Edgar Filing: AKAMAI TECHNOLOGIES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________

FORM 10-Q

______________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number 0-27275

______________________________________________

Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)



Delaware		04-3432319
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

150 Broadway

Cambridge, MA 02142

(617) 444-3000

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

______________________________________________

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	Emerging growth company o
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

The number of shares outstanding of the registrant’s common stock as of August 3, 2017: 171,423,149

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AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at June 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	48

SIGNATURES		49

EXHIBIT INDEX		50

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, expect share data)	June 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	352,501		$	324,169
Marketable securities	330,620			512,849
Accounts receivable, net of reserves of $1,389 and $6,145 at June 30, 2017, and December 31, 2016, respectively	395,865			368,596
Prepaid expenses and other current assets	159,371			104,303
Total current assets	1,238,357			1,309,917
Property and equipment, net	856,039			801,017
Marketable securities	731,781			779,311
Goodwill	1,356,623			1,228,503
Acquired intangible assets, net	184,041			149,463
Deferred income tax assets	7,448			8,982
Other assets	114,750			95,953
Total assets	$	4,489,039		$	4,373,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	91,741		$	76,120
Accrued expenses	222,023			238,777
Deferred revenue	73,772			52,972
Other current liabilities	11,528			6,719
Total current liabilities	399,064			374,588
Deferred revenue	3,848			3,758
Deferred income tax liabilities	21,762			11,652
Convertible senior notes	651,400			640,087
Other liabilities	125,793			118,691
Total liabilities	1,201,867			1,148,776
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 700,000,000 shares authorized; 175,148,684 shares issued and 172,027,173 shares outstanding at June 30, 2017, and 173,254,797 shares issued and outstanding at December 31, 2016	1,751			1,733
Additional paid-in capital	4,317,583			4,239,588
Accumulated other comprehensive loss	(32,520		)	(56,222		)
Treasury stock, at cost, 3,121,511 shares at June 30, 2017, and no shares at December 31, 2016	(177,615		)	—
Accumulated deficit	(822,027		)	(960,729		)
Total stockholders’ equity	3,287,172			3,224,370
Total liabilities and stockholders’ equity	$	4,489,039		$	4,373,146

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands, except per share data)	2017			2016			2017			2016
Revenue	$	608,908		$	572,135		$	1,218,145		$	1,139,860
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	214,650			206,323			420,353			401,059
Research and development	53,373			37,690			105,535			78,532
Sales and marketing	119,432			103,223			232,998			205,434
General and administrative	123,518			107,538			238,527			209,821
Amortization of acquired intangible assets	7,753			6,711			15,322			13,427
Restructuring charges	2,971			470			2,971			7,288
Total costs and operating expenses	521,697			461,955			1,015,706			915,561
Income from operations	87,211			110,180			202,439			224,299
Interest income	4,281			3,393			8,905			6,713
Interest expense	(4,646		)	(4,639		)	(9,243		)	(9,292		)
Other income (expense), net	563			415			(121		)	226
Income before provision for income taxes	87,409			109,349			201,980			221,946
Provision for income taxes	29,637			35,714			63,278			73,453
Net income	$	57,772		$	73,635		$	138,702		$	148,493
Net income per share:
Basic	$	0.33		$	0.42		$	0.80		$	0.84
Diluted	$	0.33		$	0.42		$	0.80		$	0.84
Shares used in per share calculations:
Basic	172,674			175,499			172,916			175,951
Diluted	173,439			176,420			174,305			176,980

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
(in thousands)	2017		2016			2017		2016
Net income	$	57,772	$	73,635		$	138,702	$	148,493
Other comprehensive income (loss):
Foreign currency translation adjustments	13,073		(3,728		)	22,572		5,925
Change in unrealized gain on investments, net of income tax provision of $193, $529, $681 and $2,311 for the three and six months ended June 30, 2017 and 2016, respectively	320		904			1,130		3,912
Other comprehensive income (loss)	13,393		(2,824		)	23,702		9,837
Comprehensive income	$	71,165	$	70,811		$	162,404	$	158,330

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Six Months Ended June 30,
(in thousands)	2017			2016
Cash flows from operating activities:
Net income	$	138,702		$	148,493
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	175,739			165,783
Stock-based compensation	80,255			66,652
Provision for deferred income taxes	39,368			2,785
Amortization of debt discount and issuance costs	9,243			9,292
Other non-cash reconciling items, net	1,609			3,501
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(17,873		)	17,786
Prepaid expenses and other current assets	(50,108		)	(10,991		)
Accounts payable and accrued expenses	(17,541		)	12,282
Deferred revenue	10,406			12,126
Other current liabilities	5,901			6,971
Other non-current assets and liabilities	(8,450		)	1,062
Net cash provided by operating activities	367,251			435,742
Cash flows from investing activities:
Cash paid for acquired businesses, net of cash acquired	(197,201		)	—
Purchases of property and equipment	(104,881		)	(86,820		)
Capitalization of internal-use software development costs	(83,305		)	(73,661		)
Purchases of short- and long-term marketable securities	(181,219		)	(384,585		)
Proceeds from sales of short- and long-term marketable securities	180,215			50,541
Proceeds from maturities of short- and long-term marketable securities	232,901			301,802
Other non-current assets and liabilities	(1,249		)	(1,512		)
Net cash used in investing activities	(154,739		)	(194,235		)
Cash flows from financing activities:
Proceeds related to the issuance of common stock under stock plans	25,680			27,095
Employee taxes paid related to net share settlement of stock-based awards	(41,338		)	(32,410		)
Repurchases of common stock	(177,615		)	(199,710		)
Other non-current assets and liabilities	(1,096		)	—
Net cash used in financing activities	(194,369		)	(205,025		)
Effects of exchange rate changes on cash and cash equivalents	10,189			689
Net increase in cash and cash equivalents	28,332			37,171
Cash and cash equivalents at beginning of period	324,169			289,473
Cash and cash equivalents at end of period	$	352,501		$	326,644

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received in the six months ended June 30, 2017 and 2016 of $2,481 and $457, respectively	$	54,146		$	38,228
Non-cash investing activities:
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses	46,988			28,113
Capitalization of stock-based compensation	14,026			11,424

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

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AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED 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 over the Internet. The Company's globally-distributed platform comprises more than 200,000 servers across 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, 2016, filed with the Securities and Exchange Commission on February 28, 2017.

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

In March 2016, the Financial Accounting Standards Board ("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 on January 1, 2017. Upon adoption, the Company began recognizing tax benefits related to stock-based compensation in its provision for income taxes rather than as additional paid-in capital. The Company elected to continue estimating forfeitures in determining the amount of compensation cost. The Company was not required to adjust beginning retained earnings as a result of these two items.

In addition, the Company adopted the presentation requirements related to the excess tax benefits in its statements of cash flows on a retrospective basis beginning January 1, 2015. The line items, included in both cash flows from operating activities and financing activities labeled excess tax benefits from stock-based compensation, were eliminated. This had the impact of increasing net cash provided by operating activities and net cash used in financing activities. Prior periods have been revised as follows (in thousands):



	Net Cash Provided by Operating Activities				Net Cash Used in Financing Activities
	As Reported		As Adjusted		As Reported			As Adjusted
Year ended December 31, 2015	$	764,151	$	793,452	$	(267,728	)	$	(297,029	)
Three months ended March 31, 2016	190,238		191,373		(115,736		)	(116,871		)
Six months ended June 30, 2016	433,110		435,742		(202,393		)	(205,025		)
Nine months ended September 30, 2016	684,510		687,590		(288,008		)	(291,088		)
Year Ended December 31, 2016	866,298		871,812		(354,265		)	(359,779		)

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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. This standard will be effective for the Company on January 1, 2018, and the Company has elected to adopt it retrospectively to each prior period presented.

The updated guidance impacts, or requires the Company to modify, 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 and transfer of control for all performance obligations has occurred/all other revenue recognition criteria have been achieved, rather than when it is reasonably assured. The Company has quantified the impact that these changes would have had on revenue reported for the year ended December 31, 2016, and each of the quarters therein, and it would not have had a material impact on the Company's consolidated financial statements. The Company continues to assess the expected impact to the year ending December 31, 2017, and each of the quarters therein, but does not expect adoption to have a material impact on its consolidated financial statements for the year then ending.

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. The Company is currently quantifying the impact that these changes would have had on sales and marketing expenses recorded in the consolidated statements of income for the year ended December 31, 2016, for the six months ended June 30, 2017, and for each of the quarters therein. The Company is also assessing the expected impact on the consolidated balance sheet as of December 31, 2017, particularly the impact on prepaid expenses and other current assets and retained earnings.

The Company continues to evaluate the impact this updated guidance has on disclosure requirements related to revenue.

In February 2016, the FASB issued guidance that requires companies to present assets and liabilities arising from leases with terms 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, including 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 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 on its consolidated financial statements of adopting this new accounting guidance.

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 recognizing a cumulative-effect adjustment as a component of equity as of the date of adoption. The Company is evaluating the potential impact on its consolidated financial statements of adopting this new accounting guidance.

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In January 2017, the FASB issued guidance that changes the definition of a business to assist entities with evaluating whether transactions should be accounted for as transfers of assets or business combinations. This guidance will be effective for the Company on January 1, 2018 and is to be applied prospectively. The Company is evaluating the potential impact on its consolidated financial statements of adopting this new accounting guidance.

2. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of June 30, 2017 and December 31, 2016 (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 June 30, 2017
Commercial paper	$	6,873	$	—	$	(2	)	$	6,871	$	6,871	$	—
Corporate bonds	832,072		243		(2,143		)	830,172		308,482		521,690
U.S. government agency obligations	220,014		—		(1,238		)	218,776		15,076		203,700
	$	1,058,959	$	243	$	(3,383	)	$	1,055,819	$	330,429	$	725,390

As of December 31, 2016
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

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 June 30, 2017, the Company held for investment corporate bonds with a fair value of $63.7 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 related to these corporate bonds included in accumulated other comprehensive loss as of June 30, 2017 were $0.2 million. The 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.

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The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of June 30, 2017 and December 31, 2016 (in thousands):



	Total Fair Value			Fair Value Measurements at Reporting Date Using
	Total Fair Value			Level 1		Level 2		Level 3
As of June 30, 2017
Cash Equivalents and Marketable Securities:
Money market funds	$	4,574		$	4,574	$	—	$	—
Commercial paper	6,871			—		6,871		—
Corporate bonds	830,172			—		830,172		—
U.S. government agency obligations	218,776			—		218,776		—
Mutual funds	6,582			6,582		—		—
	$	1,066,975		$	11,156	$	1,055,819	$	—

Liabilities:
Contingent consideration obligations related to completed acquisitions	$	(5,400	)	$	—	$	—	$	(5,400	)

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 obligations related to completed acquisitions	$	(7,100	)	$	—	$	—	$	(7,100	)

As of June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016, 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 three months ended June 30, 2017.

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 consist of contingent consideration related to the acquisitions of Soha Systems, Inc. ("Soha") and Cyberfend, Inc. ("Cyberfend") in 2016, was primarily an income-based 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.

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Contractual maturities of the Company’s available-for-sale marketable securities held as of June 30, 2017 and December 31, 2016 were as follows (in thousands):



	June 30, 2017		December 31, 2016
Due in 1 year or less	$	330,429	$	512,572
Due after 1 year through 5 years	725,390		775,566
	$	1,055,819	$	1,288,138

The following table reflects the activity for the Company’s major classes of liabilities measured at fair value using Level 3 inputs during the six months ended June 30, 2017 (in thousands):



	Other Liabilities: Contingent Consideration Obligation
Balance as of January 1, 2017	$	(7,100	)
Fair value adjustment to contingent consideration included in general and administrative expense	450
Cash paid upon achievement of milestone	1,250
Balance as of June 30, 2017	$	(5,400	)

3. Accounts Receivable

Net accounts receivable consisted of the following as of June 30, 2017 and December 31, 2016 (in thousands):



	June 30, 2017			December 31, 2016
Trade accounts receivable	$	282,372		$	260,976
Unbilled accounts receivable	114,882			113,765
Gross accounts receivable	397,254			374,741
Allowance for doubtful accounts	(994		)	(829		)
Reserve for cash-basis customers	(395		)	(5,316		)
Total accounts receivable reserves	(1,389		)	(6,145		)
Accounts receivable, net	$	395,865		$	368,596

The decrease to the reserve for cash-basis customers is primarily attributable to two customers that were removed from cash-basis revenue recognition due to strong, consistent history of payment.

4. Goodwill and Acquired Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2017 was as follows (in thousands):



Balance as of January 1, 2017	$	1,228,503
Acquisition of Soasta, Inc.	121,669
Measurement period adjustments	(90		)
Foreign currency translation	6,541
Balance as of June 30, 2017	$	1,356,623

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.

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Acquired intangible assets that are subject to amortization consisted of the following as of June 30, 2017 and December 31, 2016 (in thousands):



	June 30, 2017							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Completed technology	$	137,891	$	(57,780	)	$	80,111	$	119,091	$	(50,823	)	$	68,268
Customer-related intangible assets	221,010		(121,523		)	99,487		192,810		(114,209		)	78,601
Non-compete agreements	4,510		(3,533		)	977		5,030		(3,775		)	1,255
Trademarks and trade names	6,100		(2,634		)	3,466		3,700		(2,361		)	1,339
Acquired license rights	490		(490		)	—		490		(490		)	—
Total	$	370,001	$	(185,960	)	$	184,041	$	321,121	$	(171,658	)	$	149,463

Aggregate expense related to amortization of acquired intangible assets for the three and six months ended June 30, 2017 was $7.8 million and $15.3 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and six months ended June 30, 2016 was $6.7 million and $13.4 million, respectively. Based on the Company’s acquired intangible assets as of June 30, 2017, aggregate expense related to amortization of acquired intangible assets is expected to be $15.5 million for the remainder of 2017, and $31.4 million, $32.8 million, $29.5 million and $24.1 million for 2018, 2019, 2020 and 2021, respectively.

5. Business Combinations

Acquisition-related costs during the six months ended June 30, 2017 were $3.2 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 six months ended June 30, 2017 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.

Soasta

In April 2017, the Company acquired Soasta, Inc. ("Soasta"), a leader in digital performance management, for $199.3 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 acquisition is expected to allow the Company to offer solutions designed to provide greater visibility into the business impact of customers' websites and application optimization strategies.

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The following table presents the preliminary allocation of the purchase price for Soasta (in thousands):



Total purchase consideration	$	199,280

Allocation of the purchase consideration:
Cash	$	1,935
Accounts receivable	4,108
Prepaids and other current assets	1,143
Identifiable intangible assets	49,900
Goodwill	121,669
Deferred tax assets	35,121
Total assets acquired	213,876
Accounts payable	(1,119		)
Accrued liabilities	(3,915		)
Deferred revenue	(9,562		)
Total liabilities assumed	(14,596		)
Net assets acquired	$	199,280

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 Soasta expected to be deductible for tax purposes is $31.6 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	$	18,800	4.1
Customer-related intangible assets	28,200		4.6
Trademarks	2,400		4.9
Non-compete agreements	500		1.9
Total	$	49,900

The total weighted average amortization period for the intangible assets acquired from Soasta is 4.4 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

6. Convertible Senior Notes

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

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

•

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

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

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

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

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

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

The Notes consist of the following components as of June 30, 2017 and December 31, 2016 (in thousands):



	June 30, 2017			December 31, 2016
Liability component:
Principal	$	690,000		$	690,000
Less: debt discount and issuance costs, net of amortization	(38,600		)	(49,913		)
Net carrying amount	$	651,400		$	640,087

Equity component:	$	101,276		$	101,276

The estimated fair value of the Notes at June 30, 2017 was $676.2 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 $49.81 on June 30, 2017, 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 a share repurchase program previously approved by the Board of Directors. Additionally, $23.3 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The remaining net proceeds are for working capital, share repurchases and other general corporate purposes, as well as for potential acquisitions and strategic transactions.

Note Hedge

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

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Warrants

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

Interest Expense

The Notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature. The following table sets forth total interest expense included in the consolidated statements of income related to the Notes for the three and six months ended June 30, 2017 and 2016, in thousands.



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Amortization of debt discount and issuance costs	$	5,681		$	5,485		$	11,313		$	10,923
Capitalization of interest expense	(1,035		)	(846		)	(2,070		)	(1,631		)
Total interest expense	$	4,646		$	4,639		$	9,243		$	9,292

7. Commitments and Contingencies

Legal Matters

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 three and six months ended June 30, 2017, the Company received $4.5 million and $9.0 million, respectively, under this agreement, of which $4.1 million and $8.1 million was recorded as a reduction to general and administrative expenses in the consolidated statement of income, respectively, and $0.4 million and $0.9 million was recorded as interest income, respectively.

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. 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.

8. Stockholders’ Equity

Share Repurchase Program

In February 2016, the Board of Directors authorized a $1.0 billion repurchase program 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 six months ended June 30, 2017, the Company repurchased 3.1 million shares of its common stock for $177.6 million.

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Stock-Based Compensation

The following table summarizes stock-based compensation included in the Company’s consolidated statements of income for the three and six months ended June 30, 2017 and 2016 (in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Cost of revenue	$	5,074		$	4,553		$	9,759		$	8,523
Research and development	9,614			6,752			18,643			13,190
Sales and marketing	13,951			13,259			29,108			25,611
General and administrative	12,630			10,347			22,745			19,328
Total stock-based compensation	41,269			34,911			80,255			66,652
Provision for income taxes	(12,221		)	(12,388		)	(30,206		)	(24,521		)
Total stock-based compensation, net of income taxes	$	29,048		$	22,523		$	50,049		$	42,131

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 six months ended June 30, 2017 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $3.9 million and $7.4 million, respectively, before taxes. For the three and six months ended June 30, 2016, the Company's consolidated statements of income include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $3.6 million and $6.9 million, respectively, before taxes.

9. 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 six months ended June 30, 2017 (in thousands):



	Foreign Currency Translation			Net Unrealized Gains on Investments		Total
Balance as of January 1, 2017	$	(59,017	)	$	2,795	$	(56,222	)
Other comprehensive gain	22,572			1,130		23,702
Balance as of June 30, 2017	$	(36,445	)	$	3,925	$	(32,520	)

Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the six months ended June 30, 2017.

10. Income Taxes

The Company’s effective income tax rate was 31.3% and 33.1% for the six months ended June 30, 2017 and 2016, respectively. 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, including tax benefits related to stock-based compensation, retroactive changes in tax legislation, settlements of tax audits or assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

For the six months ended June 30, 2017 and 2016, the effective income tax rate was lower than the federal statutory tax rate due to the composition of income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S., plus the effect of U.S. federal, state and foreign research and development credits, partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

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11. 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 six months ended June 30, 2017 and 2016 (in thousands, except per share data):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Numerator:
Net income	$	57,772	$	73,635	$	138,702	$	148,493
Denominator:
Shares used for basic net income per share	172,674		175,499		172,916		175,951
Effect of dilutive securities:
Stock options	329		396		344		400
RSUs and DSUs	436		525		1,045		629
Convertible senior notes	—		—		—		—
Warrants related to issuance of convertible senior notes	—		—		—		—
Shares used for diluted net income per share	173,439		176,420		174,305		176,980
Basic net income per share	$	0.33	$	0.42	$	0.80	$	0.84
Diluted net income per share	$	0.33	$	0.42	$	0.80	$	0.84

For the three and six months ended June 30, 2017 and 2016, 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 three and six months ended June 30, 2017 and 2016 are as follows (in thousands):



	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2017	2016	2017	2016
Stock options	10	80	6	92
Service-based RSUs	4,134	1,904	3,407	3,283
Performance-based RSUs	1,125	1,280	1,189	704
Convertible senior notes	7,704	7,704	7,704	7,704
Warrants related to issuance of convertible senior notes	7,704	7,704	7,704	7,704
Total shares excluded from computation	20,677	18,672	20,010	19,487

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below, and notes to our unaudited consolidated financial statements included herein contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “forecasts,” “if,” “continues,” “goal,” “likely” or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See “Risk Factors” elsewhere in this quarterly report on Form 10-Q for a discussion of certain risks associated with our business. We disclaim any obligation to update forward-looking statements as a result of new information, future events or otherwise.

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related items, including, but not limited to, revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, goodwill and acquired intangible assets, capitalized internal-use software development costs, impairment and useful lives of long-lived assets, income tax, and stock-based compensation. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time they are made. Actual results may differ from our estimates. See the section entitled “Application of Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the year ended December 31, 2016 for further discussion of our critical accounting policies and estimates.

Overview

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

Revenue

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

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


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

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•

We have experienced increases in the amount of traffic delivered for customers that use our solutions for video, gaming, social media and software downloads, contributing to an increase in our revenue. However, from the second half of 2015 onward, our traffic growth rates have moderated, primarily due to the “do-it-yourself” efforts by some of our customers that are among the largest Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix. We refer to these companies as our Internet Platform Customers. These customers have increasingly elected to develop and rely on their own internal infrastructure to deliver more of their media content themselves rather than use our services. As a result, we are likely to continue experiencing lower revenue from these customers. While we have not experienced a significant shift to internal infrastructure usage across the remainder of our media services customer base, we have experienced a moderation in traffic growth from these customers. Factors that may impact their usage of our services are competition (including using multiple providers to handle their traffic needs), contract renewal terms and changes in demand for their offerings. These factors are variable and unpredictable and could negatively impact our revenue.


•	We have increased committed recurring revenue from our performance solutions by increasing sales of incremental services to our existing Web Division customers and by adding new customers. These increases helped to limit the impact of traffic moderation by certain customers (primarily those in our Media Division), as well as the effect of price decreases negotiated as part of contract renewals.


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

•

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

Expenses

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

•

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

•

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


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

•

Payroll and related compensation costs have grown as we have increased headcount, particularly in our professional services and engineering teams to support our revenue growth and strategic initiatives. We increased our headcount by 594 employees during the six-month period ended June 30, 2017, of which approximately 145 employees were from our acquisition of Soasta, Inc., or Soasta. During the year ended December 31, 2016, we increased our headcount by 406 employees. We expect to continue to hire additional employees, both domestically and internationally, in support of our strategic initiatives.

In April 2017, we completed the acquisition of Soasta, which was dilutive to our earnings per share for the three-month period ended June 30, 2017. It is expected to continue to be dilutive to our earnings per share for at least the remainder of 2017.

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Results of Operations

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



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	35.3		36.1		34.5		35.2
Research and development	8.8		6.6		8.7		6.9
Sales and marketing	19.6		18.0		19.1		18.0
General and administrative	20.3		18.8		19.6		18.4
Amortization of acquired intangible assets	1.3		1.2		1.3		1.2
Restructuring charges	0.5		0.1		0.2		0.6
Total costs and operating expenses	85.8		80.8		83.4		80.3
Income from operations	14.2		19.2		16.6		19.7
Interest income	0.7		0.6		0.7		0.6
Interest expense	(0.8	)	(0.8	)	(0.8	)	(0.8	)
Other income, net	0.1		0.1		—		—
Income before provision for income taxes	14.2		19.1		16.6		19.5
Provision for income taxes	4.9		6.2		5.2		6.4
Net income	9.3	%	12.9	%	11.4	%	13.1	%

Revenue

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017		2016		% Change		% Change at Constant Currency		2017		2016		% Change		% Change at Constant Currency
Revenue	$	608,908	$	572,135	6.4	%	7.0	%	$	1,218,145	$	1,139,860	6.9	%	8.0	%

During the three- and six-month periods ended June 30, 2017, the increase in our revenue as compared to the same periods in 2016 was primarily the result of continued strong growth from our Cloud Security Solutions, which grew 32% and 34%, respectively, during these periods. However, our recent revenue growth rates have been impacted by the "do-it-yourself" efforts of our Internet Platform Customers, some of which have developed internal infrastructure to deliver more of their media content themselves rather than rely on our media services. Revenue from these six customers in the aggregate was $51.2 million and $102.5 million for the three- and six-month periods ended June 30, 2017, respectively, as compared to $61.5 million and $134.0 million for the three- and six-month periods ended June 30, 2016, respectively.

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017		2016		% Change		% Change at Constant Currency		2017		2016		% Change		% Change at Constant Currency
Performance and Security Solutions	$	375,807	$	326,642	15.1	%	16.0	%	$	744,955	$	642,505	15.9	%	17.0	%
Media Delivery Solutions	178,905		197,077		(9.2	)	(9.0	)	366,301		403,016		(9.1	)	(9.0	)
Services and Support Solutions	54,196		48,416		11.9		13.0		106,889		94,339		13.3		14.0
Total revenue	$	608,908	$	572,135	6.4	%	7.0	%	$	1,218,145	$	1,139,860	6.9	%	8.0	%

The increase in Performance and Security Solutions revenue for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was due to increased demand across all major product lines, with especially strong growth in our Cloud Security Solutions. Cloud Security Solutions revenue for the three- and six-month periods ended June 30, 2017 was $115.1 million and $224.9 million, respectively, as compared to $87.0 million and $167.6 million for the three- and six-month periods ended June 30, 2016, respectively. The revenue growth rate for our Performance and Security solutions is likely to be lower during the remainder of 2017 due to expected moderation of purchases of lower-end web performance solutions by our media customers.

The decline in the year-over-year revenue in Media Delivery Solutions revenue for the three- and six-month periods ended June 30, 2017 was primarily the result of decreased traffic from the Internet Platform Customers, resulting from their "do-it-yourself" efforts in delivering their content. Our Media Delivery Solutions revenue for other customers decreased by 5% and 1% for the three- and six-month periods ended June 30, 2017, respectively, as compared to the same period in 2016, which was attributed to traffic growth deceleration, most notably in the U.S. We expect Media Delivery Solutions revenue to continue to moderate during the second half of 2017.

The increase in Services and Support Solutions revenue for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to purchases of upgrades to services by our existing customers and increased demand for professional services to help execute live media events.

The following table quantifies the contribution to revenue during the periods presented from our divisions (in thousands). It is a customer-focused reporting view that reflects revenue we received from customers that are managed by the indicated division. For example, Media Division revenue represents all revenue received from customers that primarily purchase our Media Delivery Solutions, including revenue from non-Media solutions those customers purchase. During the first quarter of 2017, the divisional categorization of certain customers was adjusted based on how those customer relationships are currently being managed. The historical presentation of divisional revenue was revised in order to reflect the most recent categorization and to provide a comparable view for all periods presented.



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017		2016		% Change		% Change at Constant Currency		2017		2016		% Change		% Change at Constant Currency
Web Division	$	314,988	$	273,891	15.0	%	16.0	%	$	619,674	$	540,558	14.6	%	16.0	%
Media Division	276,071		281,937		(2.1	)	(1.0	)	561,472		567,551		(1.1	)	—
Enterprise and Carrier Division	17,849		16,307		9.5		10.0		36,999		31,751		16.5		17.0
Total revenue	$	608,908	$	572,135	6.4	%	7.0	%	$	1,218,145	$	1,139,860	6.9	%	8.0	%

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The increase in Web Division revenue during the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was due to solid growth and diversification into this customer base from continued penetration of new services and upgrades. Increased revenue from our Cloud Security Solutions continues to contribute to our overall revenue growth, from sales of both our Kona Site Defender and Prolexic offerings and our continued expansion of new services.

The decline in the year-over-year revenue in the Media Division for the three- and six-month periods ended June 30, 2017 was primarily the result of decreased traffic from our Internet Platform Customers. Excluding the impact of those customers, revenue grew year-over-year by 2% and 6%, respectively, for the three- and six-month periods ended June 30, 2017 as compared to the same periods in 2016.

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017		2016		% Change		% Change at Constant Currency		2017		2016		% Change		% Change at Constant Currency
U.S.	$	403,085	$	395,085	2.0	%	2.0	%	$	809,650	$	792,368	2.2	%	2.0	%
International	205,823		177,050		16.3		19.0		408,495		347,492		17.6		20.0
Total revenue	$	608,908	$	572,135	6.4	%	7.0	%	$	1,218,145	$	1,139,860	6.9	%	8.0	%

The reduced revenue from our Internet Platform Customers negatively impacted our U.S. revenue growth rates for the three- and six-month periods ended June 30, 2017 in particular, as these customers are based in the U.S.

For both the three- and six-month periods ended June 30, 2017, approximately 34% of our revenue was derived from our operations located outside the U.S., compared to 31% and 30% for the three- and six-month periods ended June 30, 2016, respectively. No single country outside the U.S. accounted for 10% or more of revenue during any of these periods. During the three- and six-month periods ended June 30, 2017, we continued to see strong revenue growth from our operations in the Asia-Pacific region. Changes in foreign currency exchange rates impacted our revenue by an unfavorable $3.9 million and $5.0 million during the three- and six-month periods ended June 30, 2017, respectively, as compared to the same periods in 2016.

Cost of Revenue

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017			2016			% Change		2017			2016			% Change
Bandwidth fees	$	41,238		$	42,597		(3.2	)%	$	82,721		$	83,777		(1.3	)%
Co-location fees	31,542			33,223			(5.1	)	63,352			65,817			(3.7	)
Network build-out and supporting services	18,835			16,895			11.5		35,735			30,672			16.5
Payroll and related costs	54,577			46,616			17.1		104,966			91,306			15.0
Stock-based compensation, including amortization of prior capitalized amounts	8,760			7,977			9.8		16,648			14,990			11.1
Depreciation of network equipment	35,404			35,911			(1.4	)	70,659			70,481			0.3
Amortization of internal-use software	24,294			23,104			5.2		46,272			44,016			5.1
Total cost of revenue	$	214,650		$	206,323		4.0	%	$	420,353		$	401,059		4.8	%
As a percentage of revenue	35.3		%	36.1		%			34.5		%	35.2		%

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The increase in total cost of revenue for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to increases in:


•	payroll and related costs, as well as stock-based compensation, due to increased hiring in our services team to support revenue growth; and


•	amounts paid for network build-out and supporting services related to investments in network expansion to support our security infrastructure growth.

Our cost of revenue as a percentage of revenue decreased during the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016. The decrease was primarily the result of revenue growth exceeding the growth in total cost of revenue due to our efforts in reducing bandwidth and co-location fees.

We have long-term purchase commitments for co-location services and bandwidth usage with various vendors and network and Internet service providers. Our minimum commitments related to bandwidth usage and co-location services may vary from period to period depending on the timing and length of contract renewals with our service providers. There have been no significant changes to these commitments as reported in our annual report on Form 10-K for the year ended December 31, 2016, other than normal period-to-period variations.

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

Research and Development Expenses

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017			2016			% Change		2017			2016			% Change
Payroll and related costs	$	78,352		$	61,173		28.1	%	$	153,784		$	125,807		22.2	%
Stock-based compensation	9,614			6,752			42.4		18,643			13,190			41.3
Capitalized salaries and related costs	(36,976		)	(31,617		)	16.9		(70,855		)	(63,128		)	12.2
Other expenses	2,383			1,382			72.4		3,963			2,663			48.8
Total research and development	$	53,373		$	37,690		41.6	%	$	105,535		$	78,532		34.4	%
As a percentage of revenue	8.8		%	6.6		%			8.7		%	6.9		%

The increase in research and development expenses during the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was due to increases in:


•	payroll and related costs as a result of headcount growth to support investments in new product development and network scaling;


•	stock-based compensation due to increased headcount, in addition to market adjustments of award sizes due to competition for certain engineering talent; and


•	decreases in our rate of capitalization as new employees ramp and as the amount of development work that does not qualify for capitalization fluctuates, particularly as it relates to our acquisition of Soasta.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. Capitalized development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. During the three- and six-month periods ended June 30, 2017, we capitalized $7.1 million and $13.1 million, respectively, of stock-based compensation. During the three- and six-month periods ended June 30, 2016, we capitalized $5.7 million and $10.6

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million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, which is generally two years.

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

Sales and Marketing Expenses

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



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017			2016			% Change		2017			2016			% Change
Payroll and related costs	$	84,431		$	74,948		12.7	%	$	166,842		$	150,828		10.6	%
Stock-based compensation	13,951			13,259			5.2		29,108			25,611			13.7
Marketing programs and related costs	11,739			9,495			23.6		21,689			15,608			39.0
Other expenses	9,311			5,521			68.6		15,359			13,387			14.7
Total sales and marketing	$	119,432		$	103,223		15.7	%	$	232,998		$	205,434		13.4	%
As a percentage of revenue	19.6		%	18.0		%			19.1		%	18.0		%

The increase in sales and marketing expenses during the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to an increase in:


•	payroll and related costs from headcount increases to support our Web and Enterprise and Carrier Divisions' go-to-market strategies in support of growth opportunities; and


•	marketing programs and related costs in support of our go-to-market strategy and ongoing geographic expansion.

The increase in other expenses during the three-month period ended June 30, 2017, as compared to the same period in 2016, is due to the timing of sales events, which occurred earlier in the year in 2016 as compared with 2017.

We believe that sales and marketing expenses will continue to increase during 2017 as compared to 2016, primarily due to increased payroll and related costs due to increased hiring in our sales and marketing organizations during 2017.

General and Administrative Expenses

General and administrative expenses consisted of the following for the periods presented (in thousands):



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2017			2016			% Change		2017			2016			% Change
Payroll and related costs	$	47,516		$	39,175		21.3	%	$	92,407		$	80,363		15.0	%
Stock-based compensation	12,630			10,347			22.1		22,745			19,328			17.7
Depreciation and amortization	18,069			15,964			13.2		36,597			31,393			16.6
Facilities-related costs	20,184			17,800			13.4		38,982			35,208			10.7
Provision for doubtful accounts	752			342			119.9		905			828			9.3
Acquisition-related costs	3,057			352			nm		2,848			163			nm
License of patent	(4,089		)	—			nm		(8,124		)	—			nm
Professional fees and other expenses	25,399			23,558			7.8		52,167			42,538			22.6
Total general and administrative	$	123,518		$	107,538		14.9	%	$	238,527		$	209,821		13.7	%
As a percentage of revenue	20.3		%	18.8		%			19.6		%	18.4		%

The increase in general and administrative expenses for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was primarily due to the expansion of company infrastructure throughout 2016 to support

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investments in engineering, go-to market capacity and enterprise expansion initiatives, particularly expansion of our facility footprint, which increased facilities-related costs and depreciation and amortization. We also increased headcount, specifically in our network infrastructure and information technology functions in support of our security infrastructure growth, which increased payroll and related costs. For the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, we also experienced an increase in acquisition-related costs due to our acquisition of Soasta and an increase in professional fees for legal services due to ongoing litigation.

The increase in general and administrative expenses for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was partially offset by payments received from Limelight Networks, Inc., or Limelight, under the terms of a patent license arrangement we entered into to resolve a patent lawsuit between Akamai and Limelight.

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

Amortization of Acquired Intangible Assets



	For the Three Months Ended June 30,								For the Six Months Ended June 30,
(in thousands)	2017			2016			% Change		2017			2016			% Change
Amortization of acquired intangible assets	$	7,753		$	6,711		15.5	%	$	15,322		$	13,427		14.1	%
As a percentage of revenue	1.3		%	1.2		%			1.3		%	1.2		%

The increase in amortization of acquired intangible assets for the three- and six-month periods ended June 30, 2017, as compared to the same periods in 2016, was the result of amortization of assets related to our 2016 and 2017 acquisitions. Based on our intangible assets at June 30, 2017, we expect amortization of acquired intangible assets to be approximately $15.5 million for the remainder of 2017, and $31.4 million, $32.8 million, $29.5 million and $24.1 million for 2018, 2019, 2020 and 2021, respectively.

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Restructuring Charges



	For the Three Months Ended June 30,							For the Six Months Ended June 30,
(in thousands)	2017			2016			% Change	2017			2016			% Change
Restructuring charges	$	2,971		$	470		nm	$	2,971		$	7,288		nm
As a percentage of revenue	0.5		%	0.1		%		0.2		%	0.6		%

The restructuring charges for the three- and six-month periods ended June 30, 2017 consisted of severance expenses associated with the acquisition of Soasta, as well as a termination fee incurred to cancel a portion of the facility lease acquired in the acquisition. The restructuring charges for the three- and six-month periods ended June 30, 2016, were the result of changes that occurred during 2016 to our organizational structure to reorganize our products and development groups and global sales, services and marketing teams into divisions centered on our solutions. The restructuring charges in the 2016 periods related to severance expenses for impacted employees and charges for internal-use software not yet placed into service that were not completed nor launched due to changing priorities as part of the reorganization.

Non-Operating Income (Expense)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands)	2017		2016		% Change		2017	2016	% Change
Interest income	$	4,281	$	3,393	26.2	%	$