Nature of Business and Basis of Presentation

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

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

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

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

Newly-Adopted Accounting Pronouncements

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

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

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



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

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

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



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

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

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

Recent Accounting Pronouncements

In February 2016, the FASB issued guidance that requires companies to present assets and liabilities arising from leases with terms greater than 12 months on the consolidated balance sheets. The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. This will impact all leases, including leases for real estate and co-location facilities, among other arrangements currently under evaluation. The Company plans to adopt this standard in the first quarter of 2019 on a modified retrospective basis. The Company expects to record significant right-of-use assets and lease liabilities on its consolidated balance sheets, but does not expect the adoption to impact its results of operations or cash flows. The Company has formed a project team to assess the current state of accounting for leases, to understand the gaps between the current state and required future state and to implement the new processes, systems and controls required. To date, the Company has completed its gap analysis, selected a software tool to assist with the accounting for leases, has begun to implement the software, and has begun its data collection and migration efforts. The Company is also in the process of finalizing its accounting policies and designing the related processes and internal controls. The Company expects the adoption of this standard to require changes to its processes, systems and controls over financial reporting.

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

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

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

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