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.
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.
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
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.
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.
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.
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
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
.
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.
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.
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
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.
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.
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
.
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
|
|
|
|
|
•
|
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.
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.
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.
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
.
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
|
|
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
.
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
.
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
|
|
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
|
%
|
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
.
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
|
|
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
$531.9 million
for the years ended
December 31, 2016, 2015 and 2014
, respectively. Other than the U.S., no single country accounted for
10%
or more of the Company’s total revenue for any reported period.
19. Quarterly Financial Results (unaudited)
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(in thousands, except per share data)
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First Quarter
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Second Quarter
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Third Quarter
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Fourth Quarter
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Year ended December 31, 2016:
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Revenue
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$
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567,725
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$
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572,135
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$
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584,065
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$
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616,124
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Cost of revenue (exclusive of amortization of acquired intangible assets)
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194,736
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206,323
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204,467
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203,475
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Net income
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74,858
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73,635
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|
76,000
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91,639
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Basic net income per share
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0.42
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0.42
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0.44
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0.53
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Diluted net income per share
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0.42
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0.42
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0.43
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0.52
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Year ended December 31, 2015:
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Revenue
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$
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526,536
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$
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540,723
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$
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551,030
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$
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579,159
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Cost of revenue (exclusive of amortization of acquired intangible assets)
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169,294
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179,910
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183,204
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193,212
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Net income
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77,746
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67,200
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|
88,040
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88,420
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Basic net income per share
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0.44
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|
0.38
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|
0.49
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|
|
0.50
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Diluted net income per share
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0.43
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0.37
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0.49
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0.49
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