Akamai Technologies, Inc.: United States Securities and Exchange Commission FORM 10 Q

8/31/2016
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10Q1akam10q6302016.htmFORM10Q
UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
______________________________________________
FORM10Q
______________________________________________
(MarkOne)
QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGE
ACTOF1934
ForthequarterlyperiodendedJune30,2016
or
TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGE
ACTOF1934
Forthetransitionperiodfromto
Commissionfilenumber027275
______________________________________________
AkamaiTechnologies,Inc.
(Exactnameofregistrantasspecifiedinitscharter)
Delaware
(Stateorotherjurisdictionof
incorporationororganization)
043432319
(I.R.S.Employer
IdentificationNo.)
150Broadway
Cambridge,MA02142
(617)4443000
(Address,IncludingZipCode,andTelephoneNumber,
IncludingAreaCode,ofRegistrantsPrincipalExecutiveOffices)
______________________________________________
Indicatebycheckmarkwhethertheregistrant:(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecurities
ExchangeActof1934(theExchangeAct)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwas
requiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesNo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,every
InteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationST(232.405ofthischapter)during
thepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesNo
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anonacceleratedfilerorasmaller
reportingcompany.Seethedefinitionsoflargeacceleratedfiler,acceleratedfilerandsmallerreportingcompanyinRule
12b2oftheExchangeAct.
Largeacceleratedfiler
Acceleratedfiler
Nonacceleratedfiler
Smallerreportingcompany
(Donotcheckifasmallerreportingcompany)
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b2oftheExchangeAct).YesNo
ThenumberofsharesoutstandingoftheregistrantscommonstockasofAugust4,2016:174,724,451
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AKAMAITECHNOLOGIES,INC.
FORM10Q
FORTHEQUARTERLYPERIODENDEDJUNE30,2016
TABLEOFCONTENTS
Page
PARTI.FINANCIALINFORMATION
Item1.
FinancialStatements(Unaudited)
ConsolidatedBalanceSheetsatJune30,2016andDecember31,2015
ConsolidatedStatementsofIncomeforthethreeandsixmonthsendedJune30,2016and2015
ConsolidatedStatementsofComprehensiveIncomeforthethreeandsixmonthsendedJune30,2016
and2015
ConsolidatedStatementsofCashFlowsforthesixmonthsendedJune30,2016and2015
NotestoUnauditedConsolidatedFinancialStatements
Item2.
ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations
16
Item3.
QuantitativeandQualitativeDisclosuresAboutMarketRisk
32
Item4.
ControlsandProcedures
32
PARTII.OTHERINFORMATION
Item1.
LegalProceedings
32
Item1A. RiskFactors
Item2.
Item6.
32
UnregisteredSalesofEquitySecuritiesandUseofProceeds
43
Exhibits
43
SIGNATURES
45
EXHIBITINDEX
46
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PARTI.FINANCIALINFORMATION
Item1.FinancialStatements(Unaudited)
CONSOLIDATEDBALANCESHEETS
June30,
2016
(inthousands,expectsharedata)
December31,
2015
ASSETS
Currentassets:
326,644 $
289,473
Marketablesecurities
542,062
460,088
Accountsreceivable,netofreservesof$8,487and$7,364atJune30,2016,and
December31,2015,respectively
364,401
380,399
Prepaidexpensesandothercurrentassets
132,477
123,228
Totalcurrentassets
1,365,584
1,253,188
Propertyandequipment,net
786,835
753,180
Marketablesecurities
731,232
774,674
1,150,137
1,150,244
142,668
156,095
2,455
4,700
90,811
89,603
Cashandcashequivalents
Goodwill
Acquiredintangibleassets,net
Deferredincometaxassets
Otherassets
Totalassets
4,269,722 $
LIABILITIESANDSTOCKHOLDERSEQUITY
Currentliabilities:
68,249 $
Accountspayable
4,181,684
61,982
Accruedexpenses
234,013
216,166
Deferredrevenue
67,163
54,154
7,117
138
376,542
332,440
3,735
4,163
10,248
12,888
628,970
618,047
99,754
93,268
1,119,249
1,060,806
Othercurrentliabilities
Totalcurrentliabilities
Deferredrevenue
Deferredincometaxliabilities
Convertibleseniornotes
Otherliabilities
Totalliabilities
Commitmentsandcontingencies
Stockholdersequity:
Preferredstock,$0.01parvalue5,000,000sharesauthorized700,000shares
designatedasSeriesAJuniorParticipatingPreferredStocknosharesissuedor
outstanding
Commonstock,$0.01parvalue700,000,000sharesauthorized179,061,970shares
issuedand175,110,207sharesoutstandingatJune30,2016,and177,212,181shares
issuedandoutstandingatDecember31,2015
Additionalpaidincapital
1,791
1,772
4,508,376
4,437,420
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Accumulatedothercomprehensiveloss
(31,616)
Treasurystock,atcost,3,951,763sharesatJune30,2016,andnosharesat
December31,2015
(199,710)
Accumulateddeficit
Totalstockholdersequity
Totalliabilitiesandstockholdersequity
(41,453)
(1,128,368)
(1,276,861)
3,150,473
3,120,878
4,269,722 $
4,181,684
Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.
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CONSOLIDATEDSTATEMENTSOFINCOME
FortheThreeMonths
EndedJune30,
2016
(inthousands,exceptpersharedata)
FortheSixMonths
EndedJune30,
2015
2016
2015
Revenue
572,135 $
540,723 $
1,139,860 $
Costsandoperatingexpenses:
Costofrevenue(exclusiveofamortizationof
acquiredintangibleassetsshownbelow)
1,067,259
206,323
179,910
401,059
349,204
37,690
36,693
78,532
72,521
Salesandmarketing
103,223
111,501
205,434
214,980
Generalandadministrative
107,538
99,152
209,821
188,744
6,711
6,752
13,427
13,532
470
455
7,288
497
461,955
434,463
915,561
839,478
110,180
106,260
224,299
227,781
Researchanddevelopment
Amortizationofacquiredintangibleassets
Restructuringcharges
Totalcostsandoperatingexpenses
Incomefromoperations
Interestincome
3,393
2,541
6,713
5,542
Interestexpense
(4,639)
(4,678)
(9,292)
(9,254)
415
(1,605)
226
(1,906)
109,349
102,518
221,946
222,163
35,714
35,318
73,453
77,217
67,200
Otherincome(expense),net
Incomebeforeprovisionforincometaxes
Provisionforincometaxes
Netincome
73,635 $
Netincomepershare:
Basic
0.42
Diluted
0.42 $
Sharesusedinpersharecalculations:
148,493
0.38
144,946
0.84
0.81
0.37 $
0.84 $
0.80
Basic
175,499
178,682
175,951
178,614
Diluted
176,420
180,738
176,980
180,782
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CONSOLIDATEDSTATEMENTSOFCOMPREHENSIVEINCOME
FortheThreeMonths
EndedJune30,
2016
(inthousands)
2015
FortheSixMonths
EndedJune30,
2016
Netincome
73,635 $
67,200 $
148,493 $
Othercomprehensive(loss)income:
Foreigncurrencytranslationadjustments
Changeinunrealizedgain(loss)oninvestments,
netofincometax(provision)benefitof$(529),
$639,$(2,311)and$(574)forthethreeandsix
monthsendedJune30,2016and2015,
respectively
Othercomprehensive(loss)income
Comprehensiveincome
2015
144,946
(3,728)
607
5,925
(7,808)
904
(1,073)
3,912
1,040
(2,824)
(466)
9,837
(6,768)
70,811 $
66,734 $
158,330 $
138,178
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CONSOLIDATEDSTATEMENTSOFCASHFLOWS
FortheSixMonths
EndedJune30,
2016
(inthousands)
Cashflowsfromoperatingactivities:
Netincome
148,493 $
Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:
Depreciationandamortization
2015
144,946
165,783
144,449
Stockbasedcompensation
66,652
61,920
Excesstaxbenefitsfromstockbasedcompensation
(2,632)
(22,737)
Provision(benefit)fordeferredincometaxes
2,785
(16,275)
Amortizationofdebtdiscountandissuancecosts
9,292
9,253
Othernoncashreconcilingitems,net
3,501
1,146
Changesinoperatingassetsandliabilities,netofeffectsofacquisitions:
Accountsreceivable
17,786
(14,292)
Prepaidexpensesandothercurrentassets
(10,991)
12,022
Accountspayableandaccruedexpenses
12,282
31,673
Deferredrevenue
12,126
7,023
Othercurrentliabilities
6,971
199
Othernoncurrentassetsandliabilities
1,062
4,425
433,110
363,752
Netcashprovidedbyoperatingactivities
Cashflowsfrominvestingactivities:
Cashpaidforacquiredbusinesses,netofcashacquired
(122,945)
Purchasesofpropertyandequipment
(86,820)
(159,495)
Capitalizationofinternalusesoftwaredevelopmentcosts
(73,661)
(73,587)
(384,585)
(405,989)
Purchasesofshortandlongtermmarketablesecurities
Proceedsfromsalesofshortandlongtermmarketablesecurities
Proceedsfrommaturitiesofshortandlongtermmarketablesecurities
Netcashusedininvestingactivities
Cashflowsfromfinancingactivities:
Proceedsrelatedtotheissuanceofcommonstockunderstockplans
Excesstaxbenefitsfromstockbasedcompensation
Employeetaxespaidrelatedtonetsharesettlementofstockbasedawards
Repurchasesofcommonstock
Netcashusedinfinancingactivities
Effectsofexchangeratechangesoncashandcashequivalents
Netincreaseincashandcashequivalents
Cashandcashequivalentsatbeginningofperiod
Cashandcashequivalentsatendofperiod
50,541
2,008
301,802
527,677
(1,512)
(1,909)
(194,235)
(234,240)
27,095
36,512
2,632
22,737
(32,410)
(39,354)
(199,710)
(126,068)
(1,250)
(202,393)
(107,423)
689
(3,291)
37,171
18,798
289,473
238,650
326,644 $
257,448
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CONSOLIDATEDSTATEMENTSOFCASHFLOWS,continued
FortheSixMonths
EndedJune30,
2016
(inthousands)
Supplementaldisclosureofcashflowinformation:
Cashpaidforincometaxes,netofrefundsreceivedinthesixmonthsendedJune30,
2016and2015of$457and$17,964,respectively
Noncashinvestingactivities:
38,228 $
2015
12,055
Purchasesofpropertyandequipmentandcapitalizationofinternalusesoftware
developmentcostsincludedinaccountspayableandaccruedexpenses
28,113
41,874
Capitalizationofstockbasedcompensation
11,424
8,615
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NOTESTOUNAUDITEDCONSOLIDATEDFINANCIALSTATEMENTS
1.NatureofBusinessandBasisofPresentation
AkamaiTechnologies,Inc.(theCompany)providescloudservicesfordelivering,optimizingandsecuring
contentandbusinessapplicationsovertheInternet.TheCompany'sgloballydistributedplatformcomprisesover219,000
serversinmorethan1,500networksinapproximately125countries.TheCompanywasincorporatedinDelawarein1998
andisheadquarteredinCambridge,Massachusetts.TheCompanycurrentlyoperatesinoneindustrysegment:providing
cloudservicesfordelivering,optimizingandsecuringcontentandbusinessapplicationsovertheInternet.
Theaccompanyinginterimconsolidatedfinancialstatementsareunauditedandhavebeenpreparedinaccordance
withaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP)forinterimfinancialinformation.
ThesefinancialstatementsincludetheaccountsoftheCompanyanditswhollyownedsubsidiaries.Allintercompany
transactionsandbalanceshavebeeneliminatedintheaccompanyingfinancialstatements.
CertaininformationandfootnotedisclosuresnormallyincludedintheCompanysannualauditedconsolidated
financialstatementsandaccompanyingnoteshavebeencondensedin,oromittedfrom,theseinterimfinancialstatements.
Accordingly,theunauditedconsolidatedfinancialstatementsincludedhereinshouldbereadinconjunctionwiththe
auditedconsolidatedfinancialstatementsandaccompanyingnotesincludedintheCompanysannualreportonForm10K
fortheyearendedDecember31,2015,filedwiththeSecuritiesandExchangeCommission(the"Commission")onFebruary
29,2016.
TheresultsofoperationspresentedinthisquarterlyreportonForm10Qarenotnecessarilyindicativeoftheresults
ofoperationsthatmaybeexpectedforanyfutureperiods.Intheopinionofmanagement,theseunauditedconsolidated
financialstatementsincludealladjustments,consistingonlyofnormalrecurringadjustments,thatarenecessaryforafair
statementoftheresultsofallinterimperiodsreportedherein.
NewlyAdoptedAccountingPronouncements
InApril2015,theFinancialAccountingStandardsBoard(FASB)issuedupdatedguidancetosimplifythe
presentationofdebtissuancecostsonthebalancesheets.Thisguidancemoveddebtissuancecostsfromtheassetssectionof
thebalancesheettotheliabilitiessectionasadirectdeductionfromthecarryingamountofthedebtissued.TheCompany
retrospectivelyadoptedtheguidanceonJanuary1,2016.Thepriorperiodconsolidatedbalancesheetpresented,asof
December31,2015,wasrevisedtoreclassify$6.2millionofdebtissuancecostsincludedinotherassetstoconvertible
seniornotes.ThishadtheimpactofreducingtheCompany'stotalassetsandtotalliabilitiesby$6.2million,asofDecember
31,2015.TherevisionhadnoimpactontheCompany'sresultsofoperations,financialpositionorcashflows.
InSeptember2015,theFASBissuedupdatedguidancethateliminatestherequirementtorestatepriorperiod
financialstatementsformeasurementperiodadjustments.Inanefforttoreducecomplexityinfinancialreporting,thenew
guidancerequiresthatthecumulativeimpactofameasurementperiodadjustment,includingtheimpactonpriorperiods,be
recognizedinthereportingperiodinwhichtheadjustmentisidentified.Thestandardwaseffectiveforandadoptedbythe
CompanyonJanuary1,2016.ThisguidancedidnothaveanimpactontheCompany'sresultsofoperations,financial
conditionorcashflowsasthemeasurementperiodsfortheCompany's2015acquisitionswereclosedasofDecember31,
2015.
RecentAccountingPronouncements
InMay2014,theFASBissuedupdatedguidanceanddisclosurerequirementsforrecognizingrevenue.Thenew
revenuerecognitionstandardprovidesafivestepanalysisoftransactionstodeterminewhenandhowrevenueis
recognized.Thecoreprincipleisthatacompanyshouldrecognizerevenuetodepictthetransferofpromisedgoodsor
servicestocustomersinanamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledinexchangefor
thosegoodsorservices.ThisstandardwillbeeffectivefortheCompanyonJanuary1,2018,andmaybeapplied
retrospectivelytoeachperiodpresentedorasacumulativeeffectadjustmentasofthedateofadoption.TheCompanyis
evaluatingthepotentialimpactofadoptingthisnewaccountingguidance.
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InFebruary2016,theFASBissuedguidancethatrequirescompaniestopresentassetsandliabilitiesarisingfrom
leasesontheconsolidatedbalancesheets.Theupdatedstandardaimstoincreasetransparencyandcomparabilityamong
organizationsbyrequiringlesseestorecognizeleaseassetsandleaseliabilitiesonthebalancesheetandrequiringdisclosure
ofkeyinformationaboutleasingarrangements.ThisstandardwillbeeffectivefortheCompanyonJanuary1,2019,andisto
be
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appliedusingamodifiedretrospectiveapproach.Earlyadoptionispermitted.TheCompanyisevaluatingthepotential
impactofadoptingthisnewaccountingguidance.
InMarch2016,theFASBissuedguidancethatisintendedtosimplifyaspectsofhowsharebasedpaymentsare
accountedforandpresentedinfinancialstatements.Thisguidancerequiresthatentitiesrecordalltaxeffectsofsharebased
paymentsatsettlementorexpirationthroughtheincomestatement.Thestandardalsoamendshowwindfalltaxbenefitsare
recognized,theminimumstatutorytaxwithholdingrequirementsandhowentitieselecttorecognizesharebasedpayment
forfeitures.ThisguidancewillbeeffectivefortheCompanyonJanuary1,2017,andportionswillberequiredtobeapplied
onaretrospectiveormodifiedretrospectivebasis.Earlyadoptionispermitted.TheCompanyisevaluatingthepotential
impactofadoptingthisnewaccountingguidance.
2.FairValueMeasurements
ThefollowingisasummaryofavailableforsalemarketablesecuritiesheldasofJune30,2016andDecember31,
2015(inthousands):
Amortized
Cost
AsofJune30,2016
Commercialpaper
GrossUnrealized
Gains
Losses
Classificationon
BalanceSheet
ShortTerm
LongTerm
Aggregate
Marketable
Marketable
FairValue Securities Securities
18,376 $
(13) $
18,363 $
18,363 $
Corporatebonds
979,799
2,178
(111)
981,866
458,619
523,247
U.S.governmentagency
obligations
269,712
362
(23)
270,051
65,080
204,971
542,062 $
728,218
$ 1,267,887 $
AsofDecember31,2015
Commercialpaper
2,491 $
(4) $
2,487 $
2,487 $
2,540 $
(147) $ 1,270,280 $
Corporatebonds
995,100
73
(3,365)
991,808
432,585
559,223
U.S.governmentagency
obligations
239,587
41
(575)
239,053
25,016
214,037
460,088 $
773,260
$ 1,237,178 $
114 $
(3,944) $ 1,233,348 $
TheCompanyofferscertaineligibleemployeestheabilitytoparticipateinanonqualifieddeferredcompensation
plan.ThemutualfundsheldbytheCompanythatareassociatedwiththisplanareclassifiedasrestrictedtradingsecurities.
Thesesecuritiesarenotincludedintheavailableforsalesecuritiestableabovebutareincludedinmarketablesecuritiesin
theconsolidatedbalancesheets.
Unrealizedgainsandunrealizedtemporarylossesoninvestmentsclassifiedasavailableforsaleareincludedwithin
accumulatedothercomprehensivelossintheconsolidatedbalancesheets.Uponrealization,thoseamountsarereclassified
fromaccumulatedothercomprehensivelosstointerestincomeintheconsolidatedstatementsofincome.AsofJune30,
2016,theCompanyheldforinvestmentcorporatebondswithafairvalueof$51.4million,whichareclassifiedasavailable
forsalemarketablesecuritiesandhadbeeninacontinuousunrealizedlosspositionformorethan12months.Theunrealized
lossesarenotsignificantandareattributabletochangesininterestrates.TheCompanydoesnotbelieveanyunrealized
lossesrepresentotherthantemporaryimpairmentsbasedontheevaluationofavailableevidence.AsofDecember31,2015,
theCompanyheldforinvestmentcorporatebondswithafairvalueof$71.4millionthathadbeeninacontinuousunrealized
losspositionformorethan12months.
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ThefollowingtabledetailsthefairvaluemeasurementswithinthefairvaluehierarchyoftheCompanysfinancial
assetsatJune30,2016andDecember31,2015(inthousands):
TotalFairValue
AsofJune30,2016
CashEquivalentsandMarketableSecurities:
3,789 $
3,789 $
Moneymarketfunds
Commercialpaper
FairValueMeasurementsatReportingDateUsing
Level1
Level2
Level3
18,363
18,363
Corporatebonds
981,866
981,866
U.S.governmentagencyobligations
270,051
270,051
3,014
3,014
Mutualfunds
1,277,083 $
6,803 $
1,270,280 $
AsofDecember31,2015
CashEquivalentsandMarketableSecurities:
1,250 $
1,250 $
Moneymarketfunds
Commercialpaper
2,487
2,487
Corporatebonds
991,808
991,808
U.S.governmentagencyobligations
239,053
239,053
1,414
1,414
Mutualfunds
1,236,012
2,664
1,233,348
AsofJune30,2016andDecember31,2015,theCompanygroupedmoneymarketfundsandmutualfundsusinga
Level1valuationbecausemarketpricesforsuchinvestmentsarereadilyavailableinactivemarkets.AsofJune30,2016and
December31,2015,theCompanygroupedcommercialpaper,corporatebondsandU.S.governmentagencyobligations
usingaLevel2valuationbecausequotedpricesforidenticalorsimilarassetsareavailableinmarketsthatareinactive.The
CompanydidnothaveanytransfersofassetsbetweenLevel1,Level2orLevel3ofthefairvaluemeasurementhierarchy
duringthesixmonthsendedJune30,2016.
Whendevelopingfairvalueestimates,theCompanymaximizestheuseofobservableinputsandminimizestheuse
ofunobservableinputs.Whenavailable,theCompanyusesquotedmarketpricestomeasurefairvalue.Thevaluation
techniqueusedtomeasurefairvaluefortheCompany'sLevel1andLevel2assetsisamarketapproach,usingpricesand
otherrelevantinformationgeneratedbymarkettransactionsinvolvingidenticalorcomparableassets.Ifmarketpricesarenot
available,thefairvaluemeasurementisbasedonmodelsthatuseprimarilymarketbasedparametersincludingyieldcurves,
volatilities,creditratingsandcurrencyrates.Incertaincaseswheremarketrateassumptionsarenotavailable,theCompany
isrequiredtomakejudgmentsaboutassumptionsmarketparticipantswouldusetoestimatethefairvalueofafinancial
instrument.
ContractualmaturitiesoftheCompanysavailableforsalemarketablesecuritiesheldasofJune30,2016and
December31,2015wereasfollows(inthousands):
June30,
2016
Duein1yearorless
Dueafter1yearthrough5years
December31,
2015
542,062 $
460,088
728,218
773,260
1,270,280 $
1,233,348
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3.AccountsReceivable
NetaccountsreceivableconsistedofthefollowingasofJune30,2016andDecember31,2015(inthousands):
June30,
2016
Tradeaccountsreceivable
December31,
2015
264,645 $
262,885
Unbilledaccountsreceivable
108,243
124,878
Grossaccountsreceivable
372,888
387,763
Allowancefordoubtfulaccounts
(1,391)
(906)
Reserveforcashbasiscustomers
(7,096)
(6,458)
Totalaccountsreceivablereserves
(8,487)
(7,364)
Accountsreceivable,net
364,401 $
380,399
4.GoodwillandAcquiredIntangibleAssets
ThechangeinthecarryingamountofgoodwillforthesixmonthsendedJune30,2016wasasfollows(in
thousands):
BalanceasofJanuary1,2016
1,150,244
Foreigncurrencytranslation
(107)
BalanceasofJune30,2016
1,150,137
TheCompanytestsgoodwillforimpairmentatleastannually.Throughthedatetheconsolidatedfinancial
statementswereissued,notriggeringeventshadoccurredthatwouldindicateapotentialimpairmentexists.
AcquiredintangibleassetsthataresubjecttoamortizationconsistedofthefollowingasofJune30,2016and
December31,2015(inthousands):
June30,2016
Gross
Carrying
Amount
Completedtechnology
Customerrelated
intangibleassets
Accumulated
Amortization
120,791 $
(64,951) $
Net
Carrying
Amount
December31,2015
Gross
Carrying
Amount
Accumulated
Amortization
55,840 $
120,791 $
(58,633) $
Net
Carrying
Amount
62,158
191,710
(108,540)
83,170
191,710
(102,872)
88,838
Noncompeteagreements
6,540
(4,518)
2,022
6,540
(3,374)
3,166
Trademarksandtrade
names
3,700
(2,064)
1,636
3,700
(1,767)
1,933
490
(490)
490
(490)
Acquiredlicenserights
Total
323,231 $
(180,563) $
142,668 $
323,231 $
(167,136) $
156,095
AggregateexpenserelatedtoamortizationofacquiredintangibleassetsforthethreeandsixmonthsendedJune30,
2016was$6.7millionand$13.4million,respectively.Aggregateexpenserelatedtoamortizationofacquiredintangible
assetsforthethreeandsixmonthsendedJune30,2015was$6.8millionand$13.5million,respectively.Basedonthe
CompanysacquiredintangibleassetsasofJune30,2016,aggregateexpenserelatedtoamortizationofacquiredintangible
assetsisexpectedtobe$13.1millionfortheremainderof2016,and$27.8million,$23.7million,$21.7millionand$17.7
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millionfor2017,2018,2019and2020,respectively.
5.ConvertibleSeniorNotes
InFebruary2014,theCompanyissued$690.0millioninparvalueofconvertibleseniornotesdue2019(the
"Notes").TheNotesareseniorunsecuredobligationsoftheCompany,donotbearregularinterestandmatureon
February15,2019,unlessrepurchasedorconvertedpriortomaturity.
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Attheiroption,holdersmayconverttheirNotespriortothecloseofbusinessonthebusinessdayimmediately
precedingAugust15,2018onlyunderthefollowingcircumstances:
duringanycalendarquartercommencingafterthecalendarquarterendedJune30,2014(andonlyduringsuch
calendarquarter),ifthelastreportedsalepriceoftheCompany'scommonstockforatleast20tradingdays
(whetherornotconsecutive)duringtheperiodof30consecutivetradingdaysendingonthelasttradingday
oftheimmediatelyprecedingcalendarquarterisgreaterthanorequalto130%oftheconversionpriceon
eachapplicabletradingdayor
duringthefivebusinessdayperiodafteranyfiveconsecutivetradingdayperiodinwhichthetradingpriceper
$1,000principalamountofNotesforeachtradingdayofthemeasurementperiodwaslessthan98%ofthe
productofthelastreportedsalepriceoftheCompany'scommonstockandtheconversionrateoneachsuch
tradingdayorupontheoccurrenceofspecifiedcorporateevents.
OnorafterAugust15,2018,holdersmayconvertalloranyportionoftheirNotesatanytimepriortothecloseof
businessonthesecondscheduledtradingdayimmediatelyprecedingthematuritydate,regardlessoftheforegoing
circumstances.
Uponconversion,theCompany,atitselection,maypayordelivertoholderscash,sharesoftheCompany'scommon
stockoracombinationofcashandsharesoftheCompany'scommonstock.Theinitialconversionrateis11.1651sharesof
theCompany'scommonstockper$1,000principalamount,whichisequivalenttoaninitialconversionpriceof
approximately$89.56pershare,subjecttoadjustmentsincertainevents,andrepresentsapotentialconversioninto7.7
millionshares.
InaccountingfortheissuanceoftheNotes,theCompanyseparatedtheNotesintoliabilityandequitycomponents.
Thecarryingcostoftheliabilitycomponentwascalculatedbymeasuringthefairvalueofasimilardebtobligationthatdoes
nothaveanassociatedconvertiblefeature.Thecarryingamountoftheequitycomponentrepresentingtheconversionoption
wasdeterminedbydeductingthefairvalueoftheliabilitycomponentfromtheparvalueoftheNotes.Thedifference
betweentheprincipalamountoftheNotesandtheproceedsallocatedtotheliabilitycomponent(debtdiscount)is
amortizedtointerestexpenseusingtheeffectiveinterestmethodoverthetermoftheNotes.Theequitycomponentis
recordedinadditionalpaidincapitalintheconsolidatedbalancesheetandwillnotberemeasuredaslongasitcontinuesto
meettheconditionsforequityclassification.
InaccountingforthetransactioncostsrelatedtotheissuanceoftheNotes,theCompanyallocatedthetotal
transactioncostsincurredtotheliabilityandequitycomponentsbasedontheirrelativevalues.Transactioncostsattributable
totheliabilitycomponentarebeingamortizedtointerestexpenseoverthetermoftheNotes,andtransactioncosts
attributabletotheequitycomponentarenettedagainsttheequitycomponentoftheNotesinstockholdersequity.
TheNotesconsistofthefollowingcomponents(inthousands):
June30,
2016
Liabilitycomponent:
December31,
2015
690,000 $
690,000
(61,030)
(71,953)
628,970 $
618,047
Equitycomponent:
101,276 $
Principal
Less:debtdiscountandissuancecosts,netofamortization
Netcarryingamount
101,276
TheestimatedfairvalueoftheNotesatJune30,2016was$669.3million.Thefairvaluewasdeterminedbasedon
datapointsotherthanquotedpricesthatareobservable,eitherdirectlyorindirectly,andhasbeenclassifiedasLevel2
withinthefairvaluehierarchy.BasedontheclosingpriceoftheCompany'scommonstockof$55.93onJune30,2016,the
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valueoftheNotesifconvertedtocommonstockwaslessthantheprincipalamountof$690.0million.
TheCompanyused$62.0millionoftheproceedsfromtheofferingtorepurchasesharesofitscommonstock,
concurrentlywiththeissuanceoftheNotes.Therepurchasesweremadeinaccordancewiththesharerepurchaseprogram
previouslyapprovedbytheBoardofDirectors(Note7).Additionally,$23.3millionoftheproceedswasusedforthenetcost
of
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convertiblenotehedgeandwarranttransactions.Theremainingnetproceedsareforworkingcapital,sharerepurchasesand
othergeneralcorporatepurposes,aswellasforpotentialacquisitionsandstrategictransactions.
NoteHedge
TominimizetheimpactofpotentialdilutionuponconversionoftheNotes,theCompanyenteredintoconvertible
notehedgetransactionswithrespecttoitscommonstockinFebruary2014.TheCompanypaid$101.3millionforthenote
hedgetransactions.Thenotehedgetransactionscoverapproximately7.7millionsharesoftheCompanyscommonstockata
strikepricethatcorrespondstotheinitialconversionpriceoftheNotes,alsosubjecttoadjustment,andareexercisableupon
conversionoftheNotes.ThenotehedgetransactionsareintendedtoreducedilutionintheeventofconversionoftheNotes.
Warrants
Separately,inFebruary2014,theCompanyenteredintowarranttransactions,wherebytheCompanysoldwarrants
toacquire,subjecttoantidilutionadjustments,upto7.7millionsharesoftheCompanyscommonstockatastrikepriceof
approximately$104.49pershare.TheCompanyreceivedaggregateproceedsof$78.0millionfromthesaleofthewarrants.
Theconvertiblenotehedgeandwarranttransactionswillgenerallyhavetheeffectofincreasingtheconversionpriceofthe
Notestoapproximately$104.49pershare.
InterestExpense
TheNotesdonotbearregularinterest,buthaveaneffectiveinterestrateof3.2%attributabletotheconversion
feature.Thefollowingtablesetsforthtotalinterestexpenseincludedintheconsolidatedstatementsofincomerelatedtothe
Notes(inthousands):
FortheThreeMonths
EndedJune30,
2016
Amortizationofdebtdiscountandissuancecosts $
Capitalizationofinterestexpense
Totalinterestexpense
2015
FortheSixMonths
EndedJune30,
2016
2015
5,485 $
5,297
10,923
10,548
(846)
(619)
(1,631)
(1,294)
4,639 $
4,678 $
9,292 $
9,254
6.Contingencies
DuringthethreemonthsendedJune30,2016,theCompanycompletedaninternalinvestigation,withthe
assistanceofoutsidecounsel,relatingtoimpropersalespracticesbyaformeremployee.Theinternalinvestigationincludeda
reviewofcompliancewiththerequirementsoftheU.S.ForeignCorruptPracticesAct("FCPA")andotherapplicablelaws
andregulations.InFebruary2015,theCompanyvoluntarilycontactedtheCommissionandDepartmentofJusticetoadvise
bothagenciesofthisinternalinvestigation.InJune2016,theCompanysignedanonprosecutionagreementwiththe
Commissionandagreedtodisgorge$0.7milliontoresolvethismatter,includinginterest.Theamountwasaccruedandpaid
duringthesixmonthsendedJune30,2016.
InJuly2016,aspartoftheresolutionofapatentinfringementlawsuitfiledbytheCompanyagainstLimelight
Networks,Inc.(Limelight)in2006,theCompanyhasagreedtolicensetoLimelighttechnologycoveredbycertainofthe
Companyspatents.ThetermsoftheagreementrequireLimelighttopaytheCompany$54.0millionin12equal
installmentsoverthreeyears,beginninginAugust2016.
7.StockholdersEquity
ShareRepurchaseProgram
InOctober2013,theBoardofDirectorsauthorizeda$750.0millionsharerepurchaseprogram,effectivefrom
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October16,2013throughDecember31,2016.InFebruary2016,theBoardofDirectorsauthorizeda$1.0billionshare
repurchaseprogramthatsupersededtheOctober2013programandiseffectivefromFebruary9,2016throughDecember31,
2018.TheCompany'sgoalforthesharerepurchaseprogramistooffsetthedilutioncreatedbyitsemployeeequity
compensationprogramsandprovidetheflexibilitytoreturncapitaltoshareholdersasbusinessandmarketconditions
warrant.DuringthesixmonthsendedJune30,2016,theCompanyrepurchased4.0millionsharesofitscommonstockfor
$199.7million.
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StockBasedCompensation
ThefollowingtablesummarizesstockbasedcompensationincludedintheCompanysconsolidatedstatementsof
incomeforthethreeandsixmonthsendedJune30,2016and2015(inthousands):
FortheThreeMonths
EndedJune30,
Costofrevenue
2016
$
2015
FortheSixMonths
EndedJune30,
2016
2015
4,553 $
3,502 $
6,752
6,009
13,190
11,375
Salesandmarketing
13,259
12,847
25,611
25,830
10,347
9,893
19,328
18,050
Totalstockbasedcompensation
34,911
32,251
66,652
61,920
(12,388)
(10,405)
(24,521)
(22,107)
Totalstockbasedcompensation,netofincome
taxes
22,523 $
21,846 $
8,523 $
42,131 $
6,665
39,813
Inadditiontotheamountsofstockbasedcompensationreportedinthetableabove,theCompanysconsolidated
statementsofincomeforthethreeandsixmonthsendedJune30,2016includestockbasedcompensationreflectedasa
componentofamortizationofcapitalizedinternalusesoftwareof$3.6millionand$6.9million,respectively,beforetaxes.
ForthethreeandsixmonthsendedJune30,2015,theCompany'sconsolidatedstatementsofincomeincludestockbased
compensationreflectedasacomponentofamortizationofcapitalizedinternalusesoftwareof$3.4millionand$6.4million,
respectively,beforetaxes.
8.AccumulatedOtherComprehensiveLoss
Thefollowingtablesummarizesthechangesinaccumulatedothercomprehensiveloss,whichisreportedasa
componentofstockholders'equity,forthesixmonthsendedJune30,2016(inthousands):
Foreign
Currency
Translation
BalanceasofJanuary1,2016
Othercomprehensivegain
BalanceasofJune30,2016
NetUnrealized
Gainson
Investments
(44,936) $
5,925
(39,011) $
3,483 $
3,912
7,395 $
Total
(41,453)
9,837
(31,616)
ThetaxeffectonaccumulatedunrealizedgainsoninvestmentswasinsignificantasofJune30,2016and
December31,2015.Amountsreclassifiedfromaccumulatedothercomprehensivelosstonetincomewereinsignificantfor
thesixmonthsendedJune30,2016.
9.IncomeTaxes
TheCompanyseffectiveincometaxratewas33.1%and34.8%forthesixmonthsendedJune30,2016and2015,
respectively.Theeffectiveincometaxrateisbasedonestimatedincomefortheyear,theestimatedcompositionofthe
incomeindifferentjurisdictionsanddiscreteadjustments,ifany,intheapplicablequarterlyperiods,includingretroactive
changesintaxlegislation,settlementsoftaxauditsorassessments,theresolutionoridentificationoftaxposition
uncertaintiesandacquisitionsofothercompanies.
ForthesixmonthsendedJune30,2016,theeffectiveincometaxratewaslowerthanthefederalstatutorytaxrate
duetothecompositionofincomefromforeignjurisdictionsthatistaxedatlowerratescomparedtothestatutorytaxratesin
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theU.S.andtheU.S.federal,stateandforeignresearchanddevelopmentcredits,partiallyoffsetbytheeffectsofaccounting
forstockbasedcompensationinaccordancewiththeauthoritativeguidanceforsharebasedpaymentsandstateincome
taxes.ForthesixmonthsendedJune30,2015,theeffectiveincometaxratewaslowerthanthefederalstatutorytaxratedue
tothedomesticproductionactivitiesdeductionandthecompositionofincomefromforeignjurisdictionsthatistaxedat
lower
ratescomparedtothestatutorytaxratesintheU.S.,partiallyoffsetbytheeffectsofaccountingforstockbasedcompensation
inaccordancewiththeauthoritativeguidanceforsharebasedpaymentsandstateincometaxes.
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10.NetIncomeperShare
Basicnetincomepershareiscomputedusingtheweightedaveragenumberofcommonsharesoutstandingduring
theapplicableperiod.Dilutednetincomepershareiscomputedusingtheweightedaveragenumberofcommonshares
outstandingduringtheperiod,plusthedilutiveeffectofpotentialcommonstock.Potentialcommonstockconsistsofshares
issuablepursuanttostockoptions,restrictedstockunits(RSUs),deferredstockunits("DSUs"),convertibleseniornotes
andwarrantsissuedbytheCompany.Thedilutiveeffectofoutstandingawardsandconvertiblesecuritiesisreflectedin
dilutedearningspersharebyapplicationofthetreasurystockmethod.
Thefollowingtablesetsforththecomponentsusedinthecomputationofbasicanddilutednetincomepersharefor
thethreeandsixmonthsendedJune30,2016and2015(inthousands,exceptpersharedata):
FortheThreeMonths
EndedJune30,
2016
Numerator:
Netincome
Denominator:
2015
FortheSixMonths
EndedJune30,
2016
73,635 $
67,200 $
148,493 $
Sharesusedforbasicnetincomepershare
175,499
Effectofdilutivesecurities:
178,682
175,951
2015
144,946
178,614
Stockoptions
396
912
400
954
RSUsandDSUs
525
1,144
629
1,214
Warrantsrelatedtoissuanceofconvertibleseniornotes
176,420
180,738
176,980
180,782
Sharesusedfordilutednetincomepershare
Basicnetincomepershare
Dilutednetincomepershare
0.42 $
0.38 $
0.84 $
0.81
0.42 $
0.37 $
0.84 $
0.80
ForthethreeandsixmonthsendedJune30,2016and2015,certainpotentialoutstandingsharesfromstockoptions,
servicebasedRSUs,convertiblenotesandwarrantswereexcludedfromthecomputationofdilutednetincomepershare
becausetheeffectofincludingtheseitemswasantidilutive.Additionally,certainperformancebasedRSUswereexcluded
fromthecomputationofdilutednetincomepersharebecausetheunderlyingperformanceconditionsforsuchRSUshadnot
beenmetasofthesedates.Thenumberofpotentiallyoutstandingsharesexcludedfromthecomputationofdilutednet
incomepershareforthethreeandsixmonthsendedJune30,2016and2015areasfollows(inthousands):
FortheThreeMonths
EndedJune30,
2016
Stockoptions
2015
FortheSixMonths
EndedJune30,
2016
2015
80
92
13
ServicebasedRSUs
1,904
28
3,283
325
PerformancebasedRSUs
1,280
1,148
704
1,148
7,704
7,704
7,704
7,704
Warrantsrelatedtoissuanceofconvertibleseniornotes
7,704
7,704
7,704
7,704
Thecalculationofassumedproceedsusedtodeterminethedilutedweightedaveragesharesoutstandingunderthe
treasurystockmethodintheperiodspresentedwasadjustedbytaxwindfallsandshortfallsassociatedwithallofthe
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Companysoutstandingstockawards.Suchwindfallsandshortfallsarecomputedbycomparingthetaxdeductibleamount
ofoutstandingstockawardstotheirgrantdatefairvaluesandmultiplyingtheresultsbytheapplicablestatutorytaxrate.A
positiveresultcreatesawindfall,whichincreasestheassumedproceeds,andanegativeresultcreatesashortfall,which
reducestheassumedproceeds.
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Item2.ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations
ThisquarterlyreportonForm10Q,particularlyManagementsDiscussionandAnalysisofFinancialCondition
andResultsofOperationssetforthbelow,andnotestoourunauditedconsolidatedfinancialstatementsincludedherein
containforwardlookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.These
statementsaresubjecttorisksanduncertaintiesandarebasedonthebeliefsandassumptionsofourmanagementasofthe
datehereofbasedoninformationcurrentlyavailabletoourmanagement.Useofwordssuchasbelieves,expects,
anticipates,intends,plans,estimates,should,forecasts,if,continues,goal,likelyorsimilar
expressionsindicatesaforwardlookingstatement.Forwardlookingstatementsarenotguaranteesoffutureperformance
andinvolverisks,uncertaintiesandassumptions.Actualresultsmaydiffermateriallyfromtheforwardlookingstatements
wemake.SeeRiskFactorselsewhereinthisquarterlyreportonForm10Qforadiscussionofcertainrisksassociated
withourbusiness.Wedisclaimanyobligationtoupdateforwardlookingstatementsasaresultofnewinformation,future
eventsorotherwise.
Ourmanagementsdiscussionandanalysisofourfinancialconditionandresultsofoperationsisbaseduponour
unauditedconsolidatedfinancialstatementsincludedelsewhereinthisquarterlyreportonForm10Q,whichwehave
preparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,orGAAP,for
interimperiodsandwithRegulationSXpromulgatedundertheSecuritiesExchangeActof1934,asamended,orthe
ExchangeAct.Thepreparationoftheseunauditedconsolidatedfinancialstatementsrequiresustomakeestimatesand
judgmentsthataffectthereportedamountsofassets,liabilities,revenuesandexpensesandrelateditems,including,butnot
limitedto,revenuerecognition,accountsreceivableandrelatedreserves,valuationandimpairmentofmarketable
securities,goodwillandacquiredintangibleassets,capitalizedinternalusesoftwaredevelopmentcosts,impairmentand
usefullivesoflonglivedassets,incometax,andstockbasedcompensation.Webaseourestimatesandjudgmentson
historicalexperienceandonvariousotherassumptionsthatwebelievetobereasonableunderthecircumstancesatthe
timetheyaremade.Actualresultsmaydifferfromourestimates.SeethesectionentitledApplicationofCritical
AccountingPoliciesandEstimatesinourannualreportonForm10KfortheyearendedDecember31,2015forfurther
discussionofourcriticalaccountingpoliciesandestimates.
Overview
Weprovidecloudservicesfordelivering,optimizingandsecuringcontentandbusinessapplicationsoverthe
Internet.Formanyofourcoresolutions,werelyonarecurringrevenuemodelwithcustomersexecutingcontractshaving
termsofoneyearorlonger.Webelievethisemphasisonlongertermcontractsallowsustohaveaconsistentandpredictable
baselevelofrevenue,whichisimportanttoourfinancialsuccess.Wearealsodependentonmediacustomerswhereusageof
ourservicesislesspredictableasaresult,ourrevenueisimpactedbytheamountofmediaandsoftwaredownloadtrafficwe
serveonournetwork,therateofadoptionofsocialmediaandvideoplatformcapabilities,thetimingandvariabilityof
customerspecificonetimeeventsandtheimpactofseasonalvariationsonourbusiness.Thepricesweareabletochargefor
ourservicesisalsoakeyvariableimpactingincome.
Wehaveobservedthefollowingtrendsrelatedtoourrevenueinrecentyears:
IncreasedsalesofourCloudSecuritySolutionshavemadeasignificantcontributiontorevenuegrowth,andwe
expecttocontinueourfocusonsecuritysolutionsinthefuture.
Wehaveincreasedcommittedrecurringrevenuebyaddingnewcustomersandincreasingsalesofincremental
servicestoourexistingcustomers.Theseincreaseshelpedtolimittheimpactofreductionsinusageofour
servicesandcontractterminationsbycertaincustomers,aswellastheeffectofpricedecreasesnegotiatedaspart
ofcontractrenewals.
Inrecentyears,wehaveexperiencedincreasesintheamountoftrafficdeliveredforourcustomersthatuseour
solutionsforvideo,gaming,socialmediaandsoftwaredownloads.Afterseeingaslowersequentialquarterly
growthrateinrevenuefromtheseservicesacrossthesecondhalfof2015andthefirstquarterof2016,we
experiencedadeclineintrafficdeliveredinthesecondquarterascomparedtothefirstquarterofthisyear.We
believethatthisdevelopmentisprimarilyattributabletoanincreaseintheuseof"doityourself"approachesby
severalofourlargestInternetplatformcustomersbasedintheU.S.,whichhasledtoamoderationintheoverall
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rateofgrowthofcustomertrafficonournetwork.Wearelikelytoexperiencecontinueddecreasesinrevenue
fromthesecustomersduringtheremainderoftheyear.
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Theunitpricespaidbysomeofourcustomershavedeclined,reflectingtheimpactofcompetition.Our
profitabilitywouldhavebeenhigherabsentthesepricedeclines.
Wehaveexperiencedvariationsincertaintypesofrevenuefromquartertoquarter.Inparticular,weexperience
higherrevenueinthefourthquarteroftheyearforsomeofoursolutionsasaresultofholidayseasonactivity.
Wealsoexperiencelowerrevenueinthesummermonths,particularlyinEurope,frombothecommerceand
mediacustomersbecauseoverallInternetusedeclinesduringthattime.Inaddition,weexperiencequarterly
variationsinrevenueattributableto,amongotherthings,thenatureandtimingofsoftwareandgamingreleases
byourcustomersusingoursoftwaredownloadsolutionswhethertherearelargelivesportingorotherevents
thatincreasetheamountofmediatrafficonournetworkandthefrequencyandtimingofpurchasesofcustom
services.
Ourlevelofprofitabilityisalsoimpactedbyourexpenses,includingdirectcoststosupportourrevenuesuchas
bandwidthandcolocationcosts.Wehaveobservedthefollowingtrendsrelatedtoourprofitabilityinrecentyears:
Networkbandwidthcostsrepresentasignificantportionofourcostofrevenue.Historically,wehavebeenable
tomitigateincreasesinthesecostsbyreducingournetworkbandwidthcostsperunitandinvestingininternal
usesoftwaredevelopmenttoimprovetheperformanceandefficiencyofournetwork.Ourtotalbandwidthcosts
mayincreaseinthefutureasaresultofexpectedhighertrafficlevelsandservingmoretraffictohighercost
regions.Wewillneedtocontinuetoeffectivelymanageourbandwidthcoststomaintaincurrentlevelsof
profitability.
Colocationcostsarealsoasignificantportionofourcostofrevenue.Byimprovingourinternalusesoftware
andmanagingourhardwaredeploymentstoenableustouseserversmoreefficiently,wehavebeenableto
managethegrowthofcolocationcosts.Weexpecttocontinuetoscaleournetworkinthefutureandwillalso
needtoeffectivelymanageourcolocationcoststomaintaincurrentlevelsofprofitability.
Duetothefixednatureofsomeofourcolocationandbandwidthcostsoveraminimumtimeperiod,itmaynot
bepossibletoquicklyreducethosecosts.Ifourrevenuegrowthratedeclines,ourprofitabilitycoulddecrease.
Payrollandrelatedcompensationcostshavegrownaswehaveincreasedheadcounttosupportourrevenue
growthandstrategicinitiatives.Weincreasedourheadcountby979employeesduringtheyearended
December31,2015.Weexpecttocontinuetohireadditionalemployeesin2016,bothdomesticallyand
internationally,insupportofourstrategicinitiatives.Wehavehired179employeesduringthefirsthalfof2016.
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ResultsofOperations
Thefollowingtablesetsforth,asapercentageofrevenue,consolidatedstatementsofincomedatafortheperiods
indicated:
FortheThreeMonths
EndedJune30,
FortheSixMonths
EndedJune30,
2016
2016
Revenue
2015
100.0%
Costsandoperatingexpenses:
100.0%
Costofrevenue(exclusiveofamortizationofacquired
intangibleassetsshownbelow)
100.0%
2015
100.0%
36.1
33.3
35.2
32.7
6.6
6.8
6.9
6.8
Salesandmarketing
18.0
20.6
18.0
20.1
18.8
18.3
18.4
17.7
1.2
1.2
1.2
1.3
0.1
0.1
0.6
80.8
80.3
80.3
78.6
19.2
19.7
19.7
21.4
Interestincome
0.6
0.5
0.6
0.5
Interestexpense
(0.8)
(0.9)
(0.8)
(0.9)
0.1
(0.3)
(0.2)
19.1
19.0
19.5
20.8
6.2
6.5
6.4
7.2
Totalcostsandoperatingexpenses
Incomebeforeprovisionforincometaxes
Netincome
12.9%
12.5%
13.1%
13.6%
Revenue
Revenueduringtheperiodspresentedwasasfollows(inthousands):
FortheThreeMonths
EndedJune30,
Revenue
2016
2015
%Change
atConstant
%Change Currency
$ 572,135 $ 540,723
5.8%
FortheSixMonths
EndedJune30,
2016
2015
%Change
atConstant
%Change Currency
5.6% $1,139,860 $1,067,259
6.8%
7.1%
DuringthethreeandsixmonthperiodsendedJune30,2016,theincreaseinourrevenueascomparedtothesame
periodsin2015wasprimarilytheresultofcontinuedstronggrowthfromourCloudSecuritySolutions,whichgrew42%and
44%,respectively.Ouroverallrevenuegrowthrateislowerthanithasbeeninthepastduetothe"doityourself"effortsof
ourtwolargestcustomers,whichareInternetplatformcompanies.TotalrevenuefromoursixlargeInternetplatform
customerswas$61.5millionand$134.0millionduringthethreeandsixmonthperiodsendedJune30,2016,respectively,
ascomparedto$96.5millionand$192.3millionduringthethreeandsixmonthsendedJune30,2015,respectively.
Changesinforeigncurrencyexchangeratesimpactedourrevenuepositivelyby$1.2millionandnegativelyby$2.7
millionduringthethreeandsixmonthperiodsendedJune30,2016,respectively,ascomparedtothesameperiodsin2015.
ForthethreeandsixmonthperiodsendedJune30,2016and2015,nosinglecustomeraccountedfor10%ormoreof
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AspartofareorganizationweannouncedonFebruary9,2016,wehaveadjustedthecategorizationofourrevenue
solutioncategories.CertainofourservicesthatwerepreviouslyincludedinMediaDeliverySolutionsarenowpresentedin
PerformanceandSecuritySolutions.Beginninginthefirstquarterof2016,revenuefromtheseserviceswasclassifiedinits
respectiveproductsolutioncategoryaccordingly,wehaverevisedpriorperiodamountsinthefollowingtable.
Thefollowingtablequantifiesthecontributiontorevenueduringtheperiodspresentedfromoursolutioncategories
(inthousands):
FortheThreeMonths
EndedJune30,
2016
2015
FortheSixMonths
EndedJune30,
%Change
atConstant
%Change Currency
2016
2015
%Change
atConstant
%Change Currency
Performance
andSecurity
Solutions
$ 326,642 $ 282,391
15.7%
15.6% $ 642,505 $ 554,350
15.9%
16.3%
Media
Delivery
Solutions
Servicesand
Support
Solutions
Total
revenue
197,077
217,151
(9.2)
(9.5)
403,016
432,016
(6.7)%
(6.5)
48,416
41,181
17.6
17.1
94,339
80,893
16.6%
16.7
5.6% $1,139,860 $1,067,259
6.8%
$ 572,135 $ 540,723
5.8%
7.1%
TheincreaseinPerformanceandSecuritySolutionsrevenueforthethreeandsixmonthperiodsendedJune30,
2016,ascomparedtothesameperiodsin2015,wasduetoincreaseddemandacrossallmajorproductlines,withespecially
stronggrowthinourCloudSecuritySolutions.CloudSecuritySolutionsrevenueforthethreeandsixmonthperiodended
June30,2016was$87.0millionand$167.6million,respectively,ascomparedto$61.5millionand$116.6millionforthe
threeandsixmonthperiodsendedJune30,2015,respectively.
ThedeclineintheyearoveryearrevenuegrowthrateinMediaDeliverySolutionsrevenueforthethreeandsix
monthperiodsendedJune30,2016wasprimarilytheresultofdecreasedtrafficfromseveralofourlargestInternetplatform
customersresultingfromtheir"doityourself"effortsindeliveringtheircontent,andinparticularfromtwoofourlargest
customers.ExcludingsixofourlargestInternetplatformcustomers,therestofourMediaDeliverySolutionsrevenuegrew
11%and10%forthethreeandsixmonthperiodsendedJune30,2016,respectively,ascomparedtothesameperiodsin
2015,withparticularlystronggrowthamongouroverthetop,orOTT,videodeliverycustomers.
TheincreaseinServicesandSupportSolutionsrevenueforthethreeandsixmonthperiodsendedJune30,2016,as
comparedtothesameperiodsin2015,wasduetostrongcustomerattachmentratesforourhigherendenterpriseclass
professionalservices,particularlyforcustomersbuyingourWebPerformanceandCloudSecuritySolutions.
Asaresultofourreorganizationin2016,oursales,marketingandproductdevelopmentfunctionsarenow
organizedintothreedivisions.Thefollowingtablequantifiesthecontributiontorevenueduringtheperiodspresentedfrom
thecustomersineachdivision(inthousands):
FortheThreeMonths
EndedJune30,
2016
2015
%Change
FortheSixMonths
EndedJune30,
%Changeat
Constant
Currency
2016
2015
%Change
%Changeat
Constant
Currency
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Division
Web
Division
Enterprise
andCarrier
Division
Total
revenue
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$ 288,432 $ 294,551
(2.1)%
(2.2)% $ 580,365 $ 588,517
(1.4)%
(1.1)%
271,327
236,017
15.0
14.6
535,070
460,257
16.3
16.5
12,376
10,155
21.9
21.8
24,425
18,485
32.1
32.0
$ 572,135 $ 540,723
5.8%
5.6% $1,139,860 $1,067,259
6.8%
7.1%
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ThedeclineintheyearoveryearrevenuegrowthrateinMediaDivisionrevenueforthethreeandsixmonth
periodsendedJune30,2016wastheresultofdecreasedtrafficfromseveralofourlargestInternetplatformcustomers,as
discussedabove.Theyearoveryearrevenuegrowthrateswere14%and13%forthethreeandsixmonthperiodsended
June30,2016,ascomparedtothesameperiods2015,respectively,excludingrevenueforsixofourlargeInternetplatform
customers.
TheincreaseinWebDivisionrevenueduringthethreeandsixmonthperiodsendedJune30,2016,ascomparedto
thesameperiodsin2015,wasduetogrowthinthiscustomerbase,particularlywithourCloudSecuritySolutions.
ThefollowingtablequantifiesrevenuederivedintheU.S.andinternationally(inthousands):
FortheThreeMonths
EndedJune30,
2016
U.S.
$ 395,085 $ 399,103
International
Total
revenue
177,050
%Changeat
Constant
%Change Currency
2015
141,620
$ 572,135 $ 540,723
FortheSixMonths
EndedJune30,
2016
%Change
atConstant
%Change Currency
2015
(1.0)%
(1.0)% $ 792,368 $ 788,076
25.0
24.1
5.8%
347,492
279,183
5.6% $1,139,860 $1,067,259
0.5%
24.5
6.8%
0.5%
25.5
7.1%
ThereducedrevenuefromourlargestInternetplatformcustomersweighedheavilyonU.S.revenueasthese
customersarebasedintheU.S.RevenuederivedfromouroperationslocatedoutsideoftheU.S.forthethreeandsixmonth
periodsendedJune30,2016wasapproximately31%and30%,respectively,oftotalrevenue,ascomparedto26%foreach
ofthethreeandsixmonthperiodsendedJune30,2015.NosinglecountryoutsideoftheU.S.accountedfor10%ormoreof
revenueduringtheseperiods.Duringthefirstsixmonthsof2016,wecontinuedtoseestrongrevenuegrowthfromour
operationsintheAsiaPacificregion.
CostofRevenue
Costofrevenueconsistedofthefollowingfortheperiodspresented(inthousands):
FortheThreeMonths
EndedJune30,
FortheSixMonths
EndedJune30,
2016
2015
%Change
2016
2015
%Change
42,597
36,088
83,777
71,601
17.0%
Colocationfees
33,223
31,569
5.2
65,817
61,260
7.4
Networkbuildoutandsupporting
services
16,895
15,533
8.8
30,672
26,960
13.8
Payrollandrelatedcosts
46,616
39,600
17.7
91,306
77,152
18.3
7,977
6,797
17.4
14,990
12,775
17.3
Depreciationofnetworkequipment
35,911
31,933
12.5
70,481
63,432
11.1
Amortizationofinternaluse
software
23,104
18,390
25.6
44,016
36,024
22.2
$ 179,910
14.7% $ 401,059
$ 349,204
14.8%
Bandwidthfees
Stockbasedcompensation,
includingamortizationofprior
capitalizedamounts
Totalcostofrevenue
Asapercentageofrevenue
$ 206,323
36.1%
33.3%
18.0% $
35.2%
32.7%
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TheincreaseintotalcostofrevenueforthethreeandsixmonthperiodsendedJune30,2016,ascomparedtothe
sameperiodsin2015,wasprimarilyduetoincreasesin:
amountspaidtonetworkprovidersforbandwidthfeestosupporttheincreaseintrafficservedonournetwork
thefeespaidtoourbandwidthproviderswerealsoimpactedbythetypeoftrafficdeliveredandtheregionin
whichitwasserved
amountspaidfornetworkbuildoutandsupportingservicesrelatedtotheincreaseinserverdeploymentsand
investmentsinnetworkexpansion
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payrollandrelatedcosts,aswellasstockbasedcompensation,ofservicepersonnelduetoheadcountgrowth
inourservicesorganizationtosupportourincreaseinServicesandSupportrevenue,andournetwork
operationspersonneltosupportourothersolutionrevenueand
depreciationofnetworkequipmentandamortizationofinternalusesoftwareaswecontinuedtoinvestinour
infrastructureandreleaseinternallydevelopedsoftwareontoournetwork.
Ourcostofrevenueasapercentageofrevenuealsoincreasedduringthethreeandsixmonthperiodsended
June30,2016,ascomparedtothesameperiodsin2015.Theincreasewasprimarilytheresultofourincreasedinvestmentsin
thestrategicexpansionofournetwork.
Wehavelongtermpurchasecommitmentsforcolocationservicesandbandwidthusagewithvariousvendorsand
networkandInternetserviceproviders.Ourminimumcommitmentsrelatedtobandwidthusageandcolocationservicesmay
varyfromperiodtoperioddependingonthetimingandlengthofcontractrenewalswithourserviceproviders.Therehave
beennosignificantchangestothecommitmentsreportedinourannualreportonForm10KfortheyearendedDecember31,
2015,otherthannormalperiodtoperiodvariations.
Webelievethatcostofrevenuewillincreaseduring2016ascomparedto2015primarilybecauseweexpectto
deploymoreserversanddelivermoretrafficonournetwork,whichwillresultinhigherexpensesassociatedwiththe
increasedtraffic.Additionally,during2016,weanticipateamortizationofinternalusesoftwaredevelopmentcoststo
increaseascomparedto2015,alongwithincreasedpayrollandrelatedcostsassociatedwithournetworkandprofessional
servicespersonnelandrelatedexpenses.Weplantocontinuemakinginvestmentsinournetworkwiththeexpectationthat
ourcustomerbasewillcontinuetoexpandandthatwewillcontinuetodelivermoretraffictoexistingcustomers.
ResearchandDevelopmentExpenses
Researchanddevelopmentexpensesconsistedofthefollowingfortheperiodspresented(inthousands):
FortheThreeMonths
EndedJune30,
Capitalizedsalariesandrelatedcosts
Otherexpenses
Totalresearchanddevelopment $
FortheSixMonths
EndedJune30,
2016
2015
%Change
61,173
54,619
12.0% $ 125,807
$ 109,554
14.8%
6,009
12.4
16.0
(31,617)
(25,845)
22.3
(63,128)
(52,087)
21.2
1,382
1,910
(27.6)
2,663
3,679
(27.6)
36,693
72,521
6,752
37,690
6.6%
6.8%
2.7% $
2016
13,190
78,532
6.9%
2015
11,375
%Change
8.3%
6.8%
TheincreaseinresearchanddevelopmentexpensesduringthethreeandsixmonthperiodsendedJune30,2016,as
comparedtothesameperiodsin2015,wasduetoincreasesinpayrollandrelatedcostsasaresultofheadcountgrowth
withinthepastyeartosupportinvestmentsinnewproductdevelopmentandnetworkscaling,partiallyoffsetbyincreasesin
capitalizedsalariesandrelatedcosts.
Researchanddevelopmentcostsareexpensedasincurred,otherthancertaininternalusesoftwaredevelopment
costseligibleforcapitalization.Thesedevelopmentcostsconsistofpayrollandrelatedcostsforpersonnelandexternal
consultingexpensesinvolvedinthedevelopmentofinternalusesoftwareusedtodeliverourservicesandoperateour
network.DuringthethreeandsixmonthperiodsendedJune30,2016,wecapitalized$5.7millionand$10.6million,
respectively,ofstockbasedcompensation.DuringthethreeandsixmonthperiodsendedJune30,2015,wecapitalized
$4.1millionand$7.8million,respectively,ofstockbasedcompensation.Thesecapitalizedinternalusesoftware
developmentcostsareamortizedtocostofrevenueovertheirestimatedusefullives,whichisgenerallytwoyears.
Webelievethatresearchanddevelopmentexpenseswillincreaseinabsolutedollarsduringtheremainingquarters
of2016ascomparedtothefirsttwoquartersof2016,asweexpecttocontinuetohireadditionaldevelopmentpersonnelin
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ordertomakeimprovementstoourcoretechnologyandsupportthedevelopmentofnewservicesandengineering
innovation.
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SalesandMarketingExpenses
Salesandmarketingexpensesconsistedofthefollowingfortheperiodspresented(inthousands):
FortheThreeMonths
EndedJune30,
2016
2015
%Change
74,948
79,461
13,259
12,847
3.2
Marketingprogramsandrelated
costs
9,495
9,101
4.3
Otherexpenses
5,521
10,092
(45.3)
$ 111,501
Totalsalesandmarketing
$ 103,223
18.0%
FortheSixMonths
EndedJune30,
2016
(5.7)% $ 150,828
2015
%Change
$ 151,529
(0.5)%
25,611
25,830
(0.8)
15,608
20,877
(25.2)
13,387
16,744
(20.0)
$ 214,980
(7.4)% $ 205,434
20.6%
18.0%
(4.4)%
20.1%
ThedecreaseinsalesandmarketingexpensesduringthethreeandsixmonthperiodsendedJune30,2016,as
comparedtothesameperiodsin2015,wasprimarilyduetoadecreaseincommissionsexpenseandotherexpenses,which
consistsprimarilyofcostsassociatedwithsalesandmarketingeventsandrelatedtravelexpensesaswemoderate
discretionaryspendingtoalignwithourrevenuegrowthrates.ThedecreaseduringthethreemonthperiodendedJune30,
2016,ascomparedtothesameperiodin2015,wasalsoimpactedbythetimingoflargemarketingeventsyearoveryear.
Duringtheremainingquartersof2016,webelievethatsalesandmarketingexpenseswillincreaseinabsolute
dollarsascomparedtothefirsttwoquartersof2016,duetoincreasesincorporatemarketingexpendituresandpayrolland
relatedcosts.
GeneralandAdministrativeExpenses
Generalandadministrativeexpensesconsistedofthefollowingfortheperiodspresented(inthousands):
FortheThreeMonths
EndedJune30,
FortheSixMonths
EndedJune30,
2016
2015
%Change
2016
2015
%Change
39,175
40,885
80,363
82,022
10,347
9,893
4.6
19,328
18,050
7.1
15,964
13,620
17.2
31,393
25,353
23.8
Facilitiesrelatedcosts
17,800
15,955
11.6
35,208
30,187
16.6
342
345
(0.9)
828
336
146.4
352
88
300.0
163
806
(79.8)
23,558
18,366
28.3
42,538
31,990
33.0
99,152
$ 188,744
11.2%
Provisionfordoubtfulaccounts
Acquisitionrelatedcosts
Professionalfeesandotherexpenses
Totalgeneraland
administrative
$ 107,538
18.8%
18.3%
(4.2)% $
8.5% $ 209,821
18.4%
(2.0)%
17.7%
TheincreaseingeneralandadministrativeexpensesforthethreeandsixmonthperiodsendedJune30,2016,as
comparedtothesameperiodsin2015,wasprimarilyduetotheexpansionofcompanyinfrastructurethroughout2015to
supportinvestmentsinengineering,gotomarketcapacityandenterpriseexpansioninitiatives.Inparticular,weincreased
ourfacilityfootprint,whichincreasedfacilitiesrelatedcostsanddepreciationandamortization.Inthethreeandsixmonth
periodsendedJune30,2016,wealsoincurredhigherlegalfeesduetoongoinglitigationandhigherotherprofessionalfees
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tosupportouroperations,ascomparedtothesameperiodsin2015.
Duringtheremainingquartersof2016,weexpectgeneralandadministrativeexpensestoincreaseinabsolute
dollarsascomparedtothefirsttwoquartersof2016,duetoanticipatedfacilitiesrelatedcostsattributabletoincreased
hiring,investmentininformationtechnologyandfacilityexpansion.Wealsoexpectlegalfeesassociatedwithongoing
litigationtoremainhigherthanweexperiencedin2015.
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AmortizationofAcquiredIntangibleAssets
FortheThreeMonths
EndedJune30,
2016
(inthousands)
Amortizationofacquiredintangible
assets
$
6,711
2015
1.2%
6,752
FortheSixMonths
EndedJune30,
%Change
2016
2015
%Change
13,427
13,532
(0.6)% $
1.2%
1.2%
(0.8)%
1.3%
BasedonourintangibleassetsatJune30,2016,weexpectamortizationofacquiredintangibleassetstobe
approximately$13.1millionfortheremainderof2016,and$27.8million,$23.7million,$21.7millionand$17.7millionfor
2017,2018,2019and2020,respectively.
RestructuringCharges
FortheThreeMonths
EndedJune30,
2016
(inthousands)
470
2015
%Change
455
0.1%
FortheSixMonths
EndedJune30,
3.3%
0.1%
2016
7,288
0.6%
2015
497
%Change
1,366.4%
TherestructuringchargesforthethreeandsixmonthperiodsendedJune30,2016wereprimarilytheresultof
changestoourorganizationalstructuretoreorganizeourproductsanddevelopmentgroupsandglobalsales,servicesand
marketingteamsintodivisionscenteredonoursolutions.Therestructuringchargesrelatetoseveranceexpensesforimpacted
employeesinthesixmonthperiodendedJune30,2016andalsoreflectachargeforinternalusesoftwarenotyetplacedinto
servicethatwillnotbecompletedandlaunchedduetochangingprioritiesaspartofthereorganization.
NonOperatingIncome(Expense)
FortheThreeMonths
EndedJune30,
2016
(inthousands)
Interestincome
Interestexpense
3,393
2015
$
0.6%
$
(4,639)
(0.8)%
$
415
0.1%
2,541
%Change
33.5% $
0.5%
(4,678)
(0.8)
(0.9)%
(1,605)
FortheSixMonths
EndedJune30,
(125.9)
(0.3)%
2016
6,713
0.6%
(9,292)
(0.8)%
226
2015
5,542
%Change
21.1%
0.5%
(9,254)
0.4
(0.9)%
(1,906)
(111.9)
(0.2)%
Fortheperiodspresented,interestincomeconsistsofinterestearnedoninvestedcashbalancesandmarketable
securities,andinterestexpenseconsistsoftheamortizationofthedebtdiscountanddebtissuancecostsrelatedtoour
convertibleseniornotesissuedinFebruary2014.
Otherincome(expense),netprimarilyrepresentsnetforeignexchangegainsandlossesandothernonoperating
expenseandincomeitems.Thefluctuationsinotherincome(expense),netforthethreeandsixmonthperiodsended
June30,2016,ascomparedtothesameperiodsin2015,wereprimarilyduetoforeigncurrencyexchangeratefluctuations
onintercompanyandothernonfunctionalcurrencytransactions.Otherincome(expense),netmayfluctuateinthefuture
basedonchangesinforeigncurrencyexchangeratesorotherevents.
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ProvisionforIncomeTaxes
FortheThreeMonths
EndedJune30,
(inthousands)
Effectiveincometaxrate
FortheSixMonths
EndedJune30,
2016
2015
%Change
2016
2015
%Change
35,714
35,318
73,453
77,217
1.1% $
6.2%
6.5%
6.4%
7.2%
32.7%
34.5%
33.1%
34.8%
(4.9)%
ForthesixmonthsendedJune30,2016,oureffectiveincometaxratewaslowerthanthefederalstatutorytaxrate
duetothecompositionofincomefromforeignjurisdictionsthatistaxedatlowerratescomparedtothestatutorytaxratesin
theU.S.,thedomesticproductionactivitiesdeductionandthetreatmentofstockbasedcompensationinintercompany
arrangements.Thesebenefitswerepartiallyoffsetbytheeffectsofaccountingforstockbasedcompensationinaccordance
withtheauthoritativeguidanceforsharebasedpaymentsandstateincometaxes.
ForthesixmonthsendedJune30,2015,oureffectiveincometaxratewasslightlylowerthanthefederalstatutory
taxrate.Thedomesticproductionactivitiesdeductionandthecompositionofincomefromforeignjurisdictionsthatistaxed
atlowerratescomparedtothestatutorytaxratesintheU.S.causedourtaxratetobelowerthanthefederalstatutorytaxrate
duringthesixmonthsendedJune30,2015however,thoseitemswereoffsetbytheeffectsofaccountingforstockbased
compensationinaccordancewiththeauthoritativeguidanceforsharebasedpaymentsandstateincometaxes.
Weexpectourfullyeareffectiveincometaxratetodecreaseslightlyduringtheremainingquartersof2016.This
expectationdoesnottakeintoconsiderationtheeffectofpotentialonetimediscreteitemsincludingsettlementsoftax
auditsandassessments,theresolutionoridentificationoftaxpositionuncertaintiesandacquisitionsofothercompaniesthat
mayberecordedinthefuture.Theeffectivetaxratecouldalsobedifferentdependingonthenatureandtimingof
dispositionsofincentivestockoptionsandotheremployeeequityawards.Further,oureffectivetaxratemayfluctuatewithin
afiscalyearandfromquartertoquarterduetoitemsarisingfromonetimediscreteitems.
Indeterminingournetdeferredtaxassetsandvaluationallowances,annualizedeffectivetaxratesandcashpaidfor
incometaxes,managementisrequiredtomakejudgmentsandestimatesaboutdomesticandforeignprofitability,thetiming
andextentoftheutilizationofnetoperatinglosscarryforwards,applicabletaxrates,transferpricingmethodologiesandtax
planningstrategies.Judgmentsandestimatesrelatedtoourprojectionsandassumptionsareinherentlyuncertaintherefore,
actualresultscoulddiffermateriallyfromourprojections.
Wehaverecordedcertaintaxreservestoaddresspotentialexposuresinvolvingourincometaxandsalesandusetax
positions.Thesepotentialtaxliabilitiesresultfromthevaryingapplicationofstatutes,rules,regulationsandinterpretations
bydifferenttaxingjurisdictions.Ourestimateofthevalueofthesetaxreservesreflectsassumptionsbasedonpast
experiencesandjudgmentsabouttheinterpretationofstatutes,rulesandregulationsbytaxingjurisdictions.Itispossible
thattheultimatetaxliabilityorbenefitfromthesemattersmaybemateriallygreaterorlessthantheamountthatwehave
estimated.
NonGAAPFinancialMeasures
InadditiontoprovidingfinancialmeasurementsbasedonGAAP,wepubliclydiscussadditionalfinancialmeasures
thatarenotpreparedinaccordancewithGAAP,ornonGAAPfinancialmeasures.ManagementusesnonGAAPfinancial
measures,inadditiontoGAAPfinancialmeasures,tounderstandandcompareoperatingresultsacrossaccountingperiods,
forfinancialandoperationaldecisionmaking,forplanningandforecastingpurposes,tomeasureexecutivecompensation
andtoevaluateourfinancialperformance.ThesenonGAAPfinancialmeasuresare:nonGAAPincomefromoperations,
nonGAAPoperatingmargin,nonGAAPnetincome,nonGAAPnetincomeperdilutedshare,AdjustedEBITDA,Adjusted
EBITDAmarginandimpactofforeigncurrencyexchangerates,asdiscussedbelow.
ManagementbelievesthatthesenonGAAPfinancialmeasuresreflectourongoingbusinessinamannerthatallows
formeaningfulcomparisonsandanalysisoftrendsinthebusiness,astheyexcludeexpensesandgainsthatmaybe
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infrequent,unusualinnatureornotreflectiveofourongoingoperatingresults.Managementalsobelievesthatthesenon
GAAPfinancialmeasuresenableinvestorstoevaluateouroperatingresultsandfutureprospectsinthesamemanneras
management.ThesenonGAAPfinancialmeasuresmayalsofacilitatecomparingfinancialresultsacrossaccountingperiods
andtothoseofpeercompanies.
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ThenonGAAPfinancialmeasuresdonotreplacethepresentationofourGAAPfinancialmeasuresandshouldonly
beusedasasupplementto,notasasubstitutefor,ourfinancialresultspresentedinaccordancewithGAAP.
ThenonGAAPadjustments,andourbasisforexcludingthemfromnonGAAPfinancialmeasures,areoutlined
below:
AmortizationofacquiredintangibleassetsWehaveincurredamortizationofintangibleassets,includedin
ourGAAPfinancialstatements,relatedtovariousacquisitionswemade.Theamountofanacquisition's
purchasepriceallocatedtointangibleassetsandtermofitsrelatedamortizationcanvarysignificantlyandare
uniquetoeachacquisitiontherefore,weexcludeamortizationofacquiredintangibleassetsfromournon
GAAPfinancialmeasurestoprovideinvestorswithaconsistentbasisforcomparingpreandpostacquisition
operatingresults.
StockbasedcompensationandamortizationofcapitalizedstockbasedcompensationAlthoughstock
basedcompensationisanimportantaspectofthecompensationpaidtoouremployees,thegrantdatefairvalue
variesbasedonthestockpriceatthetimeofgrant,varyingvaluationmethodologies,subjectiveassumptions
andthevarietyofawardtypes.Thismakesthecomparisonofourcurrentfinancialresultstopreviousandfuture
periodsdifficulttointerprettherefore,webelieveitisusefultoexcludestockbasedcompensationand
amortizationofcapitalizedstockbasedcompensationfromournonGAAPfinancialmeasuresinorderto
highlighttheperformanceofourcorebusinessandtobeconsistentwiththewaymanyinvestorsevaluateour
performanceandcompareouroperatingresultstopeercompanies.
AcquisitionrelatedcostsAcquisitionrelatedcostsincludetransactionfees,advisoryfees,duediligence
costsandotherdirectcostsassociatedwithstrategicactivities.Inaddition,subsequentadjustmentstoour
initialestimatedamountsofcontingentconsiderationandindemnificationassociatedwithspecificacquisitions
areincludedwithinacquisitionrelatedcosts.Theseamountsareimpactedbythetimingandsizeofthe
acquisitions.WeexcludeacquisitionrelatedcostsfromournonGAAPfinancialmeasurestoprovideauseful
comparisonofouroperatingresultstopriorperiodsandtoourpeercompaniesbecausesuchamountsvary
significantlybasedonthemagnitudeofouracquisitiontransactions.
RestructuringchargesWehaveincurredrestructuringchargesthatareincludedinourGAAPfinancial
statements,primarilyrelatedtoworkforcereductionsandestimatedcostsofexitingfacilityleasecommitments.
WeexcludetheseitemsfromournonGAAPfinancialmeasureswhenevaluatingourcontinuingbusiness
performanceassuchitemsvarysignificantlybasedonthemagnitudeoftherestructuringactionanddonot
reflectexpectedfutureoperatingexpenses.Inaddition,thesechargesdonotnecessarilyprovidemeaningful
insightintothefundamentalsofcurrentorpastoperationsofourbusiness.
AmortizationofdebtdiscountandissuancecostsandamortizationofcapitalizedinterestexpenseIn
February2014,weissued$690millionofconvertibleseniornotesdue2019withacouponinterestrateof0%.
Theimputedinterestrateoftheconvertibleseniornoteswasapproximately3.2%.Thisisaresultofthedebt
discountrecordedfortheconversionfeaturethatisrequiredtobeseparatelyaccountedforasequityunder
GAAP,therebyreducingthecarryingvalueoftheconvertibledebtinstrument.Thedebtdiscountisamortized
asinterestexpensetogetherwiththeissuancecostsofthedebt.Allofourinterestexpenseiscomprisedofthese
noncashcomponentsandisexcludedfrommanagement'sassessmentofouroperatingperformancebecause
managementbelievesthenoncashexpenseisnotrepresentativeofongoingoperatingperformance.
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LossoninvestmentsandlegalmattercostsWehaveincurredlossesfromtheimpairmentofcertain
investmentsandthesettlementoflegalmatters.WehavealsoincurredcostswithrespecttoourinternalU.S.
ForeignCorruptPracticesAct("FCPA")investigationinadditiontothedisgorgementwewererequiredtopay
toresolveit.WebelieveexcludingtheseamountsfromournonGAAPfinancialmeasuresisusefultoinvestors
asthetypesofeventsgivingrisetothemoccurinfrequentlyandarenotrepresentativeofourcorebusiness
operations.
IncometaxeffectofnonGAAPadjustmentsandcertaindiscretetaxitemsThenonGAAPadjustments
describedabovearereportedonapretaxbasis.TheincometaxeffectofnonGAAPadjustmentsisthe
differencebetweenGAAPandnonGAAPincometaxexpense.NonGAAPincometaxexpenseiscomputed
onnonGAAPpretaxincome(GAAPpretaxincomeadjustedfornonGAAPadjustments)andexcludes
certaindiscretetaxitems(suchasrecordingorreleaseofvaluationallowances),ifany.Webelievethat
applyingthenonGAAPadjustmentsandtheirrelatedincometaxeffectallowsustohighlightincome
attributabletoourcoreoperations.
ThefollowingtablereconcilesGAAPincomefromoperationstononGAAPincomefromoperationsandnon
GAAPoperatingmarginfortheperiodspresented(inthousands):
FortheThreeMonths
EndedJune30,
2016
2015
2016
2015
110,180
106,260
224,299
227,781
FortheSixMonths
EndedJune30,
6,711
6,752
13,427
13,532
34,911
32,251
66,652
61,920
4,071
3,636
7,679
6,744
470
455
7,288
497
Acquisitionrelatedcosts(benefits)
361
(530)
282
(135)
Legalmattercosts
101
890
Amortizationofcapitalizedstockbasedcompensationand
capitalizedinterestexpense
NonGAAPincomefromoperations
156,805
1,514
150,338
320,517
2,786
313,125
GAAPoperatingmargin
19%
20%
20%
21%
NonGAAPoperatingmargin
27%
28%
28%
29%
ThefollowingtablereconcilesGAAPnetincometononGAAPnetincomeandnonGAAPnetincomeperdiluted
sharefortheperiodspresented(inthousands,exceptpersharedata):
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FortheThreeMonths
EndedJune30,
FortheSixMonths
EndedJune30,
2016
2016
Netincome
2015
2015
73,635 $
67,200 $
148,493 $
144,946
6,711
6,752
13,427
13,532
34,911
32,251
66,652
61,920
4,071
3,636
7,679
6,744
470
455
7,288
497
361
(530)
282
Legalmattercosts
101
1,514
890
2,786
4,639
4,678
9,292
9,254
25
(12,832)
(13,788)
(24,155)
(26,225)
112,067 $
102,168 $
229,848 $
213,344
GAAPnetincomeperdilutedshare
0.42 $
0.37 $
0.84 $
0.80
NonGAAPnetincomeperdilutedshare
0.64 $
0.57 $
1.30 $
1.18
Lossoninvestments
IncometaxeffectofabovenonGAAPadjustmentsandcertain
discretetaxitems
NonGAAPnetincome
Sharesusedindilutedpersharecalculations
176,420
180,738
176,980
(135)
180,782
NonGAAPnetincomeperdilutedshareiscalculatedasnonGAAPnetincomedividedbydilutedweighted
averagecommonsharesoutstanding.GAAPdilutedweightedaveragesharesoutstandingareadjustedinnonGAAPper
sharecalculationsforthesharesthatwouldbedeliveredtouspursuanttothenotehedgetransactionsenteredintoin
connectionwiththeissuanceof$690.0millioninparvalueofconvertibleseniornotesdue2019.UnderGAAP,shares
deliveredunderhedgetransactionsarenotconsideredoffsettingsharesinthefullydilutedsharecalculationuntiltheyare
delivered.However,wewouldreceiveabenefitfromthenotehedgetransactionsandwouldnotallowthedilutiontooccur,
somanagementbelievesthatadjustingforthisbenefitprovidesameaningfulviewofnetincomepershare.Unlessanduntil
ourweightedaveragestockpriceisgreaterthan$89.56,theinitialconversionprice,therewillbenodifferencebetweenour
GAAPandnonGAAPdilutedweightedaveragecommonsharesoutstanding.
WeconsiderAdjustedEBITDAtobeanotherimportantindicatoroftheoperationalstrengthandperformanceofour
businessandagoodmeasureofourhistoricaloperatingtrends.AdjustedEBITDAeliminatesitemsthatareeithernotpartof
ourcoreoperationsordonotrequireacashoutlay.WedefineAdjustedEBITDAasGAAPnetincomeexcludingthe
followingitems:interestincomeincometaxesdepreciationandamortizationoftangibleandintangibleassetsstockbased
compensationamortizationofcapitalizedstockbasedcompensationacquisitionrelatedcostsrestructuringchargesgains
andotheractivityrelatedtodivestitureofabusinessgainsandlossesonlegalsettlementscostsincurredwithrespecttoour
internalForeignCorruptPracticesActinvestigationforeignexchangegainsandlosseslossonearlyextinguishmentof
debtamortizationofdebtdiscountandissuancecostsamortizationofcapitalizedinterestexpensecertaingainsandlosses
oninvestmentsandothernonrecurringorunusualitemsthatmayarisefromtimetotime.AdjustedEBITDAmargin
representsAdjustedEBITDAstatedasapercentageofrevenue.
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ThefollowingtablereconcilesGAAPnetincometoAdjustedEBITDAandAdjustedEBITDAmarginforthe
periodspresented(inthousands):
FortheThreeMonths
EndedJune30,
FortheSixMonths
EndedJune30,
2016
2015
2016
73,635
67,200
$ 148,493
$ 144,946
Netincome
2015
6,711
6,752
13,427
13,532
34,911
32,251
66,652
61,920
4,071
3,636
7,679
6,744
470
455
7,288
497
361
(530)
282
(135)
Legalmattercosts
101
890
Interestincome
(3,393)
1,514
(2,541)
(6,713)
2,786
(5,542)
4,639
4,678
9,292
9,254
35,714
35,318
73,453
77,217
74,332
63,601
144,677
124,173
(415)
1,605
(226)
1,906
Other(income)expense,net
AdjustedEBITDA
$ 231,137
AdjustedEBITDAmargin
$ 213,939
40%
$ 465,194
40%
$ 437,298
41%
41%
ImpactofForeignCurrencyExchangeRates
Revenueandearningsfromourinternationaloperationshavehistoricallybeenanimportantcontributortoour
financialresults.Consequently,ourfinancialresultshavebeenimpacted,andmanagementexpectstheywillcontinuetobe
impacted,byfluctuationsinforeigncurrencyexchangerates.Forexample,whenthelocalcurrenciesofourforeign
subsidiariesweaken,ourconsolidatedresultsstatedinU.S.dollarsarenegativelyimpacted.
Becauseexchangeratesareameaningfulfactorinunderstandingperiodtoperiodcomparisons,management
believesthepresentationoftheimpactofforeigncurrencyexchangeratesonrevenueandearningsenhancesthe
understandingofourfinancialresultsandevaluationofperformanceincomparisontopriorperiods.Thedollarimpactof
changesinforeigncurrencyexchangeratespresentediscalculatedbytranslatingcurrentperiodresultsusingmonthly
averageforeigncurrencyexchangeratesfromthecomparativeperiodandcomparingthemtothereportedamount.The
percentagechangeatconstantcurrencypresentediscalculatedbycomparingthepriorperiodamountsasreportedandthe
currentperiodamountstranslatedusingthesamemonthlyaverageforeigncurrencyexchangeratesfromthecomparative
period.
LiquidityandCapitalResources
Todate,wehavefinancedouroperationsprimarilythroughpublicandprivatesalesofdebtandequitysecurities
andcashgeneratedbyoperations.AsofJune30,2016,ourcash,cashequivalentsandmarketablesecurities,whichconsisted
primarilyofcorporatebondsandU.S.governmentagencysecurities,totaled$1.6billion.Factoringinourconvertiblesenior
notes,ournetcashis$909.9million.Weplaceourcashinvestmentsininstrumentsthatmeethighqualitycreditstandards,
asspecifiedinourinvestmentpolicy.Ourinvestmentpolicyalsolimitstheamountofourcreditexposuretoanyoneissueor
issuerandseekstomanagetheseassetstoachieveourgoalsofpreservingprincipalandmaintainingadequateliquidityatall
times.
Changesincash,cashequivalentsandmarketablesecuritiesaredependentuponchangesin,amongotherthings,
workingcapitalitemssuchasdeferredrevenues,accountspayable,accountsreceivableandvariousaccruedexpenses,as
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wellaschangesinourcapitalandfinancialstructureduetocommonstockrepurchases,debtrepurchasesandissuances,stock
optionexercises,purchasesandsalesofmarketablesecuritiesandsimilarevents.Webelieveourstrongbalancesheetand
cashpositionareimportantcompetitivedifferentiatorsthatprovidethefinancialflexibilitynecessarytomakeinvestmentsat
opportunetimes.Weexpecttocontinuetoevaluatestrategicinvestmentstostrengthenourbusinessonanongoingbasis.
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AsofJune30,2016,wehadcashandcashequivalentsof$224.6millionheldinaccountsoutsidetheU.S.An
immaterialamountofthesefundswouldbesubjecttoU.S.federaltaxationifrepatriated,withsuchtaxliabilitypartially
offsetbyforeigntaxcredits.TheremainderofourcashandcashequivalentsheldoutsidetheU.S.aresubjectto,oroffsetby,
intercompanyobligationstoourparentcompanyintheU.S.and,therefore,arenotsubjecttoU.S.federaltaxation.Asa
result,ourliquidityisnotmateriallyimpactedbytheamountofcashandcashequivalentsheldinaccountsoutsidetheU.S.
CashProvidedbyOperatingActivities
FortheSixMonths
EndedJune30,
2016
(inthousands)
Netincome
Noncashreconcilingitemsincludedinnetincome
Changesinoperatingassetsandliabilities
$
Netcashflowsprovidedbyoperatingactivities
2015
148,493 $
144,946
245,381
177,756
39,236
41,050
433,110 $
363,752
TheincreaseincashprovidedbyoperatingactivitiesforthesixmonthperiodendedJune30,2016,ascomparedto
thesameperiodin2015,wasprimarilyduetohighercashcollectionfromcustomersduetoincreasedrevenueandthetiming
ofcashcollection,andlowercommissionsandannualbonuspaymentsduetolowerattainment.Theseincreasestocash
providedbyoperatingactivitieswereoffsetbyhighercashpaidfortaxesduringthesixmonthsended2016,ascomparedto
thesameperiodin2015,andalsotheincreaseincashbasedoperatingexpensesandthetimingofthosepayments.
CashUsedinInvestingActivities
FortheSixMonths
EndedJune30,
2016
(inthousands)
Cashpaidforacquiredbusinesses,netofcashacquired
Purchasesofpropertyandequipmentandcapitalizationofinternalusesoftware
developmentcosts
Netmarketablesecuritiesactivity
Otherinvestingactivity
(122,945)
(160,481)
(233,082)
(32,242)
123,696
(1,512)
Netcashusedininvestingactivities
2015
(194,235) $
(1,909)
(234,240)
Thedecreaseincashusedininvestingactivitieswasdrivenbyadecreaseinpurchasesofpropertyandequipment
duringthesixmonthperiodendedJune30,2016,ascomparedtothesameperiodin2015,aswemoderatedinvestmentin
ournetwork.Inaddition,theacquisitionsofXerocole,Inc.andCodemateApSoccurredduringthesixmonthperiodended
June30,2015,withnocorrespondingacquisitionsinthesixmonthperiodendedJune30,2016.Netmarketablesecurities
activityincreasedcashusedininvestingactivitiesduringthesixmonthperiodendedJune30,2016aswereinvestedthe
majorityoftheproceedsfromsalesandmaturitiesofourmarketablesecurities,ascomparedtothesixmonthperiodended
June30,2015,wherewedidnotreinvestaportionofourproceedsinordertofundtheacquisitions.
DuringthesixmonthperiodendedJune30,2015,wecompletedlargeplannedinvestmentsinournetwork
infrastructuretosupportthecontinuedgrowthofourcustomerbaseandexpectedincreasesintrafficgrowth.Additionally,
duringthesixmonthperiodendedJune30,2015,weexpandedourfacilitiesfootprintandcompanyinfrastructureinsupport
ofgrowthinourengineeringoperationsandgotomarketstrategy.
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CashUsedinFinancingActivities
FortheSixMonths
EndedJune30,
2016
(inthousands)
Activityrelatedtostockbasedcompensation
Repurchasesofcommonstock
Otherfinancingactivities
$
Netcashusedinfinancingactivities
(2,683) $
2015
19,895
(199,710)
(126,068)
(1,250)
(202,393) $
(107,423)
TheincreaseincashusedinfinancingactivitiesduringthesixmonthperiodendedJune30,2016,ascomparedto
thesameperiodin2015,wasprimarilytheresultofincreasedsharerepurchases.InOctober2013,theBoardofDirectors
authorizeda$750.0millionsharerepurchaseprogram,effectivefromOctober16,2013throughDecember31,2016.In
February2016,theBoardofDirectorsauthorizeda$1.0billionsharerepurchaseprogramthatsupersededtheOctober2013
repurchaseprogramandiseffectivefromFebruary11,2016throughDecember31,2018.Thegoaloftherepurchaseprogram
isbothtooffsetdilutionfromourequitycompensationplansandtoprovideuswiththeflexibilitytoincreasereturnof
capitaltoshareholdersasbusinessandmarketconditionswarrant.
DuringthesixmonthperiodendedJune30,2016,werepurchased4.0millionsharesofcommonstockata
weightedaveragepriceof$50.54pershareforanaggregateof199.7million.DuringthesixmonthperiodendedJune30,
2015,werepurchased1.8millionsharesofcommonstockataweightedaveragepriceof$70.53pershareforanaggregateof
$126.1million.Thetimingandamountofanyfuturesharerepurchaseswillbedeterminedbyourmanagementbasedonits
evaluationofmarketconditionsandotherfactors.
ConvertibleSeniorNotes
InFebruary2014,weissued$690.0millioninparvalueofconvertibleseniornotesdue2019andenteredinto
relatedconvertiblenotehedgeandwarranttransactions.Thetermsofthenotes,hedgeandwarranttransactionsarediscussed
morefullyinNote5totheconsolidatedfinancialstatementsincludedelsewhereinthisquarterlyreportonForm10Q.The
netproceedsoftheofferingareforsharerepurchases,workingcapitalandgeneralcorporatepurposes,includingpotential
acquisitionsandotherstrategictransactions.
LiquidityOutlook
Webelieve,basedonourpresentbusinessplan,thatourcurrentcash,cashequivalentsandmarketablesecurities
balancesandourforecastedcashflowsfromoperationswillbesufficienttomeetourforeseeablecashneedsforatleastthe
next12months.Ourforeseeablecashneeds,inadditiontoourrecurringoperatingcosts,includeourplannedcapital
expenditures,investmentsininformationtechnologyandfacilityexpansion,aswellasanticipatedsharerepurchases,lease
andpurchasecommitmentsandsettlementsofotherlongtermliabilities.
ContractualObligations
Ourprincipalcommitmentsconsistofobligationsunderleasesforofficespace,serviceagreementswithcolocation
facilitiesfordatacentercapacityandbandwidthusageandopenvendorpurchaseorders.Ourminimumcommitmentsrelated
tobandwidthusageandcolocationservicesmayvaryfromperiodtoperioddependingonthetimingandlengthofcontract
renewalswithourserviceproviders.AsofJune30,2016,therehavebeennosignificantchangesinourfuturenon
cancelableminimumpaymentsunderthesecommitmentsfromthosereportedinourannualreportonForm10Kfortheyear
endedDecember31,2015,otherthannormalperiodtoperiodvariations.
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OffBalanceSheetArrangements
Wehaveenteredintoindemnificationagreementswiththirdparties,includingvendors,customers,landlords,our
officersanddirectors,shareholdersofacquiredcompanies,jointventurepartnersandthirdpartiestowhichwelicense
technology.Generally,theseindemnificationagreementsrequireustoreimburselossessufferedbyathirdpartydueto
variousevents,suchaslawsuitsarisingfrompatentorcopyrightinfringementorournegligence.Theseindemnification
obligationsareconsideredoffbalancesheetarrangementsinaccordancewiththeauthoritativeguidanceforguarantors
accountinganddisclosurerequirementsforguarantees,includingindirectguaranteesofindebtednessofothers.SeealsoNote
10toourconsolidatedfinancialstatementsincludedinourannualreportonForm10KfortheyearendedDecember31,
2015forfurtherdiscussionoftheseindemnificationagreements.Thefairvalueofguaranteesissuedormodifiedduringthe
sixmonthsendedJune30,2016wasdeterminedtobeimmaterial.
AsofJune30,2016,wedidnothaveanyadditionalmaterialoffbalancesheetarrangements.
LegalMatters
Wearepartytovariouslitigationmattersthatmanagementconsidersroutineandincidentaltoourbusiness.
Managementdoesnotexpecttheresultsofanyoftheseroutineactionstohaveamaterialeffectonourbusiness,resultsof
operations,financialconditionorcashflows.
AsfirstdisclosedinourannualreportonForm10KfortheyearendedDecember31,2014filedwiththe
CommissiononMarch2,2015,weinitiatedaninternalinvestigation,withtheassistanceofoutsidecounsel,relatingto
impropersalespracticesbyaformeremployee.TheinvestigationwasconcludedinthequarterendedJune30,2016.It
includedareviewofcompliancewiththerequirementsoftheFCPAandotherapplicablelawsandregulations.InFebruary
2015,wevoluntarilycontactedtheCommissionandDepartmentofJusticetoadvisebothagenciesofthisinternal
investigation.InJune2016,wesignedanonprosecutionagreementwiththeCommissionandagreedtodisgorge$0.7
milliontoresolvethismatter,includinginterest.TheamountwasaccruedandpaidduringthesixmonthperiodendedJune
30,2016.
NewlyAdoptedAccountingPronouncements
InApril2015,theFinancialAccountingStandardsBoard,orFASB,issuedupdatedguidancetosimplifythe
presentationofdebtissuancecostsonthebalancesheets.Thisguidancemoveddebtissuancecostsfromtheassetssectionof
thebalancesheettotheliabilitiessectionasadirectdeductionfromthecarryingamountofthedebtissued.We
retrospectivelyadoptedtheguidanceonJanuary1,2016.Thepriorperiodconsolidatedbalancesheetpresented,asof
December31,2015,wasrevisedtoreclassify$6.2millionofdebtissuancecostsincludedinotherassetstoconvertible
seniornotes.Thishadtheimpactofreducingtotalassetsandtotalliabilitiesby$6.2million,asofDecember31,2015.The
revisionhadnoimpactonourresultsofoperations,financialpositionorcashflows.
InSeptember2015,theFASBissuedupdatedguidancethateliminatestherequirementtorestatepriorperiod
financialstatementsformeasurementperiodadjustments.Inanefforttoreducecomplexityinfinancialreporting,thenew
guidancerequiresthatthecumulativeimpactofameasurementperiodadjustment,includingtheimpactonpriorperiods,be
recognizedinthereportingperiodinwhichtheadjustmentisidentified.Thestandardwaseffectiveforandadoptedbyuson
January1,2016.Thisguidancedidnothaveanimpactonourresultsofoperations,financialconditionorcashflowsasthe
measurementperiodsforour2015acquisitionswereclosedasofDecember31,2015.
RecentAccountingPronouncements
InMay2014,theFASBissuedupdatedguidanceanddisclosurerequirementsforrecognizingrevenue.Thenew
revenuerecognitionstandardprovidesafivestepanalysisoftransactionstodeterminewhenandhowrevenueis
recognized.Thecoreprincipleisthatacompanyshouldrecognizerevenuetodepictthetransferofpromisedgoodsor
servicestocustomersinanamountthatreflectstheconsiderationtowhichtheentityexpectstobeentitledinexchangefor
thosegoodsorservices.ThisstandardwillbeeffectiveforusonJanuary1,2018,andmaybeappliedretrospectivelytoeach
periodpresentedorasacumulativeeffectadjustmentasofthedateofadoption.Weareevaluatingthepotentialimpactof
adoptingthisnewaccountingguidance.
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InFebruary2016,theFASBissuedguidancethatrequirescompaniestopresentassetsandliabilitiesarisingfrom
leasesontheconsolidatedbalancesheets.Theupdatedstandardaimstoincreasetransparencyandcomparabilityamong
organizationsbyrequiringlesseestorecognizeleaseassetsandleaseliabilitiesonthebalancesheetandrequiringdisclosure
of
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keyinformationaboutleasingarrangements.ThisstandardwillbeeffectiveforusonJanuary1,2019,andistobeapplied
usingamodifiedretrospectiveapproach.Earlyadoptionispermitted.Weareevaluatingthepotentialimpactofadoptingthis
newaccountingguidance.
InMarch2016,theFASBissuedguidancethatisintendedtosimplifyaspectsofhowsharebasedpaymentsare
accountedforandpresentedinthefinancialstatements.Thisguidancerequiresthatentitiesrecordalltaxeffectsofshare
basedpaymentsatsettlementorexpirationthroughtheincomestatement.Thestandardalsoamendshowwindfalltax
benefitsarerecognized,minimumstatutorytaxwithholdingrequirementsandhowentitieselecttorecognizesharebased
paymentforfeitures.ThisguidancewillbeeffectiveforusonJanuary1,2017andportionswillberequiredtobeappliedon
aretrospectiveormodifiedretrospectivebasis.Earlyadoptionispermitted.Weareevaluatingthepotentialimpactof
adoptingthisnewaccountingguidance.
Item3.QuantitativeandQualitativeDisclosuresAboutMarketRisk
InterestRateRisk
Ourportfolioofcashequivalentsandshortandlongterminvestmentsismaintainedinavarietyofsecurities,
includingU.S.governmentagencyobligations,highqualitycorporatedebtsecurities,commercialpaper,mutualfundsand
moneymarketfunds.Themajorityofourinvestmentsareclassifiedasavailableforsalesecuritiesandcarriedatfairmarket
valuewithcumulativeunrealizedgainsorlossesrecordedasacomponentofaccumulatedothercomprehensivelosswithin
stockholders'equity.Asharpriseininterestratescouldhaveanadverseimpactonthefairmarketvalueofcertainsecurities
inourportfolio.Wedonotcurrentlyhedgeourinterestrateexposureanddonotenterintofinancialinstrumentsfortrading
orspeculativepurposes.
ForeignCurrencyRisk
Growthinourinternationaloperationswillincrementallyincreaseourexposuretoforeigncurrencyfluctuationsas
wellasotherriskstypicalofinternationaloperationsthatcouldimpactourbusiness,including,butnotlimitedto,differing
economicconditions,changesinpoliticalclimate,differingtaxstructuresandotherregulationsandrestrictions.
TransactionExposure
Foreignexchangeratefluctuationsmayadverselyimpactourconsolidatedresultsofoperationsasexchangerate
fluctuationsontransactionsdenominatedincurrenciesotherthanourfunctionalcurrenciesresultingainsandlossesthatare
reflectedinourconsolidatedstatementsofincome.Weenterintoshorttermforeigncurrencyforwardcontractstooffset
foreignexchangegainsandlossesgeneratedbytheremeasurementofcertainassetsandliabilitiesrecordedinnon
functionalcurrencies.Changesinthefairvalueofthesederivatives,aswellasremeasurementgainsandlosses,are
recognizedinourconsolidatedstatementsofincomewithinotherexpense,net.Foreigncurrencytransactiongainsandlosses
fromtheseforwardcontractsweredeterminedtobeimmaterialduringthesixmonthsendedJune30,2016.Wedonotenter
intoderivativefinancialinstrumentsfortradingorspeculativepurposes.
TranslationExposure
TotheextenttheU.S.dollarweakensagainstforeigncurrencies,thetranslationoftheseforeigncurrencydenominated
transactionswillresultinincreasedrevenueanddecreasedoperatingexpenses.Conversely,ourrevenuewilldecreaseand
ouroperatingexpenseswillincreasewhentheU.S.dollarstrengthensagainstforeigncurrencies.
Foreignexchangeratefluctuationsmayalsoadverselyimpactourconsolidatedfinancialconditionastheassetsand
liabilitiesofourforeignoperationsaretranslatedintoU.S.dollarsinpreparingourconsolidatedbalancesheet.Thesegains
orlossesarerecordedasacomponentofaccumulatedothercomprehensivelosswithinstockholders'equity.
CreditRisk
Concentrationsofcreditriskwithrespecttoaccountsreceivablearelimitedtocertaincustomerstowhichwemake
substantialsales.Ourcustomerbaseconsistsofalargenumberofgeographicallydispersedcustomersdiversifiedacross
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numerousindustries.Webelievethatouraccountsreceivablecreditriskexposureislimited.AsofJune30,2016and
December31,2015,nocustomerhadanaccountsreceivablebalanceof10%ormoreofouraccountsreceivable.Webelieve
thatatJune30,2016,theconcentrationofcreditriskrelatedtoaccountsreceivablewasinsignificant.
Item4.ControlsandProcedures
Ourmanagement,withtheparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer(ourprincipal
executiveofficerandprincipalfinancialofficer,respectively),evaluatedtheeffectivenessofourdisclosurecontrolsand
proceduresasofJune30,2016.Thetermdisclosurecontrolsandprocedures,asdefinedinRules13a15(e)and15d15(e)
undertheSecuritiesExchangeActof1934,asamended,ortheExchangeAct,meanscontrolsandotherproceduresofa
companythataredesignedtoensurethatinformationrequiredtobedisclosedbyacompanyinthereportsthatitfilesor
submitsundertheExchangeActisrecorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedinthe
SecuritiesandExchangeCommissionsrulesandforms.Disclosurecontrolsandproceduresinclude,withoutlimitation,
controlsandproceduresdesignedtoensurethatinformationrequiredtobedisclosedbyacompanyinthereportsthatitfiles
orsubmitsundertheExchangeActisaccumulatedandcommunicatedtothecompanysmanagement,includingitsprincipal
executiveandprincipalfinancialofficers,asappropriatetoallowtimelydecisionsregardingrequireddisclosures.
Managementrecognizesthatanycontrolsandprocedures,nomatterhowwelldesignedandoperated,canprovideonly
reasonableassuranceofachievingtheirobjectives,andmanagementnecessarilyappliesitsjudgmentinevaluatingthecost
benefitrelationshipofpossiblecontrolsandprocedures.Basedontheevaluationofourdisclosurecontrolsandproceduresas
ofJune30,2016,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthat,asofsuchdate,ourdisclosure
controlsandprocedureswereeffectiveatthereasonableassurancelevel.
Nochangeinourinternalcontroloverfinancialreporting(asdefinedinRules13a15(f)and15d15(f)underthe
ExchangeAct)occurredduringthefiscalquarterendedJune30,2016thathasmateriallyaffected,orisreasonablylikelyto
materiallyaffect,ourinternalcontroloverfinancialreporting.
PARTII.OTHERINFORMATION
Item1.
LegalProceedings
Wearepartytolitigationthatweconsiderroutineandincidentaltoourbusiness.Wedonotcurrentlyexpectthe
resultsofanyoftheselitigationmatterstohaveamaterialeffectonourbusiness,resultsofoperations,financialconditionor
cashflows.
Item1A.RiskFactors
Thefollowingareimportantfactorsthatcouldcauseouractualoperatingresultstodiffermateriallyfromthose
indicatedorsuggestedbyforwardlookingstatementsmadeinthisquarterlyreportonForm10Qorpresentedelsewhereby
managementfromtimetotime.Wehavenotmadeanymaterialchangestotheriskfactorspreviouslydisclosedinourannual
reportonForm10KfortheyearendedDecember31,2015,exceptthatwehaveupdatedtheRiskFactorentitled"Weface
risksassociatedwithinternationaloperationsandexpansioneffortsthatcouldharmourbusiness"toreflectthatweentered
intoaNonProsecutionAgreementwiththeCommissioninconnectionwithapreviouslydisclosedinvestigationinto
certainsalespracticesinacountryoutsidetheU.S.
Ifwedonotcontinuetoinnovateanddevelopsolutionsandtechnologiesthatareusefulforourcustomersorthatimprove
ouroperatingefficiencies,ouroperatingresultsmaysuffer.
Wehavebeeninbusinessformorethan17yearsandconsiderourselvespioneersinthedevelopmentofcontentand
applicationdeliverysolutions.Astheinformationtechnologyindustryevolves,however,itmaybecomeincreasingly
difficultforustomaintainatechnologicaladvantage.Inparticular,ourtraditionalofferingsriskbecomingcommoditizedas
competitorsorevencurrentorformercustomersseektoreplicatethemsuchthatwemustlowerthepriceswecharge,
reducingtheprofitabilityofsuchofferings,orrisklosingsuchbusiness.Webelieve,therefore,thatdevelopinginnovative,
highmarginsolutionsiskeytoourrevenuegrowthandprofitability.Wemustdosoinarapidlychangingtechnology
environmentwhereitcanbedifficulttoanticipatetheneedsofpotentialcustomersandwherecompetitorsmaydevelop
productsandservicesthatare,ormaybeviewedas,betterthanours.Theprocessofdevelopingnewsolutionsiscomplex
anduncertainwemustcommitsignificantresourcestodevelopingnewservicesorfeatureswithoutknowingwhetherour
investmentswillresultinservicesthemarketwillaccept.Thiscouldcauseourexpensestogrowmorerapidlythanour
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revenue.Furthermore,wemaynotsuccessfullyexecuteourtechnologyinitiativesbecauseoferrorsinplanning,timingor
execution,technicaloroperationalhurdlesthatwefailtoovercomeinatimelyfashion,misunderstandingsaboutmarket
demandoralackofappropriateresources.Failuretoadequatelydevelop,onacosteffectivebasis,innovativenewor
enhancedsolutionsthatareattractivetocustomersandtokeeppacewithrapidtechnologicalandmarketchangescouldhave
amaterialeffectonourbusiness,resultsofoperations,financialconditionandcashflows.
Slowertrafficgrowthonournetworkandnumerousotherfactorscouldcauseourrevenuegrowthratetoslowand
profitabilitytodecline.
Webaseourdecisionsaboutexpenselevelsandinvestmentsonestimatesofourfuturerevenueandfuture
anticipatedrateofgrowth.Manyofourexpensesarefixedcostinnatureforsomeminimumamountoftime,suchaswithco
locationandbandwidthproviders,soitmaynotbepossibletoreducecostsinatimelymannerorwithoutthepaymentof
feestoexitcertainobligationsearly.Ifweexperienceslowertrafficgrowthonournetworkthanweexpectorthanwehave
experiencedinrecentyears,ourrevenuegrowthratewillslow,andwemaynotbeabletomaintainourcurrentlevelof
profitabilityin2016oronaquarterlyorannualbasisthereafter.Numerousfactorscanimpacttrafficgrowthincluding:
decisionsbyourmediacustomerstodelayintroductionofOTTvideodeliveryinitiatives
customers,particularlylargeInternetplatformcompanies,utilizingtheirowndatacentersandimplementing
deliveryapproachesthatlimitoreliminaterelianceonthirdpartyproviderslikeusand
macroeconomicmarketandindustrypressures.
Ourrevenuegrowthratemayslowandprofitabilitymaydeclineinfutureperiodsasaresultofanumberofother
factorsunrelatedtotrafficgrowth,including:
inabilitytoincreasesalesofourcoreservicesandadvancedfeatures
increasedheadcountexpenses
changesinourcustomers'businessmodelsthatwedonotfullyanticipateorthatwefailtoaddressadequatelyand
increasedreliancebycustomersonoursecuresocketlayer,orSSL,networkwhichismoreexpensivetomaintain
andoperate.
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Theinformationtechnologyindustryandthemarketsinwhichwecompeteareconstantlyevolving,whichmakesourfuture
businessstrategies,practicesandresultsdifficulttopredict.
Theinformationtechnologyindustryandthemarketsinwhichwecompetehavegrownrapidlyoverthelifeofour
companyandcontinuetoevolveinresponsetonewtechnologicaladvances,changingbusinessmodelsandotherfactors.
Weandtheothercompaniesthatcompeteinthisindustryandthesemarketsexperiencecontinuallyshiftingbusiness
relationships,commercialfocusesandbusinesspriorities,allofwhichoccurinreactiontoindustryandmarketforcesandthe
emergenceofnewopportunities.Theseshiftshaveledorcouldleadto:
ourcustomersorpartnersbecomingourcompetitors
ournetworksuppliersbecomingpartnerswithusor,conversely,nolongerseekingtoworkwithus
ourworkingmorecloselywithhardwareproviders
largetechnologycompaniesthatpreviouslydidnotappeartoshowinterestinthemarketsweseektoaddress
enteringintothosemarketsascompetitorsand
needingtoexpandintonewlinesofbusinessortochangeorabandonexistingstrategies.
Asaresultofthisconstantlychangingenvironment,ourfuturebusinessstrategies,practicesandresultsmaybe
difficulttopredict,andwemayfaceoperationaldifficultiesinadjustingtothechanges.
OurtechnologicalapproachtoaddressingthechallengesofconductingbusinessovertheInternetmaynotbeadequateor
costeffectivetohandleevolvingmarketforces.
WebelievethattheInternethasthepotentialtoexperiencedramaticgrowthinthefuture.Forexample,onlya
minorityofindividualswatchtelevisionovertheInternetnow,butmanypredictthattheInternetwillbecomethedominant
mediumfordeliveryofvideocontentinthefuture.Inaddition,theuseofmobiledeviceshasincreasedrapidlyinrecent
yearsandisexpectedtocontinuetogrowinthefuture.Therecoulddevelopaninflectionpointabovewhichglobalusageof
theInternetincreasestoalevelthatcausesourcurrentapproachestothedeliveryofcontentandapplicationstonolongerbe
sustainableatcurrentlevelsofprofitabilityoratall.Itisexpensivetodeploydedicatedserversindatacentersaroundthe
worldtherefore,theapproachofdeployingatthe"edge"oftheInternetmaybeinadequatetofullyaddressourcustomers'
evolvingneedsorwemaynolongerbeabletomaintainourcurrentapproachtodelivery.Ifweareunabletodevelopor
acquirescalablenewtechnologiestoaddresstheexpectedgrowthandotherchangesweexpect,ourbusinessandfinancial
statementsmaysuffer.
Ifweareunabletocompeteeffectively,ourbusinesswillbeadverselyaffected.
Wecompeteinmarketsthatareintenselycompetitiveandrapidlychanging.Ourcurrentandpotentialcompetitors
varybysize,productandserviceofferingsandgeographicregionandrangefromstartupsthatoffersolutionscompeting
withadiscretepartofourbusinesstolargetechnologyortelecommunicationscompaniesthatoffer,ormaybeplanningto
introduce,productsandservicesthatarebroadlycompetitivewithwhatwedo.Theprimarycompetitivefactorsinour
marketare:excellenceoftechnology,globalpresence,customerservice,technicalexpertise,security,easeofuse,breadthof
servicesoffered,priceandfinancialstrength.Competitorsincludesomeofourcurrentpartnersandcustomers.
Manyofourcurrentandpotentialcompetitorshavesubstantiallygreaterfinancial,technicalandmarketing
resources,largercustomerbases,longeroperatinghistories,greaterbrandrecognitionandmoreestablishedrelationshipsin
theindustrythanwedo.Asaresult,someofthesecompetitorsmaybeableto:
developsuperiorproductsorservices,gaingreatermarketacceptance,andexpandtheirserviceofferings
moreefficientlyormorerapidly
adapttoneworemergingtechnologiesandchangesincustomerrequirementsmorequickly
takeadvantageofacquisitionandotheropportunitiesmorereadily
adoptmoreaggressivepricingpoliciesandallocategreaterresourcestothepromotion,marketing,andsales
oftheirservicesand
dedicategreaterresourcestotheresearchanddevelopmentoftheirproductsandservices.
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Smallerandmorenimblecompetitorsmaybeableto:
attractcustomersbyofferinglesssophisticatedversionsofservicesthanweprovideatlowerpricesthan
thosewecharge
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developnewbusinessmodelsthataredisruptivetousand
respondmorequicklythanwecantoneworemergingtechnologies,changesincustomerrequirementsand
marketandindustrydevelopments,resultinginsuperiorofferings.
Existingandpotentialcustomersmaynotpurchaseourservices,ormaylimittheiruseofthem,becausethey:
pursuea"doityourself"approachbyputtinginplaceequipment,softwareandothertechnologysolutions
forcontentandapplicationdeliverywithintheirinternalsystems
enterintorelationshipsdirectlywithnetworkprovidersinsteadofrelyingonanoverlaynetworklikeours
or
implementmultivendorpoliciestoreducerelianceonexternalproviderslikeus.
Ultimately,increasedcompetitionofalltypescouldresultinpriceandrevenuereductions,lossofcustomersand
lossofmarketshare,eachofwhichcouldmateriallyimpactourbusiness,profitability,financialcondition,resultsof
operationsandcashflows.
Ouroperatingresultscanbeimpactedbytheactionsandbusinesslifecyclesofasmallnumberoflargecustomers.
Historically,ouroperatingresultshavebeensubjecttofluctuationsrelatedtodependenceonseverallarge
customers,particularlymediacompanies,forasignificantportionofourrevenues.Theamountoftrafficwedeliveronbehalf
ofthosecustomerscanvarysignificantlybasedondecisionstheymakeabouttheirbusinesses,includingwhethertostartor
delaynewbusinessinitiatives,buildouttheirownnetworkstohandledelivery,orimplementormaintainmultiplevendor
strategies.Theseapproachescanchangerapidlyandunpredictably.Whilewebelievethatwewillbelessrelianton
individualcustomersinthefuture,wearelikelytocontinuetofacesomeuncertaintyinforecastingourrevenuesasthey
relatetothesecustomersfromquartertoquarteroroverlongerperiods.Wecouldalsoexperienceinconsistentrevenue
growthpatternsandearnings.
Wemaybeunabletoreplacelostrevenueduetocustomercancellations,renewalsatlowerratesorotherlessfavorable
terms.
Itiskeytoourprofitabilitythatweoffsetlostcommittedrecurringrevenueduetocustomercancellations,
terminations,pricereductionsorotherlessfavorabletermsbyaddingnewcustomersandincreasingthenumberofhigh
marginservices,featuresandfunctionalitiesthatourexistingcustomerspurchase.Wecannotpredictourrenewalrates.Some
customersmayelectnottorenewandothersmayrenewatlowerprices,lowercommittedtrafficlevels,orforshortercontract
lengths.Historically,asignificantpercentageofourrenewals,particularlywithlargercustomers,hasledtounitprice
declinesascompetitionhasincreasedandthemarketforcertainpartsofourbusinesshasmatured.Ourrenewalratesmay
declineasaresultofanumberoffactors,includingcompetitivepressures,customerdissatisfactionwithourservices,
customers'inabilitytocontinuetheiroperationsandspendinglevels,theimpactofmultivendorpolicies,customers
implementingorincreasingtheiruseofinhousetechnologysolutionsandgeneraleconomicconditions.Inaddition,our
customercontractingmodelsmaychangetomoveawayfromacommittedrevenuestructuretoa"payasyougo"approach.
Theabsenceofacommitmentwouldmakeiteasierforcustomerstostopdoingbusinesswithus,whichwouldnegatively
impactrevenue.
Securitybreachesandotherunplannedinterruptionsinthefunctioningofournetworkorservicescouldleadtosignificant
costsanddisruptionsthatcouldharmourbusiness,financialresultsandreputation.
Ourbusinessisdependentonprovidingourcustomerswithfast,efficientandreliabledistributionofapplications
andcontentovertheInternet.Wetransmitandstoreourcustomers'informationanddataaswellasourown.Maintainingthe
securityandavailabilityofourservices,networkandinternalITsystemsisacriticalissueforusandourcustomers.Thecosts
toustoavoidoralleviatecyberorothersecurityproblems,bugs,viruses,worms,malicioussoftwareprogramsandsecurity
vulnerabilitiesaresignificant,andoureffortstoaddresstheseproblemsmaynotbesuccessfulandcouldresultin
interruptions,delays,cessationofservice,lossofexistingorpotentialcustomers,liabilitytothirdpartiesandregulatory
sanctions.Asweexpandouremphasisonsellingsecurityrelatedsolutions,wemaybecomeamoreattractivetargetfor
attacksonourinfrastructureintendedtostealinformationaboutourtechnology,financialdataorcustomerinformationor
takeotheractionsthatwouldbedamagingtoourcustomersandus.Ournetworkorservicescouldalsobedisruptedby
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numerousotherevents,includingfailureorrefusalofourthirdpartynetworkproviderstoprovidethenecessarycapacity,
naturaldisasters,powerlossesandhumanerror.Anysignificantbreachofoursecuritymeasuresorotherdisruptionstoour
networkorITsystemswouldthreatenourabilitytoprovideourcustomerswithfast,efficientandreliabledistributionof
applicationsandcontentovertheInternet,wouldharmourreputationandcouldleadtocustomercredits,lossofcustomers,
higherexpensesandincreasedlegalliability.
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Acquisitionsandotherstrategictransactionswecompletecouldresultinoperatingdifficulties,dilution,diversionof
managementattentionandotherharmfulconsequencesthatmayadverselyimpactourbusinessandresultsofoperations.
Acquisitionsareanimportantpartofourcorporatestrategy.Wemayalsoenterintoothertypesofstrategic
relationshipsthatinvolvetechnologysharingorclosecooperationwithothercompanies.Acquisitionsandothercomplex
transactionsareaccompaniedbyanumberofrisks,includingthefollowing:
difficultyintegratingtheoperationsandpersonnelofacquiredcompanies
potentialdisruptionofourongoingbusiness
potentialdistractionofmanagement
diversionofbusinessresourcesfromcoreoperations
expensesrelatedtothetransactions
failuretorealizesynergiesorotherexpectedbenefits
increasedaccountingchargessuchasimpairmentofgoodwillorintangibleassets,amortizationofintangibleassets
acquiredandareductionintheusefullivesofintangibleassetsacquiredand
potentialunknownliabilitiesassociatedwithacquiredbusinesses.
Anyinabilitytointegratecompletedacquisitionsorcombinationsinanefficientandtimelymannercouldhavean
adverseimpactonourresultsofoperations.Aswecompleteacquisitions,wemayencounterdifficultyinincorporating
acquiredtechnologiesintoourofferingswhilemaintainingthequalitystandardsthatareconsistentwithourbrandand
reputation.Ifwearenotsuccessfulincompletingacquisitionsorotherstrategictransactionsthatwemaypursueinthefuture,
wemayincursubstantialexpensesanddevotesignificantmanagementtimeandresourceswithoutasuccessfulresult.Future
acquisitionscouldrequireuseofsubstantialportionsofouravailablecashorresultindilutiveissuancesofsecurities.
Technologysharingorotherstrategicrelationshipsweenterintomaygiverisetodisputesoverintellectualproperty
ownership,operationalresponsibilitiesandothersignificantmatters.Suchdisputesmaybeexpensiveandtimeconsumingto
resolve.
Ourfailuretoeffectivelymanageouroperationsasourbusinessevolvescouldharmus.
Ourfutureoperatingresultswilldependonourabilitytomanageouroperations.Asaresultofthediversificationof
ourbusiness,personnelgrowth,acquisitionsandinternationalexpansioninrecentyears,manyofouremployeesarenow
basedoutsideofourCambridge,Massachusettsheadquartershowever,mostkeymanagementdecisionsaremadebya
relativelysmallgroupofindividualsbasedprimarilyatourheadquarters.Ifweareunabletoappropriatelyincrease
managementdepth,enhancesuccessionplanninganddecentralizeourdecisionmakingatapacecommensuratewithour
actualordesiredgrowthrates,wemaynotbeabletoachieveourfinancialoroperationalgoals.Itisalsoimportanttoour
continuedsuccessthatwehirequalifiedemployees,properlytrainthemandmanageoutpoorlyperformingpersonnel,all
whilemaintainingourcorporatecultureandspiritofinnovation.Ifwearenotsuccessfulattheseefforts,ourgrowthand
operationscouldbeadverselyaffected.
InApril2016,weimplementedareorganizationofourproductsanddevelopmentandglobalsales,channelsand
marketingorganizationsintonewgroupsfocusedonourMedia,WebandEnterprise&Carriercustomersandsolutions.Our
goalistoimprovealignmentbetweencustomerfeedbackandproductinnovation,makingAkamaieasiertodobusinesswith
andincreasingproductivity.Structuralchangeslikethesecanbedistractingtomanagementandtherestoftheemployee
base,andwemaynotultimatelyrealizetheintendedbenefits,evenafterincurringexpensesincarryingoutthe
reorganization.
Asourbusinessevolves,wemustalsoexpandandadaptourITandoperationalinfrastructure.Ourbusinessrelieson
ourdatasystems,billingsystemsandotheroperationalandfinancialreportingandcontrolsystems.Allofthesesystemshave
becomeincreasinglycomplexduetothediversificationandcomplexityofourbusiness,acquisitionsofnewbusinesseswith
differentsystemsandincreasedregulationovercontrolsandprocedures.Tomanageourtechnicalsupportinfrastructure
effectivelyandimproveoursalesefficiency,wewillneedtocontinuetoupgradeandimproveourdatasystems,billing
systems,orderingprocessesandotheroperationalandfinancialsystems,proceduresandcontrols.Theseupgradesand
improvementsmaybedifficultandcostly.Ifweareunabletoadaptoursystemsandorganizationinatimely,efficientand
costeffectivemannertoaccommodatechangingcircumstances,ourbusinessmaybeadverselyaffected.Ifthethirdparties
werelyonforhosteddatasolutionsforourinternalnetworkandinformationsystemsaresubjecttoasecuritybreachor
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otherwisesufferdisruptionsthatimpacttheservicesweutilize,theintegrityandavailabilityofourinternalinformation
couldbecompromisedcausingthelossofconfidentialorproprietaryinformation,damagetoourreputationandeconomic
loss.
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Ifweareunabletoretainourkeyemployeesandhireandretainqualifiedsales,technical,marketingandsupport
personnel,ourabilitytocompetecouldbeharmed.
Ourfuturesuccessdependsupontheservicesofourexecutiveofficersandotherkeytechnology,sales,marketing
andsupportpersonnelwhohavecriticalindustryexperienceandrelationships.Thereissignificantcompetitionfortalented
individualsintheregionsinwhichourprimaryofficesarelocated,whichaffectsbothourabilitytoretainkeyemployees
andhirenewones.Inmakingemploymentdecisions,particularlyinourindustry,jobcandidatesandcurrentpersonneloften
considerthevalueofstockbasedcompensation.Declinesinthepriceofourstockcouldadverselyaffectourabilitytoattract
orretainkeyemployees.
Noneofourofficersorkeyemployeesisboundbyanemploymentagreementforanyspecificterm.Membersofour
seniormanagementteamhaveleftAkamaiovertheyearsforavarietyofreasons,andwecannotbecertainthattherewillnot
beadditionaldepartures,whichmaybedisruptivetoouroperationsanddetrimentaltoourfutureoutlook.Thelossofthe
servicesofanyofourkeyemployeesorourinabilitytoattractandretainnewtalentcouldhinderordelaythe
implementationofourbusinessmodelandthedevelopmentandintroductionof,andnegativelyimpactourabilitytosell,
ourservices.
Ourstockpricehasbeen,andmaycontinuetobe,volatile,andyourinvestmentcouldlosevalue.
Themarketpriceofourcommonstockhasbeenvolatile.Tradingpricesmaycontinuetofluctuateinresponsetoa
numberofeventsandfactors,includingthefollowing:
quarterlyvariationsinoperatingresults
slowerthanexpectedgrowthintrafficoverournetwork
announcementsbyourcustomersrelatedtotheirbusinessesthatcouldbeviewedasimpactingtheirusageofour
solutions
introductionofnewproducts,servicesandstrategicdevelopmentsbyusorourcompetitors
marketspeculationaboutwhetherweareatakeovertarget
activismbyanysinglelargestockholderorcombinationofstockholders
changesinfinancialestimatesandrecommendationsbysecuritiesanalysts
failuretomeettheexpectationsofsecuritiesanalysts
purchasesorsalesofourstockbyourofficersanddirectors
macroeconomicfactors
repurchasesofsharesofourcommonstock
performancebyothercompaniesinourindustryand
geopoliticalconditionssuchasactsofterrorismormilitaryconflicts.
Furthermore,ourrevenue,particularlythatportionattributabletousageofourservicesbeyondcustomer
commitments,canbedifficulttoforecast,and,asaresult,ourquarterlyoperatingresultscanfluctuatesubstantially.This
concernisparticularlyacutewithrespecttoourmediaandcommercecustomersforwhichholidaysalesareakeybut
unpredictabledriverofusageofourservices.Inthefuture,ourcustomercontractingmodelsmaychangetomoveawayfrom
acommittedrevenuestructuretoa"payasyougo"approach.Theabsenceofacommitmentwouldmakeiteasierfor
customerstostopdoingbusinesswithus,whichwouldcreateadditionalchallengeswithourforecastingprocesses.Because
asignificantportionofourcoststructureislargelyfixedintheshortterm,revenueshortfallstendtohavea
disproportionatelynegativeimpactonourprofitability.Ifweannouncerevenueorprofitabilityresultsthatdonotmeetor
exceedourguidanceormakechangesinourguidancewithrespecttofutureoperatingresults,ourstockpricemaydecrease
significantlyasaresult.
Anyoftheseevents,aswellasothercircumstancesdiscussedintheseRiskFactors,maycausethepriceofour
commonstocktofall.Inaddition,thestockmarketingeneral,andthemarketpricesofstockofpubliclytradedtechnology
companiesinparticular,haveexperiencedsignificantvolatilitythatoftenhasbeenunrelatedtotheoperatingperformanceof
suchcompanies.Thesebroadstockmarketfluctuationsmayadverselyaffectthemarketpriceofourcommonstock,
regardlessofouroperatingperformance.
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Wefacerisksassociatedwithinternationaloperationsandexpansioneffortsthatcouldharmourbusiness.
Wehaveoperationsinnumerousforeigncountriesandmaycontinuetoexpandouroperationsinternationally.Such
expansioncouldrequireustomakesignificantexpenditures,whichcouldharmourprofitability.Weareincreasinglysubject
toanumberofrisksassociatedwithinternationalbusinessactivitiesthatmayincreaseourcosts,makeouroperationsless
efficientandrequiresignificantmanagementattention.Theserisksinclude:
currencyexchangeratefluctuationsandlimitationsontherepatriationandinvestmentoffunds
difficultiesintransferringfundsfrom,orconvertingcurrenciesin,certaincountries
changesinregulatoryrequirementsthatcouldposeriskstoourintellectualproperty,increasethecostofdoing
businessinacountryorcreateotherdisadvantagestoourbusiness
interpretationsoflawsorregulationsthatwouldsubjectustoregulatorysupervisionor,inthealternative,requireus
toexitacountry,whichcouldhaveanegativeimpactonthequalityofourservicesorourresultsofoperations
uncertaintyregardingliabilityforcontentorservices
adjustingtodifferentemployee/employerrelationshipsanddifferentregulationsgoverningsuchrelationships
corporateandpersonalliabilityforallegedoractualviolationsoflawsandregulations
difficultyinstaffing,developingandmanagingforeignoperationsasaresultofdistance,languageandcultural
differences
relianceonchannelpartnersoverwhichwehavelimitedcontrolorinfluenceonadaytodaybasisand
potentiallyadversetaxconsequences.
PoliticaleventssuchastheUnitedKingdom'svoteinJune2016towithdrawfromtheEuropeanUnionmayincreasethe
likelihoodofcertainoftheserisksmaterializingorheightentheirimpact.
Inaddition,compliancewithcomplexforeignandU.S.lawsandregulationsthatapplytoourinternational
operationsincreasesourcostofdoingbusiness.Thesenumerous,rapidlychangingandsometimesconflictinglawsand
regulationsincludeinternalcontrolanddisclosurerules,dataprivacyandfilteringrequirements,anticorruptionlaws,such
astheFCPA,theUKBriberyActandlocallawsprohibitingcorruptpaymentstogovernmentalofficials,andantitrustand
competitionregulations,amongothers.Violationsoftheselawsandregulationsbyouremployeesorpartnerscouldresultin
finesandpenalties,criminalsanctionsagainstus,ourofficers,orouremployees,prohibitionsontheconductofourbusiness
andonourabilitytoofferourproductsandservicesinoneormorecountries,andcouldalsomateriallyaffectourbrand,our
internationalexpansionefforts,ourabilitytoattractandretainemployees,ourbusiness,andourfinancialstatements.
Althoughwehaveimplementedpoliciesandproceduresdesignedtoensurecompliancewiththeselawsandregulations,
therecanbenoassurancethatouremployees,contractorsoragentswillnotviolateourpoliciesorapplicablelaws.
WeenteredintoaNonProsecutionAgreementwiththeCommissiononMay3,2016inconnectionwiththe
previouslydisclosedinvestigationrelatingtosalespracticesinacountryoutsidetheU.S.Intheeventweviolatethetermsof
thisNonProsecutionAgreement,wecouldbesubjecttoadditionalinvestigationorenforcementbytheCommissionorthe
DepartmentofJustice.Inaddition,whetherbyvirtueofdisclosureoftheNPAorotherwise,wemaybesubjectto
investigationsbyforeigngovernments.Anysuchinvestigationsorenforcementactionscouldhaveamaterialadverseeffect
onus.
Defectsordisruptionsinourservicescoulddiminishdemandforoursolutionsorsubjectustosubstantialliability.
Ourservicesarehighlycomplexandaredesignedtobedeployedinandacrossnumerouslargeandcomplex
networksthatwedonotcontrol.Fromtimetotime,wehaveneededtocorrecterrorsanddefectsinthesoftwarethat
underliesourservicesandplatformthathavegivenrisetoserviceincidents.Wehavealsoexperiencedcustomer
dissatisfactionwiththequalityofsomeofourmediadeliveryandotherservices,whichhasledtolossofbusinessandcould
leadtolossofcustomersinthefuture.Theremaybeadditionalerrorsanddefectsinoursoftwarethatmayadverselyaffect
ouroperations.Wemaynothaveinplaceadequatequalityassuranceprocedurestoensurethatwedetecterrorsinour
softwareinatimelymanner,andwemayhaveinsufficientresourcestoefficientlycopewithmultipleserviceincidents
happeningsimultaneouslyorinrapidsuccession.Ifweareunabletoefficientlyandcosteffectivelyfixerrorsorother
problemsthatmaybeidentifiedandimprovethequalityofourservices,orifthereareunidentifiederrorsthatallowpersons
toimproperlyaccessourservices,wecouldexperiencelossofrevenueandmarketshare,damagetoourreputation,increased
expenses,delayedpaymentsandlegalactionsbyourcustomers.
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Wemayhaveinsufficienttransmissionandcolocationspace,whichcouldresultindisruptionstoourservicesandlossof
revenue.
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Ouroperationsaredependentinpartupontransmissioncapacityprovidedbythirdpartytelecommunications
networkprovidersandaccesstocolocationfacilitiestohouseourservers.Therecanbenoassurancethatweareadequately
preparedforunexpectedincreasesinbandwidthdemandsbyourcustomers.Thebandwidthwehavecontractedtopurchase
maybecomeunavailableforavarietyofreasons,includingpaymentdisputes,networkprovidersgoingoutofbusiness,
networksimposingtrafficlimitsorgovernmentsadoptingregulationsthatimpactnetworkoperations.Insomeregions,
networkprovidersmaychoosetocompetewithusandbecomeunwillingtosellusadequatetransmissioncapacityatfair
marketprices.Thisriskisheightenedwheremarketpowerisconcentratedwithoneorafewmajornetworks.Wealsomaybe
unabletomovequicklyenoughtoaugmentcapacitytoreflectgrowingtrafficdemands.Failuretoputinplacethecapacity
werequirecouldresultinareductionin,ordisruptionof,servicetoourcustomersandultimatelyalossofthosecustomers.In
recentyears,ithasbecomeincreasinglyexpensivetohouseourserversatnetworkfacilities.Weexpectthistrendto
continue.Inaddition,customershaveincreasinglyelectedtotransmittheircontentoverourSSLnetwork,whichismore
costlyforustooperateandcouldrequiresignificantadditionalinvestmentforus.Theseincreasedexpenseshavemade,and
willmake,itmorecostlyforustoexpandouroperationsandmoredifficultforustomaintainorimproveourprofitability.
Governmentregulationisevolving,andunfavorablechangescouldharmourbusiness.
LawsandregulationsthatapplytocommunicationsandcommerceovertheInternetarebecomingmoreprevalent.
Inparticular,domesticandforeigngovernmentattemptstoregulatetheoperationoftheInternetcouldnegativelyimpactour
business.WhileregulationsrecentlyadoptedbytheU.S.FederalCommunicationsCommissionthatgoverncertainaspects
oftheoperationoftheInternet(suchascontentblockingandthrottlingandpaidprioritization)donotapplytocontent
deliverynetworkproviderslikeus,thereisnoguaranteethatfutureregulatoryandlegislativeinitiativeswillnotimpactour
business.Furthermore,withmorebusinessbeingconductedovertheInternet,therehavebeencallsformorestringent
copyrightprotection,tax,consumerprotection,cybersecurity,datalocalizationandcontentrestrictionlaws,bothintheU.S.
andabroad,thatmayimposeadditionalburdensoncompaniesconductingbusinessonlineorprovidingInternetrelated
servicessuchasours.Theadoptionofanyofthesemeasurescouldnegativelyaffectbothourbusinessdirectlyaswellasthe
businessesofourcustomers,whichcouldreducetheirdemandforourservices.
Wemayalsobeimpactedbychangesinprivacyrelatedregulationsgoverningthecollection,use,retention,sharing
andsecurityofdatathatwereceivefromourcustomers,visitorstotheirwebsitesandothers.Complyingwithadiverserange
ofprivacyrequirementscouldcauseustoincursubstantialcostsorrequireustochangeourbusinesspracticesinamanner
adversetoourbusiness.Inaddition,wehaveapubliclyavailableprivacypolicyconcerningourcollection,useand
disclosureofuserdata.Anyfailure,orperceivedfailure,byustocomplywithourpostedprivacypoliciesorwithany
privacyrelatedlaws,governmentregulationsordirectives,orindustryselfregulatoryprinciplescouldresultindamageto
ourreputationorproceedingsoractionsagainstusbygovernmentalentitiesorothers,whichcouldpotentiallyhavean
adverseeffectonourbusiness.
FluctuationsinforeigncurrencyexchangeratesaffectouroperatingresultsinU.S.dollarterms.
Anincreasingportionofourrevenueisderivedfrominternationaloperations.Revenuegeneratedandexpenses
incurredbyourinternationalsubsidiariesareoftendenominatedinthecurrenciesofthelocalcountries.Asaresult,our
consolidatedU.S.dollarfinancialstatementsaresubjecttofluctuationsduetochangesinexchangeratesasthefinancial
resultsofourinternationalsubsidiariesaretranslatedfromlocalcurrenciesintoU.S.dollars.Inaddition,ourfinancialresults
aresubjecttochangesinexchangeratesthatimpactthesettlementoftransactionsinnonfunctionalcurrencies.Whilewe
haveimplementedaforeigncurrencyhedgingprogramtomitigatetransactionalexposures,thereisnoguaranteethatsuch
programwillbefullyeffective.
Wemayneedtodefendagainstpatentorcopyrightinfringementclaims,whichwouldcauseustoincursubstantialcostsor
limitourabilitytousecertaintechnologiesinthefuture.
Asweexpandourbusinessanddevelopnewtechnologies,productsandservices,wemaybecomeincreasingly
subjecttointellectualpropertyinfringementandotherclaims,includingthosethatmayariseunderinternationallaws.In
manycases,wehaveagreedtoindemnifyourcustomersandchannelandstrategicpartnersifourservicesinfringeor
misappropriatespecifiedintellectualpropertyrightstherefore,wecouldbecomeinvolvedinlitigationorclaimsbrought
againstcustomersorchannelorstrategicpartnersifourservicesortechnologyarethesubjectofsuchallegations.Any
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litigationorclaims,whetherornotvalid,broughtagainstusorpursuanttowhichweindemnifyourcustomersorchannelor
strategicpartnerscouldresultinsubstantialcostsanddiversionofresourcesandrequireustodooneormoreofthe
following:
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ceaseselling,incorporatingorusingfeatures,functionalities,productsorservicesthatincorporatethechallenged
intellectualproperty
paysubstantialdamagesandincursignificantlitigationexpenses
obtainalicensefromtheholderoftheinfringedintellectualpropertyright,whichlicensemaynotbeavailableon
reasonabletermsoratallor
redesignproductsorservices.
Ifweareforcedtotakeanyoftheseactions,ourbusinessmaybeseriouslyharmed.
Ourbusinesswillbeadverselyaffectedifweareunabletoprotectourintellectualpropertyrightsfromunauthorizeduseor
infringementbythirdparties.
Werelyonacombinationofpatent,copyright,trademarkandtradesecretlawsandcontractualrestrictionson
disclosuretoprotectourintellectualpropertyrights.Theselegalprotectionsaffordonlylimitedprotection.Wehave
previouslybroughtlawsuitsagainstentitiesthatwebelievedwereinfringingourintellectualpropertyrightsbuthavenot
alwaysprevailed.Suchlawsuitscanbeexpensiveandrequireasignificantamountofattentionfromourmanagementand
technicalpersonnel,andtheoutcomesareunpredictable.Monitoringunauthorizeduseofourservicesisdifficult,andwe
cannotbecertainthatthestepswehavetakenorwilltakewillpreventunauthorizeduseofourtechnology.Wehave
licensedtechnologyfromtheMassachusettsInstituteofTechnologythatiscoveredbyvariouspatentsandcopyrights
relatingtoInternetcontentdeliverytechnology.Someofourcoretechnologyisbasedinpartonthetechnologycoveredby
thesepatents,patentapplicationsandcopyrights.Thesepatentsarescheduledtoexpirebeginningin2018.Asthepatents
expire,wewillnolongerhavetherighttoexcludeothersfrompracticingthetechnologiescoveredbythem.Furthermore,we
cannotbecertainthatanypendingorfuturepatentapplicationswillbegranted,thatanyfuturepatentwillnotbe
challenged,invalidatedorcircumvented,orthatrightsgrantedunderanypatentthatmaybeissuedwillprovidecompetitive
advantagestous.Ifweareunabletoprotectourproprietaryrightsfromunauthorizeduse,thevalueofourintellectual
propertyassetsmaybereduced.Althoughwehavelicensedfromotherpartiesproprietarytechnologycoveredbypatents,we
cannotbecertainthatanysuchpatentswillnotbechallenged,invalidatedorcircumvented.Suchlicensesmayalsobenon
exclusive,meaningourcompetitionmayalsobeabletoaccesssuchtechnology.
Werelyoncertainopensourcesoftwaretheuseofwhichcouldresultinourhavingtodistributeourproprietary
software,includingoursourcecode,tothirdpartiesonunfavorableterms,whichcouldmateriallyaffectourbusiness.
Certainofourserviceofferingsusesoftwarethatissubjecttoopensourcelicenses.Opensourcecodeissoftware
thatisfreelyaccessible,usableandmodifiable.Opensourcesoftwaremayhavesecurityflawsandotherdeficienciesthat
couldmakeoursolutionslessreliableanddamageourbusiness.Certainopensourcecodeisgovernedbylicenseagreements,
thetermsofwhichcouldrequireusersofsuchsoftwaretomakeanyderivativeworksofthesoftwareavailabletootherson
unfavorabletermsoratnocost.Becauseweuseopensourcecode,wemayberequiredtotakeremedialactioninorderto
protectourproprietarysoftware.Suchactioncouldincludereplacingcertainsourcecodeusedinoursoftware,discontinuing
certainofourproductsortakingotheractionsthatcouldbeexpensiveanddivertresourcesawayfromourdevelopment
efforts.Inaddition,thetermsrelatingtodisclosureofderivativeworksinmanyopensourcelicensesareunclear.Ifacourt
interpretsoneormoresuchopensourcelicensesinamannerthatisunfavorabletous,wecouldberequiredtomakecertain
ofourkeysoftwareavailableatnocost.
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Wemaybeunsuccessfulatdevelopingandmaintainingstrategicrelationshipswiththirdpartiesthatexpandour
distributionchannelsandincreaserevenue,whichcouldsignificantlylimitourlongtermgrowth.
Ourfuturesuccesswilllikelyrequireustomaintainandincreasethenumberanddepthofourrelationshipswith
resellers,systemsintegrators,productmakersandotherstrategicpartnersandtoleveragethoserelationshipstoexpandour
distributionchannelsandincreaserevenue.Theneedtodevelopsuchrelationshipscanbeparticularlyacuteinareasoutside
oftheU.S.Wehavenotalwaysbeensuccessfulatdevelopingtheserelationshipsduetothecomplexityofourservices,our
historicalrelianceonaninternalsalesforce,apastlackofstrategicfocusonsucharrangementsandotherfactors.Recruiting
andretainingqualifiedchannelpartnersandtrainingthemintheuseofourtechnologyandservicesandensuringthatthey
arecompliantwithourethicalexpectationsrequiressignificanttimeandresources.Inordertodevelopandexpandour
distributionchannel,wemustcontinuetoexpandandimproveourportfolioofsolutionsaswellasthesystems,processes
andproceduresthatsupportourchannels.Thosesystems,processesandproceduresmaybecomeincreasinglycomplexand
difficulttomanage.Thetimeandexpenserequiredforthesalesandmarketingorganizationsofourchannelpartnersto
becomefamiliarwithourofferings,includingournewservicesdevelopments,maymakeitmoredifficulttointroducethose
productstoenterprises.Ourfailuretomaintainandincreasethenumberandqualityofrelationshipswithchannelpartners,
andanyinabilitytosuccessfullyexecuteonthepartnershipsweinitiate,couldsignificantlyimpedeourrevenuegrowth
prospectsintheshortandlongterm.
ThepotentialexhaustionofthesupplyofunallocatedIPv4addressesandtheinabilityofAkamaiandotherInternetusers
tosuccessfullytransitiontoIPv6couldharmouroperationsandthefunctioningoftheInternetasawhole,thereby
negativelyaffectingourbusiness.
AnInternetProtocoladdress,orIPaddress,isanumericallabelthatisassignedtoanydeviceconnectingtothe
Internet.Today,thefunctioningoftheInternetisdependentontheuseofInternetProtocolversion4,orIPv4,thefourth
versionoftheInternetProtocol,whichuses32bitaddresses.WecurrentlyrelyontheacquisitionofIPaddressesforthe
functioningandexpansionofournetworkandexpectsuchreliancetocontinueinthefuture.Thereare,however,onlya
finitenumberofIPv4addresses.ThesupplyofunallocatedIPv4addressesislikelytobeexhaustedinthenearfuture.Internet
Protocolversion6,orIPv6,uses128bitaddressesandhasbeendesignedtosucceedIPv4andalleviatetheexpected
exhaustionofunallocatedaddressesunderthatversion.WhileIPv4andIPv6willcoexistforsomeperiodoftime,
eventuallyallInternetusersandcompanieswillneedtotransitiontoIPv6.Therecanbenoguaranteethattheplanswehave
beendevelopingforthetransitiontoIPv6willbeeffective.IfweareunabletoobtaintheIPv4addressesweneed,on
financialtermsacceptabletousoratall,beforeweorotherentitiesthatrelyontheInternetcantransitiontoIPv6,ourcurrent
andfutureoperationscouldbemateriallyharmed.IfthereisnotatimelyandsuccessfultransitiontoIPv6byInternetusers
generally,theInternetcouldfunctionlesseffectively,whichcoulddamagenumerousbusinesses,theeconomygenerallyand
theprospectsforfuturegrowthoftheInternetasamediumfortransactingbusiness.Thiscould,inturn,beharmfultoour
financialcondition,resultsofoperationsandcashflows.
Iftheaccountingestimateswemake,andtheassumptionsonwhichwerely,inpreparingourfinancialstatementsprove
inaccurate,ouractualresultsmaybeadverselyaffected.
Ourfinancialstatementshavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedinthe
U.S.Thepreparationofthesefinancialstatementsrequiresustomakeestimatesandjudgmentsabout,amongotherthings,
taxes,revenuerecognition,stockbasedcompensationcosts,capitalizationofinternalusesoftwaredevelopmentcosts,
investments,contingentobligations,allowancefordoubtfulaccounts,intangibleassetsandrestructuringcharges.These
estimatesandjudgmentsaffect,amongotherthings,thereportedamountsofourassets,liabilities,revenueandexpenses,the
amountsofchargesaccruedbyus,andrelateddisclosureofcontingentassetsandliabilities.Webaseourestimateson
historicalexperienceandonvariousotherassumptionsthatwebelievetobereasonableunderthecircumstancesandatthe
timetheyaremade.Ifourestimatesortheassumptionsunderlyingthemarenotcorrect,actualresultsmaydiffermaterially
fromourestimatesandwemayneedto,amongotherthings,accrueadditionalchargesthatcouldadverselyaffectourresults
ofoperations,whichinturncouldadverselyaffectourstockprice.Inaddition,newaccountingpronouncementsand
interpretationsofaccountingpronouncementshaveoccurredandmayoccurinthefuturethatcouldadverselyaffectour
reportedfinancialresults.
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Wemayhaveexposuretogreaterthananticipatedtaxliabilities.
Ourfutureincometaxescouldbeadverselyaffectedbyearningsbeinglowerthananticipatedinjurisdictionsthat
havelowerstatutorytaxratesandhigherthananticipatedinjurisdictionsthathavehigherstatutorytaxrates,orchangesin
taxlaws,regulations,oraccountingprinciples,aswellascertaindiscreteitemssuchasequityrelatedcompensation.We
haverecordedcertaintaxreservestoaddresspotentialexposuresinvolvingourincometaxandsalesandusetaxpositions.
Thesepotentialtaxliabilitiesresultfromthevaryingapplicationofstatutes,rules,regulationsandinterpretationsby
differentjurisdictions.Ourreserves,however,maynotbeadequatetocoverourtotalactualliability.Althoughwebelieve
ourestimates,ourreservesandthepositionswehavetakenarereasonable,theultimatetaxoutcomemaydifferfromthe
amountsrecordedinourfinancialstatementsandmaymateriallyaffectourfinancialresultsintheperiodorperiodsforwhich
suchdeterminationismade.
Ifwefailtomaintainaneffectivesystemofinternalcontrols,wemaynotbeabletoaccuratelyreportourfinancialresults
orpreventfraud.Asaresult,ourstockholderscouldloseconfidenceinourfinancialreporting,whichcouldharmour
businessandthetradingpriceofourcommonstock.
WehavecompliedwithSection404oftheSarbanesOxleyActof2002byassessing,strengtheningandtestingour
systemofinternalcontrols.Eventhoughweconcludedourinternalcontroloverfinancialreportinganddisclosurecontrols
andprocedureswereeffectiveasoftheendoftheperiodcoveredbythisreport,weneedtocontinuetomaintainour
processesandsystemsandadaptthemtochangesasourbusinessevolvesandwerearrangemanagementresponsibilitiesand
reorganizeourbusiness.Thiscontinuousprocessofmaintainingandadaptingourinternalcontrolsandcomplyingwith
Section404isexpensiveandtimeconsumingandrequiressignificantmanagementattention.Wecannotbecertainthatour
internalcontrolmeasureswillcontinuetoprovideadequatecontroloverourfinancialprocessesandreportingandensure
compliancewithSection404.Furthermore,asourbusinesschanges,includingbyexpandingouroperationsindifferent
markets,increasingrelianceonchannelpartnersandcompletingacquisitions,ourinternalcontrolsmaybecomemore
complexandwewillrequiresignificantlymoreresourcestoensureourinternalcontrolsremaineffective.Failureto
implementrequiredneworimprovedcontrols,ordifficultiesencounteredintheirimplementation,couldharmouroperating
resultsorcauseustofailtomeetourreportingobligations.Ifweorourindependentregisteredpublicaccountingfirm
identifymaterialweaknesses,thedisclosureofthatfact,evenifquicklyremediated,couldreducethemarket'sconfidencein
ourfinancialstatementsandharmourstockprice.
Anyfailuretomeetourdebtobligationswoulddamageourbusiness.
AsofJune30,2016,wehadtotalparvalueof$690.0millionofconvertibleseniornotesoutstanding.Ourabilityto
refinancethenotes,makecashpaymentsinconnectionwithconversionsofthenotesorrepurchasethosenotesintheevent
ofafundamentalchange(asdefinedintheindenturegoverningthenotes)willdependonmarketconditionsandourfuture
performance,whichissubjecttoeconomic,financial,competitiveandotherfactorsbeyondourcontrol.Wealsomaynotuse
thecashwehaveraisedthroughtheissuanceoftheconvertibleseniornotesinanoptimallyproductiveandprofitable
manner.Ifweareunabletoremainprofitableorifweusemorecashthanwegenerateinthefuture,ourlevelofindebtedness
atsuchtimecouldadverselyaffectouroperationsbyincreasingourvulnerabilitytoadversechangesingeneraleconomic
andindustryconditionsandbylimitingorprohibitingourabilitytoobtainadditionalfinancingforadditionalcapital
expenditures,acquisitionsandgeneralcorporateandotherpurposes.Inaddition,ifweareunabletomakecashpayments
uponconversionofthenotes,wewouldberequiredtoissuesignificantamountsofourcommonstock,whichwouldbe
dilutivetothestockofexistingstockholders.Ifwedonothavesufficientcashtorepurchasethenotesfollowinga
fundamentalchangewewouldbeindefaultunderthetermsofthenotes,whichcouldseriouslyharmourbusiness.In
addition,thetermsofthenotesdonotlimittheamountoffutureindebtednesswemayincur.Ifweincursignificantlymore
debt,thiscouldintensifytherisksdescribedabove.
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Wemayissueadditionalsharesofourcommonstockorinstrumentsconvertibleintosharesofourcommonstockand
therebymateriallyandadverselyaffectthemarketpriceofourcommonstock.
OurBoardofDirectorshastheauthoritytoissueadditionalsharesofourcommonstockorotherinstruments
convertibleinto,orexchangeableorexercisablefor,sharesofourcommonstock.Ifweissueadditionalsharesofourcommon
stockorinstrumentsconvertibleintosharesofourcommonstock,itmaymateriallyandadverselyaffectthemarketpriceof
ourcommonstock.
Oursalestogovernmentclientssubjectustorisksincludingearlytermination,audits,investigations,sanctionsand
penalties.
WehavecustomercontractswiththeU.S.government,aswellasforeign,stateandlocalgovernmentsandtheir
respectiveagencies.Suchgovernmententitiesoftenhavetherighttoterminatethesecontractsatanytime,withoutcause.
Thereisincreasedpressureforgovernmentsandtheiragencies,bothdomesticallyandinternationally,toreducespending.
Mostofourgovernmentcontractsaresubjecttolegislativeapprovalofappropriationstofundtheexpendituresunderthese
contracts.Thesefactorscombinetopotentiallylimittherevenuewederivefromgovernmentcontractsinthefuture.
Additionally,governmentcontractsgenerallyhaverequirementsthataremorecomplexthanthosefoundincommercial
enterpriseagreementsandthereforearemorecostlytocomplywith.Suchcontractsarealsosubjecttoauditsand
investigationsthatcouldresultincivilandcriminalpenaltiesandadministrativesanctions,includingterminationof
contracts,refundofaportionoffeesreceived,forfeitureofprofits,suspensionofpayments,finesandsuspensionsor
debarmentfromfuturegovernmentbusiness.
Wemaybecomeinvolvedinlitigationthatmayadverselyimpactourbusiness.
Fromtimetotime,weareormaybecomeinvolvedinvariouslegalproceedingsrelatingtomattersincidentaltothe
ordinarycourseofourbusiness,includingpatent,commercial,productliability,employment,classaction,whistleblower
andotherlitigationandclaims,andgovernmentalandotherregulatoryinvestigationsandproceedings.Suchmatterscanbe
timeconsuming,divertmanagementsattentionandresourcesandcauseustoincursignificantexpenses.Furthermore,
becausesuchmattersareinherentlyunpredictableandmaynotbecoveredbyinsurance,therecanbenoassurancethatthe
resultsofanyofthesematterswillnothaveanadverseimpactonourbusiness,resultsofoperations,financialcondition,or
cashflows.Underourcharter,wecouldberequiredtoindemnifyandadvanceexpensestoourdirectorsandofficersin
connectionwiththeirinvolvementincertainactions,suits,investigationsandotherproceedings.Therecanbenoassurance
thatanyofthesepaymentswillnotbematerial.
Generalglobalmarketandeconomicconditionsmayhaveanadverseimpactonouroperatingperformance,resultsof
operationsandcashflows.
Ourbusinesshasbeenandcouldcontinuetobeaffectedbygeneralglobaleconomicandmarketconditions.Tothe
extenteconomicconditionsimpairourcustomers'abilitytoprofitablymonetizethecontentwedeliverontheirbehalf,they
mayreduceoreliminatethetrafficwedeliverforthem.Suchreductionsintrafficwouldleadtoareductioninourrevenue.
Additionally,inadowncycleeconomicenvironment,wemayexperiencethenegativeeffectsofincreasedcompetitive
pricingpressure,customerloss,aslowdownincommerceovertheInternetandcorrespondingdecreaseintrafficdelivered
overournetworkandfailuresbycustomerstopayamountsowedtousonatimelybasisoratall.Suppliersonwhichwerely
forservers,bandwidth,colocationandotherservicescouldalsobenegativelyimpactedbyeconomicconditionsthat,in
turn,couldhaveanegativeimpactonouroperationsorexpenses.Therecanbenoassurance,therefore,thatcurrenteconomic
conditionsorworseningeconomicconditionsoraprolongedorrecurringrecessionwillnothaveasignificantadverse
impactonouroperatingresults.
Globalclimatechangeandnaturalresourceconservationregulationscouldadverselyimpactourbusiness.
Ourdeployednetworkofserversconsumessignificantenergyresources,includingthosegeneratedbytheburning
offossilfuels.Inresponsetoconcernsaboutglobalclimatechange,governmentsmayadoptnewregulationsaffectingthe
useoffossilfuelsorrequiringtheuseofalternativefuelsources.Inaddition,ourcustomersandinvestorsmayrequireusto
takestepstodemonstratethatwearetakingecologicallyresponsiblemeasuresinoperatingourbusiness.Thecostsandany
expensesweincurtomakeournetworkmoreenergyefficientcouldmakeuslessprofitableinfutureperiods.Failureto
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complywithapplicablelawsandregulationsorotherrequirementsimposedonuscouldleadtofines,lostrevenueand
damagetoourreputation.
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Becausewedonotintendtopaydividends,stockholderswillbenefitfromaninvestmentinourcommonstockonlyifit
appreciatesinvalue.
Wecurrentlyintendtoretainourfutureearnings,ifany,foruseintheoperationofourbusinessanddonotexpectto
payanycashdividendsintheforeseeablefutureonourcommonstock.Asaresult,thesuccessofaninvestmentinour
commonstockwilldependuponanyfutureappreciationinitsvalue.Thereisnoguaranteethatourcommonstockwill
appreciateinvalueorevenmaintainthepriceatwhichstockholdershavepurchasedtheirshares.
Provisionsofourcharter,bylawsandDelawarelawmayhaveantitakeovereffectsthatcouldpreventachangeincontrol
evenifthechangeincontrolwouldbebeneficialtoourstockholders.
Provisionsofourcharter,bylawsandDelawarelawcouldmakeitmoredifficultforathirdpartytocontrolor
acquireus,evenifdoingsowouldbebeneficialtoourstockholders.Theseprovisionsinclude:
aclassifiedboardstructuresothatonlyapproximatelyonethirdofourBoardofDirectorsisupforreelection
inanyoneyear
ourBoardofDirectorshastherighttoelectdirectorstofillavacancycreatedbytheexpansionoftheBoardof
Directorsortheresignation,deathorremovalofadirector
stockholdersmustprovideadvancenoticetonominateindividualsforelectiontotheBoardofDirectorsorto
proposemattersthatcanbeacteduponatastockholders'meetingand
ourBoardofDirectorsmayissue,withoutstockholderapproval,sharesofundesignatedpreferredstock.
Further,asaDelawarecorporation,wearealsosubjecttocertainDelawareantitakeoverprovisions.Under
Delawarelaw,acorporationmaynotengageinabusinesscombinationwithanyholderof15%ormoreofitscapitalstock
unlesstheholderhasheldthestockforthreeyearsor,amongotherthings,theboardofdirectorshasapprovedthe
transaction.OurBoardofDirectorscouldrelyonDelawarelawtopreventordelayanacquisitionofus.
Item2.UnregisteredSalesofEquitySecuritiesandUseofProceeds
(c)IssuerPurchasesofEquitySecurities
Thefollowingisasummaryofourrepurchasesofourcommonstockinthesecondquarterof2016(inthousands,
exceptshareandpersharedata):
Period(1)
(c)TotalNumberof
(d)Approximate
SharesPurchasedas
DollarValueof
PartofPublicly
SharesthatMayYet
(a)TotalNumberof
(b)AveragePrice
AnnouncedPlansor bePurchasedUnder
SharesPurchased(2) PaidperShare(3)
Programs(4)
PlansorPrograms(4)
April1,2016April30,2016
555,226 $
52.56
555,226 $
930,390
May1,2016May31,2016
606,027
51.20
606,027
899,358
June1,2016June30,2016
570,255
53.96
570,255
868,585
Total
1,731,508 $
52.55
1,731,508 $
868,585
(1)
(2)
(3)
(4)
Informationisbasedonsettlementdatesofrepurchasetransactions.
Consistsofsharesofourcommonstock,parvalue$0.01pershare.Allrepurchasesweremadepursuanttoa
previouslyannouncedprogram.
Includescommissionspaid.
InOctober2013,theBoardofDirectorsauthorizeda$750.0millionsharerepurchaseprogram,effectivefrom
October16,2013throughDecember31,2016.InFebruary2016,theBoardofDirectorsauthorizeda$1.0billion
sharerepurchaseprogramthatsupersededtheOctober2013repurchaseprogramandiseffectivefromFebruary11,
2016throughDecember31,2018.
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Item6.Exhibits
TheexhibitsfiledaspartofthisquarterlyreportonForm10Qarelistedintheexhibitindeximmediatelyprecedingthe
exhibitsandareincorporatedherein.
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SIGNATURES
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobe
signedonitsbehalfbytheundersignedthereuntodulyauthorized.
AkamaiTechnologies,Inc.
August8,2016
By: /s/JamesBenson
JamesBenson
ChiefFinancialOfficer
(DulyAuthorizedOfficer,PrincipalFinancialOfficer)
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EXHIBITINDEX
Exhibit31.1
CertificationofChiefExecutiveOfficerpursuanttoRule13a14(a)/Rule15d14(a)oftheSecurities
ExchangeActof1934,asamended
CertificationofChiefFinancialOfficerpursuanttoRule13a14(a)/Rule15d14(a)oftheSecurities
ExchangeActof1934,asamended
CertificationofChiefExecutiveOfficerpursuantto18U.S.C.Section1350,asadoptedpursuantto
Section906oftheSarbanesOxleyActof2002
CertificationofChiefFinancialOfficerpursuantto18U.S.C.Section1350,asadoptedpursuantto
Section906oftheSarbanesOxleyActof2002
101.INS
XBRLInstanceDocument*
101.SCH
XBRLTaxonomyExtensionSchemaDocument*
101.CAL
XBRLTaxonomyCalculationLinkbaseDocument*
101.DEF
XBRLTaxonomyExtensionDefinitionLinkbaseDocument*
101.LAB
XBRLTaxonomyLabelLinkbaseDocument*
101.PRE
XBRLTaxonomyPresentationLinkbaseDocument*
Exhibit31.2
Exhibit32.1
Exhibit32.2
Submittedelectronicallyherewith
AttachedasExhibit101tothisreportarethefollowingformattedinXBRL(ExtensibleBusinessReporting
Language):(i)ConsolidatedBalanceSheetsatJune30,2016andDecember31,2015,(ii)ConsolidatedStatementsof
IncomeforthethreeandsixmonthsendedJune30,2016and2015,(iii)ConsolidatedStatementsofComprehensiveIncome
forthethreeandsixmonthsendedJune30,2016and2015,(iv)ConsolidatedStatementsofCashFlowsforthesixmonths
endedJune30,2016and2015and(v)NotestoUnauditedConsolidatedFinancialStatements.
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Akamai Technologies, Inc.: United States Securities and Exchange Commission FORM 10 Q

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8/31/2016

5.6% $1,139,860 $1,067,259

15.6% $ 642,505 $ 554,350

5.6% $1,139,860 $1,067,259

(2.2)% $ 580,365 $ 588,517

5.6% $1,139,860 $1,067,259

(1.0)% $ 792,368 $ 788,076

5.6% $1,139,860 $1,067,259

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