Edgar Filing: AKAMAI TECHNOLOGIES INC

AKAM 10Q 9/30/2013

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, 2013



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.)

8 Cambridge Center

Cambridge, MA 02142

(617) 444-3000

(Address, Including Zip Code, and Telephone Number,

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

______________________________________________

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

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

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



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

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

The number of shares outstanding of the registrant’s common stock as of November 5, 2013: 178,977,003

Table of Contents

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 5.	Other Information	42
Item 6.	Exhibits	49

SIGNATURES		50

EXHIBIT INDEX		51

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS



(in thousands, expect share data)	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	235,015		$	201,989
Marketable securities	331,300			235,592
Accounts receivable, net of reserves of $3,584 and $3,807 at September 30, 2013 and December 31, 2012, respectively	256,453			218,777
Prepaid expenses and other current assets	67,452			51,604
Deferred income tax assets	20,422			20,422
Total current assets	910,642			728,384
Property and equipment, net	424,605			345,091
Marketable securities	620,204			657,659
Goodwill	751,271			723,701
Acquired intangible assets, net	79,803			84,554
Deferred income tax assets	20,672			21,427
Other assets	77,928			39,811
Total assets	$	2,885,125		$	2,600,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	49,073		$	43,291
Accrued expenses	171,527			133,087
Deferred revenue	37,025			26,291
Other current liabilities	27,799			275
Total current liabilities	285,424			202,944
Deferred revenue	2,643			2,565
Other liabilities	53,928			49,364
Total liabilities	341,995			254,873
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding	—			—
Common stock, $0.01 par value; 700,000,000 shares authorized; 203,958,959 shares issued and 178,707,441 shares outstanding at September 30, 2013 and 200,199,536 shares issued and 177,782,814 shares outstanding at December 31, 2012	2,059			2,015
Additional paid-in capital	5,295,939			5,195,543
Accumulated other comprehensive loss	(5,434		)	(1,640		)
Treasury stock, at cost, 25,251,518 shares at September 30, 2013 and 22,416,722 shares at December 31, 2012	(736,870		)	(624,462		)
Accumulated deficit	(2,012,564		)	(2,225,702		)
Total stockholders’ equity	2,543,130			2,345,754
Total liabilities and stockholders’ equity	$	2,885,125		$	2,600,627

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

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands, except per share data)	2013			2012			2013			2012
Revenue	$	395,790		$	345,321		$	1,141,942		$	996,075
Costs and operating expenses:
Cost of revenue	132,039			134,221			377,136			390,406
Research and development	24,857			19,351			67,359			54,373
Sales and marketing	67,811			55,206			198,326			160,681
General and administrative	66,634			51,003			183,365			156,241
Amortization of acquired intangible assets	4,859			5,381			16,653			15,611
Restructuring charges	69			—			891			14
Total costs and operating expenses	296,269			265,162			843,730			777,326
Income from operations	99,521			80,159			298,212			218,749
Interest income, net	1,458			1,593			4,543			4,865
Other (expense) income, net	(305		)	(241		)	(96		)	449
Income before provision for income taxes	100,674			81,511			302,659			224,063
Provision for income taxes	20,918			33,280			89,521			88,366
Net income	$	79,756		$	48,231		$	213,138		$	135,697
Net income per share:
Basic	$	0.45		$	0.27		$	1.20		$	0.76
Diluted	$	0.44		$	0.27		$	1.17		$	0.75
Shares used in per share calculations:
Basic	178,235			177,455			178,008			178,040
Diluted	181,922			181,053			181,623			181,738

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

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2013		2012		2013			2012
Net income	$	79,756	$	48,231	$	213,138		$	135,697
Other comprehensive income (loss):
Foreign currency translation adjustments	2,950		3,770		(4,810		)	740
Change in unrealized gain on investments, net of income tax expense of $1,532, $425, $629 and $538 for the three and nine months ended September 30, 2013 and 2012, respectively	2,571		821		1,016			1,002
Other comprehensive income (loss)	5,521		4,591		(3,794		)	1,742
Comprehensive income	$	85,277	$	52,822	$	209,344		$	137,439

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

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30,
(in thousands)	2013			2012
Cash flows from operating activities:
Net income	$	213,138		$	135,697
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	134,455			149,203
Stock-based compensation	72,211			69,180
Provision for doubtful accounts	889			(61		)
Excess tax benefits from stock-based compensation	(18,152		)	(17,589		)
Provision for deferred income taxes	—			826
Gain from disposal of property and equipment	(15		)	(62		)
Gain from divestiture of a business	(1,188		)	—
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable	(51,321		)	(21,587		)
Prepaid expenses and other current assets	(9,266		)	10,010
Accounts payable and accrued expenses	43,730			49,149
Deferred revenue	10,991			5,542
Other current liabilities	32			(2,897		)
Other non-current assets and liabilities	(3,328		)	(104		)
Net cash provided by operating activities	392,176			377,307
Cash flows from investing activities:
Cash paid for acquired businesses, net of cash acquired	(27,420		)	(306,030		)
Purchases of property and equipment	(142,567		)	(119,116		)
Capitalization of internal-use software development costs	(55,171		)	(39,921		)
Purchases of short- and long-term marketable securities	(403,556		)	(554,303		)
Proceeds from sales of short- and long-term marketable securities	79,207			135,993
Proceeds from maturities of short- and long-term marketable securities	265,495			214,159
Proceeds from the sale of property and equipment	761			12
Other non-currents assets and liabilities	(3,320		)	979
Net cash used in investing activities	(286,571		)	(668,227		)
Cash flows from financing activities:
Proceeds related to the issuance of common stock under stock plans	54,418			33,760
Excess tax benefits from stock-based compensation	18,152			17,589
Employee taxes paid related to net share settlement of stock-based awards	(28,559		)	(26,566		)
Repurchases of common stock	(112,408		)	(111,649		)
Net cash used in financing activities	(68,397		)	(86,866		)
Effects of exchange rate changes on cash and cash equivalents	(4,182		)	1,239
Net increase (decrease) in cash and cash equivalents	33,026			(376,547		)
Cash and cash equivalents at beginning of period	201,989			559,197
Cash and cash equivalents at end of period	$	235,015		$	182,650

Table of Contents

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued



	For the Nine Months Ended September 30,
(in thousands)	2013		2012
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	44,191	$	51,822
Non-cash financing and investing activities:
Purchases of property and equipment included in accrued expenses	$	12,630	$	12,939
Capitalization of stock-based compensation, net of impairments	$	9,252	$	6,694
Convertible note receivable received for divestiture of a business	$	18,882	$	—

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

Table of Contents

AKAMAI TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides cloud services for delivering, optimizing and securing online content and business applications. Akamai’s globally-distributed platform comprises more than 141,000 servers in approximately 1,200 networks in 90 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one industry segment: providing cloud services for delivering, optimizing and securing online content and business applications.

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 or omitted in 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, 2012, filed with the Securities and Exchange Commission on March 1, 2013.

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.

Revision of Prior Period Amounts

In the first quarter of 2013, the Company conducted a reevaluation of its business model. Following the review, the Company determined it was appropriate to change the classification of cost of services and support and cost of network build-out and support from sales and marketing and general and administrative expenses, respectively, to costs of revenue because such costs directly support the Company's revenue. The Company has concluded that the prior classification was an error and that it is immaterial to all annual and quarterly periods previously presented. However, to facilitate period-over-period comparisons, the Company has revised its prior period financial statements to reflect the corrections in the period in which the expenses were incurred.

The effect of the revisions to the consolidated statements of operations for the three and nine months ended September 30, 2012, is as follows (in thousands):



	Three Months Ended							Nine Months Ended
	As Previously Reported		Adjustment			As Revised		As Previously Reported		Adjustment			As Revised
Cost of revenue	$	109,995	$	24,226		$	134,221	$	320,018	$	70,388		$	390,406
Research and development	19,351		—			19,351		54,373		—			54,373
Sales and marketing	75,924		(20,718		)	55,206		219,096		(58,415		)	160,681
General and administrative	54,511		(3,508		)	51,003		168,214		(11,973		)	156,241
Amortization of acquired intangible assets	5,381		—			5,381		15,611		—			15,611
Restructuring charges	—		—			—		14		—			14
Total costs and operating expenses	$	265,162	$	—		$	265,162	$	777,326	$	—		$	777,326

The classification error did not affect reported revenue, total costs and operating expenses, income from operations, net income, net income per share, cash flows or any balance sheet line item.

Table of Contents

During the third quarter of 2013, the Company identified immaterial classification errors in its historical consolidated statements of cash flows. The errors relate to the timing of cash payments for property and equipment, cash receipts from employees for common stock related to the Company's employee stock purchase plan and cash payments for lease deposits. The cash flows for these items were improperly reflected as changes in operating assets and liabilities rather than as investing or financing activities. There was no impact to the net change in cash and cash equivalents. The Company concluded these errors are immaterial to all annual and quarterly periods previously presented and has reflected the corrections as a revision to the consolidated statements of cash flows previously filed.

The effect of the revisions to the consolidated statements of cash flows for the nine months ended September 30, 2012, is as follows (in thousands):



	As Previously Reported		Adjustment		As Revised
Cash flows from operating activities:
Changes in operating assets and liabilities, net of effects from acquisitions:
Prepaid expenses and other current assets	11,103		(1,093	)	10,010
Accounts payable and accrued expenses	54,732		(5,583	)	49,149
Other non-current assets and liabilities	(536	)	432		(104	)
Net cash provided by operating activities	383,551		(6,244	)	377,307
Cash flows from investing activities:
Purchases of property and equipment	(119,256	)	140		(119,116	)
Other non-current assets and liabilities	—		979		979
Net cash used in investing activities	(669,346	)	1,119		(668,227	)
Cash flows from financing activities:
Proceeds related to the issuance of common stock under stock plans	28,635		5,125		33,760
Net cash used in financing activities	(91,991	)	5,125		(86,866	)
Net decrease in cash and cash equivalents	(376,547	)	—		(376,547	)

2. Changes to Significant Accounting Policies

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally includes purchases of items with a per-unit value greater than $1,000 and a useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives of property and equipment. Changes to the estimated useful lives are recorded prospectively from the date of the change. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income from operations.

The Company implemented software and hardware initiatives to manage its global network more efficiently and, as a result, the expected average useful life of its network assets, primarily servers, increased from three to four years effective January 1, 2013. This change decreased depreciation expense on network assets by approximately $10.3 million and $37.2 million, for the three and nine months ended September 30, 2013, respectively.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued guidance and disclosure requirements for reporting of comprehensive income: amounts reclassified out of accumulated other comprehensive income. The guidance requires that an entity provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP. The guidance became effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The adoption of this guidance in the first quarter of 2013 did not have a material impact on the Company's consolidated financial results.

Table of Contents

3. Fair Value Measurements

The Company accounts for financial assets and liabilities in accordance with a fair value measurement accounting standard. The accounting standard provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:


•	Level 1 — Quoted prices in active markets for identical assets or liabilities.


•	Level 2 — Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are inactive, or other inputs that are observable or can be corroborated by observable market data.


•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques.

The following is a summary of available-for-sale marketable securities held as of September 30, 2013 and December 31, 2012 (in thousands):



			Gross Unrealized							Classification Balance Sheet
	Amortized Cost		Gains		Losses			Aggregate Fair Value		Short-Term Marketable Securities		Long-Term Marketable Securities
As of September 30, 2013
Certificates of deposit	$	219	$	—	$	—		$	219	$	171	$	48
Corporate bonds	755,548		1,017		(514		)	756,051		296,783		459,268
U.S. government agency obligations	195,386		45		(197		)	195,234		34,346		160,888
	$	951,153	$	1,062	$	(711	)	$	951,504	$	331,300	$	620,204

As of December 31, 2012
Certificates of deposit	$	3,100	$	—	$	—		$	3,100	$	3,057	$	43
Commercial paper	7,481		2		(1		)	7,482		7,482		—
Corporate bonds	691,931		1,269		(205		)	692,995		217,548		475,447
U.S. government agency obligations	189,607		95		(28		)	189,674		7,505		182,169
	$	892,119	$	1,366	$	(234	)	$	893,251	$	235,592	$	657,659

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income, net in the statements of operations. As of September 30, 2013, the Company did not hold any investment-related assets that had been in a continuous loss position for more than 12 months.

Table of Contents

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liability at September 30, 2013 and December 31, 2012 (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, 2013
Cash Equivalents and Marketable Securities:
Money market funds	$	778		$	778	$	—	$	—
Certificates of deposit	4,252			4,252		—		—
Corporate bonds	756,051			—		756,051		—
U.S. government agency obligations	195,234			—		195,234		—
	$	956,315		$	5,030	$	951,285	$	—
Other Assets:
Note receivable	$	21,195		$	—	$	—	$	21,195

As of December 31, 2012
Cash Equivalents and Marketable Securities:
Money market funds	$	22,255		$	22,255	$	—	$	—
Certificates of deposit	7,473			7,473		—		—
Commercial paper	9,482			—		9,482		—
Corporate bonds	692,995			—		692,995		—
U.S. government agency obligations	189,674			—		189,674		—
	$	921,879		$	29,728	$	892,151	$	—
Other Liabilities:
Contingent consideration obligation related to Verivue acquisition	$	(1,200	)	$	—	$	—	$	(1,200	)

As of September 30, 2013 and December 31, 2012, the Company grouped money market funds and certificates of deposit using a Level 1 valuation because market prices for such investments are readily available in active markets. As of September 30, 2013 and December 31, 2012, the Company grouped commercial paper, U.S. government agency obligations and corporate bonds using a Level 2 valuation because quoted prices for identical or similar assets are available in markets that are inactive.

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

The valuation technique used to measure fair value for the Company's Level 3 asset, which consists of a $25.0 million face value convertible note receivable that is due and payable on July 24, 2014, is primarily an income approach, where the expected weighted average future cash flows are discounted back to present value. The significant unobservable inputs used in the fair value measurement of the convertible note receivable are the probability of conversion to equity and the fair value of equity in which the note is convertible to. The valuation assumed a 90% probability of being converted to equity. If a 70% probability of conversion was used, the fair value of the note would have been $22.0 million.

The valuation technique used to measure fair value of the Company's Level 3 liability, which consists of contingent consideration related to the acquisition of Verivue, Inc. ("Verivue") (Note 6), is primarily an income approach. The significant unobservable input used in the fair value measurement of the contingent consideration is the likelihood of achieving defined levels of customer revenue.

Table of Contents

Significant increases or decreases in the underlying assumptions used to value the Company's Level 3 asset and liability held at September 30, 2013 and December 31, 2012, respectively, could significantly increase or decrease the fair value estimates recorded in the consolidated balance sheets.

Contractual maturities of the Company’s available-for-sale marketable securities held at September 30, 2013 and December 31, 2012 were as follows (in thousands):



	September 30, 2013		December 31, 2012
Due in 1 year or less	$	331,300	$	235,592
Due after 1 year through 5 years	620,204		657,659
	$	951,504	$	893,251

The following table reflects the activity for the Company’s major classes of assets and liabilities measured at fair value using Level 3 inputs for the nine months ended September 30, 2013 (in thousands):



	Other Assets: Note Receivable		Other Liabilities: Contingent Consideration Obligation
Balance as of January 1, 2013	$	—	$	(1,200	)
Fair value adjustment to contingent consideration for acquisition of Verivue included in general and administrative expense	—		1,200
Convertible note receivable from divestiture of a business	18,882		—
Unrealized gain on convertible note receivable included in other comprehensive income	2,313		—
Balance as of September 30, 2013	$	21,195	$	—

4. Accounts Receivable

Net accounts receivable consisted of the following as of September 30, 2013 and December 31, 2012 (in thousands):



	September 30, 2013			December 31, 2012
Trade accounts receivable	$	169,873		$	143,533
Unbilled accounts	90,164			79,051
Gross accounts receivable	260,037			222,584
Allowance for doubtful accounts	(824		)	(1,154		)
Reserve for cash-basis customers	(2,760		)	(2,653		)
Total accounts receivable reserves	(3,584		)	(3,807		)
Accounts receivable, net	$	256,453		$	218,777

5. Goodwill and Acquired Intangible Assets

The change in the carrying amount of goodwill for the nine months ended September 30, 2013 was as follows (in thousands):



Balance as of January 1, 2013⁽¹⁾	$	723,701
Divestiture of Advertising Decision Solutions business	(1,939		)
Acquisition of strategic network assets	29,509
Balance as of September 30, 2013	$	751,271

(1) Balance as of January 1, 2013 has been revised to reflect purchase accounting measurement period adjustments (Note 6).

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.

Table of Contents

Acquired intangible assets that are subject to amortization consist of the following as of September 30, 2013 and December 31, 2012 (in thousands):



	September 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Completed technology	$	62,331	$	(33,071	)	$	29,260
Customer relationships	115,100		(73,536		)	41,564
Non-compete agreements	10,570		(4,084		)	6,486
Trademarks and trade names	3,400		(907		)	2,493
Acquired license rights	490		(490		)	—
Total	$	191,891	$	(112,088	)	$	79,803



	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Completed technology	$	71,531	$	(32,842	)	$	38,689
Customer relationships	104,700		(68,702		)	35,998
Non-compete agreements	14,770		(7,645		)	7,125
Trademarks and trade names	3,700		(958		)	2,742
Acquired license rights	490		(490		)	—
Total	$	195,191	$	(110,637	)	$	84,554

Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2013 was $4.9 million and $16.7 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2012 was $5.4 million and $15.6 million, respectively. Based on the Company’s acquired intangible assets as of September 30, 2013, aggregate expense related to amortization of acquired intangible assets is expected to be $4.9 million for the remainder of 2013, and $20.6 million, $18.8 million, $14.0 million and $9.5 million for 2014, 2015, 2016 and 2017, respectively.

6. Business Acquisitions and Divestitures

Strategic Network Transaction

On November 30, 2012, the Company entered into a strategic alliance with AT&T Services, Inc. ("AT&T"). Under the agreement, AT&T became a reseller of the Company's services and the Company contracted to purchase bandwidth, co-location and related services from AT&T. The Company entered into the agreement with a goal of expanding its content delivery network customer base and developing a relationship with AT&T as a bandwidth and co-location service provider. The transaction meets the definition of a business combination and it was determined that the Company obtained control of the acquired assets in July 2013. The total consideration is $55.0 million, of which $27.5 million was paid during the third quarter of 2013. The remaining payment is recorded as an other current liability in the consolidated balance sheet and is expected to be paid in the fourth quarter of 2013.

The Company allocated $29.5 million of the consideration to goodwill and $16.1 million to acquired intangible assets. The allocation of the purchase price is preliminary, pending the finalization of the valuation of certain network assets acquired. The weighted average useful life of the intangible assets acquired is 9.8 years. The value of the goodwill acquired can be attributed to expected synergies between AT&T and the Company related to future customer expansion and cost reductions. The total amount of goodwill expected to be deducted for tax purposes is $29.5 million. The revenue and earnings included in the Company's consolidated financial statements since the acquisition date are not material. Pro forma results of the operations have not been presented because the effects are not material to the consolidated financial statements.

Table of Contents

Verivue Acquisition

On December 4, 2012, the Company acquired all of the outstanding common and preferred stock of Verivue in exchange for $30.9 million in cash. In addition, the Company recorded a liability of $1.2 million for contingent consideration related to expected achievement of post-closing milestones. The Company acquired Verivue with a goal of complementing its Aura Network Solutions and accelerating time to market in providing a comprehensive, licensed content delivery network solution for network operators. The Company allocated $14.9 million of the cost of the acquisition to goodwill and $7.5 million to acquired intangible assets. The purchase price was finalized in the third quarter of 2013. The Company recorded a reduction of $5.8 million to goodwill upon the finalization of measurement period adjustments related to deferred tax assets and liabilities in the third quarter of 2013.

The total weighted average useful life of the intangible assets acquired from Verivue is 6.4 years. The value of the goodwill from the acquisition can be attributed to a number of business factors, including a trained technical workforce in place in the United States and expected cost synergies. The total amount of goodwill related to the acquisition of Verivue expected to be deducted for tax purposes is $3.0 million. As of March 31, 2013, the Company determined the agreed upon post-closing milestones were not expected to be achieved and therefore reversed the $1.2 million liability recorded at December 31, 2012 for the contingent consideration and recorded it as general and administrative expense in the consolidated statement of operations. As of September 30, 2013, the Company continues to believe the milestones will not be achieved.

FastSoft Acquisition

On September 13, 2012, the Company acquired all of the outstanding common and preferred stock of FastSoft, Inc. ("FastSoft") in exchange for $14.4 million in cash. The Company acquired FastSoft with a goal of complementing the Company's media delivery solutions with technology for optimizing the throughput of video and other digital content across IP networks. The Company allocated $7.1 million of the cost of the acquisition to goodwill and $3.7 million to acquired intangible assets. The allocation of the purchase price was finalized in the third quarter of 2013. The Company recorded a reduction of $1.8 million to goodwill upon the finalization of measurement period adjustments related to deferred tax assets and liabilities in the third quarter of 2013.

The total weighted average useful life of the intangible assets acquired from FastSoft is 9.0 years. The value of the goodwill from the acquisition can be attributed to a number of business factors, including a trained technical workforce in place in the United States and expected cost synergies. The total amount of goodwill related to the acquisition of FastSoft expected to be deducted for tax purposes is $1.7 million.

Cotendo Acquisition

On March 6, 2012, the Company acquired all of the outstanding common and preferred stock, including vested and unvested stock options, of Cotendo, Inc. ("Contendo") in exchange for $278.9 million in cash and assumption of unvested options. The Company acquired Cotendo with the intention of increasing the Company's pace of innovation in the areas of site acceleration and mobile optimization. The Company allocated $233.8 million of the cost of the acquisition to goodwill and $43.8 million to acquired intangible assets. The allocation of the purchase price has been finalized. The value of the goodwill from the acquisition of Cotendo can be attributed to a number of business factors, including potential sales opportunities to provide services to Cotendo customers; a trained technical workforce in place in the United States and Israel; an existing sales pipeline and a trained sales force; and cost synergies expected to be realized. The total weighted average amortization period for the intangible assets acquired from Cotendo is 7.1 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized. The total amount of goodwill related to the acquisition of Cotendo expected to be deducted for tax purposes is $44.4 million.

Blaze Acquisition

On February 7, 2012, the Company acquired all of the outstanding common and preferred stock, including vested and unvested stock options, of Blaze Software, Inc. ("Blaze") in exchange for $19.3 million in cash and assumption of unvested options. The Company acquired Blaze with a goal of complementing the Company's site acceleration solutions with technology designed to optimize the speed at which a web page is rendered. The Company allocated $15.1 million of the cost of the acquisition to goodwill and $5.1 million to acquired intangible assets. The allocation of the purchase price has been finalized. The total weighted average useful life of the intangible assets acquired from Blaze is 5.3 years. The value of the goodwill from this acquisition can be attributed to a number of business factors, including a trained technical workforce in place in Canada and

Table of Contents

cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Blaze expected to be deducted for tax purposes is $13.5 million.

ADS Divestiture

Consistent with its strategy to prioritize higher-margin businesses, the Company sold its Advertising Decision Solutions ("ADS") business to MediaMath, Inc. ("MediaMath") in exchange for a $25.0 million face value convertible note receivable that is due and payable on July 24, 2014 (see Note 3). The transaction closed during the first quarter of 2013. These operations were not material to the Company's annual net sales, net income or earnings per share. No significant gains or losses were realized on this transaction. The accompanying interim consolidated financial statements for the nine months ended September 30, 2013 include the impact of approximately one month of ADS operations prior to the sale. All assets and liabilities used by the ADS operations have been excluded from the consolidated balance sheet presentation. Simultaneously with the sale, the Company entered into a multi-year relationship agreement whereby MediaMath will have exclusive rights to leverage the Company's pixel-free technology for use within digital advertising and marketing applications.

7. Stockholders’ Equity

Stock Repurchase Program

In April 2012, the Company's Board of Directors authorized a $150 million stock repurchase program covering a twelve-month period commencing on May 1, 2012. In January 2013, the Board of Directors authorized a $150 million extension of its share repurchase program, effective for a twelve-month period beginning February 1, 2013. In October 2013, the Board of Directors authorized a new $750 million share repurchase program, effective from October 16, 2013 through December 31, 2016. Unused amounts from the May 2012 program were not carried over to the program approved in January 2013, and unused amounts from the January 2013 program were not carried over to the October 2013 program.

During the three and nine months ended September 30, 2013, the Company repurchased 0.7 million and 2.8 million shares, respectively, of its common stock for $29.6 million and $112.4 million, respectively. During the three and nine months ended September 30, 2012, the Company repurchased 1.2 million and 3.6 million shares, respectively, of its common stock for $36.5 million and $111.6 million, respectively.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Cost of revenues	$	2,885		$	2,834		$	8,230		$	8,604
Research and development	4,583			4,427			12,819			13,258
Sales and marketing	10,048			8,746			29,278			25,671
General and administrative	6,963			6,628			21,884			21,647
Total stock-based compensation	24,479			22,635			72,211			69,180
Provision for income taxes	(8,272		)	(9,242		)	(24,581		)	(27,114		)
Total stock-based compensation, net of taxes	$	16,207		$	13,393		$	47,630		$	42,066

In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of operations for the three and nine months ended September 30, 2013 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $2.2 million and $6.1 million, respectively, before taxes. The Company’s consolidated statements of operations for the three and nine months ended September 30, 2012 include stock-based compensation reflected as a component of amortization of capitalized internal-use software of $2.0 million and $5.7 million, respectively, before taxes.

Table of Contents

8. Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated other comprehensive loss, which is reported as a component of stockholders' equity, for the nine months ended September 30, 2013 (in thousands):



	Foreign Currency Translation Adjustments			Net Unrealized Gain on Investments		Total
Balance as of January 1, 2013	$	(2,354	)	$	714	$	(1,640	)
Other comprehensive (loss) income	(4,810		)	1,016		(3,794		)
Balance as of September 30, 2013	$	(7,164	)	$	1,730	$	(5,434	)

The tax effect on accumulated unrealized gain on investments was $1.0 million and $0.4 million as of September 30, 2013 and December 31, 2012, respectively. Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the nine months ended September 30, 2013.

9. Restructuring

In prior years, the Company implemented workforce reductions across all areas of the Company. The Company recorded restructuring charges for the amount of one-time benefits provided to affected employees. Additionally, in connection with excess and vacated facilities under long-term non-cancelable leases, the Company recorded a restructuring charge for the estimated future lease payments, less estimated sublease income, for these vacated facilities. For the nine months ended September 30, 2013, the Company recorded additional restructuring charges related to workforce reductions and relocation expenses.

The following table summarizes the accrual and usage of the restructuring charges for the nine months ended September 30, 2013 (in thousands):



	Leases			Severance			Total
Beginning balance, January 1, 2013	$	517		$	124		$	641
Restructuring charge	—			891			891
Cash payments	(122		)	(821		)	(943		)
Ending balance, September 30, 2013	$	395		$	194		$	589
Current portion of accrued restructuring included in other current liabilities	$	105		$	194		$	299
Long-term portion of accrued restructuring included in other liabilities	$	290		$	—		$	290

10. Income Taxes

The Company’s effective income tax rate, including discrete items, was 29.6% and 39.4% for the nine months ended September 30, 2013 and 2012, respectively. The effective income tax rate is based upon estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods, including retroactive changes in tax legislation, settlements of tax audits or assessments, the resolution or identification of tax position uncertainties, and acquisitions of other companies.

During the third quarter of 2013, the Company completed an analysis of its domestic production activities deduction, which resulted in a net tax benefit of $16.5 million for the period from January 1, 2010 through September 30, 2013. The Company also recorded a discrete item during the nine months ended September 30, 2013 related to the reinstatement of the federal research and development credit at the beginning of 2013, which was retroactive to 2012.

For the nine months ended September 30, 2013, the effective income tax rate was lower than the federal statutory tax rate mainly due to the domestic production activities deduction, the composition of income in foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the United States, as well as the reinstatement of the federal research and development credit during 2013. For the nine months ended September 30, 2012, the effective income tax rate was higher than the federal statutory tax rate mainly due to the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income tax expense.

Table of Contents

During 2012, the Company corrected immaterial errors in its reported income tax expense attributable to prior fiscal periods. During the nine months ended September 30, 2013, the Company concluded the review that gave rise to the corrections and recorded an additional $1.4 million of income tax expense.

11. Net Income per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, deferred stock units and restricted stock units (“RSUs”) issued by the Company.

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, 2013 and 2012 (in thousands, except per share data):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Numerator:
Net income	$	79,756	$	48,231	$	213,138	$	135,697
Denominator:
Shares used for basic net income per share	178,235		177,455		178,008		178,040
Effect of dilutive securities:
Stock options	1,580		2,101		1,693		2,207
RSUs and deferred stock units	2,107		1,497		1,922		1,491
Shares used for diluted net income per share:	181,922		181,053		181,623		181,738
Basic net income per share	$	0.45	$	0.27	$	1.20	$	0.76
Diluted net income per share	$	0.44	$	0.27	$	1.17	$	0.75

For the three and nine months ended September 30, 2013 and 2012, certain potential outstanding stock options and service-based RSUs were excluded from the computation of diluted earnings per share because the effect of including these options and RSUs would be 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 earnings per share for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2013	2012	2013	2012
Options	1,308	2,438	1,782	2,735
Service-based RSUs	37	1,321	234	1,401
Performance-based RSUs	1,140	1,518	1,145	1,536
Total shares excluded from computation	2,485	5,277	3,161	5,672

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

Table of Contents

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 investments, marketable securities and note receivable, goodwill and acquired intangible assets, capitalized internal-use software costs, impairment and useful lives of long-lived assets, tax reserves, loss contingencies and stock-based compensation costs. 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, 2012 for further discussion of our critical accounting policies and estimates.

Overview

We provide cloud services for delivering, optimizing and securing online content and business applications. We primarily derive income from sales of services to customers executing contracts with terms of one year or longer. We believe that this emphasis on longer-term contracts generally allows us to have a consistent and predictable base level of revenue which is important to our financial success. Accordingly, to be successful, we must maintain our base of recurring revenue contracts by minimizing customer cancellations or terminations and limiting the impact of price reductions reflected in contract renewals, and build on that base by adding new customers and increasing the number of services, features and functionalities that our existing customers purchase. Accomplishing these goals requires that we compete effectively in the marketplace on the basis of quality, price and the attractiveness of our services and technology.

Our revenue is impacted by a number of factors, including our ability to maintain our base of committed recurring revenues, the timing and variability of customer-specific one-time events, prices we are able to charge for our services, the amount of traffic we serve on our network and the impact of seasonal variations on our business. We have observed the following trends related to our revenue during the first three quarters of 2013:


•	We have been able to offset lost committed recurring revenue by adding new customers and increasing sales of incremental services to our existing customers.

•

Consistent with prior years, the unit prices offered to some customers have declined as a result of increased competition. These price reductions have primarily impacted customers for which we deliver high volumes of traffic over our network, such as digital media customers. To increase or maintain revenue and our profit margin, it is important that we continue to offset price declines with increased traffic, increased sales of incremental services to existing customers, enhanced efficiencies in our network and lower co-location and bandwidth expenses.


•	We experienced an increase in the rate of traffic in our video and software download solutions as compared to the first three quarters of 2012.

Table of Contents

•

We experience variations in revenue from quarter to quarter; in particular, we typically experience higher revenue in the fourth quarter of the year due to increased usage of our services by retail customers. We also see lower revenue in the summer months, particularly in Europe, from both e-commerce and media customers because they typically use the Internet less frequently during that time. We also experience quarterly variations in revenue attributable to our software download solutions due to the nature and timing of software releases by our customers.

Our profitability is also impacted by our expense levels, including direct costs to support our revenue, such as co-location and bandwidth costs, and expenses incurred to support strategic initiatives that we anticipate will generate revenue in the future. We observed the following trends during the first three quarters of 2013 and discuss our expectations related to our cost of revenue and operating expenses:

•

We continued to reduce our network bandwidth costs per unit and to invest in internal-use software development to improve the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels but would be partially offset by anticipated continued reductions in bandwidth costs per unit. To achieve these lower bandwidth costs per unit, we must effectively route traffic over our network through lower cost providers and continue to reduce our overall bandwidth pricing.


•	Co-location costs are a significant percentage of total 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 will need to continue to achieve such cost reductions to maintain and improve our profitability.

•

We implemented software and hardware initiatives to manage our global network more efficiently; as a result, the expected average useful life of our network assets, primarily servers, increased from three to four years, effective January 1, 2013. This change is expected to continue to decrease depreciation expense related to our network equipment during the remainder of 2013, as compared to 2012. Conversely, we expect to continue to enhance and add functionality to our service offerings, which increases our internal-use software development costs attributable to employees working on such projects. As a result, the amortization of internal-use software development costs, which we include in cost of revenue, has been higher in 2013 as compared to 2012.


•	We have increased our headcount by 695 full-time employees since the end of 2012, which is net of approximately 74 employees who were part of the Advertising Decision Solutions divestiture in the first quarter of 2013. We expect to continue to hire additional employees as we release new products and services, as well as continue our global expansion.

Based on our analysis of, among other things, the aforementioned trends and events, as of the date of this quarterly report on Form 10-Q, we expect to continue to generate net income on a quarterly and annual basis during 2013; however, our future results are likely to be affected by the factors discussed in the paragraphs above as well as those identified in the section captioned “Risk Factors” and elsewhere in this quarterly report on Form 10-Q.

Table of Contents

Results of Operations

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



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	33.4		38.9		33.0		39.2
Research and development expense	6.3		5.6		5.9		5.5
Sales and marketing expense	17.1		16.0		17.4		16.1
General and administrative expense	16.8		14.8		16.1		15.7
Amortization of acquired intangible assets	1.2		1.6		1.5		1.6
Restructuring charges	—		—		0.1		—
Total costs and operating expenses	74.8		76.9		74.0		78.0
Income from operations	25.2		23.1		26.0		22.0
Interest income, net	0.4		0.5		0.4		0.5
Other (expense) income, net	(0.1	)	(0.1	)	—		—
Income before provision for income taxes	25.5		23.5		26.4		22.5
Provision for income taxes	5.3		9.6		7.8		8.9
Net income	20.2	%	13.9	%	18.6	%	13.6	%

Revenue

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013		2012		% Change		2013		2012		% Change
Revenue	$	395.8	$	345.3	14.6	%	$	1,141.9	$	996.1	14.6	%

During the three and nine months ended September 30, 2013, the increase in our revenue was driven by continued strong demand for our services. The increases in our revenue are attributable to the addition of new customers, increased sales of incremental services to our existing customers, amounts earned for traffic usage in excess of committed amounts and one-time events. These contributions to higher revenue were partially offset by lost committed recurring revenue, price declines and the divestiture of our Advertising Decision Solutions business.

For the three and nine months ended September 30, 2013, resellers accounted for 21% of revenue as compared to 22% and 21% of revenue, respectively, for the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2013 and 2012, no single customer accounted for 10% or more of revenue.

For the three and nine months ended September 30, 2013, approximately 28% of our revenue was derived from our operations located outside of the United States, including 17% derived from Europe. For the three and nine months ended September 30, 2012, approximately 29% and 28%, respectively, of our revenue was derived from operations outside of the United States, including 16% and 17%, respectively, derived from Europe. No single country outside of the United States accounted for 10% or more of revenue during any of these periods. During the quarter, we continued to see strong growth from our operations in the Asia Pacific region and continued softening in our operations in Europe, the Middle East and Africa, primarily due to macroeconomic headwinds.

Changes in foreign currency exchange rates negatively impacted our revenue by $4.3 million during the third quarter of 2013 as compared to 2012.

Table of Contents

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013		2012		% Change		2013		2012		% Change
Media Delivery Solutions	$	189.1	$	165.0	14.6	%	$	549.7	$	478.1	15.0	%
Performance and Security Solutions	173.9		146.2		18.9		498.4		420.8		18.4
Service and Support Solutions	32.8		24.5		33.9		91.7		67.1		36.7
Advertising Decision Solutions and other	—		9.6		(100.0	)	2.1		30.1		(93.0	)
Total revenue	$	395.8	$	345.3	14.6	%	$	1,141.9	$	996.1	14.6	%

The increase in Media Delivery Solutions revenue for the three and nine month periods ended September 30, 2013, as compared to the same periods in 2012, was due to increased online media consumption and higher software download volumes, particularly related to a large software release in the third quarter of 2013 from one of our customers and strong growth in usage by some of our largest, most strategic accounts. The increases in the three and nine months ended September 30, 2013, were partially offset by a large media customer finalizing the removal of its video content from our platform during the nine months ended September 30, 2013 resulting in loss of revenue as compared to the same periods in 2012.

The increase in Performance and Security Solutions revenue for the three and nine month periods ended September 30, 2013, as compared to the same periods in 2012, was due to increase in demand for our performance and security solutions from both new and existing customers.

The increase in the Service and Support Solutions revenue for the three and nine month periods ended September 30, 2013, as compared to the same periods in 2012, was due to an increase in sales of our services and support offerings to customers that augment their purchase of our core Media Delivery and Performance and Security solutions.

The Advertising Decision Solutions business was divested in the first quarter of 2013.

Cost of Revenue

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013			2012			% Change		2013			2012			% Change
Bandwidth, network build-out and support-related fees	$	31.5		$	31.9		(1.3	)%	$	90.7		$	96.4		(5.9	)%
Co-location fees	32.2			32.9			(2.1	)	97.2			99.7			(2.5	)
Payroll and related costs	29.4			23.6			24.6		82.2			66.6			23.4
Stock-based compensation, including amortization of prior capitalized amounts	5.0			4.8			4.2		14.0			14.1			(0.7	)
Depreciation and impairment of network equipment	22.0			30.8			(28.6	)	60.5			86.3			(29.9	)
Amortization of internal-use software	11.9			10.2			16.7		32.5			27.3			19.0
Total cost of revenue	$	132.0		$	134.2		(1.6	)%	$	377.1		$	390.4		(3.4	)%
As a percentage of revenue	33.4		%	38.9		%			33.0		%	39.2		%

In recent years, we have continued to reduce our network bandwidth costs per unit, co-location fees and other network-related expenses, which contributed to the decrease in our cost of revenue in the three and nine months ended September 30, 2013 as compared to the same periods in 2012. These decreases were the result of recent initiatives to manage our global network more efficiently and the reduction of our depreciation expense by increasing the expected average useful lives of our network assets.

Table of Contents

This net decrease in cost of revenue was primarily due to decreases in:

•

depreciation expense of network equipment in place as of January 1, 2013 of approximately $8.2 million and $33.3 million for the three and nine months ended September 30, 2013, respectively, due to software and hardware initiatives we have implemented to manage our global network more efficiently, resulting in an increase in the expected average useful life of our network assets, primarily servers, from three to four years, effective January 1, 2013; and


•	amounts paid to network providers due to lower bandwidth and service-related fees due to reduced bandwidth costs per unit.

These decreases were partially offset by increases in:


•	payroll and related costs of service personnel due to headcount growth to support our revenue growth; and


•	amortization of internal-use software as we continued to invest in our infrastructure.

Cost of revenue during the three and nine months ended September 30, 2013 also included credits received of approximately $2.1 million and $7.1 million, respectively, from settlements and renegotiations from billing disputes related to bandwidth contracts. Cost of revenue during the three and nine months ended September 30, 2012 included similar credits received of approximately $3.1 million and $7.9 million, respectively.

We have long-term purchase commitments for bandwidth usage and co-location services with various network and Internet service providers. Our minimum commitments related to bandwidth usage and co-location services are consistent with the amounts reported in our Form 10-K for the year ended December 31, 2012.

We believe that cost of revenue will increase during the fourth quarter of 2013 as compared to the first three quarters of 2013. We expect to deploy more servers and deliver more traffic on our network, which will result in higher expenses associated with the increased traffic and additional co-location fees; however, such costs are likely to be partially offset by lower bandwidth costs per unit and continued efficiency in network deployment. Additionally, for the remainder of 2013, we anticipate amortization of internal-use software development costs to increase, along with increased payroll and related costs associated with our network and professional services personnel and related expenses. We plan to continue to make investments in our network in the expectation that our customer base will continue to expand. Conversely, we expect that depreciation expense for the remainder of 2013 will be lower than depreciation expense reported in the same period in 2012 due to the change in estimated useful lives of our network equipment.

We have revised cost of revenue reported in 2012 in the table above as a result of a reevaluation of our business model. Costs that were previously classified as sales and marketing and general and administrative are now classified as cost of revenue. See Note 1 to the unaudited consolidated financial statements included in this quarterly report for additional information and amounts revised.

Research and Development Expenses

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013			2012			% Change		2013			2012			% Change
Payroll and related costs	$	36.5		$	26.4		38.3	%	$	100.8		$	75.6		33.3	%
Stock-based compensation	4.6			4.5			2.2		12.8			13.3			(3.8	)
Capitalized salaries and related costs	(17.7		)	(12.3		)	43.9		(50.1		)	(37.1		)	35.0
Other expenses	1.5			0.8			87.5		3.9			2.6			50.0
Total research and development	$	24.9		$	19.4		28.4	%	$	67.4		$	54.4		23.9	%
As a percentage of revenue	6.3		%	5.6		%			5.9		%	5.5		%

The increase in research and development expenses during the three and nine month periods ended September 30, 2013, as compared to the same periods in 2012, was due to increases in payroll and related costs as a result of continued growth in headcount to invest in new product development, partially offset by increases in capitalized salaries and related costs.

Table of Contents

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. These development costs consisted of external consulting expenses and payroll and related costs for personnel involved in the development of internal-use software used to deliver our services and operate our network. During the three and nine months ended September 30, 2013, we capitalized $3.1 million and $9.3 million, respectively, of stock-based compensation. For the three and nine months ended September 30, 2012, we capitalized $2.5 million and $6.4 million, respectively, of stock-based compensation. These capitalized internal-use software costs are amortized to cost of revenue over their estimated useful lives of two years.

We believe that research and development expenses will increase in absolute dollars during the remainder of 2013 as compared to the first three quarters of 2013 as we expect to continue to hire additional development personnel in order to make improvements to our core technology and develop new services.

Sales and Marketing Expenses

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013			2012			% Change		2013			2012			% Change
Payroll and related costs	$	48.6		$	38.3		26.9	%	$	133.8		$	105.0		27.4	%
Stock-based compensation	10.0			8.7			14.9		29.3			25.7			14.0
Marketing and related costs	4.2			4.8			(12.5	)	18.5			16.8			10.1
Other expenses	5.0			3.4			47.1		16.7			13.2			26.5
Total sales and marketing	$	67.8		$	55.2		22.8	%	$	198.3		$	160.7		23.4	%
As a percentage of revenue	17.1		%	16.0		%			17.4		%	16.1		%

The increase in sales and marketing expenses during the three and nine months ended September 30, 2013, as compared to the same periods in 2012, was primarily due to higher payroll and related costs, as we invested in our sales organization in support of our go-to-market capacity and ongoing geographic expansion.

We believe that sales and marketing expenses will increase in absolute dollars during the remainder of 2013 as compared to the first three quarters of 2013 due to an expected increase in payroll and related costs as a result of continued headcount growth in our sales and marketing organization.

General and Administrative Expenses

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



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2013			2012			% Change		2013			2012			% Change
Payroll and related costs	$	27.2		$	21.1		28.9	%	$	75.6		$	60.4		25.2	%
Stock-based compensation	7.0			6.6			6.1		21.9			21.6			1.4
Depreciation	7.1			5.1			39.2		18.9			14.4			31.3
Provision for doubtful accounts	(0.1		)	(0.5		)	(80.0	)	0.4			(0.9		)	(144.4	)
Facilities-related costs	11.5			8.6			33.7		31.5			25.5			23.5
Acquisition-related costs	1.3			0.3			333.3		0.6			5.1			(88.2	)
Professional and other fees	12.6			9.8			28.6		34.5			30.1			14.6
Total general and administrative	$	66.6		$	51.0		30.6	%	$	183.4		$	156.2		17.4	%
As a percentage of revenue	16.8		%	14.8		%			16.1		%	15.7		%

The increase in general and administrative expenses for the three and nine months ended September 30, 2013, as compared to the same periods in 2012, was primarily due to the expansion of company infrastructure to support investments in engineering

Table of Contents

and go-to-market capacity. We increased general and administrative headcount, external consulting support and our facility footprint in support of our investments in the business. These actions increased payroll and related costs, facilities-related costs, depreciation and professional and other fees for the three and nine months ended September 30, 2013, as compared to the same periods in 2012.

During the remainder of 2013, we expect general and administrative expenses to increase in absolute dollars as compared to the first three quarters of 2013 due to anticipated higher payroll and related costs and facilities-related costs attributable to increased hiring, investment in information technology and planned facility expansion.

Amortization of Acquired Intangible Assets



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in millions)	2013			2012			% Change		2013			2012			% Change
Amortization of acquired intangible assets	$	4.9		$	5.4		(9.3	)%	$	16.7		$	15.6		7.1	%
As a percentage of revenue	1.2		%	1.6		%			1.5		%	1.6		%

Amortization of acquired intangible assets consists of amortization of intangible assets acquired in business combinations and amortization of acquired license rights.

The increase in amortization of acquired intangible assets for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to the amortization of assets related to the acquisitions of Blaze, Cotendo, FastSoft and Verivue during 2012, partially offset by the write-off of intangible assets recorded as part of the divestiture of our Advertising Decisions Solutions business in 2013. The decrease in amortization of acquired intangible assets for the three months ended September 30, 2013 as compared to the same period in 2012 is related to the completion of amortization of intangible assets acquired in previous years. Based on our intangible assets at September 30, 2013, we expect amortization of acquired intangible assets to be approximately $4.9 million for the remainder of 2013, and $20.6 million, $18.8 million, $14.0 million and $9.5 million for 2014, 2015, 2016 and 2017, respectively.

Restructuring Charges



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in millions)	2013			2012			% Change		2013			2012			% Change
Restructuring charges	$	0.1		$	—		—	%	$	0.9		$	—		—	%
As a percentage of revenue	—		%	—		%			0.1		%	—		%

The restructuring charge for the nine months ended September 30, of 2013 is the result of workforce reductions and relocation expenses.

Interest Income, Net



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in millions)	2013			2012			% Change		2013			2012			% Change
Interest income, net	$	1.5		$	1.6		(6.3	)%	$	4.5		$	4.9		(8.2	)%
As a percentage of revenue	0.4		%	0.5		%			0.4		%	0.5		%

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

Table of Contents

Other (Expense) Income, Net



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in millions)	2013			2012			% Change		2013			2012			% Change
Other (expense) income, net	$	(0.3	)	$	(0.2	)	50.0	%	$	(0.1	)	$	0.4		(125.0	)%
As a percentage of revenue	(0.1		)%	(0.1		)%			—		%	—		%

Other (expense) income, net primarily represents net foreign exchange gains and losses incurred and other non-operating expense and income items. The fluctuations in other (expense) income, net for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was primarily due to foreign currency exchange rate fluctuations on inter-company and other non-functional currency transactions. Other (expense) income, net may fluctuate in the future based upon changes in foreign exchange rates or other events.

Provision for Income Taxes



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in millions)	2013			2012			% Change		2013			2012			% Change
Provision for income taxes	$	20.9		$	33.3		(37.2	)%	$	89.5		$	88.4		1.2	%
As a percentage of revenue	5.3		%	9.6		%			7.8		%	8.9		%
Effective income tax rate	20.8		%	40.8		%			29.6		%	39.4		%

For the nine months ended September 30, 2013, our effective income tax rate was lower than the federal statutory tax rate mainly due to the retroactive adoption of the domestic production activities deduction which resulted in a net tax benefit of $16.5 million for the period from January 1, 2010 through September 30, 2013, the reinstatement of the federal research and development credit at the beginning of 2013, which included a one-time retroactive impact for fiscal year 2012, as well as the composition of income in foreign jurisdictions that is taxed at lower rates compared to the statutory tax rates in the United States. For the nine months ended September 30, 2012, the effective income tax rate was higher than the federal statutory tax rate mainly due to the effects of accounting for stock-based compensation in accordance with the authoritative guidance for share-based payments and state income tax expense. The effective income tax rate is based upon the estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods, including settlements of tax audits or assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

The increase in the provision for income taxes in the nine months ended September 30, 2013 as compared to the same period in 2012 was mainly due to the increase in operating income, partially offset by the domestic production activities deduction, the federal research and development credit and a change in the composition of projected income in different jurisdictions.

While we expect our effective income tax rate to increase during the remainder of 2013, this expectation does not take into consideration the effect of one-time discrete items that may be recorded in the future. The effective tax rate could be materially different depending on the nature and timing of dispositions of incentive stock options and other employee equity awards. Further, our effective tax rate may fluctuate within a fiscal year and from quarter to quarter due to items arising from discrete events, including settlements of tax audits and assessments, the resolution or identification of tax position uncertainties and acquisitions of other companies.

In determining our net deferred tax assets and valuation allowances, annualized effective tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.

We have recorded certain tax reserves to address potential exposures involving our income tax and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of these tax reserves reflects assumptions based on past experiences and

Table of Contents

judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the ultimate tax liability or benefit from these matters may be materially greater or less than the amount that we have estimated.

Non-GAAP Financial Measures

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

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

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

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

•

Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we made. The amount of an acquisition's purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, we exclude amortization of acquired intangible assets from non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.

•

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

•

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

•

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

•

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

Table of Contents

•

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

The following table reconciles GAAP net income to non-GAAP net income and non-GAAP net income per diluted share for the periods presented (in millions, except per share data):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Net income	$	79.8	$	48.2	$	213.1