterprise branch locations, Akamai Connect extends the Akamai Intelligent Platform directly into the branch. The


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solution is architected to enable customers to reduce costs while delivering high-quality application experiences with minimal bandwidth impact, regardless of device, connectivity or public/private cloud architectures.

Network Operator Solutions

With the growth in consumer adoption of Internet video and other media, carriers around the world have experienced significant traffic increases, resulting in congestion across networks from aggregation, to backbone, to interconnection. Our Network Operator offerings are designed to help carriers operate a cost-efficient network that capitalizes on traffic growth and new subscriber services by reducing the complexity of building a CDN and interconnecting access providers. Similarly, our Mobile Network Solutions address the need for tailored solutions to handle the unique complexities of using mobile networks to offer access to content and applications. These offerings include:

Aura Licensed CDN – Aura Licensed CDN is a suite of solutions designed to empower network operators to build and run a highly-scalable media content delivery network that efficiently delivers its own content as well as content from Akamai customers and other targeted services, all utilizing a common HTTP caching infrastructure. The Aura Licensed CDN federates with the Akamai Intelligent Platform, providing global delivery of operator content with a single business agreement. The solution also includes HyperCache, a common HTTP caching layer in the network that supports traffic offload and delivery of content, and Request Router, a DNS-based content request router that directs user requests to an optimal available CDN node.

Aura Managed CDN – Aura Managed CDN is a scalable, turnkey CDN solution designed to provide network operators with CDN capabilities through an infrastructure that is maintained by Akamai. With it, an operator can leverage the same CDN techniques used by Akamai, but on servers that are dedicated to the network operator's services. Operators can deliver multi-screen video services and large objects, plus offer commercial CDN services, relying on Akamai CDN experts and proven technology for content provisioning, delivery and reporting.

Intelligent DNS Solutions – Our AnswerX offering is an intelligent recursive DNS platform built for effective management of DNS traffic. To help make web services fast, safe and uniquely personal for subscribers, AnswerX manages subscriber preferences (e.g., opt-in or opt-out), tracks popular destinations and maintains lists of typo squatters (website addresses that are similar to popular ones but with misspelled names) and phishing domains.

Media Delivery Solutions

In recent years, streaming of movies, television and live events has come to represent a significant percentage of traffic on the Internet. Providing solutions to handle that media is an important part of our current and future strategy. Our Media Delivery Solutions are designed to enable enterprises to execute their digital media distribution strategies, not only by providing solutions for their volume and global reach requirements but also by improving the end-user experience, boosting reliability and reducing their cost of Internet-related infrastructure. Our offerings include:

Adaptive Delivery – We provide adaptive delivery solutions for streaming video content that are designed to cope with variable connection speeds, different devices and disparate locations around the world.

Download Delivery – Our download delivery offerings provide accelerated distribution for large file downloads, including games, progressive media (video and audio) files, documents and other file-based content.

Infinite Media Acceleration – These media delivery acceleration solutions are designed with the goal to bring broadcast quality TV experiences to broadband.

Media Services – These services help simplify the preparation of online media with integrated transcoding, digital rights management and content packaging designed to enable our customers to quickly and easily deliver live and on-demand content to multiple types of devices and platforms.

Media Analytics – We offer a comprehensive suite of analytics tools to monitor online video viewer experiences and the effectiveness of web software downloads, while measuring audience engagement, and quality of service performance. These solutions are designed to provide actionable and relevant metrics to help businesses understand their entire media workflow from ingest to device through four complementary modules: Quality of Service Monitor, Viewer Diagnostics, Audience Analytics and Download Analytics.



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NetStorage – NetStorage is a globally-distributed cloud storage solution for our customers' content that offers automatic geographically-dispersed replication that is designed for resiliency, high availability and real time performance optimization.

Services and Support Solutions

Akamai offers an array of Service and Support offerings that are designed to assist our customers with integrating, configuring, optimizing and managing our core offerings. Once customers are deployed on the network, they can rely on our professional services experts for customized solutions, problem resolution and 24/7 technical support. Special features available to enterprises that purchase our premium support solution include a dedicated technical account team, proactive service monitoring, custom technical support handling procedures and customized training.

Our Technology and Network

The Akamai Intelligent Platform leverages more than 200,000 servers deployed in approximately 1,600 networks ranging from large, backbone network providers to medium and small Internet service providers, or ISPs, to cable modem and satellite providers to universities and other networks. By deploying servers within a wide variety of networks across 131 countries, we are better able to manage and control routing and delivery quality to geographically diverse users. We also have thousands of peering relationships that provide us with direct paths to end-user networks, which reduce data loss, while also potentially giving us more options for delivery at reduced cost.

To make this wide-reaching deployment effective, we use specialized technologies, such as advanced routing, load balancing, data collection and monitoring. Our intelligent routing software is designed to ensure that website visitors experience fast page loading, access to applications and content assembly wherever they are on the Internet and regardless of global or local traffic conditions. Dedicated professionals staff our network operations command center 24 hours a day, seven days a week to monitor and react to Internet traffic patterns and trends. We frequently deploy enhancements to our software globally to strengthen and improve the effectiveness of our network.

Our platform offers flexibility too. Customers can control the extent of their use of Akamai services to scale on demand, using as much or as little capacity of the global platform as they require, to support widely varying traffic and rapid growth without the need for expensive and complex internal infrastructure.

Research and Development

Our research and development personnel are continuously undertaking efforts to enhance and improve our existing services, strengthen our network and create new services in response to our customers' needs and market demand. As of December 31, 2016, we had 1,762 research and development employees. Our research and development expenses were $167.6 million, $148.6 million and $125.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are net of capitalized costs related to the development of internal-use software used to deliver our services and operate our network. For the years ended December 31, 2016, 2015 and 2014, we capitalized $124.6 million, $105.7 million and $91.1 million, respectively, of payroll, payroll-related and external consulting costs related to the development of internal-use software. Additionally, for the years ended December 31, 2016, 2015 and 2014, we capitalized $21.4 million, $16.7 million and $13.7 million, respectively, of stock-based compensation attributable to our research and development personnel.

Industry Segment and Geographic Information

We operate in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet. Our revenue derived from operations outside the U.S. was $720.0 million, $593.0 million and $531.9 million, for each of the years ended December 31, 2016, 2015 and 2014, respectively. This represented 31% of our total revenue for the year ended December 31, 2016 and 27% of our total revenue for each of the years ended December 31, 2015 and 2014. No single country outside of the U.S. accounted for 10% or more of our revenue in any such year.

Our long-lived assets include servers, which are deployed into networks worldwide, in addition to other property and equipment used to support our operations. As of December 31, 2016, we had approximately $297.8 million and $231.8 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively. As of December 31, 2015, we had approximately $298.9 million and $227.8 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively.



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Customers

As of December 31, 2016, our customers included many of the world's leading corporations, including Airbnb, Apple, Autodesk, Bristol Myers Squibb, Cathay Pacific, The Coca-Cola Company, Crate & Barrel, eBay, Electronic Arts, FedEx, Ford Motor Company, FOX, General Electric, Home Depot, HubSpot, IKEA, Investec, JetBlue, Marriott, NBCUniversal, Norwegian Cruise Line, Panasonic, Panera Bread, PayPal, Qantas, Qualcomm, Rabobank, Rakuten, Salesforce.com, Siemens, Ticketmaster, Toshiba, Turner Broadcasting, Ubisoft and Viacom. We also actively sell to government agencies. As of December 31, 2016, our public sector customers included the Federal Aviation Administration, the Federal Emergency Management Agency, the U.S. Census Bureau, the U.S. Department of Defense, the U.S. Postal Service, the U.S. Department of Labor and the U.S. Securities and Exchange Commission.

No customer accounted for 10% or more of total revenue for any of the years ended December 31, 2016, 2015 and 2014. Six of our customers that are large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix, or our Internet Platform Customers, in aggregate, accounted for 11%, 17% and 18% of our total revenue during the years ended December 31, 2016, 2015 and 2014, respectively. Less than 10% of our total revenue in each of the years ended December 31, 2016, 2015 and 2014 was derived from contracts or subcontracts terminable at the election of the federal government, and we do not expect such contracts to account for more than 10% of our total revenue in 2017.

Sales, Service and Marketing

We market and sell our solutions globally through our direct sales and service organization and through more than 250 active channel partners including AT&T, Deutsche Telecom, IBM, Orange Business Services and Telefonica Group. In addition to entering into agreements with resellers, we have several other types of sales and marketing focused alliances with entities such as system integrators, application service providers, referral partners and sales agents. By aligning with these partners, we believe we are better able to market our services and encourage increased adoption of our technology throughout the industry.

Our sales, service and marketing professionals are located in more than 60 offices in the Americas, Europe, the Middle East and Asia and focus on direct and channel sales, sales operations, professional services, account management and technical consulting. As of December 31, 2016, we had 3,153 employees in this organization.

To support our sales efforts and promote the Akamai brand, we conduct comprehensive marketing programs. Our marketing strategies include an active public relations campaign, print advertisements, online advertisements, participation at trade shows, strategic alliances, ongoing customer communication programs, training and sales support.

Competition

The market for our services is intensely competitive and characterized by rapidly changing technology, evolving industry standards and frequent new product and service innovations. We expect competition for our services to increase both from existing competitors and new market entrants. We compete primarily on the basis of:

the performance and reliability of our services;
return on investment in terms of cost savings and new revenue opportunities for our customers;
reduced infrastructure complexity;
sophistication and functionality of our offerings;
scalability;
security;
ease of implementation and use of service;
customer support; and
price.

We compete with companies offering products and services that address Internet performance problems, including companies that provide Internet content delivery and hosting services, security solutions, technologies used by network operators to improve the efficiency of their systems, streaming content delivery services and equipment-based solutions for Internet performance problems, such as load balancers and server switches. Other companies offer online distribution of digital media assets through advertising-based billing or revenue-sharing models that may represent an alternative method for charging for the delivery of content and applications over the Internet. In addition, existing and potential customers may decide to purchase or develop their own hardware, software or other technology solutions rather than rely on a provider of externally-managed services like Akamai.



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We believe that we compete favorably with other companies in our industry through the global scale of the Akamai Intelligent Platform, which we believe provides the most effective means of meeting the needs of enterprise customers and is unique to us. In our view, we also benefit from the superior quality of our offerings, our customer service and the information we can provide to our customers about their online operations and value.

Proprietary Rights and Licensing

Our success and ability to compete are dependent on developing and maintaining the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. As of December 31, 2016, we owned, or had exclusive rights to, more than 265 U.S. patents covering our technology as well as patents issued by other countries. Our U.S.-issued patents have terms extendable to various dates between 2017 and 2034. We do not believe that the expiration of any particular patent in the near future would be material to our business. In October 1998, we entered into a license agreement with the Massachusetts Institute of Technology, or MIT, under which we were granted a royalty-free, worldwide exclusive right to use and sublicense the intellectual property rights of MIT under various patent applications and copyrights relating to Internet content delivery technology. We seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.

Employees

As of December 31, 2016, we had 6,490 full-time and part-time employees. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical, managerial and other personnel for whom competition is intense. Our employees are not represented by any collective bargaining unit. We believe our relations with our employees are good, and we have been acknowledged in respected publications as an excellent place to work.

Additional Information

Akamai was incorporated in Delaware in 1998, and we have our corporate headquarters at 150 Broadway, Cambridge, Massachusetts. Our Internet website address is www.akamai.com. We make available, free of charge, on or through our Internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto that we have filed or furnished with the Securities and Exchange Commission, or the Commission, as soon as reasonably practicable after we electronically file them with the Commission. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating such information by reference into, this annual report on Form 10-K.



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Item 1A. Risk Factors

The following are 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.

If we do not continue to innovate and develop solutions and technologies that are useful for our customers or that improve our operating efficiencies, our operating results may suffer.

We have been in business for nearly two decades and consider ourselves pioneers in the development of content and application delivery solutions. As the information technology industry evolves, however, it may become increasingly difficult for us to maintain a technological advantage. In particular, our traditional offerings risk becoming commoditized as competitors or even current or former customers seek to replicate them such that we must lower the prices we charge, reducing the profitability of such offerings, or risk losing such business. We believe, therefore, that developing or acquiring innovative, high-margin solutions is key to our revenue growth and profitability. We must do so in a rapidly-changing technology environment where it can be difficult to anticipate the needs of potential customers, where competitors may develop products and services that are, or may be viewed as, better than ours and where it can be costly to acquire other companies. The process of developing new solutions is complex and uncertain; we must commit significant resources to developing new services or features without knowing whether our investments will result in services the market will accept. This could cause our expenses to grow more rapidly than our revenue. There is often a lengthy period between commencing development initiatives and bringing new or improved solutions to market. During this time, the technology preferences, customer demand and market for our solutions, or those introduced by our competitors, may move in directions that we had not anticipated. Furthermore, we may not successfully execute our technology initiatives because of errors in planning, timing or execution, technical or operational hurdles that we fail to overcome in a timely fashion or a lack of appropriate resources. Failure to adequately develop, on a cost-effective basis, innovative new or enhanced solutions that are attractive to customers and to keep pace with rapid technological and market changes could have a material effect on our business, results of operations, financial condition and cash flows.

Slower traffic growth on our network and numerous other factors could cause our revenue growth rate to slow and profitability to decline.

Increasing traffic on our network is key to our revenue growth and profitability. Numerous factors can impact traffic growth including:

the pace of introduction of over-the-top (often referred to as OTT) video delivery initiatives by our customers;
the popularity of our customers' streaming offerings as compared to those offered by companies that do not use our services;
customers, particularly large Internet platform companies, utilizing their own data centers and implementing delivery approaches that limit or eliminate reliance on third party providers like us; and
macro-economic market and industry pressures.

We base our decisions about expense levels and investments on estimates of our future revenue and future anticipated rate of growth. Many of our expenses are fixed cost in nature for some minimum amount of time, such as with co-location and bandwidth providers, so it may not be possible to reduce costs in a timely manner or without the payment of fees to exit certain obligations early. If we experience slower traffic growth on our network than we expect or than we have experienced in recent years, our revenue growth rate will slow, and we may not be able to maintain our current level of profitability in 2017 or on a quarterly or annual basis thereafter.

Our profitability may also decline in future periods as a result of a number of other factors unrelated to traffic growth, including:

inability to increase sales of our core services and advanced features;
increased headcount expenses;
changes in our customers' business models that we do not fully anticipate or that we fail to address adequately; and
increased reliance by customers on our secure socket layer, or SSL, network which is more expensive to maintain and operate.



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The information technology industry and the markets in which we compete are constantly evolving, which makes our future business strategies, practices and results difficult to predict.

The information technology industry and the markets in which we compete have grown significantly over the life of our company and continue to evolve rapidly in response to new technological advances, changing business models and other factors. We and the other companies that compete in this industry and these markets experience continually shifting business relationships, commercial focuses and business priorities, all of which occur in reaction to industry and market forces and the emergence of new opportunities. These shifts have led or could lead to:

our customers or partners becoming our competitors;
our network suppliers becoming partners with us or, conversely, no longer seeking to work with us;
our working more closely with hardware providers;
large technology companies that previously did not appear to show interest in the markets we seek to address entering into those markets as competitors; and
needing to expand into new lines of business or to change or abandon existing strategies.

The Internet itself is constantly evolving. There could develop an inflection point above which global usage of the Internet increases to a level that causes our current approaches to the delivery of content and applications to no longer be sustainable at current levels of profitability or at all. We also need to continue to manage successfully the transition from the IPv4 protocol to IPv6.

With this constantly changing environment, our future business strategies, practices and results may be difficult to predict, and we may face operational difficulties in adjusting to the changes. Any of these developments could harm our business.

If we are unable to compete effectively, our business will be adversely affected.

We compete in markets that are intensely competitive and rapidly changing. Our current and potential competitors vary by size, product and service offerings, and geographic region and range from start-ups that offer solutions competing with a discrete part of our business to large technology or telecommunications companies that offer, or may be planning to introduce, products and services that are broadly competitive with what we do. The primary competitive factors in our market are: excellence of technology, global presence, customer service, technical expertise, security, ease-of-use, breadth of services offered, price and financial strength. Competitors include some of our current partners and customers.

Many of our current and potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater brand recognition and more established relationships in the industry than we do. As a result, some of these competitors may be able to:

develop superior products or services, gain greater market acceptance, and expand their service offerings more efficiently or more rapidly;
adapt to new or emerging technologies and changes in customer requirements more quickly;
take advantage of acquisition and other opportunities more readily;
adopt more aggressive pricing policies and allocate greater resources to the promotion, marketing, and sales of their services; and
dedicate greater resources to the research and development of their products and services.

Smaller and more nimble competitors may be able to:

attract customers by offering less sophisticated versions of services than we provide at lower prices than those we charge;
develop new business models that are disruptive to us; and
respond more quickly than we can to new or emerging technologies, changes in customer requirements and market and industry developments, resulting in superior offerings.

Existing and potential customers may not purchase our services, or may limit their use of them, because they:

pursue a "do-it-yourself" approach by putting in place equipment, software and other technology solutions for content and application delivery within their internal systems;
enter into relationships directly with network providers instead of relying on an overlay network like ours; or
implement multi-vendor policies to reduce reliance on external providers like us.


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Ultimately, increased competition of all types could result in price and revenue reductions, loss of customers and loss of market share, each of which could materially impact our business, profitability, financial condition, results of operations and cash flows.

We may be unable to replace lost revenue due to customer cancellations, renewals at lower rates or other less favorable terms.

It is key to our profitability that we offset lost committed recurring revenue due to customer cancellations, terminations, price reductions or other less favorable terms by adding new customers and increasing the number of high-margin services, features and functionalities that our existing customers purchase. We cannot predict our renewal rates. Some customers may elect not to renew and others may renew at lower prices, lower committed traffic levels, or for shorter contract lengths. Historically, a significant percentage of our renewals, particularly with larger customers, has led to unit price declines as competition has increased and the market for certain parts of our business has matured. Our renewal rates may decline as a result of a number of factors, including competitive pressures, customer dissatisfaction with our services, customers' inability to continue their operations and spending levels, the impact of multi-vendor policies, customers implementing or increasing their use of in-house technology solutions and general economic conditions. In addition, our customer contracting models may change to move away from a committed revenue structure to a "pay-as-you-go" approach. The absence of a commitment would make it easier for customers to stop doing business with us, which would negatively impact revenue.

Security breaches and attacks on our platform could lead to significant costs and disruptions that could harm our business, financial results and reputation.

Our business is dependent on providing our customers with fast, efficient and reliable distribution of applications and content over the Internet. We transmit and store our customers' information and data as well as our own. Maintaining the security and availability of our services, network and internal IT systems and the security of information we hold is a critical issue for us and our customers. Attacks on our customers and our own network take a variety of forms, including distributed denial of service (DDoS) attacks, infrastructure attacks, botnets, malicious file uploads, cross-site scripting, credential abuse, bugs, viruses, worms and malicious software programs. Malicious actors use attempts to fraudulently induce employees or suppliers to disclose sensitive information through illegal electronic spamming, phishing or other tactics. In addition, unauthorized parties may attempt to gain physical access to our facilities in order to infiltrate our information systems.

In recent years, Internet-based attacks have increased in size, sophistication and complexity, increasing the exposure to our customers and us. In addition, as we expand our emphasis on selling security-related solutions, we may become a more attractive target for attacks on our infrastructure intended to destabilize, overwhelm or shut down our platform. The costs to us to avoid or alleviate cyber or other security problems and vulnerabilities are significant. However, our efforts to address these problems may not be successful. Any significant breach of our security measures could:

lead to the dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers;
threaten our ability to provide our customers with our services;
generate negative publicity about us;
result in litigation and increased legal liability or fines; or
lead to governmental inquiry or oversight.

The occurrence of any of these events could harm our business or damage our brand and reputation, lead to customer credits, loss of customers, higher expenses, and possibly impede our present and future success in retaining and attracting new customers. A successful assault on our infrastructure would be damaging to our reputation and could adversely affect our financial condition.

Similar security risks exist with respect to our business partners and the third-party vendors that we rely on for aspects of our information technology support services and administrative functions. As a result, we are subject to the risk that the activities of our business partners and third-party vendors may adversely affect our business even if the attack or breach does not directly impact our systems.



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We may have insufficient transmission and co-location space, which could result in disruptions to our services and loss of revenue.

Our operations are dependent in part upon transmission capacity provided by third party telecommunications network providers and access to co-location facilities to house our servers. There can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers, particularly those under cyber-attack. The bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes, network providers going out of business, natural disasters, networks imposing traffic limits or governments adopting regulations that impact network operations. In some regions, network providers may choose to compete with us and become unwilling to sell us adequate transmission capacity at fair market prices. This risk is heightened where market power is concentrated with one or a few major networks. We also may be unable to move quickly enough to augment capacity to reflect growing traffic or security demands. Failure to put in place the capacity we require could result in a reduction in, or disruption of, service to our customers and ultimately a loss of those customers. In recent years, it has become increasingly expensive to house our servers at network facilities. We expect this trend to continue. In addition, customers have increasingly elected to transmit their content over our SSL network, which is more costly for us to operate and could require significant additional investment for us. These increased expenses have made, and will make, it more costly for us to expand our operations and more difficult for us to maintain or improve our profitability.

Acquisitions and other strategic transactions we complete could result in operating difficulties, dilution, diversion of management attention and other harmful consequences that may adversely impact our business and results of operations.

We expect to pursue acquisitions and other types of strategic relationships that involve technology sharing or close cooperation with other companies. Acquisitions and other complex transactions are accompanied by a number of risks, including the following:

difficulty integrating the operations and personnel of acquired companies;
potential disruption of our ongoing business;
potential distraction of management;
diversion of business resources from core operations;
expenses related to the transactions;
failure to realize synergies or other expected benefits;
increased accounting charges such as impairment of goodwill or intangible assets, amortization of intangible assets acquired and a reduction in the useful lives of intangible assets acquired; and
potential unknown liabilities associated with acquired businesses.

Any inability to integrate completed acquisitions or combinations in an efficient and timely manner could have an adverse impact on our results of operations. If we use a significant portion of our available cash to pay for acquisitions that are not successful, it could harm our balance sheet and limit our flexibility to pursue other opportunities without having enjoyed the intended benefits of the acquisition. As we complete acquisitions, we may encounter difficulty in incorporating acquired technologies into our offerings while maintaining the quality standards that are consistent with our brand and reputation. If we are not successful in completing acquisitions or other strategic transactions that we may pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. Future acquisitions could require use of substantial portions of our available cash or result in dilutive issuances of securities. Technology sharing or other strategic relationships we enter into may give rise to disputes over intellectual property ownership, operational responsibilities and other significant matters. Such disputes may be expensive and time-consuming to resolve.



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Our operating results can be impacted by the actions and business life cycles of a small number of large customers.

Historically, our operating results have been subject to fluctuations due to our dependence on several large customers, particularly media companies, for a significant portion of our revenues. The amount of traffic we deliver on behalf of those customers can vary significantly based on decisions they make about their businesses, including whether to start or delay new business initiatives, build out their own networks to handle delivery, or implement or maintain multiple vendor strategies. These approaches can change rapidly and unpredictably. While we believe that we will be less reliant on individual customers in the future, we are likely to continue to face some uncertainty in forecasting our revenues as they relate to these customers from quarter to quarter or over longer periods. We could also experience inconsistent revenue growth patterns and earnings as a result of the behavior of these customers.

Our failure to effectively manage our operations as our business evolves could harm us.

Our future operating results will depend on our ability to manage our operations. As a result of the diversification of our business, personnel growth, acquisitions and international expansion in recent years, many of our employees are now based outside of our Cambridge, Massachusetts headquarters; however, most key management decisions are made by a relatively small group of individuals based primarily at our headquarters. If we are unable to appropriately increase management depth, enhance succession planning and decentralize our decision-making at a pace commensurate with our actual or desired growth rates, we may not be able to achieve our financial or operational goals. It is also important to our continued success that we hire qualified personnel, properly train them and manage out poorly-performing personnel, all while maintaining our corporate culture and spirit of innovation. If we are not successful in these efforts, our growth and operations could be adversely affected.

As our business evolves, we must also expand and adapt our IT and operational infrastructure. Our business relies on our data systems, billing systems and other operational and financial reporting and control systems. All of these systems have become increasingly complex due to the diversification and complexity of our business, acquisitions of new businesses with different systems and increased regulation over controls and procedures. To manage our technical support infrastructure effectively and improve our sales efficiency, we will need to continue to upgrade and improve our data systems, billing systems, ordering processes and other operational and financial systems, procedures and controls. These upgrades and improvements may be difficult and costly. If we are unable to adapt our systems and organization in a timely, efficient and cost-effective manner to accommodate changing circumstances, our business may be adversely affected. If the third parties we rely on for hosted data solutions for our internal network and information systems are subject to a security breach or otherwise suffer disruptions that impact the services we utilize, the integrity and availability of our internal information could be compromised causing the loss of confidential or proprietary information, damage to our reputation and economic loss.

Our restructuring and reorganization activities may be disruptive to our operations and harm our business.

Over the past several years, we have implemented internal restructurings and reorganizations designed to reduce the size and cost of our operations, improve operational efficiencies, enhance our ability to pursue market opportunities and accelerate our technology development initiatives. We may take similar steps in the future as we seek to realize operating synergies, optimize our operations to achieve our target operating model and profitability objectives, or better reflect changes in the strategic direction of our business. Disruptions in operations have occurred and will likely continue to occur, including with respect to our research and development efforts, as a result of taking these actions. Taking these actions may also result in significant expense for us, including with respect to workforce reduction, as well as decreased productivity and unanticipated employee turnover. Substantial expense or business disruptions resulting from restructuring and reorganization activities could adversely affect our operating results.

If we are unable to retain our key employees and hire and retain qualified sales, technical, marketing and support personnel, our ability to compete could be harmed.

Our future success depends upon the services of our executive officers and other key technology, sales, marketing and support personnel who have critical industry experience and relationships. There is significant competition for talented individuals in the regions in which our primary offices are located, which affects both our ability to retain key employees and hire new ones. In making employment decisions, particularly in our industry, job candidates and current personnel often consider the value of stock-based compensation. Declines in the price of our stock could adversely affect our ability to attract or retain key employees.

None of our officers or key employees is bound by an employment agreement for any specific term. Members of our senior management team have left Akamai over the years for a variety of reasons, and we cannot be certain that there will not be additional departures, which may be disruptive to our operations and detrimental to our future outlook. The loss of the services


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of any of our key employees or our inability to attract and retain new talent could hinder or delay the implementation of our business model and the development and introduction of, and negatively impact our ability to sell, our services.

Our stock price has been, and may continue to be, volatile, and your investment could lose value.

The market price of our common stock has been volatile. Trading prices may continue to fluctuate in response to a number of events and factors, including the following:

quarterly variations in operating results;
announcements by our customers related to their businesses that could be viewed as impacting their usage of our solutions;
market speculation about whether we are a takeover target;
activism by any single large stockholder or combination of stockholders;
changes in financial estimates and recommendations by securities analysts;
failure to meet the expectations of securities analysts;
purchases or sales of our stock by our officers and directors;
macro-economic factors;
repurchases of shares of our common stock;
successful cyber-attacks against our network or systems;
performance by other companies in our industry; and
geopolitical conditions such as acts of terrorism or military conflicts.

Furthermore, our revenue, particularly that portion attributable to usage of our services beyond customer commitments, can be difficult to forecast, and, as a result, our quarterly operating results can fluctuate substantially. This concern is particularly acute with respect to our media and commerce customers for which holiday sales are a key but unpredictable driver of usage of our services. In the future, our customer contracting models may change to move away from a committed revenue structure to a "pay-as-you-go" approach. The absence of a minimum revenue commitment would make it easier for customers to stop doing business with us, which would create additional challenges with our forecasting processes. Because a significant portion of our cost structure is largely fixed in the short-term, revenue shortfalls tend to have a disproportionately negative impact on our profitability. If we announce revenue or profitability results that do not meet or exceed our guidance or make changes in our guidance with respect to future operating results, our stock price may decrease significantly as a result.

Any of these events, as well as other circumstances discussed in these Risk Factors, may cause the price of our common stock to fall. In addition, the stock market in general, and the market prices of stock of publicly-traded technology companies in particular, have experienced significant volatility that often has been unrelated to the operating performance of such companies. These broad stock market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

We face risks associated with global operations that could harm our business.

We have operations in numerous foreign countries and may continue to expand our operations internationally. Such expansion could require us to make significant expenditures, which could harm our profitability. We are increasingly subject to a number of risks associated with international business activities that may increase our costs, make our operations less efficient and require significant management attention. These risks include:

currency exchange rate fluctuations and limitations on the repatriation and investment of funds;
difficulties in transferring funds from, or converting currencies in, certain countries;
regulations related to security requirements, data localization or restricting content that could pose risks to our intellectual property, increase the cost of doing business in a country or create other disadvantages to our business;
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;
uncertainty regarding liability for content or services;
adjusting to different employee/employer relationships and different regulations governing such relationships;
corporate and personal liability for alleged or actual violations of laws and regulations;
difficulty in staffing, developing and managing foreign operations as a result of distance, language and cultural differences;
reliance on channel partners over which we have limited control or influence on a day-to-day basis; and
potentially adverse tax consequences.



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Geo-political events such as the United Kingdom's vote in June 2016 to withdraw from the European Union, commonly referred to as Brexit, may increase the likelihood of certain of these risks materializing or heighten their impact on us in affected regions. In particular, it is possible that the level of economic activity in the United Kingdom and the rest of Europe will be adversely impacted and that we will face increased regulatory and legal complexities, including those related to tax, trade, security and employees as a result of Brexit. Such changes could be costly and potentially disruptive to our operations and business relationships in affected markets.

In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous, rapidly-changing and sometimes conflicting laws and regulations include internal control and disclosure rules, data privacy and filtering requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, or FCPA, the UK Bribery Act and local laws prohibiting corrupt payments to governmental officials, and antitrust and competition regulations, among others. Violations of these laws and regulations by our employees or partners could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our global operations, any international expansion efforts, our ability to attract and retain employees, our business, and our financial statements. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies or applicable laws.

We entered into a Non-Prosecution Agreement with the Commission in June 2016 in connection with the previously-disclosed investigation relating to sales practices in a country outside the U.S. In the event we violate the terms of this Non- Prosecution Agreement, we could be subject to additional investigation or enforcement by the Commission or the Department of Justice. In addition, whether by virtue of disclosure of the Non-Prosecution Agreement or otherwise, we may be subject to investigations by foreign governments. Any such investigations or enforcement actions could have a material adverse effect on us.

Defects or disruptions in our services could diminish demand for our solutions or subject us to substantial liability.

Our services are highly complex and are designed to be deployed in and across numerous large and complex networks that we do not control. From time to time, we have needed to correct errors and defects in the software that underlies our services and platform that have given rise to service incidents. We have also experienced customer dissatisfaction with the quality of some of our media delivery and other services, which has led to loss of business and could lead to loss of customers in the future. There may be additional errors and defects in our software that may adversely affect our operations. We may not have in place adequate quality assurance procedures to ensure that we detect errors in our software in a timely manner, and we may have insufficient resources to efficiently cope with multiple service incidents happening simultaneously or in rapid succession. If we are unable to efficiently and cost-effectively fix errors or other problems that may be identified and improve the quality of our services, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenue and market share, damage to our reputation, increased expenses, delayed payments and legal actions by our customers.

Government regulation is evolving, and unfavorable changes could harm our business.

Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. In particular, domestic and foreign government attempts to regulate the operation of the Internet could negatively impact our business. While regulations recently adopted by the U.S. Federal Communications Commission that govern certain aspects of the operation of the Internet (such as content blocking and throttling and paid prioritization) do not apply to content delivery network providers like us, there is no guarantee that future regulatory and legislative initiatives or changes, including as a result of the election of the new U.S. presidential administration, will not impact our business. In particular, it is difficult to predict how the regulatory environment in the U.S. will change as a result of the new presidential administration or whether any changes will have an adverse or favorable impact on our business.

Increasing regulatory focus on privacy issues and expanding laws and regulations could expose us to increased liability.

Privacy laws, including the new European Union General Data Protection Regulation, are rapidly changing and evolving globally. Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. New laws and industry self-regulatory codes have been enacted and more are being considered that may affect our ability to reach current and prospective customers, to understand how our products and services are being used, to respond to customer requests allowed under the laws, and how we use data generated from our network. Any perception that our business practices, data collection activities or how our services operate represent an invasion of privacy, whether or not consistent with current regulations and industry practices, may subject us to public criticism (or


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boycotts), class action lawsuits, reputational harm or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability.
In the past we have relied on the U.S.-European Union and the U.S.-Swiss Safe Harbor Frameworks, as agreed to by the U.S. Department of Commerce and the European Union and Switzerland as a means to legally transfer covered personal data from Europe to the United States. However, on October 6, 2015, the European Court of Justice invalidated the U.S.-European Union Safe Harbor Framework and Swiss data protection authorities later invalidated the U.S.-Swiss Safe Harbor Framework. As a result, we have been establishing alternate legitimate means of transferring covered personal data from the European Economic Area to the United States, including the new Privacy Shield framework. The legitimacy of these alternate means are subject to ongoing judicial challenge and review in the European Union. Any changing or new requirements or rulings by the European Union or member jurisdictions may impact our services or subject us to sanctions, including fines and a prohibition on data transfers, by EU data protection regulators. Furthermore, the European Court of Justice’s decision may result in different European data protection regulators applying differing standards for the transfer of personal data, which could result in increased regulation, cost of compliance and limitations on data transfer for us and our customers. These developments could harm our business, financial condition and results of operations.
We also have a publicly-available privacy policy concerning our collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policy could result in damage to our reputation or proceedings or actions against us, which could potentially have an adverse effect on our business.

Fluctuations in foreign currency exchange rates affect our operating results in U.S. dollar terms.

An increasing portion of our revenue is derived from international operations. Revenue generated and expenses incurred by our international subsidiaries are often denominated in the currencies of the local countries. As a result, our consolidated U.S. dollar financial statements are subject to fluctuations due to changes in exchange rates as the financial results of our international subsidiaries are translated from local currencies into U.S. dollars. In addition, our financial results are subject to changes in exchange rates that impact the settlement of transactions in non-functional currencies. While we have implemented a foreign currency hedging program to mitigate transactional exposures, there is no guarantee that such program will be effective.

We may need to defend against patent or copyright infringement claims, which would cause us to incur substantial costs or limit our ability to use certain technologies in the future.

As we expand our business and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement and other claims, including those that may arise under international laws. In many cases, we have agreed to indemnify our customers and channel and strategic partners if our services infringe or misappropriate specified intellectual property rights; therefore, we could become involved in litigation or claims brought against customers or channel or strategic partners if our services or technology are the subject of such allegations. Any litigation or claims, whether or not valid, brought against us or pursuant to which we indemnify our customers or channel or strategic partners 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 features, functionalities, products or services that incorporate the challenged intellectual property;
pay substantial damages and incur significant litigation expenses;
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.

If we are forced to take any of these actions, our business may be seriously harmed.

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 contractual restrictions on disclosure to protect our intellectual property rights. These legal protections afford only limited protection. We have previously brought lawsuits against entities that we believed were infringing our intellectual property rights but have not always prevailed. Such lawsuits can be expensive and require a significant amount of attention from our management and technical personnel, and the outcomes are unpredictable. Monitoring unauthorized use of our services is difficult, and we cannot be certain that the steps we have taken or will take will prevent unauthorized use of our technology. We have licensed technology from the Massachusetts Institute of Technology that is covered by various patents and copyrights relating to Internet content delivery technology. Some


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of our core technology is based in part on the technology covered by these patents, patent applications and copyrights. These patents are scheduled to expire beginning in 2018. As the patents expire, we will no longer have the right to exclude others from practicing the technologies covered by them. 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. If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced. 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. Such licenses may also be non-exclusive, meaning our competition may also be able to access such technology.

We rely on certain “open-source” software the use of which could result in our having to distribute our proprietary software, including our source code, to third parties on unfavorable terms, which could materially affect our business.

Certain of our service offerings use software that is subject to open-source licenses. Open-source code is software that is freely accessible, usable and modifiable. Open-source software may have security flaws and other deficiencies that could make our solutions less reliable and damage our business. Certain open-source code is governed by license agreements, the terms of which could require users of such software to make any derivative works of the software available to others on unfavorable terms or at no cost. Because we use open-source code, we may be required to take remedial action in order to protect our proprietary software. Such action could include replacing certain source code used in our software, discontinuing certain of our products or taking other actions that could be expensive and divert resources away from our development efforts. In addition, the terms relating to disclosure of derivative works in many open-source licenses are unclear. If a court interprets one or more such open-source licenses in a manner that is unfavorable to us, we could be required to make certain of our key software available at no cost.

We may be unsuccessful at developing and maintaining strategic relationships with third parties that expand our distribution channels and increase revenue, which could significantly limit our long-term growth.

Our future success will likely require us to maintain and increase the number and depth of our relationships with resellers, systems integrators, product makers and other strategic partners and to leverage those relationships to expand our distribution channels and increase revenue. If we become reliant on a small number of large partners, any termination of our relationship with one of them could have an adverse impact on our financial condition. The need to develop such relationships can be particularly acute in areas outside of the U.S. We have not always been successful at developing these relationships due to the complexity of our services, our historical reliance on an internal sales force and other factors. Recruiting and retaining qualified channel partners and training them in the use of our technology and services and ensuring that they are compliant with our ethical expectations requires significant time and resources. In order to develop and expand our distribution channel, we must continue to expand and improve our portfolio of solutions as well as the systems, processes and procedures that support our channels. Those systems, processes and procedures may become increasingly complex and difficult to manage. The time and expense required for the sales and marketing organizations of our channel partners to become familiar with our offerings, including our new services developments, may make it more difficult to introduce those products to enterprises. Our failure to maintain and increase the number and quality of relationships with channel partners, and any inability to successfully execute on the partnerships we initiate, could significantly impede our revenue growth prospects in the short and long term.

If the accounting 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 U.S. The preparation of these financial statements requires us to make estimates and judgments about, among other things, taxes, revenue recognition, stock-based compensation costs, capitalization of internal-use software development costs, investments, contingent obligations, allowance for doubtful accounts, intangible assets and restructuring charges. These estimates and judgments affect, among other things, the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, 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 and at the time they are made. If our estimates or the assumptions underlying them are not correct, actual results may differ materially from our estimates and we may need to, among other things, accrue additional charges that could adversely affect our results of operations, which in turn could adversely affect our stock price. In addition, new accounting pronouncements and interpretations of accounting pronouncements have occurred and may occur in the future that could adversely affect our reported financial results.



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We may have exposure to greater-than-anticipated tax liabilities.

Our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items such as equity-related compensation. We have recorded certain tax reserves to address potential exposures involving our income tax and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different jurisdictions. We are currently subject to tax audits in various jurisdictions including the Commonwealth of Massachusetts. If the outcome of such audit or other audits were to be adverse to us, our reserves may not be adequate to cover our total actual liability. Although we believe our estimates, our reserves and the positions we have taken are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.

We have complied with Section 404 of the Sarbanes-Oxley Act of 2002 by assessing, strengthening and testing our system of internal controls. Even though we concluded our internal control over financial reporting and disclosure controls and procedures were effective as of the end of the period covered by this report, we need to continue to maintain our processes and systems and adapt them to changes as our business evolves and we rearrange management responsibilities and reorganize our business. This continuous process of maintaining and adapting our internal controls and complying with Section 404 is expensive and time-consuming and requires significant management attention. We cannot be certain that our internal control measures will continue to provide adequate control over our financial processes and reporting and ensure compliance with Section 404. Furthermore, as our business changes, including by expanding our operations in different markets, increasing reliance on channel partners and completing acquisitions, our internal controls may become more complex and we will require significantly more resources to ensure our internal controls remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm identify material weaknesses, the disclosure of that fact, even if quickly remediated, could reduce the market's confidence in our financial statements and harm our stock price.

Any failure to meet our debt obligations would damage our business.

As of December 31, 2016, we had total par value of $690.0 million of convertible senior notes outstanding. Our ability to refinance the notes, make cash payments in connection with conversions of the notes or repurchase the notes in the event of a fundamental change (as defined in the indenture governing the notes) will depend on market conditions and our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We also may not use the cash we have raised through the issuance of the convertible senior notes in an optimally productive and profitable manner. If we are unable to remain profitable or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our 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 additional capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make cash payments upon conversion of the notes, we would be required to issue significant amounts of our common stock, which would be dilutive to the stock of existing stockholders. If we do not have sufficient cash to repurchase the notes following a fundamental change, we would be in default under the terms of the notes, which could seriously harm our business. In addition, the terms of the notes do not limit the amount of future indebtedness we may incur. If we incur significantly more debt, this could intensify the risks described above.



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We may issue additional shares of our common stock or instruments convertible into shares of our common stock and thereby materially and adversely affect the market price of our common stock.

Our Board of Directors has the authority to issue additional shares of our common stock or other instruments convertible into, or exchangeable or exercisable for, shares of our common stock. If we issue additional shares of our common stock or instruments convertible into, or exchangeable or exercisable for, shares of our common stock, it may materially and adversely affect the market price of our common stock.

Our sales to government clients subject us to risks including early termination, audits, investigations, sanctions and penalties.

We have customer contracts with the U.S. government, as well as foreign, state and local governments and their respective agencies. Such government entities often have the right to terminate these contracts at any time, without cause. There is increased pressure for governments and their agencies, both domestically and internationally, to reduce spending. Most of our government contracts are subject to legislative approval of appropriations to fund the expenditures under these contracts. These factors combine to potentially limit the revenue we derive from government contracts in the future. Additionally, government contracts generally have requirements that are more complex than those found in commercial enterprise agreements and therefore are more costly to comply with. Such contracts are also subject to audits and investigations that could result in civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.

We may become involved in litigation that may adversely impact our business.

From time to time, we are or may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. In addition, under our charter, we could be required to indemnify and advance expenses to our directors and officers in connection with their involvement in certain actions, suits, investigations and other proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses.

We are currently involved in litigation with one of our competitors, Limelight Networks, Inc., or Limelight, involving claims for patent infringement. Limelight has asserted that it is entitled to significant damages. While we challenge the basis of the underlying claims and amount of such assertions, if such action were to be decided against our favor and a court were to award Limelight significant damages, our business and financial condition would be adversely impacted.

Furthermore, because litigation is inherently unpredictable and may not be covered by insurance, there can be no assurance that the results of the Limelight litigation or any of these other matters will not have an adverse impact on our business, results of operations, financial condition or cash flows.

General global market and economic conditions may have an adverse impact on our operating performance, results of operations and cash flows.

Our business has been and could continue to be affected by general global economic and market conditions. To the extent economic conditions impair our customers' ability to profitably monetize the content we deliver on their behalf, they may reduce or eliminate the traffic we deliver for them. Such reductions in traffic would lead to a reduction in our revenue. Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, a slow down in commerce over the Internet and corresponding decrease in traffic delivered over our network and failures by customers to pay amounts owed to us on a timely basis or at all. Suppliers on which we rely for servers, bandwidth, co-location and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our operations or expenses. There can be no assurance, therefore, that current economic conditions or worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our operating results.



20


Global climate change and natural resource conservation regulations could adversely impact our business.

Our deployed network of servers consumes significant energy resources, including those generated by the burning of fossil fuels. In response to concerns about global climate change, governments may adopt new regulations affecting the use of fossil fuels or requiring the use of alternative fuel sources. In addition, our customers, investors and other stakeholders may require us to take steps to demonstrate that we are taking ecologically responsible measures in operating our business. The costs and any expenses we incur to make our network more energy efficient could make us less profitable in future periods. Failure to comply with applicable laws and regulations or other requirements imposed on us could lead to fines, lost revenue and damage to our reputation.

Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We currently intend to retain our future earnings, if any, for use in the operation of our business and do not expect to pay any cash dividends in the foreseeable future on our common stock. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Provisions of our charter, by-laws 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 charter, by-laws and Delaware law could make it more difficult for a third party to control or acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

a classified board structure so that only approximately one-third of our Board of Directors is up for re-election in any one year;
our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director;
stockholders must provide advance notice to nominate individuals for election to the Board of Directors or to propose matters that can be acted upon at a stockholders' meeting; and
our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock.

Further, as a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease approximately 490,000 square feet of property in Cambridge, Massachusetts where our primary corporate offices are located. The majority of the leases for such space are scheduled to expire in December 2019, and of this space, we have subleased approximately 18,000 square feet to another company. In November 2016, we executed a lease for new headquarters space in Cambridge, Massachusetts. The lease is for approximately 480,000 square feet and is expected to commence at the termination of our current leases in Cambridge. The initial lease term is 15 years. In addition to the new lease, we also executed an arrangement obligating us to lease at least 150,000 square feet of additional space in Cambridge.



21


We also maintain offices in several other locations in the United States, including in or near each of Phoenix, Arizona; Los Angeles, San Francisco, Santa Clara and San Diego, California; Denver, Colorado; Washington, D.C.; Fort Lauderdale, Florida; Atlanta, Georgia; Chicago, Illinois; Westford, Massachusetts; Manchester, New Hampshire; New York, New York; Dallas, Texas; Reston, Virginia and Seattle, Washington. Outside the United States we maintain offices in or near the following cities: Bangalore, Chennai, Delhi and Mumbai, India; Beijing, Hong Kong, Shenzhen, and Shanghai, China; Sao Paulo, Brazil; Copenhagen, Denmark; Dortmund, Hamburg, Frankfurt and Munich, Germany; Paris, France; Brussels, Belgium; London, England; Tokyo, Fukuoka, Nagoya and Osaka, Japan; Singapore; Madrid, Spain; Sydney, Melbourne and Canberra, Australia; Herziliya, Israel; Edinburgh, Scotland; Ottawa and Toronto, Canada; San Jose, Costa Rica; Milan, Italy; Stockholm, Sweden; Seoul, South Korea; Geneva and Zurich, Switzerland; Kuala Lumpur, Malaysia; Taipei, Taiwan; Amsterdam, the Netherlands; Prague, Czech Republic; Dubai, UAE; Istanbul, Turkey; and Krakow, Poland.

All of our facilities are leased. We believe our facilities are sufficient to meet our needs for the foreseeable future and, if needed, additional space will be available at a reasonable cost.

Item 3. Legal Proceedings

We are party to litigation that we consider routine and incidental to our business. We do not currently expect the results of any of these litigation matters to have a material effect on our business, results of operations, financial condition or cash flows.

In November 2015, Limelight filed a complaint in the U.S. District Court for the Eastern District of Virginia against Akamai and XO Communications LLC, or XO, alleging patent infringement by the two companies.  The complaint alleges that Akamai and XO infringed six of Limelight’s content delivery patents.  The complaint seeks to recover from Akamai and XO significant monetary damages based upon lost revenue due to infringing technology used by the companies. We have agreed to indemnify XO for damages it incurs in this matter.  We have made counterclaims in the action against Limelight alleging that Limelight has infringed five Akamai content delivery patents, and we are seeking monetary damages based upon lost revenue due to the infringing technology used by Limelight.  The case is scheduled for trial in May 2017.  We currently believe that the outcome of this litigation will not have a material impact on our business.

Item 4. Mine Safety Disclosures

Not applicable.



22


PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, par value $0.01 per share, trades under the symbol “AKAM” on the NASDAQ Global Select Market. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock on the NASDAQ Global Select Market:
 
 
2016
 
2015
 
High
 
Low
 
High
 
Low
First quarter
$
57.05

 
$
39.43

 
$
73.53

 
$
56.85

Second quarter
$
57.50

 
$
48.88

 
$
78.44

 
$
69.13

Third quarter
$
58.47

 
$
47.80

 
$
76.98

 
$
63.14

Fourth quarter
$
71.04

 
$
52.63

 
$
76.39

 
$
50.56


As of February 22, 2017, there were 409 holders of record of our common stock.

We have never paid or declared any cash dividends on shares of our common stock or other securities and do not anticipate paying or declaring any cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation of our business.

Issuer Purchases of Equity Securities

The following is a summary of our repurchases of our common stock in the fourth quarter of 2016 (in thousands, except share and per share data):
 
Period(1)
 
Total Number of Shares Purchased(2)
 
Average Price Paid per Share(3)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(4)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs(4)
October 1, 2016 – October 31, 2016
 
558,379

 
$
55.38

 
558,379

 
$
742,507

November 1, 2016 – November 30, 2016
 
352,708

 
66.84

 
352,708

 
718,932

December 1, 2016 – December 31, 2016
 
368,440

 
66.31

 
368,440

 
694,501

Total
 
1,279,527

 
$
61.68

 
1,279,527

 
$
694,501


(1)
Information is based on settlement dates of repurchase transactions.
(2)
Consists of shares of our common stock, par value $0.01 per share. All repurchases were made pursuant to a previously-announced program.
(3)
Includes commissions paid.
(4)
In October 2013, the Board of Directors authorized a $750.0 million share repurchase program, effective from October 2013 through December 2016. In February 2016, the Board of Directors authorized a $1.0 billion share repurchase program that superseded the October 2013 repurchase program and is effective from February 2016 through December 2018.

During the year ended December 31, 2016, we repurchased 7.0 million shares of our common stock for an aggregate of $373.8 million.



23


Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this annual report on Form 10-K. The consolidated statements of income and balance sheet data for all periods presented is derived from the audited consolidated financial statements included elsewhere in this annual report on Form 10-K or in prior year annual reports on Form 10-K on file with the Commission.

The following table sets forth selected financial data for the last five fiscal years (in thousands, except per share data):

Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Revenue
 
$
2,340,049

 
$
2,197,448

 
$
1,963,874

 
$
1,577,922

 
$
1,373,947

Total costs and operating expenses
 
1,880,455

 
1,731,298

 
1,474,355

 
1,163,954

 
1,059,460

Income from operations
 
459,594

 
466,150

 
489,519

 
413,968

 
314,487

Net income
 
316,132

 
321,406

 
333,948

 
293,487

 
203,989

Basic net income per share
 
1.81

 
1.80

 
1.87

 
1.65

 
1.15

Diluted net income per share
 
1.79

 
1.78

 
1.84

 
1.61

 
1.12

Cash, cash equivalents and marketable securities
 
1,616,329

 
1,524,235

 
1,628,284

 
1,246,922

 
1,095,240

Total assets
 
4,373,146

 
4,181,684

 
4,001,546

 
2,957,685

 
2,600,627

Convertible senior notes
 
640,087

 
624,288

 
604,851

 

 

Other long-term liabilities
 
134,101

 
110,319

 
117,349

 
65,088

 
51,929

Total stockholders’ equity
 
3,224,370

 
3,120,878

 
2,945,335

 
2,629,431

 
2,345,754


The following items impact the comparability of the consolidated financial data presented above:

During the years presented in the table above, various acquisitions occurred, the results of which are presented prospectively from the date of acquisition. See Note 8 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for more details regarding these acquisitions.

Effective January 1, 2013, we increased the expected average useful lives of our network assets, primarily servers, from three to four years to reflect software and hardware related initiatives to manage our global network more efficiently. For the years ended December 31, 2016, 2015, 2014 and 2013, this change decreased depreciation expense on network assets as compared to the year ended December 31, 2012. The change increased net income and both basic and diluted net income per share for the years ended December 31, 2016, 2015, 2014 and 2013 as compared to the year ended December 31, 2012.


24


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this annual report on Form 10-K. See “Risk Factors” elsewhere in this annual report on Form 10-K for a discussion of certain risks associated with our business. The following discussion contains forward-looking statements. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof.

Overview

We provide cloud services for delivering, optimizing and securing content and business applications over the Internet. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our performance and security offerings, increase media traffic on our network, develop new products and carefully manage our capital spending and other expenses.

Revenue

For most of our solutions, our customers commit to contracts having terms of a year or longer, which allows us to have a consistent and predictable base level of revenue. In addition to a base level of revenue, we are also dependent on media customers where usage of our services is more variable. As a result, our revenue is impacted by the amount of media and software download traffic we serve on our network, the rate of adoption of social media and video platform capabilities, the timing and variability of customer-specific one-time events and the impact of seasonal variations on our business. The ability to expand our product portfolio and to maintain the prices we charge for our services are also key factors impacting our revenue growth.

We have observed the following trends related to our revenue in recent years:

Increased sales of our security solutions have made a significant contribution to revenue growth, and we expect to continue our focus on security solutions in the future.

We have experienced increases in the amount of traffic delivered for customers that use our solutions for video, gaming, social media and software downloads, contributing to an increase in our revenue. However, from the second half of 2015 onward, our traffic growth rates have moderated, primarily due to the “do-it-yourself” efforts by some of our customers that are among the large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix. We refer to these companies as our Internet Platform Customers. Some of these customers have elected to develop and rely on their internal infrastructure to deliver more of their media content themselves rather than use our services. As a result, we are likely to continue experiencing lower revenue from these customers. We have not, however, been experiencing a significant shift to internal infrastructure usage across the remainder of our media services customer base.

We have increased committed recurring revenue from our solutions by increasing sales of incremental services to our existing customers and adding new customers. These increases helped to limit the impact of reductions in usage of our services and contract terminations by certain customers, as well as the effect of price decreases negotiated as part of contract renewals.

The unit prices paid by some of our customers have declined, reflecting the impact of competition. Our revenue would have been higher absent these price declines.

We have experienced variations in certain types of revenue from quarter to quarter. In particular, we experience higher revenue in the fourth quarter of the year for some of our solutions as a result of holiday season activity. We also experience lower revenue in the summer months, particularly in Europe, from both e-commerce and media customers because overall Internet use declines during that time. In addition, we experience quarterly variations in revenue attributable to, among other things, the nature and timing of software and gaming releases by our customers using our software download solutions; whether there are large live sporting or other events that increase the amount of media traffic on our network; and the frequency and timing of purchases of custom services.


25


Expenses

Our level of profitability is also impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs. We have observed the following trends related to our profitability in recent years:

Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels and serving more traffic from higher cost regions. We will need to continue to effectively manage our bandwidth costs to maintain current levels of profitability.

Co-location costs are also a significant portion of our cost of revenue. By improving our internal-use software and managing our hardware deployments to enable us to use servers more efficiently, we have been able to manage the growth of co-location costs. We expect to continue to scale our network in the future and will need to continue to effectively manage our co-location costs to maintain current levels of profitability.

Due to the fixed nature of some of our co-location and bandwidth costs over a minimum time period, it may not be possible to quickly reduce those costs. If our revenue growth rate declines, our profitability could decrease.

Payroll and related compensation costs have grown as we have increased headcount to support our revenue growth and strategic initiatives. We increased our headcount by 406 employees during the year ended December 31, 2016. During the year ended December 31, 2015, we increased our headcount by 979 employees. We expect to continue to hire additional employees, both domestically and internationally, in support of our strategic initiatives.

Fluctuations in foreign currency exchange rates have also impacted our reported results. Revenue and expenses of our operations outside of the U.S. are important contributors to our overall financial performance, and as currencies have weakened against the U.S. dollar, our revenue has been negatively impacted and our expenses have been positively impacted. If foreign currency exchange rates during the year ended December 31, 2016 had remained the same as exchange rates during the year ended December 31, 2015, our revenue would have increased by 7% as opposed to 6%. Conversely, diluted earnings per share would have decreased by 1% as opposed to increasing by 1%. If foreign currency exchange rates during the year ended December 31, 2015 had remained the same as exchange rates during the year ended December 31, 2014, our revenue would have increased by 16% as opposed to 12%. Similarly, diluted earnings per share would have increased by 2% as opposed to decreasing 3% had exchange rates remained constant during the same period.

In recent years, we have used strategic acquisitions to complement and augment existing technological capabilities. During 2016, 2015 and 2014 we completed various acquisitions which were immaterial to our financial results as a whole during those years, but have contributed to increases in our revenue and level of expenses. Also in February 2014, we completed an offering of $690.0 million in par value of convertible senior notes. The notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature.
 


26


Results of Operations

The following sets forth, as a percentage of revenue, consolidated statements of income data for the years indicated: 

 
2016
 
2015
 
2014
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and operating expenses:
 
 
 
 
 
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
34.6

 
33.0

 
31.1

Research and development
7.2

 
6.8

 
6.4

Sales and marketing
18.2

 
20.1

 
19.3

General and administrative
18.8

 
17.7

 
16.6

Amortization of acquired intangible assets
1.1

 
1.2

 
1.6

Restructuring charges
0.4

 

 
0.1

Total costs and operating expenses
80.3

 
78.8

 
75.1

Income from operations
19.7

 
21.2

 
24.9

Interest income
0.6

 
0.5

 
0.4

Interest expense
(0.8
)
 
(0.8
)
 
(0.8
)
Other income (expense), net
0.2

 
(0.1
)
 
(0.1
)
Income before provision for income taxes
19.7

 
20.8

 
24.4

Provision for income taxes
6.1

 
6.2

 
7.4

Net income
13.6
 %
 
14.6
 %
 
17.0
 %

Revenue

Revenue during the periods presented is as follows (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
 
2015
 
2014
 
% Change
 
% Change at Constant Currency
Revenue
$
2,340,049

 
$
2,197,448

 
6.5
%
 
6.6
%
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

The increase in our revenue from 2015 to 2016 was primarily the result of continued strong growth from our Cloud Security Solutions, which grew 43%. Our web performance solutions also contributed to our revenue growth in 2016. Our overall revenue growth rate was lower than it has been in the past, primarily due to the "do-it-yourself" efforts of our Internet Platform Customers, some of which have developed internal infrastructure to deliver more of their media content themselves rather than rely on our media services. Revenue from these six customers (Amazon, Apple, Facebook, Google, Microsoft and Netflix) in the aggregate was $250.4 million and $379.3 million for the years ended December 31, 2016 and 2015, respectively.
 
The increase in our revenue from 2014 to 2015 was driven by higher demand for our services across all of our solutions and geographies, with particularly strong growth from our Cloud Security Solutions. Revenue from our Internet Platform Customers was $379.3 million and $358.9 million for the years ended December 31, 2015 and 2014, respectively.












27


The following table quantifies the contribution to revenue from our solution categories for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
 
2015
 
2014
 
% Change
 
% Change at Constant Currency
Performance and Security Solutions
$
1,355,030

 
$
1,158,281

 
17.0
 %
 
17.3
 %
 
$
1,158,281

 
$
1,003,573

 
15.4
%
 
19.0
%
Media Delivery Solutions
787,179

 
868,820

 
(9.4
)
 
(9.6
)
 
868,820

 
813,066

 
6.9

 
10.5

Services and Support Solutions
197,840

 
170,347

 
16.1

 
16.0

 
170,347

 
147,235

 
15.7

 
19.8

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
 %
 
6.6
 %
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

The increases in Performance and Security Solutions revenue for 2016 as compared to 2015, and 2015 as compared to 2014, were due to increased demand across all major product lines, with especially strong growth in our Cloud Security Solutions. Cloud Security Solutions revenue for the year ended December 31, 2016 was $364.9 million, as compared to $254.4 million and $170.0 million for the years ended December 31, 2015 and 2014, respectively.

The decrease in Media Delivery Solutions revenue for 2016 as compared to 2015 was primarily the result of decreased traffic from our Internet Platform Customers, resulting from their "do-it-yourself" efforts in delivering their content. Our Media Delivery Solutions for other customers revenue grew by 8%. The increase in Media Delivery Solutions revenue for 2015 as compared to 2014 was due to higher demand across most of our customer base.

The increases in Services and Support Solutions revenue for 2016 as compared to 2015, and 2015 as compared to 2014, were due to strong new customer attachment rates for our professional services as well as purchases of upgrades to services by our existing customers.

As a result of our 2016 reorganization, our sales, marketing and product development functions are now organized into three divisions. The following table quantifies the contribution to revenue during the periods presented from the customers in each division (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
 
2015
 
2014
 
% Change
 
% Change at Constant Currency
Media Division
$
1,165,281

 
$
1,187,732

 
(1.9
)%
 
(1.8
)%
 
$
1,187,732

 
$
1,109,781

 
7.0
%
 
10.3
%
Web Division
1,120,001

 
968,584

 
15.6

 
15.7

 
968,584

 
824,302

 
17.5

 
21.7

Enterprise and Carrier Division
54,767

 
41,132

 
33.1

 
33.1

 
41,132

 
29,791

 
38.1

 
39.4

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
 %
 
6.6
 %
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

The decline in the year-over-year revenue growth rate in Media Division revenue in 2016 as compared to 2015 and the relatively small revenue improvement in 2015 over 2014 was the result of decreased traffic from our Internet Platform Customers. The year-over-year revenue growth rate for our other customers was 13% and 8% for the years ended December 31, 2016 and 2015, respectively.



28


The increase in Web Division revenue for 2016 as compared to 2015 was due to growth in this customer base, particularly with our Cloud Security Solutions. The increase in Web Division revenue in 2015 as compared to 2014 was due to strong demand across most of our customer base particularly for our Cloud Security Solutions, including from our largest, most strategic customers.

The following table quantifies revenue derived in the U.S. and internationally (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
 
2015
 
2014
 
% Change
 
% Change at Constant Currency
U.S.
$
1,620,021

 
$
1,604,492

 
1.0
%
 
1.0
%
 
$
1,604,492

 
$
1,429,063

 
12.3
%
 
12.3
%
International
720,028

 
592,956

 
21.4

 
21.6

 
592,956

 
534,811

 
10.9

 
24.3

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
%
 
6.6
%
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

The reduced revenue from our Internet Platform Customers negatively impacted our U.S. revenue growth rates for the year ended December 31, 2016, as these customers are based in the U.S. For the year ended December 31, 2016, approximately 31%, of our revenue was derived from our operations located outside of the U.S., compared to 27% for each of the years ended December 31, 2015 and 2014. No single country outside of the U.S. accounted for 10% or more of revenue during any of these periods.

During 2016, we continued to see strong revenue growth from our operations in the Asia Pacific region. Changes in foreign currency exchange rates negatively impacted our revenue by $1.0 million in 2016 as compared to 2015, and negatively by $71.7 million in 2015 as compared to 2014.

Cost of Revenue

Cost of revenue consisted of the following for the periods presented (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Bandwidth fees
$
168,202

 
$
150,607

 
11.7
%
 
$
150,607

 
$
124,470

 
21.0
%
Co-location fees
129,904

 
125,983

 
3.1

 
125,983

 
113,661

 
10.8

Network build-out and supporting services
61,320

 
58,207

 
5.3

 
58,207

 
42,114

 
38.2

Payroll and related costs
189,409

 
158,742

 
19.3

 
158,742

 
143,468

 
10.6

Stock-based compensation, including amortization of prior capitalized amounts
31,145

 
26,222

 
18.8

 
26,222

 
21,866

 
19.9

Depreciation of network equipment
140,777

 
130,098

 
8.2

 
130,098

 
107,250

 
21.3

Amortization of internal-use software
88,244

 
75,761

 
16.5

 
75,761

 
58,114

 
30.4

Total cost of revenue
$
809,001

 
$
725,620

 
11.5
%
 
$
725,620

 
$
610,943

 
18.8
%
As a percentage of revenue
34.6
%
 
33.0
%
 
 
 
33.0
%
 
31.1
%
 
 

The increase in total cost of revenue for 2016 as compared to 2015 was primarily due to increases in:

amounts paid to network providers for bandwidth fees to support the increase in traffic served on our network and for traffic served from higher cost regions;
payroll and related costs, as well as stock-based compensation, due to more hiring in our services to support revenue growth; and
depreciation of network equipment and amortization of internal-use software as we continued to invest in our infrastructure and release internally-developed software onto our network.



29


The increase in total cost of revenue for 2015 as compared to 2014 was primarily due to increases in:

amounts paid to network providers for bandwidth fees to support the increase in traffic served on our network;
amounts paid for network build-out and supporting services related to the increase in server deployments and investments in network expansion;
payroll and related costs of service personnel due to more hiring in our services and network operations organizations to support revenue growth; and
depreciation of network equipment and amortization of internal-use software as we continued to invest in our infrastructure and release internally developed software onto our network.

We have long-term purchase commitments for co-location services and bandwidth usage with various vendors and network and Internet service providers. Our minimum commitments related to bandwidth usage and co-location services may vary from period to period depending on the timing and length of contract renewals with our service providers. See Note 11 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for details regarding our bandwidth usage and co-location services purchase commitments.

We believe that cost of revenue will increase during 2017 as compared to 2016 primarily due to higher bandwidth expenses associated with increased customer traffic on our network and the costs of efforts to increase our network's capacity and resiliency to combat potential attacks on our platform. Additionally, during 2017, we anticipate amortization of internal-use software development costs to increase as compared to 2016, along with increased payroll and related costs associated with our professional services personnel and related expenses. We plan to continue making investments in our network with the expectation that our customer base will continue to expand and that we will continue to deliver more traffic to existing customers.

Research and Development Expenses

Research and development expenses consisted of the following for the periods presented (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Payroll and related costs
$
253,351

 
$
220,198

 
15.1
 %
 
$
220,198

 
$
188,509

 
16.8
 %
Stock-based compensation
29,739

 
23,926

 
24.3

 
23,926

 
19,351

 
23.6

Capitalized salaries and related costs
(122,084
)
 
(103,352
)
 
18.1

 
(103,352
)
 
(91,106
)
 
13.4

Other expenses
6,622

 
7,819

 
(15.3
)
 
7,819

 
8,532

 
(8.4
)
Total research and development
$
167,628

 
$
148,591

 
12.8
 %
 
$
148,591

 
$
125,286

 
18.6
 %
As a percentage of revenue
7.2
%
 
6.8
%
 
 
 
6.8
%
 
6.4
%
 
 

The increases in research and development expenses for 2016 as compared to 2015, and 2015 as compared to 2014, were due to increases in payroll and related costs as a result of headcount growth to support investments in new product development and network scaling, partially offset by increases in capitalized salaries and related costs.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. Capitalized development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. For the years ended December 31, 2016, 2015 and 2014, we capitalized $21.4 million, $16.7 million and $13.7 million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, which is generally two years.

We believe that research and development expenses during 2017 will increase as compared to 2016, as we expect to continue to increase the number of development personnel, through hiring or acquisition activity, in order to make improvements to our core technology and support engineering innovation and the development of new services.



30


Sales and Marketing Expenses

Sales and marketing expenses consisted of the following for the periods presented (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Payroll and related costs
$
309,181

 
$
316,845

 
(2.4
)%
 
$
316,845

 
$
264,788

 
19.7
 %
Stock-based compensation
55,407

 
53,542

 
3.5

 
53,542

 
47,571

 
12.6

Marketing programs and related costs
36,904

 
43,990

 
(16.1
)
 
43,990

 
35,833

 
22.8

Other expenses
25,475

 
26,611

 
(4.3
)
 
26,611

 
30,843

 
(13.7
)
Total sales and marketing
$
426,967

 
$
440,988

 
(3.2
)%
 
$
440,988

 
$
379,035

 
16.3
 %
As a percentage of revenue
18.2
%
 
20.1
%
 
 
 
20.1
%
 
19.3
%
 
 

The decrease in sales and marketing expenses for 2016 as compared to 2015 was primarily due to a decrease in performance-based commissions earned and reduced spending on marketing programs and related costs as we moderated discretionary spending to align with our revenue growth rates. The increase in sales and marketing expenses for 2015 as compared to 2014 was primarily due to higher payroll and related costs, as we invested in our sales and marketing organization, as well as additional marketing programs and related costs in support of our go-to-market strategy and ongoing geographic expansion.

We believe that sales and marketing expenses will increase during 2017 as compared to 2016, due to increased payroll and related costs as a result of headcount growth during 2016. We expect headcount growth consistent with historical levels in our sales and marketing organizations in 2017.

General and Administrative Expenses

General and administrative expenses consisted of the following for the periods presented (in thousands):
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Payroll and related costs
$
163,348

 
$
161,660

 
1.0
 %
 
$
161,660

 
$
146,373

 
10.4
 %
Stock-based compensation
41,073

 
35,062

 
17.1

 
35,062

 
33,151

 
5.8

Depreciation and amortization
65,780

 
54,562

 
20.6

 
54,562

 
40,053

 
36.2

Facilities-related costs
72,549

 
64,302

 
12.8

 
64,302

 
52,684

 
22.1

Provision for doubtful accounts
1,235

 
1,717

 
(28.1
)
 
1,717

 
1,229

 
39.7

Acquisition-related costs
1,028

 
1,756

 
(41.5
)
 
1,756

 
3,911

 
(55.1
)
License of patent
(8,577
)
 

 
(100.0
)
 

 

 

Professional fees and other expenses
103,480

 
69,206

 
49.5

 
69,206

 
48,444

 
42.9

Total general and administrative
$
439,916

 
$
388,265

 
13.3
 %
 
$
388,265

 
$
325,845

 
19.2
 %
As a percentage of revenue
18.8
%
 
17.7
%
 
 
 
17.7
%
 
16.6
%
 
 

The increase in total general and administrative expenses for 2016 as compared to 2015 was primarily due to increases in:

legal and other professional fees due to ongoing litigation;
expansion of company infrastructure throughout 2015 and 2016 to support investments in engineering, go-to market
capacity and enterprise expansion initiatives, particularly expansion of our facility footprint, which
increased facilities-related costs and depreciation and amortization; and
stock-based compensation as a result of increased headcount and the impact that changing estimates have on our
performance-based stock-based compensation from period to period.



31


The increase in total general and administrative expenses for 2015 as compared to 2014 was primarily due to increases in:

expansion of company infrastructure throughout 2015 to support investments in engineering, go-to market
capacity and enterprise expansion initiatives, particularly expansion of our general and administrative headcount and our facility footprint, which increased payroll and related costs, facilities-related costs and depreciation and amortization; and
increases in the number of software-as-a-service, or SaaS, solutions that we use, as compared to 2014, which contributed to the increase in professional fees and other expenses, along with increases in legal and other professional consulting fees.

During 2017, we expect general and administrative expenses to increase as compared to 2016, due to anticipated increased payroll and related costs and facilities-related costs. The increase in those expenses is expected to be attributable to increased hiring, investments in information technology and the expansion of our facility footprint to support headcount growth, which occurred throughout 2016 and is expected to continue in 2017.

Amortization of Acquired Intangible Assets

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Amortization of acquired intangible assets
$
26,642

 
$
27,067

 
(1.6
)%
 
$
27,067

 
$
32,057

 
(15.6
)%
As a percentage of revenue
1.1
%
 
1.2
%
 
 
 
1.2
%
 
1.6
%
 
 

The decrease in amortization of acquired intangible assets in 2016, as compared to 2015, was attributable to the finalization of amortization of intangible assets acquired in previous years; partially offset by acquired intangible asset amortization acquired in 2015 and 2016. The decrease in amortization of acquired intangible assets in 2015, as compared to 2014, was driven by the finalization of amortization of intangible assets acquired in earlier years, in addition to the deceleration in recognition of customer backlog-related intangible assets acquired from Prolexic, which had a short useful life.

Based on acquired intangible assets at December 31, 2016, future amortization is expected to be approximately $29.2 million, $26.4 million, $25.0 million, $21.1 million and $16.6 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.

Restructuring Charges

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Restructuring charges
$
10,301

 
$
767

 
1,243.0
%
 
$
767

 
$
1,189

 
(35.5
)%
As a percentage of revenue
0.4
%
 
%
 
 
 
%
 
0.1
%
 
 

The restructuring charges in 2016 were primarily the result of changes to our organizational structure to reorganize our products and development groups and global sales, services and marketing teams into divisions centered on our solutions. The restructuring charges relate to severance expenses for impacted employees and charges for internal-use software not yet placed into service that will not be completed and launched due to changing priorities as part of the reorganization. The restructuring charges in 2015 and 2014 consisted of severance expenses for redundant employees associated with acquisitions completed during those years. We do not expect to continue to incur significant restructuring charges as a result of any of these actions.



32


Non-Operating Income (Expense)

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Interest income
$
14,702

 
$
11,200

 
31.3
%
 
$
11,200

 
$
7,680

 
45.8
%
As a percentage of revenue
0.6
 %
 
0.5
 %
 
 
 
0.5
 %
 
0.4
 %
 
 
Interest expense
$
(18,638
)
 
$
(18,525
)
 
0.6
%
 
$
(18,525
)
 
$
(15,463
)
 
19.8
%
As a percentage of revenue
(0.8
)%
 
(0.8
)%
 
 
 
(0.8
)%
 
(0.8
)%
 

Other income (expense), net
$
3,788

 
$
(2,201
)
 
100.0
%
 
$
(2,201
)
 
$
(1,960
)
 
12.3
%
As a percentage of revenue
0.2
 %
 
(0.1
)%
 
 
 
(0.1
)%
 
(0.1
)%
 
 

For the periods presented, interest income primarily consists of interest earned on invested cash balances and marketable securities, and interest expense consists of the amortization of the debt discount and debt issuance costs related to our convertible senior notes issued in February 2014.

Other income (expense), net for the years ended December 31, 2016, 2015 and 2014 primarily represents net foreign exchange gains and losses mainly due to foreign currency exchange rate fluctuations on intercompany and other non-functional currency transactions. The fluctuation in other income (expense), net for 2016 as compared to 2015 also includes the impact of gains recognized on the disposition of certain cost method investments. Other income (expense), net may fluctuate in the future based on changes in foreign currency exchange rates or other events.

Provision for Income Taxes

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
% Change
 
2015
 
2014
 
% Change
Provision for income taxes
$
143,314

 
$
135,218

 
6.0
%
 
$
135,218

 
$
145,828

 
(7.3
)%
As a percentage of revenue
6.1
%
 
6.2
%
 
 
 
6.2
%
 
7.4
%
 
 
Effective income tax rate
31.2
%
 
29.6
%
 
 
 
29.6
%
 
30.4
%
 
 

For the year ended December 31, 2016, the effective income tax rate was lower than the federal statutory tax rate due to the composition of income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S., the domestic production activities deduction and the U.S. federal, state and foreign research and development credits, partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

For the year ended December 31, 2015, our effective income tax rate was lower than the federal statutory tax rate due to the retroactive application of a U.S. tax court ruling with respect to the treatment of stock-based compensation in intercompany arrangements, the federal research and development credit, the domestic production activities deduction and the composition of income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S. These benefits were partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

For the year ended December 31, 2014, our effective income tax rate was lower than the federal statutory tax rate mainly due to the federal research and development credit, a state tax benefit from software development activities, the domestic production activities deduction and the composition of income in foreign jurisdictions with lower tax rates, partially offset by state income taxes and the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments.

The increase in the provision for income taxes for 2016 as compared to 2015 was mainly due to the retroactive application of a U.S. tax court ruling with respect to the treatment of stock-based compensation on intercompany arrangements which occurred in 2015, a decrease in the U.S. federal and state research and development credits and a change in the composition of income from foreign jurisdictions. This increase in the provision for income taxes was partially offset by an increase in the domestic production activities deduction.



33


The decrease in the provision for income taxes in 2015 as compared to 2014 was mainly due to the retroactive application of a U.S. tax court ruling with respect to the treatment of stock-based compensation in intercompany arrangements and the composition of income from foreign jurisdictions with lower tax rates than the statutory tax rates in the U.S. These benefits were partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments.

Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the disposition of employee equity awards, settlements of tax audits and assessments and tax law changes. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ depending on the local statutory rates.

Non-GAAP Financial Measures

In addition to providing financial measurements based on accounting principles generally accepted in the U.S., or GAAP, we publicly discuss additional financial measures that are not prepared in accordance with GAAP, or non-GAAP financial measures. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision-making, for planning and forecasting purposes, to measure executive compensation and to evaluate our financial performance. These non-GAAP financial measures are: non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per diluted share, Adjusted EBITDA, Adjusted EBITDA margin and impact of foreign currency exchange rates, as discussed below.

Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that facilitates meaningful comparisons and analysis of trends in the business, as they assist in the comparison of financial results across accounting periods and to those of our peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate our operating results and future prospects in the same manner as management. These non-GAAP financial measures may also exclude expenses and gains that may be unusual in nature, infrequent or not reflective of our ongoing operating results.

The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.

The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:

Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and are unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.

Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to evaluate; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies.

Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to our initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. We exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of our operating results to prior periods and to our peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions.



34


Restructuring charges – We have incurred restructuring charges that are included in our GAAP financial statements, primarily related to workforce reductions and estimated costs of exiting facility lease commitments. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or historical operations of our business.

Benefit from adoption of software development activities – In 2014, we recognized a benefit to non-income related tax expense associated with the adoption of software development activities. We exclude this item from our non-GAAP financial measures because transactions of this nature occur infrequently and are not considered part of our core business operations.

Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In February 2014, we issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rate of the convertible senior notes was approximately 3.2%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity under GAAP, thereby reducing the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. All of our interest expense is comprised of these non-cash components and is excluded from management's assessment of our operating performance because management believes the non-cash expense is not representative of ongoing operating performance.

Gains and losses on investments – We have recorded gains and losses from the disposition and impairment of certain investments. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them occur infrequently and are not representative of our core business operations and ongoing operating performance.

Legal matter costs – We have incurred losses from the settlement of legal matters and costs with respect to our internal U.S. Foreign Corrupt Practices Act investigation in addition to the disgorgement we were required to pay to resolve it. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations.

Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. We believe that applying the non-GAAP adjustments and their related income tax effect allows us to highlight income attributable to our core operations.

The following table reconciles GAAP income from operations to non-GAAP income from operations and non-GAAP operating margin for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
2016
 
2015
 
2014
Income from operations
$
459,594

 
$
466,150

 
$
489,519

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

Amortization of capitalized stock-based compensation and capitalized interest expense
15,439

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

 
(2,670
)
Non-GAAP income from operations
$
658,436

 
$
638,435

 
$
647,689

 
 
 
 
 
 
GAAP operating margin
20
%
 
21
%
 
25
%
Non-GAAP operating margin
28
%
 
29
%
 
33
%



35


The following table reconciles GAAP net income to non-GAAP net income for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
2016
 
2015
 
2014
Net income
$
316,132

 
$
321,406

 
$
333,948

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

Amortization of capitalized stock-based compensation and capitalized interest expense

15,439

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

 
(2,670
)
Amortization of debt discount and issuance costs
18,638

 
18,525

 
15,463

(Gain) loss on investments
(4,807
)
 
25

 
443

Income tax effect of above non-GAAP adjustments and certain discrete tax items
(52,661
)
 
(58,309
)
 
(59,202
)
Non-GAAP net income
$
476,144

 
$
453,932

 
$
448,822


The following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the years ended December 31, 2016, 2015 and 2014 (share in thousands):
 
2016
 
2015
 
2014
GAAP net income per diluted share
$
1.79

 
$
1.78

 
1.84

Amortization of acquired intangible assets
0.14

 
0.16

 
0.17

Stock-based compensation
0.82

 
0.70

 
0.62

Amortization of capitalized stock-based compensation and capitalized interest expense

0.09

 
0.08

 
0.06

Restructuring charges
0.06

 

 
0.01

Acquisition-related costs
0.01

 

 
0.03

Legal matter costs
0.01

 
0.02

 

Benefit from adoption of software development activities

 

 
(0.01
)
Amortization of debt discount and issuance costs
0.11

 
0.10

 
0.09

(Gain) loss on investments
(0.03
)
 

 

Income tax effect of above non-GAAP adjustments and certain discrete tax items
(0.30
)
 
(0.32
)
 
(0.33
)
Non-GAAP net income per diluted share
$
2.70

 
$
2.52

 
$
2.48

 
 
 
 
 
 
Shares used in per share calculations
176,215

 
180,415

 
181,186


Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by diluted weighted average common shares outstanding. GAAP diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of our convertible senior notes. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of net income per share. Unless and until our weighted average stock price is greater than $89.56, the initial conversion price, there will be no difference between our GAAP and non-GAAP diluted weighted average common shares outstanding.



36


We consider Adjusted EBITDA to be another important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that are either not part of our core operations or are non-cash in nature. We define Adjusted EBITDA as GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; benefit from adoption of software development activities; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs incurred with respect to our internal FCPA investigation; foreign exchange gains and losses; loss on early extinguishment of debt; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue.

The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
2016
 
2015
 
2014
Net income
$
316,132

 
$
321,406

 
$
333,948

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

Amortization of capitalized stock-based compensation and capitalized interest expense
15,439

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

 
(2,670
)
Interest income
(14,702
)
 
(11,200
)
 
(7,680
)
Amortization of debt discount and issuance costs
18,638

 
18,525

 
15,463

Provision for income taxes
143,314

 
135,218

 
145,828

Depreciation and amortization
292,221

 
258,878

 
204,843

Other (income) expense, net
(3,788
)
 
2,201

 
1,960

Adjusted EBITDA
$
950,657

 
$
897,313

 
$
852,532

Adjusted EBITDA margin
41
%
 
41
%
 
43
%

Impact of Foreign Currency Exchange Rates

Revenue and earnings from our international operations have historically been an important contributor to our financial results. Consequently, our financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our foreign subsidiaries weaken, generally our consolidated results stated in U.S. dollars are negatively impacted.

Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount. The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.



37


Liquidity and Capital Resources

To date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of December 31, 2016, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds and U.S. government agency securities, totaled $1.6 billion. Factoring in our convertible senior notes of $690.0 million, our net cash at December 31, 2016 was $926.3 million. We place our cash investments in instruments that meet high-quality credit standards, as specified in our investment policy. Our investment policy also limits the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity at all times.

Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as deferred revenues, accounts payable, accounts receivable and various accrued expenses, as well as changes in our capital and financial structure due to common stock repurchases, debt repurchases and issuances, stock option exercises, purchases and sales of marketable securities and similar events. We believe our strong balance sheet and cash position are important competitive differentiators that provide the financial flexibility necessary to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business on an ongoing basis.

As of December 31, 2016, we had cash and cash equivalents of $228.0 million held in accounts outside the U.S. An immaterial amount of these funds would be subject to U.S. federal taxation if repatriated, with such tax liability partially offset by foreign tax credits. The remainder of our cash and cash equivalents held outside the U.S. are subject to, or offset by, intercompany obligations to our parent company in the U.S. and, therefore, are not subject to U.S. federal taxation. As a result, our liquidity is not materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S.

Cash Provided by Operating Activities

 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
2014
Net income
$
316,132

 
$
321,406

 
$
333,948

Non-cash reconciling items included in net income
509,814

 
425,366

 
319,312

Changes in operating assets and liabilities
40,352

 
17,379

 
4,810

Net cash flows provided by operating activities
$
866,298

 
$
764,151

 
$
658,070


The increase in cash provided by operating activities for 2016, as compared to 2015, was primarily due to higher cash collection from customers due to increased revenue, and lower commissions and annual bonus payments due to lower award attainment levels. These increases to cash provided by operating activities were partially offset by higher cash paid for taxes during 2016, as compared to 2015. Accounts receivable days outstanding was 54 days as of the year ended December 31, 2016, compared to 59 days as of the year ended December 31, 2015.

The increase in cash provided by operating activities for 2015 as compared to 2014, was primarily due to the decrease in cash paid for income taxes of $75.0 million versus $166.2 million for the years ended December 31, 2015 and 2014, respectively. The increase is also due to an increase in cash collections from customers as a result of increased revenue, offset by the increase in operating expenditures and the overall timing of our working capital payments. Accounts receivable days outstanding was 59 days as of the year ended December 31, 2015, compared to 56 days as of the year ended December 31, 2014.



38


Cash Used in Investing Activities

 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
2014
Cash paid for acquired businesses, net of cash acquired
$
(95,439
)
 
$
(141,147
)
 
$
(386,532
)
Purchases of property and equipment and capitalization of internal-use software development costs
(316,289
)
 
(444,983
)
 
(318,627
)
Net marketable securities activity
(58,484
)
 
153,060

 
(479,392
)
Other investing activities
782

 
(2,494
)
 
5,745

Net cash used in investing activities
$
(469,430
)
 
$
(435,564
)
 
$
(1,178,806
)

The increase in cash used in investing activities in 2016 as compared to 2015 was driven by net marketable securities activity which was a net outflow for the year. Our excess cash as well as the proceeds from sales and maturities of our marketable securities were reinvested, as compared to 2015, where we did not reinvest a portion of our proceeds in order to fund acquisitions. This outflow is partially offset by a decrease in purchases of property and equipment during 2016, as compared 2015, as we moderated investment in our network. Additionally, acquisitions during 2016 were of a smaller magnitude than those during 2015.

The decrease in cash used in investing activities in 2015 partially relates to the acquisition of Prolexic during 2014, with no corresponding acquisition of the same magnitude during 2015. Net marketable securities activity also contributed to the decrease in cash used in investing activities. During 2014, we invested the proceeds from our convertible senior notes, which caused the activity for marketable securities to be a net outflow. The decrease in cash used in investing activities was partially offset by an increase of purchases of property and equipment and capitalized internal-use software during 2015, as compared to 2014, as we continued to invest in our network with the goal of enhancing and adding functionality to our service offerings.

Cash (Used in) Provided by Financing Activities

 
For the Years Ended December 31,
(in thousands)
2016
 
2015
 
2014
Activity related to convertible senior notes
$

 
$

 
$
655,413

Activity related to stock-based compensation
19,529

 
36,928

 
68,698

Repurchases of common stock
(373,794
)
 
(302,606
)
 
(268,647
)
Other financing activities

 
(2,050
)
 
(19,437
)
Net cash (used in) provided by financing activities
$
(354,265
)
 
$
(267,728
)
 
$
436,027


The increase in cash used in financing activities during 2016 as compared to 2015, was primarily the result of increased share repurchases. In October 2013, the Board of Directors authorized a $750.0 million share repurchase program, effective from October 16, 2013 through December 31, 2016. In February 2016, the Board of Directors authorized a $1.0 billion share repurchase program that superseded the October 2013 repurchase program and became effective in February 2016 through December 31, 2018. The Company's goal for the share repurchase program is to offset the dilution created by its employee equity compensation programs and provide the flexibility to return capital to shareholders as business and market conditions warrant.

During 2016, 2015 and 2014, we repurchased 7.0 million, 4.5 million and 4.6 million shares of our common stock, respectively, at an average price per share of $53.28, $67.05 and $58.02, respectively.

The decrease in cash from financing activities during 2015 as compared to 2014, was primarily the result of the convertible senior notes issued in February 2014 and related note hedge and warrant transactions. During 2015, we also increased our repurchases of common stock.



39


Convertible Senior Notes

In February 2014, we issued $690.0 million in par value of convertible senior notes due 2019 and entered into related convertible note hedge and warrant transactions. The terms of the notes, hedge and warrant transactions are discussed more fully in Note 10 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. We have used, and intend to use, the net proceeds of the offering for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.

Liquidity Outlook

We believe, based on our present business plan, that our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations will be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology and facility expansion, opportunistic business acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other long-term liabilities.

Contractual Obligations, Contingent Liabilities and Commercial Commitments

The following table presents our contractual obligations and commercial commitments, as of December 31, 2016, for the next five years and thereafter (in thousands):
 
 
Payments Due by Period
 
Total
 
Less than
12 Months

 
12 to 36
Months

 
36 to 60
Months

 
More than
60 Months

Real estate operating leases
$
785,426

 
$
53,410

 
$
89,788

 
$
109,140

 
$
533,088

Bandwidth and co-location agreements
126,197

 
105,451

 
20,167

 
579

 

Open vendor purchase orders
150,631

 
137,642

 
12,349

 
640

 

Convertible senior notes
690,000

 

 
690,000

 

 

Total contractual obligations
$
1,752,254

 
$
296,503

 
$
812,304

 
$
110,359

 
$
533,088


In accordance with the authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2016, we had unrecognized tax benefits of $77.1 million, including $13.7 million of accrued interest and penalties. We believe that it is reasonably possible that $15.8 million of our unrecognized tax benefits will be recognized by the end of 2017. The settlement period for the remaining amount of the unrecognized tax benefits is unknown.

Letters of Credit

As of December 31, 2016, we had outstanding $6.8 million in irrevocable letters of credit issued by us in favor of third party beneficiaries, primarily related to facility leases. These irrevocable letters of credit, which are not included in the table of contractual obligations above, are unsecured and are expected to remain in effect, in some cases, until 2028.

Off-Balance Sheet Arrangements

We have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See Note 11 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during 2016 and 2015 was determined to be immaterial.



40


Legal Matters

We are party to various litigation matters that management considers routine and incidental to its business. Management does not expect the results of any of these routine actions to have a material effect on our business, results of operations, financial condition or cash flows.

In November 2015, Limelight filed a complaint in the U.S. District Court for the Eastern District of Virginia against Akamai and XO Communications LLC, or XO, alleging patent infringement by the two companies.  The complaint alleges that Akamai and XO infringed six of Limelight’s content delivery patents.  The complaint seeks to recover from Akamai and XO significant monetary damages based upon lost revenue due to infringing technology used by the companies.  We have agreed to indemnify XO for damages it incurs in this matter. We have made counterclaims in the action against Limelight alleging that Limelight has infringed five Akamai content delivery patents, and we are seeking monetary damages based upon lost revenue due to the infringing technology used by Limelight.  The case is scheduled for trial in May 2017.  We currently believe that the outcome of this litigation will not have a material impact on our business.

Significant Accounting Policies and Estimates

See Note 1 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for information regarding recent and newly adopted accounting pronouncements.

Application of Critical Accounting Policies and Estimates

Overview

Our MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, capitalized internal-use software development costs, goodwill and acquired intangible assets, income tax reserves, impairment and useful lives of long-lived assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results may differ from these estimates. For a complete description of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.

Definitions

We define our critical accounting policies as those policies that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our consolidated financial statements. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time an accounting estimate is made and applied and require us to assess a range of potential outcomes.

Review of Critical Accounting Policies and Estimates

Revenue Recognition

Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

We primarily derive revenue from sales of services to customers executing contracts with terms of one year or longer. These contracts generally commit the customer to a minimum monthly, quarterly or annual level of usage and specify the rate at which the customer must pay for actual usage above the monthly, quarterly or annual minimum. For contracts with a monthly commitment, we recognize the monthly minimum as revenue each month, provided that an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable and collection is reasonably assured. Should a customer’s usage of our service exceed the monthly minimum, we recognize revenue for such excess usage in the period of the additional usage. For annual or other non-monthly period revenue commitments, we recognize revenue monthly based upon the customer’s actual usage each month of the commitment period and only recognize any remaining committed amount for the applicable period in the last month thereof.



41


We typically charge customers an integration fee when the services are first activated. The integration fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement. We also derive revenue from services sold as discrete, non-recurring events or based solely on usage. For these services, we recognize revenue once the event or usage has occurred.

When more than one element is contained in a revenue arrangement, we determine the fair value for each element in the arrangement based on vendor-specific objective evidence, or VSOE, for each respective element, including any renewal rates for services contractually offered to the customer. Elements typically included in our multiple element arrangements consist of our core services – the delivery of content, applications and software over the Internet – as well as mobile and security solutions and enterprise professional services. These elements have value to our customers on a stand-alone basis in that they can be sold separately by another vendor. Generally, there is no right of return relative to these services.

We typically use VSOE to determine the fair value of our separate elements. All stand-alone sales of professional services are reviewed to establish the average stand-alone selling price for those services. For our core services, the fair value is the price charged for a single deliverable on a per unit basis when it is sold separately.

For arrangements in which we are unable to establish VSOE, third party evidence, or TPE, of the fair value of each element is determined based upon the price charged when the element is sold separately by another vendor. For arrangements in which we are unable to establish VSOE or TPE for each element, we use the best estimate of selling price, or BESP, to determine the fair value of the separate deliverables. We estimate BESP based upon a management-approved price list and pre-established discount levels for each solution that takes into consideration volume, geography and industry lines. We allocate arrangement consideration across the multiple elements using the relative selling price method.

At the inception of a customer contract, we make an estimate as to that customer’s ability to pay for the services provided. We base our estimate on a combination of factors, including the successful completion of a credit check or financial review, our collection experience with the customer and other forms of payment assurance. Upon the completion of these steps, we recognize revenue monthly in accordance with our revenue recognition policy. If we subsequently determine that collection from the customer is not reasonably assured, we record an allowance for doubtful accounts and bad debt expense for all of that customer’s unpaid invoices and cease recognizing revenue for continued services provided until cash is received from the customer. Changes in our estimates and judgments about whether collection is reasonably assured would change the timing of revenue or amount of bad debt expense that we recognize.

We also sell our services through a reseller channel. Assuming all other revenue recognition criteria are met, we recognize revenue from reseller arrangements based on the reseller’s contracted non-refundable minimum purchase commitments over the term of the contract, plus amounts sold by the reseller to its customers in excess of the minimum commitments. Amounts attributable to this excess usage are recognized as revenue in the period in which the service is provided.

From time to time, we enter into contracts to sell our services or license our technology to unrelated enterprises at or about the same time we enter into contracts to purchase products or services from the same enterprises. If we conclude that these contracts were negotiated concurrently, we record as revenue only the net cash received from the vendor, unless the product or service received has a separate and identifiable benefit and the fair value to us of the vendor’s product or service can be objectively established.

We may from time to time resell licenses or services of third parties. We record revenue for these transactions on a gross basis when we have risk of loss related to the amounts purchased from the third party and we add value to the license or service, such as by providing maintenance or support for such license or service. If these conditions are present, we recognize revenue when all other revenue recognition criteria are satisfied.

Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees, prepayments made by customers for future periods, deferred integration and activation set-up fees and amounts billed under customer arrangements with extended payment terms.



42


Accounts Receivable and Related Reserves

Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. In addition to trade accounts receivable, our accounts receivable balance includes unbilled accounts that represent revenue recorded for customers that is typically billed within one month. We record reserves against our accounts receivable balance. These reserves consist of allowances for doubtful accounts and revenue from certain customers on a cash-basis. Increases and decreases in the allowance for doubtful accounts are included as a component of general and administrative expense in the consolidated statements of income. Increases in the reserve for cash-basis customers are recorded as a reduction of revenue. The reserve for cash-basis customers increases as services are provided to customers for which collection is no longer reasonably assured. The reserve decreases and revenue is recognized when and if cash payments are received.

Estimates are used in determining these reserves and are based upon our review of outstanding balances on a customer-specific, account-by-account basis. The allowance for doubtful accounts is based upon a review of customer receivables from prior sales with collection issues where we no longer believe that the customer has the ability to pay for prior services provided. We perform ongoing credit evaluations of our customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in creation of a cash basis reserve until we receive consistent payments.

Valuation and Impairment of Marketable Securities

We measure the fair value of our financial assets and liabilities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We have certain financial assets and liabilities recorded at fair value (principally cash equivalents and short- and long-term marketable securities) that have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we can access at the reporting date. Fair values determined by Level 2 inputs utilize data points other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 3 inputs are based on unobservable data points for the asset or liability.

Marketable securities are considered to be impaired when a decline in fair value below cost basis is determined to be other-than-temporary. We periodically evaluate whether a decline in fair value below cost basis is other-than-temporary by considering available evidence regarding these investments including, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance and operational and financing cash flow factors, overall market conditions and trends and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value. Once a decline in fair value is determined to be other-than-temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Write-downs, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio if, among other things, relevant information related to our investments and marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.

Impairment and Useful Lives of Long-Lived Assets

We review our long-lived assets, such as property and equipment and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets and expected future cash flows. Changes in these estimates could materially impact results from operations.


43



Goodwill and Acquired Intangible Assets

We test goodwill for impairment on an annual basis, as of December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer and the executive management team. We have assigned the entire balance of goodwill to our one reporting unit. The fair value of the reporting unit was based on our market capitalization as of each of December 31, 2016 and 2015, and it was substantially in excess of the carrying value of the reporting unit at each date.
    
Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. We engaged third party valuation specialists to assist us with the initial measurement of the fair value of acquired intangible assets. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible assets.

Income Taxes

Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards by using expected tax rates in effect in the years during which the differences are expected to reverse or the carryforwards are expected to be realized.

We currently have net deferred tax assets, comprised of net operating loss, or NOL, carryforwards, tax credit carryforwards and deductible temporary differences. Our management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. In determining our net deferred tax assets and valuation allowances, annualized effective tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of NOL carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.

We have recorded certain tax reserves to address potential exposures involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of our tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be more or less than the amount that we estimated.

Uncertainty in income taxes is recognized in our financial statements using a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement.

Accounting for Stock-Based Compensation

We issue stock-based compensation awards including stock options, restricted stock units and deferred stock units. We measure the fair value of these awards at the grant date and recognize such fair value as expense over the vesting period. We have selected the Black-Scholes option pricing model to determine the fair value of stock option awards and the Monte Carlo simulation model to determine the fair value of market-based restricted stock awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of the stock awards and the volatility of the underlying common stock. Our assumptions may differ from those used in prior periods. Changes to the assumptions may have a significant impact on the fair value of stock-based awards, which could have a material impact on our financial statements. Judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. Should our actual forfeiture rates differ significantly from our estimates, our stock-based compensation expense and results of operations could be materially impacted. In addition, for awards that vest and become exercisable only upon achievement of specified performance conditions, we make judgments and estimates each quarter about the probabil