Annual Report 2014
Fellow Shareholders,
2014 was a transitional year and in 2015 we plan to return the company to
growth. I am proud of the work of the Limelight team, and the solid progress we
made this year. We remained focused on three strategic intents – creating
customers for life, growing profitable revenue and becoming an employer of
choice. Our goal is to create shareholder value by executing against our plan.
Our vision and mission is clear - Securely manage and globally deliver digital
content, building customer satisfaction through exceptional reliability and
performance.
During the year, we aligned the company around priorities and objectives.
Relentless focus on customers, improving operations, reducing customer churn
and employee turnover, delivering key functionality, and focusing on internal cost
efficiency were among our key priorities. Customer satisfaction was, and will
remain, our top priority.
On June 2, 2014, the Supreme Court of the United States ruled
unanimously in our favor in the longstanding case bought forward by
Akamai.
By yearend we had built a patent portfolio with a 113 patents.
We announced the Limelight OrchestrateTM solution for Media and
Broadcasters, which empowers broadcasters and media content owners
to deliver broadcast quality video to online audiences…globally.
We announced the Limelight OrchestrateTM solution for Gaming, which
offers an integrated approach supporting the development, promotion,
distribution, play, and update of video games for a global audience.
Limelight is a founding member of Streaming Video Alliance – an industry
association, formed in November 2014. The alliance will facilitate the
creation of standards and best practices to scale the infrastructure for
online video and improve efficiency while preserving a high quality
experience for consumers.
For the full year, we generated revenue of $162.3 million, with adjusted EBITDA
of approximately $4.8 million, and a non-GAAP net loss, adjusted for certain
charges, of $12.3 million, or $0.13 per basic share. We also reported a GAAP
net loss of $24.6 million, or $0.25 per basic share. We ended the year with a
strong balance sheet, including approximately $93.1 million in cash and
marketable securities.
We continue to see strong demand from the market for our digital content
delivery services. Couple that with our significantly improved customer
satisfaction levels, as measured by Net Promoter Score, and we expect to
continue to see more business from existing customers, as well as new
customers joining our ranks.
This industry is healthy and we believe our position in it is improving. While we
have much work ahead of us, there are many opportunities that lead me to
believe, we will continue to show positive momentum in continuing improvements
across multiple measures in 2015. The entire company remains focused on
working together to provide excellent service and support to our customers, and
driving value for our shareholders. We believe, this is the best path for creating
above market shareholder returns. We appreciate your support.
Sincerely,
Robert Lento
President & CEO
Limelight Networks, Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 001-33508
Limelight Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-1677033
(I.R.S. Employer
Identification No.)
222 South Mill Avenue, 8th Floor
Tempe, AZ 85281
(Address of principal executive offices, including Zip Code)
(602) 850-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately
$177.2 million based on the last reported sale price of the common stock on the Nasdaq Global Select Market on June 30, 2014.
The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of February 10, 2015: 98,309,471
shares.
Portions of the Proxy Statement for the Registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference in Part III of
DOCUMENTS INCORPORATED BY REFERENCE
this Form 10-K.
LIMELIGHT NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2014
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships, Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Schedule II — Valuation and Qualifying Account
Exhibits Index and Exhibits
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, among other things, statements as to industry trends, our
future expectations, operations, financial condition and prospects, business strategies and other matters that do not relate
strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These
statements are based on the beliefs and assumptions of our management relying on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and
those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this annual report on Form 10-K. Given these
risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake
no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. All
information is presented in thousands, except per share amounts, customer count and where specifically noted.
PART I
Item 1.
Business
Overview
Limelight operates a globally distributed, high-performance, computing platform (our global network) and provides a
suite of integrated services including content delivery services, video content management services, performance services for
website and web application acceleration, and cloud storage services. These four primary service groups work collectively to
enable organizations to deliver digital content to any device, anywhere in the world and are collectively referred to as the
Limelight Orchestrate Platform (the Orchestrate Platform).
The services we provide through the Orchestrate Platform help our customers optimize and deliver digital content to
web, mobile, social, gaming, large screen, and other digital channels. These services provide advanced features including video
publishing, mobile enablement, content delivery, website and web application acceleration, transcoding, and cloud storage.
These services leverage our global network, which provides highly available, highly redundant storage, bandwidth, and
computing resources, as well as connectivity to last-mile broadband network providers.
We derive revenue primarily from the sale of services that comprise components of the Orchestrate Platform. We also
generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space
services. We also maintain relationships with resellers that purchase our services for resale to their end customers.
We provide our services to customers that we believe view Internet, mobile, social, and other digital initiatives as
critical to their success, including traditional and emerging media companies operating in the television, music, radio,
newspaper, magazine, movie, game, software, and social media industries, as well as to enterprises, technology companies, and
government entities conducting business online. Our offerings enable our customers to deliver a high quality online experience
across all customer interaction channels, and thereby improve brand awareness, drive revenue, and enhance their customer
relationships.
We are a Delaware corporation formed in 2001. Our principal executive offices are located at 222 South Mill Avenue,
8th Floor, Tempe, Arizona 85281, and our main telephone number is (602) 850-5000. We began development of our
infrastructure in 2001 and began generating meaningful revenue in 2002. We began international operations in 2004. As of
December 31, 2014, we had approximately 1,095 active customers and had a presence in approximately 53 countries
throughout the world. As used herein, “Limelight,” “we,” “us,” “our” and "the Company" refer to Limelight Networks, Inc. and
its subsidiaries, unless the context indicates otherwise.
We are registered as a reporting company under the Securities Exchange Act of 1934, as amended (Exchange Act).
Accordingly, we file or furnish with the Securities and Exchange Commission, or the Commission, annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports as required by the
Exchange Act and the rules and regulations of the Commission. We refer to these reports as "Periodic Reports". The public may
read and copy any Periodic Reports or other materials we file with the Commission at the Commission’s Public Reference
Room at 100 F. Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by
calling 1-800-SEC-0330. In addition, the Commission maintains an Internet website that contains reports, proxy and
1
information statements and other information regarding issuers, such as Limelight Networks, Inc., that file electronically with
the Commission. The address of this website is www.sec.gov.
Our Internet website address is www.limelight.com. We make available, free of charge, on or through our Internet
website our Periodic Reports and amendments to those Periodic Reports as soon as reasonably practicable after we
electronically file them with the Commission. We are not, however, including the information contained on our website, or
information that may be accessed through links on our website, as part of, or incorporating it by reference into, this annual
report on Form 10-K.
Five Trends Driving Internet Congestion
We have identified five trends that point to an Internet of the future in which congestion may cause outages and
prevent organizations from delivering the highest quality digital experiences. In this situation, the need and demand for private,
global networks to deliver digital content become important. These trends are:
•
Improved Video Quality. Consumers are continuing to consume online streaming video in record numbers. As the
2014 world cup demonstrated and online providers, such as YouTube, demonstrate, online video is rapidly growing
towards becoming a primary method by which users consume video content, whether it’s via their personal
computers (PCs), smartphones, tablets, or connected televisions. Yet, consumers continue to expect the same
quality experience online as they would have in viewing a television. To keep up with the consumer expectations,
organizations have been forced to increase quality to provide a “broadcast-like” experience. For example, with the
recent advent of 4K resolution devices, several large-scale online video providers are already streaming in this new
format that requires, in most cases, four times the bandwidth of a traditional high definition stream. We believe that
as more content is made available in 4K resolution (coupled with increasing sales of 4K-ready devices like
televisions), more consumers will want to consume the higher-quality content, resulting in increased strain on
Internet architecture and infrastructure.
• Growth of digital downloads. With the growing availability of higher bandwidth connections to connected devices,
consumers are becoming more accustomed to making purchases of movies, music, games, and applications digitally
from a variety of retailers. As a result, consumers accept larger download sizes. For example, recent releases of
popular games have topped 50 gigabytes (GBs) in size. As digital purchases of massive files increases, we believe
that this will cause more strain on the Internet’s infrastructure resulting in additional pressure on organizations and
service providers to take steps to avoid congestion, latency, lengthening download times, and increasingly
interrupted downloads, all of which we believe would undermine an organization’s ability to deliver the best
possible digital experience.
•
•
Shift to over the top technology (OTT) and television everywhere (TVE). Recent service provider announcements
of services for cord-cutters coupled with broadcasters and other content providers announcing plans to provide
content directly to consumers illustrates the shift towards internet protocol television (IPTV) OTT, and consumer
demand for online streaming services. As day-to-day consumption of video content shifts to Internet-based delivery
(either via OTT or TVE), we believe this will put an increasing strain on the Internet putting additional pressure on
organizations and service providers to take steps to protect the quality of the end-user experience as this increasing
segment of traffic competes with other Internet activities, such as browsing websites and downloading digital
content.
The Internet of Things. Connected devices communicate with each other and with server-based resources via the
Internet. Although it is unclear as to how much bandwidth this “background communication” will consume, as
more devices become connected and begin communicating with each other and other resources, this traffic will
compete with other Internet traffic such as streaming video and digital downloads. We believe that the Internet of
Things may complicate an organization’s ability to utilize the Internet to deliver high quality digital experiences.
• Webpage size. In our recent annual study, The State of the User Experience, over 1000 surveyed respondents
indicated that performance of a website was the most important aspect in satisfaction with a digital experience.
According to the HTTPArchive, as of July 2014, the top 1000 websites had surpassed 1600K (1.6mb) in average
size. This increasing webpage size demonstrates that organizations are building more complex, interactive, and
engaging digital experiences. We believe that larger websites will become the norm as consumer bandwidth
increases. We believe, through a highly congested Internet, these websites will become increasingly harder to
deliver at the level of performance that users expect.
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Six Trends Illustrating Consumer Demand for Digital Content
The Internet is key for today’s digital business. Hyper text transfer protocol (HTTP) and other Internet protocols are
critical to enabling organizations to digitize their business processes and operations as well as provide the kinds of experiences
that consumers around the globe have come to expect across web, mobile, social, and large screen channels. We believe there
are six trends that illustrate a demand for digital content, contribute to the overall usage of the Internet, increase potential
congestion, and punctuate the need for a private, global network to meet the level of performance that users expect. We believe
these trends are:
• The continued growth of online video. Consumers are increasingly demanding and consuming, and publishers are
increasingly making available for these consumers, video, music, and other forms of rich media over the Internet. In
particular, we anticipate that consumer demand for online video will continue to grow rapidly. This anticipation is
supported by Cisco’s annual report of Internet traffic and consumer behavior that predicts by 2017, over 70% of
Internet traffic will be online video. Based on this trend, we expect that businesses will continue to incorporate
video into their digital marketing efforts as a way to further differentiate their message from competitors and
generate new opportunities for engagement. This anticipation is further supported by a report from BI Research
finding that video ad revenue will increase at a three-year compound annual growth rate (CAGR) of 19.5% through
2016. KPCB analyst Mary Meeker’s 2014 Internet Trends report shows video consumption on mobile devices is
also growing rapidly.
• Mobile First. We believe that mobile is becoming increasingly important as a primary method users use to interact
with online content, a position supported by Google’s 2012 “The Multi-Screen World” study that among other
things, concluded that consumers typically utilize four devices every day to consume content-smartphones, tablets,
PCs, and TVs. The study further indicated that consumers start many activities on their mobile devices and finish
them on larger screens. KPCB analyst Mary Meeker’s 2014 Internet Trends report also shows that between 2013
and 2014 mobile usage for accessing the web in some countries doubled as a percentage of overall web access with
clear growth in all regions around the globe. Ultimately, mobile devices enable consumers to remain connected and
engaged with an organization’s story when they are away from their primary computers or TVs and it’s clear that
consumers are employing these devices more often to do so. But in order for those consumers to remain engaged,
the experience must be consistent across devices. An organization’s dynamic content and video has to be accessible
regardless of device and provide the same engagement and interaction with those users. These findings were further
supported by Nielsen Research’s 2014 digital-consumer-report.
•
•
•
•
The continued migration of information technology (IT) services into the cloud. Enterprises may seek to decrease
infrastructure expenditures by moving to a “cloud-based” model in which application delivery and storage are
available on-demand and paid for on an as-needed basis. We anticipate that the core cloud computing market will
continue to grow at a rapid pace as the cloud increasingly becomes a mainstream IT strategy embraced by corporate
enterprises and government agencies. This core market includes platform-as-a-service (PaaS) and infrastructure-as-
a-service (IaaS) offerings, as well as the cloud-delivered software used to build and manage a cloud environment.
Increasing user expectations for digital experience performance. Websites are becoming increasingly complex
and large while user expectations for website performance are becoming more demanding, a situation that we
explored in our annual State of the User Experience report that explores consumer feelings and expectations around
digital experiences. We anticipate that these demanding consumer expectations will drive a continued need for
website and web application acceleration services. The combination of performance expectation coupled with
multi-device delivery creates a considerable challenge for most organizations.
Increasing need for scalable storage. According to International Data Corporation, the amount of data created each
year has grown rapidly and from 2013 to 2020, the digital universe will grow by a factor of 10, more than doubling
every two years. We believe this rapid growth in data production will create demand for flexible and scalable
storage mechanisms to support growing libraries of digital content. We anticipate the need for digital content
storage to increase because of the growing demand for video and other types of digital content as well as other
trends like the continued migration of IT services into the cloud.
The evolution of digital marketing. As the global online economy has continued to expand and grow, it has become
increasingly difficult for businesses to capture consumer attention. Because of this difficulty, we anticipate that
marketing will continue to evolve from broadcast advertising and other marketing messages to engaging with users
through conversations associated with content in a variety of places including websites and social networks. We
believe this kind of engagement requires that content be increasingly comprised of video and rich media, and be
3
delivered in a manner that meets the high user expectations for the delivery and responsiveness of digital
experiences.
Requirements for delivering effective digital experiences
We believe that the challenges of delivering digital content, particularly related to rich media, dynamic content, and
applications over the Internet to a wide variety of mobile and connected devices, have created a new set of technical,
management, and economic requirements for organizations seeking to succeed in the online economy. We believe those
requirements include the following:
• Reduction of IT involvement. As businesses rely increasingly on cloud-based services they will require more
intuitive web-based interfaces that enable adoption and usage of the cloud-based services by the entire company or
organization, regardless of location, with less direct IT support required.
• Business rules-based content delivery. Consumers increasingly expect the ability to consume any form of media
content online. To meet this expectation, traditional media companies are making their enormous libraries of
content, such as television shows and movies, available for viewing online. Content providers often have
regulations with respect to where they can display their content. Accordingly, companies require powerful features
that enable them to control where content is stored, for how long, and in what regions it can be delivered.
• Ability to scale capacity to handle rapidly accelerating demand. Online businesses must scale delivery of their
web presence smoothly as the quantity of their site visitors or audience increases to avoid delays for users. When a
large number of users simultaneously access a particular digital content asset like a website or video, the operator
must be able to meet that surge in demand without making users wait. Rapidly accelerating demand can be related
to a single event, such as a breaking news story or seasonal shopping, or can be spread across an entire library of
content, such as when a social media website surges in popularity. The continued increase in video and other rich
media consumption, and the growing size of digital content objects, contributes to concerns that Internet bandwidth
may be supply constrained in the future.
• Ability to easily publish and deliver online video. As the consumer demand for online video grows, businesses and
organizations may be required to adopt video into their marketing messages. However, there are a host of
complexities involved in developing and implementing a “video publishing workflow.” Businesses will require
intuitive tools that will enable them to manage their video portfolio, and quickly and efficiently publish and deliver
their video content at scale with quality performance. Additionally, businesses will require that video content can be
converted automatically for quality playing on any mobile device with the opportunity to integrate advertisements
into on-demand assets.
• Addressing mobile users. With the increasing popularity of smartphones and tablets, businesses and organizations
must ensure that their content, whether dynamic web pages or video, display properly in their mobile format.
However, adding this requirement to existing content publishing workflows may greatly complicate internal
processes that may result in delays for making content available to end users. Additionally, because many mobile
devices have separate requirements, businesses will require features for automatically delivering correctly
formatted content.
• Reliability and Consistency. Throughout the path data must traverse to reach a user, problems with the underlying
infrastructure supporting the Internet can occur. For example, servers can crash or network connections can fail.
Network, datacenter, or service provider outages can mean frustrated users, lost audiences, and missed revenue
opportunities. Businesses require a massively redundant network that they can rely on to ensure a reliable and
consistent delivery of their digital experiences.
•
Security. Maintaining effective security is a challenge for any enterprise that operates an Internet presence. Threats,
denial of service attacks, viruses, and piracy can impact online web presence in many ways, including
compromising personal and sensitive information, loss of customer trust and loyalty, loss of revenue, and negative
publicity and brand reputation. Businesses require services that employ a number of software and network features
to mitigate the risk of unauthorized access to content and network-related attacks against web properties, digital
content, and applications. In 2014, there were a number of high profile security incidents that continue to raise the
awareness, and strategic importance of security in our industry.
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Our Services
We believe our integrated suite of services coupled with our global network are responsive to the trends that are
driving Internet growth and address the requirements for delivering effective digital experiences. Our primary services include
the following:
• Content delivery services improve the reliability and performance of digital content by using our global network to
deliver rich media files such as video, music, games, and software, or live streaming of corporate or entertainment
events. We support all major formats as well as dynamic and static webpages.
• Mobile delivery services help publishers deliver properly-formatted, device-optimized video to almost any media-
enabled mobile device as well as to present dynamic pre-, mid-, or post-roll video and audio advertising into media
that is delivered to mobile or connected users. These mobility services automatically detect the requesting mobile
device and provide a version of the content suitable to that device.
• Video content management services help organizations publish, manage, syndicate, analyze, and monetize video
content through a cloud-based service. Services here also include off-the-shelf players for quick deployment, a
mobile application to capture video in the field, and monetization features that enable customers to integrate
advertising into the video playback experience.
•
Performance services improve web experiences by speeding up the loading of web pages for faster action and
providing consistent performance from any geography for dynamic and personalized content, online commerce
transactions, and web applications.
• Cloud storage services provide customers with a scalable, redundant, geographically diverse storage of media and
enterprise content offering policies for global geographic placement, content workflow, and business logic controls.
Our Solutions
In addition to marketing our core suite of services, we continue to develop and launch prepackaged solutions that help
organizations tackle workflow-related challenges in delivering digital content to their customers. These solutions integrate
multiple Orchestrate services with documented “reference architectures” that align to specific use cases and industries. Our
solutions include the following:
• Enterprise Web addresses the complexities of delivering high performing website content globally to any device.
• Media and Broadcasters addresses the complexities of publishing and delivering digital video content to global
audiences on any devices.
• Gaming addresses the complexities of distributing, promoting, and updating video games across PC, consoles, and
mobile devices.
Limelight Networks Global Network
Our global network provides highly available, highly redundant storage, bandwidth, and computing resources in
support of our services and solutions. This architecture, managed by our proprietary software, automatically responds to
network and datacenter outages and disruptions. All of our delivery locations are interconnected via our global network and also
connected to multiple Internet backbone and broadband Internet service provider (ISP) networks. This global network has three
main features:
• Densely configured, high-capacity. Our global network consists of dense clusters of specially configured servers
organized into large, multi-tiered, logical delivery locations. The extensive storage capacity of these logical
locations leads to fewer cache misses to our network of servers than we believe would occur in other content
delivery network (CDN) architectures and provides significant scalability and responsiveness to surges in end-user
demand. The clustering of many high-performance CPUs provide us with aggregated computational power.
• Many connections to other networks. Our logical locations are directly connected to hundreds of ISPs and other
user access networks, which are computer networks connected to end-users. In addition, for dedicated connectivity
between our logical locations, we operate a dedicated fiber optic backbone and metro area networks. Also, our
infrastructure has multiple connections to the Internet. In combination, these connections enable us to frequently
bypass the often-congested public Internet, improving the delivery speed of content.
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•
Intelligent software to manage the network. We have developed proprietary software that manages our global
network. This software manages, among other things, the delivery of digital content, the retrieval of dynamic
content, storage and retrieval of objects, activity logging, and information reporting.
We have begun to expand our architecture through the use of “smart pops.” These smaller pops are less dense than our
traditional densely-configured metro pops and are designed to be quickly and more cost-effectively deployed within existing
networks. In addition, we continue to explore and implement ways to improve throughput and efficiency of our infrastructure
through the use of advanced technologies that help us deliver more content, more quickly, for less cost.
Segment and Geographic Information
We operate in one industry segment, providing content delivery and related services and solutions for global
businesses to help them deliver their digital content across Internet, mobile, and social channels. We operate in three geographic
areas - Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific. For the years ended December 31, 2014, 2013,
and 2012, approximately 38%, 31%, and 30%, respectively, of our total revenue was derived from our operations outside the
Americas. For the years ended December 31, 2014, 2013, and 2012, we derived approximately 55%, 57%, and 57%,
respectively of our international revenue from EMEA and approximately 45%, 43%, and 43%, respectively, of our international
revenue from Asia Pacific. During 2014 and 2012, we had two countries, Japan and the United States that represented more
than 10% of our total revenues. During 2013, no single country outside of the United States accounted for 10% or more of our
total revenues. For a description of risks attendant to our foreign operations, see the section titled “Risk Factors” set forth in
Part 1, Item 1A of this annual report on Form 10-K. For more segment and geographic information, including revenue from
customers, a measure of profit or loss, and total assets for each of the last three fiscal years, see our Consolidated Financial
Statements included in this annual report on Form 10-K, including Note 21 thereto.
Sales, Service and Marketing
Our sales and service professionals are located in six offices in the United States with an additional eleven office
locations in EMEA and Asia Pacific. We target media, high tech, software, gaming, enterprise, and other organizations for
which the delivery of digital content is critical to the success of their business.
Our sales and service organization includes employees in telesales and field sales, professional services, account
management, and solutions engineering. As of December 31, 2014, we had approximately 119 employees in our sales
organization. Our ability to achieve revenue growth in the future will depend in large part on whether we successfully recruit,
train, and retain sufficient sales, technical, and global services personnel, and how well we establish and maintain our
distribution and reseller relationships. We believe that the complexity of our services will continue to require highly trained
global sales and services personnel.
To support our sales efforts and promote the Limelight brand, we conduct marketing programs. Our marketing
strategies include an active public relations campaign, advertisements, events and trade shows, strategic alliances, and on-going
customer communication programs. As of December 31, 2014, we had 23 employees in our global marketing organization.
Customers
Our customers operate in the media, entertainment, gaming, software, enterprise, and other sectors. As of
December 31, 2014, we had approximately 1,095 active customers worldwide, including many widely recognized names in the
fields of video, digital music, news media, games, rich media applications, and software delivery. During 2014, some of our
most notable customers included ABC, Amazon, Apple, BBC, Bell Canada, Ciena, Fasig Tipton, NetApp, MLB, Middle East
Broadcasting Company, NBC, NFL, Microsoft, Netflix, Nintendo Wii, Nissan, QVC, Sony, Swiss Re and Yahoo!
For the year ended December 31, 2014, we had no customer who accounted for 10% or more of our total revenue.
During 2013 and 2012, we had one customer, Netflix who accounted for approximately 11% of our total revenue. In the past,
the customers that comprise our top 20 customers have continually changed, and our large customers may not continue to be as
significant going forward as they have been in the past.
From time to time we have discontinued service to customers for non-payment. Although we did not receive
continuing revenue from these former customers, these changes provided for a stronger mix of customers across our base,
decreased our days sales outstanding, and allowed us to recoup network capacity to help meet future growth needs. We continue
to focus on acquiring and retaining high quality customers across all market segments.
6
Competition
We operate in the digital content delivery market, which is rapidly evolving and highly competitive. We expect this
competitive environment to continue. We believe that the principal competitive factors affecting this market fall into three
primary categories: management, delivery, and metrics.
Management for digital content is measured by the features available for managing, publishing, and delivering digital
content across multiple channels and to multiple devices.
Delivery for digital content is measured by scale and performance. We measure scale by the number of physical
locations in the network and the capabilities of the network to deliver large amounts of content to locations around the world
and to absorb unplanned spikes in requests for content. We measure performance by file delivery time, end-user media
consumption rates, quality of the end-user experience, and scalability, both in terms of average capacity and special event
capacity.
In addition, metrics around the ability to efficiently locate and deliver web content, the ease of implementation, the
ability to customize systems for unique content types and mixes, reliability, security, consumer engagement, and cost efficiency
continue to be key criteria for this market.
The market for digital content delivery is increasingly complex and can require multiple vendors to provide customers
with a complete set of tools and services to manage and deliver all of their digital content to all audiences as part of a global
digital presence. We believe customers will increasingly look for a single vendor to help them deliver their digital content, to
lower costs in relationship and administration management, reduce risk to their business, increase overall quality and speed of
delivery, and improve and measure consumer engagement effectiveness.
We believe our integrated suite of services and solutions supported by our global network compete effectively in
digital content delivery and provide a competitive advantage in that our integrated suite coupled with our global network help
obviate the need for customers to seek and manage multiple vendors who provide multiple point solutions. We also believe the
combination of cloud-based software and infrastructure/bandwidth associated with the physical global network solve multiple
challenges for customers by removing the need to install, manage, or provision software and hardware to satisfy the
requirements for storing and delivering digital content.
We believe our future success will depend on our ability to continue to enhance the performance, integration, and
functionality of our existing suite of services and of our global network, and on our ability to add additional services and
functionality to meet the market’s increasing expectations regarding digital content delivery and consumer engagement.
The global digital content delivery market is fragmented, but we face primary competition from Akamai, and to a
lesser extent, Level 3 Communication. Other competitors in the market include Amazon, CDN Networks, ChinaCache, and
Edgecast, who was acquired by Verizon in 2014.
The principal methods of competition in this market include scale, performance, service, ease of use, product features,
and price. We believe we are competitive in scale, performance, and price, while focusing on rapid improvements in service
and ease of use. Product feature competition is heated, requiring continuous investment in innovation.
Research and Development
Our research and development organization is responsible for the design, development, testing, and certification of the
software, hardware, and network architecture of our global network and support of our content delivery and other Orchestrate
Platform solutions. As of December 31, 2014, we had 151 employees in our research and development group. Our research and
development personnel are primarily located in San Francisco, California; Boston, Massachusetts; Grand Rapids, Michigan;
New York, New York; Seattle, Washington; Tel Aviv, Israel; Lviv, Ukraine and at our headquarters in Tempe, Arizona. Our
engineering efforts support product development across all of our service areas, as well as innovation related to the global
network itself. We test our services to ensure scalability in times of peak demand. We use internally developed and third-party
software to monitor and to improve the performance of our network in the major Internet consumer markets around the world
where we provide services for our customers. Our research and development expenses were $20,965, $22,003 and $20,182 in
2014, 2013 and 2012, respectively, including stock-based compensation expense of $1,477, $2,256, and $2,743 in 2014, 2013,
and 2012, respectively.
7
Intellectual Property
Our success depends in part upon our ability to protect our core technology and other intellectual capital. To
accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights,
trademarks, domain registrations, and contractual protections.
As of December 31, 2014, we had received 113 patents in the United States, expiring between 2023 and 2034, the
Patent and Trademark Office had allowed four more U.S. applications, and we had 57 U.S. patent applications pending. We
have 18 issued patents in foreign countries. We do not know whether any of our patent applications will result in the issuance of
a patent or whether the examination process will require us to narrow our claims. Any patents that may be issued to us may be
contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing
them. Therefore, we cannot predict the exact effect of having a patent with certainty.
As of December 31, 2014, we had received five trademarks in the United States. Our name, Limelight Networks, has
been filed for multiple classes in the United States, Australia, Canada, the European Union, India, Japan, South Korea and
Singapore. We have seven pending trademark applications in foreign countries, and 22 non United States trademarks registered.
There is a risk that pending trademark applications may not issue, and that those trademarks that have issued may be challenged
by others who believe they have superior rights to the marks.
We generally control access to and use of our proprietary software and other confidential information through the use
of internal and external controls, including physical and electronic security, contractual protections with employees, contractors,
customers and partners, and domestic and foreign copyright laws.
Despite our efforts to protect our trade secrets and proprietary rights and other intellectual property rights by following
sound business practices, licenses, and confidentiality agreements, there is risk that unauthorized parties may still copy or
otherwise obtain and use our software and technology. In addition, we have been expanding our international operations, and
effective patent, copyright, trademark, and trade secret protection may not be available or may be limited in foreign countries.
Further, expansion of our business with additional employees, locations, and legal jurisdictions may create greater risk that our
trade secrets and proprietary rights will be harmed. If we fail to effectively protect our intellectual property and other
proprietary rights, our business could be harmed.
Third parties could claim that our products or technologies infringe their proprietary rights. The Internet content
delivery services industry is characterized by the existence of a large number of patents, trademarks, and copyrights and by
frequent litigation based on allegations of infringement or other violations of intellectual property rights. We expect that
infringement claims may further increase as the number of products, services, and competitors in our market increases. Further,
continued success in this market may provide an impetus to those who might use intellectual property litigation as a weapon
against us.
During 2014 we were party to a lawsuit alleging aspects of our content delivery network infringed upon third party
patent rights. More information about this case, Akamai Technologies, Inc. vs. Limelight Networks, Inc., is described in further
detail under “Legal Proceedings” in Part 1, Item 3 of this annual report on Form 10-K. We have been the target of intellectual
property infringement claims in the past and may be the target of such claims by third parties in the future.
Employees
As of December 31, 2014, we had 520 employees. Of these employees, 387 are based in the Americas, 96 are based in
EMEA and 37 are based in Asia Pacific. None of our employees are represented by a labor union, and we have not experienced
any work stoppages to date. We consider the relationships with our employees to be positive.
Executive Officers of the Registrant
Our executive officers and their ages and positions as of February 1, 2015 are as follows:
Name
Robert A. Lento
Peter J. Perrone
Philip C. Maynard
Charles Kirby Wadsworth
George E. Vonderhaar
Sajid Malhotra
Age
53
47
60
58
54
51
Position
President, Chief Executive Officer and Director
Senior Vice President, Chief Financial Officer and Treasurer
Senior Vice President, Chief Legal Officer and Secretary
Chief Marketing Officer
Chief Sales Officer
Senior Vice President, Strategy, Facilities, Investors Relations and Procurement
8
Robert A. Lento has served as our Chief Executive Officer since November 2012 and has served as a member of our
board of directors since January 2013. Prior to joining us, Mr. Lento was a senior sales executive at Convergys Corporation, a
provider of customer management services, from July 1998 to May 2012, most recently serving as President - Information
Management Division from September 2007 to May 2012. Prior to that, from 1997 to 1998, Mr. Lento served as President of
LAN Systems for Donnelly Enterprise Solutions, Inc., a provider of information management solutions. From 1989 to 1996,
Mr. Lento served in leadership positions at ENTEX Information Services, Inc., a provider of computing infrastructure services.
Mr. Lento received a B.S. in Management from the State University of New York.
Peter J. Perrone has served as our Senior Vice President, Chief Financial Officer and Treasurer since November
2013. Prior to that Mr. Perrone served as our Senior Vice President since joining the Company in August 2013. Prior to joining
us, Mr. Perrone was a Vice President in Goldman, Sachs & Co.’s Principal Investment Area since 2002 and became a Managing
Director in 2007. Prior to transferring to the Principal Investment Area in 2001, Mr. Perrone worked in the High Technology
Group at Goldman, Sachs & Co., where he started as an Associate in 1999. Mr. Perrone received a B.S. from Duke University,
an M.S. from the Georgia Institute of Technology and an M.B.A. from the Massachusetts Institute of Technology, Sloan School
of Management. Mr. Perrone previously served as a member of our board of directors since July 2006. Mr. Perrone resigned
from his position as a member of our board of directors, as a member of the Nominating and Governance Committee, and as a
member and the Chairman of the Compensation Committee in August 2013, prior to joining the Company. Mr. Perrone also
currently serves on the board of directors of Endurance International Group, Inc.
Philip C. Maynard has served as our Senior Vice President, Chief Legal Officer and Secretary since October 2007.
From August 2004 to October 2006, Mr. Maynard served as Senior Vice President, Chief Legal Officer and Secretary of FileNet
Corporation, a provider of data and content management software for managing and sharing information across corporate
networks and the Internet, and as Associate General Counsel for IBM Corporation from October 2006 to October 2007,
following IBM’s acquisition of FileNet. From March 2004 to August 2004, Mr. Maynard served as Executive Vice President
and Chief Legal Officer of SRS Labs, Inc., a leading provider of audio enhancement and integrated circuit solutions. From 2003
to 2004, Mr. Maynard was of counsel with the law firm of Stradling Yocca Carlson & Rauth in Newport Beach, California.
From 2000 to 2002, Mr. Maynard served as Vice President & Division General Counsel for Invensys Software Systems, a
division of Invensys, PLC, a UK-based engineering firm. From 1997 to 2000, Mr. Maynard was General Counsel for
Wonderware Corporation, a leading developer of industrial automation software solutions, which was acquired by Invensys.
Mr. Maynard received his J.D. (magna cum laude) from Loyola Law School in Los Angeles, California.
Charles Kirby Wadsworth has served as our Chief Marketing Officer since June 2012. Prior to joining us, Mr.
Wadsworth served as Vice President, Global Marketing for F5 Networks, Inc., a provider of cloud computing services, from
September 2007 to May 2012. Prior to that, Mr. Wadsworth served as Senior Vice President, Marketing and Business
Development for Acopia Networks, Inc., a provider of file virtualization services, from August 2006 to September 2007. Mr.
Wadsworth received an M.B.A. from the Kellogg School of Management at Northwestern University and a B.S. in Information
Systems from Northeastern University.
George E. Vonderhaar has served as our Chief Sales Officer since February 2013. Prior to joining us, Mr. Vonderhaar
served in various capacities for Convergys Corporation, a provider of customer management services, from 1984 through 2012,
including as Senior Vice President, General Manager - Cable and Satellite from January 2011 until the division was acquired by
NEC Corporation in May 2012, where Mr. Vonderhaar then served as Vice President, General Manager North America Cable
from May 2012 to July 2012. Mr. Vonderhaar also was Senior Vice President - Human Resources Management at Convergys
Corporation from April 2006 through June 2010, when the Human Resources Outsourcing division was acquired by
NorthgateArinso, where Mr. Vonderhaar then served as Vice President, Client Services and General Manager from June 2010 to
December 2010. Mr. Vonderhaar also served as General Manager - Mobile Cable Solutions Group at Convergys Corporation
from November 2004 to April 2006. Mr. Vonderhaar received a B.S. in Business Administration from Marquette University.
Sajid Malhotra has served as our Senior Vice President, Strategy, Facilities, Investor Relations and Procurement since
March 2014. Prior to joining us, from September 2012 to March 2013, Mr. Malhotra was an independent consultant focused on
strategic and financial consulting, communication and value creation. Prior to that, from 2006 to 2012, Mr. Malhotra was the
Senior Vice President of Strategy, Marketing and Mergers and Acquisitions for Convergys Corporation. Prior to joining
Convergys, Mr. Malhotra held several senior executive positions with NCR Corporation and AT&T. Mr. Malhotra earned his
bachelor’s degree in computer science and a master’s degree of business administration in finance from PACE University in
New York.
9
Item 1A.
Risk Factors
You should carefully consider the risks described below. These risks are not the only risks that we may face. Additional
risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that
affect us. If any of the following risks occurs, our business, financial condition or results of operations could be materially and
adversely affected which could cause our actual operating results to differ materially from those indicated or suggested by
forward-looking statements made in this annual report on Form 10-K or presented elsewhere by management from time to time.
Risks Related to Our Business
We currently face competition from established competitors and may face competition from others in the future.
We compete in markets that are intensely competitive, rapidly changing and characterized by frequently declining
prices and vendors offering a wide range of alternate solutions. We have experienced and expect to continue to experience
increased competition on price, features, functionality, integration and other factors. Many of our current competitors, as well
as a number of our potential competitors, have longer operating histories, greater name recognition, broader customer
relationships and industry alliances and substantially greater financial, technical and marketing resources than we do. As a
consequence of the competitive dynamics in our market we have experienced reductions in our prices, and an increased
requirement for product advancement and innovation in order to remain competitive, which in turn adversely affect our
revenue, gross margin and operating results.
Our primary competitors for the content delivery service offering of our Orchestrate Platform include Akamai, Level 3
Communications, Amazon, CDNetworks, and Verizon Digital Media Services. Also, as a result of the growth of the content
delivery market, a number of companies have recently entered or are currently attempting to enter our market, either directly or
indirectly, some of which may become significant competitors in the future. Given the relative ease by which customers
typically can switch among content delivery service providers, differentiated offerings or pricing by competitors could lead to a
rapid loss of customers. Some of our current or potential competitors may bundle their offerings with other services, software
or hardware in a manner that may discourage content providers from purchasing the services that we offer. In addition, as we
expand internationally, we face different market characteristics and competition with local content delivery service providers,
many of which are very well positioned within their local markets. Increased competition could result in price reductions and
revenue shortfalls, loss of customers and loss of market share, which could harm our business, financial condition and results of
operations.
Our primary competitors for the other service offerings of our Orchestrate Platform include Brightcove, Ooyala
(recently acquired by Telstra), Fastly, Highwinds, Yotta, as well as open source product such as Kaltura. However, the
competitive landscape is different from content delivery in this area in that the process of changing vendors can be more costly
and complicated for the customer, which could make it difficult for us to attract new customers and increase our market share.
If we are unable to increase our customer base and increase our market share, our business, financial condition and results of
operations may suffer.
We generate our revenue primarily from the sale of content delivery services, and the failure of the market for these
services to expand as we expect or the reduction in spending on those services by our current or potential customers
would seriously harm our business.
While we offer our customers a number of services and solutions associated with our Orchestrate Platform, we
generate the majority of our revenue from charging our customers for the content delivered on their behalf through our global
network. We are subject to an elevated risk of reduced demand for these services. Furthermore, if the market for delivery of
rich media content in particular does not continue to grow as we expect or grows more slowly, then we may fail to achieve a
return on the significant investment we are making to prepare for this growth. Our success, therefore, depends on the continued
and increasing reliance on the Internet for delivery of media content and our ability to cost-effectively deliver these services.
Factors that may have a general tendency to limit or reduce the number of users relying on the Internet for media content, the
amount of content consumed by our customers’ users or the number of providers making this content available online include a
general decline in Internet usage, litigation involving our customers and third party restrictions on online content, including
copyright restrictions, digital rights management and restrictions in certain geographic regions, system impairments or outages,
including those caused by hacking or cyber attacks, as well as a significant increase in the quality or fidelity of offline media
content beyond that available online to the point where users prefer the offline experience. The influence of any of these factors
may cause our current or potential customers to reduce their spending on content delivery services, which would seriously harm
our operating results and financial condition.
10
If we are unable to sell our services at acceptable prices relative to our costs, our revenue and gross margins will
decrease, and our business and financial results will suffer.
Prices for content delivery services have fallen in recent years and are likely to fall further in the future. We have
invested significant amounts in purchasing capital equipment to increase the capacity of our global computing network. Our
investments in our infrastructure are based upon our assumptions regarding future demand and also prices that we will be able
to charge for our services. These assumptions may prove to be wrong. If the price that we are able to charge customers to
deliver their content falls to a greater extent than we anticipate, if we over-estimate future demand for our services or if our
costs to deliver our services do not fall commensurate with any future price declines, we may not be able to achieve acceptable
rates of return on our infrastructure investments and our gross profit and results of operations may suffer dramatically.
As we further expand our global network and the Orchestrate Platform, and as we refresh our network equipment, we
are dependent on significant future growth in demand for our services to justify additional capital expenditures. If we fail to
generate significant additional demand for our services, our results of operations will suffer, and we may fail to achieve planned
or expected financial results. There are numerous factors that could, alone or in combination with other factors, impede our
ability to increase revenue, moderate expenses or maintain gross margins, including:
•
•
•
•
•
•
•
•
•
•
continued price declines arising from significant competition;
increasing settlement fees for certain peering relationships;
failure to increase sales of our Orchestrate Platform services;
increases in electricity, bandwidth and rack space costs or other operating expenses, and failure to achieve
decreases in these costs and expenses relative to decreases in the prices we can charge for our Orchestrate
Platform services and products;
inability to maintain our prices relative to our costs;
failure of our current and planned services and software to operate as expected;
loss of any significant customers or loss of existing customers at a rate greater than our increase in new customers
or our sales to existing customers;
failure to increase sales of our Orchestrate Platform services to current customers as a result of their ability to
reduce their monthly usage of our services to their minimum monthly contractual commitment;
failure of a significant number of customers to pay our fees on a timely basis or at all or failure to continue to
purchase our Orchestrate Platform services in accordance with their contractual commitments; and
inability to attract high quality customers to purchase and implement our current and planned services.
A significant portion of our revenue is derived collectively from our video content management services, performance
services for website and web application acceleration, and cloud storage services. These services tend to have higher gross
margins than our content delivery services. We do not have a long history of offering these services, and we may not be able to
achieve the growth rates in such services revenue that we or our investors expect or have experienced in the past. There are
numerous companies that compete in providing these services, and many of these companies have greater financial and sales
resources than we do. We may not be successful in competing against current and new providers of these services. If we are
unable to achieve the growth rates in revenue that we expect for these service offerings, our revenue and operating results could
be significantly and negatively affected.
If we are unable to develop new services and enhancements to existing services or fail to predict and respond to
emerging technological trends and customers’ changing needs, our operating results and market share may suffer.
The market for our Orchestrate Platform services is characterized by rapidly changing technology, evolving industry
standards and new product and service introductions. Our operating results depend on our ability to understand user preferences
or predict industry changes, and modify our solutions and services on a timely basis or develop and introduce new services into
existing and emerging markets. The process of developing new technologies is complex and uncertain. We must commit
significant resources to developing new services or enhancements to our existing services before knowing whether our
investments will result in services the market will accept. Furthermore, we may not execute our technology initiatives
successfully because of errors in planning or timing, technical hurdles that we fail to overcome in a timely fashion,
misunderstandings about market demand or a lack of appropriate resources. As prices for content delivery services fall, we will
increasingly rely on new product offerings and other Orchestrate Platform service offerings to maintain or increase our gross
margins. Failures in execution, delays in bringing new or improved products or services to market, failure to effectively
integrate service offerings or market acceptance of new services we introduce could result in competitors providing those
solutions before we do, which could lead to loss of market share, revenue and earnings.
11
Rapidly evolving technologies or new business models could cause demand for our Orchestrate Platform services to
decline or could cause these services to become obsolete.
Customers, potential customers or third parties may develop technological or business model innovations that address
digital delivery requirements in a manner that is, or is perceived to be, equivalent or superior to our Orchestrate Platform
service offerings. This is particularly true as our customers increase their operations and begin expending greater resources on
delivering their content using third party solutions. If we fail to offer content delivery, video content management and other
related services that are competitive to in-sourced solutions, we may lose additional customers or fail to attract customers that
may consider pursuing this in-sourced approach, and our business and financial results would suffer.
Also, if competitors introduce new products or services that compete with or surpass the quality or the price or
performance of our services, we may be unable to renew our agreements with existing customers or attract new customers at
the prices and levels that allow us to generate attractive rates of return on our investment. We may not anticipate such
developments and may be unable to adequately compete with these potential solutions. In addition, our customers’ business
models may change in ways that we do not anticipate, and these changes could reduce or eliminate our customers’ needs for our
services. If this occurred, we could lose customers or potential customers, and our business and financial results would suffer.
As a result of these or similar potential developments, in the future it is possible that competitive dynamics in our
market may require us to reduce our prices faster than we anticipate, which could harm our revenue, gross margin and
operating results.
Failure to effectively enhance our sales and marketing capabilities could harm our ability to increase our customer base
and achieve broader market acceptance of our services.
Increasing our customer base and achieving broader market acceptance of our services will depend to a significant
extent on our ability to enhance our sales and marketing operations. We have a concentration of our sales force at our
headquarters in Tempe, Arizona but we also have a widely deployed field sales force. We have realigned our sales resources to
improve our sales productivity and efficiency and to bring our sales personnel closer to our current and potential customers.
Realigning our sales force has been and will continue to be expensive and could cause some near-term productivity
impairments. As a result, we may not be successful in improving the productivity and efficiency of our sales force, which could
cause our results of operations to suffer.
We believe that there is significant competition for both inside and direct sales personnel with the sales skills and
technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large
part, on our success in recruiting, training and retaining sufficient numbers of inside and direct sales personnel. New hires
require significant training and, in most cases, take a significant period of time before they achieve full productivity. Our recent
hires and planned hires may not become as productive as we would like, and we may be unable to hire or retain sufficient
numbers of qualified individuals in the future in the markets where we do business. Our business will be seriously harmed if
our sales force productivity efforts do not generate a corresponding significant increase in revenue.
Many of our significant current and potential customers are pursuing emerging or unproven business models, which, if
unsuccessful, or ineffective at monetizing delivery of their content, could lead to a substantial decline in demand for our
content delivery and other Orchestrate Platform services.
Because the proliferation of broadband Internet connections and the subsequent monetization of content libraries for
distribution to Internet users are relatively recent phenomena, many of our customers’ business models that center on the
delivery of rich media and other content to users remain unproven. Some of our customers will not be successful in selling
advertising, subscriptions, or otherwise monetizing the content we deliver on their behalf and consequently may not be
successful in creating a profitable business model. This will result in some of our customers discontinuing their Internet or web-
based business operations and discontinuing use of our services and solutions. Further, weakness and related uncertainty in the
global financial markets and economy - which has included, among other things, reductions in available capital and liquidity
from banks and other providers of credit, fluctuations in equity and currency values worldwide and concerns that portions of
the worldwide economy may be in a prolonged recessionary period - may materially adversely impact our customers’ access to
capital or willingness to spend capital on our services or, in some cases, ultimately cause the customer to file for protection
from creditors under applicable insolvency or bankruptcy laws or simply go out of business. This uncertainty may also impact
our customers’ levels of cash liquidity, which could affect their ability or willingness to timely pay for services that they will
order or have already ordered from us. From time to time we discontinue service to customers for non-payment of services. We
expect further customers may discontinue operations or not be willing or able to pay for services that they have ordered from
us. Further loss of customers may adversely affect our financial results.
12
We depend on a limited number of customers for a substantial portion of our revenue in any fiscal period, and the loss
of, or a significant shortfall in demand from these customers could significantly harm our results of operations.
During any given fiscal period, a relatively small number of customers typically account for a significant percentage
of our revenue. Sales to our top 20 customers in 2014 accounted for approximately 50% of our total revenue. During 2014, we
had no customer who represented 10% or more of our total revenue. Large customers may not continue to be as significant
going forward as they have been in the past.
In the past, the customers that comprised our top 20 customers have continually changed, and we also have
experienced significant fluctuations in our individual customers’ usage of our services. As a consequence, we may not be able
to adjust our expenses in the short term to address the unanticipated loss of a large customer during any particular period. As
such, we may experience significant, unanticipated fluctuations in our operating results which may cause us to not meet our
expectations or those of stock market analysts, which could cause our stock price to decline.
If we are unable to attract new customers or to retain our existing customers, our revenue could be lower than expected
and our operating results may suffer.
In addition to adding new customers, to increase our revenue, we must sell additional services to existing customers
and encourage existing customers to increase their usage levels. If our existing and prospective customers do not perceive our
services to be of sufficiently high value and quality, we may not be able to retain our current customers or attract new
customers. We sell our services pursuant to service agreements that generally include some form of financial minimum
commitment. Our customers have no obligation to renew their contracts for our services after the expiration of their initial
commitment, and these service agreements may not be renewed at the same or higher level of service, if at all. Moreover, under
some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms
of their agreements. Aside from minimum financial commitments, customers are not obligated to use our services for any
particular type or amount of traffic. These facts, in addition to the changing competitive landscape in our market, means that we
cannot accurately predict future customer renewal rates or usage rates. Our customers’ renewal rates may decline or fluctuate as
a result of a number of factors, including:
•
•
•
•
their satisfaction or dissatisfaction with our services;
the prices of our services;
the prices of services offered by our competitors;
discontinuation by our customers of their Internet or web-based content distribution business;
• mergers and acquisitions affecting our customer base; and
•
reductions in our customers’ spending levels.
If our customers do not renew their service agreements with us, or if they renew on less favorable terms, our revenue
may decline and our business may suffer. Similarly, our customer agreements often provide for minimum commitments that are
often significantly below our customers’ historical usage levels. Consequently, even if we have agreements with our customers
to use our services, these customers could significantly curtail their usage without incurring any penalties under our
agreements. In this event, our revenue would be lower than expected and our operating results could suffer.
It also is an important component of our growth strategy to market our services and solutions to particular industries or
market segments. As an organization, we may not have significant experience in selling our services into certain of these
markets. We have only recently begun a number of these initiatives, and our ability to successfully sell our services into these
markets to a meaningful extent remains unproven. If we are unsuccessful in such efforts, our business, financial condition and
results of operations could suffer.
Rapid increase in the use of mobile and alternative devices to access the Internet present significant development and
deployment challenges.
The number of people who access the Internet through devices other than PCs, including mobile devices, game
consoles and television set-top devices, has increased dramatically in the past few years. The capabilities of these devices are
advancing dramatically and the increasing need to provide a high quality video experience will present us and other providers
with significant challenges. If we are unable to deliver our service offerings to a substantial number of alternative device users
and at a high quality, or if we are slow to develop services and technologies that are more compatible with these devices, we
may fail to capture a significant share of an increasingly important portion of the market. Such a failure could limit our ability
to compete effectively in an industry that is rapidly growing and changing.
13
Any unplanned interruption or substantial and extensive degradation in the functioning of our network or services, or
attacks on our internal information technology systems, could lead to significant costs and disruptions that could reduce
our revenue and harm our business, financial results and reputation.
Our business is dependent on providing our customers with fast, efficient and reliable distribution of content delivery
and digital asset management services over the Internet every minute of every day. Many of our customers depend primarily or
exclusively on our services to operate their businesses. Consequently, any disruption, or substantial and extensive degradation
of our services could have a material impact on our customers’ businesses. Our network or services could be disrupted by
numerous events, including natural disasters, failure or refusal of our third party network providers to provide the necessary
capacity or access, failure of our software or global network infrastructure and power losses. In addition, we deploy our servers
in third party co-location facilities, and these third-party co-location providers could experience system outages or other
disruptions that could constrain our ability to deliver our services. We may also experience disruptions caused by software
viruses, unauthorized hacking of our systems, security breaches or other cyber attacks by unauthorized users. Any unauthorized
hacking of our systems or other cyber attacks by unauthorized users could lead to the unauthorized release of confidential
information that could damage our customers’ business and reputation, as well as our own.
We could experience a significant, unplanned disruption, or substantial and extensive degradation of our services, or
our network may fail in the future. Despite our significant infrastructure investments, we may have insufficient
communications and server capacity to address these or other disruptions, which could result in interruptions in our services.
Any widespread interruption or substantial and extensive degradation in the functioning of our Orchestrate Platform services
for any reason would reduce our revenue and could harm our business and financial results. If such a widespread interruption
occurred, or if we failed to deliver content to users as expected during a high-profile media event, game release or other well-
publicized circumstance, our reputation could be damaged severely. Moreover, any disruptions, significant degradation, or
security breaches could undermine confidence in our services and cause us to lose customers or make it more difficult to attract
new ones, either of which could harm our business and results of operations.
We are a party to a lawsuit with a significant competitor, and an adverse outcome in that lawsuit is possible, which
could have a significant, adverse effect on our financial condition and operations. If an injunction were entered against
us, it could force us to cease providing some significant portion of our content delivery services.
We are currently a defendant in one significant lawsuit (see discussion in “Legal Proceedings” in Part I, Item 3 of this
annual report on Form 10-K). The expenses of defending this lawsuit and other lawsuits to which we are or may become a
party, particularly fees paid to our lawyers and expert consultants, have been significant and may continue to adversely affect
our operating results during the pendency of such lawsuits. Also, this litigation has been a distraction to our management and
technical personnel.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in Akamai Technologies, Inc. v.
Limelight Networks, Inc. The court stated that the trial court correctly determined that we did not directly infringe Akamai’s
’703 patent, and as such it upheld the trial court’s decision to vacate the original jury’s damages award. The court also held that
we did not infringe Akamai’s ’413 or ’645 patents. However, a slim majority in this three-way divided opinion also announced
a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new
trial to attempt to prove that we induced our customers to infringe Akamai’s patent under the court’s new legal standard. We
filed a petition to appeal this sharply divided Court of Appeals decision to the Supreme Court. On January 10, 2014, the
Supreme Court granted our petition for writ of certiorari and did not act on Akamai's cross petition. On April 30, 2014, the
Supreme Court heard oral argument in our case. On June 2, 2014, the Supreme Court issued its decision and reversed the
Federal Circuit's decision, remanding the case back to that court. On July 24, 2014, the Federal Circuit issued an order vacating
its prior judgment, reinstating the appeals, dissolving its en banc status, and referring the case back to the original Court of
Appeals panel for further proceedings. The Federal Circuit heard arguments on September 11, 2014. An adverse ruling could
seriously impact our ability to conduct our business and to offer our products and services to our customers. A permanent
injunction could prevent us from operating our content delivery services or from delivering certain types of traffic, which could
impact the viability of those portions of our business. Any adverse ruling, in turn, would harm our revenue, market share,
reputation, liquidity and overall financial position.
We are from time to time party to other lawsuits in addition to that described above. Lawsuits are expensive to defend
and to prosecute, and require a diversion of management time and attention away from other activities to pursue the defense or
prosecution of such matters. Adverse ruling in such lawsuits either alone or cumulatively may have an adverse impact on our
revenue, expenses, market share, reputation, liquidity and overall financial position.
We need to defend our intellectual property and processes against patent or copyright infringement claims, which may
cause us to incur substantial costs and threaten our ability to do business.
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Companies, organizations or individuals, including our competitors and non-practicing entities (sometimes referred to
as NPEs), may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make,
use or sell our services or develop new services, which could make it more difficult for us to operate our business. From time to
time, we may receive inquiries from holders of patents inquiring whether we infringe their proprietary rights. Companies
holding Internet-related patents or other intellectual property rights are increasingly bringing suits alleging infringement of such
rights or otherwise asserting their rights and seeking licenses. In addition, many of our agreements with customers require us to
indemnify customers for third-party intellectual property infringement claims against them. Pursuant to such agreements, we
may be required to defend such customers against certain claims which could cause us to incur additional significant costs. Any
litigation or claims, whether or not valid, could result in substantial costs and diversion of resources. In addition, if we are
determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the
following:
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cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
pay substantial damages;
obtain a license from the holder of the infringed intellectual property right, which license may or may not be
available on reasonable terms or at all; or
redesign products or services.
If we are forced to take any of these actions, our business may be seriously harmed.
Our business may be adversely affected if we are unable to protect our intellectual property rights from unauthorized
use or infringement by third parties.
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. We have applied for patent protection in the United States and a number of foreign countries.
These legal protections afford only limited protection and laws in foreign jurisdictions may not protect our proprietary rights as
fully as in the United States. Monitoring infringement of our intellectual property rights is difficult, and we cannot be certain
that the steps we have taken will prevent unauthorized use of our intellectual property rights. Developments and changes in
patent law, such as changes in interpretations of the joint infringement standard, could restrict how we enforce certain patents
we hold. We also cannot be certain that any pending or future patent applications will be granted, that any future patent will not
be challenged, invalidated or circumvented, or that rights granted under any patent that may be issued will provide competitive
advantages to us.
We use certain “open-source” software the use of which could result in our having to distribute our proprietary
software, including our source code, to third parties on unfavorable terms, which could materially affect our business.
Certain of our service offerings use software that is subject to open-source licenses. Open-source code is software that
is freely accessible, usable and modifiable. Certain open-source code is governed by license agreements, the terms of which
could require users of such open-source code to make any derivative works of such open-source code available to others on
unfavorable terms or at no cost. Because we use open-source code, we may be required to take remedial action to protect our
proprietary software. Such action could include replacing certain source code used in our software, discontinuing certain of our
products or features or taking other actions that could divert resources away from our development efforts.
In addition, the terms relating to disclosure of derivative works in many open-source licenses are unclear. We
periodically review our compliance with the open-source licenses we use and do not believe we will be required to make our
proprietary software freely available. However, if a court interprets one or more such open-source licenses in a manner that is
unfavorable to us, we could be required to make some components of our software available at no cost.
If we fail to manage future growth effectively, we may not be able to market and sell our services successfully.
Our future operating results depend to a large extent on our ability to successfully manage our operations. For
example, we must be effective in training new sales personnel in our offerings to become productive and generate revenue,
forecasting revenue, controlling expenses and investments in anticipation of expanded operations, implementing and enhancing
our global network and administrative infrastructure, systems and processes, addressing new markets, and expanding our
international operations. A failure to manage our growth effectively could materially and adversely affect our ability to market
and sell our products and services.
Our business depends on a strong brand reputation, and if we are not able to maintain and enhance our brand, our
business will suffer.
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We believe that maintaining and enhancing the “Limelight Networks” brand is important to expanding our base of
customers and maintaining brand loyalty among customers and that the importance of brand recognition will increase due to
the growing number of competitors providing similar services and solutions. Maintaining and enhancing our brand may require
us to make substantial investments in research and development and in the marketing of our solutions and services and these
investments may not be successful. If we fail to promote and maintain the “Limelight Networks” brand, or if we incur
excessive expenses in this effort, our business and results of operations could be adversely impacted. We anticipate that, as our
market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and
expensive. Maintaining and enhancing our brand will depend largely on our ability to be a technology leader and to continue to
provide high quality solutions and services, which we may not do successfully.
Our results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of
securities analysts or investors, which could cause our stock price to decline.
Our results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If
our results of operations fall below the expectations of securities analysts or investors, the price of our common stock could
decline substantially. In addition to the effects of other risks discussed in this section, fluctuations in our results of operations
may be due to a number of factors, including:
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our ability to increase sales to existing customers and attract new customers to our content delivery and other
Orchestrate Platform services;
the addition or loss of large customers, or significant variation in their use of our content delivery and other
Orchestrate Platform services;
costs associated with current or future intellectual property lawsuits and other lawsuits;
service outages or third party security breaches to our platform or to one or more of our customers’ platforms;
the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our
business, operations and infrastructure;
the timing and success of new product and service introductions by us or our competitors;
the occurrence of significant events in a particular period that result in an increase in the use of our content
delivery and other Orchestrate Platform services, such as a major media event or a customer’s online release of a
new or updated video game or operating system;
changes in our pricing policies or those of our competitors;
the timing of recognizing revenue;
limitations of the capacity of our global network and related systems;
the timing of costs related to the development or acquisition of technologies, services or businesses;
the potential write-down or write-off of intangible or other long-lived assets;
general economic, industry and market conditions (such as the fluctuations experienced in the stock and credit
markets during the recent deterioration of global economic conditions) and those conditions specific to Internet
usage;
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limitations on usage imposed by our customers in order to limit their online expenses; and
• war, threat of war or terrorist actions, including cyber terrorism targeted broadly, at us, or our customers, or both,
and inadequate cyber security.
We believe that our revenue and results of operations may vary significantly in the future and that period-to-period
comparisons of our operating results may not be meaningful. You should not rely on the results of one period as an indication
of future performance.
We have a history of losses and we may not achieve or maintain profitability in the future.
Since 2006, we have been profitable only one year, which was as a result of a reversal of a significant reserve for
litigation. Our adoption of ASC 718 in 2006 substantially increased the amount of share-based compensation expense we
record and has had a significant impact on our results of operations. This significant amount of share-based compensation
expense reflects an increase in the level of stock options, restricted stock and restricted stock unit grants. Also, we have
incurred, and may continue to incur significant costs associated with litigation. Our share-based compensation expense and any
material ongoing litigation costs could adversely affect our ability to achieve and maintain profitability in the future.
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We also may not achieve sufficient revenue to achieve or maintain profitability and may continue to incur significant
losses in the future, which could cause the price of our common stock to decline. We may incur significant losses in the future
for a number of reasons, including slowing demand for our services, increasing competition and competitive pricing pressures,
any inability to generally provide our services in a cost-effective manner, as well as other risks described herein, and we may
encounter unforeseen expenses, difficulties, complications and delays, and other unknown factors.
We could incur charges due to impairment of goodwill and long-lived assets.
As of December 31, 2014, we had a goodwill balance of $76,133, which is subject to periodic testing for impairment.
Our long-lived assets also are subject to periodic testing for impairment. A significant amount of judgment is involved in the
periodic testing. Failure to achieve sufficient levels of cash flow could result in impairment charges for goodwill or fixed asset
impairment for long-lived assets, which could have a material adverse effect on our reported results of operations. Our goodwill
impairment analysis also includes a comparison of the aggregate estimated fair value of our reporting unit to our total market
capitalization. If our stock trades below our book value a significant and sustained decline in our stock price and market
capitalization could result in goodwill impairment charges. During times of financial market volatility, significant judgment
will be used to determine the underlying cause of the decline and whether stock price declines are short-term in nature or
indicative of an event or change in circumstances. Impairment charges, if any, resulting from the periodic testing are non-cash.
We may have difficulty scaling and adapting our existing architecture to accommodate increased traffic and technology
advances or changing business requirements, which could lead to the loss of customers and cause us to incur unexpected
expenses to make network improvements.
Our content delivery and other Orchestrate Platform services are highly complex and are designed to be deployed in
and across numerous large and complex networks. Our global network infrastructure has to perform well and be reliable for us
to be successful. The greater the user traffic and the greater the complexity of our solutions and services, the more resources we
will need to invest in additional infrastructure and support. Further, as a result of our on-going litigation in the Akamai
Technologies, Inc. v. Limelight Networks, Inc. lawsuit we made significant investment in designing and implementing changes
to our network architecture in order to implement our content delivery services in a manner we believe does not infringe the
claims of Akamai’s ’703 patent as alleged in the February 2008 trial. We have spent and expect to continue to spend substantial
amounts on the purchase and lease of equipment and data centers and the upgrade of our technology and network infrastructure
to handle increased traffic over our network, implement changes to our network architecture and integrate existing solutions
and to roll out new solutions and services. This expansion is expensive and complex and could result in inefficiencies,
operational failures or defects in our network and related software. If we do not implement such changes or expand
successfully, or if we experience inefficiencies and operational failures, the quality of our solutions and services and user
experience could decline. From time to time, we have needed to correct errors and defects in our software or in other aspects of
our network. In the future, there may be additional errors and defects that may harm our ability to deliver our services,
including errors and defects originating with third party networks or software on which we rely. These occurrences could
damage our reputation and lead us to lose current and potential customers. We must continuously upgrade our infrastructure in
order to keep pace with our customers’ evolving demands. Cost increases or the failure to accommodate increased traffic or
these evolving business demands without disruption could harm our operating results and financial condition.
Our operations are dependent in part upon communications capacity provided by third party telecommunications
providers. A material disruption of the communications capacity we have leased could harm our results of operations,
reputation and customer relations.
We lease private line capacity for our backbone from third party providers, including Global Crossing, a company that
was acquired by one of our direct competitors. Our contracts for private line capacity generally have terms of three to four
years. The communications capacity we have leased may become unavailable for a variety of reasons, such as physical
interruption, technical difficulties, contractual disputes, or the financial health of our third party providers. Alternative
providers are available; however, it could be time consuming and expensive to promptly identify and obtain alternative third
party connectivity. Failure of Global Crossing specifically could jeopardize utilization of the service fees prepaid by us under
our agreement with Global Crossing. Additionally, as we grow, we anticipate requiring greater private line capacity than we
currently have in place. If we are unable to obtain such capacity from third party providers on terms commercially acceptable to
us or at all, our business and financial results would suffer. We may not be able to deploy on a timely basis enough network
capacity to meet the needs of our customer base or effectively manage demand for our services.
Our business depends on continued and unimpeded access to third party controlled end-user access networks.
Our content delivery services depend on our ability to access certain end-user access networks in order to complete the
delivery of rich media and other online content to end-users. Some operators of these networks may take measures that could
degrade, disrupt or increase the cost of our or our customers’ access to certain of these end-user access networks by restricting
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or prohibiting the use of their networks to support or facilitate our services, or by charging increased fees to us, our customers
or end-users in connection with our services. A United States Court of Appeals ruling struck down FCC regulations that
prohibited phone and cable companies from discriminating among content producers in delivering data over their networks. As
a result, our customers could experience increased cost or slower data on these third-party networks. If we or our customers
experience increased cost in delivering content to end users as a result of this ruling, or otherwise, or if end users perceive a
degradation of quality, our business and that of our customers may be significantly harmed. This or other types of interference
could result in a loss of existing customers, increased costs and impairment of our ability to attract new customers, thereby
harming our revenue and growth.
In addition, the performance of our infrastructure depends in part on the direct connection of our global network to a
large number of end-user access networks, known as peering, which we achieve through mutually beneficial cooperation with
these networks. In some instances, network operators charge us for the peering connections. If, in the future, a significant
percentage of these network operators elected to no longer peer with our network or peer with our network on less favorable
economic terms, then the performance of our infrastructure could be diminished, our costs could increase and our business
could suffer.
If our ability to deliver media files in popular proprietary content formats was restricted or became cost-prohibitive,
demand for our content delivery services could decline, we could lose customers and our financial results could suffer.
Our business depends on our ability to deliver media content in all major formats. If our legal right or technical ability
to store and deliver content in one or more popular proprietary content formats, such as Adobe Flash, was limited, our ability to
serve our customers in these formats would be impaired and the demand for our content delivery and other Orchestrate
Platform services would decline by customers using these formats. Owners of propriety content formats may be able to block,
restrict or impose fees or other costs on our use of such formats, which could lead to additional expenses for us and for our
customers, or which could prevent our delivery of this type of content altogether. Such interference could result in a loss of
existing customers, increased costs and impairment of our ability to attract new customers, which would harm our revenue,
operating results and growth.
As part of our business strategy, we may acquire businesses or technologies and may have difficulty integrating these
operations.
We have completed a number of business acquisitions and may seek to acquire businesses or technologies that are
complementary to our business in the future. Acquisitions are often complex and involve a number of risks to our business,
including the difficulty of integrating the operations, services, solutions and personnel of the acquired companies, the potential
disruption of our ongoing business, the potential distraction of management, the possibility that our business culture and the
business culture of the acquired companies will not be compatible, the difficulty of incorporating or integrating acquired
technology and rights with or into our other services and solutions, expenses related to the acquisition and to the integration of
the acquired companies, the impairment of relationships with employees and customers as a result of any integration of new
personnel, risks related to the businesses of acquired companies that may continue to impact the businesses following the
merger and potential unknown liabilities associated with acquired companies. Any inability to integrate services, solutions,
operations or personnel in an efficient and timely manner could harm our results of operations.
If we are not successful in completing acquisitions that we may pursue in the future, we may be required to reevaluate
our business strategy, and we may incur substantial expenses and devote significant management time and resources without a
productive result. In addition, future acquisitions will require the use of our available cash or dilutive issuances of securities.
Future acquisitions or attempted acquisitions could also harm our ability to achieve profitability. We may also experience
significant turnover from the acquired operations or from our current operations as we integrate businesses.
If we are unable to retain our key employees and hire qualified sales and technical personnel, our ability to compete
could be harmed.
Our future success depends upon the continued services of our executive officers and other key technology, sales,
marketing and support personnel who have critical industry experience and relationships that they rely on in implementing our
business plan. There is increasing competition for talented individuals with the specialized knowledge to deliver Orchestrate
Platform services and this competition affects both our ability to retain key employees and hire new ones. Historically, we have
experienced a significant amount of employee turnover, especially with respect to our sales personnel. As a result, a significant
number of our sales personnel are relatively new and may need time to become fully productive. The loss of the services of any
of our key employees could disrupt our operations, delay the development and introduction of our services, and negatively
impact our ability to sell our services.
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Our senior management team has limited experience working together as a group, and may not be able to manage our
business effectively.
Six members of our senior management team, our President and Chief Executive Officer, Chief Financial Officer and
Treasurer, Chief Marketing Officer, Chief Sales Officer, our Senior Vice President of Development and Delivery, and our
Senior Vice President of Strategy, Corporate Development & Investor Relations have been hired by us since June 2012. In
addition, in late 2013, we eliminated the position of Chief Operating Officer and the responsibilities of this position were
distributed among the current management team. As a result, our senior management team has limited experience working
together as a group and is required to perform additional responsibilities. This lack of shared experience and experience with
these additional responsibilities could harm our senior management team’s ability to quickly and efficiently respond to
problems and effectively manage our business.
We face risks associated with international operations that could harm our business.
We have operations in numerous foreign countries and may continue to expand our sales and support organizations
internationally. As part of our growth strategy, we intend to expand our sales and support organizations internationally, as well
as to further expand our international network infrastructure. Expansion could require us to make significant expenditures,
including the hiring of local employees, in advance of generating any revenue. As a consequence, we may fail to achieve
profitable operations that will compensate our investment in international locations. We are subject to a number of risks
associated with international business activities that may increase our costs, lengthen our sales cycle and require significant
management attention. These risks include:
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increased expenses associated with sales and marketing, deploying services and maintaining our infrastructure in
foreign countries;
competition from local content delivery service providers, many of which are very well positioned within their
local markets;
challenges caused by distance, language and cultural differences;
unexpected changes in regulatory requirements preventing or limiting us from operating our global network or
resulting in unanticipated costs and delays;
interpretations of laws or regulations that would subject us to regulatory supervision or, in the alternative, require
us to exit a country, which could have a negative impact on the quality of our services or our results of operations;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
corporate and personal liability for violations of local laws and regulations;
currency exchange rate fluctuations and repatriation of funds;
potentially adverse tax consequences;
credit risk and higher levels of payment fraud; and
foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United
States.
International operations are subject to significant additional risks not generally faced in our domestic operations,
including, but not limited to, risks relating to legal systems that may not adequately protect contract and intellectual property
rights, policies and taxation, the physical infrastructure of the country, as well as risks relating to potential political turmoil and
currency exchange controls. There can be no assurance that these international risks will not materially adversely affect our
business. For example, our operations include software development and quality assurance activities in Ukraine, which is
currently experiencing a period of social unrest. Should there be significant productivity losses, or if we become unable to
conduct operations in Ukraine in the future, and our contingency plans are unsuccessful in addressing the related risks, our
business could be adversely affected.
We are subject to the effects of fluctuations in foreign exchange rates, which could affect our operating results.
The financial condition and results of operations of our operating foreign subsidiaries are reported in the relevant local
currency and are then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated U.S.
dollar financial statements. Also, although a large portion of our customer and vendor agreements are denominated in U.S.
dollars, we may be exposed to fluctuations in foreign exchange rates with respect to customer agreements with certain of our
international customers. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly
and may do so in the future. In addition to currency translation risk, we incur currency transaction risk whenever one of our
operating subsidiaries enters into a transaction using a different currency than the relevant local currency. Given the volatility
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of exchange rates, we may be unable to manage our currency transaction risks effectively. Currency fluctuations could have a
material adverse effect on our future international sales and, consequently, on our financial condition and results of operations.
Internet-related and other laws relating to taxation issues, privacy, data security and consumer protection and liability
for content distributed over our network, could harm our business.
Laws and regulations that apply to communications and commerce conducted over the Internet are becoming more
prevalent, both in the United States and internationally, and may impose additional burdens on companies conducting business
online or providing Internet-related services such as ours. Increased regulation could negatively affect our business directly, as
well as the businesses of our customers, which could reduce their demand for our services. For example, tax authorities abroad
may impose taxes on the Internet-related revenue we generate based on where our internationally deployed servers are located.
In addition, domestic and international taxation laws are subject to change. Our services, or the businesses of our customers,
may become subject to increased taxation, which could harm our financial results either directly or by forcing our customers to
scale back their operations and use of our services in order to maintain their operations. Also, the Communications Act of 1934,
as amended by the Telecommunications Act of 1996 (the “Act”), and the regulations promulgated by the Federal
Communications Commission under Title II of the Act, may impose obligations on the Internet and those participants involved
in Internet-related businesses. In addition, the laws relating to the liability of private network operators for information carried
on, processed by or disseminated through their networks are unsettled, both in the United States and abroad. Network operators
have been sued in the past, sometimes successfully, based on the content of material disseminated through their networks. We
may become subject to legal claims such as defamation, invasion of privacy and copyright infringement in connection with
content stored on or distributed through our network. In addition, our reputation could suffer as a result of our perceived
association with the type of content that some of our customers deliver. If we need to take costly measures to reduce our
exposure to the risks posed by laws and regulations that apply to communications and commerce conducted over the Internet,
or are required to defend ourselves against related claims, our financial results could be negatively affected.
Several other federal laws also could expose us to liability and impose significant additional costs on us. For example,
the Digital Millennium Copyright Act has provisions that limit, but do not eliminate, our liability for the delivery of customer
content that infringe copyrights or other rights, so long as we comply with certain statutory requirements. In addition, the
Children’s Online Privacy Protection Act restricts the ability of online services to collect information from minors and the
Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Also, there are emerging regulation and industry standards
regarding the collection and use of personal information and protecting the security of data on networks. Compliance with these
laws, regulations and standards is complex and any failure on our part to comply with these regulations may subject us to
additional liabilities.
Privacy concerns could lead to legislative and other limitations on our ability to use “cookies” and video player
“cookies” that are crucial to our ability to provide services to our customers.
Our ability to compile data for customers depends on the use of “cookies” and video player “cookies” to identify
certain online behavior that allows our customers to measure a website or video’s effectiveness. A cookie is a small file of
information stored on a user’s computer that allows us to recognize that user’s browser or video player when the user makes a
request for a web page or to play a video. Government authorities inside the United States concerned with the privacy of
Internet users have suggested limiting or eliminating the use of cookies. Bills aimed at regulating the collection and use of
personal data from Internet users are currently pending in United States Congress and many state legislatures. Attempts at such
regulation may be drafted in such a way as to limit or prohibit the use of technology like cookies, thereby creating restrictions
that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have
conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy.
Our foreign operations may also be adversely affected by regulatory action outside the United States. For example, the
European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information
regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that
imposes certain restrictions on the use of cookies and also places restrictions on the sending of unsolicited communications.
Each European Union member country was required to enact legislation to comply with the provisions of the electronic
communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws
limiting the use of user profiling, and other countries, both in and out of the European Union, may impose similar limitations.
Internet users may directly limit or eliminate the placement of cookies on their computers by using third-party
software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software and in their
video player software. Internet browser software upgrades also may result in limitations on the use of cookies. Technologies
like the Platform for Privacy Preferences Project may limit collection of cookies. Plaintiffs’ attorneys also have organized class
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action suits against companies related to the use of cookies and several companies, including companies in the Internet
advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and
use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to
collect such information. If our ability to use cookies were substantially restricted due to the foregoing, or for any other reason,
we would have to generate and use other technology or methods that allow the gathering of user data in order to provide
services to customers. This change in technology or methods could require significant re-engineering time and resources, and
may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods
might not be available on commercially reasonable terms, if at all. If the use of cookies is prohibited and we are not able to
efficiently and cost effectively create new technology, our business, financial condition and results of operations would be
materially adversely affected. In addition, any compromise of security that results in the release of Internet users’ and/or our
customers’ data could seriously limit the adoption of our service offerings as well as harm our reputation and brand, expose us
to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business.
The risk that these types of events could seriously harm our business is likely to increase as the amount of data stored for
customers on our servers and the number of countries where we operate has been increasing, and we may need to expend
significant resources to protect against security breaches, which could have an adverse effect on our business, financial
condition or results of operations.
If we are required to seek funding, such funding may not be available on acceptable terms or at all.
We may need to obtain funding due to a number of factors, including a shortfall in revenue, increased expenses, final
adverse judgments in litigation matters, increased investment in capital equipment or the acquisition of significant businesses or
technologies. We believe that our cash, cash equivalents and marketable securities classified as current plus cash from
operations will be sufficient to fund our operations and proposed capital expenditures for at least the next 12 months. However,
we may need or desire funding before such time. If we do need to obtain funding, it may not be available on commercially
reasonable terms or at all. If we are unable to obtain sufficient funding, our business would be harmed. Even if we were able to
find outside funding sources, we might be required to issue securities in a transaction that could be highly dilutive to our
investors or we may be required to issue securities with greater rights than the securities we have outstanding today. We might
also be required to take other actions that could lessen the value of our common stock, including borrowing money on terms
that are not favorable to us. If we are unable to generate or raise capital that is sufficient to fund our operations, we may be
required to curtail operations, reduce our capabilities or cease operations in certain jurisdictions or completely.
Our business requires the continued development of effective business support systems to support our customer growth
and related services.
The growth of our business depends on our ability to continue to develop effective business support systems. This is a
complicated undertaking requiring significant resources and expertise. Business support systems are needed for:
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implementing customer orders for services;
delivering these services; and
timely and accurate billing for these services.
Because our business plan provides for continued growth in the number of customers that we serve and services
offered, there is a need to continue to develop our business support systems on a schedule sufficient to meet proposed service
roll-out dates. The failure to continue to develop effective business support systems could harm our ability to implement our
business plans and meet our financial goals and objectives.
Divestiture of our businesses or product lines, including those that we have acquired or will acquire, may materially
adversely affect our financial condition, results of operations or cash flows, or may result in impairment charges that
may adversely affect our results of operations.
Divestitures involve risks, including difficulties in the separation of operations, services, products and personnel, the
diversion of management’s attention from other business concerns, the disruption of our business, the potential loss of key
employees and the retention of uncertain contingent liabilities related to the divested business, any of which could result in a
material adverse effect to our financial condition, results of operations or cash flows. Divestitures of previously acquired
businesses may result in significant asset impairment charges, including those related to goodwill and other intangible assets,
which could have a material adverse effect on our financial condition and results of operations. Future impairment may result
from, among other things, deterioration in the performance of the acquired business or product line, adverse market conditions
and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the
activities of the acquired business or product line, changes in accounting rules and regulations, and a variety of other
circumstances. The amount of any impairment is recorded as a charge to the statement of operations. We may never realize the
21
full value of our goodwill and intangible assets, and any determination requiring the write-off of a significant portion of these
assets may have an adverse effect on our financial condition and results of operations. We cannot assure you that we will be
successful in managing these or any other significant risks that we encounter in divesting a business or product line.
We have incurred, and will continue to incur significantly increased costs as a result of operating as a public company,
and our management is required to devote substantial time to compliance initiatives.
As a public company, we have incurred, and will continue to incur, significant expenses, including increased
accounting, legal and other professional fees, insurance premiums, investor relations costs, and costs associated with
compensating our independent directors. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
and the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Global Select
Market, impose additional requirements on public companies, including requiring changes in corporate governance practices.
For example, the listing requirements of the Nasdaq Global Select Market require that we satisfy certain corporate governance
requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder
meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct.
Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover,
these rules and regulations have increased our legal and financial compliance costs and make some activities more time-
consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain
director and officer liability insurance. These rules and regulations could also make it more difficult for us to identify and retain
qualified persons to serve on our board of directors, our board committees or as executive officers.
If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove
inaccurate, our actual results may be adversely affected.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments about, among other
things, taxes, revenue recognition, share-based compensation costs, contingent obligations and doubtful accounts. These
estimates and judgments affect the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges
accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our
estimates or the assumptions underlying them are not correct, we may need to accrue additional charges or reduce the value of
assets that could adversely affect our results of operations, investors may lose confidence in our ability to manage our business
and our stock price could decline.
If we fail to maintain proper and effective internal controls or fail to implement our controls and procedures with
respect to acquired or merged operations, our ability to produce accurate financial statements could be impaired, which
could adversely affect our operating results, our ability to operate our business and investors’ views of us.
We must ensure that we have adequate internal financial and accounting controls and procedures in place so that we
can produce accurate financial statements on a timely basis. We are required to spend considerable effort on establishing and
maintaining our internal controls, which is costly and time-consuming and needs to be re-evaluated frequently.
We have operated as a public company since June 2007, and we will continue to incur significant legal, accounting
and other expenses as we comply with the Sarbanes-Oxley Act of 2002, as well as new rules implemented from time to time by
the SEC and the Nasdaq Global Select Market. These rules impose various requirements on public companies, including
requiring changes in corporate governance practices, increased reporting of compensation arrangements and other
requirements. Our management and other personnel will continue to devote a substantial amount of time to these compliance
initiatives. Moreover, new rules and regulations will likely increase our legal and financial compliance costs and make some
activities more time-consuming and costly. These rules and regulations could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors, our board committees or as executive officers.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report our assessment of the
effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal
year. Furthermore, our independent registered public accounting firm, Ernst & Young LLP (EY), is required to report on
whether it believes we maintained, in all material respects, effective internal control over financial reporting as of the end of the
year. Our continued compliance with Section 404 will require that we incur substantial expense and expend significant
management time on compliance related issues, including our efforts in implementing controls and procedures related to
acquired or merged operations. We currently do not have an internal audit group and use an international accounting firm to
assist us with our assessment of the effectiveness of our internal controls over financial reporting. In future years, if we fail to
timely complete this assessment, or if EY cannot timely attest, there may be a loss of public confidence in our internal controls,
the market price of our stock could decline, and we could be subject to regulatory sanctions or investigations by the Nasdaq
22
Global Select Market, the SEC or other regulatory authorities, which would require additional financial and management
resources. In addition, any failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations
and affect our reported results of operations.
A change in accounting standards or practices can have a significant effect on our operating results and may affect our
reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations
of existing accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning
of current practices may adversely affect our reported financial results or the way we conduct our business.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been, and is likely to continue to be, volatile.
The trading prices of our common stock and the securities of technology companies generally have been highly
volatile. Factors affecting the trading price of our common stock will include:
•
•
•
•
•
•
•
variations in our operating results;
announcements of technological innovations, new services or service enhancements, strategic alliances or
significant agreements by us or by our competitors;
commencement or resolution of, our involvement in and uncertainties arising from, litigation, particularly our
current litigation with Akamai and MIT;
recruitment or departure of key personnel;
changes in the estimates of our operating results or changes in recommendations by any securities analysts that
elect to follow our common stock;
developments or disputes concerning our intellectual property or other proprietary rights;
the gain or loss of significant customers;
• market conditions in our industry, the industries of our customers and the economy as a whole; and
•
adoption or modification of regulations, policies, procedures or programs applicable to our business.
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence,
the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial
condition. The trading price of our common stock might also decline in reaction to events or speculation of events that affect
other companies in our industry even if these events do not directly affect us.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or
misleading opinion or report, our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities
analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding
our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or
trading volume to decline.
Insiders have substantial control over us and will be able to influence corporate matters.
As of December 31, 2014, our directors and executive officers and their affiliates beneficially owned, in the aggregate,
approximately 42% of our outstanding common stock, including approximately 31% beneficially owned by investment entities
affiliated with Goldman, Sachs & Co. These stockholders are able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or
other sale of our company or its assets. This concentration of ownership could limit other stockholders’ ability to influence
corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our
common stock to decline.
23
Because we may need to raise additional capital in the future to continue to expand our business and our research and
development activities, among other things, we may conduct additional equity offerings. If we or our stockholders sell
substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public
market, the market price of our common stock could fall. A decline in the market price of our common stock could make it
more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control
of our company and may affect the trading price of our common stock.
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law,
could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions:
•
•
•
•
•
•
•
establish that members of the board of directors may be removed only for cause upon the affirmative vote of
stockholders owning a majority of our capital stock;
authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase
the number of outstanding shares and thwart a takeover attempt;
limit who may call special meetings of stockholders;
prohibit stockholder action by written consent, thereby requiring stockholder actions to be taken at a meeting of
the stockholders;
establish advance notice requirements for nominations for election to the board of directors or for proposing
matters that can be acted upon at stockholder meetings;
provide for a board of directors with staggered terms; and
provide that the authorized number of directors may be changed only by a resolution of our board of directors.
In addition, Section 203 of the Delaware General Corporation Law, which imposes certain restrictions relating to
transactions with major stockholders, may discourage, delay or prevent a third party from acquiring us.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our global corporate headquarters is located in approximately 64,000 square feet of leased office space in Tempe,
Arizona. We also lease space for a data center and warehouse in Phoenix, Arizona. We lease offices in several other locations in
the United States, including in or near San Francisco, California; Boston, Massachusetts; New York, New York; Grand Rapids,
Michigan and Seattle, Washington. We also lease offices in Europe and Asia in or near London, England; Paris, France;
Munich, Germany; Lviv, Ukraine; Tokyo, Japan; and Seoul, Korea. We believe our facilities are sufficient to meet our needs for
the foreseeable future and, if needed, additional space will be available at a reasonable cost.
Item 3.
Legal Proceedings
We are involved in litigation with Akamai and the Massachusetts Institute of Technology (MIT) relating to a claim of
patent infringement. The action was filed in June 2006 in the United States District Court for the District of Massachusetts. The
trial date was set for February 2008 with respect to four claims relating to United States Patent No. 6,108,703 (the ’703 patent).
Before trial, Akamai waived by stipulation its claims of indirect or induced infringement and proceeded to trial only on the
theory of direct infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that we infringed four claims
of the ’703 patent at issue and rejecting our invalidity defenses. The jury awarded an aggregate of approximately $45,500
which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31,
2007. In addition, the jury awarded pre-judgment interest which we estimated to be $2,600 at December 31, 2007. We recorded
the aggregate $48,100 as a provision for litigation as of December 31, 2007. During 2008, we recorded an additional provision
of approximately $17,500 for potential additional infringement damages and interest. On July 1, 2008, the court denied our
motions for JMOL, Obviousness, and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as
premature and denied its Motions for Summary Judgment regarding our equitable defenses. The court conducted a bench trial
in November 2008 regarding our equitable defenses. We also filed a motion for reconsideration of the court’s earlier denial of
our motion for JMOL. Our motion for reconsideration of JMOL was based largely upon a clarification in the standard for a
finding of joint infringement articulated by the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after
24
the court denied our initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting aside the
adverse jury verdict and ruling that we did not infringe Akamai’s ’703 patent and that we were entitled to JMOL. Based upon
the court’s April 24, 2009 order, we reversed the $65,600 provision for litigation previously recorded for this lawsuit as we no
longer believed that payment of any amounts represented by the litigation provision was probable. The court entered final
judgment in our favor on May 22, 2009, and Akamai filed a notice of appeal of the court’s decision on May 26, 2009. On
December 20, 2010, the Court of Appeals for the Federal Circuit issued its opinion affirming the trial court’s entry of judgment
in our favor. On February 18, 2011, Akamai filed a motion with the Court of Appeals for the Federal Circuit seeking a
rehearing and rehearing en banc. On April 21, 2011, the Court of Appeals for the Federal Circuit issued an order denying the
petition for rehearing, granting the petition for rehearing en banc, vacating the December 20, 2010 opinion affirming the trial
court’s entry of judgment in our favor, and reinstated the appeal.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals
stated that the trial court correctly determined we did not directly infringe Akamai’s ’703 patent and upheld the trial court’s
decision to vacate the original jury’s damages award. The Court of Appeals also held that we did not infringe Akamai’s ’413 or
’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement,
remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our
customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On December 28, 2012, we filed a
petition for writ of certiorari to the United States Supreme Court to appeal this sharply divided Court of Appeals decision.
Akamai then filed a cross petition for consideration of the Court of Appeals standard for direct infringement followed by an
opposition to our petition. On January 10, 2014, the Supreme Court granted our petition for writ of certiorari and did not act on
Akamai's cross petition. On April 30, 2014, the Supreme Court heard oral argument in our case. On June 2, 2014, the Supreme
Court issued its decision and reversed the Federal Circuit's decision, remanding the case back to that court. On July 24, 2014,
the Federal Circuit issued an order vacating its prior judgment, reinstating the appeals, dissolving its en banc status, and
referring the case back to the original Court of Appeals panel for further proceedings. The Federal Circuit heard arguments on
September 11, 2014. We do not believe an ultimate loss is probable. We will continue to vigorously defend against the
allegation; however, we cannot provide any assurance that the lawsuit ultimately will be resolved in our favor. An adverse
ruling could seriously impact our ability to conduct significant portions of our business and to offer certain of our products and
services to our customers. A permanent injunction could prevent us from operating our content delivery services or from
delivering certain types of traffic, which could impact the viability of those portions of our business. Any adverse ruling, in
turn, would harm our revenue, market share, reputation, liquidity and overall financial position. In light of the status of the
litigation, we believe that there is a reasonable possibility that we have incurred a loss related to the Akamai litigation. While
we believe that there is a reasonable possibility that a loss has been incurred, we are not able to estimate a range of the loss due
to the complexity and procedural status of the case and do not believe a loss is probable therefore, no provision for this lawsuit
is recorded in our consolidated financial statements.
In the ordinary course of our business, we are also involved in a number of other legal actions, both as plaintiff and
defendant, and could incur uninsured liability in any one or more of them. With respect to pending legal actions to which we
are a party, although the outcomes of these actions are not generally determinable, we believe that the ultimate resolution of
these matters will not have a material adverse effect on our financial position, cash flows or results of operations. Litigation
relating to the content delivery services industry is not uncommon, and we are, and from time to time have been, subject to
such litigation. No assurances can be given with respect to the extent or outcome of any such litigation in the future.
Item 4.
Mine Safety Disclosures.
Not applicable.
25
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock, par value $0.001 per share, trades on The Nasdaq Global Select Market under the symbol
“LLNW”.
The following table sets forth, for the periods indicated, the high and low sale price per share of our common stock on
The Nasdaq Global Select Market:
2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
$
$
$
$
$
$
$
2.52
2.50
2.56
2.08
2.39
3.25
3.15
2.99
$
$
$
$
$
$
$
$
2.03
1.80
1.89
1.82
1.88
1.91
2.16
2.11
As of February 10, 2015, there were 298 holders of record of our common stock.
Dividends
We have never paid or declared any cash dividends on shares of our common stock or other securities and do not
anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
Issuers Purchases of Equity Securities
The following is a summary of our repurchases of common stock during the three months ended December 31, 2014
(in thousands, except share and per share data):
Period
October 1, - October 31, 2014
November 1, - November 30, 2014
December 1, - December 31, 2014
Total Number of
Shares Purchased
Average Price Paid
Per Share (1)
—
247,000
524,543
771,543
—
2.81
2.84
______________
(1)
Includes commissions, markups and expenses
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (2)
12,509
11,818
10,338
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
—
247,000
524,543
771,543
(2)
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. Under the current
authorization, we may repurchase shares periodically in the open market or through privately negotiated transactions,
26
in accordance with applicable securities rules regarding issuer repurchases. All repurchased shares were cancelled and
returned to authorized but unissued status.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock between
December 31, 2009 and December 31, 2014, with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the
S&P Information Technology Sector Index, over the same period. This graph assumes the investment of $100 on December 31,
2009 in our common stock, the Nasdaq Composite Index and the S&P Information Technology Sector Index, and assumes the
reinvestment of dividends, if any. The comparisons shown in the graph below are based upon historical data. We caution that
the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the
potential future performance of our common stock.
This graph assumes an investment on December 31, 2009 of $100 in our common stock (based on the closing sale
price of our common stock), and in each of such indices (including the reinvestment of all dividends). Measurement points are
to the last trading day for each respective period. The performance shown is not necessarily indicative of future performance.
27
Item 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial
Statements and related notes and with “Management Discussion and Analysis of Financial Condition and Results of
Operations” and other financial data included elsewhere in this annual report on Form 10-K. In January 2010 and April 2010,
we acquired chors GmbH (chors) and EyeWonder, LLC (EyeWonder), respectively. On September 1, 2011, we completed the
sale of EyeWonder and chors video and rich media advertising services to DG FastChannel, Inc. (DG). Accordingly, the results
related to the sale of EyeWonder and chors for the year ended December 31, 2011 and prior periods have been reclassified to
discontinued operations and have not been included in our selected financial data and management’s discussion and analysis of
financial condition and results of operations. On December 23, 2013, we sold our Web Content Management business resulting
in a gain on sale of $3,836 which is included in Other, net, for the year ended December 31, 2013. This sale was not treated as a
discontinued operation because the operations and cash flows of our Web Content Management business cannot be clearly
distinguished, operationally or for financial reporting purposes, from the rest of the Company. All information is presented in
thousands, except per share amounts, customer count and where specifically noted.
Revenues
Cost of revenue:
Cost of services (1)
Depreciation — network
Total cost of revenue
Gross profit
Operating expenses:
General and administrative (1)
Sales and marketing (1)
Research and development (1)
Depreciation and amortization
Total operating expenses
Operating loss
Other income (expense):
Interest expense
Interest income
Gain on sale of cost basis investment
Other, net
Total other income (expense)
Loss from continuing operations before
income taxes
Income tax provision (benefit)
Loss from continuing operations
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes
Net loss
Net (loss) income per share:
Basic and diluted
Continuing operations
Discontinued operations
Total
Weighted average shares used in per share
calculation:
Basic and diluted
_______________
Limelight Networks, Inc.
Year Ended December 31,
2014
162,259
$
2013
173,433
$
2012
180,236
$
2011
171,292
$
2010
154,223
$
82,176
16,673
98,849
63,410
28,176
37,458
20,965
3,529
90,128
(26,718)
(32)
276
—
1,821
2,065
(24,653)
203
(24,856)
88,783
22,942
111,725
61,708
31,904
41,474
22,003
5,804
101,185
(39,477)
(76)
321
—
4,643
4,888
(34,589)
387
(34,976)
85,226
27,992
113,218
67,018
34,500
45,044
20,182
5,843
105,569
(38,551)
(177)
356
9,420
(602)
8,997
(29,554)
481
(30,035)
82,976
28,030
111,006
60,286
30,672
40,110
17,163
4,787
92,732
(32,446)
(299)
752
—
(311)
142
(32,304)
(2,238)
(30,066)
73,630
22,224
95,854
58,369
28,358
38,757
10,895
2,460
80,470
(22,101)
(62)
910
—
(250)
598
(21,503)
727
(22,230)
265
$
(24,591) $
(426)
(35,402) $
(2,861)
(32,896) $
4,778
(25,288) $
1,879
(20,351)
$
$
(0.25) $
—
(0.25) $
(0.36) $
(0.01)
(0.37) $
(0.30) $
(0.02)
(0.32) $
(0.28) $
0.05
(0.23) $
(0.24)
0.02
(0.22)
98,365
96,851
101,283
109,236
94,300
28
(1)
Includes share-based compensation as follows:
Cost of services
General and administrative
Sales and marketing
Research and development
Total
Consolidated Balance Sheet Data:
Cash and cash equivalents and marketable
securities, current
Non-current marketable securities
Working capital
Property and equipment, net
Total assets
Long-term debt, less current portion
Total stockholders’ equity
Limelight Networks, Inc.
Year Ended December 31,
2014
2013
2012
2011
2010
$
1,956
$
1,873
$
2,117
$
2,419
$
4,741
2,317
1,477
5,971
2,245
2,256
6,511
3,104
2,743
6,132
3,776
3,554
2,359
5,984
4,840
2,999
$
10,491
$
12,345
$
14,475
$
15,881
$
16,182
Limelight Networks, Inc.
Year Ended December 31,
2014
2013
2012
2011
2010
$
93,084
$
118,462
$
127,955
$
140,199
$
66,870
40
100,218
32,636
241,341
135
46
123,265
32,905
268,298
358
18
137,066
41,251
304,881
824
212,163
237,331
267,230
51
159,180
56,368
346,345
2,124
309,105
103
127,280
52,891
298,640
1,641
256,109
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements include, among other things, statements as to
industry trends, our future expectations, operations, financial condition and prospects, business strategies and other matters
that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These
statements are based on the beliefs and assumptions of our management based on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and
those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this annual report on Form 10-K. Given these
risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake
no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Prior period information has been modified to conform to current year presentation. All information is presented in thousands,
except per share amounts, customer count and where specifically noted.
Overview
We were founded in 2001 as a provider of content delivery network services to deliver digital content over the
Internet. We began development of our infrastructure in 2001 and began generating meaningful revenue in 2002. Today, we
operate a globally distributed, high-performance, computing platform (our global network) and provide a suite of integrated
services including content delivery services, video content management services, performance services for website and web
application acceleration, and cloud storage services. These four primary service groups work collectively to enable
organizations to deliver digital content to any device, anywhere in the world. The suite of services that we offer collectively
comprises our Limelight Orchestrate Platform (the Orchestrate Platform).
We derive revenue primarily from the sale of components of the Orchestrate Platform. Our delivery services represent
approximately 75% of our total revenue. We also generate revenue through the sale of professional services and other
infrastructure services, such as transit and rack space services. We believe continued increases in content delivery traffic
growth rates is an important trend that will continue to out pace declining average selling prices in the industry.
We compete in markets that are highly competitive. We have experienced and expect to continue to experience
increased competition in price, features, functionality, integration and other factors leading to customer churn and customers
operating their own network. During the third quarter of 2014, our content delivery contract with Netflix, Inc. (Netflix) expired.
Netflix represented approximately 11% of our annual revenue prior to such expiration.
Our international revenue continued to grow in 2014, and we expect this trend to continue as we focus on our strategy
of expanding our network and customer base internationally. For the years ended December 31, 2014, 2013, and 2012,
approximately 38%, 31%, and 30%, respectively, of our total revenue was derived from our operations outside the Americas.
In addition to these revenue-related trends, our profitability is impacted by trends in our costs of services and operating
expenses. We are working with our vendors to renegotiate our fixed rate infrastructure contracts to variable rate in order to
scale our operations based on traffic levels and lower bandwidth costs per unit. Our operating expenses are largely driven by
payroll and related employee costs. We increased headcount from 482 to 520 as of December 31, 2013 and 2014, respectively,
primarily in our operations and research and development organizations. We expect headcount will continue to increase as we
expand our business and continue our investments in research and development and increase our sales force.
We make our capital investment decisions based on careful evaluation of a number of variables, including the amount
of traffic we anticipate on our network, the cost of the physical infrastructure required to deliver such traffic, and the forecasted
capacity utilization of our network. Our capital expenditures have decreased the past two years from the higher levels
experienced during our network build-out. We expect an increase in capital expenditures in 2015 compared to 2014, to support
growth opportunities and to further upgrade and improve our global network and systems.
The following table summarizes our revenue, costs and expenses for the years ended December 31, 2014, 2013, and
2012 (in thousands of dollars and as a percentage of total revenue).
30
Revenues
Cost of revenue
Gross profit
Total operating expenses
Operating loss
Total other income
Loss from continuing operations before income taxes
Income tax provision
Loss from continuing operations
Discontinued operations:
2014
Year Ended December 31,
2013
2012
$ 162,259
98,849
100.0 % $ 173,433
111,725
60.9 %
100.0 % $ 180,236
113,218
64.4 %
63,410
90,128
(26,718)
2,065
(24,653)
203
(24,856)
39.1 %
55.5 %
(16.5)%
1.3 %
(15.2)%
0.1 %
(15.3)%
61,708
101,185
(39,477)
4,888
(34,589)
387
(34,976)
35.6 %
58.3 %
(22.8)%
2.8 %
(19.9)%
0.2 %
(20.2)%
67,018
105,569
(38,551)
8,997
(29,554)
481
(30,035)
100.0 %
62.8 %
37.2 %
58.6 %
(21.4)%
5.0 %
(16.4)%
0.3 %
(16.7)%
Income (loss) from discontinued operations, net of
income taxes
265
0.2 %
(426)
(0.2)%
(2,861)
(1.6)%
Net loss
$ (24,591)
(15.2)% $ (35,402)
(20.4)% $ (32,896)
(18.3)%
Use of Non-GAAP Financial Measures
To evaluate our business, we consider and use non-generally accepted accounting principles (Non-GAAP) net income
(loss) and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same
adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period
basis. We consider Non-GAAP net income (loss) to be an important indicator of overall business performance because it allows
us to evaluate results without the effects of share-based compensation, litigation expenses, amortization of intangibles,
acquisition related expenses, gain on sale of cost basis investment, discontinued operations and the gain on sale of our Web
Content Management (WCM) business. We define EBITDA from continuing operations as U.S. GAAP net income (loss) before
interest income, interest expense, gain on sale of cost basis investment, other income and expense, provision for income taxes,
depreciation and amortization, discontinued operations and gain on sale of WCM. We believe that EBITDA from continuing
operations provides a useful metric to investors to compare us with other companies within our industry and across industries.
We define Adjusted EBITDA as EBITDA from continuing operations adjusted for share-based compensation, litigation
expenses, and acquisition related expenses. We use Adjusted EBITDA as a supplemental measure to review and assess
operating performance. We also believe use of Adjusted EBITDA facilitates investors’ use of operating performance
comparisons from period to period, as well as across companies.
In our February 2, 2015 earnings press release, as furnished on Form 8-K, we included Non-GAAP net loss, EBITDA
from continuing operations and Adjusted EBITDA. The terms Non-GAAP net loss, EBITDA from continuing operations and
Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or
liquidity presented in accordance with U.S. GAAP. Our Non-GAAP net loss, EBITDA from continuing operations and Adjusted
EBITDA have limitations as analytical tools, and when assessing our operating performance, Non-GAAP net loss, EBITDA
from continuing operations and Adjusted EBITDA should not be considered in isolation, or as a substitute for net loss or other
consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not
limited to:
•
•
•
•
•
•
EBITDA from continuing operations and Adjusted EBITDA do not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for, our working capital needs;
they do not reflect the cash requirements necessary for litigation costs;
they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments,
on our debt that we may incur;
they do not reflect income taxes or the cash requirements for any tax payments;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be
replaced sometime in the future, and EBITDA from continuing operations and Adjusted EBITDA do not reflect any
cash requirements for such replacements;
31
• while share-based compensation is a component of operating expense, the impact on our financial statements
compared to other companies can vary significantly due to such factors as the assumed life of the options and the
assumed volatility of our common stock; and
•
other companies may calculate EBITDA from continuing operations and Adjusted EBITDA differently than we do,
limiting their usefulness as comparative measures.
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income
(loss), EBITDA from continuing operations, and Adjusted EBITDA only as supplemental support for management’s analysis of
business performance. Non-GAAP net income (loss), EBITDA from continuing operations and Adjusted EBITDA are
calculated as follows for the periods presented.
Reconciliation of Non-GAAP Financial Measures
In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly
comparable U.S. GAAP financial measures and reconciling the unaudited Non-GAAP financial metrics to the comparable U.S.
GAAP measures.
Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Loss
(Unaudited)
U.S. GAAP net loss
Share-based compensation
Litigation defense expenses
Acquisition related expenses
Amortization of intangible assets
Gain on sale of cost basis investment
Loss (gain) on sale of the WCM business
(Income) loss from discontinued operations
Non-GAAP net loss
Year Ended December 31,
2014
2013
2012
$
(24,591)
10,491
$
(35,402)
12,345
$
(32,896)
14,475
817
—
1,138
—
62
(265)
(12,348)
$
$
450
176
2,843
—
(3,836)
426
(22,998)
527
(388)
2,871
(9,420)
—
2,861
(21,970)
$
Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
(Unaudited)
U.S. GAAP net loss
Depreciation and amortization
Interest expense
Gain on sale of cost basis investment
Loss (gain) on sale of the WCM business
Interest and other (income) expense
Income tax provision
(Income) loss from discontinued operations
EBITDA from continuing operations
Share-based compensation
Litigation defense expenses
Acquisition related expenses
Adjusted EBITDA
32
Year Ended December 31,
$
$
2014
(24,591)
20,202
32
—
62
(2,159)
203
(265)
(6,516)
10,491
817
—
$
$
2013
(35,402)
28,746
76
—
(3,836)
(1,128)
387
426
(10,731)
12,345
450
176
$
$
$
4,792
$
2,240
$
2012
(32,896)
33,835
177
(9,420)
—
246
481
2,861
(4,716)
14,475
527
(388)
9,898
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires
management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial
statements and accompanying notes. Note 2 to the consolidated financial statements describes the significant accounting
policies and methods used in the preparation of the consolidated financial statements. The accounting policies described below
are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions,
and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from
the amounts reported based on these policies.
Revenue Recognition
We derive revenue primarily from the sale of services that comprise components of the Orchestrate Platform. Our
customers generally execute contracts with terms of one year or longer, which we refer to as recurring revenue contracts or
long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional
charges applicable for actual usage above the monthly minimum commitment. We define usage as customer data sent or
received using our content delivery service, or content that is hosted or cached by us at the request or direction of our
customer. We recognize the monthly minimum as revenue each month provided that an enforceable contract has been signed by
both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable, and collection is
reasonably assured. Should a customer’s usage of our services exceed the monthly minimum commit, we recognize revenue for
such excess in the period of the usage. For annual or other non-monthly period revenue commitments, we recognize revenue
monthly based upon the customer’s actual usage each month of the commitment period and only recognize any remaining
committed amount for the applicable period in the last month thereof.
Certain of our revenue arrangements consist of multi-element arrangements. Revenue arrangements with multiple
deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer. Our
multiple-element arrangements may include a combination of some or all of the following: content delivery services, video
content management services, performance services for website and web application acceleration, and cloud storage. Each of
these products has stand-alone value and is sold separately. In the absence of vendor specific objective evidence (VSOE) or
third-party evidence of selling prices, consideration would be allocated based on management’s best estimate of such prices.
The deliverables within multiple-element arrangements are provided over the same contract period, and therefore, revenue is
recognized over the same period.
We typically charge the customer an installation fee when the services are first activated. We do not charge installation
fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as revenue ratably over the
estimated life of the customer arrangement. Installation fees do not have standalone value.
We also derive revenue from services and events sold as discrete, non-recurring events or based solely on usage. For
these services, we recognize revenue after an enforceable contract has been signed by both parties, the fee is fixed or
determinable, the event or usage has occurred, and collection is reasonably assured.
At the inception of a customer contract for service, we make an assessment as to that customer’s ability to pay for the
services provided. If we subsequently determine that collection from the customer is not reasonably assured, we record an
allowance for doubtful accounts and bad debt expense or deferred revenue for all of that customer’s unpaid invoices and cease
recognizing revenue for continued services provided until cash is received.
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred
revenue primarily consists of the unearned portion of monthly billed service fees; prepayments made by customers for future
periods and deferred installation fees.
Accounts Receivable and Related Reserves
Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. We record reserves as a
reduction of our accounts receivable balance for service credits and for doubtful accounts. Estimates are used in determining
both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative
expenses.
Our allowance for doubtful accounts is based upon a calculation that uses our aging of accounts receivable and applies
a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve
percentages are determined based on our historical write-off experience. These estimates could change significantly if our
customers’ financial condition changes or if the economy in general deteriorates.
33
Our reserve for future service credits relates to service credits that are expected to be issued to customers during the
ordinary course of business, as well as for billing disputes. These credits typically relate to customer disputes and billing
adjustments and are estimated at the time the revenue is recognized and recorded as a reduction of revenues. Estimates for
service credits are based on an analysis of credits issued in previous periods.
Goodwill and Other Intangible Assets
We have recorded goodwill and other intangible assets as a result of our business acquisitions. Goodwill is recorded
when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible
assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer
base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill.
We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate
that goodwill might be impaired. We have concluded that we have one reporting unit and assigned the entire balance of
goodwill to this reporting unit. The estimated fair value of the reporting unit is determined using the Company’s market
capitalization as of its annual impairment assessment date or more frequently if circumstances indicate the goodwill might be
impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include
but are not limited to:
•
•
•
sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers,
loss of key personnel, emergence of new technologies or new competitors;
decline in overall market or economic conditions leading to a decline in our stock price; and
decline in observed control premiums paid in business combinations involving comparable companies.
The estimated fair value of the reporting unit is determined using a market approach. Our market capitalization is
adjusted for a control premium based on the estimated average and median control premiums of transactions involving
companies comparable to us. As of the annual impairment testing date of October 31, 2014 and in an interim impairment test
performed at December 31, 2014, we determined that goodwill was not impaired. We noted that the estimated fair value of our
reporting unit exceeded carrying value by approximately $117,330 or 53%, and $169,141 or 80%, using the market
capitalization plus an estimated control premium of 40% on the annual impairment testing date and December 31, 2014,
respectively. Adverse changes to certain key assumptions as described above could result in a future charge to earnings.
Our other intangible assets represent existing technologies and customer relationship intangibles. Other intangible
assets are amortized over their respective estimated lives, ranging from less than one year to six years. In the event that facts
and circumstances indicate intangibles or other long-lived assets may be impaired, we evaluate the recoverability and estimated
useful lives of such assets. Amortization of other intangible assets is included in depreciation and amortization in the
accompanying consolidated statements of operations.
Impairment and Useful Lives of Long-Lived Assets
We review our long-lived assets, such as fixed assets and amortizable intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would
trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset.
When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to
the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference
between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is
estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy
include forecasted usage of the long-lived assets, the useful lives of these assets, and expected future cash flows. Changes in
these estimates could materially impact results from operations.
Contingencies
We record contingent liabilities resulting from asserted and unasserted claims when it is probable that a loss has been
incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable
possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple
factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual
losses in any future period are inherently uncertain.
34
Deferred Taxes and Tax Reserves
Our 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 for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates
in effect during the years in which the differences are expected to reverse or the carryforwards are expected to be realized.
We currently have net deferred tax assets consisting of net operating loss 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. Forming a conclusion that a valuation allowance
is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent
cumulative losses, we have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. In the event we were to determine that we would be able to realize our deferred income tax assets in the
future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the
provision for income taxes in the period of such realization.
We have recorded certain tax reserves to address potential exposures involving our income tax and sales and use tax
positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by
different taxing jurisdictions. Our estimate of the value of our tax reserves contain 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 materially more or less than the amount that we estimated.
Uncertainty in income taxes is recognized in our financial statements under guidance that prescribes a two-step
process to determine the amount of tax benefit to be recognized. 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, 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. Our unrecognized tax benefit from uncertain tax positions increased by $286 from January 1, 2014 to
December 31, 2014. We anticipate that our unrecognized tax benefits may increase or decrease within twelve months of the
reporting date, as audits or reviews are initiated or settled and as a result of settling potential tax liabilities in certain foreign
jurisdictions. It is not currently reasonably possible to estimate the range of change. We recognize interest and penalties related
to unrecognized tax benefits in our tax provision.
Our effective tax rate is influenced by the recognition of tax positions pursuant to the more likely than not standard
that such positions will be sustained upon examination by the taxing authority. In addition, other factors such as changes in tax
laws, rulings by taxing authorities and court decisions, and significant changes in our operations through acquisitions or
divestitures can have a material impact on the effective tax rate. Differences between our estimated and actual effective income
tax rates and related liabilities are recorded in the period they become known.
We conduct business in various foreign countries. As a multinational corporation, we are subject to taxation in
multiple locations, and the calculation of our foreign tax liabilities involves dealing with uncertainties in the application of
complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities
will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no
longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is
less than we expect the ultimate assessment to be.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax
laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the
evolution of regulations and court rulings. Therefore, the actual liability for United States or foreign taxes may be materially
different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously
recorded tax liabilities.
Share-Based Compensation
We account for our share-based compensation awards using the fair-value method. The grant date fair value was
determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires us to
make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. Our expected
volatility is derived from our volatility rate as a publicly traded company. The expected term is based on our historical
experience. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for
zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. We have never
paid cash dividends and do not currently intend to pay cash dividends, and therefore, we have assumed a 0% dividend yield.
35
We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. We will continue
to use judgment in evaluating the expected term, volatility, and forfeiture rate related to our own share-based awards on a
prospective basis, and in incorporating these factors into the model. If our actual experience differs significantly from the
assumptions used to compute our share-based compensation cost, or if different assumptions had been used, we may have
recorded too much or too little share-based compensation cost.
We apply the straight-line attribution method to recognize compensation costs associated with awards that are not
subject to graded vesting. For awards that are subject to graded vesting and performance based awards, we recognize
compensation costs separately for each vesting tranche. We also estimate when and if performance-based awards will be
earned. If an award is not considered probable of being earned, no amount of share-based compensation is recognized. If the
award is deemed probable of being earned, related compensation expense is recorded over the estimated service period. To the
extent our estimates of awards considered probable of being earned changes, the amount of share-based compensation
recognized will also change.
Results of Continuing Operations
Comparison of the Years Ended December 31, 2014 and 2013
Revenue
We derive revenue primarily from the sale of components of the Orchestrate Platform. We also generate revenue
through the sale of professional services and other infrastructure services, such as transit and rack space services.
The following table reflects our revenue for the year ended December 31, 2014, compared to December 31, 2013:
Revenue
Year Ended December 31,
2014
2013
$
162,259
$ 173,433
Increase
(Decrease)
(11,174)
$
Percent
Change
(6.4)%
to:
•
•
•
Our revenue decreased during the year ended December 31, 2014 versus the comparable 2013 period primarily due
the sale of the Web Content Management (WCM) business in December 2013. Revenue from our WCM-related
business was approximately $12 million for the year ended December 31, 2013.
the expiration of our content delivery contract with Netflix in July 2014. Revenue from Netflix was approximately
$11 million and $20 million for the years ended December 31, 2014 and 2013, respectively.
our active customers worldwide decreased to 1,095 as of December 31, 2014 compared to 1,295 as of December 31,
2013. Approximately 25% of the decrease in customers is attributable to the sale of the WCM business.
Partially offsetting these decreases were increases in volume to several large customers as well as an increase in
average selling price for delivery of approximately 10% year over year.
During the year ended December 31, 2014 and 2013, sales to our top 20 customers accounted for approximately 50%
and 44%, respectively, of our total revenue. The customers that comprised our top 20 customers have continually changed,
and our large customers may not continue to be as significant going forward as they have been in the past.
During the year ended December 31, 2014, we had no customer who accounted for 10% or more of our total revenue.
For the year ended December 31, 2013, we had one customer, Netflix, who represented approximately 11% of our total
revenue.
36
Revenue by geography is based on the location of the customer from which the revenue is earned. The following
table sets forth revenue by geographic area:
Americas
EMEA
Asia Pacific
Total revenue
Year Ended December 31,
2014
2013
$ 101,302
62.5% $ 119,020
33,630
27,327
20.7%
16.8%
30,793
23,620
68.6%
17.8%
13.6%
$ 162,259
100.0% $ 173,433
100.0%
At this time, we anticipate revenues will range between $156 and $164 million in 2015.
Cost of Revenue
Cost of revenue consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for
non-settlement free peering and connection to Internet service providers or ISPs, and fees paid to data center operators for
housing of our network equipment in third party network data centers, also known as co-location costs. Cost of revenue also
includes leased warehouse space and utilities, depreciation of network equipment used to deliver our content delivery services,
payroll and related costs, and share-based compensation for our network operations and professional services personnel.
Other costs include professional fees and outside services, travel and travel-related expenses and royalty expenses.
Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
Bandwidth and co-location fees
Depreciation - network
Payroll and related employee costs
Share-based compensation
Other costs
Total cost of revenue
Year Ended December 31,
2014
2013
$
55,274
16,673
17,691
1,957
7,254
34.1% $
10.3%
10.9%
1.2%
4.5%
59,447
22,942
18,951
1,873
8,512
$
98,849
60.9% $
111,725
34.3%
13.2%
10.9%
1.1%
4.9%
64.4%
Our cost of revenue decreased in aggregate dollars and as a percentage of total revenue for the year ended
December 31, 2014 versus the comparable 2013 period, primarily as a result of the following:
•
•
•
•
decreased bandwidth and co-location fees as a result of our focus on renegotiating our fixed rate infrastructure
contracts to variable rate based on traffic levels. Additionally, during the third quarter of 2014, we recorded a
nonrecurring $1,100 credit related to an over billing from one of our co-location providers;
decreased network depreciation as a result of a decrease in capital expenditures beginning in 2012;
decreased payroll and related employee costs as a result of lower average salaries due to employee mix; and
decreased other costs primarily due to lower consulting fees.
Our network equipment is primarily depreciated over a three year useful life. Capital expenditures prior to 2012 were
much higher due to our network build-out. Over the past three years, capital expenditures have remained consistent. We
anticipate 2015 depreciation expense related to our network equipment to increase as we expect an increase in capital
expenditures over 2014 levels.
37
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total
revenue):
Payroll and related employee costs
Professional fees and outside services
Share-based compensation
Other costs
Total general and administrative
Year Ended December 31,
2014
2013
$
10,347
6.4% $
10,206
6,003
4,741
7,085
3.7%
2.9%
4.4%
7,762
5,971
7,965
5.9%
4.5%
3.4%
4.6%
$
28,176
17.4% $
31,904
18.4%
Our general and administrative expense decreased in aggregate dollars and as a percentage of total revenue for the
year ended December 31, 2014 versus the comparable 2013 period, primarily as a result of the following:
•
•
•
decreased professional fees and outside services primarily due to lower general legal fees (patent defense costs
and commercial and employment issues) and reduced consulting fees;
decreased share-based compensation; and
decreased other costs which was primarily lower facilities, bad debt expense and office supplies, partially offset
by increased franchise taxes and software fees.
We expect our general and administrative expenses to remain consistent with 2014 in aggregate dollars.
Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
Payroll and related employee costs
Share-based compensation
Marketing programs
Other costs
Total sales and marketing
Year Ended December 31,
2014
2013
$
24,016
14.8% $
24,799
14.3%
2,317
1,467
9,658
1.4%
0.9%
6.0%
$
37,458
23.1% $
2,245
2,822
11,608
41,474
1.3%
1.6%
6.7%
23.9%
Our sales and marketing expense decreased in aggregate dollars and as a percentage of total revenue for the year
ended December 31, 2014 versus the comparable 2013 period, primarily as a result of the following:
•
•
•
decreased payroll and related employee costs primarily due to reduced sales personnel and lower variable
compensation;
decreased marketing and public relations spending; and
decreased other costs primarily related to reduced subscription based services, lower facilities and facility related
costs, reduced costs associated with employee events, and lower travel related expenses.
We expect our sales and marketing expenses to increase in both aggregate dollars and as a percentage of revenue
compared to 2014 as we expand our sales workforce.
38
Research and Development
Research and development expense was composed of the following (in thousands and as a percentage of total
revenue):
Payroll and related employee costs
Share-based compensation
Other costs
Total research and development
Year Ended December 31,
2014
2013
$
15,887
9.8% $
16,568
1,478
3,600
0.9%
2.2%
2,256
3,179
9.6%
1.3%
1.8%
$
20,965
12.9% $
22,003
12.7%
Our research and development expense decreased in aggregate dollars and slightly increased as a percentage of total
revenue for the year ended December 31, 2014 versus the comparable 2013 period, primarily as a result of the following:
•
•
decreased payroll and related employee costs due to lower average salaries and transitioning of our network and
software engineering work to lower cost locations; and
decreased share-based compensation.
These decreases were partially offset by increased other costs primarily due to increased consulting and facilities
related expenses.
We expect our research and development expenses to increase in both aggregate dollars and as a percentage of
revenue compared to 2014.
Depreciation and Amortization (Operating Expenses)
Depreciation and amortization expense was $3,529, or 2.2% of revenue, for the year ended December 31, 2014
versus $5,804, or 3.3% of revenue, for the comparable 2013 period. This reduction was primarily due to lower amortization of
intangible assets. Depreciation expense consists of depreciation on equipment and furnishings used by general administrative,
sales and marketing, and research and development personnel. Amortization expense consists of amortization of intangible
assets acquired in business combinations and has decreased due to the sale of our WCM business in December 2013.
Interest Expense
Interest expense was $32 for the year ended December 31, 2014 versus $76 for the comparable 2013 period. Interest
expense is primarily comprised of interest paid on capital leases.
As of December 31, 2014, with the exception of our capital leases, we had no outstanding credit facilities.
Interest Income
Interest income was $276 for the year ended December 31, 2014 versus $321 for the comparable 2013 period.
Interest income includes interest earned on invested cash balances and marketable securities.
Other Income (Expense)
Other income (expense) was $1,821 for the year ended December 31, 2014 versus $4,643 for the comparable 2013
period. For the year ended December 31, 2014, other income (expense) consists primarily of foreign currency transaction
gains and losses, and also includes a working capital adjustment associated with the sale of our WCM business, and gains on
sale of assets.
For the year ended December 31, 2013, other income (expense) consists primarily of the gain on the sale of our
WCM business of approximately $3,836 as well as foreign currency transaction gains and losses.
Income Tax Expense
Income tax expense from continuing operations for the year ended December 31, 2014 was $203 versus $387 for the
comparable 2013 period. Income tax expense on the loss from continuing operations before taxes was different than the
statutory income tax rate primarily due to our providing for a valuation allowance on deferred tax assets in certain
jurisdictions, and recording of state and foreign tax expense for the year. The effective income tax rate is based primarily upon
39
income or loss for the year, the composition of the income or loss in different countries, and adjustments, if any, for the
potential tax consequences, benefits or resolutions for tax audits.
Income (Loss) from Discontinued Operations
Discontinued operations relate to our EyeWonder and chors rich media advertising services. On September 1, 2011,
we completed the sale of EyeWonder and chors to DG. See Note 5 of Notes to Consolidated Financial Statements included in
Part II, Item 8 of this annual report on Form 10-K for additional information about discontinued operations.
Comparison of the Years Ended December 31, 2013 and 2012
Revenue
The following table reflects our revenue for the year ended December 31, 2013 compared to December 31, 2012:
Revenue
Year Ended December 31,
2013
2012
$
173,433
$ 180,236
Increase
(Decrease)
(6,803)
$
Percent
Change
(3.8)%
Our revenue decreased during the year ended December 31, 2013 versus the comparable 2012 period primarily due to
customer churn, a decline in our average unit selling price, a decline in our transit and co-location services revenue,
professional services revenue, and content management revenue, the expiration of a reseller contract during the second quarter
of 2012, and foreign currency headwinds. These decreases were partially offset by increased video and performance services
revenue, increased traffic delivered and the addition of new customers.
As of December 31, 2013, we had 1,295 active customers worldwide compared to 1,451 as of December 31, 2012,
due in part to our continued selective approach to accepting profitable business by establishing a clear process for identifying
customers that value quality, performance, availability, and service. Despite adding many new customers during the year, we
ended 2013 with a net customer loss.
Revenue by geography is based on the location of the customer from which the revenue is earned. The following
table sets forth revenue by geographic area:
Americas
EMEA
Asia Pacific
Total revenue
Cost of Revenue
Year Ended December 31,
2013
2012
$
119,020
68.6% $
125,600
30,793
23,620
17.8%
13.6%
30,898
23,738
69.7%
17.1%
13.2%
$
173,433
100.0% $
180,236
100.0%
Cost of revenue was composed of the following (in thousands and as a percentage of total revenue):
Bandwidth and co-location fees
Depreciation - network
Payroll and related employee costs
Share-based compensation
Other costs
Total cost of revenue
Year Ended December 31,
2013
2012
$
59,447
22,942
18,951
1,873
8,512
34.3% $
13.2%
10.9%
1.1%
4.9%
56,716
27,992
18,075
2,117
8,318
$
111,725
64.4% $
113,218
31.5%
15.5%
10.0%
1.2%
4.6%
62.8%
40
Our cost of revenue decreased in aggregate dollars and increased as a percentage of total revenue for the year ended
December 31, 2013 versus the comparable 2012 period, primarily as a result of the following:
•
•
•
bandwidth and co-location fees which increased primarily due to increased peering costs and rack fees as a result of
an increase in traffic delivered;
payroll and related employee costs increased due to increased operations personnel; and
other costs increased due to higher consulting fees.
These increases were offset by a decrease in network depreciation as equipment becomes fully depreciated.
General and Administrative
General and administrative expense was composed of the following (in thousands and as a percentage of total
revenue):
Payroll and related employee costs
Professional fees and outside services
Share-based compensation
Bad debt expense
Other costs
Year Ended December 31,
2013
2012
$
10,206
5.9% $
7,762
5,971
965
7,000
4.5%
3.4%
0.6%
4.0%
9,388
8,123
6,511
2,010
8,468
5.2%
4.5%
3.6%
1.1%
4.7%
Total general and administrative
$
31,904
18.4% $
34,500
19.1%
Our general and administrative expense decreased in aggregate dollars and slightly decreased as a percentage of total
revenue for the year ended December 31, 2013 versus the comparable 2012 period, primarily as a result of the following:
•
•
•
a decrease in other costs which was primarily due to lower non-income taxes due to a recovery of use tax, decreased
fees and licenses and decreased facilities and facilities related costs;
decreased bad debt expense due to lower past due and unrecoverable amounts from certain customers; and
decreased stock based compensation for administrative personnel.
These decreases were partially offset by an increase in payroll and payroll related employee costs due to increased
salaries.
Sales and Marketing
Sales and marketing expense was composed of the following (in thousands and as a percentage of total revenue):
Payroll and related employee costs
Share-based compensation
Marketing programs
Other costs
Total sales and marketing
Year Ended December 31,
2013
2012
$
24,799
14.3% $
27,293
15.1%
2,245
2,822
11,608
41,474
$
1.3%
1.6%
6.7%
23.9% $
3,104
2,599
12,048
45,044
1.7%
1.4%
6.7%
25.0%
Our sales and marketing expense decreased in aggregate dollars and as a percentage of total revenue for the year
ended December 31, 2013 versus the comparable 2012 period, primarily as a result of the following:
•
payroll and related employee costs decreased due to lower salaries and lower variable compensation on reduced
revenue and lower headcount; and
•
stock-based compensation decreased due to lower headcount in our sales organization.
41
These decreases in costs were partially offset by an increase in marketing programs as a result of trade shows, the
announcement of Limelight Orchestrate V2.0 during the second quarter of 2013 and the announcement of Limelight
Orchestrate V2.5 during the fourth quarter of 2013.
Research and Development
Research and development expense was composed of the following (in thousands and as a percentage of total
revenue):
Payroll and related employee costs
Share-based compensation
Other costs
Year Ended December 31,
2013
2012
$
16,568
9.6% $
15,006
2,256
3,179
1.3%
1.8%
2,743
2,433
8.3%
1.5%
1.3%
Total research and development
$
22,003
12.7% $
20,182
11.2%
Our research and development expense increased in aggregate dollars and as a percentage of total revenue for the
year ended December 31, 2013 versus the comparable 2012 period, primarily as a result of the following:
•
increased payroll and related employee costs due to increased salaries for network and software engineering
personnel; and
•
increased other costs primarily due to higher consulting costs.
These increases in research and development expense were partially offset by a decrease in stock-based
compensation.
Depreciation and Amortization (Operating Expenses)
Depreciation and amortization expense was $5,804, or 3.3% of revenue, for the year ended December 31, 2013
versus $5,843, or 3.2% of revenue, for the comparable 2012 period. Depreciation expense consists of depreciation on
equipment and furnishings used by general administrative, sales and marketing, and research and development personnel.
Amortization expense consists of amortization of intangible assets acquired in business combinations.
Interest Expense
Interest expense was $76 for the year ended December 31, 2013 versus $177 for the comparable 2012 period. Interest
expense is primarily comprised of interest paid on capital leases.
As of December 31, 2013, with the exception of our capital leases, we had no outstanding credit facilities.
Interest Income
Interest income was $321 for the year ended December 31, 2013 versus $356 for the comparable 2012 period.
Interest income includes interest earned on invested cash balances and marketable securities.
Gain on Sale of Cost Basis Investment
In August 2012, we sold our strategic investment in Gaikai Inc. (Gaikai), a private cloud-based gaming company and
we recorded a gain on sale of our cost basis investment of $9,420.
Other Income (Expense)
Other income (expense) was $4,643 for the year ended December 31, 2013 versus $(602) for the comparable 2012
period. For the year ended December 31, 2013, other income (expense) consists primarily of the gain on the sale of our WCM
business of approximately $3,836 as well as foreign currency transaction gains and losses.
For the year ended December 31, 2012, other income (expense) consists primarily of foreign currency transaction
gains and losses.
42
Income Tax Expense
Based on an estimated annual effective tax rate and discrete items, income tax expense from continuing operations
for the year ended December 31, 2013 was $387 versus $481 for the comparable 2012 period. Income tax expense on the loss
from continuing operations before taxes was different than the statutory income tax rate primarily due to our providing for a
valuation allowance on deferred tax assets in certain jurisdictions, and recording of state and foreign tax expense for the year.
The effective income tax rate is based primarily upon forecasted income or loss for the year, the composition of the income or
loss in different countries, and adjustments, if any, for the potential tax consequences, benefits or resolutions for tax audits.
Gain (Loss) from Discontinued Operations
Discontinued operations relate to our EyeWonder and chors rich media advertising services. On September 1, 2011,
we completed the sale of EyeWonder and chors to DG. See Note 5 of Notes to Consolidated Financial Statements included in
Part II, Item 8 of this annual report on Form 10-K for additional information about discontinued operations.
Liquidity and Capital Resources
As of December 31, 2014, our cash, cash equivalents and marketable securities classified as current totaled $93,084.
Included in this amount is approximately $14,697 of cash and cash equivalents held outside the United States that would be
subject to withholding taxes upon repatriation.
The major components of changes in cash flows for the years ended December 31, 2014, 2013, and 2012 are discussed
in the following paragraphs.
Operating Activities
Net cash provided by operating activities of continuing operations decreased by $5,128 for the year ended
December 31, 2014 versus the comparable 2013 period. Changes in operating assets and liabilities of $3,651 during the year
ended December 31, 2014 versus $2,130 in the comparable 2013 period were primarily due to:
•
•
•
•
•
•
accounts receivable increased $1,600 during the year ended December 31, 2014 due to the timing of billings net of
collections as compared to a $2,581 decrease in the comparable 2013 period;
prepaid expenses and other current assets increased $1,792 during the year ended December 31, 2014 versus a
decrease of $1,222 for the comparable 2013 period due primarily to prepayment of software licenses in 2014
partially offset by amortization of prepaid bandwidth expenses;
other assets decreased $1,607 during the year ended December 31, 2014 versus a decrease of $519 for the
comparable 2013 period due to the amortization of bandwidth expenses paid in prior periods;
accounts payable increased $2,276 during the year ended December 31, 2014 versus a decrease of $2,192 for the
comparable 2013 period due to timing of vendor payments;
deferred revenue decreased $1,109 during the year ended December 31, 2014 versus an increase of $4 for the
comparable 2013 period due to changes in WCM deferred revenue balances in the prior period; and
other current liabilities decreased $2,154 during the year ended December 31, 2014 versus an increase of $384 for
the comparable 2013 period primarily due to the application of customer deposits to their receivable balances.
Net cash provided by operating activities of continuing operations decreased by $6,833 for the year ended
December 31, 2013 versus the comparable 2012 period. Changes in operating assets and liabilities of $2,130 during the year
ended December 31, 2013 versus $1,672 in the comparable 2012 period were primarily due to:
•
•
•
accounts receivable decreased $2,581 during the year ended December 31, 2013 due to the timing of billings net of
collections as compared to a $567 increase in the comparable 2012 period;
prepaid expenses and other current assets and other long-term assets decreased $1,741 due to the amortization of
certain prepaid vendor contracts and the collection of non-income tax related receivables during the year ended
December 31, 2013 versus the comparable 2012 period; and
accounts payable decreased $2,192 during the year ended December 31, 2013 versus the comparable 2012 period due
to timing of vendor payments.
Cash provided by operating activities may not be sufficient to cover new purchases of property and equipment during
2015 and potential litigation expenses associated with patent litigation. The timing and amount of future working capital
43
changes and our ability to manage our days sales outstanding will also affect the future amount of cash used in or provided by
operating activities.
Investing Activities
Net cash used in investing activities of continuing operations was $21,499 for the year ended December 31, 2014
versus $19,019 for the comparable 2013 period. Net cash used in investing activities was primarily related to the purchase of
marketable securities, and capital expenditures primarily for computer equipment associated with the build-out and expansion
of our global computing platform, offset by cash generated from maturities of marketable securities.
Net cash used in investing activities of continuing operations was $19,019 for the year ended December 31, 2013
versus $450 for the comparable 2012 period. Net cash used in investing activities was principally comprised of cash used for
the purchase of short-term marketable securities and capital expenditures primarily for computer equipment associated with the
build-out and expansion of our global computing platform, offset by cash generated from maturities of short-term marketable
securities, the proceeds from the sale of our WCM business, the receipt of proceeds from the sale of our investment in Gaikai
that had been held in an escrow account and the sale of discontinued operations.
We expect to have ongoing capital expenditure requirements as we continue to invest in and expand our content
delivery network. During 2014, we made capital expenditures of $18,581, which represented approximately 11% of our total
revenue. We expect an increase in capital expenditures in 2015 compared to 2014, to support growth opportunities and to
further upgrade and improve our global network and systems.
Financing Activities
Net cash used in financing activities of continuing operations was $5,422 for the year ended December 31, 2014
versus $8,922 for the comparable 2013 period. Net cash used in financing activities in the year ended December 31, 2014
related to payments made for the purchase of our common stock under our stock repurchase plans of $4,542, payments of
employee tax withholdings related to restricted stock units of $1,795 and payments made on our capital lease obligations of
$466, partially offset by cash received from the purchase of common stock through our employee stock purchase plan and cash
received from the exercise of stock options of $1,381.
Net cash used in financing activities of continuing operations was $8,922 for the year ended December 31, 2013
versus $23,093 for the comparable 2012 period. Net cash used in financing activities in the year ended December 31, 2013
related to payments made for the purchase of our common stock under our stock repurchase plans of $5,512, payments of
employee tax withholdings related to restricted stock units of $2,372 and payments made on our capital lease obligations of
$1,301, offset by cash received from the purchase of common stock through our employee stock purchase plan and cash
received from the exercise of stock options of $263.
On February 12, 2014, our board of directors authorized a $15,000 share repurchase program. During the year ended
December 31, 2014, we have purchased and canceled approximately 1,719 shares of our common stock. As of December 31,
2014, we had $10,338 remaining under this share repurchase authorization. We have continued making purchases under this
authorization into 2015. Between January 1, 2015 and January 31, 2015, we purchased and canceled approximately another 293
shares of our common stock, and now have $9,525 remaining under this share repurchase authorization. All repurchased shares
were canceled and returned to authorized but unissued status.
On October 29, 2012, our board of directors authorized and approved a common stock repurchase plan that authorized
us to repurchase up to $10,000 of our shares of common stock, exclusive of any commissions, markups or expenses, from time
to time through May 9, 2013. During 2013, we purchased and canceled approximately 2,300 shares under this repurchase plan.
Any repurchased shares were canceled and returned to authorized but unissued status.
As of December 31, 2014, we had no outstanding debt other than the aforementioned capital leases.
Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things,
working capital items such as deferred revenues, accounts payable, accounts receivable, accrued provision for litigation and
various accrued expenses, as well as changes in our capital and financial structure due to debt repurchases and issuances, stock
option exercises, sales of equity investments and similar events.
We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated
cash needs for at least the next 12 months. If the assumptions underlying our business plan regarding future revenue and
expenses change, or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or debt
securities.
44
Contractual Obligations, Contingent Liabilities, and Commercial Commitments
In the normal course of business, we make certain long-term commitments for operating leases, primarily office
facilities, bandwidth, and computer rack space. These leases expire on various dates ranging from 2015 to 2023. We expect that
the growth of our business will require us to continue to add to and increase our long-term commitments in 2015 and beyond.
As a result of our growth strategies, we believe that our liquidity and capital resources requirements will grow.
The following table presents our contractual obligations and commercial commitments, as of December 31, 2014 over
the next five years and thereafter (in thousands):
Payments Due by Period
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
$
18,386
$
12,472
$
24,245
15,062
57,693
376
769
19,193
3,990
35,655
238
576
$
5,401
4,355
5,932
15,688
138
193
$
513
697
4,129
5,339
—
—
$
58,838
$
36,469
$
16,019
$
5,339
$
—
—
1,011
1,011
—
—
1,011
Operating Leases
Bandwidth leases
Rack space leases
Real estate leases
Total operating leases
Capital leases
Other purchase obligations
Total commitments
Off Balance Sheet Arrangements
As of December 31, 2014, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii)
of SEC Regulation S-K.
New Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting
Policies - Recent Accounting Standards.”
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our debt and investment portfolio. In our
investment portfolio, we do not use derivative financial instruments. Our investments are primarily with our commercial and
investment banks and, by policy, we limit the amount of risk by investing primarily in money market funds, United States
Treasury obligations, high quality corporate and municipal obligations, and certificates of deposit. Our outstanding capital lease
obligations bear fixed interest rates and are not impacted by fluctuations in interest rates. We do not believe that a 10% change
in interest rates would have a significant impact on our interest income, operating results, or liquidity.
Foreign Currency Risk
We operate in the Americas, EMEA and Asia-Pacific. As a result of our international business activities, our financial
results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign
markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We have foreign
currency exchange rate exposure on our results of operations as it relates to revenues and expenses denominated in foreign
currencies. A portion of our cost of revenues and operating expenses are denominated in foreign currencies as are revenues
associated with certain international customers. To the extent that the U.S. dollar weakens, similar foreign currency
denominated transactions in the future will result in higher revenues and higher cost of revenues and operating expenses, with
expenses having the greater impact on our financial results. Similarly, our revenues and expenses will decrease if the
U.S. dollar strengthens against these foreign currencies. Although we will continue to monitor our exposure to currency
fluctuations, and, where appropriate, may use financial hedging techniques in the future to minimize the effect of these
fluctuations, we are not currently engaged in any financial hedging transactions. Assuming a 10% weakening of the U.S. dollar
45
relative to our foreign currency denominated revenues and expenses, our net loss for the year ended December 31, 2014 would
have been higher by approximately $3,019. There are inherent limitations in the sensitivity analysis presented, primarily due to
the assumption that foreign exchange rate movements across multiple jurisdictions are similar and would be linear and
instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex markets or other changes that
could arise which may positively or negatively affect our results of operations.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.
If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs
through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Credit Risk
During any given fiscal period, a relatively small number of customers typically account for a significant percentage
of our revenue. For example, in 2014, 2013, and 2012, sales to our top 20 customers accounted for approximately 50%, 44%
and 43%, respectively, of our total revenue. During 2014, we had no customer who represented 10% or more of our total
revenue. During 2013 and 2012, we had one customer, Netflix, who represented approximately 11% of our total revenue for
each year. In 2015, we anticipate that our top 20 customer concentration levels will remain consistent with 2014. In the past, the
customers that comprised our top 20 customers have continually changed, and our large customers may not continue to be as
significant going forward as they have been in the past.
46
Item 8.
Financial Statements and Supplementary Data
LIMELIGHT NETWORKS, INC.
Index to Consolidated Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Page
48
49
50
51
52
54
55
47
The Board of Directors and Stockholders of Limelight Networks, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Limelight Networks, Inc. as of December 31, 2014
and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Limelight Networks, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Limelight Networks, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated February 17, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 17, 2015
48
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Income taxes receivable
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Marketable securities, less current portion
Deferred income taxes, less current portion
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Deferred revenue
Capital lease obligations
Income taxes payable
Other current liabilities
Total current liabilities
Capital lease obligations, less current portion
Deferred income taxes
Deferred revenue, less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 7,500 shares authorized; 0 shares issued
and outstanding
Common stock, $0.001 par value; 300,000 shares authorized at December 31, 2014 and,
2013; 98,409 and 97,677 shares issued and outstanding at December 31, 2014 and
2013, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2014
December 31,
2013
$
$
$
$
$
$
$
57,767
35,317
22,622
237
78
9,625
125,646
32,636
40
1,364
76,133
1,071
4,451
241,341
7,065
3,509
223
248
14,383
25,428
135
170
405
3,040
29,178
85,956
32,506
21,430
371
93
8,192
148,548
32,905
46
1,307
77,035
2,354
6,103
268,298
5,473
3,523
466
799
15,022
25,283
358
321
1,500
3,505
30,967
—
—
98
464,294
(7,786)
(244,443)
212,163
241,341
$
98
458,748
(1,663)
(219,852)
237,331
268,298
The accompanying notes are an integral part of the consolidated financial statements.
49
Limelight Networks, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Revenues
Cost of revenue:
Cost of services (1)
Depreciation — network
Total cost of revenue
Gross profit
Operating expenses:
General and administrative
Sales and marketing
Research and development
Depreciation and amortization
Total operating expenses
Operating loss
Other income (expense):
Interest expense
Interest income
Gain on sale of cost basis investment
Other, net
Total other income (expense)
Loss from continuing operations before income taxes
Income tax provision
Loss from continuing operations
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes
Net loss
Net loss per share:
Basic and diluted
Continuing operations
Discontinued operations
Total
Years Ended December 31,
2014
162,259
$
2013
173,433
$
2012
180,236
$
82,176
16,673
98,849
63,410
28,176
37,458
20,965
3,529
90,128
(26,718)
(32)
276
—
1,821
2,065
(24,653)
203
(24,856)
88,783
22,942
111,725
61,708
31,904
41,474
22,003
5,804
101,185
(39,477)
(76)
321
—
4,643
4,888
(34,589)
387
(34,976)
85,226
27,992
113,218
67,018
34,500
45,044
20,182
5,843
105,569
(38,551)
(177)
356
9,420
(602)
8,997
(29,554)
481
(30,035)
265
(426)
(2,861)
(24,591) $
(35,402) $
(32,896)
(0.25) $
(0.36) $
—
(0.01)
(0.25) $
(0.37) $
(0.30)
(0.02)
(0.32)
$
$
$
Weighted average shares used in per share calculation:
Basic and diluted
98,365
96,851
101,283
____________
(1)
Cost of services excludes amortization related to intangibles, including existing technologies, customer relationships,
and trade names and trademarks, which are included in depreciation and amortization
The accompanying notes are an integral part of the consolidated financial statements.
50
LIMELIGHT NETWORKS, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive loss, net of tax:
Unrealized loss on marketable securities
Foreign exchange translation
Other comprehensive loss, net of tax
Comprehensive loss
Years Ended December 31,
2014
2013
2012
$
(24,591) $
(35,402) $
(32,896)
(68)
(6,055)
(6,123)
(30,714) $
(13)
(941)
(954)
(36,356) $
(28)
(172)
(200)
(33,096)
$
The accompanying notes are an integral part of the consolidated financial statements.
51
Limelight Networks, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
Balance at December 31, 2011
Common Stock
Shares
104,349
Amount
104
$
Additional
Paid-In
Capital
$ 460,845
Contingent
Consideration
219
$
Accumulated
Other
Comprehensive
Income (Loss)
$
Net loss
Change in unrealized loss on
available-for-sale
investments, net of taxes
Foreign currency
translation adjustment,
net of taxes
Exercise of common stock
options
Vesting of restricted stock units
Restricted stock units
surrendered in lieu of
withholding taxes
Common stock received from
escrow in settlement of
EyeWonder indemnity claims
Issuance of common stock for
contingent consideration
Issuance of common stock for
business acquisitions
Purchase of common
stock
—
—
—
175
2,451
—
—
—
—
3
—
—
—
190
(3)
(788)
(1)
(1,903)
(110)
61
350
—
—
—
(398)
186
—
(8,450)
(8)
(21,134)
—
98
—
—
—
—
2
14,475
$ 452,258
$
—
—
—
38
(2)
Share-based compensation -
continuing operations
Balance at December 31, 2012
—
98,038
$
Net loss
Change in unrealized
loss on available-for-sale
investments, net of taxes
Foreign currency translation
adjustment, net of taxes
Exercise of common stock
options
Vesting of restricted stock units
Restricted stock units
surrendered in lieu of
withholding taxes
Issuance of common stock for
settlement of contingent
consideration
Issuance of common stock
under employee stock
purchase plan
Purchase of common stock
Share-based compensation —
continuing operations
—
—
—
143
2,032
135
(2,089)
—
Balance at December 31, 2013
97,677
$
Net loss
—
(593)
—
(1,304)
11
—
33
(33)
—
(2)
—
98
—
225
(4,845)
12,345
$ 458,748
$
—
52
—
—
—
— $
—
—
—
—
—
—
—
—
(186)
—
—
—
33
—
—
—
—
—
—
$
Accumulated
Deficit
Total
(509) $ (151,554) $ 309,105
(32,896)
(32,896)
—
(28)
(172)
—
—
—
—
—
—
—
—
—
—
—
(28)
(172)
190
—
—
(1,904)
—
—
—
(398)
—
—
— (21,142)
—
—
14,475
(709) $ (184,450) $ 267,230
(35,402)
(35,402)
—
(13)
(941)
—
—
—
—
—
—
—
—
—
—
(13)
(941)
38
—
—
(1,304)
—
—
—
—
225
(4,847)
—
—
12,345
(1,663) $ (219,852) $ 237,331
(24,591)
(24,591)
—
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Contingent
Consideration
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Change in unrealized
loss on available-for-sale
investments, net of taxes
Foreign currency translation
adjustment, net of taxes
Exercise of common stock
options
Vesting of restricted stock units
Restricted stock units
surrendered in lieu of
withholding taxes
Issuance of common stock
under employee stock
purchase plan
Purchases of common stock
Share-based compensation —
continuing operations
Balance at December 31, 2014
—
—
522
2,385
—
—
1
2
—
—
893
(2)
(725)
(1)
(1,643)
269
(1,719)
—
98,409
$
—
(2)
—
98
488
(4,681)
10,491
—
—
—
—
—
—
—
—
(68)
(6,055)
—
—
—
—
—
—
—
—
—
(68)
(6,055)
894
—
—
(1,644)
—
—
488
(4,683)
—
10,491
(7,786) $ (244,443) $ 212,163
—
$ 464,294
$
— $
The accompanying notes are an integral part of the consolidated financial statements.
53
Limelight Networks, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net loss
Income (loss) from discontinued operations
Net loss from continuing operations
Adjustments to reconcile net loss from continuing operations to net cash provided by
operating activities of continuing operations:
Depreciation and amortization
Share-based compensation
Foreign currency remeasurement gain
Deferred income taxes
Loss on disposal of property and equipment
Accounts receivable charges
Amortization (accretion) of premium (discount) on marketable securities
Non cash tax benefit associated with sale of discontinued operations
Non cash increase in cost basis investment
Gain on sale of cost basis investment
Gain on sale of the Web Content Management business
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Income taxes receivable
Other assets
Accounts payable
Deferred revenue
Other current liabilities
Income taxes payable
Other long term liabilities
Net cash provided by operating activities of continuing operations
Investing activities
Purchase of marketable securities
Maturities of marketable securities
Purchases of property and equipment
Proceeds from the sale of cost basis investment
Proceeds from sale of the Web Content Management business
Proceeds from the sale of discontinued operations
Net cash used in investing activities of continuing operations
Financing activities
Payments on capital lease obligations
Payment of employee tax withholdings related to restricted stock
Cash paid for purchase of common stock
Proceeds from exercise of stock options and employee stock plan
Net cash used in financing activities of continuing operations
Effect of exchange rate changes on cash and cash equivalents
Discontinued operations
Cash used in operating activities of discontinued operations
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplement disclosure of cash flow information
Cash paid during the year for interest
Cash paid during the year for income taxes, net of refunds
Property and equipment remaining in accounts payable and other current liabilities
Property and equipment acquired through leasehold incentives
Contingent consideration common stock issued in connection with acquisition of businesses
Property acquired due to vendor concession
2014
Years Ended December 31,
2013
2012
$
(24,591) $
265
(24,856)
(35,402) $
(426)
(34,976)
(32,896)
(2,861)
(30,035)
20,202
10,491
(2,167)
(359)
—
408
459
(59)
—
—
—
(1,600)
(1,792)
150
1,607
2,276
(1,109)
(2,154)
(233)
(796)
468
(25,482)
22,150
(18,581)
—
—
414
(21,499)
(466)
(1,795)
(4,542)
1,381
(5,422)
(1,732)
(4)
(28,189)
85,956
57,767
$
32
647
2,983
$
$
$
— $
— $
— $
$
$
$
$
$
$
$
28,746
12,345
(531)
(328)
442
965
639
—
—
—
(3,836)
2,581
1,222
105
519
(2,192)
4
384
305
(798)
5,596
(59,047)
44,901
(18,575)
1,237
12,341
124
(19,019)
(1,301)
(2,372)
(5,512)
263
(8,922)
(606)
(8)
(22,959)
108,915
85,956
76
321
1,709
386
33
250
$
$
$
$
$
$
$
33,835
14,475
(103)
(38)
89
2,010
472
—
(528)
(9,420)
—
(567)
2,910
(440)
(1,626)
2,419
(137)
17
(255)
(649)
12,429
(27,280)
27,625
(18,390)
10,154
—
7,441
(450)
(1,749)
(683)
(20,851)
190
(23,093)
(171)
(149)
(11,434)
120,349
108,915
178
1,428
948
—
186
—
The accompanying notes are an integral part of the consolidated financial statements.
54
Limelight Networks, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
1. Nature of Business
Limelight Networks, Inc. (the Company) operates a globally distributed, high-performance network (its global
network) and provides a suite of integrated services including content delivery services, video content management services,
performance services for website and web application acceleration, and cloud storage services. These four primary service
groups work collectively to enable any organization to deliver digital content to any device, anywhere in the world.
The Company, incorporated in Delaware, has operated in the Phoenix metropolitan area since 2001 and elsewhere
throughout the United States since 2003. The Company began international operations in 2004.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP). The consolidated financial statements include accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated. In addition, certain other
reclassifications have been made to prior period amounts to conform to the current period presentation. All information is
presented in thousands, except per share amounts and where specifically noted.
During the year ended December 31, 2014, the Company recorded an immaterial error correction of approximately
$1,100 relating to previous over billings by a co-location provider. This correction was recorded as a reduction of costs of
revenues.
On September 1, 2011, the Company completed the sale of its EyeWonder LLC and subsidiaries and chors GmbH
video and rich media advertising services (EyeWonder and chors) to DG FastChannel, Inc. (DG). The sale of EyeWonder and
chors met the criteria for discontinued operations during the year ended December 31, 2011. Accordingly, the results of
operations related to EyeWonder and chors have been classified as discontinued operations in all periods presented. See further
discussion in Note 5.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP
requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results and outcomes may differ from those estimates. The results of
operations presented in this annual report on Form 10-K are not necessarily indicative of the results that may be expected for
the year ending December 31, 2015 or for any future periods.
Foreign Currency Translation
The Company analyzes the functional currency for each of its international subsidiaries periodically to determine if a
significant change in facts and circumstances indicate that the primary economic currency has changed. The Company
conducts business and generates revenue from an international customer base. The Company has sales, operations and finance
resources internationally and various contracts with the foreign subsidiaries to match foreign currency costs with foreign
currency revenues. Due to changes in exchange rates between reporting periods and changes in certain account balances, the
foreign currency translation adjustment will change from period to period. During the years ended December 31, 2014, 2013
and 2012, the Company recorded foreign currency translation losses of $6,055, $941 and $172, respectively, in its statements of
comprehensive loss. During the years ended December 31, 2014 and 2013, the Company recorded a foreign exchange gain of
approximately $1,489 and $92, respectively. During the year ended December 31, 2012, the Company recorded a foreign
exchange loss of approximately $513. The foreign exchange gains and losses are included in other income (expense) in the
consolidated statements of operations.
55
Recent Accounting Standards
Recently Adopted Accounting Standards
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional
disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations -
that is, a major effect on the organization's operations and financial results - should be presented as discontinued operations.
Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.
Additionally, this ASU requires expanded disclosures about discontinued operations that will provide financial statement users
with more information about the assets, liabilities, income, and expenses of discontinued operations. The Company will adopt
this guidance effective January 1, 2015. The new guidance would only impact the Company upon the reporting of discontinued
operations.
In May 2014, the FASB issued ASU 2014-09, which provides guidance for revenue recognition. The standard’s core
principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates than under today’s guidance. These may include
identifying performance obligations in the contract, estimating the amount of variable consideration to include in the
transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective
for the Company in the first quarter of 2017. Early adoption is not permitted. The standard permits the use of the retrospective
or cumulative effect transition method. The Company has not yet selected a transition method and is currently in the process of
evaluating the impact of adoption of this ASU on its consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU 2014-15, which provides guidance for disclosure of uncertainties about an
entity’s ability to continue as a going concern. ASU 2014-15 defines management's responsibility to assess an entity's ability to
continue as a going concern, and to provide related footnote disclosures in certain circumstances. This guidance will be
effective for the Company in the first annual period ending after December 15, 2016; however, early adoption is permitted. The
Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
Revenue Recognition
The Company derives revenue primarily from the sale of services that comprise components of its Orchestrate
Platform. The Company's customers generally execute contracts with terms of one year or longer, which are referred to as
recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level
of usage with additional charges applicable for actual usage above the monthly minimum commitment. The Company defines
usage as customer data sent or received using its content delivery service, or content that is hosted or cached by the Company at
the request or direction of its customer. The Company recognizes the monthly minimum as revenue each month provided that
an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is
fixed or determinable, and collection is reasonably assured. Should a customer’s usage of the Company's services exceed the
monthly minimum commitment, the Company recognizes revenue for such excess in the period of the usage. For annual or
other non-monthly period revenue commitments, the Company recognizes revenue monthly based upon the customer’s actual
usage each month of the commitment period and only recognizes any remaining committed amount for the applicable period in
the last month thereof.
Certain of the Company's revenue arrangements consist of multi-element arrangements. Revenue arrangements with
multiple deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer.
The Company's multiple-element arrangements may include a combination of some or all of the following: content delivery
services, video content management services, performance services for website and web application acceleration, and cloud
storage. Each of these products has stand-alone value and is sold separately. In the absence of vendor specific objective
evidence (VSOE) or third-party evidence of selling prices, consideration would be allocated based on management’s best
estimate of such prices. The deliverables within multiple-element arrangements are provided over the same contract period, and
therefore, revenue is recognized over the same period.
The Company typically charges the customer an installation fee when the services are first activated. The Company
does not charge installation fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as
revenue ratably over the estimated life of the customer arrangement. Installation fees do not have standalone value.
The Company also derives revenue from services and events sold as discrete, non-recurring events or based solely on
usage. For these services, the Company recognizes revenue after an enforceable contract has been signed by both parties, the
fee is fixed or determinable, the event or usage has occurred, and collection is reasonably assured.
56
At the inception of a customer contract for service, the Company makes an assessment as to that customer’s ability to
pay for the services provided. If the Company subsequently determines that collection from the customer is not reasonably
assured, the Company records an allowance for doubtful accounts and bad debt expense or deferred revenue for all of that
customer’s unpaid invoices and ceases recognizing revenue for continued services provided until cash is received.
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred
revenue primarily consists of the unearned portion of monthly billed service fees; prepayments made by customers for future
periods and deferred installation fees.
Cash and Cash Equivalents
The Company holds its cash and cash equivalents in checking, money market, and highly-liquid investments. The
Company considers all highly liquid investments with maturities of three months or less when purchased to be cash
equivalents.
Investments in Marketable Securities
Management determines the appropriate classification of its marketable securities at the time of purchase and
reevaluates such classification as of each balance sheet date. The Company has classified its investments in marketable
securities as available-for-sale. Available-for-sale investments are initially recorded at cost with temporary changes in fair value
periodically recorded through comprehensive income. Realized gains and losses and declines in value judged to be other than
temporary are determined based on the specific identification method and are reported in the statements of operations. The
Company periodically reviews its investments for other-than-temporary declines in fair value based on the specific
identification method and writes down investments to their fair value when an other-than-temporary decline has occurred.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. The Company records
reserves against its accounts receivable balance for service credits and for doubtful accounts. Estimates are used in determining
both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative
expenses.
The allowance for doubtful accounts is based upon a calculation that uses the Company’s aging of accounts receivable
and applies a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The
reserve percentages are determined based on the Company’s historical write-off experience. These estimates could change
significantly if the Company’s customers’ financial condition changes or if the economy in general deteriorates.
The Company’s reserve for service credits relates to credits that are expected to be issued to customers during the
ordinary course of business. These credits typically relate to customer disputes and billing adjustments and are estimated at the
time the revenue is recognized and recorded as a reduction of revenues. Estimates for service credits are based on an analysis of
credits issued in previous periods.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation or amortization. Depreciation and
amortization are computed using the straight-line method over the assets’ estimated useful lives of the applicable asset.
Network equipment
Computer equipment and software
Furniture and fixtures
Other equipment
3 years
3 years
3 years
3-5 years
Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the respective lease term.
Repairs and maintenance are charged to expense as incurred.
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of the acquired company.
Goodwill is not amortized but instead is tested for impairment annually or more frequently if events or changes in
circumstances indicate goodwill might be impaired. The estimated fair value of the reporting unit is determined using a market
approach. The Company’s market capitalization is adjusted for a control premium based on the estimated average and median
57
control premiums of transactions involving companies comparable to the Company. The Company has concluded that it has
one reporting unit and assigned the entire balance of goodwill to this reporting unit. As of the annual impairment testing date
of October 31, 2014 and in an interim impairment test performed at December 31, 2014, the Company determined that
goodwill was not impaired. The Company determined that the estimated fair value of its reporting unit exceeded carrying value
by approximately $117,330 or 53%, and $169,141 or 80%, using the market capitalization of the Company plus an estimated
control premium of 40% on October 31, 2014 and December 31, 2014, respectively.
The Company’s other intangible assets represent existing technologies and customer relationship intangibles. Other
intangible assets are amortized over their respective estimated lives, ranging from less than one year to six years. In the event
that facts and circumstances indicate intangibles or other long-lived assets may be impaired, the Company evaluates the
recoverability and estimated useful lives of such assets. Amortization of other intangible assets is included in depreciation and
amortization in the accompanying consolidated statements of operations.
Contingencies
The Company records contingent liabilities resulting from asserted and unasserted claims when it is probable that a
loss has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are disclosed when there is a
reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of
multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore,
actual losses in any future period are inherently uncertain.
Long-Lived Assets
The Company reviews its long-lived assets for impairment annually, or whenever events or circumstances indicate that
the carrying amount of an asset may not be fully recoverable. The Company recognizes an impairment loss if the sum of the
expected long-term undiscounted cash flows that the long-lived asset is expected to generate is less than the carrying amount of
the long-lived asset being evaluated. The Company treats any write-downs as permanent reductions in the carrying amounts of
the assets. The Company believes the carrying amounts of its long-lived assets at December 31, 2014 and 2013 are fully
realizable and has not recorded any impairment losses.
Deferred Rent and Lease Accounting
The Company leases bandwidth, co-location and office space in various locations. At the inception of each lease, the
Company evaluates the lease terms to determine whether the lease will be accounted for as an operating or a capital lease. The
term of the lease used for this evaluation includes renewal option periods only in instances where the exercise of the renewal
option can be reasonably assured and failure to exercise the option would result in an economic penalty. The Company records
tenant improvement allowances granted under the lease agreements as leasehold improvements within property and equipment
and within deferred rent.
For leases that contain rent escalation provisions, the Company records the total rent payable during the lease term on
a straight-line basis over the term of the lease (including any “rent free” period beginning upon possession of the premises), and
records any difference between the actual rent paid and the straight-line rent expense recorded as increases or decreases in
deferred rent.
Cost of Revenue
Cost of revenues consists primarily of fees paid to network providers for bandwidth and backbone, costs incurred for
non-settlement free peering and connection to Internet service provider networks and fees paid to data center operators for
housing network equipment in third party network data centers, also known as co-location costs. Cost of revenues also includes
leased warehouse space and utilities, depreciation of network equipment used to deliver the Company’s content delivery
services, payroll and related costs, and share-based compensation for its network operations, and professional services
personnel.
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 contracted minimums. A portion of the global computing platform traffic delivery is
completed through direct connection to ISP networks, called peering.
58
Research and Development
Research and development costs consist primarily of payroll and related personnel costs for the design, development,
deployment, testing, operation, and enhancement of the Company’s services, and network. Costs incurred in the development
of the Company’s services are expensed as incurred.
Advertising Costs
Costs associated with advertising are expensed as incurred. Advertising expenses, which are comprised of Internet,
trade show, and publications advertising, were approximately $1,409, $2,754, and $2,474 for the years ended December 31,
2014, 2013, and 2012, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized.
In making such determination, the Company considers all available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
In the event the Company was to determine that it would be able to realize its deferred income tax assets in the future in excess
of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the
provision for income taxes.
The Company recognizes uncertain income tax positions in its financial statements when it is more-likely-than-not the
position will be sustained upon examination.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value due to the nature and short maturity of
those instruments. The respective fair values of marketable securities are determined based on quoted market prices, which
approximate fair values. The carrying amounts of accounts receivable, accounts payable, and accrued liabilities reported in the
consolidated balance sheets approximate their respective fair values due to the immediate or short-term maturity of these
financial instruments.
Share-Based Compensation
The Company measures all employee share-based compensation awards using the fair-value method. The grant date
fair value was determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation
requires the Company to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and
dividend yield. The Company's expected volatility is derived from its own volatility rate as a publicly traded company. The
expected term is based on its historical experience. The risk-free interest factor is based on the United States Treasury yield
curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to
each grant’s expected term. The Company has never paid cash dividends and does not currently intend to pay cash dividends,
and therefore, has assumed a 0% dividend yield. The Company develops an estimate of the number of share-based awards that
will be forfeited due to employee turnover. The Company will continue to use judgment in evaluating the expected term,
volatility, and forfeiture rate related to its own share-based awards on a prospective basis, and in incorporating these factors
into the model.
The Company applies the straight-line attribution method to recognize compensation costs associated with awards that
are not subject to graded vesting. For awards that are subject to graded vesting and performance based awards, the Company
recognizes compensation costs separately for each vesting tranche. The Company also estimates when and if performance-
based awards will be earned. If an award is not considered probable of being earned, no amount of share-based compensation is
recognized. If the award is deemed probable of being earned, related compensation expense is recorded over the estimated
service period. To the extent the Company's estimates of awards considered probable of being earned changes, the amount of
share-based compensation recognized will also change.
59
3. Investments in Marketable Securities
The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2014:
Certificate of deposit
Commercial paper
Corporate notes and bonds
Convertible debt security
Total marketable securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
11,040
1,498
21,876
1,000
35,414
$
$
2
—
7
—
9
$
32
1
33
—
66
$
11,010
1,497
21,850
1,000
35,357
At December 31, 2014, the Company evaluated its marketable securities and determined unrealized losses were due to
fluctuations in interest rates. Management does not believe any of the unrealized losses represented an other-than-temporary
impairment based on its evaluation of available evidence as of December 31, 2014. The Company’s intent is to hold these
investments to such time as these assets are no longer impaired. The Company views its available-for-sale securities as
available for current operations.
The amortized cost and estimated fair value of the marketable debt securities at December 31, 2014, by maturity, are
shown below:
Available-for-sale securities
Due in one year or less
Due after one year and through five years
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
19,798
15,616
35,414
$
$
5
4
9
$
$
9
57
66
$
$
19,794
15,563
35,357
The following is a summary of marketable securities (designated as available-for-sale) at December 31, 2013:
Government agency bonds
Certificate of deposit
Commercial paper
Corporate notes and bonds
Publicly traded common stock
Total marketable securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
261
4,080
2,200
26,001
32,542
12
32,554
$
$
— $
—
—
15
15
—
15
$
— $
4
—
7
11
6
17
$
261
4,076
2,200
26,009
32,546
6
32,552
The amortized cost and estimated fair value of the marketable debt securities at December 31, 2013, by maturity, are
shown below:
Available-for-sale securities
Due in one year or less
Due after one year and through five years
4. Business Disposition
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
17,031
15,511
32,542
$
$
2
13
15
$
$
5
6
11
$
$
17,028
15,518
32,546
On December 23, 2013, the Company sold 100% of the outstanding common stock of its Web Content Management
(WCM) business for $12,341 in cash, net of preliminary working capital adjustments. After allocating goodwill of $3,799 to
60
WCM, the sale resulted in a gain of $3,836, which was included in Other, net in the consolidated statement of operations for the
year ended December 31, 2013. During the year ended December 31, 2014, the Company recorded a working capital
adjustment of $(62) (expense), related to new information subsequent to the closing of the acquisition, which is included in
Other, net in the consolidated statement of operations for the year ended December 31, 2014. This sale was not treated as a
discontinued operation because the operations and cash flows of the WCM business cannot be clearly distinguished,
operationally or for financial reporting purposes, from the rest of the Company.
5. Discontinued Operations
On September 1, 2011, the Company completed the sale of its EyeWonder and chors rich media advertising services to
DG for net proceeds of $61,000 plus an estimated $10,854 receivable from DG pursuant to the purchase agreement.
The $10,854 receivable from DG was determined by the Company based on estimated future cash payments equal to
the excess of certain current assets over certain current liabilities as of August 30, 2011. During 2013, the Company wrote-off
the remaining receivable balance of $412 from DG as it believed the balance was no longer collectible.
During the year ended December 31, 2014, the Company received $414 from DG as final settlement for the previously
written-off receivable. The Company recorded $269, ($414 cash received, net of tax of $145), as income from discontinued
operations during the year ended 2014.
Additionally, during the year ended December 31, 2014, the Company incurred $4 (net of tax) in expense related to
discontinued operations which is recorded in the accompanying consolidated statements of operations for the year ended
December 31, 2014.
During the year ended December 31, 2012, the Company recorded a charge to discontinued operations of $2,861 in
the consolidated statement of operations primarily comprised of $2,060 of allowance for doubtful accounts receivable and a
reduction of $818 related to Net Working Capital adjustments.
The sale of EyeWonder and chors met the criteria to be reported as discontinued operations. Accordingly, the operating
results of EyeWonder and chors have been reclassified to discontinued operations in the accompanying consolidated statements
of operations. The Company included only revenues and costs directly attributable to the discontinued operations in
determining income (loss) from discontinued operations, and not those attributable to the ongoing entity. Accordingly, no
general corporate overhead costs were allocated to discontinued operations.
Operating results of discontinued operations for the years ended December 31, 2014, 2013, and 2012, respectively, are
as follows:
General and administrative expenses
Gain (loss) on sale of discontinued operations, net of income taxes
Income (loss) before income taxes
Income tax expense
Income (loss) from discontinued operations
Income (loss) from discontinued operations per weighted average share:
Basic and diluted
Shares used in per weighted average share calculation for discontinued
operations:
Basic and diluted
Years Ended December 31,
2014
2013
2012
(4)
269
265
—
265
$
(15)
(411)
(426)
—
(426) $
163
(3,024)
(2,861)
—
(2,861)
— $
(0.01) $
(0.02)
$
$
98,365
96,851
101,283
61
6. Accounts Receivable
Accounts receivable include:
Accounts receivable
Unbilled accounts receivable
Less: credit allowance
Less: allowance for doubtful accounts
Total accounts receivable, net
7. Goodwill
December 31,
2014
2013
14,507
9,949
24,456
(380)
(1,454)
22,622
$
$
17,497
5,943
23,440
(610)
(1,400)
21,430
$
$
The Company has recorded goodwill as a result of its business acquisitions. Goodwill is recorded when the purchase
price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In
each of the Company’s acquisitions, the objective of the acquisition was to expand the Company’s product offerings and
customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of
goodwill.
The Company tests goodwill for impairment on an annual basis or more frequently if events or changes in
circumstances indicate that goodwill might be impaired. The Company concluded that it has one reporting unit and assigned
the entire balance of goodwill to this reporting unit during 2014. The estimated fair value of the reporting unit is determined
using the Company’s market capitalization as of its annual impairment assessment date or each reporting date if circumstances
indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in
estimating fair value include but are not limited to:
•
•
•
sustained decline in the Company’s stock price due to a decline in its financial performance due to the loss of key
customers, loss of key personnel, emergence of new technologies or new competitors;
decline in overall market or economic conditions leading to a decline in its stock price; and
decline in observed control premiums paid in business combinations involving comparable companies.
The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 were as follows:
Balance, December 31, 2012
Foreign currency translation adjustment
Disposition of the WCM business
Balance, December 31, 2013
Foreign currency translation adjustment
Balance, December 31, 2014
$
$
$
80,278
556
(3,799)
77,035
(902)
76,133
62
8. Property and Equipment
Property and equipment include:
Network equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Other equipment
Less: accumulated depreciation
Total property and equipment, net
December 31,
2014
192,145
12,169
2,718
7,351
570
214,953
(182,317)
32,636
$
$
2013
180,896
11,073
2,723
7,162
570
202,424
(169,519)
32,905
$
$
Cost of revenue depreciation expense related to property and equipment was approximately $16,673, $22,942, and
$27,992, respectively, for the years ended December 31, 2014, 2013, and 2012, respectively.
Operating expense depreciation and amortization expense related to property and equipment was approximately
$2,391, $2,961, and $2,972, respectively, for the years ended December 31, 2014, 2013, and 2012, respectively.
9. Other Current Liabilities
Other current liabilities include:
Accrued compensation and benefits
Accrued cost of revenue
Accrued legal fees
Deferred rent
Other accrued expenses
Total other current liabilities
10. Other Long Term Liabilities
Other long term liabilities include:
Deferred rent
Income taxes payable
Total other long term liabilities
11. Contingencies
Akamai Litigation
December 31,
2014
2013
5,266
2,031
1,292
1,277
4,517
14,383
$
$
6,682
1,833
1,769
1,074
3,664
15,022
December 31,
2014
2013
2,511
529
3,040
$
$
3,384
121
3,505
$
$
$
$
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, filed a
lawsuit against the Company in the United States District Court for the District of Massachusetts alleging that the Company
was infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai, United States Patent No. 6,553,413
(the ’413 patent) and United States Patent No. 6,108,703 (the ’703 patent). In September 2006, Akamai and MIT expanded
their claims to assert infringement of a third patent United States Patent No. 7,103,645 (the ’645 patent). Before trial, Akamai
waived by stipulation its claims of indirect or induced infringement and proceeded to trial only on the theory of direct
infringement. In February 2008, a jury returned a verdict in this lawsuit, finding that the Company infringed four claims of the
’703 patent at issue and rejecting the Company’s invalidity defenses. The jury awarded an aggregate of approximately $45,500
which includes lost profits, reasonable royalties and price erosion damages for the period April 2005 through December 31,
63
2007. In addition, the jury awarded prejudgment interest which the Company estimated to be $2,600 at December 31, 2007.
The Company recorded an aggregate $48,100 as a provision for litigation as of December 31, 2007. During 2008, the Company
recorded a potential additional provision of approximately $17,500 for potential additional infringement damages and interest.
The total provision for litigation at December 31, 2008 was $65,600.
On July 1, 2008, the court denied the Company’s Motions for Judgment as a Matter of Law (JMOL), Obviousness,
and a New Trial. The court also denied Akamai’s Motion for Permanent Injunction as premature and its Motions for Summary
Judgment regarding the Company’s equitable defenses. The court conducted a bench trial in November 2008 regarding the
Company’s equitable defenses. The Company also filed a motion for reconsideration of the court’s earlier denial of the
Company’s motion for JMOL. The Company’s motion for JMOL was based largely upon a clarification in the standard for a
finding of joint infringement articulated by the Federal Circuit in the case of Muniauction, Inc. v. Thomson Corp., released after
the court denied the Company’s initial motion for JMOL. On April 24, 2009, the court issued its order and memorandum setting
aside the adverse jury verdict and ruling that the Company did not infringe Akamai’s ’703 patent and that the Company was
entitled to JMOL. Based upon the court’s April 24, 2009 order, the Company reversed the $65,600 provision for litigation
previously recorded for this lawsuit as the Company no longer believed that payment of any amounts represented by the
litigation provision was probable. The court entered final judgment in favor of the Company on May 22, 2009, and Akamai
filed its notice of appeal of the court’s decision on May 26, 2009. On December 20, 2010, the Court of Appeals for the Federal
Circuit issued its opinion affirming the trial court’s entry of judgment in the Company’s favor. On February 18, 2011, Akamai
filed a motion with the Court of Appeals for the Federal Circuit seeking a rehearing and rehearing en banc. On April 21, 2011,
the Court of Appeals for the Federal Circuit issued an order denying the petition for rehearing, granting the petition for
rehearing en banc, vacating the December 20, 2010 opinion affirming the trial court’s entry of judgment in the Company’s
favor, and reinstated the appeal.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in the case. The Court of Appeals
stated that the trial court correctly determined that the Company did not directly infringe Akamai’s ’703 patent and upheld the
trial court’s decision to vacate the original jury’s damages award. The Court of Appeals also held that the Company did not
infringe Akamai’s ’413 or ’645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory
of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to
prove that the Company induced its customers to infringe Akamai’s patent under the Court of Appeals’ new legal standard. On
December 28, 2012, the Company filed a petition for writ of certiorari to the United States Supreme Court to appeal this
sharply divided Court of Appeals decision. Akamai then filed a cross petition for consideration of the Court of Appeals standard
for direct infringement followed by an opposition to the Company’s petition. On January 10, 2014, the Supreme Court granted
our petition for writ of certiorari and did not act on Akamai's cross petition. On April 30, 2014, the Supreme Court heard oral
argument in our case. On June 2, 2014, the Supreme Court issued its decision and reversed the Federal Circuit's decision,
remanding the case back to that court. On July 24, 2014, the Federal Circuit issued an order vacating its prior judgment,
reinstating the appeals, dissolving its en banc status, and referring the case back to the original Court of Appeals panel for
further proceedings. The Federal Circuit heard arguments on September 11, 2014. The Company does not believe an ultimate
loss is probable; therefore, no provision for this lawsuit is recorded in the consolidated financial statements.
In light of the status of the litigation, the Company believes that there is a reasonable possibility that it has incurred a
loss related to the Akamai litigation. While the Company believes that there is a reasonable possibility that a loss has been
incurred, the Company is not able to estimate a range of the loss due to the complexity and procedural status of the case. The
Company will continue to vigorously defend against the allegation.
Legal and other expenses associated with this case have been significant. The Company includes these litigation
expenses in general and administrative expenses as incurred, as reported in the consolidated statement of operations.
Other Litigation
The Company is subject to various other legal proceedings and claims, either asserted or unasserted, arising in the
ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse effect on the Company’s business, financial position,
results of operations, or cash flows. Litigation relating to the content delivery services industry is not uncommon, and the
Company is, and from time to time has been, subject to such litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future.
Other Matters
The Company is subject to indirect taxation in various states and foreign jurisdictions. Laws and regulations that apply
to communications and commerce conducted over the Internet are becoming more prevalent, both in the United States and
internationally, and may impose additional burdens on the Company conducting business online or providing Internet-related
64
services. Increased regulation could negatively affect the Company’s business directly, as well as the businesses of its
customers, which could reduce their demand for the Company’s services. For example, tax authorities in various states and
abroad may impose taxes on the Internet-related revenue the Company generates based on regulations currently being applied
to similar but not directly comparable industries.
There are many transactions and calculations where the ultimate tax determination is uncertain. In addition, domestic
and international taxation laws are subject to change. In the future, the Company may come under audit, which could result in
changes to its tax estimates. The Company believes it maintains adequate tax reserves to offset potential liabilities that may
arise upon audit. Although the Company believes its tax estimates and associated reserves are reasonable, the final
determination of tax audits and any related litigation could be materially different than the amounts established for tax
contingencies. To the extent these estimates ultimately prove to be inaccurate, the associated reserves would be adjusted,
resulting in the recording of a benefit or expense in the period in which a change in estimate or a final determination is made.
12. Net Loss per Share
The Company calculates basic and diluted earnings per weighted average share based on net income (loss). The
Company uses the weighted-average number of shares of common stock outstanding during the period for the computation of
basic earnings per share. Diluted earnings per share include the dilutive effect of convertible stock options and restricted stock
units in the weighted-average number of shares of common stock outstanding.
The following table sets forth the components used in the computation of basic and diluted net loss per share for the
periods indicated:
Loss from continuing operations
Income (loss) from discontinued operations
Net loss
Basic and diluted weighted average outstanding shares of common stock
Basic and diluted loss per share:
Continuing operations
Discontinued operations
Basic and diluted net loss per share
$
$
$
$
2014
2013
2012
(24,856) $
265
(24,591) $
98,365
(34,976) $
(426)
(35,402) $
96,851
(0.25) $
—
(0.25) $
(0.36) $
(0.01)
(0.37) $
(30,035)
(2,861)
(32,896)
101,283
(0.30)
(0.02)
(0.32)
For the years ended December 31, 2014, 2013 and 2012, outstanding options and restricted stock units of
approximately 2,468, 1,986 and 2,273, respectively, were excluded from the computation of diluted net loss per share because
including them would have been anti-dilutive.
13. Stockholders’ Equity
Common Stock
On February 12, 2014, the Company's board of directors authorized a $15,000 share repurchase program. Under this
program, the Company may repurchase shares periodically in the open market or through privately negotiated transactions, in
accordance with applicable securities rules regarding issuer repurchases. During the year ended December 31, 2014, the
Company purchased and canceled 1,719 shares for $4,683, including commissions and expenses. All repurchased shares were
canceled and returned to authorized but unissued status.
During the year ended December 31, 2013, the Company purchased and canceled approximately 2,300 shares for
approximately $5,512, including commissions and expenses under a previously authorized share repurchase program. All
repurchased shares were canceled and returned to authorized but unissued status.
In June 2013, the Company’s stockholders approved the Company’s 2013 Employee Stock Purchase Plan (ESPP). The
ESPP allows participants to purchase the Company’s common stock at a 15% discount of the lower of the beginning or end of
the offering period using the closing price on that day. During the years ended December 31, 2014 and 2013, the Company
issued 269 and 135 shares, respectively, under the ESPP. Total cash proceeds from the purchase of shares under the ESPP
were approximately $487 and $225, respectively for the years ended December 31, 2014 and 2013. As of December 31, 2014,
shares reserved for issuance to employees under this plan totaled 3,596 and the Company held employee contributions of
approximately $88 (included in other current liabilities) for future purchases under the ESPP. The ESPP is considered
65
compensatory. The Company recorded compensation expense of $178 and $57, respectively, during the years ended December
31, 2014 and 2013, related to the ESPP.
The Company has reserved approximately 5,446 unissued shares of common stock for future options and restricted
stock units under the incentive compensation plan.
Preferred Stock
The Company's board of directors has authorized the issuance of up to 7,500 shares of preferred stock at December 31,
2014. The preferred stock may be issued in one or more series pursuant to a resolution or resolutions providing for such
issuance duly adopted by the board of directors. As of December 31, 2014, the Board had not adopted any resolutions for the
issuance of preferred stock.
14. Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss, net of tax, for the year ended December 31,
2014 was as follows:
Unrealized
Gains (Losses) on
Available for
Sale Securities
Foreign
Currency
(1,688)
$
25
$
(6,055)
—
(6,055)
(7,743)
$
(68)
—
(68)
(43)
$
$
$
Total
(1,663)
(6,123)
—
(6,123)
(7,786)
Balance, December 31, 2013
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive loss
Balance, December 31, 2014
15. Share-Based Compensation
Incentive Compensation Plans
The Company maintains Incentive Compensation Plans (the Plans) to attract, motivate, retain, and reward high quality
executives and other employees, officers, directors, and consultants by enabling such persons to acquire or increase a
proprietary interest in the Company. The Plans are intended to be qualified plans under the Internal Revenue Code.
The Plans allow the Company to award stock option grants and restricted stock units (RSUs) to employees, directors
and consultants of the Company. During 2014, the Company granted awards to employees and directors. The exercise price of
incentive stock options granted under the Plan may not be granted at less than 100% of the fair market value of the Company’s
common stock on the date of the grant.
66
Data pertaining to stock option activity under the Plans are as follows:
Balance at December 31, 2011
Granted
Exercised
Cancelled
Balance at December 31, 2012
Granted
Exercised
Cancelled
Balance at December 31, 2013
Granted
Exercised
Cancelled
Balance at December 31, 2014
$
Number of
Shares
(In thousands)
13,348
2,972
(176)
(1,834)
14,310
4,902
(143)
(3,087)
15,982
4,215
(522)
(2,803)
16,872
Weighted
Average
Exercise
Price
5.23
2.40
1.08
6.10
4.58
2.19
0.26
3.87
4.00
2.40
1.71
4.15
3.66
The following table summarizes the information about stock options outstanding and exercisable at December 31,
2014:
Exercise Price
$ 0.00 — $ 1.50
$ 1.51 — $ 3.00
$ 3.01 — $ 4.50
$ 4.51 — $ 6.00
$ 6.01 — $ 7.50
$ 7.51 — $ 15.00
Options Outstanding
Options Exercisable
Number of
Options
Outstanding
(In thousands)
493
9,535
2,621
1,533
1,633
1,057
16,872
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
$
1.2
8.5
3.3
4.9
1.4
3.5
0.38
2.26
3.74
5.16
6.46
11.06
Number of
Options
Exercisable
(In thousands)
493
$
3,439
2,458
1,458
1,620
1,042
10,510
Weighted
Average
Exercise
Price
0.38
2.18
3.78
5.15
6.46
11.10
The weighted-average grant-date fair value of options granted during the years ended December 31, 2014, 2013, and
2012 on a per-share basis was approximately $1.45, $1.48, and $1.60, respectively. The total intrinsic value of the options
exercised during the years ended December 31, 2014, 2013, and 2012 was approximately $449, $265, and $309, respectively.
The aggregate intrinsic value of options outstanding at December 31, 2014 is approximately $6,008. The weighted average
remaining contractual term of options currently exercisable at December 31, 2014 was 4.4 years.
The fair value of options awarded were estimated on the grant date using the following weighted average assumptions:
Expected volatility
Expected term, years
Risk-free interest
Expected dividends
Years Ended December 31,
2014
2013
2012
66.05%
5.99
1.83%
—%
77.96%
6.05
1.31%
—%
78.10%
5.88
0.91%
—%
Unrecognized share-based compensation related to stock options totaled $8,418 at December 31, 2014. The Company
expects to amortize unvested stock compensation related to stock options over a weighted average period of approximately 2.5
years at December 31, 2014.
67
During the years ended December 31, 2014, 2013, and 2012, the Company recorded share-based compensation related
to stock options of approximately $4,704, $6,617, and $7,426, respectively.
The following table summarizes the different types of RSUs outstanding (in thousands):
RSUs with service-based vesting conditions
Performance-based RSUs
Unvested RSUs
Years Ended December 31,
2014
2013
2012
6,820
—
6,820
5,286
—
5,286
4,232
349
4,581
Each RSU represents the right to receive one share of the Company’s common stock upon vesting. The fair value of
these RSUs was calculated based upon the Company’s closing stock price on the date of grant.
Data pertaining to RSUs activity under the Plans is as follows:
Balance at December 31, 2011
Granted
Vested
Cancelled
Balance at December 31, 2012
Granted
Vested
Cancelled
Balance at December 31, 2013
Granted
Vested
Cancelled
Balance at December 31, 2014
$
Number of
Units
(In thousands)
3,851
4,085
(2,450)
(905)
4,581
4,970
(2,032)
(2,233)
5,286
5,542
(2,385)
(1,623)
6,820
Weighted
Average
Fair Value
3.66
2.37
2.68
3.17
2.74
2.15
2.53
2.78
2.24
2.33
2.28
2.22
2.30
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2014, 2013, and
2012 was approximately $2.33, $2.15, and $2.37, respectively. The total intrinsic value of the units vested during the years
ended December 31, 2014, 2013, and 2012 was approximately $5,469, $5,117, and $5,400, respectively. The aggregate intrinsic
value of RSUs outstanding at December 31, 2014 is $18,892.
Share-based payment compensation related to RSUs for the years ended December 31, 2014, 2013, and 2012 was
approximately $5,609, $5,671, and $7,049, respectively. At December 31, 2014 there was approximately $13,128 of total
unrecognized compensation costs related to RSUs. That cost is expected to be recognized over a weighted-average period of
approximately 2.65 years as of December 31, 2014.
The Company recorded share-based compensation expense related to stock options, restricted stock and RSUs during
the years ended December 31, 2014, 2013, and 2012 of approximately $10,491, $12,345, and $14,475, respectively.
Unrecognized share-based compensation expense totaled approximately $21,546 at December 31, 2014, which is expected to
be recognized over a weighted average period of approximately 2.59 years.
68
The following table summarizes the components of share-based compensation expense included in the Company’s
consolidated statement of operations for the years ended December 31, 2014, 2013, and 2012:
Share-based compensation expense by type:
Stock options
Restricted stock units
ESPP
Total share-based compensation expense
Years Ended December 31,
2014
2013
2012
$
$
4,704
$
6,617
$
5,609
178
5,671
57
7,426
7,049
—
10,491
$
12,345
$
14,475
Share-based compensation expense included in the consolidated statements of operations:
Cost of services
General and administrative expense
Sales and marketing expense
Research and development expense
Total share-based compensation expense
16. Related Party Transactions
$
1,956
$
1,873
$
4,741
2,317
1,477
5,971
2,245
2,256
2,117
6,511
3,104
2,743
$
10,491
$
12,345
$
14,475
In July 2006, an aggregate of 39,869,960 shares of Series B Preferred Stock was issued at a purchase price of $3.26
per share to certain accredited investors in a private placement transaction. As a result of this transaction, entities affiliated with
Goldman, Sachs & Co., one of the lead underwriters of the Company’s initial public offering (IPO), became holders of more
than 10% of the Company’s common stock. On June 14, 2007, upon the closing of the Company’s IPO, all outstanding shares
of the Company’s Series B Preferred Stock automatically converted into shares of common stock on a 1-for-1 share basis. As of
December 31, 2014, 2013, and 2012, respectively, Goldman, Sachs & Co. owned approximately 31% of the Company’s
outstanding common stock.
The Company leased office space to an entity in which previous members of its board of directors have an ownership
interest. During the year ended December 31, 2012, the Company invoiced and collected approximately $16, in office space
rental from this entity.
The Company sold services to entities owned, in whole or in part, by certain of the Company’s executive officers and
previous directors. Revenue derived from related parties was less than 1% of total revenue for the year ended December 31,
2014. Revenue derived from related parties was approximately 1% for the years ended December 31, 2013 and 2012,
respectively. Total outstanding accounts receivable from all related parties as of December 31, 2014, 2013 and 2012 was $0, $7
and $1,300, respectively.
During 2013, the Company entered into an agreement for services with an entity in which a current member of its
board of directors was an officer. During 2013, the Company incurred approximately $154 in expense for services rendered.
The Company did not incur similar expenses in 2014.
69
17. Leases and Commitments
Operating Leases
The Company is committed to various non-cancellable operating leases for office space and office equipment which expire
through 2023. Certain leases contain provisions for renewal options and rent escalations upon expiration of the initial lease
terms. Approximate future minimum lease payments over the remaining lease periods as of December 31, 2014 are as follows:
2015
2016
2017
2018
2019
Thereafter
Total minimum payments
Purchase Commitments
$
$
3,990
3,152
2,780
2,850
1,279
1,011
15,062
The Company has long-term commitments for bandwidth usage and co-location with various networks and Internet
service providers or ISPs.
The following summarizes minimum commitments as of December 31, 2014:
2015
2016
2017
2018
2019
Thereafter
Total minimum payments
$
$
32,241
8,483
1,466
857
353
—
43,400
Rent and operating expense relating to these operating lease agreements and bandwidth and co-location agreements
was approximately $58,288, $61,693, and $58,818, respectively, for the years ended December 31, 2014, 2013, and 2012.
Capital Leases
The Company leases equipment under capital lease agreements which extend through 2017. As of December 31, 2014
and 2013, the outstanding balance for capital leases was approximately $358 and $824, respectively. The Company recorded
assets under capital lease obligations of approximately $2,224 and $2,312, respectively, as of December 31, 2014 and 2013.
Related accumulated amortization totaled approximately $2,209 and $1,878, respectively as of December 31, 2014 and 2013.
The assets acquired under capital leases and related accumulated amortization is included in property and equipment, net in the
consolidated balance sheets. The related amortization is included in depreciation and amortization expense in the Consolidated
Statements of Operations. The average interest rate on the Company’s outstanding capital leases at December 31, 2014 was
approximately six percent. Interest expense related to capital leases was approximately $32, $76, and $170, respectively, for the
years ended December 31, 2014, 2013, and 2012.
Future minimum capital lease payments at December 31, 2014 were as follows:
2015
2016
2017
2018
2019
Thereafter
Total
Amounts representing interest
Present value of minimum lease payments
70
$
$
238
134
4
—
—
—
376
(18)
358
18. Concentrations
During the year ended December 31, 2014, the Company had no customer who represented 10% or more of total
revenue. For the years ended December 31, 2013, and 2012, Netflix, Inc. represented approximately 11% of the Company’s
total revenue.
Revenue from sources outside America totaled approximately $60,957, $54,413, and $54,636, respectively, for the
years ended December 31, 2014, 2013, and 2012.
During the years ended December 31, 2014 and 2012, the Company had two countries, Japan and the United States,
which accounted for 10% or more of the Company’s total revenues. During the year ended December 31, 2013, the Company
had no single country outside of the United States that accounted for 10% or more of the Company's total revenues.
19. Income Taxes
The Company's loss from continuing operations before income taxes consists of the following:
(Loss) income from continuing operations before income taxes:
United States
Foreign
The components of the provision for income taxes are as follows:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total provision
Years Ended December 31,
2014
2013
2012
(25,025) $
372
(24,653) $
(34,789) $
200
(34,589) $
(29,991)
437
(29,554)
Years Ended December 31,
2014
2013
2012
(143) $
26
680
563
15
—
(375)
(360)
203
$
— $
80
442
522
16
—
(151)
(135)
387
$
—
(20)
558
538
16
—
(73)
(57)
481
$
$
$
$
71
A reconciliation of the U.S. federal statutory rate to the Company’s effective income tax rate is shown in the table
below:
Years Ended December 31,
2014
2013
2012
Amount
Percent
Amount
Percent
Amount
Percent
U.S. federal statutory tax rate
$
(8,629)
35 % $
(12,106)
35 % $
(10,344)
35 %
Impact related to sale of discontinued
operations
Valuation allowance
Foreign income taxes
State income taxes
Non-deductible expenses
Uncertain tax positions
Share-based compensation
Other
Provision for income taxes
$
(143)
7,424
(26)
26
1,335
201
—
15
203
1 %
(30)%
— %
— %
(6)%
(1)%
— %
— %
(1)% $
—
12,958
221
80
(783)
14
—
3
387
— %
(37)%
(1)%
— %
2 %
— %
— %
— %
(1)% $
—
10,329
351
(20)
168
(18)
—
15
481
— %
(35)%
(1)%
— %
(1)%
— %
— %
— %
(2)%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purpose. Significant components of the
Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Share-based compensation
Net operating loss and tax credit carry-forwards
Deferred revenue
Accounts receivable reserves
Fixed assets
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Prepaid expenses
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
December 31,
2014
2013
$
13,613
$
33,519
2,089
556
4,813
1,693
56,283
(177)
(144)
(36)
(357)
(54,654)
1,272
$
$
12,797
25,052
2,808
537
5,751
2,267
49,212
(738)
(164)
(65)
(967)
(47,166)
1,079
In addition to the deferred tax assets listed in the table above, the Company has unrecorded tax benefits of $10,750 and
$10,350 at December 31, 2014 and December 31, 2013, respectively, primarily attributable to the difference between the
amount of the financial statement expense and the allowable tax deduction associated with employee stock options and RSUs,
which, if subsequently realized will be recorded to contributed capital. As a result of net operating loss (NOL) carryforwards,
the Company was not able to recognize the excess tax benefits of stock option deductions because the deductions did not
reduce income tax payable. Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to
reduce future income and is incorporated into the disclosed amounts of the Company’s federal and state NOL carryforwards,
discussed below.
The federal and state NOL carryforwards relate to prior years’ NOLs, which may be used to reduce tax liabilities in
future years. At December 31, 2014, the Company had $97,400 federal and $66,200 state NOL carryforwards, including the
NOLs discussed in the preceding paragraph. The Company’s federal NOL will begin to expire in 2027 and the state NOL
carryforwards will begin to expire in 2015. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of
72
NOLs and other tax attributes may be subject to substantial limitations if certain ownership changes occur during a three-year
testing period (as defined by the Internal Revenue Code). At December 31, 2014 the Company had state tax credit
carryforwards of $88, which will expire at various dates beginning in 2015.
The Company reduces the carrying amounts of deferred tax assets by a valuation allowance, if based on the evidence
available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-
not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the
deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus
stand-alone state tax filings, the Company’s experience with loss carryforwards not expiring unutilized, and all tax planning
alternatives that may be available.
A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax
assets at certain foreign subsidiaries as management cannot conclude that it is more-likely-than-not that these assets will be
realized. As of December 31, 2014, no valuation allowance was provided on $1,600 of deferred tax assets associated with
certain NOLs because it was believed that they will be used to offset the Company’s liabilities relating to its uncertain tax
positions. In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that
unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a NOL carryforward,
a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the
unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred
tax assets.
Estimated liabilities for unrecognized tax benefits are included in “other liabilities” on the consolidated balance sheet.
These contingent liabilities relate to various tax matters that result from uncertainties in the application of complex income tax
regulations in the numerous jurisdictions in which the Company operates. As of December 31, 2014, unrecognized tax benefits
were $2,043, of which approximately $446, if recognized, would favorably impact the effective tax rate and the remaining
balance would be substantially offset by valuation allowances.
A summary of the activities associated with the Company’s reserve for unrecognized tax benefits, interest and
penalties follow:
Balance at January 1, 2013
Additions for tax positions related to current year
Settlements
Reduction for tax positions of prior years
Balance at December 31, 2013
Additions for tax positions related to current year
Additions for tax positions related to prior years
Settlements
Adjustment related to foreign currency translation
Reductions related to the lapse of applicable statute of limitations
Reduction for tax positions of prior years
Balance at December 31, 2014
Unrecognized
Tax Benefits
$
$
1,757
—
—
—
1,757
—
312
—
(4)
(22)
—
2,043
The Company recognizes interest and penalties related to unrecognized tax benefits in its tax provision. As of
December 31, 2014, the Company had an interest and penalties accrual related to unrecognized tax benefits of $79, which
decreased during 2014 by $15. The Company anticipates its unrecognized tax benefits may increase or decrease within twelve
months of the reporting date, as audits or reviews are initiated or settled and as a result of settled potential tax liabilities in
certain foreign jurisdictions. It is not currently reasonably possible to estimate the range of change.
The Company files income tax returns in jurisdictions with varying statues of limitations. Tax years 2010 through
2013 generally remain subject to examination by federal and most state tax authorities. As of December 31, 2014, the Company
is not under any federal or state examinations.
Income taxes have not been provided on a portion of the undistributed earnings of the Company’s foreign subsidiaries
over which the Company had sufficient influence to control the distribution of such earnings and had determined that
73
substantially all of such earnings were reinvested indefinitely. The undistributed earnings of the Company’s foreign subsidiaries
were approximately $1,600 at December 31, 2014. These earnings could become subject to either or both federal income tax
and foreign withholding tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s domestic
subsidiaries, or if the Company sells its investment in such subsidiaries. A hypothetical calculation of the deferred tax liability,
assuming those earnings were remitted, is not practicable.
20. 401(k) Plan
The Company manages the Limelight Networks 401(k) Plan covering effectively all employees of the Company. The
plan is a 401(k) profit sharing plan in which participating employees are fully vested in any contributions they make.
The Company will match employee deferrals as follows: a dollar-for-dollar match on eligible employee’s deferral that
does not exceed 3% of compensation for the year and a 50% match on the next 2% of the employee deferrals. Company
employees may elect to reduce their current compensation up to the statutory limit. The Company made matching contributions
of approximately $1,225, $1,196, and $1,101 during the years ended December 31, 2014, 2013, and 2012, respectively.
21. Segment Reporting and Geographic Information
The Company operates in one industry segment — content delivery and related services. The Company operates in
three geographic areas — Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific.
Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The
Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating
resources and evaluating financial performance. The Company has one business activity and there are no segment managers
who are held accountable for operations, operating results and plans for products or components below the consolidated unit
level. Accordingly, the Company reports as a single operating segment.
Revenue by geography is based on the location of the customer from which the revenue is earned. The following table
sets forth revenue and long-lived assets by geographic area:
Revenue
Americas
EMEA
Asia Pacific
Total revenue
The following table sets forth long-lived assets by geographic area:
Long-lived Assets
Americas
International
Total long-lived assets
Years Ended December 31,
2014
2013
2012
101,302
33,630
27,327
162,259
$
$
119,020
30,793
23,620
173,433
$
$
125,600
30,898
23,738
180,236
Years Ended December 31,
2014
2013
2012
22,505
11,202
33,707
$
$
26,502
8,757
35,259
$
$
36,513
11,125
47,638
$
$
$
$
74
22. Fair Value Measurements
The Company evaluates certain of its financial instruments within the three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. These tiers include:
Level 1 — defined as observable inputs such as quoted prices in active markets;
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop
its own assumptions.
As of December 31, 2014 and 2013, the Company held certain assets and liabilities that were required to be measured
at fair value on a recurring basis. These include money market funds, commercial paper, corporate notes and bonds, U.S.
government agency bonds, a convertible debt security and publicly traded stocks, which are classified as either cash and cash
equivalents or marketable securities.
The Company’s financial assets are valued using market prices on active markets (level 1), less active markets
(level 2) and on unobservable inputs where little or no market data exists (level 3). Level 1 instrument valuations are obtained
from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are
obtained from readily available pricing sources for comparable instruments or identical instruments in less active markets.
Level 3 inputs are valued using models that take into account the terms of the arrangement as well as multiple inputs where
applicable, such as current interest rates, discount rates and customer credit profile.
The following is a summary of fair value measurements at December 31, 2014:
Fair Value Measurements at Reporting Date Using
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
57
$
21,850
1,497
11,010
1,000
$
35,414
$
57
—
—
—
—
57
$
— $
21,850
1,497
11,010
—
$
34,357
$
—
—
—
—
1,000
1,000
Description
Assets:
Money market funds (2)
Corporate notes and bonds (1)
Commercial paper (1)
Certificate of deposit (1)
Convertible debt security (1)
Total assets measured at fair value
____________
(1)
(2)
Classified in marketable securities
Classified in cash and cash equivalents
In November 2014, the Company made a $1,000 strategic, noncontrolling convertible debt security investment in an
unconsolidated privately-held entity, which is included in marketable securities in its Consolidated Balance Sheets. The fair
value of this investment has been measured based on this recent transaction, which is considered the best evidence of fair value
currently available. When this evidence is not available, the Company uses other valuation techniques such as transactions in
similar instruments, discounted cash flow techniques, third party appraisals or public comparables. Based on its assessment of
fair value at December 31, 2014, there has not been any significant change in the fair value of the convertible debt security
since the date of the Company's investment.
75
The following is a summary of fair value measurements at December 31, 2013:
Fair Value Measurements at Reporting Date Using
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
261
9,740
26,009
2,200
4,076
6
42,292
$
$
— $
9,740
—
—
—
6
9,746
$
261
—
26,009
2,200
4,076
—
32,546
$
$
—
—
—
—
—
—
—
Description
Assets:
Government agency bonds (1)
Money market funds (2)
Corporate notes and bonds (1)
Commercial paper (1)
Certificate of deposit (1)
Publicly traded common stock (1)
Total assets measured at fair value
____________
(1)
(2)
Classified in marketable securities
Classified in cash and cash equivalents
The carrying amount of cash equivalents approximates fair value because their maturity is less than three months. The
carrying amount of short-term and long-term marketable securities approximates fair value as the securities are marked to
market as of each balance sheet date with any unrealized gains and losses reported in stockholders’ equity. The carrying amount
of accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term maturity of the
amounts.
23. Quarterly Financial Results (unaudited)
The following table sets forth certain unaudited quarterly results of operations of the Company for the years ended
December 31, 2014 and 2013.
In the opinion of management, this information has been prepared on the same basis as the audited consolidated
financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the
amounts below for a fair statement of the quarterly information when read in conjunction with the audited consolidated
financial statements and related notes included elsewhere in this annual report on Form 10-K:
Revenues
Gross profit
Loss from continuing operations
Income (loss) from discontinued operations
Net loss
Basic and diluted net loss per share from continuing
operations
Basic and diluted net loss per share from discontinued
operations
Basic and diluted net loss per share
Basic and diluted weighted average common shares
outstanding
For the Three Months Ended
March 31,
2014
June 30,
2014
Sept. 30,
2014 (a)
Dec. 31,
2014
41,170
$
15,267
$
(7,640) $
— $
(7,640) $
41,343
$
15,873
$
(7,138) $
$
269
(6,869) $
39,020
$
16,141
$
(5,071) $
(4) $
(5,075) $
40,727
16,129
(5,007)
—
(5,007)
(0.08) $
(0.07) $
(0.05) $
(0.05)
— $
(0.08) $
— $
(0.07) $
— $
(0.05) $
—
(0.05)
97,946
98,419
98,458
98,637
$
$
$
$
$
$
$
$
(a) During the three months ended September 30, 2014, the Company recorded an immaterial error correction of
approximately $1,100 relating to previous over billings by a co-location provider. The correction was recorded as a reduction
of costs of revenue.
76
Revenues
Gross profit
Loss from continuing operations
Loss from discontinued operations
Net loss
Basic and diluted net loss per share from continuing
operations
Basic and diluted net loss per share from discontinued
operations
Basic and diluted net loss per share
Basic and diluted weighted average common shares
outstanding
For the Three Months Ended
March 31,
2013
June 30,
2013
Sept. 30,
2013
Dec. 31,
2013 (b)
45,813
$
16,777
$
(8,136) $
— $
(8,136) $
42,763
$
42,656
$
14,417
$
(11,233) $
— $
(11,233) $
$
15,240
(10,903) $
(15) $
(10,918) $
42,200
15,275
(4,704)
(411)
(5,115)
(0.08) $
(0.12) $
(0.11) $
(0.05)
— $
(0.08) $
— $
(0.12) $
— $
(0.11) $
—
(0.05)
96,818
96,257
96,949
97,380
$
$
$
$
$
$
$
$
(b) See discussion of sale of the WCM business in Note 4.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2014. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as
of December 31, 2014.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. GAAP. Our 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 our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our 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
77
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management
used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) (2013 framework). Based on this assessment, our management has concluded that our
internal control over financial reporting was effective as of December 31, 2014.
Our financial statements included in this annual report on Form 10-K have been audited by Ernst & Young LLP,
independent registered public accounting firm, as indicated in the following report. Ernst & Young LLP has also provided an
attestation report on the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints
and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to
their costs.
78
The Board of Directors and Stockholders of Limelight Networks, Inc.
Report of Independent Registered Public Accounting Firm
We have audited Limelight Networks, Inc.’s internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) (the COSO criteria). Limelight Networks, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our
audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinion.
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, Limelight Networks, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Limelight Networks, Inc. as of December 31, 2014 and 2013, and the related
consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2014 and our report dated February 17, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 17, 2015
79
Item 9B. Other Information
None.
80
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item relating to our directors and nominees is included under the captions “Proposal
One: Election of Directors,” “— Information About the Directors and Nominees,” and “Board of Directors Meetings and
Committees — Nominating and Governance Committee” in our Proxy Statement related to the 2015 Annual Meeting of
Shareholders and is incorporated herein by reference.
The information required by this item regarding our Audit Committee is included under the caption “Board of
Directors Meetings and Committees” in our Proxy Statement related to the 2015 Annual Meeting of Shareholders and is
incorporated herein by reference.
The information required by this item relating to our executive officers is included under the caption “Executive
Officers of the Registrant” in Part I of this annual report on Form 10-K.
The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 is
included under the caption “Executive Compensation and Other Matters — Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement related to the 2015 Annual Meeting of Shareholders and is incorporated herein by
reference.
We have adopted a code of ethics and business conduct that applies to our Chief Executive Officer, Chief Financial
Officer and all other principal executive and senior financial officers and all employees, officers and directors. This code of
ethics and business conduct is posted on our website. The Internet address for our website is www.limelight.com, and the code
of ethics may be found from our main webpage by clicking first on “About Us” and then on “Investors”, next on “Corporate
Governance”, and finally on “Code of Ethics” under Governance Documents.
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of this code of ethics by posting such information on our website, on the webpage found by clicking through
to “Code of Ethics” as specified above.
Item 11.
Executive Compensation
The information appearing under the headings “Executive Compensation and Other Matters,” “— Director
Compensation,” “Board of Directors Meetings and Committees — Compensation Committee Interlocks and Insider
Participation,” and “— Compensation Committee Report” in our Proxy Statement related to the 2015 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item relating to security ownership of certain beneficial owners and management is
included under the heading “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement
related to the 2015 Annual Meeting of Shareholders, and is incorporated herein by reference.
81
Equity Compensation Plan Information
The following table provides information regarding our current equity compensation plans as of December 31, 2014
(shares in thousands):
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
16,872
—
16,872
$
$
3.66
—
3.66
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)) (c)
5,446
—
5,446
Item 13.
Certain Relationships, Related Transactions, and Director Independence
The information required by this item relating to review, approval or ratification of transactions with related persons is
included under the heading “Certain Relationships and Related Transactions,” and the information required by this item relating
to director independence is included under the headings “Proposal One: Election of Directors” and “Board of Directors
Meetings and Committees — Board Independence,” in each case in our Proxy Statement related to the 2015 Annual Meeting of
Shareholders, and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this item is included under the headings “Audit Committee Report—Principal Accountant
Fees and Services” and “— Audit Committee Pre-Approval Policy,” in each case in our Proxy Statement related to the 2015
Annual Meeting of Shareholders, and is incorporated herein by reference.
82
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
(a)
Documents included in this annual report on Form 10-K.
(1)
Financial Statements. See Item 8 — Financial Statements and Supplementary Data included in this
annual report on Form 10-K.
(2)
Financial Schedules. The schedule listed below is filed as part of this annual report on Form 10-K:
Schedule II — Valuation and Qualifying Accounts
Page
85
All other schedules are omitted as the information required is inapplicable or the information is presented in the
consolidated financial statements and the related notes.
(b)
Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately
preceding the exhibits and are incorporated herein.
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIMELIGHT NETWORKS, INC.
SIGNATURES
Date: February 17, 2015
By:
/S/ PETER J. PERRONE
Peter J. Perrone
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert A. Lento and Peter J. Perrone and each of them, each with the power of substitution, their attorney-in-fact, to sign
any amendments to this Annual Report on Form 10-K (including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
President, Chief Executive Officer and Director (Principal
Executive Officer)
Date
February 17,
2015
/S/ ROBERT A. LENTO
Robert A. Lento
/S/ PETER J. PERRONE
Peter J. Perrone
/S/ DANIEL R. BONCEL
Daniel R. Boncel
/S/ WALTER D. AMARAL
Walter D. Amaral
/S/ GRAY HALL
Gray Hall
/S/ JEFFREY T. FISHER
Jeffrey T. Fisher
/S/ JOSEPH H. GLEBERMAN
Joseph H. Gleberman
/S/ FREDRIC W. HARMAN
Fredric W. Harman
/S/ DAVID C. PETERSCHMIDT
David C. Peterschmidt
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 17,
2015
February 17,
2015
February 17,
2015
February 17,
2015
February 17,
2015
February 17,
2015
February 17,
2015
February 17,
2015
Vice President, Finance (Principal Accounting Officer)
Non-Executive Chairman of the Board and Director
Director
Director
Director
Director
Director
84
LIMELIGHT NETWORKS, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Description
Year ended December 31, 2012:
Allowances deducted from asset accounts:
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Charged
Against
Revenue
Deductions
Write-Offs
Net of
Recoveries
Balance at
End of Period
Reserves for accounts receivable
$
Deferred tax asset valuation allowance $
4,391
36,215
2,062
10,000
Year ended December 31, 2013:
Allowances deducted from asset accounts:
Reserves for accounts receivable
$
Deferred tax asset valuation allowance $
4,070
46,215
Year ended December 31, 2014:
Allowances deducted from asset accounts:
Reserves for accounts receivable
$
Deferred tax asset valuation allowance $
2,010
47,166
965
951
408
7,488
(170)
—
(30)
—
(230)
—
2,213
$
— $
4,070
46,215
2,995
$
— $
2,010
47,166
354
$
— $
1,834
54,654
85
____________
INDEX TO EXHIBITS
Exhibit
Number
2.1(1)
2.2(2)
3.1(3)
3.2(4)
4.1(5)
4.2(5)
10.1(5)
10.2(5)
10.3(5)
10.4†(6)
10.4.01†(7)
10.4.02†(8)
10.4.03†(9)
10.5(10)
10.6(11)
10.6.01(12)
10.7(13)
10.8(14)
10.9(15)
10.10(16)
10.11(17)
10.12(18)
10.13(19)
10.14(20)
10.15(21)
10.16(22)
10.17
21.1(23)
23.1
Exhibit Title
Agreement and Plan of Merger by and among Registrant, Elvis Merger Sub One Corporation, Elvis Merger
Sub Two LLC, EyeWonder, Inc., John J. Vincent, as Stockholder Representative and Deutsche Bank
National Trust, as Escrow Agent, dated December 21, 2009.
Purchase Agreement dated as of August 30, 2011 by and among DG FastChannel, Inc., Limelight Networks,
Inc. and Limelight Networks Germany GmbH.
Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect.
Amended and Restated Bylaws of the Registrant, as currently in effect.
Specimen Common Stock Certificate of the Registrant.
Amended and Restated Investors’ Rights Agreement dated July 12, 2006.
Form of Indemnification Agreement for directors and officers.
Amended and Restated 2003 Incentive Compensation Plan and form of agreement thereunder.
2007 Equity Incentive Plan and form of agreement thereunder.
Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth, Inc., dated August
29, 2001, and amendments thereto.
Amendments to Bandwidth/Capacity Agreement between the Registrant and Global Crossing Bandwidth,
Inc., dated August 29, 2001.
Amendment #23 to Bandwidth/Capacity Agreement between the Registrant and Global Crossing
Bandwidth, Inc., dated August 29, 2001, as amended.
Amendment #24 to Bandwidth/Capacity Agreement between the Registrant and Global Crossing
Bandwidth, Inc., dated August 29, 2001, as amended.
Form of At-Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement
for officers and employees.
Employment Agreement between the Registrant and Philip C. Maynard effective October 22, 2007.
Amendment to Employment Agreement between the Registrant and Philip C. Maynard dated December 30,
2008.
Master Executive Bonus and Management Bonus Plan.
Form of 2007 Equity Incentive Plan Restricted Stock Unit Agreement.
Form of 2007 Equity Incentive Plan Restricted Stock Unit Agreement for Non-U.S. Employees.
Standard Office Lease between the Registrant and GateWay Tempe LLC dated as of July 20, 2010.
Employment Agreement between the Registrant and Charles Kirby Wadsworth dated June 22, 2012.
Interim CEO Employment Agreement between the Registrant and Robert A. Lento dated November 8, 2012.
Employment Agreement between the Registrant and Robert A. Lento dated January 22, 2013.
Employment Agreement between the Registrant and George Vonderhaar dated January 22, 2013.
Limelight Networks, Inc. 2013 Employee Stock Purchase Plan.
Employment Agreement between the Registrant and Peter J. Perrone dated July 23, 2013.
Employment Agreement between the Registrant and Sajid Malhotra dated March 24, 2014.
List of subsidiaries of the Registrant.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
86
24.1
31.1
31.2
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
____________
Power of Attorney (See signature page).
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
XBRL INSTANCE DOCUMENT.
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT.
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT.
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT.
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT.
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on December 21,
2009.
Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on September 6,
2011.
Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on June 14, 2011.
Incorporated by reference to Exhibit 3.2 of the Registrant's Form 8-K filed on February 29, 2013.
Incorporated by reference to the same number exhibit of the Registrant’s Form S-1 Registration Statement
(Registration No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007.
Incorporated by reference to Exhibit 10.10 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007.
Incorporated by reference to Exhibit 10.10.01 of the Registrant’s Quarterly Report on Form 10-Q filed on
August 14, 2008.
Incorporated by reference to Exhibit 10.10.02 of the Registrant’s Annual Report on Form 10-K filed on March 13,
2009.
Incorporated by reference to Exhibit 10.10.03 of the Registrant’s Quarterly Report on Form 10-Q filed on
November 6, 2009.
Incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-141516), declared effective by the Securities and Exchange Commission on June 7, 2007.
Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on November 13,
2007.
Incorporated by reference to Exhibit 99.7 of the Registrant’s Current Report on Form 8-K filed on December 31,
2008.
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on May 19, 2009.
Incorporated by reference to Exhibit (a)(1)(I) of the Registrant’s Schedule TO filed on May 15, 2008.
Incorporated by reference to Exhibit (a)(1)(J) of the Registrant’s Schedule TO filed on May 15, 2008.
Incorporated by reference to Exhibit 10.32 of the Registrant’s Quarterly Report on Form 10-Q filed on November 5,
2010.
Incorporated by reference to Exhibit 10.29 of the Registrant’s Quarterly Report on Form 10-Q filed on November 5,
2012.
Incorporated by reference to Exhibit 10.20 of the Registrant's Annual Report on Form 10-K filed on March 1, 2013.
Incorporated by reference to Exhibit 10.21 of the Registrant’s Annual Report on Form 10-K filed on March 1, 2013.
Incorporated by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K filed on March 1, 2013.
Incorporated by reference to Exhibit 10.23 of the Registrant's Quarterly Report on Form 10-Q filed on August 8,
2013.
Incorporated by reference to Exhibit 10.24 of the Registrant's Quarterly Report on Form 10-Q filed on August 8,
2013.
87
(23)
Incorporated by reference to Exhibit 21.1 of the Registrant's Annual Report on Form 10-K filed on February 20,
2014.
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any filings.
† Confidential treatment has been requested or granted for portions of this exhibit by the Securities and Exchange
Commission.
88
222 South Mill Avenue
Suite 800
Tempe, AZ 85281
www.limelight.com
©2015 Limelight Networks, Inc.