Akamai Reports Third Quarter 2016 Financial Results

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Oct 25, 2016, 04:01 ET

CAMBRIDGE, Mass., Oct. 25, 2016 /PRNewswire/ --

Revenue of $584 million, up 6% year-over-year and up 5% when adjusted for foreign exchange*
Revenue excluding Internet Platform Customers⁽¹⁾ up 15% year-over-year and up 15% when adjusted for foreign exchange*
GAAP EPS of $0.43 per diluted share, down 12% year-over-year and down 15% when adjusted for foreign exchange*
Non-GAAP EPS of $0.68 per diluted share, up 10% year-over-year and up 7% when adjusted for foreign exchange*

Akamai Technologies, Inc. (NASDAQ: AKAM), the global leader in Content Delivery Network (CDN) services, today reported financial results for the third quarter ended September 30, 2016.

"Akamai's strong third quarter revenue and earnings performance was primarily driven by accelerated growth in both our Cloud Security and Web Performance Solutions," said Dr. Tom Leighton, Chief Executive Officer. "As the cyber-attacks from last week demonstrate, enterprises need solutions capable of defending against massive botnets that are exploiting millions of online devices. This is an area where Akamai's unique architecture and ongoing investments in global scale and security innovation continue to make a critical difference."

Akamai delivered the following financial results for the third quarter ended September 30, 2016:

Revenue: Revenue was $584 million, a 6% increase over third quarter 2015 revenue of $551 million and a 5% increase when adjusted for foreign exchange.*

Revenue by Solution Category⁽²⁾:

Performance and Security Solutions revenue was $345 million, up 19% year-over-year and also up 19% when adjusted for foreign exchange*
Cloud Security Solutions revenue, a component of Performance and Security, was $95 million, up 46% year-over-year and also up 46% when adjusted for foreign exchange*
Media Delivery Solutions revenue was $188 million, down 14% year-over-year and down 15% when adjusted for foreign exchange*
Services and Support Solutions revenue was $51 million, up 17% year-over-year and up 16% when adjusted for foreign exchange*

Revenue by Geography:

U.S. revenue was $404 million, up 1% year-over-year
International revenue was $180 million, up 20% year-over-year and up 17% when adjusted for foreign exchange*

Customer Revenue by Division⁽³⁾:

Effective in the second quarter of 2016, the Company is now managing the business in a new division structure. Revenue from customers in the Company's three major divisions is reported below.

Media Division revenue was $284 million, down 4% year-over-year and down 5% when adjusted for foreign exchange*
Web Division revenue was $285 million, up 17% year-over-year and up 16% when adjusted for foreign exchange*
Enterprise and Carrier Division revenue was $15 million, up 43% year-over-year and also up 43% when adjusted for foreign exchange*

Revenue from Internet Platform Customers⁽¹⁾:

Revenue from Internet Platform Customers was $58 million, down 39% year-over-year and down 40% when adjusted for foreign exchange.*
Revenue excluding Internet Platform Customers was $526 million, up 15% year-over-year and also up 15% when adjusted for foreign exchange.*

Income from operations: GAAP income from operations was $112 million, a 3% decrease from third quarter 2015. GAAP operating margin for the third quarter was 19%, down 2 percentage points from the same period last year.

Non-GAAP income from operations* was $164 million, a 4% increase from third quarter 2015. Non-GAAP operating margin* for the third quarter was 28%, down a percentage point from the same period last year.

Net income: GAAP net income was $76 million, a 14% decrease from third quarter 2015. Non-GAAP net income* was $120 million, a 7% increase from third quarter 2015.

EPS: GAAP EPS was $0.43 per diluted share, a 12% decrease from third quarter 2015 and a 15% decrease when adjusted for foreign exchange.* Non-GAAP EPS was $0.68 per diluted share, a 10% increase from third quarter 2015 and a 7% increase when adjusted for foreign exchange.*

Adjusted EBITDA*: Adjusted EBITDA was $238 million, a 7% increase from third quarter 2015. Adjusted EBITDA margin* was 41%, up a percentage point from the third quarter of 2015.

Other third quarter 2016 results included:

Cash from operations was $251 million, or 43% of revenue
Cash, cash equivalents and marketable securities as of September 30, 2016 was $1.7 billion
The Company spent $95 million to repurchase 1.8 million shares of its common stock at an average price of $53.33 per share
The Company had approximately 174 million shares of common stock outstanding as of September 30, 2016

* See Use of Non-GAAP Financial Measures below for definitions

(1) Internet Platform Customers – Six customers that are large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix

(2) Revenue by solution category – A product-focused reporting view that reflects revenue by solution purchased

(3) Customer revenue by division – A customer-focused reporting view that reflects revenue from customers that are managed by the division.

Quarterly Conference Call
Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-844-578-9671 (or 1-508-637-5655 for international calls) and using passcode 86580404. A live webcast of the call may be accessed at www.akamai.com in the Investor section. In addition, a replay of the call will be available for two weeks following the conference by calling 1-855-859-2056 (or 1-404-537-3406 for international calls) and using passcode No. 86580404. The archived webcast of this event may be accessed through the Akamai website.

About Akamai
As the global leader in Content Delivery Network (CDN) services, Akamai makes the Internet fast, reliable and secure for its customers. The company's advanced web performance, mobile performance, cloud security and media delivery solutions are revolutionizing how businesses optimize consumer, enterprise and entertainment experiences for any device, anywhere. To learn how Akamai solutions and its team of Internet experts are helping businesses move faster forward, please visit www.akamai.com or blogs.akamai.com, and follow @Akamai on Twitter.

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)	September 30, 2016		December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	381,803	$	289,473
Marketable securities	529,416		460,088
Accounts receivable, net	357,997		380,399
Prepaid expenses and other current assets	117,748		123,228
Total current assets	1,386,964		1,253,188
Property and equipment, net	797,923		753,180
Marketable securities	767,691		774,674
Goodwill	1,151,216		1,150,244
Acquired intangible assets, net	138,870		156,095
Deferred income tax assets	21,156		4,700
Other assets	89,815		89,603
Total assets	$	4,353,635	$	4,181,684
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	74,328	$	61,982
Accrued expenses	291,101		216,166
Deferred revenue	61,292		54,154
Other current liabilities	4,815		138
Total current liabilities	431,536		332,440
Deferred revenue	4,134		4,163
Deferred income tax liabilities	8,963		12,888
Convertible senior notes	634,504		618,047
Other liabilities	105,567		93,268
Total liabilities	1,184,704		1,060,806
Total stockholders' equity	3,168,931		3,120,878
Total liabilities and stockholders' equity	$	4,353,635	$	4,181,684

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Nine Months Ended
(in thousands, except per share data)	September 30, 2016		June 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Revenue	$	584,065	$	572,135	$	551,030	$	1,723,925	$	1,618,289
Costs and operating expenses:
Cost of revenue ^{(1) (2)}	204,467		206,323		183,204		605,526		532,408
Research and development ⁽¹⁾	42,341		37,690		38,396		120,873		110,917
Sales and marketing ⁽¹⁾	102,626		103,223		107,426		308,060		322,406
General and administrative ^{(1) (2)}	113,320		107,538		99,543		323,141		288,287
Amortization of acquired intangible assets	6,598		6,711		6,752		20,025		20,284
Restructuring charges	2,948		470		20		10,236		517
Total costs and operating expenses	472,300		461,955		435,341		1,387,861		1,274,819
Income from operations	111,765		110,180		115,689		336,064		343,470
Interest income	3,809		3,393		2,723		10,522		8,265
Interest expense	(4,666)		(4,639)		(4,630)		(13,958)		(13,884)
Other income (expense), net	778		415		204		1,004		(1,702)
Income before provision for income taxes	111,686		109,349		113,986		333,632		336,149
Provision for income taxes	35,686		35,714		25,946		109,139		103,163
Net income	$	76,000	$	73,635	$	88,040	$	224,493	$	232,986

Net income per share:
Basic	$	0.44	$	0.42	$	0.49	$	1.28	$	1.30
Diluted	$	0.43	$	0.42	$	0.49	$	1.27	$	1.29

Shares used in per share calculations:
Basic	174,429		175,499		178,547		175,444		178,591
Diluted	175,617		176,420		180,364		176,525		180,642

(1) Includes stock-based compensation (see supplemental table for figures)

(2) Includes depreciation and amortization (see supplemental table for figures)

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended						Nine Months Ended
(in thousands)	September 30, 2016		June 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Cash flows from operating activities:
Net income	$	76,000	$	73,635	$	88,040	$	224,493	$	232,986
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	84,511		85,114		74,785		250,294		219,234
Stock-based compensation	38,652		34,911		31,046		105,304		92,966
Excess tax benefits from stock-based compensation	(448)		(1,497)		(2,114)		(3,080)		(24,851)
(Benefit) provision for deferred income taxes	(16,646)		1,713		(1,666)		(13,861)		(17,941)
Amortization of debt discount and issuance costs	4,666		4,639		4,630		13,958		13,884
Other non-cash reconciling items, net	4,866		749		2,126		8,367		3,271
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	4,691		1,880		(26,415)		22,477		(40,707)
Prepaid expenses and other current assets	15,005		(7,510)		4,097		4,014		16,119
Accounts payable and accrued expenses	42,610		44,659		(5,575)		54,892		26,098
Deferred revenue	(5,241)		1,473		(115)		6,885		6,908
Other current liabilities	(2,301)		95		(53)		4,670		146
Other non-current assets and liabilities	5,035		3,011		13,822		6,097		18,247
Net cash provided by operating activities	251,400		242,872		182,608		684,510		546,360
Cash flows from investing activities:
Cash paid for acquired businesses, net of cash acquired	(2,936)		—		500		(2,936)		(122,445)
Purchases of property and equipment and capitalization of internal-use software development costs	(79,870)		(78,141)		(133,064)		(240,351)		(366,146)
Purchases of short- and long-term marketable securities	(230,223)		(288,742)		(178,200)		(614,808)		(584,189)
Proceeds from sales and maturities of short- and long-term marketable securities	204,190		227,234		197,440		556,533		727,125
Other non-current assets and liabilities	(1,633)		842		(1,128)		(3,145)		(3,037)
Net cash used in investing activities	(110,472)		(138,807)		(114,452)		(304,707)		(348,692)
Cash flows from financing activities:
Proceeds from the issuance of common stock under stock plans	15,244		8,745		17,776		42,339		54,288
Excess tax benefits from stock-based compensation	448		1,497		2,114		3,080		24,851
Employee taxes paid related to net share settlement of stock-based awards	(6,150)		(5,914)		(7,817)		(38,560)		(47,171)
Repurchases of common stock	(95,157)		(90,985)		(76,358)		(294,867)		(202,426)
Other non-current assets and liabilities	—		—		(800)		—		(2,050)
Net cash used in financing activities	(85,615)		(86,657)		(65,085)		(288,008)		(172,508)
Effects of exchange rate changes on cash and cash equivalents	(154)		(3,676)		(4,048)		535		(7,339)
Net increase (decrease) in cash and cash equivalents	55,159		13,732		(977)		92,330		17,821
Cash and cash equivalents at beginning of period	326,644		312,912		257,448		289,473		238,650
Cash and cash equivalents at end of period	$	381,803	$	326,644	$	256,471	$	381,803	$	256,471

AKAMAI TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP INCOME FROM OPERATIONS, NET INCOME AND ADJUSTED EBITDA

	Three Months Ended									Nine Months Ended
(in thousands, except per share data)	September 30, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Income from operations	$	111,765		$	110,180		$	115,689		$	336,064		$	343,470
GAAP operating margin	19		%	19		%	21		%	19		%	21		%
Amortization of acquired intangible assets	6,598			6,711			6,752			20,025			20,284
Stock-based compensation	38,652			34,911			31,046			105,304			92,966
Amortization of capitalized stock-based compensation and capitalized interest expense	3,983			4,071			3,152			11,662			9,896
Restructuring charges	2,948			470			20			10,236			517
Acquisition-related costs	241			361			258			523			124
Legal matter costs	—			101			430			890			3,215
Operating adjustments	52,422			46,625			41,658			148,640			127,002
Non-GAAP income from operations	$	164,187		$	156,805		$	157,347		$	484,704		$	470,472
Non-GAAP operating margin	28		%	27		%	29		%	28		%	29		%

Net income	$	76,000		$	73,635		$	88,040		$	224,493		$	232,986
Operating adjustments (from above)	52,422			46,625			41,658			148,640			127,002
Amortization of debt discount and issuance costs	4,666			4,639			4,630			13,958			13,884
Loss on investments	—			—			—			—			25
Income tax-effect of above non-GAAP adjustments and certain discrete tax items	(12,939)			(12,832)			(22,453)			(37,094)			(48,678)
Non-GAAP net income	120,149			112,067			111,875			349,997			325,219

Depreciation and amortization	73,930			74,332			64,881			218,607			189,054
Interest income	(3,809)			(3,393)			(2,723)			(10,522)			(8,265)
Other (income) expense, net	(778)			(415)			(204)			(1,004)			1,677
Provision for GAAP income taxes	35,686			35,714			25,946			109,139			103,163
Income tax-effect of above non-GAAP adjustments and certain discrete tax items	12,939			12,832			22,453			37,094			48,678
Adjusted EBITDA	$	238,117		$	231,137		$	222,228		$	703,311		$	659,526
Adjusted EBITDA margin	41		%	40		%	40		%	41		%	41		%

Non-GAAP net income per share:
Basic	$	0.69		$	0.64		$	0.63		$	1.99		$	1.82
Diluted	$	0.68		$	0.64		$	0.62		$	1.98		$	1.80

Shares used in non-GAAP per share calculations:
Basic	174,429			175,499			178,547			175,444			178,591
Diluted	175,617			176,420			180,364			176,525			180,642

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA BY SOLUTION CATEGORY

	Three Months Ended									Nine Months Ended
(in thousands)	September 30, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Revenue by solution category⁽¹⁾:
Performance and Security Solutions	$	345,118		$	326,642		$	289,046		$	987,623		$	843,396
Media Delivery Solutions	188,075			197,077			218,537			591,091			650,553
Services and Support Solutions	50,872			48,416			43,447			145,211			124,340
Total revenue	$	584,065		$	572,135		$	551,030		$	1,723,925		$	1,618,289
Cloud Security Solutions revenue	$	95,232		$	86,980		$	65,212		$	262,872		$	181,857

Revenue growth rates year-over-year:
Performance and Security Solutions	19		%	16		%	14		%	17		%	15		%
Media Delivery Solutions	(14)			(9)			6			(9)			10
Services and Support Solutions	17			18			19			17			15
Total revenue	6		%	6		%	11		%	7		%	13		%
Cloud Security Solutions revenue growth rates	46		%	42		%	40		%	45		%	51		%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates⁽²⁾:
Performance and Security Solutions	19		%	16		%	18		%	17		%	19		%
Media Delivery Solutions	(15)			(10)			10			(9)			15
Services and Support Solutions	16			17			24			17			19
Total revenue	5		%	6		%	15		%	7		%	17		%
Cloud Security Solutions revenue growth rates⁽²⁾	46		%	42		%	45		%	45		%	56		%

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA BY GEOGRAPHY

	Three Months Ended									Nine Months Ended
(in thousands)	September 30, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Revenue by geography:
U.S.	$	404,065		$	395,085		$	400,581		$	1,196,433		$	1,188,657
International	180,000			177,050			150,449			527,492			429,632
Total revenue	$	584,065		$	572,135		$	551,030		$	1,723,925		$	1,618,289

Revenue growth rates year-over-year:
U.S.	1		%	(1)		%	10		%	1		%	15		%
International	20			25			12			23			9
Total revenue	6		%	6		%	11		%	7		%	13		%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates⁽²⁾:
U.S.	1		%	(1)		%	10		%	1		%	15		%
International	17			24			27			23			23
Total revenue	5		%	6		%	15		%	7		%	17		%

(1) See customer revenue by solution category definition in press release

(2) See Use of Non-GAAP Financial Measures below for a definition

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA BY DIVISION

	Three Months Ended									Nine Months Ended
(in thousands)	September 30, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Customer revenue by division⁽¹⁾:
Media Division	$	284,107		$	288,432		$	296,848		$	864,472		$	885,365
Web Division	284,629			271,327			243,430			819,699			703,687
Enterprise and Carrier Division	15,329			12,376			10,752			39,754			29,237
Total revenue	$	584,065		$	572,135		$	551,030		$	1,723,925		$	1,618,289

Revenue growth rates year-over-year:
Media Division	(4)		%	(2)		%	5		%	(2)		%	10		%
Web Division	17			15			17			16			18
Enterprise and Carrier Division	43			22			40			36			33
Total revenue	6		%	6		%	11		%	7		%	13		%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates⁽²⁾:
Media Division	(5)		%	(2)		%	9		%	(2)		%	13		%
Web Division	16			15			22			16			22
Enterprise and Carrier Division	43			22			41			36			34
Total revenue	5		%	6		%	15		%	7		%	17		%

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA FOR INTERNET PLATFORM CUSTOMERS

	Three Months Ended									Nine Months Ended
(in thousands)	September 30, 2016			June 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Revenue from Internet Platform Customers⁽³⁾	$	58,012		$	61,497		$	95,264		$	192,014		$	287,612
Revenue excluding Internet Platform Customers	526,053			510,638			455,766			1,531,911			1,330,677
Total revenue	$	584,065		$	572,135		$	551,030		$	1,723,925		$	1,618,289

Revenue growth rates year-over-year:
Revenue from Internet Platform Customers	(39)		%	(36)		%	—		%	(33)		%	14		%
Revenue excluding Internet Platform Customers	15			15			13			15			13
Total revenue	6		%	6		%	11		%	7		%	13		%

Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates⁽²⁾:
Revenue from Internet Platform Customers	(40)		%	(36)		%	1		%	(33)		%	15		%
Revenue excluding Internet Platform Customers	15			15			18			15			18
Total revenue	5		%	6		%	15		%	7		%	17		%

(1) See customer revenue by division definition in press release

(2) See Use of Non-GAAP Financial Measures below for a definition

(3) See Internet Platform Customers definition in press release

AKAMAI TECHNOLOGIES, INC.
OTHER SUPPLEMENTAL FINANCIAL DATA

	Three Months Ended						Nine Months Ended
(in thousands, except end of period statistics)	September 30, 2016		June 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Stock-based compensation:
Cost of revenue	$	4,701	$	4,553	$	3,579	$	13,224	$	10,244
Research and development	7,727		6,752		5,982		20,917		17,357
Sales and marketing	14,729		13,259		13,465		40,340		39,295
General and administrative	11,495		10,347		8,020		30,823		26,070
Total stock-based compensation	$	38,652	$	34,911	$	31,046	$	105,304	$	92,966

Depreciation and amortization:
Network-related depreciation	$	57,521	$	58,615	$	50,937	$	171,310	$	150,070
Other depreciation and amortization	16,409		15,717		13,944		47,297		38,984
Depreciation of property and equipment	73,930		74,332		64,881		218,607		189,054
Capitalized stock-based compensation amortization	3,544		3,628		2,916		10,429		9,303
Capitalized interest expense amortization	439		443		236		1,233		593
Amortization of acquired intangible assets	6,598		6,711		6,752		20,025		20,284
Total depreciation and amortization	$	84,511	$	85,114	$	74,785	$	250,294	$	219,234

Capital expenditures⁽¹⁾⁽²⁾:
Purchases of property and equipment	$	51,332	$	50,726	$	65,429	$	152,125	$	231,050
Capitalized internal-use software development costs	35,507		36,288		33,401		106,967		98,219
Capitalized stock-based compensation	5,662		6,209		4,518		17,074		13,133
Capitalized interest expense	887		868		760		2,540		2,054
Total capital expenditures	$	93,388	$	94,091	$	104,108	$	278,706	$	344,456

Net increase (decrease) in cash, cash equivalents and marketable securities	$	78,972	$	76,706	$	(20,082)	$	154,675	$	(123,411)

End of period statistics:
Number of employees	6,334		6,263		5,943
Number of deployed servers	222,906		219,595		199,962

(1) Capital expenditures presented in this table are reported on an accrual basis, which differs from the cash-basis presentation in the statements of cash flows. The primary difference between the two is the change in purchases of property and equipment and capitalization of internal-use software development costs accrued for, but not paid, at period end.

(2) See Use of Non-GAAP Financial Measures below for a definition

Use of Non-GAAP Financial Measures
In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Akamai provides additional financial metrics that are not prepared in accordance with GAAP (non-GAAP). 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, to measure executive compensation and to evaluate Akamai's financial performance. These non-GAAP financial measures are non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per share, Adjusted EBITDA, Adjusted EBITDA margin, capital expenditures and impact of foreign currency exchange rates, as discussed below.

Management believes that these non-GAAP financial measures reflect Akamai's ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate Akamai's operating results and future prospects in the same manner as management. These non-GAAP financial measures may also exclude expenses and gains that may be unusual in nature, infrequent or not reflective of Akamai's ongoing operating results.

The non-GAAP financial measures do not replace the presentation of Akamai's GAAP financial results and should only be used as a supplement to, not as a substitute for, Akamai's financial results presented in accordance with GAAP. Akamai has provided a reconciliation of each non-GAAP financial measure used in its financial reporting and investor presentations to the most directly comparable GAAP financial measure. This reconciliation captioned "Reconciliation of GAAP to Non-GAAP Financial Measures" can be found on the Investor Relations section of Akamai's website.

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

Amortization of acquired intangible assets – Akamai has incurred amortization of intangible assets, included in its GAAP financial statements, related to various acquisitions Akamai has made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and are unique to each acquisition; therefore, Akamai excludes amortization of acquired intangible assets from its non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.
Stock-based compensation and amortization of capitalized stock-based compensation – Although stock-based compensation is an important aspect of the compensation paid to Akamai's employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of Akamai's current financial results to previous and future periods difficult to interpret; therefore, Akamai believes it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from its non-GAAP financial measures in order to highlight the performance of Akamai's core business and to be consistent with the way many investors evaluate its performance and compare its operating results to peer companies.
Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to Akamai's initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. Akamai excludes acquisition-related costs from its non-GAAP financial measures to provide a useful comparison of Akamai's operating results to prior periods and to its peer companies because such amounts vary significantly based on the magnitude of the acquisition transactions.
Restructuring charges – Akamai has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and estimated costs of exiting facility lease commitments. Akamai excludes these items from its non-GAAP financial measures when evaluating its continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of its business.
Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In February 2014, Akamai issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rate of the convertible senior notes was approximately 3.2%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity under GAAP, thereby reducing the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. All of Akamai's interest expense is comprised of these non-cash components and is excluded from management's assessment of the company's operating performance because management believes the non-cash expense is not representative of ongoing operating performance.
Loss on investments and legal matter costs – Akamai has incurred losses from the impairment of certain investments and the settlement of legal matters. Akamai has also incurred costs with respect to its internal U.S. Foreign Corrupt Practices Act ("FCPA") investigation in addition to the disgorgement Akamai was required to pay to resolve it. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them occur infrequently and are not representative of Akamai's core business operations.
Income tax effect of non-GAAP adjustments and certain discrete tax items – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. Akamai believes that applying the non-GAAP adjustments and their related income tax effect allows Akamai to highlight income attributable to its core operations.

Akamai's definitions of its non-GAAP financial measures are outlined below:

Non-GAAP income from operations – GAAP income from operations adjusted for the following items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; amortization of capitalized interest expense; acquisition-related costs; restructuring charges; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs incurred with respect to Akamai's internal FCPA investigation; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP operating margin – Non-GAAP income from operations stated as a percentage of revenue.

Non-GAAP net income – GAAP net income adjusted for the following tax-affected items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs incurred with respect to Akamai's internal FCPA investigation; loss on early extinguishment of debt; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP net income per share – Non-GAAP net income divided by basic weighted average or diluted common shares outstanding. Basic weighted average shares outstanding are those used in GAAP net income per share calculations. Diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to Akamai pursuant to the note hedge transaction entered into in connection with the issuance of $690 million of convertible senior notes due 2019. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, the company would receive a benefit from the note hedge transaction and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of operating performance. Unless and until Akamai's weighted average stock price is greater than $89.56, the initial conversion price, there will be no difference between GAAP and non-GAAP diluted weighted average common shares outstanding.

Adjusted EBITDA – GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; benefit from adoption of software development activities; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs incurred with respect to Akamai's internal FCPA investigation; foreign exchange gains and losses; loss on early extinguishment of debt; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; and other non-recurring or unusual items that may arise from time to time.

Adjusted EBITDA margin – Adjusted EBITDA stated as a percentage of revenue.

Capital expenditures – Purchases of property and equipment, capitalization of internal-use software development costs, capitalization of stock-based compensation and capitalization of interest expense.

Impact of Foreign Currency Exchange Rates – Revenue and earnings from international operations have historically been an important contributor to Akamai's financial results. Consequently, Akamai's financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount. The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.

Akamai Statement Under the Private Securities Litigation Reform Act
This release and/or our quarterly earnings conference call scheduled for later today contain information about future expectations, plans and prospects of Akamai's management that constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, including statements about potential areas for future investment. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, inability to increase our revenue at the same rate as in the past and keep our expenses from increasing at a greater rate than our revenues; delay in developing or failure to develop new service offerings or functionalities, and if developed, lack of market acceptance of such service offerings and functionalities or failure of such solutions to operate as expected, and other factors that are discussed in the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and other documents periodically filed with the SEC.

In addition, the statements in this press release and on such call represent Akamai's expectations and beliefs as of the date of this press release. Akamai anticipates that subsequent events and developments may cause these expectations and beliefs to change. However, while Akamai may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Akamai's expectations or beliefs as of any date subsequent to the date of this press release.

Contacts:
Jeff Young		Tom Barth
Media Relations		Investor Relations
Akamai Technologies		Akamai Technologies
617-444-3913		617-274-7130
[email protected]		[email protected]

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SOURCE Akamai Technologies, Inc.

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