10-K 1 akam10k123117.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, 2017
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.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 $8,322.4 million based on the last reported sale price of the Common Stock on the NASDAQ Global Select Market on June 30, 2017.

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share, as of February 22, 2018: 170,031,585 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 2018 Annual Meeting of Stockholders 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, 2017

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 statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “forecasts,” “if,” “continues,” “goal,” “likely” or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See “Risk Factors” elsewhere in this Annual Report on Form 10-K for a discussion of certain risks associated with our business. 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 faster, more reliable and more secure for customers and users around the world. For many enterprises, engaging customers through high-quality digital experiences has become mission critical. We believe that is why thousands of organizations rely on Akamai and our cloud delivery platform to make it easier for them to provide the best and most secure digital experiences to their 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, and the world around us is rapidly evolving. The emergent network known as the Internet of Things (IoT) is connecting billions of devices that transmit volumes of data from offices, hospitals, manufacturing plants, power grids, roads, schools and homes every second. At the same time, security threats are growing more sinister and advanced. Enterprise applications are moving from behind the firewall to the cloud at the same time that employees increasingly need remote access from a variety of devices - making cybersecurity more complex to achieve than yesterday’s perimeter defense. More consumers are "cutting the cord" and consuming entertainment over the Internet rather than through traditional cable, and they are increasingly using mobile devices to view content and shop. Web pages are also vastly more complex with advertisements, videos, graphics and other third-party content, causing speed and reliability to suffer. More and more, government agencies want citizens to pay their taxes, submit applications and request information online. 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 at large scale, 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
Receive and act on data about usage of their websites and applications to improve performance and business value

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 bad actors who want to steal assets and disrupt the functioning of the web can leave enterprises exposed
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 typically cannot be avoided without a CDN
User experiences are difficult to monitor and understand given myriad devices and locations
“Last mile” issues – such as bandwidth constraints between consumers and their Internet access provider – are challenging to solve


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How Akamai helps:

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

At the core of this mission is the Akamai Intelligent Platform, a globally-distributed computing platform, that comprises more than 200,000 servers deployed in more than 1,700 networks and 130 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. The 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
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 native Internet, our ability to efficiently manage a platform with millions of components, our high-quality intellectual property portfolio, our strong relationships with hundreds of 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 stockholders and provide a meaningful edge over 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 enable dynamic websites and applications to 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 in our platform, which can be thought of as a virtual Internet overlaying the native 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, and routes the request via the most reliable path to data centers to retrieve and deliver dynamic interactive content.

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.

CloudTest – Leveraging technology we acquired through our acquisition of Soasta, Inc., or Soasta, in 2017, CloudTest empowers customers to conduct load testing and other analysis of their websites in a pre-production environment.


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Testing capabilities include web and mobile applications, APIs and databases. In addition, real-time analytics and customizable dashboards allow for root cause analysis while tests are in process.

mPulse – mPulse, originally developed by Soasta, provides real-time website performance data to provide insight about end-user experiences on a website. It is designed to enable customers to understand the impact of user-perceived performance on transaction volume, revenue, conversions and other key business metrics.

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 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.

Cloud Security Solutions

Our Cloud Security Solutions, boosted by technology we acquired through our purchase of Nominum, Inc., or Nominum, in 2017 are designed to defend websites, applications and data centers against a multitude of cyber attacks. These solutions include:

Web Application Protector – Web Application Protector is designed to safeguard web assets from web application and distributed denial of service, or DDoS, attacks, while improving performance. This offering does not require hardware installation and offers both customized and pre-configured rule groupings to distinguish between legitimate and malicious traffic.

Kona Site Defender – Kona Site Defender is a cloud computing security solution that defends against network and application layer 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 Premier – 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 Security Solutions

Our Enterprise Security Solutions 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 include:



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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 and without external hardware or software.

Enterprise Threat Protector – Enterprise Threat Protector is designed to enable enterprise security teams to proactively identify, block, and mitigate targeted threats such as malware, ransomware, phishing, and data exfiltration that exploit DNS. 

Media and Network Operator Solutions

Network Operator Solutions

With the growth in consumer adoption of Internet video and other media and web usage, carriers around the world have experienced significant traffic increases, resulting in congestion across networks from aggregation, to backbone, and to interconnection. In addition, security and personalized services are critical for carriers to protect and grow their revenue and subscriber base. 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. We also help network operators provide subscriber security and personalization services; these solutions were enhanced by our acquisition of Nominum in 2017. Our network operator 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 technology for content provisioning, delivery and reporting.

DNS Infrastructure – We offer intelligent recursive DNS platforms built for effective management of DNS traffic in licensed, managed and cloud-based solutions. To improve the subscriber experience, our DNS Infrastructure solutions manage subscriber preferences and enable security and personalization services that are designed for network operators.

Security and Personalization Services – Used in conjunction with our DNS Infrastructure offerings, Akamai’s Secure Consumer product is a cybersecurity solution designed to protect a carrier’s consumer subscribers and IoT devices from phishing, viruses, ransomware and malware.  The solution includes parental controls that allow subscribers to tailor Internet access for each family member from a simple web page.  Our Secure Business product is a solution designed to let carriers easily deploy cyberthreat protection to prevent ransomware, phishing, botnets and zero-day malware attacks to their small- and medium-sized business customers.  

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 the 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.


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Infinite Media Acceleration – These media delivery acceleration solutions are designed with the goal of bringing 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.

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

Services and Support Solutions

Akamai provides 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 our 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 provides the technological underpinnings for all of our solutions. We use data generated in connection with each of our services to improve and augment the functionality of our overlay network and, in turn, to improve the effectiveness of our other services. In this approach, insights and learnings are integrated across the broader platform in service of our entire solution portfolio.

The Akamai Intelligent Platform leverages more than 200,000 servers deployed in more than 1,700 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 more than 130 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, 2017, we had 2,227 research and development employees. Our research and development expenses were $222.4 million, $167.6 million and $148.6 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015, we capitalized $149.3 million, $124.6 million and


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$105.7 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, 2017, 2016 and 2015, we capitalized $26.8 million, $21.4 million and $16.7 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 $855.0 million, $720.0 million and $593.0 million, for each of the years ended December 31, 2017, 2016 and 2015, respectively. This represented 34% of our total revenue for the year ended December 31, 2017, 31% of our total revenue for the year ended December 31, 2016 and 27% of our total revenue for the year ended December 31, 2015. No single country outside of the U.S. accounted for 10% or more of our revenue in any such year. See Note 19 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for revenue attributable to the U.S. for the periods presented and for a description of the basis on which we attribute revenue to individual countries.

Our long-lived assets include servers, which are deployed into networks worldwide, in addition to other property and equipment used to support our operations. We had net property and equipment, excluding internal use software, located in the U.S. of $311.7 million, $297.8 million and $298.9 million, for each of the years ended December 31, 2017, 2016 and 2015, respectively. We had net property and equipment, excluding internal use software, located outside of the U.S. of $249.8 million $231.8 million and $227.8 million, for each of the years ended December 31, 2017, 2016 and 2015, respectively.

Customers

As of December 31, 2017, our customers included many of the world's leading corporations, including Airbnb, Alibaba, Apple, Autodesk, Bristol Myers Squibb, Cathay Pacific, The Coca-Cola Company, Crate & Barrel, eBay, Electronic Arts, FedEx, Fidelity Investments, Ford Motor Company, FOX, General Electric, Home Depot, HubSpot, IKEA, JetBlue, Marriott, NBCUniversal, Norwegian Cruise Line, Panasonic, Panera Bread, PayPal, Qantas, Qualcomm, Rabobank, Rakuten, Salesforce.com, Siemens, Sony Interactive Entertainment, Spotify, Ticketmaster, Toshiba, Turner Broadcasting, Ubisoft and Viacom. We also actively sell to government agencies. As of December 31, 2017, our public sector customers included the Federal Aviation Administration, 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, 2017, 2016 and 2015. 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 8%, 11% and 17% of our total revenue during the years ended December 31, 2017, 2016 and 2015, respectively. Less than 10% of our total revenue in each of the years ended December 31, 2017, 2016 and 2015 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 2018.

Sales, Service and Marketing

We market and sell our solutions globally through our direct sales and service organization and through many 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 based in locations across 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, 2017, we had 3,594 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.



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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.

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 operating 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, 2017, we owned, or had exclusive rights to, more than 330 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 2018 and 2036. 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, 2017, we had 7,650 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.



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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.

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, make sound investments that bring positive returns, and develop profitable products and solutions that are attractive to existing and potential customers, 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 and security solutions. As the information technology industry evolves, however, it may become increasingly difficult for us to maintain a technological advantage in business areas where we have historically placed our focus. In particular, our traditional offerings, particularly our media and website delivery services, could face more intense competition 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.

It is, therefore, also important to our revenue growth and profitability that we enter into new business areas that present significant value-generating investment opportunities. This requires investing in business areas that can potentially provide positive returns and developing or acquiring innovative, high-margin solutions, including in areas such as enterprise security and digital performance management. 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 solutions the market will accept, and we may choose to invest in business areas for which a viable market for our products does not ultimately develop. 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, technology preferences, customer demand and the market for our solutions, or those introduced by our competitors, may move in directions that we had not anticipated when we decided to pursue such initiatives. 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 invest in areas that can potentially provide a positive return or to adequately develop, on a cost-effective basis, innovative new or enhanced solutions that are attractive to customers and profitable to us and inability 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.

During the past twenty years, we have diversified our business from a media-dominated CDN by becoming a leading supplier of web and security products and services for a broad range of customers in myriad industries. Nevertheless, increasing traffic on our network remains 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;
the pace at which our customers' enterprise applications move from behind the firewall to the cloud;


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media and other customers 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. In addition, many of our expenses are fixed cost in nature for some minimum amount of time 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 2018 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;
pricing pressure on our solutions;
failure of our new products and services, including our enterprise security and digital performance management solutions, to achieve sufficient market acceptance given our investment to develop them;
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.

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, broader product portfolios, 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, enter new markets more easily, and expand their service offerings more efficiently or more rapidly;
combine their products that are competitive with ours with other solutions they offer in a way that makes our offerings less appealing to current and potential customers;
adapt to new or emerging technologies and changes in customer requirements more quickly;
take advantage of acquisition, investment 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, sellng more high-margin services, features and functionalities to existing customers and increasing traffic usage by all customers. 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, data and encryption keys as well as our own; customer information and data may, in turn, include individual data of and about their customers. 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 are frequent and take a variety of forms, including DDoS attacks, infrastructure attacks, botnets, malicious file uploads, cross-site scripting, credential abuse, ransomware, bugs, viruses, worms and malicious software programs. Malicious actors can attempt 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 exposure for 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 – including personally identifiable information of individuals involved with 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 an 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.

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 continue 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.

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.



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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.

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, traffic measurement systems, billing systems, ordering processes 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. As a result, these systems could generate errors that impact traffic measurement or invoicing. We will need to continue to upgrade and improve our data systems, traffic measurement 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.

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 may occur as a result of taking these actions. Taking these actions may also result in significant expense for us, including with respect to workforce reductions, 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


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consider the value of stock-based compensation. In recent years, we have increasingly linked compensation levels to corporate performance metrics. Declines in the price of our stock or failure to achieve annual revenue and profitability metrics 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 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 or considering a strategic transaction;
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.

Actions of activist stockholders could be distracting to us, cause us to incur significant expenses and impact the trading value of our common stock.
 
Responding to actions by activist stockholders could be distracting to our Board of Directors, executives and our other employees. Such activities may also require us to incur significant legal and other advisor fees and public relations costs. Perceived uncertainty as to our future direction could affect customer and investor sentiment, resulting in longer sales cycles, employee retention and hiring challenges, and volatility in the price of our common stock.

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. As a result, 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:



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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;
currency exchange rate fluctuations and limitations on the repatriation and investment of funds;
difficulties in transferring funds from, or converting currencies in, certain countries;
reliance on channel partners over which we have limited control or influence on a day-to-day basis; and
potentially adverse tax consequences.

Geo-political events such as the United Kingdom's pending withdrawal 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 employee relations as a result of Brexit. Such changes could be costly and potentially disruptive to our operations and business relationships in affected regions.

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, among others:

internal control and disclosure rules;
data protection, privacy and filtering regulations and requirements;
anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and local laws prohibiting corrupt payments to governmental officials; and
antitrust and competition regulations.

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. Although we have implemented policies and procedures designed to ensure compliance with the Non-Prosecution Agreement and relevant laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies or applicable laws. Any such violations could result in fines and penalties, criminal sanctions against us or our employees and prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries. They could also materially affect our brand, our global operations, any international expansion efforts, our ability to attract and retain employees, our business overall, and our financial results.

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 or otherwise impacted our operations. 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. While we have robust quality control processes in the place, 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 systems, or if there are unidentified errors that allow persons to improperly access our services or systems, we could experience loss of revenue and market share, damage to our reputation, increased expenses, delayed payments and legal actions by our customers.



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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. It is unclear whether potential changes to regulations previously 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) will be adopted and, if adopted, how they would apply to content delivery network providers like us. It is also uncertain how future regulatory and legislative initiatives or changes will impact our business.

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

Privacy laws, including the European Union General Data Protection Regulation, or GDPR, 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, like the GDPR, may affect our ability to reach current and prospective customers, to understand how our products and services are being used, and 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 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. Compliance with GDPR may be administratively difficult and expensive.

Over the past several years, the regulatory landscape governing the transfer of covered personal data from Europe to the United States has seen sweeping changes. Currently, we have in place U.S.-European Union and U.S. Swiss Privacy Shield Frameworks to legally transfer covered personal data from Europe to the United States, but their legitimacy may continue to be subject to challenge and review. Any changing or new requirements or rulings by the European Commission or EU 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, any continued or new judicial challenges or reviews may result in new, modified or inconsistent standards or requirements 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.

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.



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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. 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; however, 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. Furthermore, open-source software may have security flaws and other deficiencies that could make our solutions less reliable and damage our business.

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.

Achieving 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


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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.

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. In particular, we do not yet know the full effect that the U.S. Tax Cuts and Jobs Act of 2017 and subsequent related regulations will have on our business and tax exposure assessment. 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, 2017, we had total par value of $690.0 million of convertible senior notes outstanding due in 2019. 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.

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


19


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 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.

Litigation 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 deceleration 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.



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. While we have invested in projects to support renewable energy development, our customers, investors and other stakeholders may require us to take more 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 currently 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 current leases for such space are scheduled to expire in December 2019. In November 2016, we executed a lease for a new primary headquarters space at 145 Broadway in Cambridge, Massachusetts. The lease is for approximately 480,000 square feet and is expected to commence at the termination of our existing corporate headquarter lease at 150 Broadway in Cambridge, Massachusetts. The initial lease term is 15 years. During 2017 we also extended our lease for 150 Broadway in Cambridge, Massachusetts, which represents 177,000 square feet of our current footprint in Cambridge, Massachusetts. The term of the extended lease is coterminous with the 145 Broadway lease.

We also have offices in other locations in the United States and other countries, the largest of which are in Santa Clara, California; Bangalore, India; 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 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


21


against Limelight alleging that Limelight has infringed Akamai content delivery patents, and we are seeking monetary damages based upon lost revenue due to the infringing technology used by Limelight. A trial date on Limelight's patents has been set for April 2018. 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.

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:
 
 
2017
 
2016
 
High
 
Low
 
High
 
Low
First quarter
$
71.64

 
$
59.50

 
$
57.05

 
$
39.43

Second quarter
$
62.58

 
$
46.81

 
$
57.50

 
$
48.88

Third quarter
$
53.45

 
$
44.65

 
$
58.47

 
$
47.80

Fourth quarter
$
68.03

 
$
48.72

 
$
71.04

 
$
52.63


As of February 22, 2018, there were 320 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 2017 (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, 2017 – October 31, 2017
 
773,304

 
$
50.69

 
773,304

 
$
348,673

November 1, 2017 – November 30, 2017
 
126,618

 
53.97

 
126,618

 
341,839

December 1, 2017 – December 31, 2017
 
144,838

 
58.90

 
144,838

 
333,309

Total
 
1,044,760

 
$
52.23

 
1,044,760

 
$
333,309


(1)
Information is based on settlement dates of repurchase transactions.
(2)
Consists of shares of our common stock, par value $0.01 per share.
(3)
Includes commissions paid.
(4)
In February 2016, the Board of Directors authorized a $1.0 billion share repurchase program effective from February 2016 through December 2018.

During the year ended December 31, 2017, we repurchased 6.9 million shares of our common stock for an aggregate of $361.2 million.



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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,
 
2017
 
2016
 
2015
 
2014
 
2013
Revenue
 
$
2,502,996

 
$
2,340,049

 
$
2,197,448

 
$
1,963,874

 
$
1,577,922

Total costs and operating expenses
 
2,186,777

 
1,880,455

 
1,731,298

 
1,474,355

 
1,163,954

Income from operations
 
316,219

 
459,594

 
466,150

 
489,519

 
413,968

Net income
 
218,321

 
316,132

 
321,406

 
333,948

 
293,487

Basic net income per share
 
1.27

 
1.81

 
1.80

 
1.87

 
1.65

Diluted net income per share
 
1.26

 
1.79

 
1.78

 
1.84

 
1.61

Cash, cash equivalents and marketable securities
 
1,279,528

 
1,616,329

 
1,524,235

 
1,628,284

 
1,246,922

Total assets
 
4,602,844

 
4,373,146

 
4,181,684

 
4,001,546

 
2,957,685

Convertible senior notes
 
662,913

 
640,087

 
624,288

 
604,851

 

Other long-term liabilities
 
165,304

 
134,101

 
110,319

 
117,349

 
65,088

Total stockholders’ equity
 
3,310,723

 
3,224,370

 
3,120,878

 
2,945,335

 
2,629,431


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



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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 effectively manage 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 each 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.


24



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.

Restructuring costs were significant in the fourth quarter of 2017, as management committed to an action to restructure certain parts of the company. The restructuring actions are expected to facilitate cost efficiencies and savings in 2018.

Payroll and related compensation costs have grown in the past several years as we have increased headcount to support our revenue growth and strategic initiatives. We increased our headcount by 1,161 employees during the year ended December 31, 2017, through hiring and from our acquisitions. During the year ended December 31, 2016, we increased our headcount by 406 employees. We expect to continue to hire employees, both domestically and internationally, in support of our strategic initiatives, but at a slower pace than experienced in 2017. We anticipate our headcount growth during 2018, if any, to be modest given the elimination of over 300 positions in the first quarter of 2018 as part of our restructuring actions. Payroll and related compensation costs are expected to increase in 2018 as a result of the hiring completed throughout 2017.

In recent years, we have used strategic acquisitions to complement and augment existing technological capabilities. During each of 2017, 2016 and 2015, we completed various acquisitions that, while immaterial to our financial results as a whole during those years, have contributed to increases in our revenue and level of expenses.
 


25


Results of Operations

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

 
2017
 
2016
 
2015
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and operating expenses:
 
 
 
 
 
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
35.0

 
34.6

 
33.0

Research and development
8.9

 
7.2

 
6.8

Sales and marketing
19.7

 
18.2

 
20.1

General and administrative
20.3

 
18.8

 
17.7

Amortization of acquired intangible assets
1.2

 
1.1

 
1.2

Restructuring charges
2.2

 
0.4

 

Total costs and operating expenses
87.3

 
80.3

 
78.8

Income from operations
12.7

 
19.7

 
21.2

Interest income
0.7

 
0.6

 
0.5

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

 
0.2

 
(0.1
)
Income before provision for income taxes
12.6

 
19.7

 
20.8

Provision for income taxes
3.9

 
6.1

 
6.2

Net income
8.7
 %
 
13.6
 %
 
14.6
 %

Revenue

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

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2017
 
2016
 
% Change
 
% Change at Constant Currency
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
Revenue
$
2,502,996

 
$
2,340,049

 
7.0
%
 
7.0
%
 
$
2,340,049

 
$
2,197,448

 
6.5
%
 
6.6
%

The increase in our revenue from 2016 to 2017 was primarily the result of continued strong growth from our Cloud Security Solutions, which grew 32% year-over-year, and from new product introductions. Overall, however, the revenue growth rates for 2017 and 2016 have been negatively impacted by 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 in the aggregate declined from $250.5 million in 2016 to $202.9 million in 2017.
 
The increase in our revenue from 2015 to 2016 was driven by higher demand for our services across all of our solutions and geographies, with particularly strong growth from our Cloud Security Solutions. The impact of the revenue decline from our Internet Platform Customers was particularly acute in 2016, declining to $250.5 million as compared to $379.3 million in 2015.

We expect our revenue to increase in 2018 as compared to 2017 as a result of increased customer traffic delivered on our network, sales of incremental services to our existing customers and sales to new customers.



26


The following table quantifies the contribution to revenue during the periods presented from our divisions (in thousands). It is a customer-focused reporting view that reflects revenue we received from customers that are managed by the indicated division. For example, Media Division revenue represents all revenue received from customers that are predominately purchasing solutions from our media verticals (OTT video services, gaming, social media, etc.), including revenue from non-media solutions that those customers purchase. During 2017, the divisional categorization of certain customers was adjusted based on how those customer relationships were being managed. The historical presentation of divisional revenue was revised in order to reflect the most recent categorization and to provide a comparable view for all periods presented. During 2018, we plan to consolidate and manage our customers in two divisions: the Web Division and the Media and Carrier Division.

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2017
 
2016
 
% Change
 
% Change at Constant Currency
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
Web Division
$
1,302,489

 
$
1,132,858

 
15.0
 %
 
15.0
 %
 
$
1,132,858

 
$
986,025

 
14.9
 %
 
14.9
 %
Media Division
1,119,282

 
1,136,150

 
(1.5
)
 
(1.5
)
 
1,136,150

 
1,157,016

 
(1.8
)
 
(1.7
)
Enterprise and Carrier Division
81,225

 
71,041

 
14.3

 
14.3

 
71,041

 
54,408

 
30.6

 
31.0

Total revenue
$
2,502,996

 
$
2,340,049

 
7.0
 %
 
7.0
 %
 
$
2,340,049

 
$
2,197,449

 
6.5
 %
 
6.6
 %

The increase in Web Division revenue for 2017 as compared to 2016 was due to increased purchases of new solutions and upgrades to existing services by this customer base. Increased sales of our Cloud Security Solutions to Web Division customers, in particular our Kona Site Defender and Prolexic solutions, as well as our new Bot Manager, offering were a principal contributor to our overall revenue growth. The increase in Web Division revenue in 2016 as compared to 2015 was due to increased demand across most of our customer base particularly for our Cloud Security Solutions.

The declines in the year-over-year revenue growth rate in Media Division revenue for 2017 as compared to 2016, and 2016 as compared to 2015, were primarily the result of decreased traffic from our Internet Platform Customers. The year-over-year revenue growth rate for other Media Division customers was 4% and 14% for the years ended December 31, 2017 and 2016, respectively.

The following table quantifies the contribution to revenue during the periods presented from our solution categories, which is a product-focused view that reflects revenue by solution purchased (in thousands):

 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
2017
 
2016
 
% Change
 
% Change at Constant Currency
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
Performance and Security Solutions
$
1,542,558

 
$
1,355,030

 
13.8
 %
 
13.9
 %
 
$
1,355,030

 
$
1,158,281

 
17.0
 %
 
17.3
 %
Media Delivery Solutions
738,916

 
787,179

 
(6.1
)
 
(6.2
)
 
787,179

 
868,820

 
(9.4
)
 
(9.6
)
Services and Support Solutions
221,522

 
197,840

 
12.0

 
12.0

 
197,840

 
170,347

 
16.1

 
16.0

Total revenue
$
2,502,996

 
$
2,340,049

 
7.0
 %
 
7.0
 %
 
$
2,340,049

 
$
2,197,448

 
6.5
 %
 
6.6
 %

The increases in Performance and Security Solutions revenue for 2017 as compared to 2016, and 2016 as compared to 2015, were due to new product introductions and 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, 2017 was $481.5 million, as compared to $364.9 million and $254.4 million for the years ended December 31, 2016 and 2015, respectively.



27


The declines in Media Delivery Solutions revenue for 2017 as compared to 2016, and 2016 as compared to 2015, were primarily the result of decreased traffic from our Internet Platform Customers, resulting from their "do-it-yourself" efforts in delivering their content. During 2017 as compared to 2016, revenue from our Media Delivery Solutions for other customers remained flat.

The increases in Services and Support Solutions revenue for 2017 as compared to 2016, and 2016 as compared to 2015, were due to strong attachment rates for our professional services for new customers as well as purchases of upgrades to professional services by our existing 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,
 
2017
 
2016
 
% Change
 
% Change at Constant Currency
 
2016
 
2015
 
% Change
 
% Change at Constant Currency
U.S.
$
1,647,948

 
$
1,620,724

 
1.7
%
 
1.7
%
 
$
1,620,724

 
$
1,604,492

 
1.0
%
 
1.0
%
International
855,048

 
719,325

 
18.9

 
18.9

 
719,325

 
592,956

 
21.3

 
21.6

Total revenue
$
2,502,996

 
$
2,340,049

 
7.0
%
 
7.0
%
 
$
2,340,049

 
$
2,197,448

 
6.5
%
 
6.6
%

The reduced revenue from our Internet Platform Customers negatively impacted our U.S. revenue growth rates for the years ended December 31, 2017 and 2016, as these customers are based in the U.S. For the year ended December 31, 2017, approximately 34% of our revenue was derived from our operations located outside of the U.S., compared to 31% for the year ended December 31, 2016, and 27% for the year ended December 31, 2015. No single country outside of the U.S. accounted for 10% or more of revenue during any of these periods.

During 2017 and 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 $0.4 million in 2017 as compared to 2016, and by $1.0 million in 2016 as compared to 2015.

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,
 
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Bandwidth fees
$
168,092

 
$
168,202

 
(0.1
)%
 
$
168,202

 
$
150,607

 
11.7
%
Co-location fees
130,181

 
129,904

 
0.2

 
129,904

 
125,983

 
3.1

Network build-out and supporting services
75,209

 
61,320

 
22.7

 
61,320

 
58,207

 
5.3

Payroll and related costs
216,681

 
189,409

 
14.4

 
189,409

 
158,742

 
19.3

Stock-based compensation, including amortization of prior capitalized amounts
36,677

 
31,145

 
17.8

 
31,145

 
26,222

 
18.8

Depreciation of network equipment
143,825

 
140,777

 
2.2

 
140,777

 
130,098

 
8.2

Amortization of internal-use software
105,093

 
88,244

 
19.1

 
88,244

 
75,761

 
16.5

Total cost of revenue
$
875,758

 
$
809,001

 
8.3
 %
 
$
809,001

 
$
725,620

 
11.5
%
As a percentage of revenue
35.0
%
 
34.6
%
 
 
 
34.6
%
 
33.0
%
 
 



28


The increase in total cost of revenue for 2017 as compared to 2016 was primarily due to increases in:

payroll and related costs, as well as stock-based compensation, due to increased hiring in our services team to support revenue growth;
amounts paid for network build-out and supporting services related to investments in network expansion to support our expanding web performance and cloud security solutions as a result of new product launches and our acquisitions; and
amortization of internal-use software as we continued to release internally-developed software onto our network as a result of new product launches and significant enhancements to our existing services.

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 increased hiring in our services team 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 12 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 2018 as compared to 2017 due to higher bandwidth expenses associated with increased customer traffic on our network and the costs we expect to incur to increase our network's capacity and resiliency with the goal of combating potential attacks on our platform. Additionally, during 2018, we anticipate amortization of internal-use software development costs to increase as compared to 2017, along with increased payroll and related costs associated with our professional services personnel and related expenses. However, we do not anticipate that cost of revenue will increase as a percentage of revenue during 2018 as compared to 2017. 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,
 
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Payroll and related costs
$
322,604

 
$
253,351

 
27.3
%
 
$
253,351

 
$
220,198

 
15.1
 %
Stock-based compensation
38,863

 
29,739

 
30.7

 
29,739

 
23,926

 
24.3

Capitalized salaries and related costs
(148,998
)
 
(122,084
)
 
22.0

 
(122,084
)
 
(103,352
)
 
18.1

Other expenses
9,965

 
6,622

 
50.5

 
6,622

 
7,819

 
(15.3
)
Total research and development
$
222,434

 
$
167,628

 
32.7
%
 
$
167,628

 
$
148,591

 
12.8
 %
As a percentage of revenue
8.9
%
 
7.2
%
 
 
 
7.2
%
 
6.8
%
 
 

The increases in research and development expenses for 2017 as compared to 2016 and 2016 as compared to 2015, 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, and as a result of recent acquisitions; and
stock-based compensation due to increased headcount and market adjustments of award sizes to existing employees due to competition for certain engineering talent.



29


The increases in research and development expenses for the periods presented above were partially offset by increases in capitalized salaries and related costs due to continued investment in internal-use software deployed on our network. 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, 2017, 2016 and 2015, we capitalized $26.8 million, $21.4 million and $16.7 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 2018 will increase as compared to 2017, as a result of the increases in headcount we experienced throughout 2017. We expect the increases to payroll and related costs in 2018 as compared to 2017 to be at a slower pace than we experienced in 2017.

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,
 
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Payroll and related costs
$
354,829

 
$
309,181

 
14.8
%
 
$
309,181

 
$
316,845

 
(2.4
)%
Stock-based compensation
60,247

 
55,407

 
8.7

 
55,407

 
53,542

 
3.5

Marketing programs and related costs
48,551

 
36,904

 
31.6

 
36,904

 
43,990

 
(16.1
)
Other expenses
30,005

 
25,475

 
17.8

 
25,475

 
26,611

 
(4.3
)
Total sales and marketing
$
493,632

 
$
426,967

 
15.6
%
 
$
426,967

 
$
440,988

 
(3.2
)%
As a percentage of revenue
19.7
%
 
18.2
%
 
 
 
18.2
%
 
20.1
%
 
 

The increase in sales and marketing expenses for 2017 as compared to 2016 was primarily due to increases in:

payroll and related costs from headcount increases to enable our Web and Enterprise and Carrier Divisions' go-to-market strategies in support of growth opportunities; and
marketing programs and related costs in support of our go-to-market strategies and ongoing geographic expansion.

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.

We believe that sales and marketing expenses will increase during 2018 as compared to 2017, due to increased payroll and related costs as a result of headcount growth during 2017 and expected hiring in 2018.



30


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,
 
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Payroll and related costs
$
194,199

 
$
163,348

 
18.9
 %
 
$
163,348

 
$
161,660

 
1.0
 %
Stock-based compensation
44,884

 
41,073

 
9.3

 
41,073

 
35,062

 
17.1

Depreciation and amortization
76,128

 
65,780

 
15.7

 
65,780

 
54,562

 
20.6

Facilities-related costs
80,452

 
72,549

 
10.9

 
72,549

 
64,302

 
12.8

Provision for doubtful accounts
3,209

 
1,235

 
159.8

 
1,235

 
1,717

 
(28.1
)
Acquisition-related costs
23,373

 
1,028

 
2,173.6

 
1,028

 
1,756

 
(41.5
)
License of patent
(16,421
)
 
(8,577
)
 
91.5

 
(8,577
)
 

 
(100.0
)
Professional fees and other expenses
103,341

 
103,480

 
(0.1
)
 
103,480

 
69,206

 
49.5

Total general and administrative
$
509,165

 
$
439,916

 
15.7
 %
 
$
439,916

 
$
388,265

 
13.3
 %
As a percentage of revenue
20.3
%
 
18.8
%
 
 
 
18.8
%
 
17.7
%
 
 

The increase in total general and administrative expenses for 2017 as compared to 2016 was primarily due to increases in:

payroll and related costs, specifically in our network infrastructure and information technology functions in support of our security infrastructure growth and network scaling and efficiency efforts;
facilities-related costs and depreciation and amortization due to expansion of company infrastructure throughout 2016 and 2017 to support investments in engineering, go-to market capacity and enterprise expansion initiatives, particularly expansion of our facility footprint; and
acquisition-related costs due to the release of an indemnification receivable related to an acquisition.

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
performance-based stock-based compensation awards from period to period.

General and administrative expenses for 2017 and 2016 are broken out by category as follows (in thousands):

 
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
 
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Global functions
 
$
201,539

 
$
189,485

 
6.4
 %
 
$
189,485

 
$
160,019

 
18.4
 %
As a percentage of revenue
 
8.1
%
 
8.1
%
 
 
 
8.1
%
 
7.3
%
 
 
Infrastructure
 
297,465

 
255,855

 
16.3

 
255,855

 
222,674

 
14.9

As a percentage of revenue
 
11.9
%
 
10.9
%
 
 
 
10.9
%
 
10.1
%
 
 
Other
 
10,161

 
(5,424
)
 
(287.3
)
 
(5,424
)
 
5,572

 
(197.3
)
Total general and administrative expenses
 
$
509,165

 
$
439,916

 
15.7
 %
 
$
439,916

 
$
388,265

 
13.3
 %
As a percentage of revenue
 
20.3
%
 
18.8
%
 
 
 
18.8
%
 
17.7
%
 
 



31


Global functions expense includes payroll, stock-based compensation and other employee-related costs for administrative functions, including finance, purchasing, order entry, human resources, legal, information technology and executive personnel, as well as third-party professional service fees. Infrastructure expense includes payroll, stock-based compensation and other employee-related costs for our network infrastructure functions, as well as facility rent expense, depreciation and amortization of facility and IT-related assets, software and software-related costs, business insurance and taxes. Our network infrastructure function is responsible for network planning, sourcing, architecture evaluation and platform security. Other expenses includes acquisition-related costs, provision for doubtful accounts and the license of a patent.

During 2018, we expect payroll and related costs of our general and administrative functions to increase as compared to 2017 as a result of headcount growth in 2017. We do not expect other areas of general and administrative expenses to experience the same level of increases as past years and we expect acquisition-related costs to decrease as a result of the release of an indemnification receivable in 2017 that will not recur in 2018 that related to a prior acquisition.

Amortization of Acquired Intangible Assets

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Amortization of acquired intangible assets
$
30,904

 
$
26,642

 
16.0
%
 
$
26,642

 
$
27,067

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

The increase in amortization of acquired intangible assets in 2017 as compared to 2016 was the result of amortization of assets related to our 2016 and 2017 acquisitions. 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 intangible assets we acquired in 2015 and 2016.

Based on acquired intangible assets as of December 31, 2017, future amortization is expected to be approximately $33.3 million, $36.5 million, $33.8 million, $27.9 million and $22.4 million for the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively.

Restructuring Charges

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Restructuring charges
$
54,884

 
$
10,301

 
432.8
%
 
$
10,301

 
$
767

 
1,243.0
%
As a percentage of revenue
2.2
%
 
0.4
%
 
 
 
0.4
%
 
%
 
 

The increase in restructuring charges in 2017 as compared to 2016 was the result of certain restructuring actions taken in the fourth quarter of 2017. Management committed to an action to restructure certain parts of the business, primarily media-related, with the intent of shifting focus to more critical areas and away from products that have not seen expected commercial success. The restructuring is also intended to facilitate other cost efficiencies and savings. Certain capitalized internal-use software charges have been realized for software not yet placed into service that will not be completed and launched due to this action. In addition, as part of cost efficiencies and savings, certain headcount and facility reductions were made. The restructuring charges in 2017 also consisted of severance expenses associated with the acquisitions of Soasta and Nominum.

The restructuring charges in 2016 were primarily the result of changes to our organizational structure to reorganize and consolidate 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.


32



The restructuring charges in 2015 consisted of severance expenses for redundant employees associated with acquisitions completed during those years.

We expect to incur additional restructuring charges of up to $15.0 million in 2018 as a result of the action committed to in the fourth quarter of 2017 and continued in the first quarter of 2018. These charges will include severance and related expenses for terminations of approximately 300 employees in the first quarter of 2018 and charges related to facility closures we plan to implement in 2018.

Non-Operating Income (Expense)

 
For the Years Ended December 31,
 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Interest income
$
17,855

 
$
14,702

 
21.4
 %
 
$
14,702

 
$
11,200

 
31.3
 %
As a percentage of revenue
0.7
 %
 
0.6
 %
 
 
 
0.6
 %
 
0.5
 %
 
 
Interest expense
$
(18,839
)
 
$
(18,638
)
 
1.1
 %
 
$
(18,638
)
 
$
(18,525
)
 
0.6
 %
As a percentage of revenue
(0.8
)%
 
(0.8
)%
 
 
 
(0.8
)%
 
(0.8
)%
 

Other income (expense), net
$
887

 
$
3,788

 
(76.6
)%
 
$
3,788

 
$
(2,201
)
 
(272.1
)%
As a percentage of revenue
 %
 
0.2
 %
 
 
 
0.2
 %
 
(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, 2017, 2016 and 2015 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)
2017
 
2016
 
% Change
 
2016
 
2015
 
% Change
Provision for income taxes
$
97,801

 
$
143,314

 
(31.8
)%
 
$
143,314

 
$
135,218

 
6.0
%
As a percentage of revenue
3.9
%
 
6.1
%
 
 
 
6.1
%
 
6.2
%
 
 
Effective income tax rate
30.9
%
 
31.2
%
 
 
 
31.2
%
 
29.6
%
 
 

For the year ended December 31, 2017, our 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 re-measurement of deferred taxes at lower tax rates expected to be in place upon realization due to the U.S. Tax Cuts and Jobs Act, or TCJA, which was enacted in December 2017, the impacts of the release of an acquisition-related reserve due to the expiration of the relevant statute of limitations and U.S. federal, state and foreign research and development credits. These benefits were partially offset by a provisional charge for the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings taken as part of the TCJA, the effects of stock-based compensation in accordance with authoritative guidance for share-based payments and state income taxes.

For the year ended December 31, 2017, the net impact of the TCJA described above was a provisional net tax expense of $26.0 million which is comprised of a one-time transition tax expense of $43.4 million on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, offset by a $17.4 million tax benefit related to the re-measurement of deferred tax assets and liabilities due to the lower corporate income tax rate.

For the year ended December 31, 2016, our 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 U.S. federal, state and foreign research and development credits, partially


33


offset by the effects of stock-based compensation in accordance with 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, U.S. federal, state, and foreign research and development credits, 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.

The decrease in the provision for income taxes for 2017 as compared to 2016 was mainly due to a decrease in profit before tax, the re-measurement of deferred taxes at lower tax rates expected to be in place upon realization as a result of the TCJA, the impacts of the release of an acquisition-related reserve due to the expiration of the relevant statute of limitations and an increase in U.S. federal, state and foreign research and development credits. These benefits were partially offset by a decrease in the domestic production activities deduction and a provisional charge for the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as a result of the TJCA.

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 that occurred in 2015, a decrease in 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.

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 set 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 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 the 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


34


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 and quantity of our acquisition transactions.

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.

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 or ongoing operating performance.

Legal matter costs – We have incurred losses from the settlement of legal matters and costs with respect to our 2015 internal U.S. Foreign Corrupt Practices Act, or FCPA, investigation in addition to the disgorgement payments we made to resolve the matter. 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 the release of income tax reserves due to statute expiration and one-time impacts of the TCJA), 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.



35


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, 2017, 2016 and 2015 (in thousands):

 
2017
 
2016
 
2015
Income from operations
$
316,219

 
$
459,594

 
$
466,150

Amortization of acquired intangible assets
30,904

 
26,642

 
27,067

Stock-based compensation
164,308

 
144,506

 
126,677

Amortization of capitalized stock-based compensation and capitalized interest expense
19,953

 
15,439

 
13,618

Restructuring charges
54,884

 
10,301

 
767

Acquisition-related costs
23,374

 
1,064

 
865

Legal matter costs

 
890

 
3,291

Non-GAAP income from operations
$
609,642

 
$
658,436

 
$
638,435

 
 
 
 
 
 
GAAP operating margin
13
%
 
20
%
 
21
%
Non-GAAP operating margin
24
%
 
28
%
 
29
%

The following table reconciles GAAP net income to non-GAAP net income for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
2017
 
2016
 
2015
Net income
$
218,321

 
$
316,132

 
$
321,406

Amortization of acquired intangible assets
30,904

 
26,642

 
27,067

Stock-based compensation
164,308

 
144,506

 
126,677

Amortization of capitalized stock-based compensation and capitalized interest expense

19,953

 
15,439

 
13,618

Restructuring charges
54,884

 
10,301

 
767

Acquisition-related costs
23,374

 
1,064

 
865

Legal matter costs

 
890

 
3,291

Amortization of debt discount and issuance costs
18,839

 
18,638

 
18,525

(Gain) loss on investments
(450
)
 
(4,807
)
 
25

Income tax effect of above non-GAAP adjustments and certain discrete tax items
(77,385
)
 
(52,661
)
 
(58,309
)
Non-GAAP net income
$
452,748

 
$
476,144

 
$
453,932




36


The following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the years ended December 31, 2017, 2016 and 2015 (shares in thousands):
 
2017
 
2016
 
2015
GAAP net income per diluted share
$
1.26

 
$
1.79

 
1.78

Amortization of acquired intangible assets
0.18

 
0.14

 
0.16

Stock-based compensation
0.95

 
0.82

 
0.70

Amortization of capitalized stock-based compensation and capitalized interest expense

0.12

 
0.09

 
0.08

Restructuring charges
0.32

 
0.06

 

Acquisition-related costs
0.14

 
0.01

 

Legal matter costs

 
0.01

 
0.02

Amortization of debt discount and issuance costs
0.11

 
0.11

 
0.10

(Gain) loss on investments

 
(0.03
)
 

Income tax effect of above non-GAAP adjustments and certain discrete tax items
(0.45
)
 
(0.30
)
 
(0.32
)
Non-GAAP net income per diluted share (1)
$
2.62

 
$
2.70

 
$
2.52

 
 
 
 
 
 
Shares used in per share calculations
172,711

 
176,215

 
180,415


(1) May not foot due to rounding

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.

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 we do not consider to be part of our core operations. 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; 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.



37


The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2017, 2016 and 2015 (in thousands):

 
2017
 
2016
 
2015
Net income
$
218,321

 
$
316,132

 
$
321,406

Amortization of acquired intangible assets
30,904

 
26,642

 
27,067

Stock-based compensation
164,308

 
144,506

 
126,677

Amortization of capitalized stock-based compensation and capitalized interest expense
19,953

 
15,439

 
13,618

Restructuring charges
54,884

 
10,301

 
767

Acquisition-related costs
23,374

 
1,064

 
865

Legal matter costs

 
890

 
3,291

Interest income
(17,855
)
 
(14,702
)
 
(11,200
)
Amortization of debt discount and issuance costs
18,839

 
18,638

 
18,525

Provision for income taxes
97,801

 
143,314

 
135,218

Depreciation and amortization
321,456

 
292,221

 
258,878

Other (income) expense, net
(887
)
 
(3,788
)
 
2,201

Adjusted EBITDA
$
931,098

 
$
950,657

 
$
897,313

Adjusted EBITDA margin
37
%
 
41
%
 
41
%

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.

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, 2017, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds and U.S. government agency securities, totaled $1.3 billion. Factoring in our convertible senior notes of $690.0 million, our net cash at December 31, 2017 was $589.5 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.

As of December 31, 2017, we had cash and cash equivalents of $212.4 million held in accounts outside the U.S. As a result of the TCJA, we have recorded a provisional tax expense of $43.4 million related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The TCJA also provides for a territorial tax system in the U.S., which may provide companies with the ability to repatriate earnings with minimal U.S. federal income tax impact beginning in 2018. We have sufficient cash in the U.S. to pay this tax obligation and do not need to rely on cash outside the U.S. for payment. As a result, our liquidity is not materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S. For additional information, including information on the impact of the TCJA, see Note 17 to the consolidated financial statements included elsewhere in this annual report on Form 10-K.

Cash Provided by Operating Activities

 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
2015
Net income
$
218,321

 
$
316,132

 
$
321,406

Non-cash reconciling items included in net income
596,624

 
515,328

 
454,667

Changes in operating assets and liabilities
(13,962
)
 
40,352

 
17,379

Net cash flows provided by operating activities
$
800,983

 
$
871,812

 
$
793,452


The decrease in cash provided by operating activities for 2017 as compared to 2016 was primarily due to lower profitability as a result of the restructuring charge in 2017 and increased level of expenses as a result of our 2017 acquisitions. Payroll and related costs, including annual bonus and commissions payouts, were higher in 2017 as compared to 2016 due to increased headcount and higher bonus and commission attainment levels.

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 attainment levels. These increases to cash provided by operating activities were partially offset by higher cash payments for taxes during 2016 as compared to 2015.



38


Cash Used in Investing Activities

 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
2015
Cash paid for acquired businesses, net of cash acquired
$
(369,073
)
 
$
(95,439
)
 
$
(141,147
)
Purchases of property and equipment and capitalization of internal-use software development costs
(414,778
)
 
(316,289
)
 
(444,983
)
Net marketable securities activity
326,272

 
(58,484
)
 
153,060

Other investing activities
(2,098
)
 
782

 
(2,494
)
Net cash used in investing activities
$
(459,677
)
 
$
(469,430
)
 
$
(435,564
)

The decrease in cash used in investing activities in 2017 as compared to 2016 was driven by a decrease in marketable securities activity. This was offset by the funding our 2017 acquisitions of Nominum and Soasta. We also increased our purchases of property and equipment in 2017 as compared to 2016 to support both network and facility expansion.

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 was 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.

Cash Used in Financing Activities

 
For the Years Ended December 31,
(in thousands)
2017
 
2016
 
2015
Activity related to stock-based compensation
$
(2,715
)
 
$
14,015

 
$
7,627

Repurchases of common stock
(361,194
)
 
(373,794
)
 
(302,606
)
Other financing activities
(1,096
)
 

 
(2,050
)
Net cash used in financing activities
$
(365,005
)
 
$
(359,779
)
 
$
(297,029
)

The increase in cash used in financing activities during 2017 as compared to 2016 was primarily due to an increase in employee taxes paid related to net share settlement of stock-based awards. 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 goals for the share repurchase program are to offset the dilution created by its employee equity compensation programs and to provide the flexibility to return capital to shareholders as business and market conditions warrant.

During 2017, 2016 and 2015, we repurchased 6.9 million, 7.0 million and 4.5 million shares of our common stock, respectively, at an average price per share of $52.59, $53.28 and $67.05, respectively. These repurchases have contributed to a decrease in weighted average shares over at least the past three years.

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 11 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.

The convertible senior notes are due in February 2019, and are classified as a long-term liability on our consolidated balance sheet as of December 31, 2017. We are currently assessing our options with respect to repayment of the notes.


39



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, 2017, 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
$
756,998

 
$
50,187

 
$
110,449

 
$
114,891

 
$
481,471

Bandwidth and co-location agreements
137,109

 
108,988

 
28,121

 

 

Open vendor purchase orders
105,340

 
93,385