Edgar Filing: AKAMAI TECHNOLOGIES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________

FORM 10-Q

______________________________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2018



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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

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



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	Emerging growth company o

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

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

The number of shares outstanding of the registrant’s common stock as of November 5, 2018: 162,866,026

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AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at September 30, 2018 and December 31, 2017	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 6.	Exhibits	58

SIGNATURES		59

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, except share data)	September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	705,407		$	313,382
Marketable securities	1,096,233			398,554
Accounts receivable, net of reserves of $1,358 and $1,281 at September 30, 2018, and December 31, 2017, respectively	466,364			461,457
Prepaid expenses and other current assets	161,785			172,853
Total current assets	2,429,789			1,346,246
Property and equipment, net	884,483			862,535
Marketable securities	257,135			567,592
Goodwill	1,488,868			1,498,688
Acquired intangible assets, net	176,640			201,259
Deferred income tax assets	23,688			36,231
Other assets	103,284			136,365
Total assets	$	5,363,887		$	4,648,916
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	96,051		$	80,278
Accrued expenses	305,267			283,743
Deferred revenue	93,732			70,495
Convertible senior notes	680,564			—
Other current liabilities	20,324			22,178
Total current liabilities	1,195,938			456,694
Deferred revenue	5,218			6,062
Deferred income tax liabilities	18,827			17,823
Convertible senior notes	864,679			662,913
Other liabilities	123,695			142,955
Total liabilities	2,208,357			1,286,447
Commitments and contingencies (Note 9)
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; 172,234,085 shares issued and 163,886,719 shares outstanding at September 30, 2018, and 169,893,324 shares issued and outstanding at December 31, 2017	1,722			1,699
Additional paid-in capital	4,352,857			4,073,362
Accumulated other comprehensive loss	(48,218		)	(21,930		)
Treasury stock, at cost, 8,347,366 shares at September 30, 2018, and no shares at December 31, 2017	(625,925		)	—
Accumulated deficit	(524,906		)	(690,662		)
Total stockholders’ equity	3,155,530			3,362,469
Total liabilities and stockholders’ equity	$	5,363,887		$	4,648,916

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)	2018			2017			2018			2017
Revenue	$	669,628		$	624,440		$	2,001,111		$	1,830,565
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	239,246			225,490			709,558			645,897
Research and development	61,049			57,226			185,823			162,761
Sales and marketing	125,323			117,863			379,556			350,299
General and administrative	119,911			124,523			444,502			363,050
Amortization of acquired intangible assets	8,294			7,753			25,019			23,075
Restructuring (benefit) charges	(732		)	332			14,442			3,303
Total costs and operating expenses	553,091			533,187			1,758,900			1,548,385
Income from operations	116,537			91,253			242,211			282,180
Interest income	9,258			4,463			19,632			13,368
Interest expense	(14,566		)	(4,746		)	(28,620		)	(13,989		)
Other (expense) income, net	(459		)	535			(3,207		)	414
Income before provision for income taxes	110,770			91,505			230,016			281,973
Provision for income taxes	3,187			27,594			25,658			86,727
Net income	$	107,583		$	63,911		$	204,358		$	195,246
Net income per share:
Basic	$	0.65		$	0.37		$	1.21		$	1.13
Diluted	$	0.64		$	0.37		$	1.20		$	1.13
Shares used in per share calculations:
Basic	165,924			170,976			168,763			172,269
Diluted	167,900			171,505			170,732			173,371

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)	2018			2017		2018			2017
Net income	$	107,583		$	63,911	$	204,358		$	195,246
Other comprehensive (loss) income:
Foreign currency translation adjustments	(7,771		)	7,689		(26,046		)	31,184
Change in unrealized gain (loss) on investments, net of income tax (provision) benefit of $(494), $(187), $78 and $(868) for the three and nine months ended September 30, 2018 and 2017, respectively	1,524			310		(242		)	1,438
Other comprehensive (loss) income	(6,247		)	7,999		(26,288		)	32,622
Comprehensive income	$	101,336		$	71,910	$	178,070		$	227,868

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)	2018			2017
Cash flows from operating activities:
Net income	$	204,358		$	195,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	318,226			272,917
Stock-based compensation	138,815			122,103
Provision for deferred income taxes	12,906			23,134
Amortization of debt discount and issuance costs	27,844			13,989
Restructuring-related software charges	2,818			—
Other non-cash reconciling items, net	9,360			3,655
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(13,611		)	(9,423		)
Prepaid expenses and other current assets	(2,084		)	(36,580		)
Accounts payable and accrued expenses	7,921			22,150
Deferred revenue	23,927			1,528
Other current liabilities	2,030			3,651
Other non-current assets and liabilities	(10,338		)	(8,828		)
Net cash provided by operating activities	722,172			603,542
Cash flows from investing activities:
Cash paid for acquired businesses, net of cash acquired	(79		)	(197,201		)
Purchases of property and equipment	(143,285		)	(185,466		)
Capitalization of internal-use software development costs	(145,122		)	(122,460		)
Purchases of short- and long-term marketable securities	(782,086		)	(249,098		)
Proceeds from sales of short- and long-term marketable securities	16,308			180,405
Proceeds from maturities of short- and long-term marketable securities	378,708			317,974
Other non-current assets and liabilities	(2,678		)	(1,166		)
Net cash used in investing activities	(678,234		)	(257,012		)
Cash flows from financing activities:
Proceeds from the issuance of convertible senior notes	1,132,185			—
Proceeds from the issuance of warrants	119,945			—
Purchase of note hedge related to convertible senior notes	(261,740		)	—
Proceeds related to the issuance of common stock under stock plans	52,497			41,740
Employee taxes paid related to net share settlement of stock-based awards	(52,145		)	(48,122		)
Repurchases of common stock	(625,925		)	(306,629		)
Other non-current assets and liabilities	(5,085		)	(1,096		)
Net cash provided by (used in) financing activities	359,732			(314,107		)
Effects of exchange rate changes on cash, cash equivalents and restricted cash	(11,528		)	12,359
Net increase in cash, and cash equivalents and restricted cash	392,142			44,782
Cash, cash equivalents and restricted cash at beginning of period	314,429			324,626
Cash, cash equivalents and restricted cash at end of period	$	706,571		$	369,408

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AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued



	For the Nine Months Ended September 30,
(in thousands)	2018		2017
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received of $17,286 and $5,867 for the nine months ended September 30, 2018 and 2017, respectively	$	32,485	$	79,479
Non-cash investing activities:
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses	54,414		29,546
Capitalization of stock-based compensation	25,676		21,602

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	705,407	$	368,152
Restricted cash	1,164		1,256
Cash, cash equivalents and restricted cash	$	706,571	$	369,408

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 security, web and mobile performance, enterprise access, and video delivery solutions to enterprises across the world. Its globally-distributed platform comprises more than 200,000 servers across more than 130 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet.

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

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 1, 2018.

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

Newly-Adopted Accounting Pronouncements

In 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 model for recognizing revenue from contracts with customers. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard can be adopted using one of two methods: retrospectively to each prior period presented or a modified retrospective application by recognizing a cumulative-effect adjustment as a component of equity as of the date of adoption. The Company adopted this new standard on a retrospective basis on January 1, 2018. The changes to the Company's revenue recognition approach under this new standard primarily impact the timing of recognizing revenue from a small number of licensed software customers. There is little impact on revenue recognized for the Company's core services. As a result of the change, the Company also began capitalizing certain commission and incentive payments.

In November 2016, the FASB issued guidance that requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this new standard on a retrospective basis on January 1, 2018.

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The following table details the changes to the consolidated balance sheet as of December 31, 2017 as a result of the retrospective adoption of the new revenue recognition standard (in thousands):



	As Previously Reported			Revenue Recognition Standard Adjustments			As Revised
ASSETS
Current assets:
Accounts receivable	$	459,127		$	2,330		$	461,457
Prepaid expenses and other current assets	137,809			35,044			172,853
Total current assets	1,308,872			37,374			1,346,246
Deferred income tax assets	51,069			(14,838		)	36,231
Other assets	112,829			23,536			136,365
Total assets	4,602,844			46,072			4,648,916
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue	$	77,705		$	(7,210	)	$	70,495
Total current liabilities	463,904			(7,210		)	456,694
Deferred revenue	6,839			(777		)	6,062
Deferred income tax liabilities	15,510			2,313			17,823
Total liabilities	1,292,121			(5,674		)	1,286,447
Stockholders' equity:
Accumulated deficit	(742,408		)	51,746			(690,662		)
Total stockholders' equity	3,310,723			51,746			3,362,469
Total liabilities and stockholders' equity	4,602,844			46,072			4,648,916

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The following table details the changes to the consolidated statements of income for the three and nine months ended September 30, 2017 as a result of the retrospective adoption of the new revenue recognition standard (in thousands, except per share data):



	For the Three Months Ended							For the Nine Months Ended
	September 30, 2017							September 30, 2017
	As Previously Reported		Revenue Recognition Standard Adjustments			As Revised		As Previously Reported		Revenue Recognition Standard Adjustments			As Revised
Revenue	$	621,399	$	3,041		$	624,440	$	1,839,544	$	(8,979	)	$	1,830,565
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets)	225,468		22			225,490		645,821		76			645,897
Sales and marketing	120,220		(2,357		)	117,863		353,218		(2,919		)	350,299
Total costs and operating expenses	535,522		(2,335		)	533,187		1,551,228		(2,843		)	1,548,385
Income from operations	85,877		5,376			91,253		288,316		(6,136		)	282,180
Income before provision for income taxes	86,129		5,376			91,505		288,109		(6,136		)	281,973
Provision for income taxes	25,617		1,977			27,594		88,895		(2,168		)	86,727
Net income	60,512		3,399			63,911		199,214		(3,968		)	195,246
Net income per share:
Basic	$	0.35	$	0.02		$	0.37	$	1.16	$	(0.03	)	$	1.13
Diluted	$	0.35	$	0.02		$	0.37	$	1.15	$	(0.02	)	$	1.13

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The statements of comprehensive income for the three and nine months ended September 30, 2017 was also impacted by the adjustments to net income of $3.4 million and $(4.0) million, respectively.

The following table details the changes to the consolidated statement of cash flows for the nine months ended September 30, 2017 as a result of the retrospective adoption of the new revenue recognition and statement of cash flow standards (in thousands):



	As Previously Reported			Revenue Recognition Standard Adjustments			Cash Flow Standard Adjustments		As Revised
Cash flows from operating activities:
Net income	$	199,214		$	(3,968	)	$	—	$	195,246
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes	25,302			(2,168		)	—		23,134
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(19,199		)	9,776			—		(9,423		)
Prepaid expenses and other current assets	(34,195		)	(2,385		)	—		(36,580		)
Deferred revenue	991			537			—		1,528
Other non-current assets and liabilities	(7,036		)	(1,792		)	—		(8,828		)
Net cash provided by operating activities	603,542			—			—		603,542
Cash flows from investing activities:
Other non-current assets and liabilities	(1,895		)	—			729		(1,166		)
Net cash used in investing activities	(257,741		)	—			729		(257,012		)
Effects of exchange rate changes on cash, cash equivalents and restricted cash	12,289			—			70		12,359
Net increase in cash, and cash equivalents and restricted cash	43,983			—			799		44,782
Cash, cash equivalents and restricted cash at beginning of period	324,169			—			457		324,626
Cash, cash equivalents and restricted cash at end of period	368,152			—			1,256		369,408

In October 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted this new standard on January 1, 2018 using the modified retrospective basis, recognizing a cumulative-effect adjustment as a component of equity as of the date of adoption. Upon adoption, the Company reclassified $11.6 million from prepaid and other current assets and $27.0 million from other assets to beginning retained earnings.

In January 2017, the FASB issued guidance that changes the definition of a "business" to assist entities with evaluating whether transactions should be accounted for as transfers of assets or business combinations. The Company adopted this guidance on January 1, 2018 and will apply it prospectively to future transactions. The adoption of this new accounting guidance had no immediate impact on the Company's consolidated financial statements; however, it may result in a future transaction being recorded as a transfer of assets, whereas previously the Company may have concluded it was a business combination.

Recent Accounting Pronouncements

In February 2016, the FASB issued guidance that requires companies to present assets and liabilities arising from leases with terms greater than 12 months on the consolidated balance sheets. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. This will impact all leases, including leases for real estate and co-location facilities, among other arrangements currently under evaluation. The Company plans to adopt this standard in the first quarter of 2019 on a modified retrospective basis. The Company expects to record significant right-of-use assets and lease liabilities on its consolidated balance sheets, but does not expect the adoption to impact its results of operations or cash flows.

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The Company has formed a project team to assess the current state of accounting for leases, to understand the gaps between the current state and required future state and to implement the new processes, systems and controls required. To date, the Company has completed its gap analysis, selected a software tool to assist with the accounting for leases, has begun to implement the software, and has begun its data collection and migration efforts. The Company is also in the process of finalizing its accounting policies and designing the related processes and internal controls. The Company expects the adoption of this standard to require changes to its processes, systems and controls over financial reporting.

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance will be effective for the Company on January 1, 2020. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the "TCJA") that was enacted in 2017. The amendments in this update are effective either in the period of adoption or retrospectively, to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized, during interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements. This guidance will be effective for the Company on January 1, 2019. The Company is evaluating the impact the update will have on its disclosures.

In August 2018, the FASB issued guidance which address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This guidance will be effective for the Company on January 1, 2020, with early adoption permitted. The Company is evaluating the potential impact of adopting this new accounting guidance on its consolidated financial statements.

2. Significant Accounting Policies Update

The Company's significant accounting policies are detailed in Note 2 of its annual report on Form 10-K for the year ended December 31, 2017. As a result of the FASB's updated guidance for revenue recognition and related changes, as described in Note 1, the following policies have been updated as of the Company's adoption date of January 1, 2018, with retrospective application to the historical periods presented.

Revenue Recognition

The Company primarily derives revenue from the sale of services to customers executing contracts having terms of one year or longer. Services included in the Company's contracts consist of its core services – the delivery of content, applications and software over the Internet – as well as security solutions and professional services. Revenue is recognized upon transfer of control of promised services in an amount that reflects the consideration the Company expects to receive in exchange for those services.

The Company enters into contracts that may include various combinations of these services, which are generally capable of being distinct and accounted for as separate performance obligations. These contracts generally commit the customer to a minimum of monthly, quarterly or annual levels of usage and specify the rate at which the customer must pay for actual usage above the stated minimum. Based on the typical structure of the Company's contracts, which are generally for monthly recurring services that are essentially the same over time and have the same pattern of transfer to the customer, most performance obligations represent a promise to deliver a series of distinct services over time.

The Company's contracts with customers sometimes include promises to deliver multiple services to a customer. Determining whether services are distinct performance obligations often requires the exercise of judgment by management. For example, advanced features that enhance a service and are highly interrelated are generally not considered distinct; rather, they

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are combined with the service they relate to into one performance obligation. Different determinations related to combining services into performance obligations could result in differences in the timing and amount of revenue recognized in a period.

Generally, the transaction price in a contract is equal to the committed price stated in the contract, less any discounts or rebates. The Company's typical contracts qualify for series accounting and the pricing terms generally do not require estimation of the transaction price beyond the reporting period. As a result, any incremental fees generated as a result of usage or “bursting” over committed contract levels are recorded in the period to which the services relate. The amount of consideration recognized for usage above contract minimums is limited to the amount the Company expects to be entitled to receive in exchange for providing the services. Once the transaction price has been determined, the Company allocates such price among all performance obligations in the contract on a relative standalone selling price (“SSP”) basis.

Determination of SSP requires the exercise of judgment by management. SSP is based on observable inputs such as the price the Company charges for the service when sold separately, or the discounted list price per management’s approved price list. In cases where services are not sold separately or price list rates are not available, a cost-plus-margin approach or adjusted market approach is used to determine SSP.

Most content delivery and security services represent stand-ready obligations that are satisfied over time as the customer simultaneously receives and consumes the benefits provided by the Company. Accordingly, revenue for those services is recognized over time, generally ratably over the term of the arrangement due to consistent monthly traffic commitments that expire each period. Any bursting over given commitments is recognized in the period in which the traffic was served. For services that involve traffic consumption, revenue is recognized in an amount that reflects the level of traffic served to a customer in a given period. For custom arrangements, other methods may be used as a measure of progress towards satisfying the performance obligations.

Some of the Company's services are satisfied at a point in time, such as one-time professional services contracts, integration services and most license sales where the primary obligation is delivery of the license at the start of the term. In these cases, revenue is recognized at the point in time of delivery or satisfaction of the performance obligation.

From time to time, the Company enters into contracts to sell its services or license its technology to unrelated enterprises at or about the same time that it enters into contracts to purchase products or services from the same enterprises. Consideration payable to a customer is reviewed as part of the transaction price. If the payment to the customer does not represent payment for a distinct service, revenue is recognized only up to the net amount of consideration after customer payment obligations are considered. The Company may also resell the licenses or services of third parties. If the Company is acting as an agent in an arrangement with a customer to provide third party services, the transaction price reflects only the net amount to which the Company will be entitled, after accounting for payments made to the third party responsible for satisfying the performance obligation.

Incremental Costs to Obtain a Contract with a Customer

The Company capitalizes incremental costs associated with obtaining customer contracts, specifically certain commission and incentive payments. The Company pays commissions and incentives up-front based on contract value upon signing a new arrangement with a customer and upon renewal and upgrades of existing contracts with customers if the renewal and upgrades result in an incremental increase in contract value. To the extent commissions and incentives are earned, the expenses, including estimated payroll taxes, are deferred on the Company's consolidated balance sheet and amortized over the expected life of the customer arrangement on a straight-line basis. The Company also incurs commission expense on an ongoing basis based upon revenue recognized. In these cases, no incremental costs are deferred, as the commissions are earned and expensed in the same period for which the associated revenue is recognized.

Based on the nature of the Company's unique technology and services, and the rate at which the Company continually enhances and updates its technology, the expected life of the customer arrangement is determined to be approximately 2.5 years. Amortization is primarily included in sales and marketing expense in the consolidated statements of income. The current portion of deferred commission and incentive payments is included in prepaid expenses and other current assets, and the long-term portion is included in other assets on the Company's consolidated balance sheets.

Contract Liabilities

Contract liabilities primarily represent payments received from customers for which the related performance obligations have not yet been satisfied. These balances consist of the unearned portion of monthly service fees and integration fees, and

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prepayments made by customers for future periods. The current and long-term portions of the Company's contract liabilities are included in deferred revenue in the respective sections of the Company's consolidated balance sheets.

3. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of September 30, 2018 and December 31, 2017 (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, 2018
Certificates of deposit	$	65,000	$	5	$	(11	)	$	64,994	$	64,994	$	—
Commercial paper	393,835		3		(98		)	393,740		393,740		—
Corporate bonds	830,558		17		(5,253		)	825,322		581,609		243,713
U.S. government agency obligations	58,683		—		(564		)	58,119		55,660		2,459
	$	1,348,076	$	25	$	(5,926	)	$	1,342,175	$	1,096,003	$	246,172

As of December 31, 2017
Commercial paper	$	6,951	$	—	$	(9	)	$	6,942	$	6,942	$	—
Corporate bonds	736,902		2		(3,829		)	733,075		289,378		443,697
U.S. government agency obligations	220,014		—		(1,764		)	218,250		102,234		116,016
	$	963,867	$	2	$	(5,602	)	$	958,267	$	398,554	$	559,713

The Company offers certain eligible employees the ability to participate in a non-qualified deferred compensation plan. The mutual funds held by the Company that are associated with this plan are classified as restricted trading securities. These securities are not included in the available-for-sale securities table above but are included in marketable securities in the consolidated balance sheets.

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income in the consolidated statements of income. As of September 30, 2018, the Company held for investment corporate and government bonds with a fair value of $406.6 million, which are classified as available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The unrealized losses of $3.8 million related to these corporate and government bonds are included in accumulated other comprehensive income as of September 30, 2018. The unrealized losses are attributable to changes in interest rates. Based on the evaluation of available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.

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The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of September 30, 2018 and December 31, 2017 (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, 2018
Cash Equivalents and Marketable Securities:
Money market funds	$	139,125		$	139,125	$	—	$	—
Certificates of deposit	64,994			64,994		—		—
Commercial paper	393,740			—		393,740		—
Corporate bonds	825,322			—		825,322		—
U.S. government agency obligations	58,119			—		58,119		—
Mutual funds	11,193			11,193		—		—
	$	1,492,493		$	215,312	$	1,277,181	$	—

Liabilities:
Contingent consideration related to a completed acquisition	$	(6,200	)	$	—	$	—	$	(6,200	)

As of December 31, 2017
Cash Equivalents and Marketable Securities:
Money market funds	$	22,649		$	22,649	$	—	$	—
Commercial paper	10,928			—		10,928		—
Corporate bonds	733,075			—		733,075		—
U.S. government agency obligations	218,248			—		218,248		—
Mutual funds	7,879			7,879		—		—
	$	992,779		$	30,528	$	962,251	$	—

Liabilities:
Contingent consideration related to a completed acquisition	$	(8,631	)	$	—	$	—	$	(8,631	)

As of September 30, 2018 and December 31, 2017, the Company grouped certificates of deposit, money market funds and mutual funds using a Level 1 valuation because market prices for such investments are readily available in active markets. As of September 30, 2018 and December 31, 2017, the Company grouped commercial paper, corporate bonds and U.S. government agency obligations using a Level 2 valuation because quoted prices for identical or similar assets are available in markets that are inactive. The Company did not have any transfers of assets between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the three months ended September 30, 2018.

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

The valuation technique used to measure fair value of the Company's Level 3 liabilities, which consist of contingent consideration related to the acquisition of Cyberfend, Inc. in 2016, was primarily an income-based approach. The significant unobservable input used in the fair value measurement of the contingent consideration was the likelihood of achieving certain post-closing financial results.

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Contractual maturities of the Company’s available-for-sale marketable securities held as of September 30, 2018 and December 31, 2017 were as follows (in thousands):



	September 30, 2018		December 31, 2017
Due in 1 year or less	$	1,096,003	$	398,554
Due after 1 year through 3 years	246,172		559,713
	$	1,342,175	$	958,267

The following table reflects the activity for the Company’s major classes of liabilities measured at fair value using Level 3 inputs during the nine months ended September 30, 2018 (in thousands):



	Other Liabilities: Contingent Consideration Obligation
Balance as of January 1, 2018	$	(8,631	)
Fair value adjustment to contingent consideration included in general and administrative expense	(1,735		)
Cash paid upon achievement of milestone	4,166
Balance as of September 30, 2018	$	(6,200	)

4. Accounts Receivable

Net accounts receivable consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018			December 31, 2017
Trade accounts receivable	$	330,989		$	320,001
Unbilled accounts receivable	136,733			142,737
Gross accounts receivable	467,722			462,738
Allowance for doubtful accounts and other reserves	(1,358		)	(1,281		)
Accounts receivable, net	$	466,364		$	461,457

5. Incremental Costs to Obtain a Contract with a Customer

The following table summarizes the deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018		December 31, 2017
Deferred costs included in prepaid and other current assets	$	38,929	$	35,044
Deferred costs included in other assets	24,064		23,536
Total deferred costs	$	62,993	$	58,580

During the three and nine months ended September 30, 2018, the Company recognized $11.2 million and $32.9 million, respectively, of amortization expense related to deferred commissions. During the three and nine months ended September 30, 2017, the Company recognized $9.3 million and $27.3 million, respectively, of amortization expense related to deferred commissions. Amortization expense related to deferred commissions is primarily included in sales and marketing expense in the consolidated statements of income.

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6. Goodwill and Acquired Intangible Assets

The change in the carrying amount of goodwill for the nine months ended September 30, 2018 was as follows (in thousands):



Balance as of January 1, 2018	$	1,498,688
Measurement period adjustments	(6,667		)
Foreign currency translation	(3,153		)
Balance as of September 30, 2018	$	1,488,868

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

Acquired intangible assets that are subject to amortization consisted of the following as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018							December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Completed technology	$	145,091	$	(77,512	)	$	67,579	$	145,091	$	(65,283	)	$	79,808
Customer-related intangible assets	245,710		(140,798		)	104,912		245,310		(128,835		)	116,475
Non-compete agreements	700		(256		)	444		4,710		(3,975		)	735
Trademarks and trade names	7,200		(3,495		)	3,705		7,200		(2,959		)	4,241
Acquired license rights	490		(490		)	—		490		(490		)	—
Total	$	399,191	$	(222,551	)	$	176,640	$	402,801	$	(201,542	)	$	201,259

Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2018 was $8.3 million and $25.0 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2017 was $7.8 million and $23.1 million, respectively. Based on the Company’s acquired intangible assets as of September 30, 2018, aggregate expense related to amortization of acquired intangible assets is expected to be $8.3 million for the remainder of 2018, and $36.6 million, $33.9 million, $28.0 million and $22.4 million for 2019, 2020, 2021 and 2022, respectively.

7. Debt

Convertible Notes – Due 2025

In May 2018, the Company issued $1,150.0 million in par value of convertible senior notes due 2025 (the "2025 Notes"). The 2025 Notes are senior unsecured obligations of the Company, bear regular interest of 0.125%, payable semi-annually on May 1 and November 1 of each year, and mature on May 1, 2025, unless repurchased or converted prior to maturity.

At their option, holders may convert their 2025 Notes prior to the close of business on the business day immediately preceding January 1, 2025, only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ended June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


•	during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

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•	upon the occurrence of specified corporate events.

On or after January 1, 2025, holders may convert all or any portion of their 2025 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, 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 10.5150 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $95.10 per share, subject to adjustments in certain events, and represents a potential conversion into 12.1 million shares.

In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar debt obligation that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2025 Notes. The difference between the principal amount of the 2025 Notes and the proceeds allocated to the liability component (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is recorded in additional paid-in capital in the consolidated balance sheet and will not be remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the 2025 Notes, the Company allocated the total transaction costs incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the 2025 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2025 Notes in stockholders’ equity.

The 2025 Notes consist of the following components as of September 30, 2018 (in thousands):



	September 30, 2018
Liability component:
Principal	$	1,150,000
Less: debt discount and issuance costs, net of amortization	(285,321		)
Net carrying amount	$	864,679

Equity component:	$	285,225

The estimated fair value of the 2025 Notes at September 30, 2018 was $1,129.7 million. The fair value was determined based on the quoted price of the 2025 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $73.15 on September 30, 2018, the value of the 2025 Notes if converted to common stock was less than the principal amount of $1,150.0 million.

The Company used $46.2 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2025 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $141.8 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The remaining net proceeds are intended to be used for the repayment at maturity of the $690.0 million in par value of convertible senior notes due 2019 as well as for working capital, share repurchases, potential acquisitions and strategic transactions and other corporate purposes.

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Note Hedge

To minimize the impact of potential dilution upon conversion of the 2025 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in May 2018. The Company paid $261.7 million for the note hedge transactions. The note hedge transactions cover approximately 12.1 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2025 Notes, also subject to adjustment, and are exercisable upon conversion of the 2025 Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the 2025 Notes.

Warrants

Separately, in May 2018, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 12.1 million shares of the Company’s common stock at a strike price of approximately $149.18 per share. The Company received aggregate proceeds of $119.9 million from the sale of the warrants. The convertible note hedge and warrant transactions will generally have the effect of increasing the conversion price of the 2025 Notes to approximately $149.18 per share.

Convertible Notes – Due 2019

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

At their option, holders may convert their 2019 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 2019 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 2019 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 2019 Notes, the Company separated the 2019 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 2019 Notes. The difference between the principal amount of the 2019 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 2019 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 2019 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 2019 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2019 Notes in stockholders’ equity.

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The 2019 Notes consist of the following components as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018			December 31, 2017
Liability component:
Principal	$	690,000		$	690,000
Less: debt discount and issuance costs, net of amortization	(9,436		)	(27,087		)
Net carrying amount	$	680,564		$	662,913

Equity component:	$	101,276		$	101,276

The estimated fair value of the 2019 Notes at September 30, 2018 was $684.8 million. The fair value was determined based on the quoted price of the 2019 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $73.15 on September 30, 2018, the value of the 2019 Notes if converted to common stock was less than the principal amount of $690.0 million.

The Company used $62.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2019 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $23.3 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The remaining net proceeds are for working capital, share repurchases and other general corporate purposes, as well as for potential acquisitions and strategic transactions.

Note Hedge

To minimize the impact of potential dilution upon conversion of the 2019 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 2019 Notes, also subject to adjustment, and are exercisable upon conversion of the 2019 Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the 2019 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 2019 Notes to approximately $104.49 per share.

Revolving Credit Facility

In May 2018, the Company entered into a $500.0 million five-year, revolving credit agreement (the “Credit Agreement”). Borrowings under the Credit Agreement may be used to finance working capital needs and for general corporate purposes. The Credit Agreement provides for an initial $500.0 million in revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount.

Borrowings under the Credit Agreement bear interest, at the Company's option, at a base rate plus a spread of 0.00% to 0.25% or an adjusted LIBOR rate plus a spread of 0.875% to 1.25%, in each case with such spread being determined based on the Company's consolidated leverage ratio specified in the Credit Agreement. Regardless of what amounts, if any, are outstanding under the Credit Agreement, the Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.075% to 0.15%, with such rate being based on the Company's consolidated leverage ratio specified in the Credit Agreement.

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. Principal covenants include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. There were no outstanding borrowings under the Credit Agreement as of September 30, 2018.

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Interest Expense

The 2025 Notes bear interest at a fixed rate of 0.125%. The interest is payable semi-annually on May 1 and November 1 of each year, commencing in November 2018. The 2025 Notes have an effective interest rate of 4.26% attributable to the conversion feature. The 2019 Notes do not bear regular interest, but have an effective interest rate of 3.2% attributable to the conversion feature. The Company is also obligated to pay ongoing commitment fees under the terms of the Credit Agreement. The following table sets forth total interest expense included in the consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Amortization of debt discount and issuance costs	$	15,295		$	5,731		31,045			$	17,044
Coupon interest payable on 2025 Notes	359			—			514			—
Revolving credit facility contractual interest expense	122			—			261			—
Capitalization of interest expense	(1,210		)	(985		)	(3,200		)	(3,055		)
Total interest expense	$	14,566		$	4,746		$	28,620		$	13,989

8. Restructuring

During the fourth quarter of 2017, management committed to an action to restructure certain parts of the Company, with the intent of shifting focus to more critical areas of the business and away from products that have not seen expected commercial success. The restructuring is also intended to facilitate cost efficiencies and savings. As part of the cost efficiency and savings plans, certain headcount and facility reductions were made in 2017 and the first three quarters of 2018. Certain capitalized internal-use software charges have also been realized for software not yet placed into service that will not be completed and implemented due to this action. The Company has incurred $62.0 million of restructuring charges as part of this action, of which $12.7 million was recognized during the nine months ended September 30, 2018, and $49.3 million was recognized during the three months ended December 31, 2017. The Company does not expect any additional restructuring charges related to this action to be significant.

The Company also recognized restructuring charges for redundant employees, facilities and contracts associated with acquisitions completed in 2017.

The following table summarizes the activity of the Company's restructuring accrual during the nine months ended September 30, 2018 (in thousands):



	Employee Severance and Related Benefits			Software Charges			Excess Facilities, Contract Terminations and Other			Total
Balance as of January 1, 2018	$	12,857		$	—		$	1,386		$	14,243
Costs incurred	5,910			2,818			5,714			14,442
Cash disbursements	(18,509		)	—			(4,885		)	(23,394		)
Software and other non-cash charges	—			(2,818		)	(1,787		)	(4,605		)
Translation adjustments and other	706			—			(205		)	501
Balance as of September 30, 2018	$	964		$	—		$	223		$	1,187

9. Commitments and Contingencies

Legal Matters

In April 2018, as part of the resolution of multiple existing lawsuits between Limelight Networks, Inc. ("Limelight") and the Company, including in the U.S. District Court for the Eastern District of Virginia and in the U.S. District Court for the

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District of Massachusetts, the Company and Limelight entered into an agreement to settle the cases and request that the U.S. Patent Trial and Appeal Board terminate certain proceedings related to patents at issue in the litigation. The Company recorded a $14.9 million charge in the second quarter of 2018, which is included in general and administrative expenses in the consolidated statement of income for the nine months ended September 30, 2018, related to this settlement.

10. Stockholders’ Equity

Share Repurchase Program

In February 2016, the Board of Directors authorized a $1.0 billion repurchase program effective from February 2016 through December 2018. In March 2018, the Company announced that its Board had increased its share repurchase authorization by $416.7 million, such that the amount that was authorized and available for repurchase in 2018 was $750.0 million. Subsequently, effective November 2018, the Board authorized an additional $1.1 billion repurchase program through December 2021.

During the three and nine months ended September 30, 2018, the Company repurchased 5.9 million and 8.3 million shares of its common stock, respectively, for $440.4 million and $625.9 million, respectively.

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, 2018 and 2017 (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Cost of revenue	$	5,494		$	5,296		$	16,343		$	15,055
Research and development	11,249			10,100			32,684			28,743
Sales and marketing	16,835			15,672			49,543			44,780
General and administrative	13,054			10,780			40,245			33,525
Total stock-based compensation	46,632			41,848			138,815			122,103
Provision for income taxes	(7,802		)	(11,211		)	(37,692		)	(41,417		)
Total stock-based compensation, net of income taxes	$	38,830		$	30,637		$	101,123		$	80,686

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, 2018 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $6.6 million and $18.1 million, respectively, before taxes and, for the three and nine months ended September 30, 2017, include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $5.1 million and $12.5 million, respectively, before taxes.

11. Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of stockholders' equity, for the nine months ended September 30, 2018 (in thousands):



	Foreign Currency Translation			Net Unrealized Gains (Losses) on Investments			Total
Balance as of January 1, 2018	$	(24,319	)	$	2,389		$	(21,930	)
Other comprehensive loss	(26,046		)	(242		)	(26,288		)
Balance as of September 30, 2018	$	(50,365	)	$	2,147		$	(48,218	)

Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the nine months ended September 30, 2018.

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12. Revenue from Contracts with Customers

The Company sells its services through a sales force located both domestically and abroad. Revenue derived from operations outside of the U.S. is determined based on the country in which the sale originated. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period. The following table summarizes revenue by geography included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
U.S.	$	412,573	$	412,348	$	1,249,041	$	1,211,454
International	257,055		212,092		752,070		619,111
Total revenue	$	669,628	$	624,440	$	2,001,111	$	1,830,565

While the Company sells its services through a geographically dispersed sales force, it manages its customer relationships in two divisions: the Web Division and the Media and Carrier Division. Customers are assigned to a division for relationship management purposes according to their predominant purchasing activity; however, customers may purchase solutions managed by the other division as well. The following table summarizes revenue by division included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
Web Division	$	356,856	$	329,684	$	1,060,777	$	950,580
Media and Carrier Division	312,772		294,756		940,334		879,985
Total revenue	$	669,628	$	624,440	$	2,001,111	$	1,830,565

Most content delivery and security services represent obligations that are satisfied over time as the customer simultaneously receives and consumes the services provided by the Company. Accordingly, the majority of the Company's revenue is recognized over time, generally ratably over the term of the arrangement due to consistent monthly traffic commitments that expire each period. A small percentage of the Company's services are satisfied at a point in time, such as one-time professional services contracts, integration services and most license sales where the primary obligation is delivery of the license at the start of the term. In these cases, revenue is recognized at a point in time of delivery or satisfaction of the performance obligation.

During the nine months ended September 30, 2018 and 2017, the Company recognized $64.3 million and $43.9 million of revenue that was included in deferred revenue as of December 31, 2017 and 2016, respectively.

As of September 30, 2018, the aggregate amount of remaining performance obligations from contracts with customers was $2.3 billion. The Company expects to recognize more than 70% of its remaining performance obligations as revenue over the next 12 months, with the remaining recognized thereafter. Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. This consists of future committed revenue for monthly, quarterly or annual periods within current contracts with customers, as well as deferred revenue arising from consideration invoiced in prior periods for which the related performance obligations have not been satisfied. It excludes estimates of variable consideration such as usage-based contracts with no committed contract as well as anticipated renewed contracts.

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13. Income Taxes

The effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods. Potential discrete adjustments include tax charges or benefits related to stock-based compensation, changes in tax legislation, settlements of tax audits or assessments, uncertain tax positions and acquisitions, among other items.

The Company is currently under audit in multiple jurisdictions and, in certain cases, is involved in litigation related to adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting adverse audit findings related to certain tax benefits and exemptions. Over the next 12 months, the Company’s current assumptions and positions could change based on audit determinations and other events impacting its analysis. Such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate.

The Company’s effective income tax rate was 11.2% and 30.8% for the nine months ended September 30, 2018 and 2017, respectively. The lower effective tax rate for the nine months ended September 30, 2018, is primarily due to a reduction in the U.S. federal statutory tax rate from 35.0% to 21.0% as part of the TCJA, an increase in the excess tax benefit related to stock-based compensation and a decrease in the provisional amount of the one-time transition tax that was recorded in the fourth quarter of 2017. These amounts were partially offset by U.S. federal taxes on Global Intangible Low-Taxed Income (“GILTI”) enacted as part of the TCJA and an intercompany sale of intellectual property.

For the nine months ended September 30, 2018, the effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation, a decrease in the provisional amount of the one-time transition tax that was recorded in the fourth quarter of 2017, the release of certain tax reserves related to the expiration of local statutes and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by U.S. federal taxes on GILTI enacted as part of the TCJA and an intercompany sale of intellectual property.

For the nine months ended September 30, 2017, the effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits, partially offset by the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income taxes.

As of September 30, 2018, the Company has not finalized the accounting for all of the tax effects of the TCJA. However, upon further analysis of certain aspects of the TCJA and refinements to the calculations, the provisional estimate of the one-time transition tax, which was recorded in the Company’s consolidated financial statements for the year ended December 31, 2017, decreased by $5.5 million. This decrease in the provisional estimate has been included as a discrete item in the interim period ended September 30, 2018. The Company will continue to refine the provisional amounts of the tax effect of the TCJA as additional guidance and information is available, including clarity regarding state income tax conformity to the current federal tax code. Any further changes to the provisional estimate of the tax effect of the TCJA will be recorded in the period in which the adjustments are made and within the prescribed measurement period.

Beginning in 2018, the TCJA provides for a modified territorial tax system imposing an incremental tax on foreign income deemed to be taxed at a “low rate” (the aforementioned GILTI provisions). Under GAAP, an election must be made to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into the measurement of deferred taxes (the “deferred method”). The Company is still evaluating the effects of these provisions and has not yet adopted a policy to account for the related impacts.

As of September 30, 2018, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease within the next twelve months by $30.8 million as a result of the expiration of local statutes of limitations.

14. Net Income per Share

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

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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, 2018 and 2017 (in thousands, except per share data):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
Numerator:
Net income	$	107,583	$	63,911	$	204,358	$	195,246
Denominator:
Shares used for basic net income per share	165,924		170,976		168,763		172,269
Effect of dilutive securities:
Stock options	80		150		158		279
RSUs and DSUs	1,896		379		1,811		823
Convertible senior notes	—		—		—		—
Warrants related to issuance of convertible senior notes	—		—		—		—
Shares used for diluted net income per share	167,900		171,505		170,732		173,371
Basic net income per share	$	0.65	$	0.37	$	1.21	$	1.13
Diluted net income per share	$	0.64	$	0.37	$	1.20	$	1.13

For the three and nine months ended September 30, 2018 and 2017, certain potential outstanding shares from stock options, service-based RSUs, convertible notes and warrants were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based RSUs were excluded from the computation of diluted net income per share because the underlying performance conditions for such RSUs had not been met as of these dates. The number of potentially outstanding shares excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2018	2017	2018	2017
Stock options	—	25	—	13
Service-based RSUs	185	5,407	1,068	4,074
Performance-based RSUs	1,515	1,116	1,520	1,165
Convertible senior notes	19,797	7,704	19,797	7,704
Warrants related to issuance of convertible senior notes	19,797	7,704	19,797	7,704
Total shares excluded from computation	41,294	21,956	42,182	20,660

15. Akamai Foundation Endowment

During the second quarter of 2018, the Company contributed $50.0 million to the Akamai Foundation, a non-profit organization founded by certain current and former employees of the Company in 2000 (the "Foundation"). The Company has the right to appoint the directors of the Foundation. The contribution is intended to be a one-time endowment. The associated expense is included in general and administrative expenses in the consolidated statements of income for the nine months ended September 30, 2018. The Foundation is a private corporate foundation with a mission of supporting youth education, with a focus on mathematics, as well as other charitable causes.

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

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

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related items, including, but not limited to, revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, goodwill and acquired intangible assets, capitalized internal-use software development costs, impairment and useful lives of long-lived assets, income taxes 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, 2017 and the section entitled "Significant Accounting Policies Update" in the notes to our unaudited consolidated financial statements included herein for further discussion of our critical accounting policies and estimates.

Overview

We provide security, web and mobile performance, enterprise access, and video delivery solutions to enterprises across the world. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our performance and security offerings, increase media traffic on our network, develop new products and carefully manage our capital spending and other expenses.

Revenue

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

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


•	Increased sales of our security solutions have made a significant contribution to revenue growth. We plan to continue to invest in this area with a focus on further enhancing our product portfolio and extending our go-to-market capabilities.


•	We have increased committed recurring revenue from our solutions by increasing sales of incremental services to our existing customers and adding new customers. These increases helped to limit the impact of reductions in usage of our services, contract terminations by certain customers and price decreases negotiated as part of contract renewals.


•	The prices paid by some of our customers have declined, reflecting the impact of competition. In particular, pricing pressure related to our delivery-based web performance solutions has reduced our revenue growth rate in recent

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quarters. Revenue growth for our web performance solutions has also been negatively impacted by the consolidation of and struggles faced by a number of our U.S.-based commerce customers.

•

We have experienced increases in the amount of traffic delivered for customers that use our solutions for video, gaming, social media and software downloads, contributing to an increase in our revenue. However, our traffic growth rates are subject to fluctuation based on, among other things, when large events occur and the “do-it-yourself” efforts by some of our customers that are among the large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix. We refer to these companies as our Internet Platform Customers. Some of these customers have elected to develop and rely on their internal infrastructure to deliver more of their media content, particularly less performance-sensitive content, rather than use our services. As a result, we have experienced lower revenue from these customers in recent years. We have not, however, been experiencing a significant shift to internal infrastructure usage across the remainder of our media services customer base.

•

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

Expenses

Our level of profitability is also impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs. Some of our bandwidth and co-location costs are fixed over a minimum time period, while others are variable and can be more easily adjusted to reflect changes in customer needs. 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. 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, serving more traffic from higher cost regions and the introduction of new solutions. We will need to continue to effectively manage our bandwidth costs to maintain current levels of profitability.

•

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

•

We incurred significant restructuring costs in the fourth quarter of 2017 and the first quarter of 2018 as management committed to an action to restructure certain parts of the company. The restructuring actions were intended to facilitate cost efficiencies and savings. During 2018, we have also launched internal transformation initiatives intended to improve our operating margins; we expect to incur incremental professional services fees in connection with these activities.

•

Payroll and related compensation costs have grown in the first three quarters of 2018 due to headcount increases in 2017, particularly in our professional services and engineering teams to support our revenue growth and strategic initiatives. During the year ended December 31, 2017, we increased our headcount by 1,161 employees. Our headcount decreased by 76 employees during the nine-month period ended September 30, 2018, primarily due to the recent restructuring actions in the fourth quarter of 2017 and the first quarter of 2018.

We retrospectively adopted the new accounting standard for revenue recognition on January 1, 2018; accordingly, prior period results have been revised for the adoption of the new standard. The changes to our revenue recognition approach under this new standard primarily impact the timing of recognizing revenue from a small number of licensed software customers. There is little impact to revenue from our core Web and Media products. As a result of the change, we also began capitalizing

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certain commission and incentive payments. The revisions as a result of adopting the new standard did not have a material impact on our annual revenue or results of operations but did cause quarter-over-quarter fluctuations.

We report our revenue by division, which is a customer-focused reporting view that reflects revenue from customers that are managed by the division. As of January 1, 2018, we now report our revenue in two divisions compared to the three divisions reported in 2017; the Media Division and Enterprise and Carrier Division were combined to form the new Media and Carrier Division. As the purchasing patterns and required account expertise of customers change over time, we may reassign a customer from one division to another. In 2018, we reassigned some of our customers from the Media and Carrier Division to the Web Division and revised historical results in order to reflect the most recent categorization and to provide a comparable view for all periods presented.

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,
	2018		2017		2018		2017
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	35.7		36.1		35.5		35.3
Research and development	9.1		9.2		9.3		8.9
Sales and marketing	18.7		18.9		19.0		19.1
General and administrative	17.9		19.9		22.2		19.8
Amortization of acquired intangible assets	1.2		1.2		1.3		1.3
Restructuring (benefit) charges	(0.1	)	0.1		0.7		0.2
Total costs and operating expenses	82.5		85.4		88.0		84.6
Income from operations	17.5		14.6		12.0		15.4
Interest income	1.4		0.7		1.0		0.7
Interest expense	(2.2	)	(0.8	)	(1.4	)	(0.8	)
Other (expense) income, net	(0.1	)	0.1		(0.2	)	—
Income before provision for income taxes	16.6		14.6		11.4		15.3
Provision for income taxes	0.5		4.4		1.3		4.7
Net income	16.1	%	10.2	%	10.1	%	10.6	%

Revenue

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2018		2017		% Change		% Change at Constant Currency		2018		2017		% Change		% Change at Constant Currency
Web Division	$	356,856	$	329,684	8.2	%	9.0	%	$	1,060,777	$	950,580	11.6	%	10.4	%
Media and Carrier Division	312,772		294,756		6.1		7.0		940,334		879,985		6.9		5.9
Total revenue	$	669,628	$	624,440	7.2	%	8.1	%	$	2,001,111	$	1,830,565	9.3	%	8.3	%

During the three- and nine-month periods ended September 30, 2018, the increase in our revenue as compared to the same periods in 2017 was primarily the result of higher media traffic volumes, increased sales of our new product offerings and continued strong growth from our Cloud Security Solutions. During the three-month period ended September 30, 2018, our

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Cloud Security Solutions revenue was $168.6 million, as compared to $122.9 million during the three-month period ended September 30, 2017, which represents a 37.2% increase. During the nine-month period ended September 30, 2018, our Cloud Security Solutions revenue was $473.1 million, as compared to $349.7 million during the nine-month period ended September 30, 2017, which represents a 35.3% increase. Cloud Security Solutions revenue increased due to sales of new products, particularly Bot Manager, Image Manager and Digital Performance Management, as well as continued strong growth in our core Kona and Prolexic Cloud Security Solutions.

The increase in Web Division revenue during the three- and nine-month periods ended September 30, 2018, as compared to the same periods in 2017, was primarily the result of increased sales of both new and existing Cloud Security Solutions to this customer base, as described above.

The increase in Media and Carrier Division revenue during the three- and nine-month periods ended September 30, 2018, as compared to the same periods in 2017, was primarily the result of increased customer traffic volumes from video delivery and gaming customers and sales of Cloud Security Solutions to this customer base. The increase in Media and Carrier Division revenue was partially offset by a decline in revenue from our Internet Platform Customers to $43.1 million and $131.5 million, respectively, for the three- and nine-month periods ended September 30, 2018, as compared to $50.7 million and $153.3 million, respectively, for the three- and nine-month periods ended September 30, 2017. Excluding these customers, revenue increased within the Media and Carrier Division by 10.5% and 11.4%, respectively, for the three- and nine-month periods ended September 30, 2018 as compared to the same periods in 2017.

Revenue derived in the U.S. and internationally during the periods presented is as follows (in thousands):



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2018		2017		% Change		% Change at Constant Currency		2018		2017		% Change		% Change at Constant Currency
U.S.	$	412,573	$	412,348	0.1	%	0.1	%	$	1,249,041	$	1,211,454	3.1	%	3.1	%
International	257,055		212,092		21.2		23.7		752,070		619,111		21.5		18.4
Total revenue	$	669,628	$	624,440	7.2	%	8.1	%	$	2,001,111	$	1,830,565	9.3	%	8.3	%

For the three- and nine-month periods ended September 30, 2018, the increase to our U.S. revenue was the result of increases in our media traffic, which was partially offset by decreased revenue from our Internet Platform Customers, which are concentrated in the U.S., and our U.S.-based commerce customers. Excluding the Internet Platform Customers, our U.S. revenue growth rates would have been 2.2% and 5.6%, respectively, for the three- and nine-month periods ended September 30, 2018, as compared to the same periods in 2017.

For the three- and nine-month periods ended September 30, 2018, approximately 38.4% and 37.6%, respectively, of our revenue was derived from our operations located outside the U.S., compared to 34.0% and 33.8% for the three- and nine-month periods ended September 30, 2017, respectively. No single country outside the U.S. accounted for 10.0% or more of revenue during any of these periods. During the three- and nine-month periods ended September 30, 2018, we continued to see strong revenue growth from our operations in the Asia-Pacific region. Changes in foreign currency exchange rates impacted our revenue by an unfavorable $6.4 million and $5.3 million, respectively, during the three- and nine-month periods ended September 30, 2018, as compared to the same periods in 2017.

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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,
	2018		2017		% Change		2018		2017		% Change
Bandwidth fees	$	33,827	$	42,717	(20.8	)%	$	116,050	$	125,438	(7.5	)%
Co-location fees	32,165		33,474		(3.9	)	97,659		96,826		0.9
Network build-out and supporting services	26,770		18,742		42.8		66,328		54,477		21.8
Payroll and related costs	60,097		55,521		8.2		179,712		160,541		11.9
Stock-based compensation, including amortization of prior capitalized amounts	11,817		10,033		17.8		33,439		26,681		25.3
Depreciation of network equipment	36,883		35,943		2.6		112,866		106,602