Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Akamai Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

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

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

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Massachusetts Appellate Tax Board Appeal

As described in Note 19 to the consolidated financial statements, the Company is currently involved in litigation related to certain adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting the adverse audit findings related to certain tax benefits and exemptions. The appeal hearing was held in late 2019 and the Company awaits the judge’s determination. Management has determined that it is more-likely-than-not that it will prevail, and no reserve has been recorded related to these controversies. However, over the next 12 months, management's current assumptions and positions could change based on audit determinations and other events impacting management’s analysis. As disclosed by management, such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate and results of operations. Management has estimated that an adverse ruling related to the Massachusetts controversy could result in a gross income tax charge of approximately $35.0 million, which could be partially offset by certain state tax credits of $25.0 million which are not currently benefited as a result of the Company’s valuation allowance assessment.

The principal considerations for our determination that performing procedures related to the Massachusetts Appellate Tax Board appeal is a critical audit matter are there was significant judgment by management when determining the Company’s uncertain tax position relative to the Massachusetts Appellate Tax Board appeal, including a high degree of estimation uncertainty relative to numerous and complex tax laws and assessment of judicial precedent. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s judgments. Also, the evaluation of audit evidence available to support the Massachusetts Appellate Tax Board appeal required significant auditor judgment as the nature of the evidence is often highly subjective and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s identification and recognition of the liability for uncertain tax positions, including controls over the evaluation of the technical merits of the Company’s appeal and evaluation of numerous and complex tax laws and judicial precedent relevant to the appeal. These procedures also included, among others, 1) evaluating the reasonableness of management’s assessment that it is more-likely-than-not the Company will prevail in the Massachusetts Appellate Tax Board matter, including the potential for an unfavorable outcome of the appeal, and 2) professionals with specialized skill and knowledge were used to assist in the evaluation of management’s assessment of the technical merits of the tax position, including evaluating the reasonableness of management’s assessment of whether the tax position is more-likely-than not of being sustained and the application of relevant tax laws and assessment of the judicial precedent.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 28, 2020

We have served as the Company’s auditor since 1998.

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)	December 31, 2019				December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	393,745			$	1,036,455
Marketable securities	1,143,249				855,650
Accounts receivable, net of reserves of $1,880 and $1,534 at December 31, 2019 and 2018, respectively	551,943				479,889
Prepaid expenses and other current assets	142,676				163,360
Total current assets	2,231,613				2,535,354
Marketable securities	835,384				209,066
Property and equipment, net	1,152,153				910,618
Operating lease right-of-use assets	758,450				—
Acquired intangible assets, net	179,431				168,348
Goodwill	1,600,265				1,487,404
Deferred income tax assets	76,528				34,913
Other assets	173,062				116,067
Total assets	$	7,006,886			$	5,461,770
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	138,946			$	99,089
Accrued expenses	334,861				328,304
Deferred revenue	71,223				69,083
Convertible senior notes	—				686,552
Operating lease liabilities	139,463				—
Other current liabilities	8,843				27,681
Total current liabilities	693,336				1,210,709
Deferred revenue	4,368				4,557
Deferred income tax liabilities	29,187				19,624
Convertible senior notes	1,839,791				874,080
Operating lease liabilities	692,181				—
Other liabilities	90,065				160,940
Total liabilities	3,348,928				2,269,910
Commitments and contingencies (Note 13)
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; 162,000,843 and 162,904,550 shares issued and outstanding at December 31, 2019 and 2018, respectively	1,620				1,629
Additional paid-in capital	3,653,486				3,670,033
Accumulated other comprehensive loss	(45,144		)		(48,912		)
Retained earnings (accumulated deficit)	47,996				(430,890		)
Total stockholders’ equity	3,657,958				3,191,860
Total liabilities and stockholders’ equity	$	7,006,886			$	5,461,770

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

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)	For the Years Ended December 31,
2019				2018				2017
Revenue	$	2,893,617			$	2,714,474			$	2,489,035
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	987,624				953,485				875,837
Research and development	261,365				246,165				222,434
Sales and marketing	523,883				517,353				481,522
General and administrative	516,093				574,067				509,165
Amortization of acquired intangible assets	38,581				33,311				30,904
Restructuring charge	17,153				27,594				54,884
Total costs and operating expenses	2,344,699				2,351,975				2,174,746
Income from operations	548,918				362,499				314,289
Interest income	34,355				26,940				17,855
Interest expense	(49,364		)		(43,202		)		(18,839		)
Other (expense) income, net	(1,428		)		(3,148		)		887
Income before provision for income taxes	532,481				343,089				314,192
Provision for income taxes	(53,350		)		(44,716		)		(91,426		)
Loss from equity method investment	(1,096		)		—				—
Net income	$	478,035			$	298,373			$	222,766
Net income per share:
Basic	$	2.94			$	1.78			$	1.30
Diluted	$	2.90			$	1.76			$	1.29
Shares used in per share calculations:
Basic	162,706				167,312				171,559
Diluted	164,573				169,188				172,711

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

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the Years Ended December 31,
(in thousands)	2019				2018				2017
Net income	$	478,035			$	298,373			$	222,766
Other comprehensive income (loss):
Foreign currency translation adjustments	(1,020		)		(27,585		)		36,151
Change in unrealized gain (loss) on investments, net of income tax (provision) benefit of $(666), $(200) and $245 for the years ended December 31, 2019, 2018 and 2017, respectively	4,788				603				(406		)
Other comprehensive income (loss)	3,768				(26,982		)		35,745
Comprehensive income	$	481,803			$	271,391			$	258,511

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

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)	For the Years Ended December 31,
2019				2018				2017
Cash flows from operating activities:
Net income	$	478,035			$	298,373			$	222,766
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	440,674				434,520				372,313
Stock-based compensation	187,140				183,813				164,308
Provision (benefit) for deferred income taxes	933				2,339				(7,244		)
Amortization of debt discount and issuance costs	45,857				41,958				18,839
Restructuring-related software charge	3,784				4,940				31,965
Other non-cash reconciling items, net	4,744				12,078				10,068
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(64,471		)		(30,445		)		(50,054		)
Prepaid expenses and other current assets	11,689				(4,132		)		(28,968		)
Accounts payable and accrued expenses	8,769				42,238				33,232
Deferred revenue	(13,547		)		(919		)		2,938
Other current liabilities	(17,230		)		9,422				16,378
Other non-current assets and liabilities	(28,073		)		14,142				14,442
Net cash provided by operating activities	1,058,304				1,008,327				800,983
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(165,329		)		(79		)		(369,073		)
Cash paid for equity method investment	(36,008		)		—				—
Purchases of property and equipment	(359,667		)		(217,609		)		(254,146		)
Capitalization of internal-use software development costs	(202,410		)		(188,132		)		(160,632		)
Purchases of short-and long-term marketable securities	(1,990,148		)		(873,697		)		(326,497		)
Proceeds from sales of short-and long-term marketable securities	856				16,569				219,916
Proceeds from maturities of short-and long-term marketable securities	1,084,373				758,481				432,853
Other non-current assets and liabilities	399				(2,066		)		(1,586		)
Net cash used in investing activities	(1,667,934		)		(506,533		)		(459,165		)
Cash flows from financing activities:
Proceeds from the issuance of convertible senior notes	1,135,629				1,132,185				—
Proceeds from the issuance of warrants	185,150				119,945				—
Purchase of note hedge related to convertible senior notes	(312,225		)		(261,740		)		—
Repayment of convertible senior notes	(690,000		)		—				—
Proceeds related to the issuance of common stock under stock plans	57,112				62,608				55,680
Employee taxes paid related to net share settlement of stock-based awards	(75,266		)		(64,305		)		(58,395		)
Repurchases of common stock	(334,519		)		(750,000		)		(361,194		)
Other non-current assets and liabilities	(1,558		)		(5,085		)		(1,096		)
Net cash (used in) provided by financing activities	(35,677		)		233,608				(365,005		)
Effects of exchange rate changes on cash and cash equivalents	2,466				(12,844		)		12,990
Net (decrease) increase in cash and cash equivalents	(642,841		)		722,558				(10,197		)
Cash, cash equivalents and restricted cash at beginning of year	1,036,987				314,429				324,626
Cash, cash equivalents and restricted cash at end of year	$	394,146			$	1,036,987			$	314,429

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(in thousands)	For the Years Ended December 31,
2019				2018				2017
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received in the years ended December 31, 2019, 2018 and 2017 of $3,731, $18,501 and $6,750, respectively	$	73,898			$	45,129			$	91,640
Cash paid for interest expense	1,438				639				—
Cash paid for operating lease liabilities	153,818
Non-cash activities:
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	529,376
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses	88,238				54,867				27,209
Capitalization of stock-based compensation	35,905				34,785				28,851
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	393,745			$	1,036,455			$	313,382
Restricted cash	401				532				1,047
Cash, cash equivalents and restricted cash	$	394,146			$	1,036,987			$	314,429

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

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)	Common Stock							Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Loss				Retained Earnings (Accumulated Deficit)				Total Stockholders' Equity
Shares			Amount
Balance at January 1, 2017	173,254,797			$	1,733			$	4,239,588			$	—			$	(57,675	)		$	(913,428	)		$	3,270,218
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes	2,453,961			24				(40,562		)														(40,538		)
Issuance of common stock under employee stock purchase plan	1,052,684			11				42,291																42,302
Stock-based compensation								193,170																193,170
Repurchases of common stock	(6,868,118	)										(361,194		)										(361,194		)
Treasury stock retirement				(69		)		(361,125		)		361,194												—
Net income																				222,766				222,766
Foreign currency translation adjustment																36,151								36,151
Change in unrealized gain on investments, net of tax																(406		)						(406		)
Balance at December 31, 2017	169,893,324			1,699				4,073,362				—				(21,930		)		(690,662		)		3,362,469
Cumulative-effect adjustment to accumulated deficit related to adoption of new accounting pronouncement																				(38,601		)		(38,601		)
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes	2,235,212			22				(56,566		)														(56,544		)
Issuance of common stock under employee stock purchase plan	973,975			10				50,678																50,688
Stock-based compensation								218,416																218,416
Equity component of convertible senior notes, net of deferred tax of $4,971 and issuance costs of $4,418								275,836																275,836
Issuance of warrants related to convertible senior notes								119,945																119,945
Purchase of note hedge related to convertible senior notes								(261,740		)														(261,740		)
Repurchases of common stock	(10,197,961	)										(750,000		)										(750,000		)
Treasury stock retirement				(102		)		(749,898		)		750,000												—
Net income																				298,373				298,373
Foreign currency translation adjustment																(27,585		)						(27,585		)
Change in unrealized gain on investments, net of tax																603								603
Balance at December 31, 2018	162,904,550			$	1,629			$	3,670,033			$	—			$	(48,912	)		$	(430,890	)		$	3,191,860

AKAMAI TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued

(in thousands, except share data)	Common Stock							Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Loss				Retained Earnings (Accumulated Deficit)				Total Stockholders' Equity
Shares			Amount
Balance at December 31, 2018	162,904,550			$	1,629			$	3,670,033			$	—			$	(48,912	)		$	(430,890	)		$	3,191,860
Cumulative-effect adjustment to accumulated deficit related to adoption of new accounting pronouncement																				851				851
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes	2,251,840			22				(72,350		)														(72,328		)
Issuance of common stock under employee stock purchase plan	879,648			9				53,680																53,689
Stock-based compensation								222,857																222,857
Equity component of convertible senior notes, net of deferred tax of $23,170 and issuance costs of $2,880								240,820																240,820
Issuance of warrants related to convertible senior notes								185,150																185,150
Purchase of note hedge related to convertible senior notes								(312,225		)														(312,225		)
Repurchases of common stock	(4,035,195	)										(334,519		)										(334,519		)
Treasury stock retirement				(40		)		(334,479		)		334,519												—
Net income																				478,035				478,035
Foreign currency translation adjustment																(1,020		)						(1,020		)
Change in unrealized gain on investments, net of tax																4,788								4,788
Balance at December 31, 2019	162,000,843			$	1,620			$	3,653,486			$	—			$	(45,144	)		$	47,996			$	3,657,958

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

AKAMAI TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides solutions for securing, delivering and optimizing content and business applications over the Internet. Its globally-distributed platform comprises more than 250,000 servers across more than 130 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the Internet.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

2. Summary of Significant Accounting Policies

Use of Estimates

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the amounts disclosed in the related notes to the consolidated financial statements. Actual results and outcomes may differ materially from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these financial statements include, but are not limited to, those related to revenue, accounts receivable and related reserves, valuation and impairment of investments and marketable securities, valuation and useful lives of acquired intangible assets, useful lives and realizability of long-lived assets, capitalized internal-use software development costs, income tax reserves and accounting for stock-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the consolidated financial statements prospectively from the date of the change in estimate.

Newly-Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance that requires companies to present assets and liabilities arising from leases on the consolidated balance sheet. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right of use ("ROU") assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company adopted this standard on January 1, 2019 on a modified retrospective basis by applying the new standard to its lease portfolio as of January 1, 2019, while continuing to apply legacy guidance in the comparative periods.

The Company elected to use the package of practical expedients available under the transition provisions of the guidance, which allows companies to not reassess prior conclusions related to contracts containing leases, lease classification and capitalization of initial direct costs. The Company also elected not to apply the hindsight practical expedient related to its lease transactions.

Adoption of the standard required the Company to record ROU assets and lease liabilities for its operating leases related to real estate and co-location arrangements. The operating leases resulted in the recognition of ROU assets and lease liabilities of $362.2 million and $394.1 million, respectively, as of January 1, 2019. The adoption of the standard also resulted in elimination of deferred rent liabilities of $31.7 million, as of January 1, 2019; such amounts are now recorded as a reduction of the ROU asset. The standard did not have an impact on the Company’s results of operations or cash flows.

Stranded Tax Effects Resulting from U.S. Tax Cuts and Jobs Act

In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJA") that was enacted in 2017. This guidance was effective for the Company on January 1, 2019. The adoption of this new accounting guidance resulted in the reclassification of $0.9 million of income tax benefits resulting from the TCJA from accumulated other comprehensive loss to

retained earnings (accumulated deficit). The adoption of this new accounting guidance did not have an impact on the Company's results of operations or cash flows.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of cash held in bank deposit accounts and short-term, highly-liquid investments with remaining maturities of three months or less at the date of purchase. Marketable securities consist of corporate, government and other securities. Securities having remaining maturities of less than one year from the date of the balance sheet are classified as short-term, and those with maturities of more than one year from the date of the balance sheet are classified as long-term in the consolidated balance sheet.

The Company classifies its debt securities with readily determinable market values as available-for-sale. These investments are classified as marketable securities on the consolidated balance sheets and are carried at fair market value, with unrealized gains and losses considered to be temporary in nature and reported as accumulated other comprehensive loss, a separate component of stockholders’ equity. The Company reviews all investments for reductions in fair value that are other-than-temporary. When such reductions occur, the cost of the investment is adjusted to fair value through recording a loss on investments in the consolidated statements of income. Gains and losses on investments are calculated on the basis of specific identification.

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

Accounts Receivable and Related Reserves

The Company’s accounts receivable balance includes unbilled amounts that represent revenue recorded for customers that are typically billed monthly in arrears. The Company records reserves against its accounts receivable balance. These reserves primarily consist of allowances for doubtful accounts. Increases and decreases in the allowance for doubtful accounts are included as a component of general and administrative expense in the consolidated statements of income. Estimates are used in determining the Company's reserves and are based upon the Company’s review of outstanding balances on a customer-specific, account-by-account basis. The allowance for doubtful accounts is based upon a review of customer receivables from prior sales with collection issues where the Company no longer believes that the customer has the ability to pay for services previously provided. The Company also performs ongoing credit evaluations of its customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in the creation of a cash-basis reserve until the Company receives consistent payments. The Company does not have any off-balance sheet credit exposure related to its customers.

Incremental Costs to Obtain a Contract with a Customer

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

Based on the nature of the Company's unique technology and services, and the rate at which the Company continually enhances and updates its technology, the expected life of the customer arrangement is determined to be approximately 2.5 years. Amortization is primarily included in sales and marketing expense in the consolidated statements of income. The current portion

of deferred commission and incentive payments is included in prepaid expenses and other current assets, and the long-term portion is included in other assets on the Company's consolidated balance sheets.

Concentrations of Credit Risk

The amounts reflected in the consolidated balance sheets for accounts receivable, other current assets, accounts payable, accrued liabilities and other current liabilities approximate fair values due to their short-term maturities. The Company maintains the majority of its cash, cash equivalents and marketable securities with major financial institutions that the Company believes to be of high credit standing. The Company believes that, as of December 31, 2019, its concentration of credit risk related to cash equivalents and marketable securities was not significant.

Concentrations of credit risk with respect to accounts receivable are primarily limited to certain customers to which the Company makes substantial sales. The Company’s customer base consists of a large number of geographically-dispersed customers diversified across several industries. To reduce risk, the Company routinely assesses the financial strength of its customers. Based on such assessments, the Company believes that its accounts receivable credit risk exposure is limited. For the years ended December 31, 2019, 2018 and 2017, no customer accounted for more than 10% of total revenue. As of December 31, 2019 and 2018, no customer had an accounts receivable balance greater than 10% of total accounts receivable. The Company believes that, as of December 31, 2019, its concentration of credit risk related to accounts receivable was not significant.

Fair Value of Financial 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 Company has certain financial assets and liabilities recorded at fair value, principally cash equivalents and short- and long-term marketable securities that have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the reporting date. Fair values determined by Level 2 inputs utilize data points other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 3 inputs are based on unobservable data points for the asset or liability.

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally include purchases of items with a per-unit value greater than $1,000 and an estimated useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the related lease terms or their estimated useful lives.

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. Repairs and maintenance costs are expensed as incurred.

The Company has 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 four years to five years, effective January 1, 2019. These changes decreased depreciation expense by $31.5 million and increased net income by $26.1 million, or $0.16 per share, for the year ended December 31, 2019.

Operating Leases

The Company enters into operating leases for real estate assets related to office space and co-location assets related to space or racks at co-location facilities and related equipment for its servers and other networking equipment. The Company determines if an arrangement contains a lease at the inception of a contract by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration and the right to obtain the economic benefits from the use of the identified asset.

Upon commencement of a lease, the Company records a ROU asset that represents the Company’s right to use the underlying asset for the lease term and a lease liability that represents an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Lease payments are discounted at the lease commencement date. As the Company’s leases do not provide an implicit rate,

an incremental borrowing rate has been applied based on the Company's credit-adjusted risk-free rate. The incremental borrowing rate at January 1, 2019 (the date the new lease standard was adopted) was used to calculate the present value of the Company’s lease portfolio as of that date.

The Company often enters into contracts that contain both lease and non-lease components. Real estate non-lease components include real estate taxes, insurance, maintenance, parking and other operating costs. Co-location non-lease components include utilities and other operating costs. As of January 1, 2019, the Company includes both lease and non-lease components of fixed costs in its lease arrangements as a single lease component. Variable costs, such as utilities based on actual usage, are not included in the measurement of ROU assets and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs.

The Company’s lease terms often include renewal options and, particularly in the case of co-location arrangements, may include evergreen provisions. The Company’s ROU assets and lease liabilities generally do not include the options to extend, or terminate, unless it is reasonably certain that the Company will exercise these options. The Company has elected to exclude leases for certain networking equipment with terms of 12 months or less from its ROU assets and lease liabilities on its consolidated balance sheet.

Lease expense is recognized on a straight-line basis over the expected lease term.

Equity Method Investments

The Company accounts for equity investments in which it has significant influence, but not a controlling financial interest, using the equity method of accounting. Under the equity method of accounting, investments are initially recorded at cost, less impairment, and subsequently adjusted to recognize the Company’s share of earnings or losses.

In February 2019, the Company and Mitsubishi UFJ Financial Group ("MUFG") announced the establishment of a joint venture, the Global Open Network, Inc. ("GO-NET"), and their plans to offer a new blockchain-based online payment network. The Company's 20% stake in GO-NET is accounted for using the equity method. As of December 31, 2019, the Company's $34.7 million investment is included in other assets on the consolidated balance sheet. The Company recorded a loss of $1.1 million during the year ended December 31, 2019 which reflects its share of the losses incurred by GO-NET during the period. Subsequent to the establishment of the joint venture, Akamai recorded revenue of $11.6 million for services provided to GO-NET.

Goodwill, Acquired Intangible Assets and Long-Lived Assets

Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds the fair value of the net identifiable assets on the date of purchase and is carried at its historical cost. The Company tests goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performs its impairment test of goodwill as of December 31 each year. As of December 31, 2019, 2018 and 2017, the fair value of the Company's reporting unit was substantially in excess of the carrying value. The tests did not result in an impairment to goodwill during the years ended December 31, 2019, 2018 and 2017.

Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated economic value derived from the related intangible asset.

Long-lived assets, including property and equipment and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances, such as service discontinuance, technological obsolescence, significant decreases in the Company’s market capitalization, facility closures, or work-force reductions indicate that the carrying amount of the long-lived asset may not be recoverable. When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that an impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset.

Contract Liabilities

Contract liabilities primarily represent payments received from customers for which the related performance obligations have not yet been satisfied. These balances consist of the unearned portion of monthly service fees and integration fees and prepayments made by customers for future periods. The current and long-term portions of the Company's contract liabilities are included in deferred revenue in the respective sections of the Company's consolidated balance sheets.

Revenue Recognition

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

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

The Company's contracts with customers sometimes include promises to deliver multiple services to a customer. Determining whether services are distinct performance obligations often requires the exercise of judgment by management. For example, advanced features that enhance a service and are highly interrelated are generally not considered distinct; rather, they are combined with the service they relate to into one performance obligation. Different determinations related to combining services into performance obligations could result in differences in the timing and amount of revenue recognized in a period.

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

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

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

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

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

Cost of Revenue

Cost of revenue consists primarily of fees paid to network providers for bandwidth and to third-party network data centers for housing servers, also known as co-location costs. Cost of revenue also includes employee costs for services delivery and network operation, build-out and support of the Company's network; network storage costs; cost of software licenses; depreciation of

network equipment used to deliver the Company’s services; amortization of network-related internal-use software; and costs for the production of live events streamed by the Company for customers. The Company enters into contracts for bandwidth with third-party network providers with terms typically ranging from several months to five years. These contracts generally commit the Company to pay minimum monthly fees plus additional fees for bandwidth usage above the committed level. In some circumstances, Internet service providers (“ISPs”) make rack space available for the Company’s servers and access to their bandwidth at a discount or no cost. In exchange, the ISP and its customers benefit by receiving content through a local Company server resulting in better content delivery. The Company does not consider these relationships to represent the culmination of an earnings process. Accordingly, the Company does not recognize as revenue the value to the ISPs associated with the use of the Company’s servers, nor does the Company recognize as expense the value of the rack space and bandwidth received at discounted or no cost.

Research and Development Costs and Capitalized Internal-Use Software

Research and development costs consist primarily of payroll and related personnel costs for the design, development, deployment, testing and enhancement of the Company’s services and network. Costs incurred in the development of the Company’s services are expensed as incurred, except certain internal-use software development costs eligible for capitalization.

Capitalized costs include external consulting fees, payroll and payroll-related costs and stock-based compensation for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects. Capitalization begins when the planning stage is complete and the Company commits resources to the software project and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred. The Company amortizes completed internal-use software that is used on its network to cost of revenue over its estimated useful life.

Accounting for Stock-Based Compensation

The Company recognizes compensation costs for all stock-based payment awards made to employees based upon the awards’ grant-date fair value. The stock-based payment awards include stock options, restricted stock units, deferred stock units and employee stock purchases related to the Company’s employee stock purchase plan.

For stock options, the Company has selected the Black-Scholes option-pricing model to determine the fair value of stock option awards. For stock awards with market-based vesting conditions, the Company uses a Monte Carlo simulation to determine the fair value of the award. For stock options, restricted stock units and deferred stock units that contain only a service-based vesting feature, the Company recognizes compensation cost on a straight-line basis over the award's vesting period. For awards with a performance condition-based vesting feature, the Company recognizes compensation cost on a graded-vesting basis over the award's expected vesting period, commencing when achievement of the performance condition is deemed probable. In addition, for awards that vest and become exercisable only upon achievement of specified performance conditions, the Company makes judgments and estimates each quarter about the probability that such performance conditions will be met or achieved. Any changes to those estimates that the Company makes from time to time may have a significant impact on the stock-based compensation expense recorded and could materially impact the Company’s results of operations.

Foreign Currency Translation and Forward Currency Contracts

The assets and liabilities of the Company's subsidiaries are translated at the applicable exchange rate as of the balance sheet date, and revenue and expenses are translated at an average rate over the period. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss, a separate component of stockholders’ equity. Gains and losses on inter-company and other non-functional currency transactions are recorded in other (expense) income, net.

The Company enters into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives, as well as re-measurement gains and losses, are recognized in current earnings in other (expense) income, net. As of December 31, 2019 and 2018, the fair value of the forward currency contracts and the underlying net gains for the years ended December 31, 2019, 2018 and 2017 were immaterial.

The Company's foreign currency forward contracts may be exposed to credit risk to the extent that its counterparties are unable to meet the terms of the agreements. The Company seeks to minimize counterparty credit (or repayment) risk by entering into transactions only with major financial institutions of investment grade credit rating.

Income Taxes

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

The Company currently has net deferred tax assets consisting of net operating loss (“NOL”) carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized.

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

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

Recent Accounting Pronouncements

Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance will be effective for the Company on January 1, 2020. The Company has determined the adoption of this new standard will not have a material impact to its consolidated financial statements.

Fair Value Disclosure

In August 2018, the FASB issued guidance that changes fair value measurement disclosure requirements. This guidance will be effective for the Company on January 1, 2020. The Company has determined the adoption of this new standard will not have a material impact to its consolidated financial statements.

Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In August 2018, the FASB issued guidance that addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance for capitalizing costs associated with developing or obtaining internal-use software. This guidance will be effective for the Company on January 1, 2020. The Company has determined the adoption of this new standard will not have a material impact to its consolidated financial statements.

3. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of December 31, 2019 and 2018 (in thousands):

					Gross Unrealized								Aggregate Fair Value				Classification on Balance Sheet
	Amortized Cost													Short-Term Marketable Securities				Long-Term Marketable Securities
As of December 31, 2019		Gains				Losses
Certificates of deposit	$	150,000			$	—			$	—			$	150,000			$	150,000			$	—
Commercial paper	73,829				23				(7		)		73,845				73,845				—
Corporate bonds	1,368,668				1,840				(378		)		1,370,130				753,538				616,592
U.S. government agency obligations	369,475				80				(74		)		369,481				165,623				203,858
	$	1,961,972			$	1,943			$	(459	)		$	1,963,456			$	1,143,006			$	820,450
As of December 31, 2018
Certificates of deposit	$	40,000			$	—			$	(7	)		$	39,993			$	39,993			$	—
Commercial paper	282,996				—				(50		)		282,946				282,946				—
Corporate bonds	685,653				1				(4,309		)		681,345				482,088				199,257
U.S. government agency obligations	50,876				—				(404		)		50,472				50,472				—
	$	1,059,525			$	1			$	(4,770	)		$	1,054,756			$	855,499			$	199,257

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

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive income to interest income in the consolidated statements of income. As of December 31, 2019, the Company held for investment corporate bonds with a fair value of $35.9 million, which are classified as available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The immaterial unrealized losses related to these corporate bonds are included in accumulated other comprehensive income as of December 31, 2019. The unrealized losses are attributable to changes in interest rates. Based on the evaluation of available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities as of December 31, 2019 and 2018 (in thousands):

	Total Fair Value				Fair Value Measurements at Reporting Date Using
	Level 1				Level 2				Level 3
As of December 31, 2019
Cash Equivalents and Marketable Securities:
Money market funds	$	50,779			$	50,779			$	—			$	—
Certificates of deposit	150,000				—				150,000				—
Commercial paper	73,845				—				73,845				—
Corporate bonds	1,370,130				—				1,370,130				—
U.S. government agency obligations	369,481				—				369,481				—
Mutual funds	15,177				15,177				—				—
	$	2,029,412			$	65,956			$	1,963,456			$	—
As of December 31, 2018
Cash Equivalents and Marketable Securities:
Money market funds	$	380,260			$	380,260			$	—			$	—
Certificates of deposit	39,993				39,993				—				—
Commercial paper	282,946				—				282,946				—
Corporate bonds	681,345				—				681,345				—
U.S. government agency obligations	50,472				—				50,472				—
Mutual funds	10,016				10,016				—				—
	$	1,445,032			$	430,269			$	1,014,763			$	—
Liabilities:
Contingent consideration obligation related to completed acquisitions	$	(6,300	)		$	—			$	—			$	(6,300	)

As of December 31, 2019 and 2018, the Company grouped money market and mutual funds using a Level 1 valuation because market prices for such investments are readily available in active markets. As of December 31, 2018, the Company also included brokered certificates of deposit using Level 1 valuation as market prices for these investments were readily available in active markets. As of December 31, 2019 and 2018, the Company grouped commercial paper, U.S. government agency obligations and corporate bonds using a Level 2 valuation because quoted prices for similar assets in active markets (or identical assets in an inactive market) are available. As of December 31, 2019, the Company also included bank certificates of deposit using Level 2 valuation because quited prices for similar assets in active markets (or identical assets in an inactive market) are available. The Company did not have any transfers of assets or liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the years ended December 31, 2019 and 2018.

When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. When available, the Company uses quoted market prices to measure fair value. The valuation technique used to measure fair value for the Company's Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that 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 the fair value of the Company's Level 3 liabilities, which consist of contingent consideration related to the acquisition of Cyberfend, Inc. ("Cyberfend") in 2016, was primarily an income-based approach. The significant unobservable input used in the fair value measurement of the contingent consideration is the likelihood of achieving development milestones to integrate the acquired technology into the Company's technology as well as achieving certain post-closing financial results.

Contractual maturities of the Company’s available-for-sale marketable securities held as of December 31, 2019 and 2018 were as follows (in thousands):

	December 31, 2019				December 31, 2018
Due in 1 year or less	$	1,143,006			$	855,499
Due after 1 year through 5 years	820,450				199,257
	$	1,963,456			$	1,054,756

The following table reflects the activity for the Company’s major classes of liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2019 and 2018 (in thousands):

	2019				2018
Beginning balance	$	(6,300	)		$	(8,631	)
Fair value adjustment to contingent consideration included in general and administrative expense	—				(1,835		)
Cash paid upon achievement of milestone	6,300				4,166
Ending balance	$	—			$	(6,300	)

4. Accounts Receivable

Net accounts receivable consisted of the following as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019				December 31, 2018
Trade accounts receivable	$	396,204			$	337,445
Unbilled accounts receivable	157,619				143,978
Gross accounts receivable	553,823				481,423
Allowance for doubtful accounts and other reserves	(1,880		)		(1,534		)
Accounts receivable, net	$	551,943			$	479,889

A summary of activity in the accounts receivable reserves for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):

	2019				2018				2017
Beginning balance	$	1,534			$	1,281			$	925
Charges to income from operations	5,116				3,824				3,407
Collections from customers previously reserved and other	(4,770		)		(3,571		)		(3,051		)
Ending balance	$	1,880			$	1,534			$	1,281

Charges to income from operations primarily represents charges to bad debt expense for increases in the allowance for doubtful accounts.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019				December 31, 2018
Prepaid income taxes	$	26,143			$	47,196
Prepaid sales and other taxes	16,213				10,751
Prepaid equipment and software maintenance	18,114				21,876
Deferred commissions	45,009				41,955
Other prepaid expenses	19,593				22,871
Other current assets	17,604				18,711
Total	$	142,676			$	163,360

Incremental Costs to Obtain a Contract with a Customer

The following table summarizes the deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019				December 31, 2018
Deferred costs included in prepaid and other current assets	$	45,009			$	41,955
Deferred costs included in other assets	25,698				26,338
Total deferred costs	$	70,707			$	68,293

During the years ended December 31, 2019, 2018 and 2017, the Company recognized $44.3 million, $45.0 million and $37.6 million, respectively, of amortization expense related to deferred commissions. Amortization expense related to deferred commissions is primarily included in sales and marketing expense in the consolidated statements of income.

6. Property and Equipment

Property and equipment consisted of the following as of December 31, 2019 and 2018 (in thousands except years):

	December 31, 2019				December 31, 2018				Estimated Useful Life
Computer and networking equipment	$	1,469,293			$	1,301,604			3-7
Purchased software	90,450				73,888				3-10
Furniture and fixtures	65,683				54,057				1-7
Office equipment	38,178				29,309				3-5
Leasehold improvements	235,279				184,700				1-15
Internal-use software	1,132,180				944,279				2-7
Property and equipment, gross	3,031,063				2,587,837
Accumulated depreciation and amortization	(1,878,910		)		(1,677,219		)
Property and equipment, net	$	1,152,153			$	910,618

Depreciation and amortization expense on property and equipment and capitalized internal-use software for the years ended December 31, 2019, 2018 and 2017 was $402.1 million, $401.2 million and $341.4 million, respectively. During the years ended December 31, 2019, 2018 and 2017, the Company capitalized $35.9 million, $34.8 million and $28.9 million, respectively, of stock-based compensation related to employees who developed and enhanced internal-use software applications.

During the years ended December 31, 2019 and 2018, the Company wrote off $166.7 million and $208.0 million, respectively, of property and equipment, gross, along with the associated accumulated depreciation and amortization. The

write-offs were primarily related to computer and networking equipment and internal-use software no longer in use. These assets had been substantially depreciated and amortized. In addition, the Company wrote off $3.8 million and $4.9 million, primarily of internal-use software as a result of certain restructuring efforts during the year ended December 31, 2019 and December 31, 2018, respectively.

7. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows (in thousands):

	2019				2018
Beginning balance	$	1,487,404			$	1,498,688
Acquisition of Janrain, Inc.	92,188				—
Acquisition of Exceda	14,712				—
Acquisition of ChameleonX, Ltd.	7,069				—
Measurement period adjustments related to acquisitions completed in prior years	—				(6,667		)
Foreign currency translation	(1,108		)		(4,617		)
Ending balance	$	1,600,265			$	1,487,404

Acquired intangible assets that are subject to amortization consisted of the following as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019												December 31, 2018
Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Completed technologies	$	153,722			$	(94,088	)		$	59,634			$	145,091			$	(81,587	)		$	63,504
Customer-related intangible assets	279,684				(163,155		)		116,529				245,710				(144,786		)		100,924
Non-compete agreements	830				(529		)		301				700				(306		)		394
Trademarks and trade names	7,600				(4,633		)		2,967				7,200				(3,674		)		3,526
Acquired license rights	490				(490		)		—				490				(490		)		—
Total	$	442,326			$	(262,895	)		$	179,431			$	399,191			$	(230,843	)		$	168,348

Aggregate expense related to amortization of acquired intangible assets for the years ended December 31, 2019, 2018 and 2017 was $38.6 million, $33.3 million and $30.9 million, respectively. Based on the Company's acquired intangible assets as of December 31, 2019, aggregate expense related to amortization of acquired intangible assets is expected to be approximately $41.0 million, $36.2 million, $31.0 million, $23.9 million and $16.6 million for the years ending December 31, 2020, 2021, 2022, 2023 and 2024, respectively.

8. Business Acquisitions

Acquisition-related costs were $1.9 million, $1.0 million and $5.5 million during the years ended December 31, 2019, 2018 and 2017, respectively, and are included in general and administrative expense in the consolidated statements of income. Pro forma results of operations for the acquisitions completed in the years ended December 31, 2019 and 2017 have not been presented because the effects of the acquisitions, individually and in the aggregate, are not material to the Company's consolidated financial results. Revenue and earnings attributable to acquired operations since the dates of their acquisitions are included in the Company's consolidated statements of income and not presented separately because they are not material.

2019 Acquisitions

ChameleonX

On November 10, 2019, the Company acquired ChameleonX, Ltd. ("ChameleonX"), an Israel-based company with a solution designed to detect when a website contains or links to malware that causes end user data to be compromised, for $11.9 million in cash. The acquisition is expected to further strengthen the Company's security solutions portfolio. The Company allocated $7.1 million of the cost of the acquisition to goodwill and $6.1 million to a technology-related identifiable intangible asset with an average useful life of 7.1 years. The value of the goodwill is primarily attributable to synergies related to the integration of ChameleonX technology onto the Company's platform as well as a trained technical workforce. The total amount of goodwill related to the acquisition of ChameleonX expected to be deductible for tax purposes is $7.1 million.

Exceda

On November 1, 2019, in a series of stock and asset purchase transactions, the Company acquired the operations of a group of companies known as Exceda, a vendor of content delivery network ("CDN") and web security services and, collectively, the Company's largest channel partner in Latin America, for $32.7 million in cash. The acquisition is expected to enable the Company to expand its Latin America business more quickly, better enable existing and new partners and improve experiences for more customers. The Company allocated $14.7 million of the cost of the acquisition to goodwill and $16.5 million to identifiable intangible assets, primarily customer-related. The total weighted average useful life of the intangible assets acquired from Exceda is 8.1 years. The value of the goodwill is primarily attributable to synergies related to the scale of the combined teams as well as Exceda's trained technical workforce. The total amount of goodwill related to the acquisition of Exceda expected to be deductible for tax purposes is $14.7 million.

The Company acquired various obligations as part of the acquisition for which it is indemnified. The total obligations recorded, with corresponding indemnification asset, totaled $20.0 million.

Janrain

In January 2019, the Company acquired Janrain, Inc. ("Janrain"), a provider of customer identity and access management solutions, for $123.6 million in cash. The Company is incorporating the Janrain technology into its Intelligent Edge Platform. The Company finalized its allocation of purchase price in the fourth quarter of 2019. Included in the final allocation are measurement period adjustments, primarily related deferred tax assets. The adjustment increased the deferred tax asset and reduced goodwill by $7.5 million. The following table presents the final allocation of the purchase price for Janrain (in thousands):

Total purchase consideration		$	123,632
Allocation of the purchase consideration:
Cash		$	2,223
Accounts receivable		7,318
Prepaid expenses and other current assets		838
Identifiable intangible assets		26,930
Goodwill		92,188
Deferred tax asset		12,622
Other assets		87
Total assets acquired		142,206
Accounts payable		(1,642		)
Accrued liabilities		(2,596		)
Deferred revenue		(14,336		)
Total liabilities assumed		(18,574		)
Net assets acquired		$	123,632

The value of the goodwill can be attributed to a number of business factors, including a trained technical and sales workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Janrain expected to be deductible for tax purposes is $46.8 million.

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

	Gross Carrying Amount				Weighted Average Useful Life
Completed technologies	$	9,000			7.9
Customer-related intangible assets	17,700				13.9
Trademarks	200				1.9
Non-compete agreements	30				1.9
Total	$	26,930

The total weighted average amortization period for the intangible assets acquired from Janrain is 11.8 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

2017 Acquisitions

Nominum

On November 27, 2017, the Company acquired Nominum, Inc. ("Nominum"), a provider of domain name system ("DNS") and enterprise security solutions, for $180.3 million in cash. The acquisition added complementary capabilities to the Company's portfolio of security offerings while expanding the Company’s distribution to carriers that serve enterprise customers. The following table presents the final allocation of the purchase price for Nominum (in thousands):

Total purchase consideration		$	180,327
Allocation of the purchase consideration:
Cash		$	8,455
Accounts receivable		9,845
Prepaid expenses and other current assets		1,082
Identifiable intangible assets		33,200
Goodwill		129,876
Fixed assets		1,570
Deferred tax assets		16,080
Other assets		19
Total assets acquired		200,127
Accounts payable		(1,501		)
Accrued liabilities		(3,471		)
Deferred revenue		(14,828		)
Total liabilities assumed		(19,800		)
Net assets acquired		$	180,327

The value of the goodwill can be attributed to a number of business factors, including a trained technical and sales workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Nominum expected to be deductible for tax purposes is $54.1 million.

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

	Gross Carrying Amount				Weighted Average Useful Life
Completed technologies	$	7,200			2.2
Customer-related intangible assets	24,700				6.5
Trademarks	1,100				3.7
Non-compete agreements	200				1.5
Total	$	33,200

The total weighted average amortization period for the intangible assets acquired from Nominum is 5.4 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

Soasta

On April 6, 2017, the Company acquired Soasta, Inc. ("Soasta"), a leader in digital performance management, for $199.3 million in cash. The acquisition has allowed the Company to offer solutions designed to provide greater visibility into the business impact of customers' website and application optimization strategies. The following table presents the final allocation of the purchase price for Soasta (in thousands):

Total purchase consideration		$	199,280
Allocation of the purchase consideration:
Cash		$	1,935
Accounts receivable		4,109
Prepaid expenses and other current assets		4,384
Identifiable intangible assets		49,900
Goodwill		122,794
Deferred tax assets		31,206
Total assets acquired		214,328
Accounts payable		(1,119		)
Accrued liabilities		(4,366		)
Deferred revenue		(9,563		)
Total liabilities assumed		(15,048		)
Net assets acquired		$	199,280

The value of the goodwill can be attributed to a number of business factors, including a trained technical and sales workforce and cost synergies expected to be realized. The total amount of goodwill related to the acquisition of Soasta expected to be deductible for tax purposes is $36.4 million.

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

	Gross Carrying Amount				Weighted Average Useful Life
Completed technologies	$	18,800			4.1
Customer-related intangible assets	28,200				4.6
Trademarks	2,400				4.9
Non-compete agreements	500				1.9
Total	$	49,900

The total weighted average amortization period for the intangible assets acquired from Soasta is 4.4 years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

9. Accrued Expenses and Other Liabilities

Accrued expenses consisted of the following as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019				December 31, 2018
Payroll and other related benefits	$	190,721			$	180,301
Bandwidth and co-location	65,213				76,184
Income tax payable	40,337				36,536
Property, use and other taxes	30,904				23,042
Professional service fees	1,775				2,169
Other accrued expenses	5,911				10,072
Total	$	334,861			$	328,304

Other liabilities consisted of the following as of December 31, 2019 and 2018 (in thousands):

	December 31, 2019				December 31, 2018
Deferred rent	$	—			$	42,566
Uncertain tax positions	31,207				63,976
Other long-term liabilities	58,858				54,398
Total	$	90,065			$	160,940

10. Restructuring

During the fourth quarter of 2019, management committed to an action to restructure certain parts of the Company to focus on investments with the potential to accelerate revenue growth. As a result, certain headcount reductions were necessary and certain capitalized internal-use software charges were realized for software not yet placed into service that will not be completed and implemented due to this action. The Company incurred expenses of $10.2 million for the year ended December 31, 2019 and expects to incur an additional $4.0 million to $7.0 million in the first quarter of 2020 for severance and related benefits and facility exit costs related to this action.

During the fourth quarter of 2018, management committed to an action to restructure certain parts of the Company with the intent of re-balancing investments to ensure long-term growth and scale. As a result, certain headcount reductions were necessary and certain capitalized internal-use software charges were realized for software not yet placed into service that will not be completed and implemented due to this action. The Company incurred expenses of $19.0 million related to this action, of which $6.7 million were incurred during the year ended December 31, 2019 and $12.3 million were incurred during the year ended December 31, 2018. The Company does not expect any additional restructuring charges related to this action.

During the fourth quarter of 2017, management committed to an action to restructure certain parts of the Company, with the intent of shifting focus to more critical areas of the business and away from products that have not seen expected commercial success. The restructuring was also intended to facilitate cost efficiencies and savings. As part of the cost efficiency and savings plans, certain headcount and facility reductions were made in 2017 and 2018. Certain capitalized internal-use software charges have also been realized for software not yet placed into service that will not be completed and implemented due to this action. The Company incurred expenses of $62.7 million related to this action, of which $13.4 million were incurred during the year ended December 31, 2018 and $49.3 million were incurred during the year ended December 31, 2017. The Company does not expect any additional restructuring charges related to this action.

The Company also recognizes restructuring charges for redundant employees, facilities and contracts associated with completed acquisitions. Restructuring charges related to these acquisitions were not material in any of the years ended December 31, 2019, 2018 and 2017.

The following table summarizes the activity of the Company's restructuring accrual during the years ended December 31, 2019, 2018 and 2017 (in thousands):

	Employee Severance and Related Benefits				Software Charges				Excess Facilities, Contract Terminations and Other				Total
Balance January 1, 2017	$	1,444			$	—			$	169			$	1,613
Costs incurred	17,311				31,965				5,608				54,884
Cash disbursements	(5,898		)		—				(3,212		)		(9,110		)
Software and other non-cash charges	—				(31,965		)		(1,179		)		(33,144		)
Balance December 31, 2017	12,857				—				1,386				14,243
Costs incurred	15,841				4,940				6,813				27,594
Cash disbursements	(18,922		)		—				(5,932		)		(24,854		)
Software and other non-cash charges	—				(4,742		)		(1,787		)		(6,529		)
Translation adjustments and other	732				—				(205		)		527
Balance December 31, 2018	10,508				198				275				10,981
Costs incurred	12,455				3,784				914				17,153
Cash disbursements	(17,294		)		(99		)		(1,038		)		(18,431		)
Software and other non-cash charges	—				(3,784		)		—				(3,784		)
Translation adjustments and other	38				—				—				38
Balance December 31, 2019	$	5,707			$	99			$	151			$	5,957

11. Debt

Convertible Notes – Due 2027

In August 2019, the Company issued $1,150.0 million in par value of convertible senior notes due 2027 (the "2027 Notes"). The 2027 Notes are senior unsecured obligations of the Company, bear regular interest of 0.375%, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020, and mature on September 1, 2027, unless repurchased or converted in accordance with their terms prior to maturity.

At their option, holders may convert their 2027 Notes prior to the close of business on the business day immediately preceding May 1, 2027, only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ended December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•	during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

•	upon the occurrence of specified corporate events.

On or after May 1, 2027, holders may convert all or any portion of their 2027 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

Upon conversion, the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The initial conversion rate is 8.6073 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $116.18 per share, subject to adjustments in certain events, and represents a potential conversion into 9.9 million shares.

In accounting for the issuance of the 2027 Notes, the Company separated the 2027 Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar debt obligation that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2027 Notes. The difference between the principal amount of the 2027 Notes and the proceeds allocated to the liability component (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2027 Notes. The equity component is recorded in additional paid-in capital in the consolidated balance sheet and will not be remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the 2027 Notes, the Company allocated the total transaction costs incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the 2027 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2027 Notes in stockholders’ equity.

The 2027 Notes consisted of the following components as of December 31, 2019 (in thousands):

	December 31, 2019
Liability component:
Principal	$	1,150,000
Less: debt discount and issuance costs, net of amortization	(222,928		)
Net carrying amount	$	927,072
Equity component:	$	220,529

The estimated fair value of the 2027 Notes at December 31, 2019 was $1,133.8 million. The fair value was determined based on the quoted price of the 2027 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $86.38 on December 31, 2019, the value of the 2027 Notes if converted to common stock was less than the principal amount of $1,150.0 million.

The Company used $100.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2027 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $127.1 million of the proceeds was used for the net cost of convertible note

hedge and warrant transactions. The net proceeds are intended to be used for working capital, share repurchases, potential acquisitions and strategic transactions, and other corporate purposes.

Note Hedge

To minimize the impact of potential dilution upon conversion of the 2027 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in August 2019. The Company paid $312.2 million for the note hedge transactions. The note hedge transactions cover approximately 9.9 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2027 Notes, also subject to adjustment, and are exercisable upon conversion of the 2027 Notes. The note hedge transactions are intended to reduce dilution in the event of conversion of the 2027 Notes.

Warrants

Separately, in August 2019, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 9.9 million shares of the Company’s common stock at a strike price of approximately $178.74 per share. The Company received aggregate proceeds of $185.2 million from the sale of the warrants. The convertible note hedge and warrant transactions will generally have the effect of increasing the conversion price of the 2027 Notes to approximately $178.74 per share.

Convertible Notes – Due 2025

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

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

•

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

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

•	upon the occurrence of specified corporate events.

On or after January 1, 2025, holders may convert all or any portion of their 2025 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.

Upon conversion, the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The initial conversion rate is 10.5150 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $95.10 per share, subject to adjustments in certain events, and represents a potential conversion into 12.1 million shares.

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

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

The 2025 Notes consist of the following components as of December 31, 2019 and December 31, 2018 (in thousands):

	December 31, 2019				December 31, 2018
Liability component:
Principal	$	1,150,000			$	1,150,000
Less: debt discount and issuance costs, net of amortization	(237,281		)		(275,920		)
Net carrying amount	$	912,719			$	874,080
Equity component:	$	285,225			$	285,225

The estimated fair value of the 2025 Notes at December 31, 2019 was $1,270.7 million. The fair value was determined based on the quoted price of the 2025 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $86.38 on December 31, 2019, the value of the 2025 Notes if converted to common stock was less than the principal amount of $1,150.0 million.

The Company used $46.2 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2025 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the Board of Directors. Additionally, $141.8 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions and for the repayment at maturity of the $690.0 million in par value of notes the Company issued in 2014. The remaining net proceeds have been and are expected to continue to be used for working capital, share repurchases, potential acquisitions and strategic transactions and other corporate purposes.

Note Hedge

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

Warrants

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

Convertible Notes – Due 2019

In February 2014, the Company issued $690.0 million in par value of convertible senior notes due 2019 (the "2019 Notes"). The 2019 Notes were senior unsecured obligations of the Company and did not bear regular interest. The 2019 Notes matured and were repaid in full on February 15, 2019 as no repurchases or conversions occurred prior to maturity.

Revolving Credit Facility

In May 2018, the Company entered into a $500.0 million five-year, revolving credit agreement (the “Credit Agreement”). Borrowings under the Credit Agreement may be used to finance working capital needs and for general corporate

purposes. The Credit Agreement provides for an initial $500.0 million in revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount. The Credit Agreement expires in May 2023.

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

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. Principal covenants include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. There were no outstanding borrowings under the Credit Agreement as of December 31, 2019.

Interest Expense

The 2027 Notes bear interest at a fixed rate of 0.375%. The interest is payable semi-annually on March 1 and September 1 of each year, commencing in March 2020. The 2027 Notes have an effective interest rate of 3.1% attributable to the conversion feature. The 2025 Notes bear interest at a fixed rate of 0.125%. The interest is payable semi-annually on May 1 and November 1 of each year, commencing in November 2018. The 2025 Notes have an effective interest rate of 4.26% attributable to the conversion feature. The 2019 Notes did not bear regular interest, but had an effective interest rate of 3.2% attributable to the conversion feature. The Company is also obligated to pay ongoing commitment fees under the terms of the Credit Agreement. The following table sets forth total interest expense included in the consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
Amortization of debt discount and issuance costs	$	52,059			$	46,493			$	22,826
Coupon interest payable on 2025 Notes	1,436				874				—
Coupon interest payable on 2027 Notes	1,557				—				—
Revolving credit facility contractual interest expense	513				368				—
Capitalization of interest expense	(6,201		)		(4,533		)		(3,987		)
Total interest expense	$	49,364			$	43,202			$	18,839

12. Leases

The Company has entered into various operating lease agreements for its offices and co-location assets and related equipment. These operating leases have lease periods expiring between 2020 and 2034. In late 2019, the operating lease for the Company’s corporate headquarters in Cambridge, Massachusetts and an operating sublease for office space both commenced, each with lease terms of 15 years. The Company did not incur a loss associated with this operating sublease arrangement. The Company has not assumed any renewal options in the determination of these lease terms and variable costs are not included as lease components as they are not fixed.

The following table is a summary of the Company’s operating lease costs for the year ended December 31, 2019 (in thousands):

	Real Estate Arrangements				Co-location Arrangements				Total
Operating lease cost	$	63,893			$	96,020			$	159,913
Short-term lease cost	111				14,301				14,412
Variable lease cost	15,610				23,524				39,134
Sublease income	(5,119		)		—				(5,119		)
Total operating lease costs	$	74,495			$	133,845			$	208,340

Lease costs for real estate arrangements are included in general and administrative expenses in the consolidated statements of income. Lease costs for co-location arrangements are primarily included in cost of revenue.

At December 31, 2019, the real estate arrangements' weighted average remaining lease term and weighted average discount rate for operating leases were 12.8 years and 3.5%, respectively. At December 31, 2019, the co-location arrangements' weighted average remaining lease term and weighted average discount rate for operating leases were 3.9 years and 2.2%, respectively.

Maturities of operating lease liabilities as of December 31, 2019 were as follows (in thousands):

	Real Estate Arrangements				Co-location Arrangements
2020	$	77,961			$	63,514
2021	79,303				17,550
2022	75,657				9,603
2023	74,244				6,189
2024	67,727				4,795
Thereafter	532,549				14,695
Total lease payments	907,441				116,346
Less: imputed interest	186,457				5,686
Total lease liabilities	$	720,984			$	110,660

As of December 31, 2019, the Company had additional operating leases, primarily for real estate facilities, that had not yet commenced of $13.7 million, which will commence in 2020 and 2022, with lease terms of one year to seven years. The table above excludes approximately $211.0 million of future sublease income that is expected to be recognized through 2034.

As of December 31, 2019, the Company had outstanding letters of credit in the amount of $7.4 million, primarily related to operating leases. The letters of credit remain in effect until the Company fulfills its obligations under these leases or as such obligations expire under the terms of the letters of credit.

Prior Period Disclosures

The minimum aggregate future obligations under non-cancelable operating leases, including real estate, co-location and bandwidth commitments as of December 31, 2018 were as follows (in thousands):

	Real Estate Arrangements				Bandwidth and Co-location Arrangements
2019	$	54,561			$	138,777
2020	78,683				24,420
2021	75,991				8,463
2022	72,579				5,233
2023	70,101				2,156
Thereafter	599,339				3,709
Total	$	951,254			$	182,758

Rent expense for the years ended December 31, 2018 and 2017 was $63.2 million and $58.8 million, respectively, as determined under the previous standard. The Company has entered into sublease agreements with tenants of various properties previously vacated by the Company. The amounts paid to the Company by these sublease tenants was $3.8 million and $3.6 million for the years ended December 31, 2018 and 2017, respectively.

13. Commitments and Contingencies

As of December 31, 2019, the Company had long-term commitments for bandwidth usage with various networks and ISPs. Additionally, as of December 31, 2019, the Company had entered into purchase orders with various vendors. The minimum future commitments as of December 31, 2019 were as follows (in thousands):

	Bandwidth Commitments				Purchase Order Commitments
2020	$	83,124			$	190,042
2021	21,191				19,540
2022	7,407				11,985
2023	1,382				2,276
2024	49				1,606
Thereafter	90				364
Total	$	113,243			$	225,813

Legal Matters

The Company is party to various litigation matters that management considers routine and incidental to its business. Management does not expect the results of any of these routine actions to have a material effect on the Company’s business, results of operations, financial condition or cash flows.

In July 2016, as part of the resolution of a patent infringement lawsuit filed by the Company against Limelight Networks, Inc. (“Limelight”) in 2006, the Company entered into an agreement that requires Limelight to pay the Company $54.0 million in 12 equal installments over three years, beginning in August 2016. During the years ended December 31, 2019, 2018 and 2017, the Company received $9.0 million, $18.0 million and $18.0 million, respectively, under this agreement. Substantially all of the amounts received were recorded as a gain contingency in the year the cash was received, which reduced general and administrative expenses in the consolidated statements of income, with the remaining as interest income.

In April 2018, as part of the resolution of multiple existing lawsuits between Limelight and the Company, including in the U.S. District Court for the Eastern District of Virginia and in the U.S. District Court for the District of Massachusetts, the Company and Limelight entered into an agreement to settle the cases and request that the U.S. Patent Trial and Appeal Board terminate certain proceedings related to patents at issue in the litigation. The Company recorded a $14.9 million charge in the second quarter of 2018, which is included in general and administrative expenses in the consolidated statement of income for the year ended December 31, 2018, related to this settlement.

Indemnification

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company's business partners, vendors or customers, in connection with its provision of its services. Generally, these obligations are limited to claims relating to infringement of a patent, copyright or other intellectual property right or the Company’s negligence, willful misconduct or violation of law. Subject to applicable statutes of limitation, the term of each of these indemnification agreements is generally perpetual from the time of execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company carries insurance that covers certain third-party claims relating to its services and activities and that could limit the Company’s exposure in that respect.

The Company has agreed to indemnify each of its officers and directors during his or her lifetime for certain events or occurrences that happen by reason of the fact that the officer or director is or was or has agreed to serve as an officer or director of the Company. The Company has director and officer insurance policies that may limit its exposure and may enable the Company to recover a portion of certain future amounts paid.

To date, the Company has not encountered material costs as a result of such indemnification obligations and has not accrued any related liabilities in its financial statements. In assessing whether to establish an accrual, the Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.

14. Stockholders’ Equity

Stock Repurchase Program

In February 2016, the Board of Directors authorized a $1.0 billion share repurchase program that was effective from February 2016 through December 2018. In March 2018, the Company announced that its Board of Directors had increased its share repurchase authorization by $416.7 million, such that the amount that was authorized and available for repurchase in 2018 was $750.0 million. Subsequently, effective November 2018, the Board of Directors authorized an additional $1.1 billion repurchase program through December 2021. The Company's goals for the share repurchase programs are to offset the dilution created by its employee equity compensation programs and provide the flexibility to return capital to shareholders as business and market conditions warrant.

During the years ended December 31, 2019, 2018 and 2017, the Company repurchased 4.0 million, 10.2 million and 6.9 million shares, respectively, of its common stock for $334.5 million, $750.0 million and $361.2 million, respectively, pursuant to the repurchase programs described above. As of December 31, 2019, the Company had $765.5 million available for future purchases of shares under the current repurchase program.

The Board of Directors authorized the retirement of all the outstanding shares of its treasury stock as of each of December 31, 2019, 2018 and 2017. The retired shares were returned to the number of authorized but unissued shares of the Company's common stock, and the retirement was recorded to additional paid-in capital.

15. 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 year ended December 31, 2019 (in thousands):

	Foreign Currency Translation				Net Unrealized Gains on Investments				Total
Balance as of January 1, 2019	$	(51,904	)		$	2,992			$	(48,912	)
Other comprehensive (loss) income	(1,020		)		4,788				3,768
Balance as of December 31, 2019	$	(52,924	)		$	7,780			$	(45,144	)

The tax effect on accumulated unrealized gains on investments was insignificant as of December 31, 2019 and 2018. Amounts reclassified from accumulated other comprehensive loss to net income were insignificant for the year ended December 31, 2019.

16. Revenue from Contracts with Customers

The Company sells its services through a sales force located both domestically and abroad. Revenue derived from operations outside of the U.S. is determined based on the country in which the sale originated. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period. The following table summarizes revenue by geography included in the Company’s consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
U.S.	$	1,694,211			$	1,683,272			$	1,637,198
International	1,199,406				1,031,202				851,837
Total revenue	$	2,893,617			$	2,714,474			$	2,489,035

While the Company sells its services through a geographically dispersed sales force, it manages its customer relationships in two divisions: the Web Division and the Media and Carrier Division. Customers are assigned to a division for relationship management purposes according to their predominant purchasing activity; however, customers may purchase solutions managed by the other division as well. The following table summarizes revenue by division included in the Company’s consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
Web Division	$	1,566,401			$	1,448,644			$	1,307,641
Media and Carrier Division	1,327,216				1,265,830				1,181,394
Total revenue	$	2,893,617			$	2,714,474			$	2,489,035

The Company reports revenue in two divisions: the Web Division and the Media and Carrier Division. Revenue by division is a customer-focused reporting view that reflects revenue from customers that are managed by the division. As the purchasing patterns and required account expertise of customers change over time, we may reassign a customer from one division to another. In 2019, the Company reassigned some customers from the Media and Carrier Division to the Web Division and revised historical results in order to reflect the most recent categorization and to provide a comparable view for all periods presented.

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

During the years ended December 31, 2019 and 2018, the Company recognized $64.1 million and $71.8 million of revenue that was included in deferred revenue as of December 31, 2018 and 2017, respectively.

As of December 31, 2019, the aggregate amount of remaining performance obligations from contracts with customers was $2.5 billion. The Company expects to recognize approximately 70% of its remaining performance obligations as revenue over the next 12 months, with the remaining recognized thereafter. Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. This consists of future committed revenue for monthly, quarterly or annual periods within current contracts with customers, as well as deferred revenue arising from consideration invoiced in prior periods for which the related performance obligations have not been satisfied. It excludes estimates of variable consideration such as usage-based contracts with no committed contract as well as anticipated renewed contracts.

17. Employee Benefit Plan

The Company has established a savings plan for its employees that is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to this plan through payroll deductions within statutory and plan limits. The Company contributed approximately $16.6 million, $16.7 million and $15.6 million of cash to the savings plan for the years ended December 31, 2019, 2018 and 2017, respectively, under a matching program.

18. Stock-Based Compensation

Equity Plans

In May 2013, the Company's stockholders approved the Akamai Technologies, Inc. 2013 Stock Incentive Plan (as amended in 2015 and 2017, the "2013 Plan"). The 2013 Plan replaced the Akamai Technologies, Inc. 2009 Stock Incentive Plan (the "2009 Plan"), which in turn replaced the Akamai Technologies, Inc. 2006 Stock Incentive Plan, the Akamai Technologies, Inc. 2001 Stock Incentive Plan and the Akamai Technologies, Inc. 1998 Stock Incentive Plan (together with the 2009 Plan, the "Previous Plans"). The Company no longer issues equity awards under the Previous Plans, and they solely exist to satisfy outstanding equity awards previously granted under those plans. The 2013 Plan allows for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and cash-based awards up to 21.5 million shares of common stock to employees, officers, directors, consultants and advisers of the Company. Additionally, the Company may grant up to 3.8 million shares of common stock thereunder that were available for grant under the 2009 Plan immediately prior to stockholder approval of the 2013 Plan. Any shares of common stock that are currently outstanding under the Previous Plans that are terminated, canceled, surrendered or forfeited will become available to grant under the 2013 Plan. As of December 31, 2019, the Company had reserved approximately 8.8 million shares of common stock available for future issuance of equity awards under the 2013 Plan.

The Company has assumed certain stock option plans and the outstanding stock options of companies that it has acquired (“Assumed Plans”). Stock options outstanding as of the date of acquisition under the Assumed Plans were exchanged for the Company’s stock options and adjusted to reflect the appropriate conversion ratio as specified by the applicable acquisition agreement, but are otherwise administered in accordance with the terms of the Assumed Plans. Stock options under the Assumed Plans generally vest over four years and expire ten years from the date of grant.

The 1999 Employee Stock Purchase Plan ("1999 ESPP") permits eligible employees to purchase up to 1.5 million shares each June 1 and December 1, provided that the aggregate number of shares issued shall not exceed 20.0 million. The 1999 ESPP allows participants to purchase shares of common stock at a 15% discount from the fair market value of the stock as determined on specific dates at six-month intervals. During the years ended December 31, 2019, 2018 and 2017, the Company issued 0.9 million, 1.0 million and 1.1 million shares under the 1999 ESPP, respectively, with a weighted average purchase price per share of $61.04, $52.04 and $40.18, respectively. Total cash proceeds from the purchase of shares under the 1999 ESPP in the years ended December 31, 2019, 2018 and 2017 were $53.7 million, $50.7 million and $42.3 million, respectively. As of December 31, 2019, approximately $5.2 million had been withheld from employees for future purchases under the 1999 ESPP.

Stock-Based Compensation Expense

The following table summarizes the components of total stock-based compensation expense included in the Company’s consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
Cost of revenue	$	22,479			$	21,892			$	20,314
Research and development	49,685				44,034				38,864
Sales and marketing	62,150				64,373				60,246
General and administrative	52,826				53,514				44,884
Total stock-based compensation	187,140				183,813				164,308
Provision for income taxes	(51,177		)		(48,502		)		(56,237		)
Total stock-based compensation, net of taxes	$	135,963			$	135,311			$	108,071

In addition to the amounts of stock-based compensation reported in the table above, the Company’s consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 also include stock-based compensation reflected as a component of amortization of capitalized internal-use software; the additional stock-based compensation was $30.6 million, $25.2 million and $17.5 million, respectively, before taxes.

The Company uses the Black-Scholes option pricing model to determine the fair value of the Company’s stock option awards. This model requires the input of subjective assumptions, including expected stock price volatility and the estimated term of each award. The estimated fair value of the Company's stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. Expected volatilities are based on the Company’s historical stock price volatility and implied volatility from traded options in its stock. The Company uses historical data to estimate the expected term of options granted within the valuation model. The risk-free interest rate for periods commensurate with the expected term of the option is based on the U.S. Treasury yield rate in effect at the time of grant. The expected dividend yield is zero, as the Company currently does not pay a dividend and does not anticipate doing so in the future.

The grant-date fair values of awards granted under the 1999 ESPP during the years ended December 31, 2019, 2018 and 2017 were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2019			2018			2017
Expected term (in years)	0.5			0.5			0.5
Risk-free interest rate	2.3	%		1.9	%		1.0	%
Expected volatility	29.6	%		31.2	%		35.8	%
Dividend yield	—	%		—	%		—	%

For the years ended December 31, 2019, 2018 and 2017, the weighted average fair value of awards granted under the 1999 ESPP was $20.90 per share, $15.29 per share and $13.60 per share, respectively.

As of December 31, 2019, total pre-tax unrecognized compensation cost for stock options, restricted stock units, deferred stock units and shares of common stock issued under the 1999 ESPP was $267.6 million. The expense is expected to be recognized through 2023 over a weighted average period of 1.7 years.

Stock Options

The following table summarizes stock option activity during the year ended December 31, 2019:

	Shares (in thousands)			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2019	120			$	37.33
Exercised	(93	)		39.23
Forfeited	(7	)		44.88
Outstanding at December 31, 2019	20			$	26.23			1.21		$	1,230
Exercisable at December 31, 2019	20			$	26.23			1.21		$	1,230
Vested or expected to vest December 31, 2019	20			$	26.23			1.21		$	1,230

The total pre-tax intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $3.9 million, $8.2 million and $12.3 million, respectively. The total fair value of options vested for the years ended December 31, 2019 and 2018 was insignificant. The total fair value of options vested for the years ended December 31, 2017 was $1.2 million.

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $86.38 on December 31, 2019, that would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date. The total number of shares issuable upon the exercise of “in-the-money” options exercisable as of December 31, 2019 was 20,000.

Deferred Stock Units

The Company has granted deferred stock units ("DSUs") to non-employee members of its Board of Directors. Each DSU represents the right to receive one share of the Company’s common stock upon vesting. The holder may elect to defer receipt of the vested shares of stock represented by the DSU for a period of at least one year but not more than ten years from the grant date. DSUs vest 100% on the first anniversary of the grant date. If a director has completed one year of Board service, vesting of 100% of the DSUs held by such director will accelerate at the time of his or her departure from the Board.

The following table summarizes the DSU activity for the year ended December 31, 2019:

	Units (in thousands)			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	171			$	49.54
Granted	25			76.62
Vested and distributed	(97	)		48.51
Outstanding at December 31, 2019	99			$	57.50

The total pre-tax intrinsic value of DSUs that were vested and distributed during the years ended December 31, 2019, 2018 and 2017 was $7.7 million, $3.0 million and $1.5 million, respectively. The total fair value of DSUs that were vested and distributed during the years ended December 31, 2019, 2018 and 2017 was $4.9 million, $1.8 million and $1.7 million, respectively. The grant-date fair value is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2019, 25,000 DSUs were unvested, with an aggregate intrinsic value of approximately $2.2 million and a weighted average remaining contractual life of approximately 0.4 years. These units are expected to vest in May 2020.

Restricted Stock Units

The following table summarizes the different types of restricted stock units ("RSUs") granted by the Company during the year ended December 31, 2019 (in thousands):

	December 31, 2019
RSUs with service-based vesting conditions	2,769
RSUs with market-based vesting conditions	105
RSUs with performance-based vesting conditions	327
Total	3,201

RSUs represent the right to receive one share of the Company’s common stock upon vesting. RSUs are granted at the discretion of the Board of Directors, a committee thereof or, subject to defined limitations, the Chief Executive Officer of the Company, acting as a committee of one director, to whom such authority has been delegated. The Company has issued RSUs that vest based on the passage of time assuming continued service with the Company, RSUs that vest only upon the achievement of defined performance metrics tied primarily to revenue and earnings targets, and RSUs that vest based upon total shareholder return ("TSR") measured against the benchmark TSR of a peer group.

For RSUs with service-based vesting conditions, the fair value is calculated based upon the Company’s closing stock price on the date of grant, and the stock-based compensation expense is being recognized over the vesting period. Most RSUs with service-based vesting provisions vest in installments over a three- or four-year period following the grant date.

The Company uses the Monte Carlo simulation model to determine the fair value of the Company's RSUs based on TSR. This model requires the input of assumptions, including the estimated term of each award, the risk-free interest rate, historical stock price volatility of the Company's shares and historical stock price volatility of peer-company shares. The grant-date fair values of the TSR-based RSUs granted during the years ended December 31, 2019, 2018 and 2017 were estimated using a Monte Carlo simulation model with the following assumptions:

	2019			2018			2017
Expected term (in years)	3.0			3.0			3.0
Risk-free interest rate	2.5	%		2.3	%		1.4	%
Akamai historical share price volatility	32.8	%		35.5	%		33.2	%
Average volatility of peer-company share price	27.0	%		26.3	%		27.1	%

For the years ended December 31, 2019, 2018 and 2017, management measured compensation expense for performance-based RSUs based upon a review of the Company’s expected achievement against specified financial performance targets. Such compensation cost is being recorded using a graded-vesting method for each series of grants of performance-based RSUs, to the extent management has deemed that such awards are probable of vesting based upon the expected achievement against the specified targets. On a periodic basis, management reviews the Company’s expected performance and adjusts the compensation cost, if needed, at such time.

The following table summarizes the RSU activity for the year ended December 31, 2019:

	Units (in thousands)			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	5,612			$	62.25
Granted	3,201			72.30
Vested	(3,086	)		63.36
Forfeited	(654	)		67.34
Outstanding at December 31, 2019	5,073			$	70.43

The total pre-tax intrinsic value of RSUs that vested during the years ended December 31, 2019, 2018 and 2017 was $189.4 million, $173.6 million and $168.6 million, respectively. The total fair value of RSUs that vested during the years ended December 31, 2019, 2018 and 2017 was $195.5 million, $178.3 million and $173.6 million, respectively. The grant-date fair value of each RSU is calculated based upon the Company’s closing stock price on the date of grant. As of December 31, 2019, 5.1 million RSUs were outstanding and unvested, with an aggregate intrinsic value of $438.4 million and a weighted average remaining vesting period of approximately 1.65 years. These RSUs are expected to vest on various dates through 2023.

19. Income Taxes

The components of income before provision for income taxes were as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
U.S.	$	24,253			$	(27,379	)		$	92,588
Foreign	508,228				370,468				221,604
Income before provision for income taxes	$	532,481			$	343,089			$	314,192

The provision for income taxes consisted of the following for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
Current tax (benefit) provision:
Federal	$	(22,704	)		$	(29,982	)		$	41,090
State	3,835				8,085				6,336
Foreign	71,286				64,274				51,244
Deferred tax (benefit) provision:
Federal	(13,987		)		5,954				(24,136		)
State	(12,212		)		701				21,689
Foreign	4,968				(7,140		)		(4,367		)
Change in valuation allowance	22,164				2,824				(430		)
Total	$	53,350			$	44,716			$	91,426

For the year ended December 31, 2017, income taxes incurred on intercompany sales were deferred on the balance sheet and amortized into earnings over the economic life of the intellectual property that was sold. Beginning in 2018, all income taxes incurred on intercompany sales are included in the current tax provision.

The Company’s effective tax rate differed from the U.S. federal statutory tax rate as follows for the years ended December 31, 2019, 2018 and 2017:

	2019			2018			2017
U.S. federal income tax rate	21.0	%		21.0	%		35.0	%
State taxes	1.0			1.2			1.5
Share-based compensation	0.3			1.0			3.7
U.S. federal, state and foreign research and development credits	(6.0	)		(7.6	)		(7.0	)
Foreign earnings	(6.1	)		(6.0	)		(7.9	)
Domestic production activities deduction	—			—			(0.7	)
Impact of TCJA, net	—			(0.8	)		6.4
Impact of acquisition-related uncertain tax position	—			—			(2.9	)
Release of uncertain tax position reserve	(5.9	)		(1.9	)		(0.5	)
Intercompany sale of intellectual property	1.9			3.3			—
Valuation allowance	4.2			0.8			—
Other	(0.4	)		2.0			1.5
	10.0	%		13.0	%		29.1	%

In December 2017 the TCJA was enacted, making significant changes to the U.S. Internal Revenue Code. Changes included a corporate income tax rate decrease from 35.0% to 21.0%, the implementation of a modified territorial tax system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 and the repeal of the domestic production activities deduction, among other items.

The components of the net deferred tax assets and liabilities and the related valuation allowance as of December 31, 2019 and 2018 were as follows (in thousands):

	2019				2018
Accrued bonus	$	25,487			$	24,093
Deferred revenue	3,874				4,188
Deferred rent	—				11,245
Operating lease liability	147,375				—
Stock-based compensation	20,606				20,345
NOLs	25,851				15,743
Unrealized losses	1,529				1,039
Tax credit carryforwards	87,305				70,235
License income	—				2,245
Convertible senior notes interest	22,506				4,724
Other	12,501				11,759
Deferred tax assets	347,034				165,616
Depreciation and amortization	(16,896		)		(23,912		)
Acquired intangible assets	(51,758		)		(45,773		)
Operating lease ROU asset	(132,949		)		—
Deferred commissions	(14,843		)		(14,232		)
Internal-use software development costs capitalized	(57,201		)		(63,586		)
Deferred tax liabilities	(273,647		)		(147,503		)
Valuation allowance	(26,046		)		(2,824		)
Net deferred tax assets	$	47,341			$	15,289

Valuation allowances will be recognized on deferred tax assets if it is more-likely-than-not that some or all of the deferred tax assets will not be utilized. In measuring deferred tax assets, the Company considers all available evidence, both positive and negative, to determine whether a valuation allowance is needed. As of December 31, 2019, the Company recorded a $26.0

million valuation allowance against deferred tax assets related to tax credits and state NOLs in which it is more-likely-than-not that such attributes will expire prior to utilization. The change in the valuation allowance during 2019 was $23.2 million.

The table below summarizes the Company's NOL and tax credit carryforwards in federal, state and foreign jurisdictions as of December 31, 2019 and 2018 (in thousands, except for years):

	2019				2018				Expirations at Various Dates Through:
NOL carryforwards:
Federal	$	87,500			$	52,500			2037
State	20,500				20,500				2039
Foreign	11,600				8,500				—
Federal and state research and development tax credit and other credit carryforwards	88,570				88,200				2034

The Company's U.S. federal and state NOL carryforwards relate to acquisitions completed in 2019, 2017 and 2012.

As of December 31, 2019, accumulated earnings outside the U.S. totaled $1.1 billion, the majority of which have been taxed due to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings and the tax on global intangible low taxed income ("GILTI") required by the TCJA. No provision for U.S. income and foreign withholding taxes has been provided for any remaining undistributed foreign earnings not subject to tax under the TCJA, or any additional basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested. Determination of the amount of the unrecognized deferred tax liability on outside basis differences is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation.

The following is a roll forward of the Company’s unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019				2018				2017
Balance at beginning of year	$	64,892			$	85,845			$	69,117
Gross increases – tax positions of prior periods	74				2,704				2,692
Gross increases – current period tax positions	2,006				3,021				27,163
Gross decreases – tax positions of prior periods	(5,201		)		(15,287		)		(277		)
Gross decreases – lapse of applicable statute of limitations	(28,672		)		(6,186		)		(12,850		)
Gross decreases – settlements	(5,740		)		(5,205		)		—
Balance at end of year	$	27,359			$	64,892			$	85,845

As of December 31, 2019, 2018 and 2017, the Company had approximately $32.6 million, $67.8 million and $90.7 million of unrecognized tax benefits, respectively. Total interest and penalties for unrecognized tax benefits include $7.8 million, $11.8 million and $10.7 million as of December 31, 2019, 2018 and 2017, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the provision for income taxes and were $1.1 million, $1.3 million and $2.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate is approximately $32.6 million.

As of December 31, 2019, it is reasonably possible that $2.8 million of unrecognized tax benefits may be recognized within the next 12 months due to the expiration of local statutes of limitations. Certain U.S. state and foreign income tax returns from 2011 through 2017 are currently under audit. The Company has reserved for those positions that are not more-likely-than-not to be sustained.

The Company is also involved in litigation related to certain adverse audit determinations. In the second quarter of 2018, the Company filed an appeal with the Massachusetts Appellate Tax Board contesting the adverse audit findings related to certain tax benefits and exemptions. The appeal hearing was held in late 2019 and the Company awaits the judge's determination. The Company has determined that it is more-likely-than-not that it will prevail, and no reserve has been

recorded related to these controversies. However, over the next 12 months, the Company's current assumptions and positions could change based on audit determinations and other events impacting its analysis. Such events, if resolved unfavorably, could significantly impact the Company’s effective income tax rate and results of operations. The Company has estimated that an adverse ruling related to its Massachusetts controversy could result in an gross income tax charge of approximately $35.0 million, which could be partially offset by certain state tax credits of $25.0 million which are not currently benefited as a result of the Company's valuation allowance assessment.

20. 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, RSUs, DSUs, convertible senior notes and warrants issued by the Company. The dilutive effect of outstanding awards and convertible securities is reflected in diluted earnings per share by application of the treasury stock method.

The following table sets forth the components used in the computation of basic and diluted net income per share for the years ended December 31, 2019, 2018 and 2017 (in thousands, except per share data):

	2019				2018				2017
Numerator:
Net income	$	478,035			$	298,373			$	222,766
Denominator:
Shares used for basic net income per share	162,706				167,312				171,559
Effect of dilutive securities:
Stock options	68				132				260
RSUs and DSUs	1,799				1,744				892
Convertible senior notes	—				—				—
Warrants related to issuance of convertible senior notes	—				—				—
Shares used for diluted net income per share	164,573				169,188				172,711
Basic net income per share	$	2.94			$	1.78			$	1.30
Diluted net income per share	$	2.90			$	1.76			$	1.29

For the years ended December 31, 2019, 2018 and 2017, certain potential outstanding shares from stock options, service-based RSUs, convertible notes and warrants were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain performance-based RSUs were excluded from the computation of diluted net income per share because the underlying performance conditions for such RSUs had not been met as of these dates. The number of potentially outstanding shares excluded from the computation of diluted net income per share for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019			2018			2017
Stock options	—			—			9
Service-based RSUs	763			899			3,258
Market-and performance-based RSUs	1,349			1,509			1,054
Convertible senior notes	21,991			19,797			7,704
Warrants related to issuance of convertible senior notes	21,991			19,797			7,704
Total shares excluded from computation	46,094			42,002			19,729

21. Akamai Foundation Endowment

During the second quarter of 2018, the Company contributed $50.0 million to the Akamai Foundation, a non-profit organization founded by certain current and former employees of the Company in 2000 (the "Foundation"). The Company has

the right to appoint the directors of the Foundation but receives no economic benefit from the Foundation's initiatives. The contribution is intended to be a one-time endowment. The associated expense is included in general and administrative expenses in the consolidated statements of income for the year ended December 31, 2018. The Foundation is a private corporate foundation with a mission of supporting youth education, with a focus on mathematics, as well as other charitable causes.

22. Segment and Geographic Information

The Company’s chief operating decision-maker is the chief executive officer and the executive management team. As of December 31, 2019, the Company operated in one industry segment: providing cloud services for securing, delivering and optimizing content and business applications over the Internet. The Company is not organized by market and is managed and operated as one business. A single management team that reports to the chief executive officer comprehensively manages the entire business. The Company does not operate any material separate lines of business or separate business entities with respect to its services. Accordingly, the Company does not accumulate discrete financial information with respect to separate divisions and does not have separate operating or reportable segments.

The Company deploys its servers into networks worldwide. As of December 31, 2019, the Company had approximately $482.7 million and $303.7 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively. As of December 31, 2018, the Company had approximately $331.5 million and $235.7 million of net property and equipment, excluding internal-use software, located in the U.S. and foreign locations, respectively.

The Company sells its services and licenses through a sales force located both domestically and abroad. Revenue derived from operations outside of the U.S. is determined based on the country in which the sale originated and was $1,199.4 million, $1,031.2 million and $855.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period.

23. Quarterly Financial Results (unaudited)

(in thousands, except per share data)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Year ended December 31, 2019:
Revenue	$	706,508			$	705,074			$	709,912			$	772,123
Cost of revenue (exclusive of amortization of acquired intangible assets)	240,743				242,193				246,938				257,750
Net income	107,130				113,915				137,890				119,100
Basic net income per share	0.66				0.70				0.85				0.74
Diluted net income per share	0.65				0.69				0.84				0.73
Year ended December 31, 2018:
Revenue	$	688,724			$	662,759			$	669,628			$	713,363
Cost of revenue (exclusive of amortization of acquired intangible assets)	234,825				235,487				239,246				243,927
Net income	53,714				43,061				107,583				94,015
Basic net income per share	0.32				0.25				0.65				0.58
Diluted net income per share	0.31				0.25				0.64				0.57