Edgar Filing: AKAMAI TECHNOLOGIES INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________

FORM 10-Q

______________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2015



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

Commission file number 0-27275

______________________________________________

Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)



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

150 Broadway

Cambridge, MA 02142

(617) 444-3000

(Address, Including Zip Code, and Telephone Number,

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

______________________________________________

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant’s common stock as of November 4, 2015: 177,938,953

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AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6.	Exhibits	45

SIGNATURES		46

EXHIBIT INDEX		47

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, expect share data)	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	256,471		$	238,650
Marketable securities	411,382			519,642
Accounts receivable, net of reserves of $9,007 and $9,023 at September 30, 2015, and December 31, 2014, respectively	365,957			329,578
Prepaid expenses and other current assets	115,601			128,981
Deferred income tax assets	61,574			45,704
Total current assets	1,210,985			1,262,555
Property and equipment, net	734,540			601,591
Marketable securities	837,020			869,992
Goodwill	1,135,500			1,051,294
Acquired intangible assets, net	158,978			132,412
Deferred income tax assets	1,888			1,955
Other assets	105,898			81,747
Total assets	$	4,184,809		$	4,001,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	60,902		$	77,412
Accrued expenses	215,290			204,686
Deferred revenue	55,580			49,679
Other current liabilities	234			2,234
Total current liabilities	332,006			334,011
Deferred revenue	4,516			3,829
Deferred income tax liabilities	49,925			39,299
Convertible senior notes	619,365			604,851
Other liabilities	93,334			74,221
Total liabilities	1,099,146			1,056,211
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 700,000,000 shares authorized; 181,081,173 shares issued and 178,233,604 shares outstanding at September 30, 2015, and 178,300,603 shares issued and outstanding at December 31, 2014	1,811			1,783
Additional paid-in capital	4,685,078			4,559,430
Accumulated other comprehensive loss	(33,519		)	(17,611		)
Treasury stock, at cost, 2,847,569 shares at September 30, 2015, and no shares at December 31, 2014	(202,426		)	—
Accumulated deficit	(1,365,281		)	(1,598,267		)
Total stockholders’ equity	3,085,663			2,945,335
Total liabilities and stockholders’ equity	$	4,184,809		$	4,001,546

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands, except per share data)	2015			2014			2015			2014
Revenue	$	551,030		$	498,042		$	1,618,289		$	1,427,579
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	183,204			158,812			532,408			447,742
Research and development	38,396			32,583			110,917			92,869
Sales and marketing	107,426			96,215			322,406			268,742
General and administrative	99,543			81,905			288,287			239,946
Amortization of acquired intangible assets	6,752			8,403			20,284			23,654
Restructuring charges (benefits)	20			(115		)	517			1,189
Total costs and operating expenses	435,341			377,803			1,274,819			1,074,142
Income from operations	115,689			120,239			343,470			353,437
Interest income	2,723			2,010			8,265			5,389
Interest expense	(4,630		)	(4,482		)	(13,884		)	(10,939		)
Other income (expense), net	204			(188		)	(1,702		)	(1,968		)
Income before provision for income taxes	113,986			117,579			336,149			345,919
Provision for income taxes	25,946			26,424			103,163			109,078
Net income	$	88,040		$	91,155		$	232,986		$	236,841
Net income per share:
Basic	$	0.49		$	0.51		$	1.30		$	1.33
Diluted	$	0.49		$	0.50		$	1.29		$	1.31
Shares used in per share calculations:
Basic	178,547			178,186			178,591			178,324
Diluted	180,364			180,955			180,642			181,278

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014
Net income	$	88,040		$	91,155		$	232,986		$	236,841
Other comprehensive loss:
Foreign currency translation adjustments	(9,261		)	(10,763		)	(17,069		)	(7,937		)
Change in unrealized gain (loss) on investments, net of income tax (provision) benefit of $(73), $715, $(647) and $324 for the three and nine months ended September 30, 2015 and 2014, respectively	121			(1,279		)	1,161			483
Other comprehensive loss	(9,140		)	(12,042		)	(15,908		)	(7,454		)
Comprehensive income	$	78,900		$	79,113		$	217,078		$	229,387

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

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30,
(in thousands)	2015			2014
Cash flows from operating activities:
Net income	$	232,986		$	236,841
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	219,234			179,643
Stock-based compensation	92,966			84,800
Excess tax benefits from stock-based compensation	(24,851		)	(23,958		)
(Benefit) provision for deferred income taxes	(17,941		)	10,622
Amortization of debt discount and issuance costs	13,884			10,939
Other non-cash reconciling items, net	3,271			2,535
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(40,707		)	(50,213		)
Prepaid expenses and other current assets	16,119			(22,346		)
Accounts payable and accrued expenses	26,098			36,876
Deferred revenue	6,908			7,688
Other current liabilities	146			(703		)
Other non-current assets and liabilities	18,247			(10,195		)
Net cash provided by operating activities	546,360			462,529
Cash flows from investing activities:
Cash paid for acquired businesses, net of cash acquired	(122,445		)	(386,532		)
Purchases of property and equipment	(262,404		)	(142,466		)
Capitalization of internal-use software development costs	(103,742		)	(83,841		)
Purchases of short- and long-term marketable securities	(584,189		)	(1,068,198		)
Proceeds from sales of short- and long-term marketable securities	2,008			354,313
Proceeds from maturities of short- and long-term marketable securities	725,117			277,109
Other non-current assets and liabilities	(3,037		)	7,222
Net cash used in investing activities	(348,692		)	(1,042,393		)
Cash flows from financing activities:
Proceeds from the issuance of convertible senior notes, net of issuance costs	—			678,735
Proceeds from the issuance of warrants related to convertible senior notes	—			77,970
Purchase of note hedge related to convertible senior notes	—			(101,292		)
Repayment of acquired debt and capital leases	—			(17,862		)
Proceeds related to the issuance of common stock under stock plans	54,288			75,361
Excess tax benefits from stock-based compensation	24,851			23,958
Employee taxes paid related to net share settlement of stock-based awards	(47,171		)	(43,205		)
Repurchases of common stock	(202,426		)	(226,513		)
Other non-current assets and liabilities	(2,050		)	(1,575		)
Net cash (used in) provided by financing activities	(172,508		)	465,577
Effects of exchange rate changes on cash and cash equivalents	(7,339		)	(5,265		)
Net increase (decrease) in cash and cash equivalents	17,821			(119,552		)
Cash and cash equivalents at beginning of period	238,650			333,891
Cash and cash equivalents at end of period	$	256,471		$	214,339

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued



	For the Nine Months Ended September 30,
(in thousands)	2015		2014
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received in the nine months ended September 30, 2015 of $19,285	$	47,045	$	117,723
Non-cash investing and financing activities:
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses	27,026		40,131
Capitalization of stock-based compensation	13,133		11,577

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

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AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides cloud services for delivering, optimizing and securing online content and business applications. The Company's globally-distributed platform comprises approximately 200,000 servers in over 1,400 networks in more than 115 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing services for delivering, optimizing and securing online content and business applications over the Internet.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 2, 2015.

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of the results of all interim periods reported herein.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) 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 standard will be effective for the Company on January 1, 2018, and may be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential impact of adopting this new accounting guidance.

In April 2015, the FASB issued updated guidance that will change the current presentation of debt issuance costs on the balance sheet. This new guidance will move debt issuance costs from the assets section of the balance sheet to the liabilities section as a direct deduction from the carrying amount of the debt issued. The guidance will be effective for the Company on January 1, 2016. The Company will reclassify its debt issuance costs included in other assets on the consolidated balance sheet to convertible senior notes within the liabilities and stockholders' equity section. The amount of deferred financing costs expected to be reclassified as of January 1, 2016 is $6.2 million. This revision will have no impact on the Company's results of operations or cash flows.

In September 2015, the FASB issued updated guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments. In an effort to reduce complexity in financial reporting, the new guidance requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. The standard will be effective for the Company on January 1, 2016. The Company does not expect this guidance to have a material impact on its results of operations, financial condition or cash flows.

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2. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of September 30, 2015 and December 31, 2014 (in thousands):



			Gross Unrealized							Classification on Balance Sheet
	Amortized Cost		Gains		Losses			Aggregate Fair Value		Short-Term Marketable Securities		Long-Term Marketable Securities
As of September 30, 2015
Corporate bonds	$	1,017,036	$	668	$	(1,179	)	$	1,016,525	$	392,335	$	624,190
U.S. government agency obligations	230,598		257		(25		)	230,830		19,047		211,783
	$	1,247,634	$	925	$	(1,204	)	$	1,247,355	$	411,382	$	835,973

As of December 31, 2014
Certificates of deposit	$	39	$	—	$	—		$	39	$	—	$	39
Commercial paper	10,487		—		(2		)	10,485		10,485		—
Corporate bonds	1,077,387		454		(2,132		)	1,075,709		424,777		650,932
U.S. government agency obligations	303,808		20		(427		)	303,401		84,380		219,021
	$	1,391,721	$	474	$	(2,561	)	$	1,389,634	$	519,642	$	869,992

During the first quarter of 2015, the Company began offering certain qualified individuals the ability to participate in a non-qualified deferred compensation plan. The mutual funds held by the Company that are associated with this plan are classified as restricted trading securities. These securities are not included in the available-for-sale securities table above, but are included in marketable securities in the consolidated balance sheets.

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income in the statements of income. As of September 30, 2015, the Company held for investment corporate bonds with a fair value of $68.8 million, which are classified as available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The unrealized losses are not significant and are attributable to changes in interest rates. The Company does not believe any unrealized losses represent other than temporary impairments based on the evaluation of available evidence. At December 31, 2014, there were no securities in a continuous unrealized loss position for more than 12 months.

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The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at September 30, 2015 and December 31, 2014 (in thousands):



	Total Fair Value			Fair Value Measurements at Reporting Date Using
	Total Fair Value			Level 1		Level 2		Level 3
As of September 30, 2015
Cash Equivalents and Marketable Securities:
Money market funds	$	1,805		$	1,805	$	—	$	—
Corporate bonds	1,016,525			—		1,016,525		—
U.S. government agency obligations	230,830			—		230,830		—
Mutual funds	1,047			1,047		—		—
	$	1,250,207		$	2,852	$	1,247,355	$	—

As of December 31, 2014
Cash Equivalents and Marketable Securities:
Money market funds	$	501		$	501	$	—	$	—
Certificates of deposit	39			39		—		—
Commercial paper	10,485			—		10,485		—
Corporate bonds	1,075,709			—		1,075,709		—
U.S. government agency obligations	303,401			—		303,401		—
	$	1,390,135		$	540	$	1,389,595	$	—

Other Liabilities:
Contingent consideration obligation related to Velocius acquisition	$	(900	)	$	—	$	—	$	(900	)

As of September 30, 2015 and December 31, 2014, the Company grouped money market funds, certificates of deposit and mutual funds using a Level 1 valuation because market prices for such investments were readily available in active markets. As of September 30, 2015 and December 31, 2014, the Company grouped commercial paper, corporate bonds and U.S. government agency obligations using a Level 2 valuation because quoted prices for identical or similar assets were available in markets that are inactive.

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

The valuation technique used to measure fair value of the Company's Level 3 liability, which consisted of a contingent consideration related to the acquisition of Velocius Networks, Inc. ("Velocius") in 2013, was primarily an income approach. The significant unobservable input used in the fair value measurement of the Velocius contingent consideration was the likelihood of achieving development milestones to integrate the acquired technology into the Company's technology. The remaining milestone was achieved in June 2015 and was paid in the third quarter of 2015.

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The following table reflects the activity for the Company’s liability measured at fair value using Level 3 inputs for the nine months ended September 30, 2015 (in thousands):



	September 30, 2015
Balance as of January 1, 2015	$	(900	)
Fair value adjustment to contingent consideration included in general and administrative expense	(100		)
Achievement of final milestone related to Velocius contingent consideration	1,000
Balance as of September 30, 2015	$	—

Contractual maturities of the Company’s available-for-sale marketable securities held at September 30, 2015 and December 31, 2014 were as follows (in thousands):



	September 30, 2015		December 31, 2014
Due in 1 year or less	$	411,382	$	519,642
Due after 1 year through 5 years	835,973		869,992
	$	1,247,355	$	1,389,634

3. Accounts Receivable

Net accounts receivable consisted of the following as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015			December 31, 2014
Trade accounts receivable	$	251,911		$	222,531
Unbilled accounts receivable	123,053			116,070
Gross accounts receivable	374,964			338,601
Allowance for doubtful accounts	(641		)	(1,033		)
Reserve for cash-basis customers	(8,366		)	(7,990		)
Total accounts receivable reserves	(9,007		)	(9,023		)
Accounts receivable, net	$	365,957		$	329,578

4. Goodwill and Acquired Intangible Assets

The change in the carrying amount of goodwill for the nine months ended September 30, 2015 was as follows (in thousands):



Balance as of January 1, 2015	$	1,051,294
Acquisition of Xerocole, Inc.	12,859
Acquisition of Codemate A/S	69,445
Foreign currency translation	1,902
Balance as of September 30, 2015	$	1,135,500

The Company tests goodwill for impairment at least annually. Through the date the consolidated financial statements were issued, no triggering events had occurred that would indicate a potential impairment exists.

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Acquired intangible assets that are subject to amortization consisted of the following as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015							December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Completed technology	$	116,891	$	(55,330	)	$	61,561	$	88,331	$	(45,537	)	$	42,794
Customer-related intangible assets	191,710		(99,933		)	91,777		173,600		(91,160		)	82,440
Non-compete agreements	6,870		(3,328		)	3,542		8,890		(4,224		)	4,666
Trademarks and trade names	3,700		(1,602		)	2,098		3,700		(1,188		)	2,512
Acquired license rights	490		(490		)	—		490		(490		)	—
Total	$	319,661	$	(160,683	)	$	158,978	$	275,011	$	(142,599	)	$	132,412

Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2015 was $6.8 million and $20.3 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2014 was $8.4 million and $23.7 million, respectively. Based on the Company’s acquired intangible assets as of September 30, 2015, aggregate expense related to amortization of acquired intangible assets is expected to be $6.8 million for the remainder of 2015, and $26.4 million, $27.6 million, $23.3 million and $21.0 million for 2016, 2017, 2018 and 2019, respectively.

5. Business Acquisitions

The Company acquired Xerocole, Inc. ("Xerocole") in February 2015 and Codemate A/S and its wholly-owned subsidiary Octoshape ApS (together, "Octoshape") in April 2015. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company's consolidated financial results. Revenue and earnings of the acquired companies since the date of the acquisitions that are included in the Company's consolidated statements of income are also not presented separately because they are not material. The total amount of acquisition-related costs were $1.1 million for the nine months ended September 30, 2015 and are included in general and administrative expense in the consolidated statements of income.

Xerocole

On February 27, 2015, the Company acquired Xerocole, a provider of recursive Domain Name System ("DNS") functionality, for $16.6 million in cash. The Company acquired Xerocole with a goal of expanding its existing Authoritative DNS products. The Company allocated $12.9 million of the cost of the acquisition to goodwill and $4.9 million to acquired intangibles, which have a weighted average useful life of 8.8 years. The allocation of the purchase price has been finalized.

Octoshape

On April 6, 2015, the Company acquired all of the outstanding capital stock of Octoshape in exchange for $107.0 million in cash. Octoshape is a cloud service provider focused on delivering broadcast, enterprise and carrier solutions. The goal of acquiring Octoshape is to make available for customers additional delivery and optimization technologies for video streams of over-the-top (also known as OTT) content and to enable the Company to more fully support Internet Protocol television (also known as IPTV) solutions.

The allocation of the purchase price has been finalized, with the exception of evaluating certain accounts receivable, current liabilities and tax-related assets and liabilities. The Company is in the process of gathering the facts and circumstances existing as of the acquisition date in order to finalize the valuation of these items.

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



Total purchase consideration	$	107,047

Allocation of the purchase consideration:
Cash	$	664
Accounts receivable	1,976
Other current assets	393
Identifiable intangible assets	41,950
Goodwill	69,445
Deferred tax assets	5,230
Total assets acquired	119,658
Other current liabilities	(1,983		)
Current deferred revenue	(770		)
Deferred tax liabilities	(9,858		)
Total liabilities assumed	(12,611		)
Net assets acquired	$	107,047

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

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



	Gross Carrying Amount		Weighted Average Useful Life (in years)
Completed technologies	$	25,310	9.8
Customer-related intangible assets	16,560		11.8
Non-compete agreements	80		2.0
Total	$	41,950

Bloxx

On October 30, 2015, the Company acquired Bloxx Limited ("Bloxx"), a provider of Secure Web Gateway ("SWG") technology, for $18.7 million in cash. The allocation of the purchase price has not been finalized as of the date of the filing of these financial statements. The acquisition is expected to provide us with technology to complement the Company's cloud security strategy for protecting businesses against Internet vulnerabilities. Pro forma results of operations for the acquisition of Bloxx have not been presented because the effects are not material to the Company's consolidated financial statements.

6. Convertible Senior Notes

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

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

•

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


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

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

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

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

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

The Notes consist of the following components (in thousands):



	September 30, 2015			December 31, 2014
Liability component:
Principal	$	690,000		$	690,000
Less: debt discount, net of amortization	(70,635		)	(85,149		)
Net carrying amount	$	619,365		$	604,851

Equity component:	$	101,276		$	101,276

The estimated fair value of the Company's Notes at September 30, 2015 was $724.3 million. The fair value was determined based on data points other than quoted prices that are observable, either directly or indirectly, and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $69.06 on September 30, 2015, the value of the Notes if converted to common stock was less than the principal amount of $690.0 million.

The Company used $62.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrently with the issuance of the Notes. The repurchases were made in accordance with the share repurchase program previously approved by the Board of Directors (Note 8). Additionally, $23.3 million of the proceeds was used for the net cost of

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convertible note hedge and warrant transactions. The Company intends to use the remaining net proceeds for working capital and other general corporate purposes, as well as for potential additional acquisitions and strategic transactions.

Note Hedge

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

Warrants

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

Interest Expense

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Amortization of debt discount	$	463		$	449		$	1,377		$	1,079
Amortization of debt issuance costs	4,881			4,712			14,515			11,373
Capitalization of interest expense	(714		)	(679		)	(2,008		)	(1,513		)
Total interest expense	$	4,630		$	4,482		$	13,884		$	10,939

7. Contingencies

The Company is 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 the Company’s revenue during the three and nine months ended September 30, 2015, and 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, the Company voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. The Company is cooperating with those agencies. As of the filing of these financial statements, the Company cannot predict the outcome of this matter. No provision with respect to this matter has been made in the Company's consolidated financial statements.

8. Stockholders’ Equity

Share Repurchase Program

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 nine months ended September 30, 2015, the Company repurchased 2.8 million shares of its common stock for $202.4 million.

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Stock-Based Compensation

The following table summarizes stock-based compensation included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Cost of revenue	$	3,579		$	3,030		$	10,244		$	8,901
Research and development	5,982			4,979			17,357			14,517
Sales and marketing	13,465			12,110			39,295			35,438
General and administrative	8,020			7,889			26,070			25,944
Total stock-based compensation	31,046			28,008			92,966			84,800
Provision for income taxes	(11,218		)	(8,472		)	(33,325		)	(26,852		)
Total stock-based compensation, net of income taxes	$	19,828		$	19,536		$	59,641		$	57,948

In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of income for the three and nine months ended September 30, 2015 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $2.9 million and $9.3 million, respectively, before income taxes. For the three and nine months ended September 30, 2014, the Company's consolidated statements of income include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $3.6 million and $7.5 million, respectively, before income taxes.

9. Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss, which is reported as a component of stockholders' equity, for the nine months ended September 30, 2015 (in thousands):



	Foreign Currency Translation Adjustments			Net Unrealized Gain on Investments		Total
Balance as of January 1, 2015	$	(22,064	)	$	4,453	$	(17,611	)
Other comprehensive (loss) income	(17,069		)	1,161		(15,908		)
Balance as of September 30, 2015	$	(39,133	)	$	5,614	$	(33,519	)

The tax effect on accumulated unrealized gain on investments was insignificant as of September 30, 2015 and December 31, 2014. Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the nine months ended September 30, 2015.

10. Income Taxes

The Company’s effective income tax rate was 30.7% and 31.5% for the nine months ended September 30, 2015 and 2014, respectively. The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

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For the nine months ended September 30, 2015, the effective income tax rate was lower than the federal statutory tax rate due to the retroactive application of a U.S. tax court ruling with respect to the treatment of stock-based compensation in intercompany arrangements, the domestic production activities deduction and the composition of income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S., partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes. For the nine months ended September 30, 2014, the effective income tax rate was lower than the federal statutory tax rate mainly due to the benefit from the state software development activities and income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S.; partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

11. Net Income per Share

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

The following table sets forth the components used in the computation of basic and diluted net income per share for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share data):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
Numerator:
Net income	$	88,040	$	91,155	$	232,986	$	236,841
Denominator:
Shares used for basic net income per share	178,547		178,186		178,591		178,324
Effect of dilutive securities:
Stock options	667		1,146		858		1,257
RSUs and deferred stock units	1,150		1,623		1,193		1,697
Convertible senior notes	—		—		—		—
Warrants related to issuance of convertible senior notes	—		—		—		—
Shares used for diluted net income per share	180,364		180,955		180,642		181,278
Basic net income per share	$	0.49	$	0.51	$	1.30	$	1.33
Diluted net income per share	$	0.49	$	0.50	$	1.29	$	1.31

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For the three and nine months ended September 30, 2015 and 2014, certain potential outstanding shares from stock options, service-based RSUs, convertible notes and warrants were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based RSUs were excluded from the computation of diluted net income per share because the underlying performance conditions for such RSUs had not been met as of these dates. The number of potential outstanding shares excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2015 and 2014 are as follows (in thousands):



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2015	2014	2015	2014
Stock options	3	261	10	462
Service-based RSUs	157	797	269	773
Performance-based RSUs	1,148	565	1,148	572
Convertible senior notes	7,704	7,704	7,704	7,704
Warrants related to issuance of convertible senior notes	7,704	7,704	7,704	7,704

The calculation of assumed proceeds used to determine the diluted weighted average shares outstanding under the treasury stock method in the periods presented was adjusted by tax windfalls and shortfalls associated with all of the Company’s outstanding stock awards. Such windfalls and shortfalls are computed by comparing the tax deductible amount of outstanding stock awards to their grant date fair values and multiplying the results by the applicable statutory tax rate. A positive result creates a windfall, which increases the assumed proceeds, and a negative result creates a shortfall, which reduces the assumed proceeds.

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

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

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related items, including, but not limited to, revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, goodwill and acquired intangible assets, capitalized internal-use software costs, impairment and useful lives of long-lived assets, income tax, and stock-based compensation. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time they are made. Actual results may differ from our estimates. See the section entitled “Application of Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the year ended December 31, 2014 for further discussion of our critical accounting policies and estimates.

Overview

We provide cloud services for delivering, optimizing and securing online content and business applications. We generally execute contracts with terms of one year or longer, and we believe this emphasis on longer-term contracts 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 reductions in usage of our services and contract terminations as well as the effect of price decreases negotiated as part of 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 primarily impacted by the amount of traffic we serve on our network, the prices we are able to charge for our services, the impact of seasonal variations on our business, the rate of adoption of social media and video platform capabilities and the timing and variability of customer-specific one-time events. We have observed the following trends related to our revenue in recent years:

•

Historically, 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 for our customers that use our solutions for video, gaming, social media and software downloads. These increases have offset price reductions and losses of customers to competitors or in-house solutions.

•

In recent months, we have seen slower growth in revenue from our Media Delivery Solutions and expect this trend to continue into 2016. We believe that this development is primarily attributable to moderation of traffic growth on our network from some of our larger customer accounts than we have experienced in the last two to three years, as well as an increase in "do-it-yourself" approaches by larger media companies based in the U.S.


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

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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 and the frequency and timing of custom services.

Our profitability is also impacted by our expense levels, including direct costs to support our revenue, such as higher bandwidth and co-location costs. In addition, we have made investments to support the potential future growth of over the top, or OTT, media offerings and to support other strategic initiatives that we anticipate will generate revenue in the future. We have observed the following trends related to our profitability in recent years:

•

Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels, 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 are also a significant portion of our cost of revenue. By improving our internal-use software and managing our hardware deployments to enable us to use servers more efficiently, we have been able to manage the growth of co-location costs. We expect to continue to scale our network in the future and will need to effectively manage our co-location costs to maintain current levels of profitability.

•

Payroll and related compensation costs have increased, as we have increased headcount to support our revenue growth and strategic initiatives. We increased our headcount by 1,200 employees in 2014, including 200 employees who were part of the acquisition of Prolexic Technologies, Inc., or Prolexic, in the first quarter of 2014. We increased our headcount by 838 employees during the nine months ended September 30, 2015, including employees who were part of the acquisitions of Xerocole, Inc., or Xerocole, and Codemate A/S, known as "Octoshape". We expect to continue to hire additional employees, but at a slower rate, both domestically and internationally in support of our strategic initiatives.

Fluctuations of foreign currency exchange rates have also impacted our reported results. Revenue and expenses of our operations outside of the U.S. are important contributors to our overall financial performance, and as currencies have weakened against the U.S. dollar, our revenue has been negatively impacted and our expenses have been positively impacted. If foreign currency exchange rates during the nine months ended September 30, 2015 had remained the same as exchange rates during the nine months ended September 30, 2014, our revenue would have increased by 17% as opposed to 13%. Similarly, diluted earnings per share would have increased by 5% as opposed to decreasing 2% had exchange rates remained constant during the same period.

During the nine months ended September 30, 2015, we completed two acquisitions. While the impact of the acquisitions is immaterial to our financial results as a whole, they have increased our level of expenses. During the nine months ended September 30, 2015, our results include the activities of the acquisition of Xerocole in February 2015 and of Octoshape in April 2015. We also acquired Bloxx Limited, or Bloxx, on October 30, 2015. During the nine months ended September 30, 2014, we acquired Prolexic.

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Results of Operations

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



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	33.2		31.9		32.9		31.4
Research and development expense	7.0		6.5		6.9		6.5
Sales and marketing expense	19.5		19.3		19.9		18.8
General and administrative expense	18.1		16.4		17.8		16.8
Amortization of acquired intangible assets	1.2		1.7		1.3		1.7
Restructuring charges (benefits)	—		—		—		0.1
Total costs and operating expenses	79.0		75.8		78.8		75.3
Income from operations	21.0		24.2		21.2		24.7
Interest income	0.5		0.4		0.5		0.4
Interest expense	(0.8	)	(0.9	)	(0.9	)	(0.8	)
Other income (expense), net	—		—		(0.1	)	(0.1	)
Income before provision for income taxes	20.7		23.7		20.7		24.2
Provision for income taxes	4.7		5.3		6.4		7.6
Net income	16.0	%	18.4	%	14.3	%	16.6	%

Revenue

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015		2014		% Change		% Change at Constant Currency		2015		2014		% Change		% Change at Constant Currency
Revenue	$	551,030	$	498,042	10.6	%	14.7	%	$	1,618,289	$	1,427,579	13.4	%	17.4	%

During the three- and nine-month periods ended September 30, 2015, the increase in our revenue as compared to the same periods in 2014 was the result of growth across all of our solutions and geographies, with particularly strong growth from our Cloud Security Solutions and moderating growth from our Media Delivery Solutions. For the three- and nine-month periods ended September 30, 2015 and 2014, no single customer accounted for 10% or more of revenue.

Changes in foreign currency exchange rates negatively impacted our revenue by $20.4 million and $58.2 million during the three- and nine-month periods ended September 30, 2015, respectively, as compared to the same periods in 2014.

For each of the three- and nine-month periods ended September 30, 2015, resellers accounted for 26% of revenue, as compared to 25% of revenue for the same periods in 2014. The increase in revenue from resellers was attributable to increased traction with our carrier channel partners.

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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 revenue was classified as Service and Support Solutions revenue. Beginning in the first quarter of 2015, revenues from product-specific services were classified in their respective product solution categories; accordingly, we have revised prior period amounts in the following table.

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015		2014		% Change		% Change at Constant Currency		2015		2014		% Change		% Change at Constant Currency
Media Delivery Solutions	$	244,887	$	232,368	5.4	%	9.6	%	$	730,232	$	665,857	9.7	%	14.0	%
Performance and Security Solutions	262,696		229,204		14.6		18.5		763,717		653,545		16.9		20.6
Service and Support Solutions	43,447		36,470		19.1		24.1		124,340		108,177		14.9		19.4
Total revenue	$	551,030	$	498,042	10.6	%	14.7	%	$	1,618,289	$	1,427,579	13.4	%	17.4	%

The growth in Media Delivery Solutions revenue for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was due to higher demand across most of our customer base. However, year over year revenue growth for these solutions slowed, particularly from some of our largest media accounts, for the three-month period ended September 30, 2015. This was compared to stronger growth in the third quarter of 2014 which benefited from unseasonably high traffic levels and revenue from our largest media accounts. In the nine-month period ended September 30, 2014, we also handled several large software and gaming releases that did not repeat in 2015, negatively impacting period-over-period revenue growth. We expect this moderation of revenue growth to continue in the fourth quarter of 2015.

The increase in Performance and Security Solutions revenue for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was due to increased demand across all major product lines, with especially strong growth in our Cloud Security Solutions. Cloud Security Solutions revenue for the three- and nine-month periods ended September 30, 2015 was $64.7 million and $180.7 million, respectively, as compared to $46.5 million and $120.4 million for the three- and nine-month periods ended September 30, 2014, respectively. The increase for the nine months ended September 30, 2015, as compared to the same period in 2014 was also impacted by the acquisition of Prolexic, which occurred in February 2014.

The increase in Service and Support Solutions revenue for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was due to strong new customer attachment rates for our professional services and service offering upgrades purchased by our installed base.

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015		2014		% Change		% Change at Constant Currency		2015		2014		% Change		% Change at Constant Currency
U.S.	$	400,581	$	363,469	10.2	%	10.2	%	$	1,188,657	$	1,031,878	15.2	%	15.2	%
International	150,449		134,573		11.8		27.0		429,632		395,701		8.6		23.3
Total revenue	$	551,030	$	498,042	10.6	%	14.7	%	$	1,618,289	$	1,427,579	13.4	%	17.4	%

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While revenue from our operations in the U.S. was higher in all of our solution categories during the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, domestic revenue reflected a larger proportion of the moderation in Media Delivery Solutions revenue growth because most of our larger media customers are based in the U.S.

Revenue derived from our operations located outside of the U.S. for each of the three- and nine-month periods ended September 30, 2015 was approximately 27%, as compared to 27% and 28% for the three- and nine-month periods ended September 30, 2014, respectively. No single country outside of the U.S. accounted for 10% or more of revenue during any of these periods. During the first nine months of 2015, 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 as compared to the same period in 2014.

Cost of Revenue

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015			2014			% Change		2015			2014			% Change
Bandwidth fees	$	37,711		$	32,391		16.4	%	$	109,312		$	90,638		20.6	%
Co-location fees	31,709			28,716			10.4		92,969			85,610			8.6
Network build-out and supporting services	15,756			9,721			62.1		42,716			31,018			37.7
Payroll and related costs	40,529			36,825			10.1		117,682			104,517			12.6
Stock-based compensation, including amortization of prior capitalized amounts	6,350			6,498			(2.3	)	19,124			16,118			18.6
Depreciation of network equipment	32,749			28,135			16.4		96,181			78,586			22.4
Amortization of internal-use software	18,400			16,526			11.3		54,424			41,255			31.9
Total cost of revenue	$	183,204		$	158,812		15.4	%	$	532,408		$	447,742		18.9	%
As a percentage of revenue	33.2		%	31.9		%			32.9		%	31.4		%

The increase in total cost of revenue for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was primarily due to increases in:


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


•	amounts paid for network build-out and supporting services related to the increase in server deployments and investments in network expansion;


•	payroll and related costs of service personnel due to headcount growth to support our product-aligned and discrete services revenue growth and our network operations personnel to support our product revenue; and


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

Our cost of revenue as a percentage of revenue has also increased during the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014. The increase was primarily the result of our increased investments in network expansion.

We have long-term purchase commitments for co-location services and bandwidth usage with various vendors and network and Internet service providers. Our minimum commitments related to bandwidth usage and co-location services may vary from period to period depending on the timing and length of contract renewals with our service providers. There have been no significant changes to the commitments reported in our annual report on Form 10-K for the year ended December 31, 2014, other than normal period-to-period variations.

We believe that cost of revenue will increase during the fourth quarter of 2015 as compared to each of the first three quarters of 2015, primarily because we expect to deploy more servers and deliver more traffic on our network, which will result in higher expenses associated with the increased traffic. However, our anticipated increases in cost of revenue are likely to be partially offset by lower bandwidth costs per unit and continued efficiency in network deployment. Additionally, for the fourth

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quarter of 2015, we anticipate amortization of internal-use software development costs to increase, as compared to the first three quarters of 2015, along with increased payroll and related costs associated with our network and professional services personnel and related expenses. We plan to continue making investments in our network with the expectation that our customer base will continue to expand and that we will continue to deliver more traffic to existing customers including OTT video traffic.

Research and Development Expenses

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015			2014			% Change		2015			2014			% Change
Payroll and related costs	$	58,005		$	49,617		16.9	%	$	167,559		$	138,421		21.1	%
Stock-based compensation	5,982			4,979			20.1		17,357			14,517			19.6
Capitalized salaries and related costs	(26,951		)	(24,496		)	10.0		(79,037		)	(66,552		)	18.8
Other expenses	1,360			2,483			(45.2	)	5,038			6,483			(22.3	)
Total research and development	$	38,396		$	32,583		17.8	%	$	110,917		$	92,869		19.4	%
As a percentage of revenue	7.0		%	6.5		%			6.9		%	6.5		%

The increase in research and development expenses during the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was due to increases in payroll and related costs as a result of continued growth in headcount to support investments in new product development and network scaling, partially offset by increases in capitalized salaries and related costs.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. 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. During the three- and nine-month periods ended September 30, 2015, we capitalized $3.9 million and $11.8 million, respectively, of stock-based compensation. During the three- and nine-month periods ended September 30, 2014, we capitalized $3.4 million and $10.3 million, respectively, of stock-based compensation. These capitalized internal-use software costs are amortized to cost of revenue over their estimated useful lives, which is generally two years.

We believe that research and development expenses during the fourth quarter of 2015 will be relatively consistent with each of the first three quarters of 2015, as we expect to continue 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 Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015			2014			% Change		2015			2014			% Change
Payroll and related costs	$	82,282		$	68,684		19.8	%	$	233,811		$	185,461		26.1	%
Stock-based compensation	13,465			12,110			11.2		39,295			35,438			10.9
Marketing programs and related costs	8,022			7,314			9.7		28,899			25,093			15.2
Other expenses	3,657			8,107			(54.9	)	20,401			22,750			(10.3	)
Total sales and marketing	$	107,426		$	96,215		11.7	%	$	322,406		$	268,742		20.0	%
As a percentage of revenue	19.5		%	19.3		%			19.9		%	18.8		%

The increase in sales and marketing expenses during the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was primarily due to increased payroll and related costs, as we invested in our sales and marketing organization, as well as additional marketing programs and related costs in support of our go-to-market strategy and

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ongoing geographic expansion. Other expenses, which consists primarily of sales and marketing events and related travel expenses, decreased as we slowed our discretionary spending to align with our anticipated moderation in revenue growth.

We believe that sales and marketing expenses will increase in absolute dollars during the fourth quarter of 2015 as compared to each of the first three quarters of 2015, due to increased payroll and related costs as a result of headcount growth throughout 2015. We expect headcount growth in the fourth quarter to be at a slower pace than we have recently experienced, primarily with respect to our direct sales team and corporate marketing function.

General and Administrative Expenses

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2015			2014			% Change		2015			2014			% Change
Payroll and related costs	$	42,667		$	38,611		10.5	%	$	124,689		$	106,635		16.9	%
Stock-based compensation	8,020			7,889			1.7		26,070			25,944			0.5
Depreciation and amortization	14,114			10,883			29.7		39,468			28,932			36.4
Facilities-related costs	16,599			13,538			22.6		46,785			39,010			19.9
Provision for doubtful accounts	775			784			(1.1	)	1,112			955			16.4
Acquisition-related costs	252			—			100.0		1,058			3,836			(72.4	)
Professional fees and other expenses	17,116			10,200			67.8		49,105			34,634			41.8
Total general and administrative	$	99,543		$	81,905		21.5	%	$	288,287		$	239,946		20.1	%
As a percentage of revenue	18.1		%	16.4		%			17.8		%	16.8		%

The increase in general and administrative expenses for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was 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 our facility footprint, which increased payroll and related costs, facilities-related costs and depreciation and amortization. In the three- and nine-month periods ended September 30, 2015, we increased the number of software-as-a-service (or SaaS) solutions that we use, as compared to the same periods in 2014, which contributed to the increase in professional fees and other expenses. These increases were partially offset by a decrease in acquisition-related costs due to the acquisition of Prolexic in the first quarter of 2014, with no corresponding acquisitions of comparable size in the nine-month period ended September 30, 2015.

During the fourth quarter of 2015, we expect general and administrative expenses to increase in absolute dollars as compared to each of the first three quarters of 2015, due to anticipated increased 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 Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2015			2014			% Change		2015			2014			% Change
Amortization of acquired intangible assets	$	6,752		$	8,403		(19.6	)%	$	20,284		$	23,654		(14.2	)%
As a percentage of revenue	1.2		%	1.7		%			1.3		%	1.7		%

The decrease in amortization of acquired intangible assets for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, was driven by the finalization of amortization of intangible assets acquired in earlier years, in addition to the deceleration in recognition of customer backlog-related intangible assets acquired from Prolexic, which have a short useful life. Based on our intangible assets at September 30, 2015, we expect amortization of acquired intangible assets to be approximately $6.8 million for the remainder of 2015, and $26.4 million, $27.6 million, $23.3 million and $21.0 million for 2016, 2017, 2018 and 2019, respectively.

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Restructuring Charges (Benefits)



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2015			2014			% Change		2015			2014			% Change
Restructuring charges (benefits)	$	20		$	(115	)	(117.4	)%	$	517		$	1,189		(56.5	)%
As a percentage of revenue	—		%	—		%			—		%	0.1		%

The restructuring charges for the three- and nine-month periods ended September 30, 2015 consisted of severance expenses associated with acquisitions. The charges for the three- and nine-month periods ended September 30, 2014 consisted of severance expenses associated with the acquisition of Prolexic, and the nine-month period ended September 30, 2014 also included a cancellation fee for termination of a contract.

Non-Operating Income (Expense)



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2015			2014			% Change		2015			2014			% Change
Interest income	$	2,723		$	2,010		35.5	%	$	8,265		$	5,389		53.4	%
As a percentage of revenue	0.5		%	0.4		%			0.5		%	0.4		%
Interest expense	$	(4,630	)	$	(4,482	)	3.3		$	(13,884	)	$	(10,939	)	26.9
As a percentage of revenue	(0.8		)%	(0.9		)%			(0.9		)%	(0.8		)%
Other income (expense), net	$	204		$	(188	)	(208.5	)	$	(1,702	)	$	(1,968	)	(13.5	)
As a percentage of revenue	—		%	—		%			(0.1		)%	(0.1		)%

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

Other income (expense), net primarily represents net foreign exchange gains and losses and other non-operating expense and income items. The fluctuations in other income (expense), net for the three- and nine-month periods ended September 30, 2015, as compared to the same periods in 2014, were primarily due to foreign currency exchange rate fluctuations on intercompany and other non-functional currency transactions. Other income (expense), net may fluctuate in the future based on changes in foreign currency exchange rates or other events.

Provision for Income Taxes



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2015			2014			% Change		2015			2014			% Change
Provision for income taxes	$	25,946		$	26,424		(1.8	)%	$	103,163		$	109,078		(5.4	)%
As a percentage of revenue	4.7		%	5.3		%			6.4		%	7.6		%
Effective income tax rate	22.8		%	22.5		%			30.7		%	31.5		%

For the nine months ended September 30, 2015, our effective income tax rate was lower than the federal statutory tax rate due to the retroactive application of a U.S. tax court ruling with respect to the treatment of stock-based compensation in intercompany arrangements, the domestic production activities deduction and the composition of income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S. These benefits were partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

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For the nine months ended September 30, 2014, our effective income tax rate was lower than the federal statutory tax rate mainly due to the benefit from the state software development activities and income from foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the U.S., partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

We expect our full year effective income tax rate to remain relatively consistent with the effective tax rate during the nine months ended September 30, 2015. This expectation does not take into consideration the effect of potential one-time discrete items that may be recorded in the future, including the federal research and development credit which is uncertain to be reinstated by year end. The effective tax rate could be different depending on the nature and timing of dispositions of incentive stock options and other employee equity awards. Further, our effective tax rate may fluctuate within a fiscal year and from quarter to quarter due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

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 and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of these tax reserves reflects assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the ultimate tax liability or benefit from these matters may be materially greater or less than the amount that we have estimated.

Non-GAAP Financial Measures

In addition to providing financial measurements based on 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, Adjusted EBITDA margin and impact of foreign currency exchange rates, as discussed below.

Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they exclude expenses and gains that may be infrequent, unusual in nature or not reflective of our ongoing operating results. Management also believes that these non-GAAP financial measures enable investors to evaluate our operating results and future prospects in the same manner as management. These non-GAAP financial measures may also facilitate 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 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 grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous

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

•

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

•

Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In February 2014, we issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rate of the convertible senior notes was approximately 3.2%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity under GAAP, thereby reducing the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt 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 matters – We have incurred losses from the impairment of certain investments and the settlement of legal matters. In addition, we have incurred costs with respect to our internal investigation related to sales practices in a country outside of the U.S. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them occur infrequently and are not representative of our core business operations.

•

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 periods presented (in thousands):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
Income from operations	$	115,689	$	120,239	$	343,470	$	353,437
Amortization of acquired intangible assets	6,752		8,403