NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Basis of Presentation
Akamai Technologies, Inc. (the “Company”) provides solutions for delivering, optimizing and securing content and business applications over the Internet. Its globally-distributed platform comprises more than 200,000 servers across more than 130 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 interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.
Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019.
The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of all interim periods reported herein.
Newly-Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires companies to present assets and liabilities arising from leases on the consolidated balance sheet. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company adopted this standard on January 1, 2019 on a modified retrospective basis by applying the new standard to its lease portfolio as of January 1, 2019, while continuing to apply legacy guidance in the comparative periods.
The Company elected to use the package of practical expedients available under the transition provisions of the guidance, which allows companies to not reassess prior conclusions related to contracts containing leases, lease classification and capitalization of initial direct costs. The Company also elected not to apply the hindsight practical expedient related to its lease transactions.
Adoption of the standard required the Company to record ROU assets and lease liabilities for its operating leases related to real estate and co-location arrangements. The operating leases resulted in the recognition of ROU assets and lease liabilities of $362.2 million and $394.1 million, respectively, as of January 1, 2019. The adoption of the standard also resulted in elimination of deferred rent liabilities of $31.7 million, as of January 1, 2019, that are now recorded as a reduction of the ROU asset. The standard did not have an impact on the Company’s results of operations or cash flows.
Stranded Tax Effects Resulting from U.S. Tax Cuts and Jobs Act
In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJA") that was enacted in 2017. This guidance was effective for the Company on January 1, 2019. The adoption of this new accounting guidance resulted in the reclassification of $0.9 million of income tax benefits resulting from the TCJA from accumulated other comprehensive loss to accumulated deficit. The adoption of this new accounting guidance did not have an impact on the Company's results of operations or cash flows.
2. Significant Accounting Policies Update
The Company's significant accounting policies are detailed in Note 2 of its annual report on Form 10-K for the year ended December 31, 2018. However, the following policies have been updated as of January 1, 2019.
Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally includes purchases of items with a per-unit value greater than $1,000 and a useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives of property and equipment. 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.
The Company has implemented software and hardware initiatives to manage its global network more efficiently and, as a result, the expected average useful life of its network assets, primarily servers, increased from four years to five years, effective January 1, 2019. These changes decreased depreciation expense by $7.8 million and $24.5 million for the three and nine months ended September 30, 2019, respectively, and increased net income by $6.4 million and $20.3 million for the three and nine months ended September 30, 2019, respectively, or $0.04 and $0.12 per share, for the three and nine months ended September 30, 2019, respectively.
Operating Leases
The Company enters into operating leases for real estate assets related to office space and co-location assets related to space or racks at co-location facilities and related equipment for its servers and other networking equipment. The Company determines if an arrangement contains a lease at the inception of a contract by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration and the right to obtain the economic benefits from the use of the identified asset.
Upon commencement of a lease, the Company records an ROU asset that represents the Company’s right to use the underlying asset for the lease term and a lease liability that represents an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Lease payments are discounted at the lease commencement date using the rate implicit in the lease unless that rate is not readily determinable. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate has been applied based on the Company's credit-adjusted risk-free rate. The incremental borrowing rate at January 1, 2019 (the date the new lease standard was adopted) was used to calculate the present value of the Company’s lease portfolio as of that date.
The Company often enters into contracts that contain both lease and non-lease components. Real estate non-lease components include real estate taxes, insurance, maintenance, parking and other operating costs. Co-location non-lease components include utilities and other operating costs. As of January 1, 2019, the Company includes both lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities based on actual usage, are not included in the measurement of ROU assets and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs.
The Company’s lease terms often include renewal options and, particularly in the case of co-location arrangements, may include evergreen provisions. The Company’s ROU assets and lease liabilities generally do not include the options to extend, or terminate, unless it is reasonably certain that the Company will exercise these options. The Company has elected to exclude leases for certain networking equipment with terms of 12 months or less from its ROU assets and lease liabilities on its consolidated balance sheet.
Lease expense is recognized on a straight-line basis over the lease term.
Equity Method Investments
The Company accounts for equity investments in which it has significant influence, but not a controlling financial interest, using the equity method of accounting. Under the equity method of accounting, investments are initially recorded at cost, less impairment, and subsequently adjusted to recognize the Company’s share of earnings or losses.
In February 2019, the Company and Mitsubishi UFJ Financial Group ("MUFG") announced the establishment of a joint venture, the Global Open Network, Inc. ("GO-NET"), and their plans to offer a new blockchain-based online payment network. The Company's 20% stake in GO-NET is accounted for using the equity method. As of September 30, 2019, the Company's $36.0 million investment is included in other assets on the consolidated balance sheet. The Company recorded a loss of $1.4 million during the three months ended September 30, 2019 which reflects its share of the losses incurred by GO-NET during the period.
Recent Accounting Pronouncements
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 does not expect application of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued guidance that changes fair value measurement disclosure requirements. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the impact the update will have on its disclosures.
In August 2018, the FASB issued guidance that addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance for capitalizing costs associated with developing or obtaining internal-use software. 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.
3. Fair Value Measurements
The following is a summary of available-for-sale marketable securities held as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
Classification on Balance Sheet
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Aggregate
Fair Value
|
|
Short-Term
Marketable
Securities
|
|
Long-Term
Marketable
Securities
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
78,454
|
|
|
$
|
20
|
|
|
$
|
(38
|
)
|
|
$
|
78,436
|
|
|
$
|
78,436
|
|
|
$
|
—
|
|
Corporate bonds
|
1,286,133
|
|
|
1,491
|
|
|
(878
|
)
|
|
1,286,746
|
|
|
638,604
|
|
|
648,142
|
|
U.S. government agency obligations
|
186,836
|
|
|
16
|
|
|
(196
|
)
|
|
186,656
|
|
|
114,468
|
|
|
72,188
|
|
|
$
|
1,551,423
|
|
|
$
|
1,527
|
|
|
$
|
(1,112
|
)
|
|
$
|
1,551,838
|
|
|
$
|
831,508
|
|
|
$
|
720,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
40,000
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
39,993
|
|
|
$
|
39,993
|
|
|
$
|
—
|
|
Commercial paper
|
282,996
|
|
|
—
|
|
|
(50
|
)
|
|
282,946
|
|
|
282,946
|
|
|
—
|
|
Corporate bonds
|
685,653
|
|
|
1
|
|
|
(4,309
|
)
|
|
681,345
|
|
|
482,088
|
|
|
199,257
|
|
U.S. government agency obligations
|
50,876
|
|
|
—
|
|
|
(404
|
)
|
|
50,472
|
|
|
50,472
|
|
|
—
|
|
|
$
|
1,059,525
|
|
|
$
|
1
|
|
|
$
|
(4,770
|
)
|
|
$
|
1,054,756
|
|
|
$
|
855,499
|
|
|
$
|
199,257
|
|
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 September 30, 2019, the Company held for investment corporate and government bonds with a fair value of $125.4 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 of $0.1 million related to these corporate and government bonds are included in accumulated other comprehensive income as of September 30, 2019. The unrealized losses are attributable to changes in interest rates. Based on the evaluation of available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.
The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of September 30, 2019 and December 31, 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
As of September 30, 2019
|
|
|
|
|
|
|
|
Cash Equivalents and Marketable Securities:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
4,000
|
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper
|
78,436
|
|
|
—
|
|
|
78,436
|
|
|
—
|
|
Corporate bonds
|
1,286,746
|
|
|
—
|
|
|
1,286,746
|
|
|
—
|
|
U.S. government agency obligations
|
186,656
|
|
|
—
|
|
|
186,656
|
|
|
—
|
|
Mutual funds
|
14,027
|
|
|
14,027
|
|
|
—
|
|
|
—
|
|
|
$
|
1,569,865
|
|
|
$
|
18,027
|
|
|
$
|
1,551,838
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Cash Equivalents and Marketable Securities:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
380,260
|
|
|
$
|
380,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposit
|
39,993
|
|
|
39,993
|
|
|
—
|
|
|
—
|
|
Commercial paper
|
282,946
|
|
|
—
|
|
|
282,946
|
|
|
—
|
|
Corporate bonds
|
681,345
|
|
|
—
|
|
|
681,345
|
|
|
—
|
|
U.S. government agency obligations
|
50,472
|
|
|
—
|
|
|
50,472
|
|
|
—
|
|
Mutual funds
|
10,016
|
|
|
10,016
|
|
|
—
|
|
|
—
|
|
|
$
|
1,445,032
|
|
|
$
|
430,269
|
|
|
$
|
1,014,763
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration related to a completed acquisition
|
$
|
(6,300
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,300
|
)
|
As of September 30, 2019 and December 31, 2018, the Company grouped certificates of deposit, 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 September 30, 2019 and December 31, 2018, the Company grouped commercial paper, corporate bonds and U.S. government agency obligations 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 between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the nine months ended September 30, 2019.
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 primarily use 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 consist of contingent consideration related to the acquisition of Cyberfend, Inc. in 2016, was primarily an income-based approach. The significant
unobservable input used in the fair value measurement of the contingent consideration was the likelihood of achieving certain post-closing financial results.
Contractual maturities of the Company’s available-for-sale marketable securities held as of September 30, 2019 and December 31, 2018 were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Due in 1 year or less
|
$
|
831,508
|
|
|
$
|
855,499
|
|
Due after 1 year through 3 years
|
720,330
|
|
|
199,257
|
|
|
$
|
1,551,838
|
|
|
$
|
1,054,756
|
|
The following table reflects the activity for the Company’s liabilities measured at fair value using Level 3 inputs during the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
Other Liabilities:
Contingent Consideration Obligation
|
Balance as of January 1, 2019
|
$
|
(6,300
|
)
|
Cash paid upon achievement of milestone
|
6,300
|
|
Balance as of September 30, 2019
|
$
|
—
|
|
4. Accounts Receivable
Net accounts receivable consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Trade accounts receivable
|
$
|
357,050
|
|
|
$
|
337,445
|
|
Unbilled accounts receivable
|
161,352
|
|
|
143,978
|
|
Gross accounts receivable
|
518,402
|
|
|
481,423
|
|
Allowance for doubtful accounts and other reserves
|
(1,745
|
)
|
|
(1,534
|
)
|
Accounts receivable, net
|
$
|
516,657
|
|
|
$
|
479,889
|
|
5. Incremental Costs to Obtain a Contract with a Customer
The following table summarizes the deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of September 30, 2019 and December 31, 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Deferred costs included in prepaid and other current assets
|
$
|
41,085
|
|
|
$
|
41,955
|
|
Deferred costs included in other assets
|
21,625
|
|
|
26,338
|
|
Total deferred costs
|
$
|
62,710
|
|
|
$
|
68,293
|
|
During the three and nine months ended September 30, 2019, the Company recognized $10.9 million and $32.5 million, respectively, of amortization expense related to deferred commissions. During the three and nine months ended September 30, 2018, the Company recognized $11.2 million and $32.9 million, respectively, of amortization expense related to deferred commissions. Amortization expense related to deferred commissions is primarily included in sales and marketing expense in the consolidated statements of income.
6. Goodwill and Acquired Intangible Assets
The change in the carrying amount of goodwill for the nine months ended September 30, 2019 was as follows (in thousands):
|
|
|
|
|
Balance as of January 1, 2019
|
$
|
1,487,404
|
|
Acquisition of Janrain, Inc.
|
99,685
|
|
Foreign currency translation
|
(3,610
|
)
|
Balance as of September 30, 2019
|
$
|
1,583,479
|
|
The Company tests goodwill for impairment at least annually. Through the date the consolidated financial statements were issued, no triggering events had occurred that would indicate a potential impairment exists.
Acquired intangible assets that are subject to amortization consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Completed technology
|
$
|
154,091
|
|
|
$
|
(95,861
|
)
|
|
$
|
58,230
|
|
|
$
|
145,091
|
|
|
$
|
(81,587
|
)
|
|
$
|
63,504
|
|
Customer-related intangible assets
|
263,410
|
|
|
(158,562
|
)
|
|
104,848
|
|
|
245,710
|
|
|
(144,786
|
)
|
|
100,924
|
|
Non-compete agreements
|
730
|
|
|
(467
|
)
|
|
263
|
|
|
700
|
|
|
(306
|
)
|
|
394
|
|
Trademarks and trade names
|
7,400
|
|
|
(4,334
|
)
|
|
3,066
|
|
|
7,200
|
|
|
(3,674
|
)
|
|
3,526
|
|
Acquired license rights
|
490
|
|
|
(490
|
)
|
|
—
|
|
|
490
|
|
|
(490
|
)
|
|
—
|
|
Total
|
$
|
426,121
|
|
|
$
|
(259,714
|
)
|
|
$
|
166,407
|
|
|
$
|
399,191
|
|
|
$
|
(230,843
|
)
|
|
$
|
168,348
|
|
Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2019 was $9.6 million and $28.9 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2018 was $8.3 million and $25.0 million, respectively. Based on the Company’s acquired intangible assets as of September 30, 2019, aggregate expense related to amortization of acquired intangible assets is expected to be $9.6 million for the remainder of 2019, and $36.9 million, $31.9 million, $26.2 million and $20.3 million for 2020, 2021, 2022 and 2023, respectively.
7. Business Combinations
Acquisition-related costs during the nine months ended September 30, 2019 were $1.2 million and are included in general and administrative expense in the consolidated statements of income. Pro forma results of operations for the acquisition completed during the nine months ended September 30, 2019 have not been presented because the effects of the acquisition were not material to the Company's consolidated financial results. Revenue and earnings of the acquired company since the date of the acquisition that are included in the Company's consolidated statements of income are also not presented separately because they are not material.
ChameleonX
In October 2019, the Company agreed to acquire ChameleonX Ltd., an Israel-based company with a solution designed to detect when a website contains or links to malware that causes end user data to be compromised, for approximately $15.0 million in cash. The acquisition is expected to further strengthen the Company's industry leading security portfolio. The acquisition is expected to close in the fourth quarter of 2019.
Exceda
In November 2019, the Company acquired Exceda, a leading provider of CDN and web security services, and the Company's largest channel partner in Latin America, for approximately $33.0 million in cash. The acquisition is expected to enable the Company to expand its Latin America business more quickly, better enable existing and new partners and improve experiences for more customers.
Janrain
In January 2019, the Company acquired Janrain, Inc. ("Janrain"), a provider of customer identity and access management solutions, for $123.6 million in cash. The allocation of the purchase price has not been finalized as of the date of the filing of these financial statements. The Company plans to incorporate the Janrain technology into Akamai's Intelligent Edge Platform.
The following table presents the preliminary allocation of the purchase price for Janrain (in thousands):
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
123,632
|
|
|
|
|
Allocation of the purchase consideration:
|
|
|
Cash
|
|
$
|
2,223
|
|
Accounts receivable
|
|
7,318
|
|
Prepaid expenses and other current assets
|
|
838
|
|
Identifiable intangible assets
|
|
26,930
|
|
Goodwill
|
|
99,685
|
|
Deferred tax assets
|
|
5,124
|
|
Other assets
|
|
87
|
|
Total assets acquired
|
|
142,205
|
|
Accounts payable
|
|
(1,641
|
)
|
Accrued expenses
|
|
(2,596
|
)
|
Deferred revenue
|
|
(14,336
|
)
|
Total liabilities assumed
|
|
(18,573
|
)
|
Net assets acquired
|
|
$
|
123,632
|
|
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 Janrain expected to be deductible for tax purposes is $42.5 million.
The following were the identifiable 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
|
$
|
9,000
|
|
|
3.0
|
Customer-related intangible assets
|
17,700
|
|
|
6.0
|
Trademarks
|
200
|
|
|
0.8
|
Non-compete agreements
|
30
|
|
|
1.0
|
Total
|
$
|
26,930
|
|
|
|
The total weighted average amortization period for the intangible assets acquired from Janrain is 5.0 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.
8. Commitments and Contingencies
Legal Matters
In April 2018, as part of the resolution of multiple existing lawsuits between Limelight Networks, Inc. ("Limelight") and the Company, including in the U.S. District Court for the Eastern District of Virginia and in the U.S. District Court for the District of Massachusetts, the Company and Limelight entered into an agreement to settle the cases and request that the U.S. Patent Trial and Appeal Board terminate certain proceedings related to patents at issue in the litigation. The Company recorded a $14.9 million charge in the third quarter of 2018, which is included in general and administrative expenses in the consolidated statement of income for the nine months ended September 30, 2018, related to this settlement.
9. Debt
Convertible Notes – Due 2027
In August 2019, the Company issued $1,150.0 million in par value of convertible senior notes due 2027 (the "2027 Notes"). The 2027 Notes are senior unsecured obligations of the Company, bear regular interest of 0.375%, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020, and mature on September 1, 2027, unless repurchased or converted in accordance with their terms prior to maturity.
At their option, holders may convert their 2027 Notes prior to the close of business on the business day immediately preceding May 1, 2027, only under the following circumstances:
|
|
•
|
during any calendar quarter commencing after the calendar quarter ended December 31, 2019 (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, and including, 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;
|
|
|
•
|
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2027 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 May 1, 2027, holders may convert all or any portion of their 2027 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
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 8.6073 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $116.18 per share, subject to adjustments in certain events, and represents a potential conversion into 9.9 million shares.
In accounting for the issuance of the 2027 Notes, the Company separated the 2027 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 2027 Notes. The difference between the principal amount of the 2027 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 2027 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 2027 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 2027 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2027 Notes in stockholders’ equity.
The 2027 Notes consisted of the following components as of September 30, 2019 (in thousands):
|
|
|
|
|
|
September 30,
2019
|
Liability component:
|
|
Principal
|
$
|
1,150,000
|
|
Less: debt discount and issuance costs, net of amortization
|
(229,454
|
)
|
Net carrying amount
|
$
|
920,546
|
|
|
|
Equity component:
|
$
|
220,529
|
|
The estimated fair value of the 2027 Notes at September 30, 2019 was $1,172.8 million. The fair value was determined based on the quoted price of the 2027 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 $91.38 on September 30, 2019, the value of the 2027 Notes if converted to common stock was less than the principal amount of $1,150.0 million.
The Company used $100.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2027 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $127.1 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The net proceeds are intended to be used for working capital, share repurchases, potential acquisitions and strategic transactions and other corporate purposes.
Note Hedge
To minimize the impact of potential dilution upon conversion of the 2027 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in August 2019. The Company paid $312.2 million for the note hedge transactions. The note hedge transactions cover approximately 9.9 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2027 Notes, also subject to adjustment, and are exercisable upon conversion of the 2027 Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the 2027 Notes.
Warrants
Separately, in August 2019, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 9.9 million shares of the Company’s common stock at a strike price of approximately $178.74 per share. The Company received aggregate proceeds of $185.2 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 2027 Notes to approximately $178.74 per share.
Convertible Notes – Due 2025
In May 2018, the Company issued $1,150.0 million in par value of convertible senior notes due 2025 (the "2025 Notes"). The 2025 Notes are senior unsecured obligations of the Company, bear regular interest of 0.125%, payable semi-annually on May 1 and November 1 of each year, and mature on May 1, 2025, unless repurchased or converted prior to maturity.
At their option, holders may convert their 2025 Notes prior to the close of business on the business day immediately preceding January 1, 2025, only under the following circumstances:
|
|
•
|
during any calendar quarter commencing after the calendar quarter ended June 30, 2018 (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, and including, 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;
|
|
|
•
|
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2025 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 January 1, 2025, holders may convert all or any portion of their 2025 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
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 10.5150 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $95.10 per share, subject to adjustments in certain events, and represents a potential conversion into 12.1 million shares.
In accounting for the issuance of the 2025 Notes, the Company separated the 2025 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 2025 Notes. The difference between the principal amount of the 2025 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 2025 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 2025 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 2025 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2025 Notes in stockholders’ equity.
The 2025 Notes consisted of the following components as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Liability component:
|
|
|
|
Principal
|
$
|
1,150,000
|
|
|
$
|
1,150,000
|
|
Less: debt discount and issuance costs, net of amortization
|
(247,098
|
)
|
|
(275,920
|
)
|
Net carrying amount
|
$
|
902,902
|
|
|
$
|
874,080
|
|
|
|
|
|
Equity component:
|
$
|
285,225
|
|
|
$
|
285,225
|
|
The estimated fair value of the 2025 Notes at September 30, 2019 was $1,319.6 million. The fair value was determined based on the quoted price of the 2025 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 $91.38 on September 30, 2019, the value of the 2025 Notes if converted to common stock was less than the principal amount of $1,150.0 million.
The Company used $46.2 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2025 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $141.8 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The Company also used a portion of the net proceeds to repay at maturity the $690.0 million in par value of convertible senior notes due 2019.
Note Hedge
To minimize the impact of potential dilution upon conversion of the 2025 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in May 2018. The Company paid $261.7 million for the note hedge transactions. The note hedge transactions cover approximately 12.1 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2025 Notes, also subject to adjustment, and are exercisable upon conversion of the 2025 Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the 2025 Notes.
Warrants
Separately, in May 2018, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 12.1 million shares of the Company’s common stock at a strike price of approximately $149.18 per share. The Company received aggregate proceeds of $119.9 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 2025 Notes to approximately $149.18 per share.
Convertible Notes – Due 2019
In February 2014, the Company issued $690.0 million in par value of convertible senior notes due 2019 (the "2019 Notes"). The 2019 Notes were senior unsecured obligations of the Company and did not bear regular interest. The 2019 Notes matured and were repaid in full on February 15, 2019 as no repurchases or conversions occurred prior to maturity. For further information, see Note 11 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
Revolving Credit Facility
In May 2018, the Company entered into a $500.0 million five-year, revolving credit agreement (the “Credit Agreement”). Borrowings under the Credit Agreement may be used to finance working capital needs and for general corporate purposes. The Credit Agreement provides for an initial $500.0 million in revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount. The Credit Agreement expires in May 2023.
Borrowings under the Credit Agreement bear interest, at the Company's option, at a base rate plus a spread of 0.00% to 0.25% or an adjusted LIBOR rate plus a spread of 0.875% to 1.25%, in each case with such spread being determined based on the Company's consolidated leverage ratio specified in the Credit Agreement. Regardless of what amounts, if any, are outstanding under the Credit Agreement, the Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.075% to 0.15%, with such rate being based on the Company's consolidated leverage ratio specified in the Credit Agreement.
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. Principal covenants include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. There were no outstanding borrowings under the Credit Agreement as of September 30, 2019.
Interest Expense
The 2027 Notes bear interest at a fixed rate of 0.375%. The interest is payable semi-annually on March 1 and September 1 of each year, commencing in March 2020. The 2027 Notes have an effective interest rate of 3.1% attributable to the conversion feature. The 2025 Notes bear interest at a fixed rate of 0.125%. The interest is payable semi-annually on May 1 and November 1 of each year, commencing in November 2018. The 2025 Notes have an effective interest rate of 4.26% attributable to the conversion feature. The 2019 Notes did not bear regular interest, but had an effective interest rate of 3.2% attributable to the conversion feature. The Company is also obligated to pay ongoing commitment fees under the terms of the Credit Agreement. The following table sets forth total interest expense included in the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amortization of debt discount and issuance costs
|
$
|
12,982
|
|
|
$
|
15,295
|
|
|
$
|
35,657
|
|
|
$
|
31,045
|
|
Coupon interest payable on 2025 Notes
|
359
|
|
|
359
|
|
|
1,077
|
|
|
514
|
|
Coupon interest payable on 2027 Notes
|
479
|
|
|
—
|
|
|
479
|
|
|
—
|
|
Revolving credit facility contractual interest expense
|
156
|
|
|
122
|
|
|
372
|
|
|
261
|
|
Capitalization of interest expense
|
(1,849
|
)
|
|
(1,210
|
)
|
|
(4,896
|
)
|
|
(3,200
|
)
|
Total interest expense
|
$
|
12,127
|
|
|
$
|
14,566
|
|
|
$
|
32,689
|
|
|
$
|
28,620
|
|
10. Leases
The following table is a summary of the Company’s operating lease costs for the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30, 2019
|
|
For the Nine Months
Ended September 30, 2019
|
|
Real Estate Arrangements
|
|
Co-location Arrangements
|
|
Total
|
|
Real Estate Arrangements
|
|
Co-location Arrangements
|
|
Total
|
Operating lease cost
|
$
|
14,517
|
|
|
$
|
23,142
|
|
|
$
|
37,659
|
|
|
$
|
43,506
|
|
|
$
|
70,082
|
|
|
$
|
113,588
|
|
Short-term lease cost
|
26
|
|
|
3,509
|
|
|
3,535
|
|
|
231
|
|
|
10,697
|
|
|
10,928
|
|
Variable lease cost
|
3,617
|
|
|
7,053
|
|
|
10,670
|
|
|
10,655
|
|
|
16,769
|
|
|
27,424
|
|
Sublease income
|
(839
|
)
|
|
—
|
|
|
(839
|
)
|
|
(2,791
|
)
|
|
—
|
|
|
(2,791
|
)
|
Total operating lease costs
|
$
|
17,321
|
|
|
$
|
33,704
|
|
|
$
|
51,025
|
|
|
$
|
51,601
|
|
|
$
|
97,548
|
|
|
$
|
149,149
|
|
Lease costs for real estate arrangements are included in general and administrative expenses in the consolidated statements of income. Lease costs for co-location arrangements are primarily included in cost of revenue.
At September 30, 2019, the real estate arrangements weighted average remaining lease term and weighted average discount rate for operating leases were 10.0 years and 4.1%, respectively. At September 30, 2019, the co-location arrangements weighted average remaining lease term and weighted average discount rate for operating leases were 3.3 years and 2.3%, respectively.
Maturities of operating lease liabilities as of September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Real Estate Arrangements
|
|
Co-location Arrangements
|
Remainder of 2019
|
$
|
10,975
|
|
|
$
|
27,688
|
|
2020
|
49,206
|
|
|
29,454
|
|
2021
|
45,094
|
|
|
9,789
|
|
2022
|
41,090
|
|
|
5,767
|
|
2023
|
39,245
|
|
|
3,944
|
|
Thereafter
|
200,317
|
|
|
10,158
|
|
Total lease payments
|
385,927
|
|
|
86,800
|
|
Less: imputed interest
|
84,087
|
|
|
4,931
|
|
Total lease liabilities
|
$
|
301,840
|
|
|
$
|
81,869
|
|
As of September 30, 2019, the Company has additional operating leases, primarily for real estate facilities, that have not yet commenced of $553.0 million. The majority of these operating leases will commence in late 2019 and have a term of 15 years.
The minimum aggregate future obligations under non-cancelable operating leases, including real estate and co-location arrangements, and bandwidth commitments as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Real Estate Arrangements
|
|
Bandwidth and Co-location Arrangements
|
2019
|
$
|
54,561
|
|
|
$
|
138,777
|
|
2020
|
78,683
|
|
|
24,420
|
|
2021
|
75,991
|
|
|
8,463
|
|
2022
|
72,579
|
|
|
5,233
|
|
2023
|
70,101
|
|
|
2,156
|
|
Thereafter
|
599,339
|
|
|
3,709
|
|
Total
|
$
|
951,254
|
|
|
$
|
182,758
|
|
11. Restructuring
During the fourth quarter of 2018, management committed to an action to restructure certain parts of the Company to re-balance investments with the goal of improving long-term growth and scale. As a result, certain headcount reductions were necessary and certain capitalized internal-use software charges were realized for software not yet placed into service that will not be completed and implemented due to this action. The Company has incurred restructuring charges of $19.0 million as part of this action, of which $6.7 million was recognized during the nine months ended September 30, 2019. The Company does not expect significant additional restructuring charges related to this action.
During the fourth quarter of 2017, management committed to an action to restructure certain parts of the Company with the intent of shifting focus to more critical areas of the business and away from products that have not seen expected commercial success. The restructuring was also intended to facilitate cost efficiencies and savings. As part of the cost efficiency and savings plans, certain headcount and facility reductions were made. The Company has incurred restructuring charges of $62.6 million as part of this action. There were insignificant charges related to these actions during the nine months ended September 30, 2019, and no additional charges are expected.
The Company also recognized restructuring charges for redundant employees, facilities and contracts associated with the Janrain acquisition completed in 2019.
The following table summarizes the activity of the Company's restructuring accrual during the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance and Related Benefits
|
|
Software Charges
|
|
Excess Facilities, Contract Terminations and Other
|
|
Total
|
Balance as of January 1, 2019
|
$
|
10,508
|
|
|
$
|
198
|
|
|
$
|
275
|
|
|
$
|
10,981
|
|
Costs incurred
|
6,825
|
|
|
—
|
|
|
54
|
|
|
6,879
|
|
Cash disbursements
|
(16,839
|
)
|
|
(99
|
)
|
|
(262
|
)
|
|
(17,200
|
)
|
Balance as of September 30, 2019
|
$
|
494
|
|
|
$
|
99
|
|
|
$
|
67
|
|
|
$
|
660
|
|
12. Stockholders’ Equity
Share Repurchase Program
Effective November 2018, the Board authorized a $1.1 billion repurchase program through December 2021. During the three and nine months ended September 30, 2019, the Company repurchased 2.0 million and 3.6 million shares of its common stock, respectively, for $175.5 million and $291.8 million, respectively. The Company's goals for the share repurchase programs are 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.
Stock-Based Compensation
The following table summarizes stock-based compensation included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of revenue
|
$
|
5,555
|
|
|
$
|
5,494
|
|
|
$
|
16,917
|
|
|
$
|
16,343
|
|
Research and development
|
12,842
|
|
|
11,249
|
|
|
36,943
|
|
|
32,684
|
|
Sales and marketing
|
15,593
|
|
|
16,835
|
|
|
46,384
|
|
|
49,543
|
|
General and administrative
|
12,825
|
|
|
13,054
|
|
|
40,018
|
|
|
40,245
|
|
Total stock-based compensation
|
46,815
|
|
|
46,632
|
|
|
140,262
|
|
|
138,815
|
|
Provision for income taxes
|
(14,867
|
)
|
|
(7,802
|
)
|
|
(41,658
|
)
|
|
(37,692
|
)
|
Total stock-based compensation, net of income taxes
|
$
|
31,948
|
|
|
$
|
38,830
|
|
|
$
|
98,604
|
|
|
$
|
101,123
|
|
In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of income for the three and nine months ended September 30, 2019 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $7.5 million and $22.9 million, respectively, before taxes, and for the three and nine months ended September 30, 2018 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $6.6 million and $18.1 million, respectively, before taxes.
13. Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of stockholders' equity, for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Net Unrealized Gains on Investments
|
|
Total
|
Balance as of January 1, 2019
|
$
|
(51,904
|
)
|
|
$
|
2,992
|
|
|
$
|
(48,912
|
)
|
Other comprehensive (loss) income
|
(10,744
|
)
|
|
3,232
|
|
|
(7,512
|
)
|
Balance as of September 30, 2019
|
$
|
(62,648
|
)
|
|
$
|
6,224
|
|
|
$
|
(56,424
|
)
|
Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the nine months ended September 30, 2019.
14. Revenue from Contracts with Customers
The Company sells its solutions 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. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period. The following table summarizes revenue by geography included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
U.S.
|
$
|
413,116
|
|
|
$
|
412,573
|
|
|
$
|
1,248,175
|
|
|
$
|
1,249,041
|
|
International
|
296,796
|
|
|
257,055
|
|
|
873,319
|
|
|
752,070
|
|
Total revenue
|
$
|
709,912
|
|
|
$
|
669,628
|
|
|
$
|
2,121,494
|
|
|
$
|
2,001,111
|
|
While the Company sells its solutions through a geographically dispersed sales force, it manages its customer relationships in two divisions: the Web Division and the Media and Carrier Division. Customers are assigned to a division for relationship management purposes according to their predominant purchasing activity; however, customers may purchase solutions managed by the other division as well. As of January 1, 2019, the Company reassigned some of its customers from the Media and Carrier Division to the Web Division and revised historical results in order to reflect the most recent categorization and to provide a comparable view for all periods presented. As the purchasing patterns and required account expertise of customers change over time, the Company may reassign a customer's division from one to another. The following table summarizes revenue by division included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Web Division
|
$
|
390,223
|
|
|
$
|
357,255
|
|
|
$
|
1,146,872
|
|
|
$
|
1,062,376
|
|
Media and Carrier Division
|
319,689
|
|
|
312,373
|
|
|
974,622
|
|
|
938,735
|
|
Total revenue
|
$
|
709,912
|
|
|
$
|
669,628
|
|
|
$
|
2,121,494
|
|
|
$
|
2,001,111
|
|
Most content delivery and security services sold by the Company represent obligations that are satisfied over time as the customer simultaneously receives and consumes the services provided. Accordingly, the majority of the Company's revenue is recognized over time, generally ratably over the term of the arrangement due to consistent monthly traffic commitments that expire each period. A small percentage of the Company's services are satisfied at a point in time, such as one-time professional services contracts, integration services and most license sales where the primary obligation is delivery of the license at the start of the term. In these cases, revenue is recognized at a point in time of delivery or satisfaction of the performance obligation.
During the nine months ended September 30, 2019 and 2018, the Company recognized $51.0 million and $64.3 million of revenue that was included in deferred revenue as of December 31, 2018 and 2017, respectively.
As of September 30, 2019, the aggregate amount of remaining performance obligations from contracts with customers was $2.3 billion. The Company expects to recognize more than 70% of its remaining performance obligations as revenue over the next 12 months, with the remaining recognized thereafter. Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. This consists of future committed revenue for monthly, quarterly or annual periods within current contracts with customers, as well as deferred revenue arising from consideration invoiced in prior periods for which the related performance obligations have not been satisfied. It excludes estimates of variable consideration such as usage-based contracts with no committed contract as well as anticipated renewed contracts.
15. Income Taxes
The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods. Potential discrete adjustments include tax charges or benefits related to stock-based compensation, changes in tax legislation, settlements of tax audits or assessments, uncertain tax positions and acquisitions, among other items.
The Company is currently under audit in multiple jurisdictions and, in certain cases, is involved in litigation related to adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting the adverse audit findings related to certain tax benefits and exemptions. The Company has determined that it is more-likely-than-not that it will prevail, and no reserve has been recorded related to these controversies. Over the next 12 months, the Company’s current assumptions and positions could change based on audit determinations and other events impacting its analysis. Such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate and results of operations. The Company has estimated that an adverse ruling related to its Massachusetts controversy could ultimately result in an income tax charge of approximately $15.0 million.
The Company’s effective income tax rate was 10.6% and 11.2% for the nine months ended September 30, 2019 and 2018, respectively. The lower effective tax rate for the nine months ended September 30, 2019, is primarily due to the release of certain tax reserves related to the expiration of local statutes of limitations, which was partially offset by an increase in the valuation allowance recorded against deferred tax assets related to state tax credits in which it is more likely than not that such credits will expire prior to utilization.
For the nine months ended September 30, 2019, the effective income tax rate was lower than the federal statutory tax rate due to the release of certain tax reserves related to the expiration of local statutes of limitations, foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by the valuation allowance recorded against deferred tax assets related to state tax credits, non-deductible executive compensation, state taxes and an intercompany sale of intellectual property.
For the nine months ended September 30, 2018, the effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation, a decrease in the provisional amount of the one-time transition tax that was recorded in the fourth quarter of 2017, the release of certain tax reserves related to the expiration of local statutes of limitations and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by the U.S. federal taxes on Global Intangible Low-Taxed Income and an intercompany sale of intellectual property.
Valuation allowances will be recognized on deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be utilized. In measuring deferred tax assets, the Company considers all available evidence, both positive and negative, to determine whether a valuation allowance is needed. In the third quarter of 2019, the Company recorded an additional $11.2 million valuation allowance against deferred tax assets related to state tax credits in which it is more likely than not that such credits will expire prior to utilization.
16. 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, restricted stock units ("RSUs"), deferred stock units ("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 three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
137,890
|
|
|
$
|
107,583
|
|
|
$
|
358,935
|
|
|
$
|
204,358
|
|
Denominator:
|
|
|
|
|
|
|
|
Shares used for basic net income per share
|
162,445
|
|
|
165,924
|
|
|
163,029
|
|
|
168,763
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
36
|
|
|
80
|
|
|
59
|
|
|
158
|
|
RSUs and DSUs
|
2,077
|
|
|
1,896
|
|
|
1,700
|
|
|
1,811
|
|
Convertible senior notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Warrants related to issuance of convertible senior notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares used for diluted net income per share
|
164,558
|
|
|
167,900
|
|
|
164,788
|
|
|
170,732
|
|
Basic net income per share
|
$
|
0.85
|
|
|
$
|
0.65
|
|
|
$
|
2.20
|
|
|
$
|
1.21
|
|
Diluted net income per share
|
$
|
0.84
|
|
|
$
|
0.64
|
|
|
$
|
2.18
|
|
|
$
|
1.20
|
|
For the three and nine months ended September 30, 2019 and 2018, certain potential outstanding common 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 common shares excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service-based RSUs
|
139
|
|
|
185
|
|
|
959
|
|
|
1,068
|
|
Performance-based RSUs
|
1,484
|
|
|
1,515
|
|
|
1,484
|
|
|
1,520
|
|
Convertible senior notes
|
21,991
|
|
|
19,797
|
|
|
21,991
|
|
|
19,797
|
|
Warrants related to issuance of convertible senior notes
|
21,991
|
|
|
19,797
|
|
|
21,991
|
|
|
19,797
|
|
Total shares excluded from computation
|
45,605
|
|
|
41,294
|
|
|
46,425
|
|
|
42,182
|
|