Nature of Business and Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Newly-Adopted and Recent Accounting Pronouncements

Newly-Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step model for recognizing revenue from contracts with customers. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard can be adopted using one of two methods: retrospectively to each prior period presented or a modified retrospective application by recognizing a cumulative-effect adjustment as a component of equity as of the date of adoption. The Company adopted this new standard on a retrospective basis on January 1, 2018. The changes to the Company's revenue recognition approach under this new standard primarily impact the timing of recognizing revenue from a small number of licensed software customers. There is little impact on revenue recognized for the Company's core services. As a result of the change, the Company also began capitalizing certain commission and incentive payments.

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

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

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

The following table details the changes to the consolidated statement of income for the three months ended March 31, 2017 as a result of the retrospective adoption of the new revenue recognition standard (in thousands, except per share data):

	As Previously Reported		Revenue Recognition Standard Adjustments			As Revised
Revenue	$	609,237	$	(8,944	)	$	600,293
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets)	205,703		24			205,727
Sales and marketing	113,566		926			114,492
Total costs and operating expenses	494,009		950			494,959
Income from operations	115,228		(9,894		)	105,334
Income before provision for income taxes	114,571		(9,894		)	104,677
Provision for income taxes	33,641		(3,547		)	30,094
Net income	80,930		(6,347		)	74,583
Net income per share:
Basic	$	0.47	$	(0.04	)	$	0.43
Diluted	$	0.46	$	(0.04	)	$	0.43

The statement of comprehensive income for the three months ended March 31, 2017 was also impacted by the adjustments to net income of $6.3 million.

The following table details the changes to the consolidated statement of cash flows for the three months ended March 31, 2017 as a result of the retrospective adoption of the new revenue recognition and statement of cash flow standards (in thousands):

	As Previously Reported			Revenue Recognition Standard Adjustments			Cash Flow Standard Adjustments		As Revised
Cash flows from operating activities:
Net income	$	80,930		$	(6,347	)	$	—	$	74,583
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for deferred income taxes	31,972			(3,547		)	—		28,425
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(30,146		)	10,270			—		(19,876		)
Prepaid expenses and other current assets	(47,065		)	(107		)	—		(47,172		)
Deferred revenue	10,876			(833		)	—		10,043
Other non-current assets and liabilities	(13,512		)	564			—		(12,948		)
Net cash provided by operating activities	142,618			—			—		142,618
Cash flows from investing activities:
Other non-current assets and liabilities	(1,230		)	—			895		(335		)
Net cash provided by investing activities	139,411			—			895		140,306
Effects of exchange rate changes on cash, cash equivalents and restricted cash	4,979			—			40		5,019
Net increase in cash, and cash equivalents and restricted cash	198,150			—			935		199,085
Cash, cash equivalents and restricted cash at beginning of period	324,169			—			457		324,626
Cash, cash equivalents and restricted cash at end of period	522,319			—			1,392		523,711

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

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

Recent Accounting Pronouncements

In February 2016, the FASB issued guidance that requires companies to present assets and liabilities arising from leases with terms greater than 12 months on the consolidated balance sheets. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This will impact all leases, including leases for real estate and co-location facilities, among other arrangements currently under evaluation. The Company plans to adopt this standard in the first quarter of 2019 and expects to record significant right-of-use assets and lease liabilities on its consolidated balance sheets. The Company has formed a project team to assess the current state of accounting for leases, to understand the gaps between the current state and required future state and to implement the new processes, systems and controls required. To date, the Company has completed its gap analysis and selected a software tool to assist with the accounting for leases. The Company is in the process of selecting and finalizing its accounting policies and developing a data collection plan. The Company expects the adoption of this standard to require changes to its processes, systems and controls over financial reporting.

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

Revenue Recognition, Incremental Costs to Obtain a Contract with a Customer and Contract Liabilities

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. Because the Company's typical contracts represent a series of distinct services delivered over time with the same pattern of transfer to the customer, variable consideration such as usage or "bursting" over committed contract levels is allocated to the period to which it relates. 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 completion of satisfying the performance obligations.

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

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

Incremental Costs to Obtain a Contract with a Customer

The Company capitalizes incremental costs associated with obtaining customer contracts, specifically certain commission and incentive payments. These costs are deferred on the Company's consolidated balance sheets and amortized over the expected life of the customer arrangement on a straight-line basis. Based on the nature of the Company's unique technology and services, and the rate at which the Company continually enhances and updates its technology, the expected life of the customer arrangement is determined to be approximately 2.5 years. Amortization is primarily included in sales and marketing expense in the consolidated statements of income. The current portion of deferred commission and incentive payments is included in prepaid expenses and other current assets and the long-term portion is included in other assets on the Company's consolidated balance sheets.

Contract Liabilities

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