Edgar Filing: AKAMAI TECHNOLOGIES INC

AKAM 10K 12/31/14

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-27275

Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)



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

150 Broadway

Cambridge, Massachusetts 02142

(Address of principle executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value	NASDAQ Global Select Market

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

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

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

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

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

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

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



Large accelerated filer þ	Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company)	Smaller reporting company o

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $10,533.7 million based on the last reported sale price of the Common Stock on the NASDAQ Global Select Market on June 30, 2014.

The number of shares outstanding of the registrant’s Common Stock, par value $0.01 per share, as of February 24, 2015: 178,833,747 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relative to the registrant’s 2015 Annual Meeting of Stockholders to be held on May 13, 2015 are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this annual report on Form 10-K.

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AKAMAI TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS



PART I

Item 1.	Business	2
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety Disclosures	21

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	69
Item 9A.	Controls and Procedures	69
Item 9B.	Other Information	69

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	69
Item 11.	Executive Compensation	69
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13.	Certain Relationships and Related Transactions, and Director Independence	70
Item 14.	Principal Accounting Fees and Services	70

PART IV

Item 15.	Exhibits, Financial Statement Schedules	70

SIGNATURES		70

Forward-Looking Statements

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

PART I

Item 1. Business

Overview

Akamai provides cloud services for delivering, optimizing and securing online content and business applications. Our solutions range from delivery of conventional content on websites, to tools that support the delivery and operation of cloud-based applications, as well as security solutions and live and on-demand streaming video capabilities – all designed to help our customers interact with people accessing the Internet from a multitude of devices and locations around the world. Forming the foundation of these solutions is the Akamai Intelligent Platform, which we believe is the world's largest globally-distributed computing platform, having over 170,000 servers deployed in more than 1,300 networks and over 100 countries around the world, tied together with sophisticated software and algorithms. This platform enables us to constantly monitor Internet conditions to:


•	identify, absorb, and block security threats;


•	provide device-level detection and optimization;


•	make routing and delivery decisions based on comprehensive knowledge of network conditions; and


•	provide our customers with business and technical insights into their online operations.

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

Making the Cloud Work for our Customers

The Internet plays a crucial role in the way companies, government agencies and other enterprises conduct business and reach the public. Enterprises want to offer a dynamic, consistent, secure experience for millions of end users and to take advantage of the potential cost savings of cloud computing – using third party server facilities to enable Internet operations. The Internet, however, is a complex system of networks that was not originally created to accommodate the volume or sophistication of today's communication demands or the dramatic expansion in the number and types of devices individuals use to access it. The ad hoc architecture of the Internet presents potential problems for its widespread usage today, such as:


•	traffic congestion at data centers and between networks;


•	traffic exceeding the capacity of routing equipment;


•	an absence of a coordinated security system to protect against hackers, bots and other malefactors that want to steal assets and disrupt the functioning of the web;


•	growth in popularity of accessing streaming and other content over mobile networks, which tend to be slower and less reliable than the fixed line Internet; and


•	“last mile” issues – such as bandwidth constraints between an end user and their Internet access provider.

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These potential problems intersect with the features of what is sometimes referred to as the hyperconnected world, including:


•	increasingly dynamic and personalized websites;


•	growth in the transmission of rich content, including high definition, or HD, video, music and games;


•	rapid expansion in the use of mobile devices leveraging different technologies and delivery systems; and


•	the desire of millions of consumers worldwide to be able to enjoy the same high-quality experience across all of the devices they use.

Achieving an enterprise's goals in the face of these challenges is made more difficult by internal technology issues. Driven by competition, globalization and expense-containment strategies, companies need an agile cloud-based infrastructure that cost-effectively meets real-time strategic and business objectives. The dramatic increase in Internet usage places extensive demands on infrastructure; however, expanding internal systems to meet even routine demand can be expensive. Keeping pace with new developments can also be a difficult challenge. Special marketing or promotional initiatives or unanticipated one-time events, such as important unanticipated news, may draw millions of additional visitors to a company's website over a brief period of time. Putting in place incremental internal infrastructure to deal with such spikes is usually impractical and cost-prohibitive. Network operators themselves are challenged to profitably manage consumer access to the Internet over their networks; recouping the costs of the infrastructure build-outs they need to make is generally not supported by their traditional business models.

Akamai offers solutions to help companies, government agencies, network operators and other enterprises meet their goals in spite of the challenges at the intersection of the Internet and the hyperconnected world. We strive to make using the cloud a viable approach for customers by addressing the following market needs in an affordable way:

•

Superior Performance. Commercial enterprises invest in websites to attract customers, transact business and provide information about the company. Our solutions are designed to help enterprises improve the performance of their websites without the need for them to make the significant investment required to develop their own Internet-related infrastructure or develop ways to cope with the challenges and limitations of the Internet. With the Akamai Intelligent Platform, content and applications can be delivered from Akamai servers located closer to website visitors from what we call the “edge” of the Internet. We are thus able to reduce the impact of traffic congestion, bandwidth constraints and capacity limitations for our customers. That translates into faster websites and applications.

•

Scalability. With the proliferation of HD video and other types of rich content and the emergence of the Internet as a crucial sales channel, enterprises of all types must be able to handle rapidly increasing numbers of requests for bandwidth-intensive digital media assets. Websites must also be able to process millions of transactions, particularly during busy seasons. Akamai takes a global approach to addressing the challenges of the Internet, and we believe the scale of our deployed network is key to this. In our view, we are uniquely able to handle today's traffic volumes as well as planned and unplanned traffic peaks, whether it is delivering worldwide sports events or handling the steady growth we have seen in online video consumption on a daily basis.

•

Security. Internet-based security threats, such as viruses, worms, hactivists, information theft and other intrusions, can impact all aspects of performance, including information security, speed, reliability and customer confidence. Security is a key component of our technology platform, and our approach is designed to help organizations guard the perimeter of their networks and bolster security without sacrificing performance. In recent years, including through the acquisition of Prolexic Technologies, or Prolexic, in 2014, we have expanded our offerings of security solutions for protecting our customers’ operations in the cloud.


•	Functionality. Websites have become increasingly dynamic, complex and sophisticated. To meet these challenges, we offer an array of advanced features designed to help our customers accelerate dynamic content and applications, more effectively manage their online media assets, optimize how pages load on individual browsers and adapt content for mobile device access.

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Our Solutions

Media Delivery Solutions

In recent years, we have seen a significant increase in video consumption over the Internet, which has been reflected in our revenue growth. We believe this traffic growth is likely to continue or even increase and that we can play an important role for our customers. Our Media Delivery Solutions are designed to enable enterprises to execute their digital media distribution strategies, not only by providing solutions for their volume and global reach requirements but also by improving the end-user experience, boosting reliability and reducing their cost of Internet-related infrastructure.

Media Content Delivery

Our Media Content Delivery Solutions are designed to provide fast and reliable HTTP delivery of media content to address the broad variety of network types – fixed or mobile – at varying connection speeds. We focus on helping media customers improve the performance of their offerings through the scalability, reliability and reach of the Akamai Intelligent Platform, our distributed network of servers and software. Each delivery solution is optimized for the type of content being provided as follows:


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


•	Adaptive Delivery – We provide adaptive delivery solutions for streaming video content in bitrate streaming formats, including Apple's HLS, Adobe's HDS, Microsoft's Smooth Streaming and the MPEG-DASH format.

Media Services

Akamai Media Services include one-stop content preparation and packaging for multiple platforms, a customizable media player, and content protection technologies. Available for both live and on-demand media workflows, and complemented by our NetStorage solution, Media Services complement our content delivery solutions and are designed to address the following business needs: high quality streaming through scalable and reliable live content ingestion; simplifying content workflow operations by centralizing live event processing and delivery into a single cloud platform; reducing expenses by eliminating the need to purchase and scale on-premise content origins; and increasing availability by leveraging Akamai’s globally distributed ingest points.

Media Analytics

We offer a comprehensive suite of analytics tools to monitor online video viewer experiences and the effectiveness of web software downloads, while measuring audience engagement, and quality of service performance. These solutions are designed to provide actionable and relevant metrics to help businesses understand their entire media workflow from ingest to device through four complementary modules: Quality of Service Monitor, Viewer Diagnostics, Audience Analytics and Download Analytics. Using these modules, businesses can set thresholds and uncover key sensitivities to focus on elements like site performance quality or usage behavior affecting success of online video experiences for both live and on-demand digital media, as well as download engagement and completion rates.

NetStorage

NetStorage is a globally-distributed cloud storage solution for our customers' content that offers automatic geographically-dispersed replication for resiliency, high availability and real time performance optimization. It complements our suite of Media Delivery Solutions to offer a simple, high-speed online content workflow solution.

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Performance and Security Solutions

Our Performance and Security Solutions are designed to take advantage of our core content and application delivery technologies to make the Internet work better for our customers.

Web Performance Solutions


•	Consumer Solutions – Akamai's consumer-focused Web Performance Solutions are designed to accelerate business-to-consumer websites that integrate rich, collaborative content and applications into their online architecture. Key offerings include:

◦

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

◦

Dynamic Site Accelerator – Dynamic Site Accelerator is designed to help customers experience globally consistent and faster website performance, handling the specific requirements of dynamically-generated content. Our platform continuously pulls and caches fresh site content onto Akamai servers, automatically directs content requests to an optimal server, routes the request via the most reliable path to data centers to retrieve and deliver dynamic interactive content. Customers rely on our ability to optimize communications to avoid Internet trouble spots and deliver a fast, reliable and secure web experience so they can focus on pursuing innovative ways to connect with users.

◦

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

◦

Global Traffic Management – Global Traffic Management is designed to ensure responsiveness to end user requests by leveraging our global load balancing technology. Unlike traditional hardware-based solutions that reside within the data center, our Global Traffic Management service is a fault-tolerant solution that makes intelligent routing decisions based on real-time data center performance health and global Internet conditions to help ensure user requests are routed to the most appropriate data center using the best possible Internet route for that user at that moment.


•	Enterprise Solutions – Our application delivery and cloud performance solutions are designed to improve the operation of highly-dynamic applications used by enterprises to connect with their customers, partners, employees and suppliers. Our enterprise web offerings are centered on:

◦

Alta – Alta is a cloud-based application delivery platform designed to enable enterprises to deliver all of their web-based applications in a fast, reliable, secure and cost-effective way to any user on any device, anywhere in the world. By placing all of the application delivery capabilities within the Akamai Intelligent Platform, applications can be seamlessly migrated across data centers or clouds at will, and the application delivery optimizations will automatically move with the application.

◦

Web Application Accelerator – Web Application Accelerator, or WAA, is a cloud-based service designed to enable enterprises to cost-effectively deliver web-based applications that are fast, reliable and secure. WAA empowers enterprises to overcome the challenges related to delivering business applications over the Internet by placing all of the application delivery capabilities within the Akamai Intelligent Platform, which means the optimizations are distributed globally and located closer to users and data centers around the world.

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◦

IP Application Accelerator – IP Application Accelerator, or IPA, is designed to enable enterprises to deliver IP applications to globally distributed users quickly, securely and reliably – without costly build-outs and dedicated IT infrastructure. IPA is architected to deliver high availability and consistent response times worldwide to support web applications including real-time interactive web conferencing solutions, virtualized applications and desktops (VDI), secure large files and applications accessed over SSL VPN connections and via mobile devices.

Cloud Security Solutions

Our Cloud Security Solutions are designed to help customers avoid data theft and downtime, as well as protect Internet-facing infrastructure, by extending the security perimeter to protect against the increasing frequency, scale and sophistication of web attacks. We offer a variety of services that address the Internet security needs of our customers, including the following:

•

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


•	Prolexic Routed – Prolexic Routed is designed to protect web- and IP-based applications in data centers from the threat of DDoS attacks by preventing attacks before they reach the data center. It provides protection against high-bandwidth, sustained web attacks as well as potentially crippling DDoS attacks that target specific applications and services.


•	Kona Web Application Firewall – The Kona Web Application Firewall service is designed to detect and mitigate potential web application attacks such as SQL injections, cross-site scripting and remote file inclusion – while keeping application performance high.

Cloud Networking Solutions

Our Cloud Networking Solutions are designed to help customers boost enterprise branch office and retail store productivity and revenue by accelerating applications, reducing bandwidth costs and extending the Internet and public clouds into private wide area networks, or WANs.

•

Cisco Intelligent WAN with Akamai Connect – This is a fully-integrated solution from Akamai and Cisco for enterprises with broadly distributed branches and office locations. By combining WAN optimization and intelligent caching directly into a Cisco router in enterprise branch locations, Akamai Connect extends the Akamai Intelligent Platform directly into the branch. The solution is architected to enable customers to reduce costs while delivering high-quality application experiences with minimal bandwidth impact, regardless of device, connectivity or public/private cloud architectures.

•

Steelhead Cloud Accelerator – Steelhead Cloud Accelerator is a cloud management solution that combines our Internet optimization technology with Riverbed Technology's private WAN optimization. By integrating the Akamai Intelligent Platform with Riverbed's RiOS, the solution optimizes Office 365 and Salesforce.com SaaS application performance whether users are located at corporate headquarters or remote branch offices.

Network Operator Solutions

With the growth in consumer adoption of Internet video and other media, networks around the world have experienced significant traffic increases, resulting in congestion across an operator's network from aggregation, to backbone, to interconnection. Our Network Operator Solutions are designed to help carriers operate a cost-efficient network that capitalizes on traffic growth and new subscriber services by reducing the complexity of building a content delivery network, or CDN, and interconnecting access providers. These offerings include:


•	Aura Licensed CDN – Aura Licensed CDN is a suite of solutions designed to enable delivery of next generation IP video services delivered to myriad types of devices across the Internet. With this solution, a network operator can build and operate a highly scalable media content delivery network that efficiently

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

•

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

Service and Support Solutions

Akamai offers an array of professional services and solutions that are designed to assist our customers with integrating, configuring and optimizing our core offerings. Special features available to enterprises that purchase our premium support solution include a dedicated technical account team, proactive service monitoring, custom technical support handling procedures and customized training.

Our Technology and Network

The Akamai Intelligent Platform leverages more than 170,000 servers deployed in approximately 1,300 networks ranging from large, backbone network providers to medium and small Internet service providers, or ISPs, to cable modem and satellite providers to universities and other networks. By deploying servers within a wide variety of networks across dozens of countries, we are better able to manage and control routing and delivery quality to geographically-diverse users. We also have more than 1,000 peering relationships that provide us with direct paths to end-user networks, which reduce data loss, while also potentially giving us more options for delivery at reduced cost.

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

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

Our Accelerated Network Partner Program allows participating network operators to install Akamai caching servers inside their network data centers. The servers and CDN capacity are fully managed by Akamai and are part of the Akamai Intelligent Platform. The program is designed to enable network operators to offer subscribers a better end-user experience for popular content and services.

Business Segments and Geographic Information

We operate in one industry segment: providing cloud services for delivering, optimizing and securing online content and business applications. For each of the years ended December 31, 2014, 2013 and 2012, 27% of our total revenue was derived from our operations outside the U.S. No single country outside of the U.S accounted for 10% or more of our revenue in any such year.

Our long-lived assets include servers, which are deployed into networks worldwide. As of December 31, 2014, we had approximately $249.5 million and $175.8 million of net property and equipment, excluding internal-use software, located in the U.S and foreign locations, respectively. As of December 31, 2013, we had approximately $210.9 million and $124.9 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively.

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Customers

As of December 31, 2014, our customers included many of the world's leading corporations, including Apple, Autodesk, BMW, Bombay Stock Exchange, eBay, EMC, FedEx, Home Depot, HubSpot, IBM, Investec, Panasonic, Qantas, Qualcomm, Ralph Lauren, Red Hat, Salesforce.com, Standard Chartered Bank, Turner Sports, Unilever, USAA and Virgin America. We also actively sell to government agencies. As of December 31, 2014, our public sector customers included the Federal Aviation Administration, the Federal Emergency Management Agency, the U.S. Census Bureau, the U.S. Department of Defense, the U.S. Postal Service and the U.S. Department of Labor.

No customer accounted for 10% or more of total revenue for any of the years ended December 31, 2014, 2013 and 2012. Less than 10% of our total revenue in each of the years ended December 31, 2014, 2013 and 2012 was derived from contracts or subcontracts terminable at the election of the federal government, and we do not expect such contracts to account for more than 10% of our total revenue in 2015.

Sales, Service and Marketing

Our sales, service and marketing professionals are located in approximately 40 offices in the Americas, Europe, the Middle East and Asia. We market and sell our solutions globally through our direct sales and service organization and through more than 100 active channel partners including AT&T, IBM and Telefonica Group. In addition to entering into agreements with resellers, we have several other types of sales and marketing focused alliances with entities such as system integrators, application service providers, referral partners and sales agents. By aligning with these partners, we believe we are better able to market our services and encourage increased adoption of our technology throughout the industry.

Our sales, service and marketing organization includes employees in direct and channel sales, sales operations, professional services, account management and technical consulting. As of December 31, 2014, we had 2,457 employees in this organization, including 385 direct sales representatives whose performance is measured on the achievement of quota objectives. Additionally, we have 1,010 technical and professional service employees who support our service revenue obligations and ongoing customer relationships.

To support our sales efforts and promote the Akamai brand, we conduct comprehensive marketing programs. Our marketing strategies include an active public relations campaign, print advertisements, online advertisements, participation at trade shows, strategic alliances, ongoing customer communication programs, training and sales support. As of December 31, 2014, we had 253 employees in our global marketing organization.

Research and Development

Our research and development personnel are continuously undertaking efforts to enhance and improve our existing services, strengthen our network and create new services in response to our customers' needs and market demand. As of December 31, 2014, we had 1,337 research and development employees. Our research and development expenses were $125.3 million, $93.9 million and $74.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. In addition, for the years ended December 31, 2014, 2013 and 2012, we capitalized $91.1 million, $67.9 million and $50.6 million, respectively, of payroll, payroll-related costs and external consulting related to the development of internal-use software to deliver our services and operate our network. Additionally, for the years ended December 31, 2014, 2013 and 2012, we capitalized $13.7 million, $11.5 million and $8.9 million, respectively, of stock-based compensation attributable to our research and development personnel.

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Competition

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


•	the performance and reliability of our services;


•	return on investment in terms of cost savings and new revenue opportunities for our customers;


•	reduced infrastructure complexity;


•	sophistication and functionality of our offerings;


•	scalability;


•	security;


•	ease of implementation and use of service;


•	customer support; and


•	price.

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

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

Proprietary Rights and Licensing

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. As of December 31, 2014, we owned, or had exclusive rights to, 230 issued U.S. patents covering our technology as well as patents issued by other countries. We also have numerous additional U.S. and foreign country patent applications pending. Our U.S.-issued patents extend to various dates between 2015 and 2033. We do not believe that the expiration of any particular patent in the near future would be material to our business. In October 1998, we entered into a license agreement with the Massachusetts Institute of Technology, or MIT, under which we were granted a royalty-free, worldwide exclusive right to use and sublicense the intellectual property rights of MIT under various patent applications and copyrights relating to Internet content delivery technology. We seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.

Employees

As of December 31, 2014, we had 5,105 full-time and part-time employees. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical, managerial and other personnel for whom competition is intense. Our employees are not represented by any collective bargaining unit. We believe our relations with our employees are good, and we have been acknowledged in respected publications as an excellent place to work.

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Item 1A. Risk Factors

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

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

We have been in business for approximately 15 years and consider ourselves pioneers in the development of content and application delivery solutions. As the information technology industry evolves, however, it may become increasingly difficult for us to maintain a technological advantage. In particular, our traditional offerings risk becoming commoditized as competitors or even current or former customers seek to replicate them such that we must lower the prices we charge, reducing the profitability of such offerings. We believe, therefore, that developing innovative, high-margin solutions is key to our revenue growth and profitability. We must do so in a rapidly changing technology environment where it can be difficult to anticipate the needs of potential customers and where competitors may develop products and services that are, or may be viewed as, better than ours. The process of developing new solutions is complex and uncertain; we must commit significant resources to developing new services or features without knowing whether our investments will result in services the market will accept. This could cause our expenses to grow more rapidly than our revenue. Furthermore, we may not successfully execute our technology initiatives because of errors in planning, timing or execution, technical or operational hurdles that we fail to overcome in a timely fashion, misunderstandings about market demand or a lack of appropriate resources. Failure to adequately develop, on a cost-effective basis, innovative new or enhanced solutions that are attractive to customers and to keep pace with rapid technological and market changes could have a material effect on our business, results of operations, financial condition and cash flows.

We believe that the Internet has the potential to experience dramatic growth in the future. For example, only a relatively small percentage of individuals watch television over the Internet now, but many predict that the Internet will become the dominant medium for delivery of video content in the future. In addition, the use of mobile devices has increased rapidly in recent years and is expected to continue to grow in the future. There could develop an inflection point above which global usage of the Internet increases to a level that our current approaches to the delivery of content and applications may not be sustainable at current levels of profitability or at all. It is expensive to deploy dedicated servers in data centers around the world; therefore, that approach to deploying at the "edge" of the Internet may be inadequate to fully address our customer's evolving needs. If we are unable to develop or acquire scalable new technologies to address the expected growth and other changes we expect, our business and financial statements may suffer.

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

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


•	our customers or partners becoming competitors;


•	our network suppliers becoming partners with us or, conversely, no longer seeking to work with us;


•	our working more closely with hardware providers;


•	large technology companies that previously did not appear to show interest in the markets we seek to address entering into those markets as competitors; and


•	our needing to expand into new lines of business.

As a result of this constantly changing environment, our future business strategies, practices and results may be difficult to predict, and we may face operational difficulties in adjusting to the changes.

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

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

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


•	develop superior products or services, gain greater market acceptance, and expand their service offerings more efficiently or more rapidly;


•	adapt to new or emerging technologies and changes in customer requirements more quickly;


•	take advantage of acquisition and other opportunities more readily;


•	adopt more aggressive pricing policies and devote greater resources to the promotion, marketing, and sales of their services; and


•	devote greater resources to the research and development of their products and services.

Smaller and more nimble competitors may be able to:


•	attract customers by offering less-sophisticated versions of services than we provide at lower prices than those we charge;


•	develop new business models that are disruptive to us; and


•	respond more quickly than we can to new or emerging technologies and changes in customer requirements, resulting in superior offerings.

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


•	pursue a "do-it-yourself" approach by putting in place equipment, software and other technology solutions for content and application delivery within their internal systems;


•	enter into relationships directly with network providers instead of relying on an overlay network like ours; or


•	implement dual vendor policies to reduce reliance on external providers like us.

Consequently, our competitors include hardware manufacturers, software companies and other entities that offer Internet-related solutions that are not service-based.

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

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

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

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

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

Numerous other factors could cause our revenue growth rate and profitability to decline.

Our revenue growth rate and profitability may decline in future periods as a result of a number of other factors, including:


•	failure to experience traffic growth and increase sales of our core services and advanced features;


•	changes in our customers' business models that we do not fully anticipate or that we fail to address adequately;


•	customers, particularly larger media customers, implementing their own data centers and delivery approaches to limit their reliance on third party providers like us;


•	macro-economic pressures; and


•	failure of a significant number of customers to pay our fees on a timely basis or at all or failure to continue to purchase our services in accordance with their contractual commitments.

We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. Many of our expenses are fixed cost in nature for some minimum amount of time, such as with co-location and bandwidth providers, so it may not be possible to reduce costs in a timely manner or without the payment of fees to exit certain obligations early. We also face higher expenses due to increased headcount and if customers shift significant amounts of their traffic to our secure socket layer, or SSL, network. Therefore, if our revenue does not increase as forecasted, we may not be able to maintain our current level of profitability in 2015 or on a quarterly or annual basis thereafter.

Security breaches and other unplanned interruptions in the functioning of our network or services could lead to significant costs and disruptions that could harm our business, financial results and reputation.

Our business is dependent on providing our customers with fast, efficient and reliable distribution of applications and content over the Internet. We transmit and store our customers' information and data as well as our own. Maintaining the security and availability of our services, network and internal IT systems is a critical issue for us and our customers. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers. As we expand our emphasis on selling security-related solutions, we may become a more attractive target for attacks on our infrastructure intended to steal information about our technology, financial data or customer information or take other actions that would be damaging to our customers and us. Our network or services could also be disrupted by numerous other events, including failure or refusal of our third party network providers to provide the necessary capacity, natural disasters, power losses and human error. Any significant breach of our security measures or other disruptions to our network or IT systems would threaten our ability to provide our customers with fast, efficient and reliable distribution of applications and content over the Internet, would harm our reputation and could lead to customer credits, loss of customers, higher expenses and increased legal liability.

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

Acquisitions are an important part of our corporate strategy. We may also enter into other types of strategic relationships that involve technology sharing or close cooperation with other companies. Acquisitions and other complex transactions are accompanied by a number of risks, including the following:


•	the difficulty of integrating the operations and personnel of acquired companies;


•	the potential disruption of our ongoing business;


•	the potential distraction of management;


•	expenses related to the transactions;


•	increased accounting charges such as impairment of goodwill or intangible assets, amortization of intangible assets acquired and a reduction in the useful lives of intangible assets acquired; and


•	potential unknown liabilities associated with acquired businesses.

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

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

Our future operating results will depend on our ability to manage our operations. As a result of the diversification of our business, personnel growth, acquisitions and international expansion in recent years, many of our employees are now based outside of our Cambridge, Massachusetts headquarters; however, most key management decisions are made by a relatively small group of individuals based primarily at our headquarters. If we are unable to appropriately increase management depth, enhance succession planning and decentralize our decision-making at a pace commensurate with our actual or desired growth rates, we may not be able to achieve our financial or operational goals.

We have greatly increased our employee base in recent years and have brought in hundreds of new employees through acquisitions. It is important to our continued success that we hire qualified employees, properly train them and manage out poorly-performing personnel, all while maintaining our corporate culture and spirit of innovation. If we are not successful at these efforts, our growth and operations could be adversely affected.

As our business evolves, we must also expand and adapt our operational infrastructure. Our business relies on our data systems, billing systems and other operational and financial reporting and control systems. All of these systems have become increasingly complex due to the diversification and complexity of our business, acquisitions of new businesses with different systems and increased regulation over controls and procedures. To manage our technical support infrastructure effectively and improve our sales efficiency, we will need to continue to upgrade and improve our data systems, billing systems, ordering processes and other operational and financial systems, procedures and controls. These upgrades and improvements will require a dedication of resources, are likely to be complex and increasingly rely on hosted computer services from third parties that we do not control. If we are unable to adapt our systems and organization in a timely, efficient and cost-effective manner to accommodate changing circumstances, our business may be adversely affected. If the third parties we rely on for hosted data solutions for our internal network and information systems are subject to a security breach or otherwise suffer disruptions that impact the services we utilize, the integrity and availability of our internal information could be compromised causing the loss of confidential or proprietary information, damage to our reputation and economic loss.

We face risks associated with international operations and expansion efforts that could harm our business.

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

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•	currency exchange rate fluctuations and limitations on the repatriation and investment of funds;


•	difficulties in transferring funds from, or converting currencies in, certain countries;


•	unexpected changes in regulatory requirements;


•	interpretations of laws or regulations that would subject us to regulatory supervision or, in the alternative, require us to exit a country, which could have a negative impact on the quality of our services or our results of operations;


•	uncertainty regarding liability for content or services;


•	adjusting to different employee/employer relationships and different regulations governing such relationships;


•	corporate and personal liability for alleged or actual violations of laws and regulations;


•	difficulty in staffing, developing and managing foreign operations as a result of distance, language and cultural differences;


•	reliance on channel partners over which we have limited control or influence on a day-to-day basis; and


•	potentially adverse tax consequences.

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

In particular, we are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. The investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market. If violations are found, we may be subject to penalties, which could include substantial fines.

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

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

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

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

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significant additional investment for us. These increased expenses have made, and will make, it more costly for us to expand our operations and more difficult for us to maintain or improve our profitability.

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

Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. In particular, domestic and foreign government attempts to regulate the operation of the Internet through net neutrality rules or other legislation, treaties or regulations could negatively impact our business even if our business is not the direct target of such regulations. Furthermore, the growth and development of the market for online commerce has prompted calls for more stringent copyright protection, tax, consumer protection, cybersecurity, content, anti-discrimination and privacy laws, both in the U.S. and abroad, that may impose additional burdens on companies conducting business online or providing Internet-related services such as ours. The adoption of any of these measures could negatively affect both our business directly as well as the businesses of our customers, which could reduce their demand for our services.

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

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

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

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


•	quarterly variations in operating results;


•	introduction of new products, services and strategic developments by us or our competitors;


•	market speculation about whether we are a takeover target;


•	changes in financial estimates and recommendations by securities analysts;


•	failure to meet the expectations of securities analysts;


•	purchases or sales of our stock by our officers and directors;


•	macro-economic factors;


•	repurchases of shares of our common stock;


•	performance by other companies in our industry; and


•	geopolitical conditions such as acts of terrorism or military conflicts.

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

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

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

As of December 31, 2014, we had total par value of $690.0 million of convertible senior notes outstanding. Our ability to refinance the notes, make cash payments in connection with conversions of the notes or repurchase those notes in the event of a fundamental change (as defined in the indenture governing the notes) will depend on market conditions and our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We also may not use the cash we have raised through the issuance of the convertible senior notes in an optimally productive and profitable manner. If we are unable to remain profitable or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for additional capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make cash payments upon conversion of the notes we would be required to issue significant amounts of our common stock, which would be dilutive to the stock of existing stockholders. If we do not have sufficient cash to repurchase notes following a fundamental change we would be in default under the terms of the notes, which could seriously harm our business. In addition, the terms of the notes do not limit the amount of future indebtedness we may incur. If we incur significantly more debt, this could intensify the risks described above.

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

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

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

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

None of our officers or key employees is bound by an employment agreement for any specific term. Members of our senior management team have left Akamai over the years for a variety of reasons, and we cannot be certain that there will not be additional departures, which may be disruptive to our operations and detrimental to our future outlook. The loss of the services of any of our key employees or our inability to attract and retain new talent could hinder or delay the implementation of our business model and the development and introduction of, and negatively impact our ability to sell, our services.

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

From time to time, we are or may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because such matters are inherently unpredictable, there can be no assurance that the results of any of these matters will not have an adverse impact on our business, results of operations, financial condition, or cash flows.

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

As we expand our business and develop new technologies, products and services, we may become increasingly

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


•	cease selling, incorporating or using features, functionalities, products or services that incorporate the challenged intellectual property;


•	pay substantial damages and incur significant litigation expenses;


•	obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or


•	redesign products or services.

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

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

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. These legal protections afford only limited protection. We have previously brought lawsuits against entities that we believed were infringing our intellectual property rights but have not always prevailed. Such lawsuits can be expensive and require a significant amount of attention from our management and technical personnel, and the outcomes are unpredictable. In 2014, the Supreme Court of the United States ruled against us in a case involving claims under one of our patents. There can be no assurance that evolving interpretations of patent laws in the United States and other countries will not limit the scope and enforceability and, therefore, the value of our patents. Monitoring unauthorized use of our services is difficult, and we cannot be certain that the steps we have taken or will take will prevent unauthorized use of our technology. Furthermore, we cannot be certain that any pending or future patent applications will be granted, that any future patent will not be challenged, invalidated or circumvented, or that rights granted under any patent that may be issued will provide competitive advantages to us. If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced. Although we have licensed from other parties proprietary technology covered by patents, we cannot be certain that any such patents will not be challenged, invalidated or circumvented. Such licenses may also be non-exclusive, meaning our competition may also be able to access such technology.

If our license agreement with MIT terminates, our business could be adversely affected.

We have licensed from the Massachusetts Institute of Technology, or MIT, technology that is covered by various patents and copyrights relating to Internet content delivery technology. Some of our core technology is based in part on the technology covered by these patents, patent applications and copyrights. Our license is effective for the life of the patents and patent applications; however, under limited circumstances, such as a cessation of our operations due to our insolvency or our material breach of the terms of the license agreement, MIT has the right to terminate our license. A termination of our license agreement with MIT could have a material adverse effect on our business. These patents are scheduled to expire beginning in 2018. As the patents expire, we will no longer have the right to exclude others from practicing the technologies covered by them.

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

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

If our ability to deliver media files in popular proprietary content formats were to become restricted or cost-prohibitive, demand for our content delivery services could decline, we could lose customers and our financial results could suffer.

Significant portions of our business depend on our ability to deliver media content in all major formats such as those used by companies like Adobe, Microsoft, Apple and Google. Owners of proprietary content formats may be able to block, restrict or impose fees or other costs on our use of such formats, which could lead to additional expenses for us and for our customers, or which could prevent our delivery of this type of content altogether. Such interference could result in a loss of existing customers, increased costs and impairment of our ability to attract new customers, which would harm our revenue, operating results and growth.

The potential exhaustion of the supply of unallocated IPv4 addresses and the inability of Akamai and other Internet users to successfully transition to IPv6 could harm our operations and the functioning of the Internet as a whole, thereby negatively affecting our business.

An Internet Protocol address, or IP address, is a numerical label that is assigned to any device connecting to the Internet. Today, the functioning of the Internet is dependent on the use of Internet Protocol version 4, or IPv4, the fourth version of the Internet Protocol, which uses 32-bit addresses. We currently rely on the acquisition of IP addresses for the functioning and expansion of our network and expect such reliance to continue in the future. There are, however, only a finite number of IPv4 addresses. The supply of unallocated IPv4 addresses is likely to be exhausted in the near future. Internet Protocol version 6, or IPv6, uses 128-bit addresses and has been designed to succeed IPv4 and alleviate the expected exhaustion of unallocated addresses under that version. While IPv4 and IPv6 will co-exist for some period of time, eventually all Internet users and companies will need to transition to IPv6. There can be no guarantee that the plans we have been developing for the transition to IPv6 will be effective. If we are unable to obtain the IPv4 addresses we need, on financial terms acceptable to us or at all, before we or other entities that rely on the Internet can transition to IPv6, our current and future operations could be materially harmed. If there is not a timely and successful transition to IPv6 by Internet users generally, the Internet could function less effectively, which could damage numerous businesses, the economy generally and the prospects for future growth of the Internet as a medium for transacting business. This could, in turn, be harmful to our financial condition, results of operations and cash flows.

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

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

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

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

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

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

Changes in regulations or user concerns regarding privacy and protection of user data could adversely affect our business.

Federal, state, foreign and international laws and regulations may govern the collection, use, retention, sharing and security of data that we receive from our customers, visitors to their websites and others. In addition, we have a publicly-available privacy policy concerning collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any privacy-related laws, government regulations or directives, or industry self-regulatory principles could result in damage to our reputation or proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business.

A large number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concern data privacy and retention issues related to our business. It is not possible to predict whether, when, or the extent to which such legislation may be adopted. In addition, the interpretation and application of user data protection laws are currently unsettled. These laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current data protection policies and practices. Complying with potentially varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

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

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

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

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

Global climate change regulations could adversely impact our business.

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

Our business could be adversely impacted as a result of war, acts of terrorism, natural disasters or climate change.

Terrorist acts, acts of war, natural disasters, or the direct and indirect effects of climate change (such as sea level rise, increased storm severity, drought, flooding, wildfires, pandemics and social unrest from resource depletion and rising food prices) may cause damage or disruption to our employees, facilities, customers, partners, suppliers, distributors and resellers, which could have an adverse impact on our business, results of operations and financial condition.

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

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

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

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


•	a classified board structure so that only approximately one-third of our board of directors is up for re-election in any one year;


•	our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director;


•	stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders' meeting; and


•	our board of directors may issue, without stockholder approval, shares of undesignated preferred stock.

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

As of March 2, 2015, we lease approximately 400,000 square feet of property in Cambridge, Massachusetts where our primary corporate offices are located. The leases for such space are scheduled to expire in December 2019, and of this space, we have subleased approximately 18,000 square feet to another company. We maintain offices in several other locations in the United States, including in or near each of Los Angeles, San Francisco, San Mateo and San Diego, California; Fort Lauderdale, Florida; Atlanta, Georgia; Chicago, Illinois; New York, New York; Dallas, Texas; Reston, Virginia and Seattle, Washington.

We also maintain offices in or near the following cities outside the United States: Bangalore, Delhi and Mumbai, India; Beijing and Hong Kong, China; Copenhagen, Denmark; Dusseldorf, Hamburg, Frankfurt and Munich, Germany; Paris, France; Brussels, Belgium; London, England; Tokyo, Fukuoka and Osaka, Japan; Singapore; Madrid, Spain; Sydney, Melbourne and Canberra, Australia; Netanya, Israel; Ottawa, Canada; San Jose, Costa Rica; Milan, Italy; Stockholm, Sweden; Seoul, South Korea; Zurich, Switzerland; Kuala Lumpur, Malaysia; Taipei, Taiwan; Amsterdam, the Netherlands; Prague, Czech Republic; and Krakow, Poland.

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

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

PART II

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

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



	2014				2013
	High		Low		High		Low
First quarter	$	63.15	$	45.59	$	42.53	$	33.55
Second quarter	$	62.76	$	50.52	$	48.47	$	32.64
Third quarter	$	64.74	$	56.40	$	53.20	$	42.17
Fourth quarter	$	65.39	$	51.74	$	53.61	$	43.74

As of February 24, 2015, there were 453 holders of record of our common stock.

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

Issuer Purchases of Equity Securities

The following is a summary of our repurchases of our common stock in the fourth quarter of 2014 (dollars in thousands, except per share data):



Period⁽¹⁾	Total Number of Shares Purchased⁽²⁾	Average Price Paid per Share⁽³⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽⁴⁾	Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs⁽⁴⁾
October 1, 2014 – October 31, 2014	285,791	$	56.63	285,791	$	459,583
November 1, 2014 – November 30, 2014	202,354	60.70		202,354	447,299
December 1, 2014 – December 31, 2014	216,944	63.00		216,944	433,632
Total	705,089	$	59.76	705,089	$	433,632


(1)	Information is based on settlement dates of repurchase transactions.


(2)	Consists of shares of our common stock, par value $0.01 per share. All repurchases were made pursuant to previously-announced programs.


(3)	Includes commissions paid.


(4)	In October 2013, the Board of Directors authorized a $750.0 million share repurchase program, effective from October 16, 2013 through December 31, 2016.

During the year ended December 31, 2014, we repurchased 4.6 million shares of our common stock for an aggregate of $268.6 million.

Item 6. Selected Financial Data

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

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



Year ended December 31,	2014		2013		2012		2011		2010
Revenue	$	1,963,874	$	1,577,922	$	1,373,947	$	1,158,538	$	1,023,586
Total costs and operating expenses	1,474,355		1,163,954		1,059,460		867,889		769,309
Income from operations	489,519		413,968		314,487		290,649		254,277
Net income	333,948		293,487		203,989		200,904		171,220
Basic net income per share	1.87		1.65		1.15		1.09		0.97
Diluted net income per share	1.84		1.61		1.12		1.07		0.90
Cash, cash equivalents and marketable securities	1,628,284		1,246,922		1,095,240		1,229,955		1,243,402
Total assets	4,001,546		2,957,685		2,600,627		2,345,501		2,352,676
Convertible senior notes	604,851		—		—		—		—
Other long-term liabilities	117,349		65,088		51,929		40,859		29,920
Total stockholders’ equity	2,945,335		2,629,431		2,345,754		2,156,250		2,177,605

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

•

Effective January 1, 2013, we increased the expected average useful lives of our network assets, primarily servers, from three to four years to reflect software and hardware related initiatives to manage our global network more efficiently. For the years ended December 31, 2014 and 2013, this change decreased depreciation expense on network assets by approximately $21.1 million and $45.7 million, respectively, and increased net income by approximately $15.5 million and $33.6 million, respectively. The change also increased both basic and diluted net income per share for the year ended December 31, 2014 by $0.09; and for the year ended December 31, 2013 by $0.19 and $0.18, respectively.


•	We divested our Advertising Decisions Solutions, or ADS, business in January 2013. Revenue from the ADS business was $2.7 million, $44.0 million, $42.7 million and $35.5 million for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.

•

During the years presented in the table above, various acquisitions occurred. In 2014, we completed one acquisition for a total purchase price of $392.1 million. In 2013, we completed two acquisitions having an aggregate purchase price of $61.9 million. In 2012, we completed four acquisitions having an aggregate purchase price of $344.7 million. See Note 8 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for more details regarding these acquisitions.

•

Our effective income tax rate was 30.4%, 30.0%, 36.6%, 34.6% and 34.7% for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. The variability of the rate was caused by certain one-time items recognized in the past few years. Our effective income tax rate for 2014 was lower than the federal statutory rate of 35.0%, primarily due to a state tax benefit from software development activities, which resulted in a tax benefit of $16.0 million for the period from January 1, 2010 to December 31, 2014, and the reinstatement of the federal research and development credit. In 2013, our effective income tax rate was favorably impacted by $18.3 million from the retroactive adoption of the domestic production activities deduction for the period from January 1, 2010 to December 31, 2013 and the reinstatement of the federal research and development credit, which was retroactive to 2012.

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

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

Overview

We provide cloud services for delivering, optimizing and securing online content and business applications. We primarily derive income from sales of services to customers executing contracts with terms of one year or longer. We believe that this emphasis on longer-term contracts generally allows us to have a consistent and predictable base level of revenue which is important to our financial success. We have been able to increase our revenue and profitability in recent years because we have expanded our customer base and increased the amount and value of services, features and functionalities that our customers purchase. These achievements have enabled us to limit the impact of customer cancellations and terminations and price reductions resulting from contract renewals. Continuing these trends requires that we compete effectively in the marketplace on the basis of the quality, price and overall attractiveness of our services and technology.

Our revenue is impacted primarily by factors such as the timing and variability of customer-specific one-time events, the prices we are able to charge for our services, the amount of traffic we serve on our network and the impact of seasonal variations on our business. We have observed the following trends related to our revenue in recent years:

•

On a consistent basis, we have increased committed recurring revenue by adding new customers and increasing sales of incremental services to our existing customers. We have also experienced increases in the rate of traffic delivered to our customers that use our solutions for video, gaming, social media and software downloads. These increases have offset the price reductions discussed below and losses of customers to competitors or in-house solutions.


•	The unit prices paid by some of our customers have declined, reflecting the impact of competition. These price reductions have primarily impacted customers for which we deliver high volumes of traffic over our network.

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•

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 the holiday season. 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 the nature and timing of software and gaming releases by our customers using our software download solutions.

Our profitability is also impacted by our expense levels, including direct costs to support our revenue, such as co-location and bandwidth costs, and expenses incurred to support strategic initiatives that we anticipate will generate revenue in the future. We have observed the following trends related to our profitability in recent years:

•

We have increased headcount to support our revenue growth and strategic initiatives, and as a result, our payroll and related compensation costs have increased. During the year ended December 31, 2014, we hired an additional 1,200 employees, including approximately 200 employees who were part of the acquisition of Prolexic Technologies, Inc., or Prolexic, in the first quarter of 2014. During 2013, we increased our headcount by more than 800 employees, which is net of approximately 70 employees who were part of the divestiture of our Advertising Decisions Solutions, or ADS, business in the first quarter of 2013. As of December 31, 2014, we had 5,105 employees. We expect to continue to hire additional employees and expand globally in support of our strategic initiatives.

•

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, but we believe such costs would be partially offset by anticipated continued reductions in bandwidth costs per unit and efficiency measures we take.

•

Co-location costs also represent 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 manage our co-location costs to maintain current levels of profitability.

•

Effective January 1, 2013, we increased the expected average useful lives of our network assets, primarily servers, from three to four years to reflect software and hardware related initiatives to manage our global network more efficiently. This change decreased depreciation expense related to our network equipment during 2014 and 2013, as compared to 2012. Conversely, we expect to continue to enhance and add functionality to our service offerings, which increases our internal-use software development costs attributable to employees working on such projects.


•	We have been able to reduce our tax rate in recent years as a result of available tax credits and other one-time items. However, we do not expect these one-time items to be consistently available to us in the future.

In February 2014, we completed the acquisition of Prolexic. Prolexic was slightly dilutive to our earnings per share for the year ended December 31, 2014. Revenue and expenses from the acquired operations have been included in our earnings since the acquisition date of February 18, 2014. Also in February 2014, we completed an offering of $690.0 million in par value of convertible senior notes. The notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature.

During 2013 we completed two acquisitions, and in 2012 we completed four acquisitions. Although our financial statements include revenue and expenses of the acquired companies following their acquisitions, the impact was not material, individually or in the aggregate, to our consolidated financial results. In the first quarter of 2013, we also divested our ADS business.

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Results of Operations

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



	2014		2013		2012
Revenue	100.0	%	100.0	%	100.0	%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	31.1		32.4		38.6
Research and development	6.4		5.9		5.4
Sales and marketing	19.3		17.8		16.3
General and administrative	16.6		16.2		15.3
Amortization of acquired intangible assets	1.6		1.4		1.5
Restructuring charges	0.1		0.1		—
Total costs and operating expenses	75.1		73.8		77.1
Income from operations	24.9		26.2		22.9
Interest income	0.4		0.4		0.5
Interest expense	(0.8	)	—		—
Other (expense) income, net	(0.1	)	—		—
Income before provision for income taxes	24.4		26.6		23.4
Provision for income taxes	7.4		8.0		8.6
Net income	17.0	%	18.6	%	14.8	%

Revenue

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



	For the Years Ended December 31,						For the Years Ended December 31,
	2014		2013		% Change		2013		2012		% Change
Revenue	$	1,963,874	$	1,577,922	24.5	%	$	1,577,922	$	1,373,947	14.8	%

The increase in our revenue from 2013 to 2014 was driven by continued strong demand for our services across all of our major solutions and geographies. In particular, we experienced the addition of new customers, increased sales of incremental services to our existing customers and amounts earned for traffic usage in excess of committed amounts as well as customer-specific one-time events. In addition, the acquisition of Prolexic during the first quarter of 2014 contributed to increased revenue. These contributions to higher revenue were partially offset by lost committed recurring revenue and price declines.

The increase in our revenue from 2012 to 2013 was also driven by increased demand for our services, partially offset by the divestiture of ADS in the first quarter of 2013.

For the year ended December 31, 2014, resellers accounted for 25% of revenue as compared to 21% and 22% of revenue, respectively, for the years ended December 31, 2013 and 2012. For the years ended December 31, 2014, 2013 and 2012, no single customer accounted for 10% or more of revenue.

Effective in the first quarter of 2014, we elected to revise our method for determining the split of revenue derived from our operations located outside the U.S. Previously, revenue was split based on our invoicing location and has been revised to reflect the location in which the sale originated. Prior period amounts have been revised to reflect the new method. For the years ended December 31, 2014, 2013 and 2012, approximately 27% of our revenue was derived from our operations located outside of the U.S. No single country outside of the U.S. accounted for 10% or more of revenue during any of these periods. During 2014, we experienced strong revenue growth from our operations in the Asia Pacific region and continued improvement in revenue growth from our operations in Europe, the Middle East and Africa, primarily driven by growth across all of our major solutions.

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Changes in foreign currency exchange rates negatively impacted our revenue by $7.8 million during 2014 as compared to 2013. Changes in foreign currency exchange rates negatively impacted our revenue by $15.0 million during 2013 as compared to 2012.

During the first quarter of 2015, we elected to revise the presentation of our revenue solution categories, primarily related to how we present product-specific services revenue. Historically, product-specific services were classified as Service and Support Solutions revenue. Beginning in the first quarter of 2015, product-specific services will be classified in their respective product solution categories.

The following table quantifies the contribution to revenue from our solution categories during the periods presented under our revised presentation (in thousands):



	For the Years Ended December 31,						For the Years Ended December 31,
	2014		2013		% Change		2013		2012		% Change
Media Delivery Solutions	$	917,407	$	760,550	20.6	%	$	760,550	$	654,144	16.3	%
Performance and Security Solutions	900,713		697,825		29.1		697,825		585,615		19.2
Service and Support Solutions	145,754		117,418		24.1		117,418		90,857		29.2
Advertising Decision Solutions and other	—		2,129		(100.0	)	2,129		43,331		(95.1	)
Total revenue	$	1,963,874	$	1,577,922	24.5	%	$	1,577,922	$	1,373,947	14.8	%

The following table quantifies the contribution to revenue from our solution categories during the periods presented under our previous presentation (in thousands):



	For the Years Ended December 31,						For the Years Ended December 31,
	2014		2013		% Change		2013		2012		% Change
Media Delivery Solutions	$	911,715	$	757,147	20.4	%	$	757,147	$	652,968	16.0	%
Performance and Security Solutions	879,221		690,559		27.3		690,559		583,818		18.3
Service and Support Solutions	172,938		128,087		35.0		128,087		93,830		36.5
Advertising Decision Solutions and other	—		2,129		(100.0	)	2,129		43,331		(95.1	)
Total revenue	$	1,963,874	$	1,577,922	24.5	%	$	1,577,922	$	1,373,947	14.8	%

The increases in Media Delivery Solutions revenue for 2014 as compared to 2013, and 2013 as compared to 2012, were due to strong demand across most of our customer base, including from our largest, most strategic customers. During 2014, we experienced particularly strong growth from our social media, gaming, video and software download customers.

The increases in Performance and Security Solutions revenue for 2014 as compared to 2013, and 2013 as compared to 2012, were due to increases in demand from both new and existing customers, particularly for our web performance and cloud security solutions. Additionally, the increase for 2014 as compared to 2013 was partially attributable to the acquisition of Prolexic.

The increases in the Service and Support Solutions revenue for 2014 as compared to 2013, and 2013 as compared to 2012, were due to increases in sales of our services and support offerings due to strong service attachment rates – increased purchases of professional services to support the integration and use of our core solutions – for both customers of our core Media Delivery and Performance and Security Solutions. We also experienced increases in 2014 as compared to 2013 as a result of event-driven revenues as our customers relied on our service professionals to help them execute live media events.

The ADS business was divested in the first quarter of 2013, which had a modest negative impact on 2014 and 2013 revenue as compared to 2012.

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Cost of Revenue

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



	For the Years Ended December 31,								For the Years Ended December 31,
	2014			2013			% Change		2013			2012			% Change
Bandwidth fees	$	124,470		$	103,344		20.4	%	$	103,344		$	95,185		8.6	%
Co-location fees	113,661			111,052			2.3		111,052			111,673			(0.6	)
Network build-out and supporting services	42,114			37,123			13.4		37,123			56,598			(34.4	)
Payroll and related costs	143,468			112,806			27.2		112,806			91,954			22.7
Stock-based compensation, including amortization of prior capitalized amounts	21,866			18,568			17.8		18,568			18,731			(0.9	)
Depreciation and impairment of network equipment	107,250			83,811			28.0		83,811			117,997			(29.0	)
Amortization of internal-use software	58,114			44,383			30.9		44,383			37,762			17.5
Total cost of revenue	$	610,943		$	511,087		19.5	%	$	511,087		$	529,900		(3.6	)%
As a percentage of revenue	31.1		%	32.4		%			32.4		%	38.6		%

The increase in total cost of revenue for 2014 as compared to 2013 was primarily due to increases in:


•	payroll and related costs of service personnel due to headcount growth to support our Service and Support Solutions revenue growth, as well as headcount growth related to our network operations to support our other solution categories and from acquisitions;


•	amounts paid to network providers for bandwidth fees to support the increase in traffic served on our network; and


•	depreciation and amortization of network equipment and internal-use software as we continued to invest in our infrastructure and release internally developed software onto our network.

The net decrease in cost of revenue for 2013 as compared to 2012 was primarily due to decreases in:


•	depreciation expense of network equipment in place as of January 1, 2013 of approximately $39.0 million, reflecting the increase in the expected average useful lives of our network assets, primarily servers, from three to four years to reflect software and hardware related initiatives to manage our global network more efficiently; and


•	cost of revenue of our ADS business, included in supporting services, which we divested in January 2013; these expenses were $1.6 million and $24.2 million for the years ended December 31, 2013 and 2012, respectively.

The net decrease for 2013 as compared to 2012 was partially offset by increases in payroll and related costs of service personnel due to headcount growth, amounts paid to network providers for bandwidth fees to support the increase in traffic served on our network and amortization of internal-use software as we continued to invest in our infrastructure.

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

We believe that cost of revenue will increase during 2015 as compared to 2014. We expect to deploy more servers and deliver more traffic on our network, which will result in higher expenses associated with the increased traffic and additional co-location fees; however, such costs are likely to be partially offset by lower bandwidth costs per unit and continued efficiency in network deployment. Additionally, during 2015, we anticipate amortization of internal-use software development costs as compared to 2014 to increase, along with increased payroll and related costs associated with our network and professional services personnel and related expenses. We plan to continue to make investments in our network in the expectation that our customer base will continue to expand.

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Research and Development Expenses

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



	For the Years Ended December 31,								For the Years Ended December 31,
	2014			2013			% Change		2013			2012			% Change
Payroll and related costs	$	188,509		$	139,018		35.6	%	$	139,018		$	104,244		33.4	%
Stock-based compensation	19,351			17,472			10.8		17,472			17,275			1.1
Capitalized salaries and related costs	(91,106		)	(67,935		)	34.1		(67,935		)	(50,648		)	34.1
Other expenses	8,532			5,324			60.3		5,324			3,873			37.5
Total research and development	$	125,286		$	93,879		33.5	%	$	93,879		$	74,744		25.6	%
As a percentage of revenue	6.4		%	5.9		%			5.9		%	5.4		%

The increases in research and development expenses for 2014 as compared to 2013, and 2013 as compared to 2012, were due to increases in payroll and related costs as a result of continued growth in headcount to support investments in new product development, partially offset by increases in capitalized salaries and related costs.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. These development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. For the years ended December 31, 2014, 2013 and 2012, we capitalized $13.7 million, $11.5 million and $8.9 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 increase in absolute dollars during 2015 as compared to 2014 as we expect to continue to hire additional development personnel in order to make improvements to our core technology and support the development of new services and engineering innovation.

Sales and Marketing Expenses

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



	For the Years Ended December 31,								For the Years Ended December 31,
	2014			2013			% Change		2013			2012			% Change
Payroll and related costs	$	264,788		$	191,554		38.2	%	$	191,554		$	147,571		29.8	%
Stock-based compensation	47,571			39,290			21.1		39,290			34,322			14.5
Marketing programs and related costs	35,833			26,449			35.5		26,449			23,508			12.5
Other expenses	30,843			23,087			33.6		23,087			17,947			28.6
Total sales and marketing	$	379,035		$	280,380		35.2	%	$	280,380		$	223,348		25.5	%
As a percentage of revenue	19.3		%	17.8		%			17.8		%	16.3		%

The increases in sales and marketing expenses for 2014 as compared to 2013, and 2013 as compared to 2012, were primarily due to higher payroll and related costs, as we invested in our sales and marketing organization, and to an increase in marketing programs and related costs in support of our go-to-market capacity and ongoing geographic expansion. Other expenses, which consisted primarily of sales and marketing events and related travel expenses, increased as we grew our sales and marketing organization.

We believe that sales and marketing expenses will increase in absolute dollars during 2015 as compared to 2014, due to an expected increase in payroll and related costs as a result of anticipated continued headcount growth primarily with respect to our direct sales team and corporate marketing function.

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General and Administrative Expenses

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



	For the Years Ended December 31,								For the Years Ended December 31,
	2014			2013			% Change		2013			2012			% Change
Payroll and related costs	$	146,373		$	105,205		39.1	%	$	105,205		$	83,845		25.5	%
Stock-based compensation	33,151			28,255			17.3		28,255			27,679			2.1
Depreciation and amortization	40,053			26,991			48.4		26,991			20,018			34.8
Facilities-related costs	52,684			44,030			19.7		44,030			34,570			27.4
Provision for doubtful accounts	1,229			475			158.7		475			(1,402		)	133.9
Acquisition-related costs	3,911			1,853			111.1		1,853			5,787			(68.0	)
Professional and other fees	48,444			48,409			0.1		48,409			39,603			22.2
Total general and administrative	$	325,845		$	255,218		27.7	%	$	255,218		$	210,100		21.5	%
As a percentage of revenue	16.6		%	16.2		%			16.2		%	15.3		%

General and administrative expenses include costs of our finance, human resources, information technology, legal and administrative network infrastructure functions, in addition to our facility-related costs and depreciation of facility-related capital assets. The increases in general and administrative expenses for 2014 as compared to 2013, and 2013 as compared to 2012, were primarily due to the expansion of company infrastructure to support investments in engineering, go-to-market capacity and enterprise expansion initiatives. In particular, we increased general and administrative headcount and expanded our facility footprint, which collectively increased payroll and related costs, facilities-related costs and depreciation and amortization. In addition, acquisition-related costs increased for 2014 as compared to 2013 due to the acquisition of Prolexic. Conversely, acquisition-related costs for 2013 as compared to 2012 decreased due to the acquisitions of Cotendo, Inc., Blaze Software, Inc., FastSoft, Inc., or FastSoft, and Verivue, Inc., or Verivue, in 2012, with no corresponding acquisitions of the same magnitude in 2013.

During 2015, we expect general and administrative expenses to increase in absolute dollars as compared to 2014 due to anticipated higher payroll and related costs and facilities-related costs attributable to increased hiring, investment in information technology and planned facility expansion.

Amortization of Acquired Intangible Assets



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Amortization of acquired intangible assets	$	32,057		$	21,547		48.8	%	$	21,547		$	20,962		2.8	%
As a percentage of revenue	1.6		%	1.4		%			1.4		%	1.5		%

The increase in amortization of acquired intangible assets during 2014 as compared to 2013 was due to the acquisition of Prolexic. The increase in amortization of acquired intangible assets during 2013 as compared to 2012 was due to the amortization of assets related to the acquisition of strategic network assets from AT&T Services, Inc. and also a full year of amortization from the acquisitions occurring in 2012, which was partially offset by the write-off of intangible assets recorded as part of the divestiture of ADS in 2013 and the completion of amortization of intangible assets acquired in previous years.

Based on acquired intangible assets at December 31, 2014, future amortization is expected to be approximately $26.8 million, $25.2 million, $23.1 million, $16.2 million and $12.6 million for the years ending December 31, 2015, 2016, 2017, 2018 and 2019, respectively. The decrease in expected amortization is due to the finalization of amortization of acquired intangible assets acquired in earlier years, in addition to the deceleration in recognition due to the pattern in which we amortize intangible assets.

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Restructuring Charges



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Restructuring charges	$	1,189		$	1,843		(35.5	)%	$	1,843		$	406		353.9	%
As a percentage of revenue	0.1		%	0.1		%			0.1		%	—		%

The 2014 restructuring charges consisted of severance and related expenses as a result of the acquisition of Prolexic, in addition to a fee for a facility contract termination. During 2013, we recorded a restructuring charge for leasehold improvements that were no longer in use as a result of an early lease termination. In addition, we incurred severance and relocation expenses for employees impacted by the closing of the facility. In 2012, we recorded restructuring charges related to work force reductions in connection with the 2012 acquisitions of FastSoft and Verivue. We do not expect to incur additional restructuring charges as a result of any of these actions.

Interest Income



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Interest income	$	7,680		$	6,077		26.4	%	$	6,077		$	6,455		(5.9	)%
As a percentage of revenue	0.4		%	0.4		%			0.4		%	0.5		%

Interest income consists of interest earned on invested cash balances and marketable securities.

Interest Expense



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Interest expense	$	(15,463	)	$	—		100.0	%	$	—		$	—		—	%
As a percentage of revenue	(0.8		)%	—		%			—		%	—		%

Interest expense consists of the amortization of the debt discount and debt issuance costs related to our convertible senior notes issued in February 2014.

Other (Expense) Income, Net



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Other (expense) income, net	$	(1,960	)	$	(491	)	299.2	%	$	(491	)	$	649		(175.7	)%
As a percentage of revenue	(0.1		)%	—		%			—		%	—		%

Other (expense) income, net primarily represents net foreign exchange gains and losses incurred. The fluctuation in other (expense) income, net for 2014 as compared to 2013, and 2013 as compared to 2012, was primarily due to foreign currency exchange rate fluctuations on inter-company and other non-functional currency transactions.

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Provision for Income Taxes



	For the Years Ended December 31,								For the Years Ended December 31,
(in thousands)	2014			2013			% Change		2013			2012			% Change
Provision for income taxes	$	145,828		$	126,067		15.7	%	$	126,067		$	117,602		7.2	%
As a percentage of revenue	7.4		%	8.0		%			8.0		%	8.6		%
Effective income tax rate	30.4		%	30.0		%			30.0		%	36.6		%

For the year ended December 31, 2014, our effective income tax rate was lower than the federal statutory tax rate mainly due to the federal research and development credit, a state tax benefit from software development activities, the domestic production activities deduction and the composition of income in foreign jurisdictions with lower tax rates; partially offset by state income taxes and the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments. For the year ended December 31, 2013, our effective income tax rate was lower than the federal statutory rate mainly due to the retroactive adoption of the domestic production activities deduction, the reinstatement of the federal research and development credit, which included a one-time retroactive impact for fiscal 2012, and the composition of income in foreign jurisdictions with lower tax rates; partially offset by state income taxes. For the year ended December 31, 2012, our effective income tax rate was higher than the federal statutory tax rate mainly due to state income tax expense and the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments; partially offset by the composition of income in foreign jurisdictions with lower tax rates.

The increase in the provision for income taxes for the year ended December 31, 2014 as compared to the same period in 2013 was mainly due to the increase in operating income and a change in the composition of projected income in different jurisdictions, partially offset by the reinstatement of the federal research and development credit, the federal domestic production activities deduction and state software development activities benefit. The increase in the provision for income taxes for the year ended December 31, 2013 as compared to the same period in 2012 was mainly due to the increase in operating income, partially offset by the domestic production activities deduction, the federal research and development credit and a change in the composition of projected income in different jurisdictions.

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

Non-GAAP Financial Measures

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

Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in our business, as they exclude expenses and gains that may be infrequent, unusual in nature or otherwise not reflective of our ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating our operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

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

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


•	Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we made. The amount of an acquisition's purchase price

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allocated to intangible assets and term of its related amortization can vary significantly and are unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.

•

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

•

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

•

Restructuring charges – We have incurred restructuring charges that are included in our GAAP financial statements, primarily related to workforce reductions and estimated costs of exiting facility lease commitments. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items are not consistently recurring and do not reflect expected future operating expense, nor provide meaningful insight into the fundamentals of current or past operations of our business.


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


•	Gains and other activity related to divestiture of a business – We recognized a gain and other activity related to the divestiture of our ADS business. We exclude gains and other activity related to divestiture of a business from our non-GAAP financial measures because transactions of this nature occur infrequently and are not considered part of our core business operations.

•

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


•	Loss on investments and legal settlements – We have incurred losses from the impairment of certain investments and the settlement of legal matters. We believe excluding these amounts from non-GAAP financial measures is useful to investors as they occur infrequently and are not representative of our core business operations.

•

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

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The following table reconciles GAAP income from operations to non-GAAP income from operations and non-GAAP operating margin for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	2014			2013			2012
Income from operations	$	489,519		$	413,968		$	314,487
Amortization of acquired intangible assets	32,057			21,547			20,962
Stock-based compensation	111,996			95,884			90,585
Amortization of capitalized stock-based compensation	10,345			8,077			7,680
Amortization of capitalized interest expense	161			—			—
Acquisition-related costs	4,807			1,853			5,787
Legal settlements	285			—
Restructuring charges	1,189			1,843			406
Benefit from adoption of software development activities	(2,670		)	—			—
Gain from divestiture of a business	—			(1,188		)	—
Non-GAAP income from operations	$	647,689		$	541,984		$	439,907
Non-GAAP operating margin	33		%	34		%	32		%

The following table reconciles GAAP net income to non-GAAP net income and non-GAAP net income per diluted share for the years ended December 31, 2014, 2013 and 2012 (in thousands, except per share data):



	2014			2013			2012
Net income	$	333,948		$	293,487		$	203,989
Amortization of acquired intangible assets	32,057			21,547			20,962
Stock-based compensation	111,996			95,884			90,585
Amortization of capitalized stock-based compensation	10,345			8,077			7,680
Amortization of capitalized interest expense	161			—			—
Acquisition-related costs	4,807			1,853			5,787
Legal settlements	285			—			—
Restructuring charges	1,189			1,843			406
Benefit from adoption of software development activities	(2,670		)	—			—
Gain from divestiture of a business	—			(1,188		)	—
Amortization of debt discount and issuance costs	15,463			—			—
Loss on investments	443			—			—
Income tax effect of above non-GAAP adjustments	(59,202		)	(54,124		)	(38,061		)
Non-GAAP net income	$	448,822		$	367,379		$	291,348

GAAP net income per diluted share	$	1.84		$	1.61		$	1.12
Non-GAAP net income per diluted share	$	2.48		$	2.02		$	1.60
Shares used in per share calculations	181,186			181,783			181,749

Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by diluted weighted average common shares outstanding. GAAP diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of $690.0 million in par value of convertible senior notes due 2019. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of net income per share. Until our weighted average stock price is greater than $89.56, the initial conversion price, there will be no difference between our GAAP and non-GAAP diluted weighted average common shares outstanding.

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

The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	2014			2013			2012
Net income	$	333,948		$	293,487		$	203,989
Amortization of acquired intangible assets	32,057			21,547			20,962
Stock-based compensation	111,996			95,884			90,585
Amortization of capitalized stock-based compensation	10,345			8,077			7,680
Amortization of capitalized interest expense	161			—			—
Acquisition-related costs	4,807			1,853			5,787
Legal settlement	285			—			—
Restructuring charges	1,189			1,843			406
Benefit from adoption of software development activities	(2,670		)	—			—
Gain from divestiture of a business	—			(1,188		)	—
Interest income	(7,680		)	(6,077		)	(6,455		)
Amortization of debt discount and issuance costs	15,463			—			—
Provision for income taxes	145,828			126,067			117,602
Depreciation and amortization	204,843			154,807			175,521
Other expense (income), net	1,960			491			(649		)
Adjusted EBITDA	$	852,532		$	696,791		$	615,428
Adjusted EBITDA margin	43		%	44		%	45		%

Impact of Foreign Currency Exchange Rates on Revenue

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

Because exchange rates are an important factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue enhances the understanding of our revenue results and evaluation of performance in comparison to prior periods. The information presented is calculated by translating current period results using the same average foreign currency exchange rates per month from the comparative period.

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Liquidity and Capital Resources

To date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of December 31, 2014, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds and U.S. government agency securities, totaled $1.6 billion. We place our cash investments in instruments that meet high quality credit standards, as specified in our investment policy. Our investment policy is also designed to limit the amount of our credit exposure to any one issue or issuer and advance goals of preserving principal and maintaining adequate liquidity at all times.

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

As of December 31, 2014, we had cash and cash equivalents of $144.3 million held in accounts outside the U.S. An immaterial amount of these funds would be subject to U.S. federal taxation if repatriated, with such tax liability partially offset by foreign tax credits. The remainder of our cash and cash equivalents held outside the U.S. are subject to, or offset by, inter-company obligations to our parent company in the U.S. and, therefore, are not subject to U.S. federal taxation. As a result, we do not believe our liquidity is materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S.

Cash Provided by Operating Activities



	For the Years Ended December 31,
(in thousands)	2014		2013			2012
Net income	$	333,948	$	293,487		$	203,989
Non-cash reconciling items included in net income	319,312		286,033			265,601
Changes in operating assets and liabilities	4,810		(15,612		)	60,430
Net cash flows provided by operating activities	$	658,070	$	563,908		$	530,020

The increase in cash provided by operating activities for the year ended December 31, 2014 as compared to 2013, and 2013 as compared to 2012, was primarily due to increased profitability and the resulting cash collections from customers, offset by payments of working capital. Cash paid for income taxes also impacted cash flows provided by operating activities, which were $166.2 million, $63.5 million and $94.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. During 2014 and 2012, we paid taxes related to our acquisitions which increased cash paid for taxes during those years. In addition, we changed the way we scheduled estimated U.S federal tax payments which caused cash paid for taxes to decrease during 2013 as compared to both 2014 and 2012. The increase in our profitability has also generally had the impact of increasing cash paid for income taxes during recent years.

We expect cash provided by operating activities to increase in 2015 due to an expected increase in cash collections related to anticipated higher revenue, partially offset by an anticipated increase in operating expenses that require cash outlays, such as salaries and commissions.

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Cash Used in Investing Activities



	For the Years Ended December 31,
(in thousands)	2014			2013			2012
Cash paid for acquired businesses, net of cash acquired	$	(386,532	)	$	(30,657	)	$	(336,680	)
Purchases of property and equipment and capitalization of internal-use software costs	(318,627		)	(260,073		)	(220,977		)
Net marketable securities activity	(479,392		)	(19,750		)	(222,277		)
Other investing activity	5,745			(2,628		)	824
Net cash used in investing activities	$	(1,178,806	)	$	(313,108	)	$	(779,110	)

The increase in cash used in investing activities for the year ended December 31, 2014 as compared to 2013, primarily relates to the acquisition of Prolexic, with no corresponding acquisitions of the same magnitude in 2013. The increase also relates to the increase in net purchases of marketable securities as a result of the investment of the proceeds of our convertible senior notes issuance. Additionally, expenditures for internal-use software increased as we continued to invest in our network with the goal of enhancing and adding functionality to our service offerings.

The decrease in cash used in investing activities for the year ended December 31, 2013 as compared to 2012, primarily related to the four acquisitions we completed in 2012 (see Note 8 to the consolidated financial statements), with no corresponding acquisitions of the same magnitude in 2013. The decrease also relates to the timing of purchases and sales of marketable securities, offset by an increase in our capital expenditures.

Cash Provided by (Used in) Financing Activities



	For the Years Ended December 31,
(in thousands)	2014			2013			2012
Activity related to convertible senior notes	$	655,413		$	—		$	—
Activity related to stock-based compensation	68,698			45,176			33,439
Repurchases of common stock	(268,647		)	(160,419		)	(141,468		)
Acquisition-related financing activities	(19,437		)	—			—
Net cash provided by (used in) financing activities	$	436,027		$	(115,243	)	$	(108,029	)

Cash provided by financing activities for the year ended December 31, 2014 was primarily the result of the convertible senior notes issued in February 2014 and related note hedge and warrant transactions. Concurrently with the convertible senior notes issuance, we also repurchased $62.0 million of our common stock, which contributed to the increase in repurchases of common stock as compared to 2013.

The increase in cash used in financing activities during the year ended December 31, 2013 as compared to 2012, was the result of an increase in repurchases of our common stock, partially offset by an increase in proceeds received from our stock-based compensation plans.

In October 2013, the Board of Directors authorized a $750.0 million share repurchase program, effective from October 16, 2013 through December 31, 2016. The goal of the program is to offset dilution from our equity compensation plans. During the years ended December 31, 2014, 2013 and 2012, we repurchased 4.6 million, 3.9 million and 4.4 million shares of our common stock, respectively, at an average price per share of $58.02, $41.16 and $32.45, respectively, pursuant to the current repurchase program, as well as prior programs approved by the Board of Directors.

Repurchases under the share repurchase program will be executed in the open market subject to Rule 10b-18 promulgated under the Exchange Act. Subject to applicable securities laws requirements, we may choose to suspend or discontinue the repurchase program at any time. Any purchases made under the program will be reflected as an increase in cash used in financing activities.

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Convertible Senior Notes

In February 2014, we issued $690.0 million par value of convertible senior notes due 2019 and entered into related convertible note hedge and warrant transactions. The terms of the notes, hedge and warrant transactions are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. We intend to use the net proceeds of the offering for share repurchases in addition to the $62.0 million in repurchases discussed above, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.

Liquidity Outlook

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

Contractual Obligations, Contingent Liabilities and Commercial Commitments

The following table presents our contractual obligations and commercial commitments, as of December 31, 2014, for the next five years and thereafter (in thousands):



	Payments Due by Period
	Total		Less than 12 Months		12 to 36 Months		36 to 60 Months		More than 60 Months
Real estate operating leases	$	223,261	$	40,728	$	81,426	$	62,695	$	38,412
Bandwidth and co-location agreements	149,879		119,081		30,341		457		—
Open vendor purchase orders	123,987		115,014		8,178		795		—
Convertible senior notes	690,000		—		—		690,000		—
Total contractual obligations	$	1,187,127	$	274,823	$	119,945	$	753,947	$	38,412

In accordance with the authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2014, we had unrecognized tax benefits of $41.1 million, including $7.7 million of accrued interest and penalties. We believe it is reasonably possible $4.3 million of our unrecognized tax benefits may be recognized by the end of 2015 as a result of ongoing audits. The settlement period for the remaining amount is unknown.

Letters of Credit

As of December 31, 2014, we had outstanding $8.3 million in irrevocable letters of credit issued by us in favor of third party beneficiaries, primarily related to facility leases. These irrevocable letters of credit, which are not included in the table of contractual obligations above, are unsecured and are expected to remain in effect, in some cases, until January 2024.

Off-Balance Sheet Arrangements

We have entered into various indemnification arrangements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies and third party licensees of our technology. Generally, these indemnification agreements require us to reimburse losses suffered by third parties due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. To date, we have not encountered material costs as a result of such obligations and have not accrued any significant liabilities related to such indemnification obligations in our financial statements. See Note 10 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of these indemnification agreements.

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Legal Matters

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

We are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. that represented less than 1% of our revenue in each of the years ended December 31, 2014, 2013 and 2012. The internal investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market. In February 2015, we voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. As of the filing of this annual report on Form 10-K, we cannot predict the outcome of this matter. No provision with respect to this matter has been made in our consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. 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. This guidance will be effective for us on January 1, 2017 and may be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the potential impact of adopting this new accounting guidance.

Application of Critical Accounting Policies and Estimates

Overview

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

Definitions

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

Review of Critical Accounting Policies and Estimates

Revenue Recognition

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

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

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

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

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

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

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

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

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

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

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

Accounts Receivable and Related Reserves

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

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

Valuation and Impairment of Marketable Securities

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

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

Impairment and Useful Lives of Long-Lived Assets

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

Effective January 1, 2013, we increased the expected average useful lives of our network assets, primarily servers, from three to four years to reflect software and hardware related initiatives to manage our global network more efficiently. This change was recorded prospectively and decreased depreciation expense on network assets by approximately $21.1 million and $45.7 million and increased net income by approximately $15.5 million and $33.6 million for the years ended December 31, 2014 and 2013, respectively. The change also increased both basic and diluted net income per share by $0.09 for the year ended December 31, 2014 and $0.19 and $0.18, respectively, for the years ended December 31, 2013.

Goodwill and Acquired Intangible Assets

We test goodwill for impairment on an annual basis, as of December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer and the executive management team. We have assigned the entire balance of goodwill to our one reporting unit. The fair value of the reporting unit was based on our market capitalization as of each of December 31, 2014 and 2013, and it was substantially in excess of the carrying value of the reporting unit at each date.

Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. We engaged third party valuation specialists to assist us with the initial measurement of the fair value of acquired intangible assets. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible assets.

Income Taxes

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

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

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

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

Accounting for Stock-Based Compensation

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

Capitalized Internal-Use Software Costs

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

Foreign Currency Risk

Growth in our international operations will incrementally increase our exposure to foreign currency fluctuations as well as other risks typical of international operations, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. Foreign exchange rate fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currencies result in gains and losses that are reflected in our consolidated statements of operations. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased net revenue and operating expenses. Conversely, our net revenue and operating expenses will decrease when the U.S. dollar strengthens against foreign currencies. We do not enter into financial instruments for trading or speculative purposes.

Transaction Exposure

We enter into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in our statements of operations within other (expense) income, net. Foreign currency transaction gains and losses were immaterial during the years ended December 31, 2014, 2013 and 2012.

Translation Exposure

Foreign exchange rate fluctuations may adversely impact our consolidated financial position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheets. These gains or losses are recognized as an adjustment to stockholders' equity which is reflected in our balance sheets under accumulated other comprehensive loss.

Credit Risk

Concentrations of credit risk with respect to accounts receivable are limited to certain customers to which we make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across numerous industries. To reduce risk, we routinely assess the financial strength of our customers. As of December 31, 2014, no customers had an account receivable balance greater than 10% of our accounts receivable. As of December 31, 2013, one customer had an account receivable balance greater than 10% of our accounts receivable. We believe that at December 31, 2014, concentration of credit risk related to accounts receivable was not significant.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Akamai Technologies, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 2, 2015

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, except share data)	December 31, 2014		December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	238,650	$	333,891
Marketable securities	519,642		340,005
Accounts receivable, net of reserves of $9,023 and $3,703 at December 31, 2014 and 2013, respectively	329,578		271,988
Prepaid expenses and other current assets	128,981		62,096
Deferred income tax assets	45,704		21,734
Total current assets	1,262,555		1,029,714
Property and equipment, net	601,591		450,287
Marketable securities	869,992		573,026
Goodwill	1,051,294		757,368
Acquired intangible assets, net	132,412		77,429
Deferred income tax assets	1,955		2,325
Other assets	81,747		67,536
Total assets	$	4,001,546	$	2,957,685
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	77,412	$	73,710
Accrued expenses	204,686		150,385
Deferred revenue	49,679		36,952
Other current liabilities	2,234		2,119
Total current liabilities	334,011		263,166
Deferred revenue	3,829		3,199
Deferred income tax liabilities	39,299		4,737
Convertible senior notes	604,851		—
Other liabilities	74,221		57,152
Total liabilities	1,056,211		328,254
Commitments and contingencies (Note 10)
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