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AKAMAI TECHNOLOGIES INC - Annual Report: 2016 (Form 10-K)

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

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

For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                    
Commission file number: 0-27275
Akamai Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3432319
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

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

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

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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



Table of Contents

AKAMAI TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

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



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Forward-Looking Statements

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

PART I

Item 1. Business

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

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

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

What our customers want to do:

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

What makes it difficult to achieve those goals:

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



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How Akamai helps:

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

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

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

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

Our Solutions

Performance and Security Solutions

Web and Mobile Performance Solutions

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

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

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

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

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


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

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

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

Cloud Security Solutions

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

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

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

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

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

Enterprise Solutions

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

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

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


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

Network Operator Solutions

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

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

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

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

Media Delivery Solutions

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

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

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

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

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

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



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

Services and Support Solutions

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

Our Technology and Network

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

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

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

Research and Development

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

Industry Segment and Geographic Information

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

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



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Customers

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

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

Sales, Service and Marketing

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

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

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

Competition

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

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

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



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

Proprietary Rights and Licensing

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

Employees

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

Additional Information

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



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Item 1A. Risk Factors

The following are important factors that could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this annual report on Form 10-K or presented elsewhere by management from time to time.

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

Smaller and more nimble competitors may be able to:

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

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

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


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

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

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

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

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

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

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

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

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



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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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


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

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

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

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

As we expand our business and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement and other claims, including those that may arise under international laws. In many cases, we have agreed to indemnify our customers and channel and strategic partners if our services infringe or misappropriate specified intellectual property rights; therefore, we could become involved in litigation or claims brought against customers or channel or strategic partners if our services or technology are the subject of such allegations. Any litigation or claims, whether or not valid, brought against us or pursuant to which we indemnify our customers or channel or strategic partners could result in substantial costs and diversion of resources and require us to do one or more of the following:

cease selling, incorporating or using features, functionalities, products or services that incorporate the challenged intellectual property;
pay substantial damages and incur significant litigation expenses;
obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or
redesign products or services.

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

Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.

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


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of our core technology is based in part on the technology covered by these patents, patent applications and copyrights. These patents are scheduled to expire beginning in 2018. As the patents expire, we will no longer have the right to exclude others from practicing the technologies covered by them. Furthermore, we cannot be certain that any pending or future patent applications will be granted, that any future patent will not be challenged, invalidated or circumvented, or that rights granted under any patent that may be issued will provide competitive advantages to us. If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced. Although we have licensed from other parties proprietary technology covered by patents, we cannot be certain that any such patents will not be challenged, invalidated or circumvented. Such licenses may also be non-exclusive, meaning our competition may also be able to access such technology.

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

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

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

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

If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected.

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



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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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



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

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

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

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

Provisions of our charter, by-laws and Delaware law may have anti-takeover effects that could prevent a change in control even if the change in control would be beneficial to our stockholders.

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

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

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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



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

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

Item 3. Legal Proceedings

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

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

Item 4. Mine Safety Disclosures

Not applicable.



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PART II

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

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

 
$
39.43

 
$
73.53

 
$
56.85

Second quarter
$
57.50

 
$
48.88

 
$
78.44

 
$
69.13

Third quarter
$
58.47

 
$
47.80

 
$
76.98

 
$
63.14

Fourth quarter
$
71.04

 
$
52.63

 
$
76.39

 
$
50.56


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

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

Issuer Purchases of Equity Securities

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

 
$
55.38

 
558,379

 
$
742,507

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

 
66.84

 
352,708

 
718,932

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

 
66.31

 
368,440

 
694,501

Total
 
1,279,527

 
$
61.68

 
1,279,527

 
$
694,501


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

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



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Item 6. Selected Financial Data

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

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

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

 
$
2,197,448

 
$
1,963,874

 
$
1,577,922

 
$
1,373,947

Total costs and operating expenses
 
1,880,455

 
1,731,298

 
1,474,355

 
1,163,954

 
1,059,460

Income from operations
 
459,594

 
466,150

 
489,519

 
413,968

 
314,487

Net income
 
316,132

 
321,406

 
333,948

 
293,487

 
203,989

Basic net income per share
 
1.81

 
1.80

 
1.87

 
1.65

 
1.15

Diluted net income per share
 
1.79

 
1.78

 
1.84

 
1.61

 
1.12

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

 
1,524,235

 
1,628,284

 
1,246,922

 
1,095,240

Total assets
 
4,373,146

 
4,181,684

 
4,001,546

 
2,957,685

 
2,600,627

Convertible senior notes
 
640,087

 
624,288

 
604,851

 

 

Other long-term liabilities
 
134,101

 
110,319

 
117,349

 
65,088

 
51,929

Total stockholders’ equity
 
3,224,370

 
3,120,878

 
2,945,335

 
2,629,431

 
2,345,754


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

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

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


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

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

Overview

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

Revenue

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

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

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

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

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

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

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


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Table of Contents

Expenses

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

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

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

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

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

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

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


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Table of Contents

Results of Operations

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

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

 
33.0

 
31.1

Research and development
7.2

 
6.8

 
6.4

Sales and marketing
18.2

 
20.1

 
19.3

General and administrative
18.8

 
17.7

 
16.6

Amortization of acquired intangible assets
1.1

 
1.2

 
1.6

Restructuring charges
0.4

 

 
0.1

Total costs and operating expenses
80.3

 
78.8

 
75.1

Income from operations
19.7

 
21.2

 
24.9

Interest income
0.6

 
0.5

 
0.4

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

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

 
20.8

 
24.4

Provision for income taxes
6.1

 
6.2

 
7.4

Net income
13.6
 %
 
14.6
 %
 
17.0
 %

Revenue

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

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

 
$
2,197,448

 
6.5
%
 
6.6
%
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

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












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Table of Contents

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

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

 
$
1,158,281

 
17.0
 %
 
17.3
 %
 
$
1,158,281

 
$
1,003,573

 
15.4
%
 
19.0
%
Media Delivery Solutions
787,179

 
868,820

 
(9.4
)
 
(9.6
)
 
868,820

 
813,066

 
6.9

 
10.5

Services and Support Solutions
197,840

 
170,347

 
16.1

 
16.0

 
170,347

 
147,235

 
15.7

 
19.8

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
 %
 
6.6
 %
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

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

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

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

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

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

 
$
1,187,732

 
(1.9
)%
 
(1.8
)%
 
$
1,187,732

 
$
1,109,781

 
7.0
%
 
10.3
%
Web Division
1,120,001

 
968,584

 
15.6

 
15.7

 
968,584

 
824,302

 
17.5

 
21.7

Enterprise and Carrier Division
54,767

 
41,132

 
33.1

 
33.1

 
41,132

 
29,791

 
38.1

 
39.4

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
 %
 
6.6
 %
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

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



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

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

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

 
$
1,604,492

 
1.0
%
 
1.0
%
 
$
1,604,492

 
$
1,429,063

 
12.3
%
 
12.3
%
International
720,028

 
592,956

 
21.4

 
21.6

 
592,956

 
534,811

 
10.9

 
24.3

Total revenue
$
2,340,049

 
$
2,197,448

 
6.5
%
 
6.6
%
 
$
2,197,448

 
$
1,963,874

 
11.9
%
 
15.5
%

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

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

Cost of Revenue

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

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

 
$
150,607

 
11.7
%
 
$
150,607

 
$
124,470

 
21.0
%
Co-location fees
129,904

 
125,983

 
3.1

 
125,983

 
113,661

 
10.8

Network build-out and supporting services
61,320

 
58,207

 
5.3

 
58,207

 
42,114

 
38.2

Payroll and related costs
189,409

 
158,742

 
19.3

 
158,742

 
143,468

 
10.6

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

 
26,222

 
18.8

 
26,222

 
21,866

 
19.9

Depreciation of network equipment
140,777

 
130,098

 
8.2

 
130,098

 
107,250

 
21.3

Amortization of internal-use software
88,244

 
75,761

 
16.5

 
75,761

 
58,114

 
30.4

Total cost of revenue
$
809,001

 
$
725,620

 
11.5
%
 
$
725,620

 
$
610,943

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

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

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



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

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

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

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

Research and Development Expenses

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

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

 
$
220,198

 
15.1
 %
 
$
220,198

 
$
188,509

 
16.8
 %
Stock-based compensation
29,739

 
23,926

 
24.3

 
23,926

 
19,351

 
23.6

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

 
(103,352
)
 
(91,106
)
 
13.4

Other expenses
6,622

 
7,819

 
(15.3
)
 
7,819

 
8,532

 
(8.4
)
Total research and development
$
167,628

 
$
148,591

 
12.8
 %
 
$
148,591

 
$
125,286

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

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

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

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



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Table of Contents

Sales and Marketing Expenses

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

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

 
$
316,845

 
(2.4
)%
 
$
316,845

 
$
264,788

 
19.7
 %
Stock-based compensation
55,407

 
53,542

 
3.5

 
53,542

 
47,571

 
12.6

Marketing programs and related costs
36,904

 
43,990

 
(16.1
)
 
43,990

 
35,833

 
22.8

Other expenses
25,475

 
26,611

 
(4.3
)
 
26,611

 
30,843

 
(13.7
)
Total sales and marketing
$
426,967

 
$
440,988

 
(3.2
)%
 
$
440,988

 
$
379,035

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

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

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

General and Administrative Expenses

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

 
$
161,660

 
1.0
 %
 
$
161,660

 
$
146,373

 
10.4
 %
Stock-based compensation
41,073

 
35,062

 
17.1

 
35,062

 
33,151

 
5.8

Depreciation and amortization
65,780

 
54,562

 
20.6

 
54,562

 
40,053

 
36.2

Facilities-related costs
72,549

 
64,302

 
12.8

 
64,302

 
52,684

 
22.1

Provision for doubtful accounts
1,235

 
1,717

 
(28.1
)
 
1,717

 
1,229

 
39.7

Acquisition-related costs
1,028

 
1,756

 
(41.5
)
 
1,756

 
3,911

 
(55.1
)
License of patent
(8,577
)
 

 
(100.0
)
 

 

 

Professional fees and other expenses
103,480

 
69,206

 
49.5

 
69,206

 
48,444

 
42.9

Total general and administrative
$
439,916

 
$
388,265

 
13.3
 %
 
$
388,265

 
$
325,845

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

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

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



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

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

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

Amortization of Acquired Intangible Assets

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

 
$
27,067

 
(1.6
)%
 
$
27,067

 
$
32,057

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

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

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

Restructuring Charges

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

 
$
767

 
1,243.0
%
 
$
767

 
$
1,189

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

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



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Table of Contents

Non-Operating Income (Expense)

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

 
$
11,200

 
31.3
%
 
$
11,200

 
$
7,680

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

Other income (expense), net
$
3,788

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

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

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

Provision for Income Taxes

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

 
$
135,218

 
6.0
%
 
$
135,218

 
$
145,828

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

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

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

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

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



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Table of Contents

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

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

Non-GAAP Financial Measures

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

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

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

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

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

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

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



34

Table of Contents

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

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

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

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

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

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

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

 
2016
 
2015
 
2014
Income from operations
$
459,594

 
$
466,150

 
$
489,519

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

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

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

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

 
$
638,435

 
$
647,689

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



35

Table of Contents

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

 
$
321,406

 
$
333,948

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

Amortization of capitalized stock-based compensation and capitalized interest expense

15,439

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

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

 
18,525

 
15,463

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

 
443

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

 
$
453,932

 
$
448,822


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

 
$
1.78

 
1.84

Amortization of acquired intangible assets
0.14

 
0.16

 
0.17

Stock-based compensation
0.82

 
0.70

 
0.62

Amortization of capitalized stock-based compensation and capitalized interest expense

0.09

 
0.08

 
0.06

Restructuring charges
0.06

 

 
0.01

Acquisition-related costs
0.01

 

 
0.03

Legal matter costs
0.01

 
0.02

 

Benefit from adoption of software development activities

 

 
(0.01
)
Amortization of debt discount and issuance costs
0.11

 
0.10

 
0.09

(Gain) loss on investments
(0.03
)
 

 

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

 
$
2.52

 
$
2.48

 
 
 
 
 
 
Shares used in per share calculations
176,215

 
180,415

 
181,186


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



36

Table of Contents

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

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

 
2016
 
2015
 
2014
Net income
$
316,132

 
$
321,406

 
$
333,948

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Stock-based compensation
144,506

 
126,677

 
111,996

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

 
13,618

 
10,506

Restructuring charges
10,301

 
767

 
1,189

Acquisition-related costs
1,064

 
865

 
4,807

Legal matter costs
890

 
3,291

 
285

Benefit from adoption of software development activities

 

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

 
18,525

 
15,463

Provision for income taxes
143,314

 
135,218

 
145,828

Depreciation and amortization
292,221

 
258,878

 
204,843

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

 
1,960

Adjusted EBITDA
$
950,657

 
$
897,313

 
$
852,532

Adjusted EBITDA margin
41
%
 
41
%
 
43
%

Impact of Foreign Currency Exchange Rates

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

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



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Liquidity and Capital Resources

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

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

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

Cash Provided by Operating Activities

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

 
$
321,406

 
$
333,948

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

 
425,366

 
319,312

Changes in operating assets and liabilities
40,352

 
17,379

 
4,810

Net cash flows provided by operating activities
$
866,298

 
$
764,151

 
$
658,070


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

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



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Cash Used in Investing Activities

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

 
(479,392
)
Other investing activities
782

 
(2,494
)
 
5,745

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

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

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

Cash (Used in) Provided by Financing Activities

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

 
$

 
$
655,413

Activity related to stock-based compensation
19,529

 
36,928

 
68,698

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

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


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

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

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



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Convertible Senior Notes

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

Liquidity Outlook

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

Contractual Obligations, Contingent Liabilities and Commercial Commitments

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

 
12 to 36
Months

 
36 to 60
Months

 
More than
60 Months

Real estate operating leases
$
785,426

 
$
53,410

 
$
89,788

 
$
109,140

 
$
533,088

Bandwidth and co-location agreements
126,197

 
105,451

 
20,167

 
579

 

Open vendor purchase orders
150,631

 
137,642

 
12,349

 
640

 

Convertible senior notes
690,000

 

 
690,000

 

 

Total contractual obligations
$
1,752,254

 
$
296,503

 
$
812,304

 
$
110,359

 
$
533,088


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

Letters of Credit

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

Off-Balance Sheet Arrangements

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



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Legal Matters

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

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

Significant Accounting Policies and Estimates

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

Application of Critical Accounting Policies and Estimates

Overview

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

Definitions

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

Review of Critical Accounting Policies and Estimates

Revenue Recognition

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

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



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

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

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

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

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

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

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

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

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



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Accounts Receivable and Related Reserves

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

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

Valuation and Impairment of Marketable Securities

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

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

Impairment and Useful Lives of Long-Lived Assets

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


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Goodwill and Acquired Intangible Assets

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

Income Taxes

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

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

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

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

Accounting for Stock-Based Compensation

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



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Capitalized Internal-Use Software Costs

We capitalize salaries and related costs, including stock-based compensation, of employees and consultants who devote time to the development of internal-use software development projects, as well as interest expense related to our senior convertible notes. Capitalization begins during the application development stage, once the preliminary project stage has been completed. If a project constitutes an enhancement to previously-developed software, we assess whether the enhancement creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once the project is available for general release, capitalization ceases and we estimate the useful life of the asset and begin amortization. We periodically assess whether triggering events are present to review internal-use software for impairment. Changes in our estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the period.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our portfolio of cash equivalents and short- and long-term investments is maintained in a variety of securities, including U.S. government agency obligations, high-quality corporate debt securities, commercial paper, mutual funds and money market funds. The majority of our investments are classified as available-for-sale securities and carried at fair market value with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive loss within stockholders' equity. A sharp rise in interest rates could have an adverse impact on the fair market value of certain securities in our portfolio. We do not currently hedge our interest rate exposure and do not enter into financial instruments for trading or speculative purposes.

Foreign Currency Risk

Growth in our international operations will incrementally increase our exposure to foreign currency fluctuations as well as other risks typical of international operations that could impact our business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions.

Transaction Exposure

Foreign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currencies result in gains and losses that are reflected in our consolidated statements of income. We enter into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in our consolidated statements of income within other income (expense), net. Foreign currency transaction gains and losses from these forward contracts were determined to be immaterial during the years ended December 31, 2016, 2015 and 2014. We do not enter into derivative financial instruments for trading or speculative purposes.

Translation Exposure

To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased revenue and operating expenses. Conversely, our revenue and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies.

Foreign exchange rate fluctuations may also adversely impact our consolidated financial condition as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are recorded as a component of accumulated other comprehensive loss within stockholders' equity.

Credit Risk

Concentrations of credit risk with respect to accounts receivable are limited to certain customers to which we make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across numerous industries. We believe that our accounts receivable credit risk exposure is limited. As of December 31, 2016 and 2015, no customer had an accounts receivable balance of 10% or more of our accounts receivable. We believe that at December 31, 2016, the concentration of credit risk related to accounts receivable was insignificant.



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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Akamai Technologies, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity present fairly, in all material respects, the financial position of Akamai Technologies, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for the classification of debt issuance costs in the consolidated balance sheets due to the adoption of ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/  PricewaterhouseCoopers LLP

Boston, Massachusetts
February 28, 2017




46

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
December 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
324,169

 
$
289,473

Marketable securities
512,849

 
460,088

Accounts receivable, net of reserves of $6,145 and $7,364 at December 31, 2016 and 2015, respectively
368,596

 
380,399

Prepaid expenses and other current assets
104,303

 
123,228

Total current assets
1,309,917

 
1,253,188

Property and equipment, net
801,017

 
753,180

Marketable securities
779,311

 
774,674

Goodwill
1,228,503

 
1,150,244

Acquired intangible assets, net
149,463

 
156,095

Deferred income tax assets
8,982

 
4,700

Other assets
95,953

 
89,603

Total assets
$
4,373,146

 
$
4,181,684

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
76,120

 
$
61,982

Accrued expenses
238,777

 
216,166

Deferred revenue
52,972

 
54,154

Other current liabilities
6,719

 
138

Total current liabilities
374,588

 
332,440

Deferred revenue
3,758

 
4,163

Deferred income tax liabilities
11,652

 
12,888

Convertible senior notes
640,087

 
618,047

Other liabilities
118,691

 
93,268

Total liabilities
1,148,776

 
1,060,806

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding

 

Common stock, $0.01 par value; 700,000,000 shares authorized; 173,254,797 and 177,212,181 shares issued and outstanding at December 31, 2016 and 2015, respectively
1,733

 
1,772

Additional paid-in capital
4,239,588

 
4,437,420

Accumulated other comprehensive loss
(56,222
)
 
(41,453
)
Accumulated deficit
(960,729
)
 
(1,276,861
)
Total stockholders’ equity
3,224,370

 
3,120,878

Total liabilities and stockholders’ equity
$
4,373,146

 
$
4,181,684


The accompanying notes are an integral part of the consolidated financial statements.
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)
For the Years Ended December 31,
2016
 
2015
 
2014
Revenue
$
2,340,049

 
$
2,197,448

 
$
1,963,874

Costs and operating expenses:
 
 
 
 
 
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
809,001

 
725,620

 
610,943

Research and development
167,628

 
148,591

 
125,286

Sales and marketing
426,967

 
440,988

 
379,035

General and administrative
439,916

 
388,265

 
325,845

Amortization of acquired intangible assets
26,642

 
27,067

 
32,057

Restructuring charges
10,301

 
767

 
1,189

Total costs and operating expenses
1,880,455

 
1,731,298

 
1,474,355

Income from operations
459,594

 
466,150

 
489,519

Interest income
14,702

 
11,200

 
7,680

Interest expense
(18,638
)
 
(18,525
)
 
(15,463
)
Other income (expense), net
3,788

 
(2,201
)
 
(1,960
)
Income before provision for income taxes
459,446

 
456,624

 
479,776

Provision for income taxes
143,314

 
135,218

 
145,828

Net income
$
316,132

 
$
321,406

 
$
333,948

Net income per share:
 
 
 
 
 
Basic
$
1.81

 
$
1.80

 
$
1.87

Diluted
$
1.79

 
$
1.78

 
$
1.84

Shares used in per share calculations:
 
 
 
 
 
Basic
174,917

 
178,391

 
178,279

Diluted
176,215

 
180,415

 
181,186


The accompanying notes are an integral part of the consolidated financial statements.


47

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

 
$
321,406

 
$
333,948

Other comprehensive loss:
 
 
 
 
 
Foreign currency translation adjustments
(14,081
)
 
(22,872
)
 
(15,349
)
Change in unrealized loss on investments, net of income tax benefit of $432, $773 and $689 for the years ended December 31, 2016, 2015 and 2014, respectively
(688
)
 
(970
)
 
(171
)
Other comprehensive loss
(14,769
)
 
(23,842
)
 
(15,520
)
Comprehensive income
$
301,363

 
$
297,564

 
$
318,428


The accompanying notes are an integral part of the consolidated financial statements.



48

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
For the Years Ended December 31,
2016
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
Net income
$
316,132

 
$
321,406

 
$
333,948

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
334,302

 
299,563

 
247,406

Stock-based compensation
144,506

 
126,677

 
111,996

Excess tax benefits from stock-based compensation
(5,514
)
 
(29,301
)
 
(32,238
)
Provision (benefit) for deferred income taxes
7,308

 
4,098

 
(25,880
)
Amortization of debt discount and issuance costs
18,638

 
18,525

 
15,463

Other non-cash reconciling items, net
10,574

 
5,804

 
2,565

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
 
 
Accounts receivable
3,356

 
(56,247
)
 
(58,397
)
Prepaid expenses and other current assets
23,881

 
7,137

 
(60,788
)
Accounts payable and accrued expenses
18,491

 
51,624

 
94,698

Deferred revenue
(1,213
)
 
3,224

 
7,725

Other current liabilities
5,484

 
(345
)
 
(702
)
Other non-current assets and liabilities
(9,647
)
 
11,986

 
22,274

Net cash provided by operating activities
866,298

 
764,151

 
658,070

Cash flows from investing activities:
 
 
 
 
 
Cash paid for acquisitions, net of cash acquired
(95,439
)
 
(141,147
)
 
(386,532
)
Purchases of property and equipment
(180,949
)
 
(311,676
)
 
(207,159
)
Capitalization of internal-use software development costs
(135,340
)
 
(133,307
)
 
(111,468
)
Purchases of short- and long-term marketable securities
(781,061
)
 
(692,879
)
 
(1,225,409
)
Proceeds from sales of short- and long-term marketable securities
57,740

 
2,008

 
373,730

Proceeds from maturities of short- and long-term marketable securities
664,837

 
843,931

 
372,287

Other non-current assets and liabilities
782

 
(2,494
)
 
5,745

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


49

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(in thousands)
For the Years Ended December 31,
2016
 
2015
 
2014
Cash flows from financing activities:
 
 
 
 
 
Proceeds from the issuance of convertible senior notes, net of issuance costs

 

 
678,735

Proceeds from the issuance of warrants related to convertible senior notes

 

 
77,970

Purchase of note hedge related to convertible senior notes

 

 
(101,292
)
Repayment of acquired debt and capital leases

 

 
(17,862
)
Proceeds related to the issuance of common stock under stock plans
59,560

 
61,791

 
87,109

Excess tax benefits from stock-based compensation
5,514

 
29,301

 
32,238

Employee taxes paid related to net share settlement of stock-based awards
(45,545
)
 
(54,164
)
 
(50,649
)
Repurchases of common stock
(373,794
)
 
(302,606
)
 
(268,647
)
Other non-current assets and liabilities

 
(2,050
)
 
(1,575
)
Net cash (used in) provided by financing activities
(354,265
)
 
(267,728
)
 
436,027

Effects of exchange rate changes on cash and cash equivalents
(7,907
)
 
(10,036
)
 
(10,532
)
Net increase (decrease) in cash and cash equivalents
34,696

 
50,823

 
(95,241
)
Cash and cash equivalents at beginning of year
289,473

 
238,650

 
333,891

Cash and cash equivalents at end of year
$
324,169

 
$
289,473

 
$
238,650

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid for income taxes, net of refunds received in the years ended December 31, 2016 and 2015 of $1,664 and $19,374, respectively
$
120,223

 
$
75,033

 
$
166,211

Non-cash financing and investing activities:
 
 
 
 
 
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses
$
36,742

 
$
19,327

 
$
45,868

Capitalization of stock-based compensation
$
23,093

 
$
17,867

 
$
15,226


The accompanying notes are an integral part of the consolidated financial statements.



50

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at January 1, 2014
178,580,696

 
$
1,808

 
$
4,561,929

 
$

 
$
(2,091
)
 
$
(1,932,215
)
 
$
2,629,431

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
3,648,994

 
14

 
6,444

 
 
 
 
 
 
 
6,458

Issuance of common stock under employee stock purchase plan
700,879

 
7

 
29,264

 
 
 
 
 
 
 
29,271

Stock-based compensation
 
 
 
 
127,222

 
 
 
 
 
 
 
127,222

Tax benefit from stock-based award activity, net
 
 
 
 
26,867

 
 
 
 
 
 
 
26,867

Equity component of convertible senior notes, net of issuance costs of $1,649
 
 
 
 
99,627

 
 
 
 
 
 
 
99,627

Issuance of warrants related to convertible senior notes
 
 
 
 
77,970

 
 
 
 
 
 
 
77,970

Purchase of note hedge related to convertible senior notes
 
 
 
 
(101,292
)
 
 
 
 
 
 
 
(101,292
)
Repurchases of common stock
(4,629,966
)
 
 
 


 
(268,647
)
 


 


 
(268,647
)
Treasury stock retirement
 
 
(46
)
 
(268,601
)
 
268,647

 
 
 
 
 

Net income
 
 
 
 
 
 
 
 
 
 
333,948

 
333,948

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(15,349
)
 
 
 
(15,349
)
Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
(171
)
 
 
 
(171
)
Balance at December 31, 2014
178,300,603

 
1,783

 
4,559,430

 

 
(17,611
)
 
(1,598,267
)
 
2,945,335

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
2,756,357

 
27

 
(27,697
)
 
 
 
 
 
 
 
(27,670
)
Issuance of common stock under employee stock purchase plan
668,654

 
7

 
34,834

 
 
 
 
 
 
 
34,841

Stock-based compensation
 
 
 
 
144,544

 
 
 
 
 
 
 
144,544

Tax benefit from stock-based award activity, net


 


 
28,870

 
 
 
 
 
 
 
28,870

Repurchases of common stock
(4,513,433
)
 


 


 
(302,606
)
 
 
 
 
 
(302,606
)
Treasury stock retirement
 
 
(45
)
 
(302,561
)
 
302,606

 
 
 
 
 

Net income
 
 
 
 
 
 
 
 
 
 
321,406

 
321,406

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(22,872
)
 
 
 
(22,872
)
Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
(970
)
 
 
 
(970
)
Balance at December 31, 2015
177,212,181

 
$
1,772

 
$
4,437,420

 
$

 
$
(41,453
)
 
$
(1,276,861
)
 
$
3,120,878



51

Table of Contents

AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued
(in thousands, except share data)
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated
Deficit
 
Total Stockholders' Equity
Shares
 
Amount
 
Balance at December 31, 2015
177,212,181

 
$
1,772

 
$
4,437,420

 
$

 
$
(41,453
)
 
$
(1,276,861
)
 
$
3,120,878

Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes
2,194,699

 
22

 
(27,416
)
 
 
 
 
 
 
 
(27,394
)
Issuance of common stock under employee stock purchase plan
863,419

 
9

 
39,905

 
 
 
 
 
 
 
39,914

Stock-based compensation
 
 
 
 
166,987

 
 
 
 
 
 
 
166,987

Tax deficiency from stock-based award activity, net
 
 
 
 
(3,584
)
 
 
 
 
 
 
 
(3,584
)
Repurchases of common stock
(7,015,502
)
 
 
 
 
 
(373,794
)
 
 
 
 
 
(373,794
)
Treasury stock retirement
 
 
(70
)
 
(373,724
)
 
373,794

 
 
 
 
 

Net income
 
 
 
 
 
 
 
 
 
 
316,132

 
316,132

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(14,081
)
 
 
 
(14,081
)
Change in unrealized gain on investments, net of tax
 
 
 
 
 
 
 
 
(688
)
 
 
 
(688
)
Balance at December 31, 2016
173,254,797

 
$
1,733

 
$
4,239,588

 
$

 
$
(56,222
)
 
$
(960,729
)
 
$
3,224,370


The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides cloud services for delivering, optimizing and securing content and business applications. The Company's globally-distributed platform comprises more than 200,000 servers in over 1,600 networks in 131 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

2. Summary of Significant Accounting Policies

Use of Estimates

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the amounts disclosed in the related notes to the consolidated financial statements. Actual results and outcomes may differ materially from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these financial statements include, but are not limited to, those related to revenue, accounts receivable and related reserves, valuation and impairment of investments and marketable securities, valuation and useful lives of acquired intangible assets, useful lives and realizability of long-lived assets, capitalized internal-use software development costs, income tax reserves and accounting for stock-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of cash held in bank deposit accounts and short-term, highly-liquid investments with remaining maturities of three months or less at the date of purchase. Marketable securities consist of corporate, government and other securities. Securities having remaining maturities of less than one year from the date of the balance sheet are classified as short-term, and those with maturities of more than one year from the date of the balance sheet are classified as long-term in the consolidated balance sheet.

The Company classifies its debt and equity investments with readily determinable market values as available-for-sale. These investments are classified as marketable securities on the consolidated balance sheets and are carried at fair market value, with unrealized gains and losses considered to be temporary in nature and reported as accumulated other comprehensive loss, a separate component of stockholders’ equity. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the cost of the investment is adjusted to fair value through recording a loss on investments in the consolidated statements of income. Gains and losses on investments are calculated on the basis of specific identification.

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



53

Table of Contents

Accounts Receivable and Related Reserves

The Company’s accounts receivable balance includes unbilled amounts that represent revenue recorded for customers that are typically billed monthly in arrears. The Company records reserves against its accounts receivable balance. These reserves consist of allowances for doubtful accounts and reserves for cash-basis customers. Increases and decreases in the allowance for doubtful accounts are included as a component of general and administrative expense in the consolidated statements of income. The Company’s reserve for cash-basis customers increases as services are provided to customers where collection is no longer assured. Increases to the reserve for cash-basis customers are recorded as reductions of revenue. The reserve decreases and revenue is recognized when and if cash payments are received.

Estimates are used in determining these reserves and are based upon the Company’s review of outstanding balances on a customer-specific, account-by-account basis. The allowance for doubtful accounts is based upon a review of customer receivables from prior sales with collection issues where the Company no longer believes that the customer has the ability to pay for services previously provided. The Company also performs ongoing credit evaluations of its customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in the creation of a cash-basis reserve until the Company receives consistent payments. The Company does not have any off-balance sheet credit exposure related to its customers.

Concentrations of Credit Risk

The amounts reflected in the consolidated balance sheets for accounts receivable, other current assets, accounts payable, accrued liabilities and other current liabilities approximate their fair values due to their short-term maturities. The Company maintains the majority of its cash, cash equivalents and marketable securities with major financial institutions that the Company believes to be of high credit standing. The Company believes that, as of December 31, 2016, its concentration of credit risk related to cash equivalents and marketable securities was not significant.

Concentrations of credit risk with respect to accounts receivable are primarily limited to certain customers to which the Company makes substantial sales. The Company’s customer base consists of a large number of geographically-dispersed customers diversified across several industries. To reduce risk, the Company routinely assesses the financial strength of its customers. Based on such assessments, the Company believes that its accounts receivable credit risk exposure is limited. For the years ended December 31, 2016, 2015 and 2014, no customer accounted for more than 10% of total revenue. As of December 31, 2016, 2015 and 2014, no customer had an accounts receivable balance greater than 10% of total accounts receivable. The Company believes that, as of December 31, 2016, its concentration of credit risk related to accounts receivable was not significant.

Fair Value of Financial Measurements

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

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally include purchases of items with a per-unit value greater than $1,000 and an estimated useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the related lease terms or their estimated useful lives. The Company periodically reviews the estimated useful lives of property and equipment, and any changes to the estimated useful lives are recorded prospectively from the date of the change.

Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in income from operations. Repairs and maintenance costs are expensed as incurred.



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Table of Contents

Goodwill, Acquired Intangible Assets and Long-Lived Assets

Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds the fair value of the net identifiable assets on the date of purchase and is carried at its historical cost. The Company tests goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performs its impairment test of goodwill as of December 31. As of December 31, 2016, 2015 and 2014, the fair value of the Company's reporting unit was substantially in excess of the carrying value. The tests did not result in an impairment to goodwill during the years ended December 31, 2016, 2015 and 2014.

Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible asset.

Long-lived assets, including property and equipment and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances, such as service discontinuance, technological obsolescence, significant decreases in the Company’s market capitalization, facility closures or work-force reductions indicate that the carrying amount of the long-lived asset may not be recoverable. When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that an impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset.

Revenue Recognition

The Company recognizes service revenue in accordance with the authoritative guidance for revenue recognition, including guidance on revenue arrangements with multiple deliverables. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

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

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

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

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

For arrangements in which the Company is unable to establish VSOE, third party evidence ("TPE") of the fair value of each element is determined based upon the price charged when the element is sold separately by another vendor. For arrangements in which the Company is unable to establish VSOE or TPE for each element, the Company uses the best estimate of selling price ("BESP") to determine the fair value of the separate deliverables. The Company estimates BESP based upon a management-approved listing of unit pricing for all solutions and pre-established discount levels for each solution that takes into consideration


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volume, geography and industry lines. The Company allocates arrangement consideration across the multiple elements using the relative selling price method.

At the inception of a customer contract, the Company makes an assessment as to that customer’s ability to pay for the services provided. The Company bases its assessment on a combination of factors, including the successful completion of a credit check or financial review, its collection experience with the customer and other forms of payment assurance. Upon the completion of these steps, the Company recognizes revenue monthly in accordance with its revenue recognition policy. If the Company subsequently determines that collection from the customer is not reasonably assured, the Company records an allowance for doubtful accounts and bad debt expense for all of that customer’s unpaid invoices and ceases recognizing revenue for continued services provided until cash is received from the customer. Changes in the Company’s estimates and judgments about whether collection is reasonably assured would change the timing of revenue or amount of bad debt expense that the Company recognizes.

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

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

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

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

Cost of Revenue

Cost of revenue consists primarily of fees paid to network providers for bandwidth and to third party network data centers for housing servers, also known as co-location costs. Cost of revenue also includes employee costs for services delivery and network operation, build-out and support of the Company's network; network storage costs; cost of software licenses; depreciation of network equipment used to deliver the Company’s services; amortization of network-related internal-use software; and costs for the production of live events. The Company enters into contracts for bandwidth with third party network providers with terms typically ranging from several months to five years. These contracts generally commit the Company to pay minimum monthly fees plus additional fees for bandwidth usage above the committed level. In some circumstances, Internet service providers (“ISPs”) make rack space available for the Company’s servers and access to their bandwidth at a discount or no cost. In exchange, the ISP and its customers benefit by receiving content through a local Company server resulting in better content delivery. The Company does not consider these relationships to represent the culmination of an earnings process. Accordingly, the Company does not recognize as revenue the value to the ISPs associated with the use of the Company’s servers, nor does the Company recognize as expense the value of the rack space and bandwidth received at discounted or no cost.

Research and Development Costs and Capitalized Internal-Use Software

Research and development costs consist primarily of payroll and related personnel costs for the design, development, deployment, testing and enhancement of the Company’s services and network. Costs incurred in the development of the Company’s services are expensed as incurred, except certain internal-use software development costs eligible for capitalization.



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Capitalized costs include external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software project, and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred. The Company amortizes completed internal-use software that is used on its network to cost of revenue over its estimated useful life.

Accounting for Stock-Based Compensation

The Company recognizes compensation costs for all stock-based payment awards made to employees based upon the awards’ grant-date fair value. The stock-based payment awards include stock options, restricted stock units, deferred stock units and employee stock purchases related to the Company’s employee stock purchase plan.

For stock options, the Company has selected the Black-Scholes option-pricing model to determine the fair value of stock option awards. For stock awards with market-based vesting conditions, the Company uses a Monte Carlo simulation to determine the fair value of the award. For stock options, restricted stock units and deferred stock units that contain only a service-based vesting feature, the Company recognizes compensation cost on a straight-line basis over the award's vesting period. For awards with a performance condition-based vesting feature, the Company recognizes compensation cost on a graded-vesting basis over the award's expected vesting period, commencing when achievement of the performance condition is deemed probable. In addition, for awards that vest and become exercisable only upon achievement of specified performance conditions, the Company makes judgments and estimates each quarter about the probability that such performance conditions will be met or achieved. Any changes to those estimates that the Company makes from time to time may have a significant impact on the stock-based compensation expense recorded and could materially impact the Company’s results of operations.

Foreign Currency Translation and Forward Currency Contracts

The assets and liabilities of the Company's subsidiaries are translated at the applicable exchange rate as of the balance sheet date, and revenue and expenses are translated at an average rate over the period. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss, a separate component of stockholders’ equity. Gains and losses on inter-company and other non-functional currency transactions are recorded in other income (expense), net.

The Company enters into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in current earnings in other income (expense), net. As of December 31, 2016 and 2015, the fair value of the forward currency contracts and the underlying net gains for the years ended December 31, 2016, 2015 and 2014 were immaterial.

The Company's foreign currency forward contracts may be exposed to credit risk to the extent that its counterparties are unable to meet the terms of the agreements. The Company seeks to minimize counterparty credit (or repayment) risk by entering into transactions only with major financial institutions of investment grade credit rating.

Taxes

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

The Company currently has net deferred tax assets consisting of net operating loss (“NOL”) carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized.

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



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

The Company has elected to account for the indirect income tax effects of stock-based compensation as provision for income taxes. This primarily includes the impact of the research and development tax credit and the domestic production activities deduction.

Newly-Adopted Accounting Pronouncements
    
In April 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance to simplify the presentation of debt issuance costs on the balance sheets. This guidance moved debt issuance costs from the assets section of the balance sheet to the liabilities section as a direct deduction from the carrying amount of the debt issued. The Company retrospectively adopted the guidance on January 1, 2016. The prior period consolidated balance sheet presented, as of December 31, 2015, was revised to reclassify $6.2 million of debt issuance costs included in other assets to convertible senior notes. This had the impact of reducing the Company's total assets and total liabilities by $6.2 million, as of December 31, 2015. This reclassification did not have a material impact on the Company's consolidated financial statements.

In September 2015, the FASB issued updated guidance that eliminates the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively. In an effort to reduce complexity in financial reporting, the new guidance requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. The standard was effective for and adopted by the Company on January 1, 2016. This guidance did not have an impact on the Company's consolidated financial statements as the measurement periods for the Company's 2015 acquisitions were closed as of December 31, 2015.

Recent Accounting Pronouncements

In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step model for recognizing revenue from contracts with customers. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard can be adopted using one of two methods: retrospectively to each prior period presented or a modified retrospective application by recognizing a cumulative-effect adjustment as a component of equity as of the date of adoption.

The updated guidance modifies certain judgments and estimates that the Company currently makes as it relates to recognizing revenue. Upon adoption of the new revenue standard, integration fee revenue that was previously recognized ratably over the estimated life of the customer arrangement will be recognized when integration has been completed, which will have the effect of accelerating revenue from integration fees. In addition, the Company currently establishes a reserve for cash basis customers if collectability is not reasonably assured and recognizes revenue as cash is collected. Upon adoption of the new standard, revenue will be recognized for those customers when collectability becomes probable, rather than as cash is collected.

The Company is also assessing the impact of capitalizing costs associated with obtaining customer contracts, specifically commission and incentive payments. Currently, these payments are expensed in the period they are incurred. Under the updated guidance, these payments will be deferred on the Company's consolidated balance sheets and amortized over the expected life of the customer contract.

This standard will be effective for the Company on January 1, 2018. The Company continues to evaluate the potential
impact of adopting this new accounting guidance on its consolidated financial statements.
  
In February 2016, the FASB issued guidance that requires companies to present assets and liabilities arising from leases with a term greater than 12 months on the consolidated balance sheets. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This will impact all leases, which include leases for real estate and co-location facilities, among other arrangements currently under evaluation. The Company plans to adopt this standard in the first quarter of 2019 and expects to record significant right-of-use assets and lease liabilities on its consolidated balance sheets.
    


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In March 2016, the FASB issued guidance that is intended to simplify aspects of how share-based payments are accounted for and presented in financial statements. This guidance requires that entities record all tax effects of share-based payments at settlement or expiration through the income statement. The standard also amends how windfall tax benefits are recognized, the minimum statutory tax withholding requirements and how entities elect to recognize share-based payment forfeitures. In addition, this guidance impacts the presentation of cash flows related to excess tax benefits by no longer requiring separate presentation as a financing activity apart from other operating income tax cash flows. This guidance was effective for the Company beginning on January 1, 2017. Upon adoption on a prospective basis, the Company is recognizing excess tax benefits in its provision for income taxes rather than as additional paid-in capital. In addition, the Company expects to adopt the presentation requirements related to the excess tax benefit in its cash flows on a retrospective basis, which will result in an increase to cash flows from operating activities of $5.5 million and $29.3 million with a corresponding decrease to cash flows from financing activities for the years ended December 31, 2016 and 2015, respectively. Finally, the Company expects to continue estimating forfeitures in determining the amount of compensation cost.

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance will be effective for the Company on January 1, 2018 and is to be applied on a modified retrospective basis through a recognizing cumulative-effect adjustment as a component of equity as of the date of adoption. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

3. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of December 31, 2016 and 2015 (in thousands):
 
 
 
Gross Unrealized
 
Aggregate
Fair Value
 
Classification on Balance Sheet
 
Amortized Cost
 
 
 
 
 
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
As of December 31, 2016
 
Gains
 
Losses
 
 
 
Commercial paper
$
40,965

 
$

 
$
(45
)
 
$
40,920

 
$
40,920

 
$

Corporate bonds
984,650

 
123

 
(3,697
)
 
981,076

 
418,495

 
562,581

U.S. government agency obligations
267,473

 
35

 
(1,366
)
 
266,142

 
53,157

 
212,985

 
$
1,293,088

 
$
158

 
$
(5,108
)
 
$
1,288,138

 
$
512,572

 
$
775,566

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
2,491

 
$

 
$
(4
)
 
$
2,487

 
$
2,487

 
$

Corporate bonds
995,100

 
73

 
(3,365
)
 
991,808

 
432,585

 
559,223

U.S. government agency obligations
239,587

 
41

 
(575
)
 
239,053

 
25,016

 
214,037

 
$
1,237,178

 
$
114

 
$
(3,944
)
 
$
1,233,348

 
$
460,088

 
$
773,260


The Company offers certain eligible employees the ability to participate in a non-qualified deferred compensation
plan. The mutual funds held by the Company that are associated with this plan are classified as restricted trading securities.
These securities are not included in the available-for-sale securities table above but are included in marketable securities in the
consolidated balance sheets.

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income in the consolidated statements of income. As of December 31, 2016, the Company held for investment corporate bonds with a fair value of $13.8 million, which are classified as available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The unrealized losses are


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not significant and are attributable to changes in interest rates. The Company does not believe any unrealized losses represent other than temporary impairments based on the evaluation of available evidence.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of December 31, 2016 and 2015 (in thousands): 
 
Total Fair Value
 
Fair Value Measurements at Reporting Date Using
 
Level 1
 
Level 2
 
Level 3
As of December 31, 2016
 
 
 
 
 
 
 
Cash Equivalents and Marketable Securities:
 
 
 
 
 
 
 
Money market funds
$
8,726

 
$
8,726

 
$

 
$

Commercial paper
40,920

 

 
40,920

 

Corporate bonds
981,076

 

 
981,076

 

U.S. government agency obligations
266,142

 

 
266,142

 

Mutual funds
4,022

 
4,022

 

 

 
$
1,300,886

 
$
12,748

 
$
1,288,138

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration obligation related to completed acquisitions
$
(7,100
)
 
$

 
$

 
$
(7,100
)
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
Cash Equivalents and Marketable Securities:
 
 
 
 
 
 
 
Money market funds
$
1,250

 
$
1,250

 
$

 
$

Commercial paper
2,487

 

 
2,487

 

Corporate bonds
991,808

 

 
991,808

 

U.S. government agency obligations
239,053

 

 
239,053

 

Mutual funds
1,414

 
1,414

 

 

 
$
1,236,012

 
$
2,664

 
$
1,233,348

 
$


The following table reflects the activity for the Company’s major classes of liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2016 and 2015 (in thousands):

 
Other Liabilities:
Contingent Consideration Obligation
Balance, January 1, 2015
$
(900
)
Fair value adjustment to Velocius contingent consideration included in general and administrative expense
(100
)
Achievement of final milestone related to Velocius contingent consideration
1,000

Balance, December 31, 2015
$

Contingent consideration obligation related to Soha Systems, Inc. acquisition
(1,600
)
Contingent consideration obligation related to Cyberfend, Inc. acquisition
(5,500
)
Balance, December 31, 2016
$
(7,100
)

As of December 31, 2016 and 2015, the Company grouped money market funds and mutual funds using a Level 1 valuation because market prices for such investments are readily available in active markets. As of December 31, 2016 and 2015, the Company grouped commercial paper, U.S. government agency obligations and corporate bonds using a Level 2 valuation because quoted prices for identical or similar assets are available in markets that are inactive. The Company did not have any transfers of assets or liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the years ended December 31, 2016 and 2015.



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When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. When available, the Company uses quoted market prices to measure fair value. The valuation technique used to measure fair value for the Company's Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

The valuation technique used to measure fair value of the Company's Level 3 liabilities, which consists of contingent consideration related to the acquisitions of Soha Systems, Inc. ("Soha") and Cyberfend, Inc. ("Cyberfend") in 2016 (Note 8), was primarily an income approach. The significant unobservable input used in the fair value measurement of the contingent consideration is the likelihood of achieving development milestones to integrate the acquired technology into the Company's technology as well as achieving certain post-closing financial results.

Contractual maturities of the Company’s available-for-sale marketable securities held as of December 31, 2016 and 2015 were as follows (in thousands):
 
December 31, 2016
 
December 31, 2015
Due in 1 year or less
$
512,572

 
$
460,088

Due after 1 year through 5 years
775,566

 
773,260

 
$
1,288,138

 
$
1,233,348


4. Accounts Receivable

Net accounts receivable consisted of the following as of December 31, 2016 and 2015 (in thousands):
 
 
December 31, 2016
 
December 31, 2015
Trade accounts receivable
$
260,976

 
$
262,885

Unbilled accounts receivable
113,765

 
124,878

Gross accounts receivable
374,741

 
387,763

Allowance for doubtful accounts
(829
)
 
(906
)
Reserve for cash-basis customers
(5,316
)
 
(6,458
)
Total accounts receivable reserves
(6,145
)
 
(7,364
)
Accounts receivable, net
$
368,596

 
$
380,399


A summary of activity in the accounts receivable reserves for the years ended December 31, 2016, 2015 and 2014, is as follows (in thousands):

 
2016
 
2015
 
2014
Beginning balance
$
7,364

 
$
9,023

 
$
3,703

Charges to income from operations
49,677

 
37,870

 
32,293

Collections from cash basis customers and write-offs
(50,896
)
 
(39,529
)
 
(26,973
)
Ending balance
$
6,145

 
$
7,364

 
$
9,023


Charges to income from operations represent charges to bad debt expense for increases in the allowance for doubtful accounts and reductions to revenue for increases in reserves for cash basis customers.



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5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of December 31, 2016 and 2015 (in thousands):

 
December 31, 2016
 
December 31, 2015
Prepaid income taxes
$
25,161

 
$
31,045

Other prepaid expenses
40,532

 
43,751

Other current assets
38,610

 
48,432

Total
$
104,303

 
$
123,228


6. Property and Equipment

Property and equipment consisted of the following as of December 31, 2016 and 2015 (dollars in thousands):
 
 
December 31, 2016
 
December 31, 2015
 
Estimated Useful Life in Years
Computer and networking equipment
$
1,170,471

 
$
1,046,739

 
3-7
Purchased software
51,727

 
46,509

 
3-10
Furniture and fixtures
41,968

 
35,212

 
5
Office equipment
24,497

 
21,108

 
3-5
Leasehold improvements
139,991

 
119,466

 
1-16
Internal-use software
656,053

 
546,520

 
2-7
Property and equipment, gross
2,084,707

 
1,815,554

 
 
Accumulated depreciation and amortization
(1,283,690
)
 
(1,062,374
)
 
 
Property and equipment, net
$
801,017

 
$
753,180

 
 

Depreciation and amortization expense on property and equipment and capitalized internal-use software for the years ended December 31, 2016, 2015 and 2014 was $307.7 million, $272.5 million and $215.3 million, respectively. During the years ended December 31, 2016, 2015 and 2014, the Company capitalized $23.1 million, $17.9 million and $15.2 million, respectively, of stock-based compensation related to employees who developed and enhanced internal-use software applications.

During the years ended December 31, 2016 and 2015, the Company wrote off $93.4 million and $48.7 million, respectively, of property and equipment, gross, along with the associated accumulated depreciation and amortization. The write-offs were primarily related to computer and networking equipment and internal-use software no longer in use. These assets had been substantially depreciated and amortized.



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7. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows (in thousands):

 
2016
 
2015
Beginning balance
$
1,150,244

 
$
1,051,294

Acquisition of Xerocole, Inc.

 
12,859

Acquisition of Codemate A/S

 
69,445

Acquisition of Bloxx Limited

 
17,694

Acquisition of Concord Systems, Inc.
1,079

 

Acquisition of Soha Systems, Inc.
43,515

 

Acquisition of Cyberfend, Inc.
38,754

 

Foreign currency translation
(5,089
)
 
(1,048
)
Ending balance
$
1,228,503

 
$
1,150,244

    
Acquired intangible assets that are subject to amortization consisted of the following as of December 31, 2016 and 2015 (in thousands):
 
 
December 31, 2016
 
December 31, 2015
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Completed technologies
$
119,091

 
$
(50,823
)
 
$
68,268

 
$
120,791

 
$
(58,633
)
 
$
62,158

Customer-related intangible assets
192,810

 
(114,209
)
 
78,601

 
191,710

 
(102,872
)
 
88,838

Non-compete agreements
5,030

 
(3,775
)
 
1,255

 
6,540

 
(3,374
)
 
3,166

Trademarks and trade names
3,700

 
(2,361
)
 
1,339

 
3,700

 
(1,767
)
 
1,933

Acquired license rights
490

 
(490
)
 

 
490

 
(490
)
 

Total
$
321,121

 
$
(171,658
)
 
$
149,463

 
$
323,231

 
$
(167,136
)
 
$
156,095


Aggregate expense related to amortization of acquired intangible assets for the years ended December 31, 2016, 2015 and 2014 was $26.6 million, $27.1 million and $32.1 million, respectively. Based on the Company's acquired intangible assets as of December 31, 2016, aggregate expense related to amortization of acquired intangible assets is expected to be approximately $29.2 million, $26.4 million, $25.0 million, $21.1 million and $16.6 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.

8. Business Acquisitions and Divestitures

Acquisition-related costs were $1.7 million, $1.8 million and $4.2 million during the years ended December 31, 2016, 2015 and 2014, respectively, and are included in general and administrative expense in the consolidated statements of income. Pro forma results of operations for the acquisitions completed in the years ended December 31, 2016, 2015 and 2014 have not been presented because the effects of the acquisitions, individually and in the aggregate, are not material to the Company's consolidated financial results. Revenue and earnings attributable to acquired operations since the dates of their acquisitions are included in the Company's consolidated statements of income and not presented separately because they are not material.

2016 Acquisitions

Concord Systems

On September 23, 2016, the Company acquired Concord Systems, Inc. ("Concord"), a provider of technology for processing data at scale, for $3.0 million in cash. The acquisition is expected to provide the Company with technology to complement existing platform data processing capabilities. The Company allocated $1.1 million of the cost of the acquisition to goodwill and $2.8 million to an identifiable intangible asset with a useful life of 7.0 years. The value of the goodwill is primarily attributable to synergies related to the integration of Concord technology onto the Company's platform as well as a


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trained technical workforce. An insignificant portion of the goodwill related to the acquisition of Concord is expected to be deducted for tax purposes. The allocation of the purchase price was finalized in the fourth quarter of 2016.

Soha Systems

On October 3, 2016, the Company acquired Soha, a provider of technology designed to facilitate secure access to enterprise applications, for $55.0 million in initial consideration and up to an additional $5.0 million for the achievement of post-closing milestones. The acquisition is intended to complement the Company's strategy of securing, protecting and accelerating enterprise applications and services in the cloud. The Company allocated $43.5 million of the cost of the acquisition to goodwill and $10.7 million to identifiable intangible assets. The total weighted average useful life of the intangible assets acquired from Soha is 4.7 years. The value of the goodwill is primarily attributable to synergies related to the integration of Soha technology onto the Company's platform as well as a trained technical workforce. The total amount of goodwill related to the acquisition of Soha expected to be deducted for tax purposes is $12.0 million. The allocation of the purchase price has not been finalized as the Company continues to assess the impact of relevant facts and circumstances.

Cyberfend

On December 15, 2016, the Company acquired Cyberfend, an innovator in bot and automation detection solutions for web and mobile environments, for $37.5 million in initial consideration and up to an additional $10.5 million upon the achievement of post-closing milestones. The acquisition is intended to further strengthen the Company's existing bot management and mitigation services. The Company allocated $38.8 million of the cost of the acquisition to goodwill and $6.5 million to acquired intangible assets. The total weighted average useful life of the intangible assets acquired from Cyberfend is 3.6 years. The value of the goodwill from the acquisition can be attributed to a number of business factors including a trained technical workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Cyberfend expected to be deducted for tax purposes is $11.0 million. The allocation of the purchase price has not been finalized as the Company continues to assess the impact of relevant facts and circumstances.

2015 Acquisitions

Xerocole

On February 27, 2015, the Company acquired Xerocole, Inc. ("Xerocole"), a provider of recursive Domain Name System ("DNS") functionality, for $16.6 million in cash. The Company acquired Xerocole with a goal of expanding its existing Authoritative DNS products. The Company allocated $12.9 million of the cost of the acquisition to goodwill and $4.9 million to acquired intangible assets. The allocation of the purchase price was finalized in the third quarter of 2015. The total weighted average useful life of the intangible assets acquired from Xerocole is 8.8 years. The value of the goodwill from the acquisition can be attributed to a number of business factors including a trained technical workforce and cost synergies expected to be realized. The total amount of goodwill expected to be deducted for tax purposes is $2.7 million.

Octoshape

On April 6, 2015, the Company acquired all of the outstanding capital stock of Codemate A/S and its wholly-owned subsidiary Octoshape ApS (together, "Octoshape") in exchange for $107.0 million in cash. Octoshape is a cloud service provider focused on delivering broadcast, enterprise and carrier solutions. The goal of acquiring Octoshape was to make available for the Company's customers additional delivery and optimization technologies for video streams of over-the-top (often referred to as OTT) content and to enable the Company to more fully support Internet Protocol television ("IPTV") solutions. The consolidated financial statements include the operating results of Octoshape from the date of acquisition.



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The purchase price allocation was finalized in the fourth quarter of 2015. The Company recorded a decrease of $0.5 million to goodwill upon the finalization of net working capital adjustments to the purchase price in the third quarter of 2015. The following table presents the final allocation of the purchase price for Octoshape (in thousands):

Total purchase consideration
 
$
107,047

 
 
 
Allocation of the purchase consideration:
 
 
Cash
 
$
664

Accounts receivable
 
1,976

Other current assets
 
393

Identifiable intangible assets
 
41,950

Goodwill
 
69,445

Deferred tax assets
 
5,230

Total assets acquired
 
119,658

Other current liabilities
 
(1,983
)
Current deferred revenue
 
(770
)
Deferred tax liabilities
 
(9,858
)
Total liabilities assumed
 
(12,611
)
Net assets acquired
 
$
107,047


The value of the goodwill can be attributed to a number of business factors, including a trained technical and sales workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Octoshape expected to be deducted for tax purposes is $69.4 million.

The following were the identified intangible assets acquired and their respective weighted average useful lives (in thousands, except years):

 
Gross Carrying Amount
 
Weighted Average Useful Life (in years)
Completed technologies
$
25,310

 
9.8
Customer-related intangible assets
16,560

 
11.8
Non-compete agreements
80

 
2.0
Total
$
41,950

 
 

The total weighted average amortization period for the intangible assets acquired from Octoshape is 10.6 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.



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Bloxx

On October 30, 2015, the Company acquired Bloxx Limited ("Bloxx"), a provider of Secure Web Gateway technology, for $18.7 million in cash. The acquisition is expected to provide the Company with technology to complement its cloud security strategy for protecting businesses against Internet vulnerabilities. The Company allocated $17.7 million of the cost of the acquisition to goodwill and $3.9 million to the acquired intangible assets. The allocation of the purchase price was finalized in the second quarter of 2016. The total weighted average useful life of the intangible assets acquired from Bloxx is 7.2 years. The value of the goodwill from the acquisition can be attributed to a number of business factors including a trained technical workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Bloxx expected to be deducted for tax purposes is $17.7 million.

2014 Acquisitions

Prolexic Acquisition

On February 18, 2014, the Company acquired all of the outstanding capital stock of Prolexic Technologies, Inc. ("Prolexic") in exchange for $392.1 million in cash and the assumption of unvested stock options. The goal of acquiring Prolexic was to provide the Company's customers with a comprehensive portfolio of security solutions designed to defend an enterprise’s web and IP infrastructure against application-layer, network-layer and data center attacks delivered via the Internet. The consolidated financial statements include the operating results of Prolexic from the date of acquisition.

The purchase price allocation was finalized in the fourth quarter of 2014. The Company recorded an increase of $2.2 million to goodwill upon the finalization of measurement period adjustments related to certain tax-related assets and liabilities in the fourth quarter of 2014.

The following table presents the final allocation of the purchase price for Prolexic (in thousands):

Total purchase consideration
 
$
392,104

 
 
 
Allocation of the purchase consideration:
 
 
Cash
 
$
33,072

Accounts receivable
 
11,208

Property and equipment
 
12,225

Identifiable intangible assets
 
87,040

Goodwill
 
293,926

Deferred tax assets
 
16,340

Other current and long-term assets
 
5,664

Total assets acquired
 
459,475

Other current liabilities
 
(5,940
)
Current deferred revenue
 
(5,812
)
Deferred tax liabilities
 
(36,203
)
Debt, capital leases and other long-term liabilities
 
(19,416
)
Total liabilities assumed
 
(67,371
)
Net assets acquired
 
$
392,104


The value of the goodwill can be attributed to a number of business factors, including a trained technical and sales workforce and the fair value of cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Prolexic expected to be deducted for tax purposes is $62.4 million.



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The following were the identified intangible assets acquired and their respective weighted average useful lives (in thousands, except for years):

 
Gross Carrying Amount
 
Weighted Average Useful Life (in years)
Completed technologies
$
26,800

 
6.9
Customer-related intangible assets
58,500

 
10.4
Non-compete agreements
940

 
3.0
Trademark
800

 
4.9
Total
$
87,040

 
 

The total weighted average amortization period for the intangible assets acquired from Prolexic is 9.2 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

9. Accrued Expenses and Other Liabilities

Accrued expenses consisted of the following as of December 31, 2016 and 2015 (in thousands):
 
 
December 31, 2016
 
December 31, 2015
Payroll and other related benefits
$
111,421

 
$
108,230

Bandwidth and co-location
61,084

 
48,228

Property, use and other taxes
52,959

 
47,364

Professional service fees
4,277

 
4,636

Other accrued expenses
9,036

 
7,708

Total
$
238,777

 
$
216,166


Other liabilities consisted of the following as of December 31, 2016 and 2015 (in thousands):

 
December 31, 2016
 
December 31, 2015
Deferred rent
$
29,668

 
$
32,876

Uncertain tax positions
73,231

 
53,641

Other long-term liabilities
15,792

 
6,751

Total
$
118,691

 
$
93,268


10. Convertible Senior Notes

In February 2014, the Company issued $690.0 million in par value of convertible senior notes due 2019 (the "Notes"). The Notes are senior unsecured obligations of the Company, do not bear regular interest and mature on February 15, 2019, unless repurchased or converted prior to maturity.

At their option, holders may convert their Notes prior to the close of business on the business day immediately preceding August 15, 2018 only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ended June 30, 2014 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; or



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during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or upon the occurrence of specified corporate events.

On or after August 15, 2018, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.

Upon conversion, the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The initial conversion rate is 11.1651 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $89.56 per share, subject to adjustments in certain events, and represents a potential conversion into 7.7 million shares.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.
The carrying cost of the liability component was calculated by measuring the fair value of a similar debt obligation that does
not have an associated convertible feature. The carrying amount of the equity component representing the conversion option
was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between
the principal amount of the Notes and the proceeds allocated to the liability component (“debt discount”) is amortized to
interest expense using the effective interest method over the term of the Notes. The equity component is recorded in additional
paid-in capital in the consolidated balance sheet and will not be remeasured as long as it continues to meet the conditions for
equity classification.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total transaction
costs incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability
component are being amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity
component are netted against the equity component of the Notes in stockholders’ equity.

The Notes consisted of the following components as of December 31, 2016 and 2015 (in thousands):
 
December 31, 2016
 
December 31, 2015
Liability component:
 
 
 
Principal
$
690,000

 
$
690,000

Less: debt discount and issuance costs, net of amortization
(49,913
)
 
(71,953
)
Net carrying amount
$
640,087

 
$
618,047

 
 
 
 
Equity component:
$
101,276

 
$
101,276


The estimated fair value of the Notes at December 31, 2016 was $721.4 million. The fair value was determined based
on the quoted price of the Notes in an inactive market on the last trading day of the reporting period and has been classified as
Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $66.68 on December 31, 2016, the value of the Notes if converted to common stock was less than the principal amount of $690.0 million.

The Company used $62.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the Notes. The repurchase was made in accordance with the share repurchase program previously approved by the Board of Directors (Note 12). Additionally, $23.3 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The remaining net proceeds are for working capital, share repurchases and other general corporate purposes, as well as for potential acquisitions and strategic transactions.

Note Hedge

To minimize the impact of potential dilution upon conversion of the Notes, the Company entered into convertible note hedge transactions with respect to its common stock in February 2014. The Company paid $101.3 million for the note hedge transactions. The note hedge transactions cover approximately 7.7 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the Notes.



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Warrants

Separately, in February 2014, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 7.7 million shares of the Company’s common stock at a strike price of approximately $104.49 per share. The Company received aggregate proceeds of $78.0 million from the sale of the warrants.  The convertible note hedge and warrant transactions will generally have the effect of increasing the conversion price of the Notes to approximately $104.49 per share.

Interest Expense

The Notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature. The following table sets forth total interest expense included in the consolidated statements of income related to the Notes for the years ended December 31, 2016 and 2015 (in thousands):

 
2016
 
2015
Amortization of debt discount and issuance costs
$
22,040

 
$
21,280

Capitalization of interest expense
(3,402
)
 
(2,755
)
Total interest expense
$
18,638

 
$
18,525


11. Commitments and Contingencies

Operating Lease Commitments

The Company leases its facilities under non-cancelable operating leases. These operating leases expire at various dates through December 2034 and generally require the payment of real estate taxes, insurance, maintenance and operating costs.

The minimum aggregate future obligations under non-cancelable leases as of December 31, 2016 were as follows (in thousands):
 
2017
$
53,410

2018
45,202

2019
44,586

2020
54,206

2021
54,934

Thereafter
533,088

Total
$
785,426


Rent expense for the years ended December 31, 2016, 2015 and 2014 was $50.3 million, $47.9 million and $39.9 million, respectively. The Company has entered into sublease agreements with tenants of various properties previously vacated by the Company. The amounts paid to the Company by these sublease tenants was $1.3 million, $3.6 million and $3.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, the Company had outstanding letters of credit in the amount of $6.8 million, primarily related to operating leases. The letters of credit remain in effect until the Company fulfills its obligations under these leases or as such obligations expire under the terms of the letters of credit.



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Purchase Commitments

As of December 31, 2016, the Company had long-term commitments for bandwidth usage and co-location with various networks and ISPs and for asset purchases for network equipment. Additionally, as of December 31, 2016, the Company had entered into purchase orders with various vendors. The minimum future commitments as of December 31, 2016 were as follows (in thousands):

 
Bandwidth and Co-location Commitments
 
Purchase Order Commitments
2017
$
105,451

 
$
137,642

2018
13,799

 
10,522

2019
6,368

 
1,827

2020
386

 
320

2021
193

 
320

Thereafter

 

Total
$
126,197

 
$
150,631


Legal Matters

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

In 2016, the Company completed an internal investigation, with the assistance of outside counsel, relating to improper sales practices by a former employee. The internal investigation included a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations. In February 2015, the Company voluntarily contacted the Commission and Department of Justice to advise both agencies of this internal investigation. In June 2016, the Company signed a non-prosecution agreement with the Commission and agreed to disgorge $0.7 million to resolve this matter, including interest.

In July 2016, as part of the resolution of a patent infringement lawsuit filed by the Company against Limelight Networks, Inc. (“Limelight”) in 2006, the Company agreed to license to Limelight technology covered by certain of the Company’s patents.  The terms of the agreement require Limelight to pay the Company $54.0 million in 12 equal installments over three years, beginning in August 2016. During the year ended December 31, 2016, the Company received $9.0 million under this agreement, which was recorded as a reduction to general and administrative expenses in the consolidated statement of income, with $0.4 million recorded as interest income.

In November 2015, Limelight filed a complaint in the U.S. District Court for the Eastern District of Virginia against the Company and XO Communications LLC (“XO”), alleging patent infringement by the two companies.  The complaint alleges that the Company and XO infringed six of Limelight’s content delivery patents. The complaint seeks to recover from the Company and XO monetary damages based upon lost revenue due to infringing technology used by the companies.  The Company has agreed to indemnify XO for damages it incurs in this matter. The Company has made counterclaims in the action against Limelight alleging that Limelight has infringed five of the Company’s content delivery patents, and the Company is seeking monetary damages based upon lost revenue due to the infringing technology used by Limelight.  The case is scheduled for trial in May 2017.  No provision with respect to this matter has been made in the Company’s consolidated financial statements.  An estimate of the possible loss or range of loss cannot be made.



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Indemnification

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company's business partners, vendors or customers, in connection with its provision of its services. Generally, these obligations are limited to claims relating to infringement of a patent, copyright or other intellectual property right or the Company’s negligence, willful misconduct or violation of law. Subject to applicable statutes of limitation, the term of these indemnification agreements is generally perpetual from the time of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company carries insurance that covers certain third party claims relating to its services and activities and that could limit the Company’s exposure in that respect.

The Company has agreed to indemnify each of its officers and directors during his or her lifetime for certain events or occurrences that happen by reason of the fact that the officer or director is or was or has agreed to serve as an officer or director of the Company. The Company has director and officer insurance policies that may limit its exposure and may enable the Company to recover a portion of certain future amounts paid.

To date, the Company has not encountered material costs as a result of such indemnification obligations and has not accrued any related liabilities in its financial statements. In assessing whether to establish an accrual, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.

12. Stockholders’ Equity

Stock Repurchase Program

In October 2013, the Board of Directors authorized a $750.0 million share repurchase program, effective from October
2013 through December 2016. In February 2016, the Board of Directors authorized a $1.0 billion share
repurchase program that superseded the October 2013 repurchase program and is effective from February 2016
through December 2018. The Company's goal for the share repurchase program is to offset the dilution created by its employee equity compensation programs and provide the flexibility to return capital to shareholders as business and market conditions warrant.

During the years ended December 31, 2016, 2015 and 2014, the Company repurchased 7.0 million, 4.5 million and 4.6 million shares, respectively, of its common stock for $373.8 million, $302.6 million and $268.6 million, respectively, pursuant to the current repurchase program as well as prior ones approved by the Board of Directors. As of December 31, 2016, the Company had $694.5 million available for future purchases of shares under the current repurchase program.

The Board of Directors authorized the retirement of all the outstanding shares of its treasury stock as of each of December 31, 2016, 2015 and 2014. The retired shares were returned to the number of authorized but unissued shares of the Company's common stock, and the retirement was recorded to additional paid-in capital.

13. Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss, which is reported as a component of stockholders' equity, for the year ended December 31, 2016 (in thousands):

 
Foreign Currency Translation
 
Net Unrealized Gains (Losses) on Investments
 
Total
Balance as of January 1, 2016
$
(44,936
)
 
$
3,483

 
$
(41,453
)
Other comprehensive loss
(14,081
)
 
(688
)
 
(14,769
)
Balance as of December 31, 2016
$
(59,017
)
 
$
2,795

 
$
(56,222
)

The tax effect on accumulated unrealized gains on investments was insignificant as of December 31, 2016 and 2015. Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the year ended December 31, 2016.



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14. Employee Benefit Plan

The Company has established a savings plan for its employees that is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to this plan through payroll deductions within statutory and plan limits. The Company contributed approximately $13.7 million, $13.1 million and $16.6 million of cash to the savings plan for the years ended December 31, 2016, 2015 and 2014, respectively, under a matching program.

15. Stock-Based Compensation

Equity Plans

In May 2013, the Company's stockholders approved the Akamai Technologies, Inc. 2013 Stock Incentive Plan (the "2013 Plan"). The 2013 Plan replaced the Akamai Technologies, Inc. 2009 Stock Incentive Plan (the "2009 Plan"), which in turn replaced the Akamai Technologies, Inc. 2006 Stock Incentive Plan, the Akamai Technologies, Inc. 2001 Stock Incentive Plan and the Akamai Technologies, Inc. 1998 Stock Incentive Plan (together with the 2009 Plan, the "Previous Plans"). The Company no longer issues equity awards under the Previous Plans, and they solely exist to satisfy outstanding equity awards previously granted under those plans. The 2013 Plan allows for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards up to 11.0 million shares of common stock to employees, officers, directors, consultants and advisers of the Company. Additionally, the Company may grant up to 3.8 million shares of common stock thereunder that were available for grant under the 2009 Plan immediately prior to stockholder approval of the 2013 Plan. Any shares of common stock that are currently outstanding under the Previous Plans that are terminated, canceled, surrendered or forfeited will become available to grant under the 2013 Plan. As of December 31, 2016, the Company had reserved approximately 6.6 million shares of common stock available for future issuance of equity awards under the 2013 Plan.

The Company has assumed certain stock option plans and the outstanding stock options of companies that it has acquired (“Assumed Plans”). Stock options outstanding as of the date of acquisition under the Assumed Plans were exchanged for the Company’s stock options and adjusted to reflect the appropriate conversion ratio as specified by the applicable acquisition agreement, but are otherwise administered in accordance with the terms of the Assumed Plans. Stock options under the Assumed Plans generally vest over four years and expire ten years from the date of grant.

The 1999 Employee Stock Purchase Plan ("1999 ESPP") permits eligible employees to purchase up to 1.5 million shares each June 1 and December 1, provided that the aggregate number of shares issued shall not exceed 20.0 million. The 1999 ESPP allows participants to purchase shares of common stock at a 15% discount from the fair market value of the stock as determined on specific dates at six-month intervals. During the years ended December 31, 2016, 2015 and 2014, the Company issued 0.9 million, 0.7 million and 0.7 million shares under the 1999 ESPP, respectively, with a weighted average purchase price per share of $46.23, $52.05 and $41.76, respectively. Total cash proceeds from the purchase of shares under the 1999 ESPP in the years ended December 31, 2016, 2015 and 2014 were $39.9 million, $34.8 million and $29.3 million, respectively. As of December 31, 2016, approximately $5.1 million had been withheld from employees for future purchases under the 1999 ESPP.

Stock-Based Compensation Expense

The following table summarizes the components of total stock-based compensation expense included in the Company’s consolidated statements of income for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
 
2016
 
2015
 
2014
Cost of revenue
$
18,287

 
$
14,145

 
$
11,934

Research and development
29,739

 
23,927

 
19,341

Sales and marketing
55,407

 
53,542

 
47,570

General and administrative
41,073

 
35,063

 
33,151

Total stock-based compensation
144,506

 
126,677

 
111,996

Provision for income taxes
(49,014
)
 
(49,033
)
 
(39,182
)
Total stock-based compensation, net of taxes
$
95,492

 
$
77,644

 
$
72,814




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In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of income for the years ended December 31, 2016, 2015 and 2014 also include stock-based compensation reflected as a component of amortization of capitalized internal-use software; the additional stock-based compensation was $13.8 million, $12.7 million and $10.3 million, respectively, before taxes.

The Company uses the Black-Scholes option pricing model to determine the fair value of the Company’s stock option awards. This model requires the input of subjective assumptions, including expected stock price volatility and the estimated term of each award. The estimated fair value of the Company's stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. Expected volatilities are based on the Company’s historical stock price volatility and implied volatility from traded options in its stock. The Company uses historical data to estimate the expected term of options granted within the valuation model. The risk-free interest rate for periods commensurate with the expected term of the option is based on the U.S. Treasury yield rate in effect at the time of grant. The expected dividend yield is zero, as the Company currently does not pay a dividend and does not anticipate doing so in the future.

The Company did not grant any stock options during 2016 or 2015. The grant-date fair values of the Company's stock option awards granted during the year ended December 31, 2014 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
 
2014
Expected term (in years)
4.4

Risk-free interest rate
0.8
%
Expected volatility
40.4
%
Dividend yield
%

For the year ended December 31, 2014, the weighted average fair value of stock option awards granted was $49.67 per share.

The grant-date fair values of the Company's ESPP awards granted during the years ended December 31, 2016, 2015 and 2014 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
 
 
2016
 
2015
 
2014
Expected term (in years)
0.5

 
0.5

 
0.5

Risk-free interest rate
0.5
%
 
0.2
%
 
0.1
%
Expected volatility
36.2
%
 
28.0
%
 
33.5
%
Dividend yield
%
 
%
 
%

For the years ended December 31, 2016, 2015 and 2014, the weighted average fair value of ESPP awards granted was $14.54 per share, $15.63 per share and $12.64 per share, respectively.

As of December 31, 2016, total pre-tax unrecognized compensation cost for stock options, restricted stock units, deferred stock units and shares of common stock issued under the 1999 ESPP was $259.5 million. The expense is expected to be recognized through 2020 over a weighted average period of 2.0 years.



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Stock Options

The following table summarizes stock option activity during the year ended December 31, 2016:
 

Shares
(in thousands)

Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in thousands)
Outstanding at January 1, 2016
1,524

 
$
32.39

 
 
 
 
Exercised
(643
)
 
28.17

 
 
 
 
Forfeited
(7
)
 
29.69

 
 
 
 
Outstanding at December 31, 2016
874

 
$
35.51

 
2.36
 
$
27,261

Exercisable at December 31, 2016
829

 
$
35.58

 
2.24
 
$
25,781

Vested or expected to vest December 31, 2016
870

 
$
35.52

 
2.35
 
$
27,123


The total pre-tax intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $18.3 million, $53.6 million and $45.8 million, respectively. The total fair value of options vested for the years ended December 31, 2016, 2015 and 2014 was $6.5 million, $10.3 million and $16.9 million, respectively.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $66.68 on December 31, 2016, that would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date. The total number of shares issuable upon the exercise of “in-the-money” options exercisable as of December 31, 2016 was 0.8 million.

Deferred Stock Units

The Company has granted deferred stock units ("DSUs") to non-employee members of its Board of Directors. Each DSU represents the right to receive one share of the Company’s common stock upon vesting. The holder may elect to defer receipt of the vested shares of stock represented by the DSU for a period of at least one year but not more than ten years from the grant date. For those granted prior to 2014, DSUs vested 50% upon the first anniversary of the grant date, with the remaining 50% vesting in equal installments of 12.5% each quarter thereafter such that all DSUs vested in full at the end of two years from date of grant. Beginning in 2014, DSUs vest 100% on the first anniversary of the grant date. If a director has completed one year of Board service, vesting of 100% of the DSUs held by such director will accelerate at the time of his or her departure from the Board.

The following table summarizes the DSU activity for the year ended December 31, 2016:

 
Units
(in thousands)
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016
146

 
$
45.42

Granted
46

 
50.72

Vested and distributed
(28
)
 
57.24

Outstanding at December 31, 2016
164

 
$
44.90


The total pre-tax intrinsic value of DSUs that were vested and distributed during the years ended December 31, 2016, 2015 and 2014 was $1.4 million, $10.7 million and $1.4 million, respectively. The total fair value of DSUs that were vested and distributed during the years ended December 31, 2016, 2015 and 2014 was $1.6 million, $4.9 million and $0.8 million, respectively. The grant-date fair value is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2016, 46,000 DSUs were unvested, with an aggregate intrinsic value of approximately $3.1 million and a weighted average remaining contractual life of approximately 0.4 years. These units are expected to vest in May 2017.



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Restricted Stock Units

The following table summarizes the different types of restricted stock units ("RSUs") granted by the Company during the year ended December 31, 2016 (in thousands):
 
 
December 31, 2016
RSUs with service-based vesting conditions
3,873

RSUs with market-based vesting conditions
127

RSUs with performance-based vesting conditions
116

Total
4,116


RSUs represent the right to receive one share of the Company’s common stock upon vesting. RSUs are granted at the discretion of the Board of Directors, a committee thereof or, subject to defined limitations, the Chief Executive Officer of the Company, acting as a committee of one director, to whom such authority has been delegated. The Company has issued RSUs that vest based on the passage of time assuming continued service with the Company, RSUs that vest only upon the achievement of defined performance metrics tied primarily to revenue and income targets and other key financial performance indicators and RSUs that vest based upon total shareholder return ("TSR") measured against the benchmark TSR of a peer group.

For RSUs with service-based vesting conditions, the fair value is calculated based upon the Company’s closing stock price on the date of grant, and the stock-based compensation expense is being recognized over the vesting period. Most RSUs with service-based vesting provisions vest in installments over a three- or four-year period following the grant date.

Beginning in the first quarter of 2016, the Company granted RSUs with market-based vesting conditions to certain of its executive officers. The Company uses the Monte Carlo simulation model to determine the fair value of the Company’s RSUs based on TSR. This model requires the input of assumptions, including the estimated term of each award, the risk-free interest rate, historical stock price volatility of the Company's shares and historical stock price volatility of peer-company shares. The grant-date fair values of the Company's RSUs with market-based vesting conditions granted during the year ended December 31, 2016 were estimated using a Monte Carlo simulation model with the following assumptions:

 
2016
Expected term (in years)
3.0

Risk-free interest rate
0.8
%
Akamai historical share price volatility
34.3
%
Average volatility of peer-company share price
27.6
%

For the years ended December 31, 2016, 2015 and 2014, management measured compensation expense for performance-based RSUs based upon a review of the Company’s expected achievement against specified financial performance targets. Such compensation cost is being recorded using a graded-vesting method for each series of grants of performance-based RSUs, to the extent management has deemed that such awards are probable of vesting based upon the expected achievement against the specified targets. On a periodic basis, management reviews the Company’s expected performance and adjusts the compensation cost, if needed, at such time.

The following table summarizes the RSU activity for the year ended December 31, 2016:
 

Units
(in thousands)

Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016
4,495


$
62.20

Granted
4,116


56.40

Vested
(2,374
)

59.13

Forfeited
(527
)

59.68

Outstanding at December 31, 2016
5,710


$
59.51



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The total pre-tax intrinsic value of RSUs that vested during the years ended December 31, 2016, 2015 and 2014 was $128.5 million, $153.6 million and $145.6 million, respectively. The total fair value of RSUs that vested during the years ended December 31, 2016, 2015 and 2014 was $140.4 million, $105.3 million and $86.9 million, respectively. The grant-date fair value of each RSU is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2016, 5.7 million RSUs were outstanding and unvested, with an aggregate intrinsic value of $380.7 million and a weighted average remaining vesting period of approximately 2.0 years. These RSUs are expected to vest on various dates through October 2020.

16. Income Taxes

The components of income before provision for income taxes were as follows for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
 
2016
 
2015
 
2014
U.S.
$
273,176

 
$
233,247

 
$
408,391

Foreign
186,270

 
223,377

 
71,385

Income before provision for income taxes
$
459,446

 
$
456,624

 
$
479,776


The provision for income taxes consisted of the following for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
 
2016
 
2015
 
2014
Current tax provision (benefit):
 
 
 
 
 
Federal
$
89,816

 
$
70,298

 
$
153,471

State
6,238

 
(1,750
)
 
4,978

Foreign
39,952

 
62,572

 
13,259

Deferred tax provision (benefit):
 
 
 
 
 
Federal
4,265

 
23,381

 
(13,073
)
State
(86
)
 
(742
)
 
(15,220
)
Foreign
3,916

 
(18,536
)
 
2,442

Change in valuation allowance
(787
)
 
(5
)
 
(29
)
Total
$
143,314

 
$
135,218

 
$
145,828


The Company includes the provision for income taxes incurred on intercompany sales as part of its current tax provision.  The amount of the current year provision for income taxes required to be deferred is included as a deferred tax benefit.  The amount of the current year deferral included in the Company’s deferred tax provision was a benefit of $9.1 million, $15.5 million and $24.3 million in the years ended December 31, 2016, 2015 and 2014, respectively.

The Company’s effective rate differed from the U.S. federal statutory rate as follows for the years ended December 31, 2016, 2015 and 2014:
 
 
2016
 
2015
 
2014
U.S. federal income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes
2.0

 
1.7

 
2.3

Nondeductible stock-based compensation
2.3

 
1.9

 
1.4

U.S. federal, state and foreign research and development credits
(3.3
)
 
(4.1
)
 
(3.2
)
Foreign earnings
(3.4
)
 
(4.6
)
 
(1.9
)
Domestic production activities deduction
(1.7
)
 
(1.2
)
 
(2.2
)
State software development activities benefit

 

 
(2.4
)
Other
0.3

 
0.9

 
1.4

 
31.2
 %
 
29.6
 %
 
30.4
 %



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The components of the net deferred tax assets and liabilities and the related valuation allowance as of December 31, 2016 and 2015 were as follows (in thousands):
 
 
2016
 
2015
Accrued bonus
$
18,390

 
$
13,161

Deferred revenue
10,055

 
11,334

Deferred rent
12,592

 
13,224

Stock-based compensation
32,030

 
31,705

Net operating losses
7,855

 
8,855

Unrealized losses
1,862

 
1,421

Tax credit carryforwards
23,629

 
22,918

License income
16,932

 

Other
7,048

 
5,989

Deferred tax assets
130,393

 
108,607

Depreciation and amortization
(10,470
)
 
(10,848
)
Acquired intangible assets
(44,788
)
 
(37,923
)
Internal-use software development costs capitalized
(77,375
)
 
(66,807
)
Deferred tax liabilities
(132,633
)
 
(115,578
)
Valuation allowance
(430
)
 
(1,217
)
Net deferred tax liabilities
$
(2,670
)
 
$
(8,188
)

During the years ended December 31, 2016 and 2015, the valuation allowance related to the Company's deferred tax assets decreased by an insignificant amount. As of December 31, 2016 and 2015, the Company had the following NOL and credit carryforwards (in thousands, except for years):

 
2016
 
2015
 
Expirations at Various Dates Through:
NOL carryforwards:
 
 
 
 
 
Federal
$
16,500

 
$
21,500

 
2029
State
11,400

 
28,200

 
2034
Foreign

 

 
 
Federal and state research and development tax credit carryforwards
41,500

 
39,800

 
2031

The Company's U.S. federal NOL carryforwards relate to acquisitions completed during 2012. As of December 31, 2016, the Company had no foreign tax credit carryforwards.

As of December 31, 2016, undistributed earnings of non-U.S. subsidiaries totaled $470.4 million. No provision for U.S. income and foreign withholding taxes has been made for these permanently reinvested foreign earnings because it is expected that such earnings will be reinvested indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise, it would be included in the Company's U.S. taxable income. The amount of unrecognized deferred income tax liability related to these earnings is $89.4 million.



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The following is a rollforward of the Company’s unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
2016
 
2015
 
2014
Balance at beginning of year
$
65,290

 
$
33,320

 
$
24,651

Gross increases — tax positions of prior periods
6,391

 
11,238

 
12,925

Gross increases — current-period tax positions
6,252

 
27,043

 
2,106

Gross decreases — tax positions of prior periods
(6,778
)
 
(5,996
)
 
(6,362
)
Gross decreases — settlements
(2,038
)
 
(315
)
 

Balance at end of year
$
69,117

 
$
65,290

 
$
33,320


As of December 31, 2016, 2015 and 2014, the Company had approximately $77.1 million, $72.3 million and $41.1 million, respectively, of total unrecognized tax benefits, including $13.7 million, $10.0 million, and $7.7 million of accrued interest and penalties as of December 31, 2016, 2015 and 2014, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the provision for income taxes and were $3.9 million, $2.2 million and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. If recognized, the aggregate amount of unrecognized tax benefits would have resulted in a reduction of income tax expense, impacting the effective income tax rate.

As of December 31, 2016, the Company believes it is reasonably possible that $15.8 million of its unrecognized tax benefits may be recognized by the end of 2017 as a result of the expiration of local statutes of limitations. Certain state and foreign income tax returns from 2011 through 2014 are currently under audit in those jurisdictions, including an audit in the Commonwealth of Massachusetts. The Company has reserved for those positions that are not more likely than not of being sustained.

Generally, in the U.S. federal and state taxing jurisdictions, tax periods in which certain loss and credit carryovers are generated remain open for audit until such time as the limitation period ends for the year in which such losses or credits are utilized. In major foreign jurisdictions, tax years after 2012 are open for examination.

17. Net Income per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, RSUs, DSUs, convertible senior notes and warrants issued by the Company. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method.

The following table sets forth the components used in the computation of basic and diluted net income per share for the years ended December 31, 2016, 2015 and 2014 (in thousands, except per share data):
 
 
2016

2015

2014
Numerator:
 
 
 
 
 
Net income
$
316,132

 
$
321,406

 
$
333,948

Denominator:
 
 
 
 
 
Shares used for basic net income per share
174,917

 
178,391

 
178,279

Effect of dilutive securities:

 

 

Stock options
384

 
794

 
1,221

RSUs and DSUs
914

 
1,230

 
1,686

Convertible senior notes

 

 

Warrants related to issuance of convertible senior notes

 

 

Shares used for diluted net income per share
176,215

 
180,415

 
181,186

Basic net income per share
$
1.81

 
$
1.80

 
$
1.87

Diluted net income per share
$
1.79

 
$
1.78

 
$
1.84




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For the years ended December 31, 2016, 2015 and 2014, certain potential outstanding shares from stock options, service-based RSUs, convertible notes and warrants were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based RSUs were excluded from the computation of diluted net income per share because the underlying performance conditions for such RSUs had not been met as of these dates. The number of potentially outstanding shares excluded from the computation of diluted net income per share for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 
2016
 
2015
 
2014
Stock options
58

 
22

 
402

Service-based RSUs
2,262

 
660

 
786

Performance-based RSUs
690

 
1,007

 
570

Convertible senior notes
7,704

 
7,704

 
7,704

Warrants related to issuance of convertible senior notes
7,704

 
7,704

 
7,704

Total shares excluded from computation
18,418

 
17,097

 
17,166


18. Segment and Geographic Information

The Company’s chief operating decision-maker is the chief executive officer and the executive management team. As of December 31, 2016, the Company operated in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet. The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief executive officer comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its services. Accordingly, the Company does not accumulate discrete financial information with respect to separate divisions and does not have separate operating or reportable segments.

The Company deploys its servers into networks worldwide. As of December 31, 2016, the Company had approximately $297.8 million and $231.8 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively. As of December 31, 2015, the Company had approximately $298.9 million and $227.8 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively.

The Company sells its services and licenses through a sales force located both domestically and abroad. Revenue derived from operations outside of the U.S. is determined based on the country in which the sale originated and was $720.0 million, $593.0 million and $531.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period.

19. Quarterly Financial Results (unaudited)

(in thousands, except per share data)
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Year ended December 31, 2016:
 
 
 
 
 
 
 
Revenue
$
567,725

 
$
572,135

 
$
584,065

 
$
616,124

Cost of revenue (exclusive of amortization of acquired intangible assets)
194,736

 
206,323

 
204,467

 
203,475

Net income
74,858

 
73,635

 
76,000

 
91,639

Basic net income per share
0.42

 
0.42

 
0.44

 
0.53

Diluted net income per share
0.42

 
0.42

 
0.43

 
0.52

Year ended December 31, 2015:
 
 
 
 
 
 
 
Revenue
$
526,536

 
$
540,723

 
$
551,030

 
$
579,159

Cost of revenue (exclusive of amortization of acquired intangible assets)
169,294

 
179,910

 
183,204

 
193,212

Net income
77,746

 
67,200

 
88,040

 
88,420

Basic net income per share
0.44

 
0.38

 
0.49

 
0.50

Diluted net income per share
0.43

 
0.37

 
0.49

 
0.49




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Table of Contents

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15
(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

To assist management, we have established an internal audit function to verify and monitor our internal controls and procedures. Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework 2013.

Based on our assessment, management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2016, our internal control over financial reporting was effective based on those criteria at the reasonable assurance level.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this annual report on Form 10-K.



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Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the fourth quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The complete response to this Item regarding the backgrounds of our executive officers and directors and other information required by Items 401, 405 and 407 of Regulation S-K will be contained in our definitive proxy statement for our 2017 Annual Meeting of Stockholders under the sections captioned “Executive Compensation Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance Matters” and is incorporated by reference herein.

Our executive officers and directors and their positions as of February 28, 2017, are as follows:

Name
 
Position
F. Thomson Leighton
 
Chief Executive Officer and Director (Principal Executive Officer)
James Benson
 
Chief Financial Officer (Principal Financial and Accounting Officer)
Robert Blumofe
 
Executive Vice President – Platform and GM Enterprise & Carrier Division
James Gemmell
 
Executive Vice President and Chief Human Resources Officer
Melanie Haratunian
 
Executive Vice President and General Counsel
Rick McConnell
 
President and GM Web Division
William Wheaton
 
Executive Vice President and GM Media Division
George H. Conrades
 
Director
Pamela J. Craig
 
Director
Monte E. Ford
 
Director
Jill A. Greenthal
 
Director
Daniel R. Hesse
 
Director
Jonathan F. Miller
 
Director
Paul Sagan
 
Director
Frederic V. Salerno
 
Director
Steven Scopellite
 
Director
Naomi O. Seligman
 
Director
Bernardus Verwaayen
 
Director

We have adopted a written code of business ethics, as amended, that applies to our principal executive officer, principal financial and accounting officer or persons serving similar functions and all of our other employees and members of our Board of Directors. The text of our amended code of ethics is available on our website at www.akamai.com. If we amend, or grant a waiver under, our code of business ethics that applies to our principal executive officer, principal financial and accounting officer, or persons performing similar functions, we intend to post information about such amendment or waiver on our website at www.akamai.com.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference herein to our definitive proxy statement for our 2017 Annual Meeting of Stockholders under the sections captioned “Executive Compensation Matters,” “Corporate Governance Matters,” “Compensation Committee Interlocks and Insider Participation” and “Director Compensation.”



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Table of Contents

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference herein to our definitive proxy statement for our 2017 Annual Meeting of Stockholders under the sections captioned “Executive Compensation Matters,” “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference herein to our definitive proxy statement for our 2017 Annual Meeting of Stockholders under the sections captioned “Certain Relationships and Related Party Transactions,” “Corporate Governance Matters” and “Compensation Committee Interlocks and Insider Participation.”

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated by reference herein to our definitive proxy statement for our 2017 Annual Meeting of Stockholders under the section captioned “Ratification of Selection of Independent Auditors.”
 
PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)
Documents Filed as Part of this Annual Report on Form 10-K

1.
Financial Statements (included in Item 8 of this Annual Report on Form 10-K):

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements

2.
Financial Statement Schedules

Financial statements schedules are omitted as they are either not required or the information is otherwise included in the consolidated financial statements.

(b)
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits and are incorporated herein.

(c)
Not applicable.

Item 16. Form 10-K Summary

None.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
February 28, 2017
AKAMAI TECHNOLOGIES, INC.
 
 
 
 
By:
/s/    JAMES BENSON        
 
 
James Benson
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 
Signature
 
Title
 
Date
 
 
 
 
 
/s/    F. THOMSON LEIGHTON
 
Chief Executive Officer and Director (Principal Executive Officer)
 
February 28, 2017
        F. Thomson Leighton
 
 
 
 
 
 
/s/    JAMES BENSON
 
Chief Financial Officer (Principal Financial and Accounting Officer)
 
February 28, 2017
     James Benson
 
 
 
 
 
 
/s/    GEORGE H. CONRADES  
 
Director
 
February 28, 2017
      George H. Conrades
 
 
 
 
 
 
/s/    PAMELA J. CRAIG
 
Director
 
February 28, 2017
Pamela J. Craig
 
 
 
 
 
 
/s/    MONTE E. FORD
 
Director
 
February 28, 2017
        Monte E. Ford
 
 
 
 
 
 
/s/    JILL A. GREENTHAL
 
Director
 
February 28, 2017
 Jill A. Greenthal
 
 
 
 
 
 
 
/s/    DANIEL R. HESSE
 
Director
 
February 28, 2017
 Daniel R. Hesse
 
 
 
 
 
 
 
/s/    JONATHAN F MILLER 
 
Director
 
February 28, 2017
      Jonathan F. Miller
 
 
 
 
 
 
/s/ PAUL SAGAN
 
Director
 
February 28, 2017
        Paul Sagan
 
 
 
 
 
 
/s/    FREDERIC V. SALERNO
 
Director
 
February 28, 2017
        Frederic V. Salerno
 
 
 
 
 
 
/s/ STEVEN SCOPELLITE
 
Director
 
February 28, 2017
Steven Scopellite
 
 
 
 
 
 
/s/    NAOMI O. SELIGMAN
 
Director
 
February 28, 2017
        Naomi O. Seligman
 
 
 
 
 
 
/s/ BERNARDUS VERWAAYEN
 
Director
 
February 28, 2017
Bernardus Verwaayen
 
 



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Table of Contents

EXHIBIT INDEX
 
3.1(A)
Amended and Restated Certificate of Incorporation of the Registrant
 
 
3.2(B)
Amended and Restated By-Laws of the Registrant, as amended
 
 
4.1(C)
Specimen common stock certificate
 
 
4.2(D)
Indenture (including form of Notes) with respect to Akamai’s 0% Convertible Senior Notes due 2019, dated as of February 20, 2014, between Akamai and U.S. Bank National Association, as trustee.
 
 
10.1(E)
Summary of the Registrant’s Compensatory Arrangements with Non-Executive Directors
 
 
10.2@
Summary of the Registrant’s Compensatory Arrangements with Executive Officers
 
 
10.3(F)@
Second Amended and Restated 1998 Stock Incentive Plan of the Registrant, as amended
 
 
10.4(G)@
Amended and Restated 1999 Employee Stock Purchase Plan of the Registrant
 
 
10.5(H)@
Amendment to Amended and Restated 1999 Employee Stock Purchase Plan of the Registrant
 
 
10.6(I)@
2001 Stock Incentive Plan of the Registrant
 
 
10.7(J)
2006 Stock Incentive Plan of the Registrant
 
 
10.8(K)@
2009 Akamai Technologies, Inc. Stock Incentive Plan
 
 
10.9(L)@
2013 Akamai Technologies, Inc. Stock Incentive Plan (as amended)
 
 
10.10(M)
Amended and Restated 1999 Stock Compensation Plan of Acerno Intermediate Holdings, Inc. (formerly known as I-Behavior Inc.)
 
 
10.11(N)
Blaze Software Inc. Stock Option Plan
 
 
10.12(O)
Cotendo, Inc. Amended and Restated 2008 Stock Plan
 
 
10.13(P)@
Form of Incentive Stock Option Agreement granted under the 2006 Stock Incentive Plan
 
 
10.14(P)@
Form of Nonstatutory Stock Option Agreement granted under the 2006 Stock Incentive Plan
 
 
10.15(Q)
Four Cambridge Center Lease Agreement dated October 1, 2007
 
 
10.16(Q)
Eight Cambridge Center Lease Agreement dated October 1, 2007
 
 
10.17 (R)
Amendment to Lease Agreement for Eight Cambridge Center dated November 7, 2016
 
 
10.18 (R)
Amendment to Lease Agreement for Four Cambridge Center dated November 7, 2016
 
 
10.19 (R)
Indenture of Lease for 145 Broadway, Cambridge, Massachusetts dated November 7, 2016
 
 
10.20 (R)
Must-Take Premises and Right of First Offer Agreement among the Registrant, Boston Properties Limited Partnership and the Trustees of Ten Cambridge Center Trust dated November 7, 2016
 
 
10.21(S)†
Exclusive Patent and Non-Exclusive Copyright License Agreement, dated as of October 26, 1998, between the Registrant and Massachusetts Institute of Technology
 
 
10.22(T)@
Employment Letter Agreement between the Registrant and F. Thomson Leighton dated February 25, 2013
 
 
10.23 (U)@
Amendment to Employment Letter Agreement between the Registrant and F. Thomson Leighton dated November 12, 2015
 
 
10.24(V)@
Form of Executive Bonus Plan
 
 
10.25(W)@
Akamai Technologies, Inc. Executive Severance Pay Plan
 
 
10.26(U)@
Form of Executive Change in Control and Severance Agreement
 
 
10.27@
Akamai Technologies, Inc. Policy on Departing Director Compensation
 
 
10.28(Y)@
Form of Incentive Stock Option Agreement for use under the 2009 Stock Incentive Plan
 
 
10.29(Y)@
Form of Non-Qualified Stock Option Agreement for use under the 2009 Stock Incentive Plan (four year vest)
 
 
10.30(Z)@
Form of Stock Option Agreement for use under the 2009 Stock Incentive Plan (three-year vest)
 
 
10.31(AA)@
Form of Stock Option Grant Agreement for use under the 2009 Stock Incentive Plan


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10.32(BB)@
Form of Restricted Stock Unit Agreement for use under the 2013 Stock Incentive Plan (time vesting)
 
 
10.33(BB)@
Form of Restricted Stock Unit Agreement for use under the 2013 Stock Incentive Plan (performance vesting)
 
 
10.34(BB)@
Form of Stock Option Agreement for use under the 2013 Stock Incentive Plan
 
 
10.35(BB)
Form of Deferred Stock Unit Agreement for use under the 2013 Stock Incentive Plan
 
 
10.36(CC)@
Form of Performance-Based Vesting Restricted Stock Unit Agreement with Retirement Provision
 
 
10.37(D)
Form of Call Option Confirmation between Akamai and each Option Counterparty
 
 
10.38(D)
Form of Warrant Confirmation between Akamai and each Option Counterparty
 
 
10.39(U)@
Form of Restricted Stock Unit Agreement for use under the 2013 Stock Incentive Plan (performance vesting 2015)
 
 
10.40(DD)@
Akamai Technologies, Inc. U.S. Non-Qualified Deferred Compensation Plan
 
 
10.41(EE)@
Separation and Release Agreement dated February 9, 2016 between the Registrant and Robert W. Hughes
 
 
21.1
Subsidiaries of the Registrant
 
 
23.1
Consent of Independent Registered Public Accounting Firm
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a- 14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a- 14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Presentation Linkbase Document
________________
(A)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-27275, 701319) filed with the Commission on August 14, 2000.
(B)
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-27275, 141172551) filed with the Commission on October 24, 2014.
(C)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1, as amended, filed with the Commission on October 13, 1999.
(D)
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-27275, 14629736) filed with the Commission on February 20, 2014.
(E)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-27275, 4660513) filed with the Commission on March 3, 2014.
(F)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-27275, 04961682) filed with the Commission on August 9, 2004.
(G)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-27275, 06691330) filed with the Commission on March 16, 2006.
(H)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-27275, 08823347) filed with the Commission on May 12, 2008.
(I)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-27275, 02560808) filed with the Commission on February 27, 2002.


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Table of Contents

(J)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 06870771) filed with the Commission on May 26, 2006.
(K)
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-27275, 11865051) filed with the Commission on May 23, 2011.
(L)
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on May 15, 2015.
(M)
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on November 18, 2008.
(N)
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on February 29, 2012.
(O)
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on March 14, 2012.
(P)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-27275, 07663384) filed with the Commission on March 1, 2007.
(Q)
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-27275, 08655930) filed with the Commission on February 29, 2008.
(R)
Incorporated by reference to the Registrant's Current Report on Form 10-K (File No. 000-27275, 161988699) filed with the Commission on November 10, 2016.
(S)
Incorporated by reference to the Registrant's Registration Statement on Form S-1 filed with the Commission on September 27, 1999.
(T)
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-27275, 13657899) filed with the Commission on March 1, 2013.
(U)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 151238671) filed with the Commission on November 17, 2015.
(V)
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-27275, 161466754) filed with the Commission on February 29, 2016.
(W)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 12974652) filed with the Commission on July 23, 2012.
(X)
Intentionally omitted.
(Y)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 09851919) filed with the Commission on May 26, 2009.
(Z)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 12532825) filed with the Commission on January 18, 2012.
(AA)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-27275, 121192724) filed with the Commission on November 9, 2012.
(BB)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 000-27275, 131025074) filed with the Commission on August 9, 2013.
(CC)
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 15585212) filed with the Commission on February 6, 2015.
(DD)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 000-27275, 15850176) filed with the Commission on May 11, 2015.
(EE)
Incorporated by Reference to the Registrant’s Current Report on Form 8-K (File No. 000-27275, 161401157) filed with the Commission on February 9, 2016.

________________
@ Management contract or compensatory plan or arrangement filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of this Annual Report.
† Confidential Treatment has been granted as to certain portions of this Exhibit. Such portions have been omitted and filed separately with the Securities and Exchange Commission.


86