UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
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For the transition period from to
Commission file number 001-33508
Limelight Networks, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-1677033
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2220 W. 14
th
Street
Tempe, AZ 85281
(Address of principal executive offices, including Zip Code)
(602) 850-5000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.001 par value
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NASDAQ Global Market
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Securities registered pursuant to Section 12(b) 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
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No
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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
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the registrants
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.
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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. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes
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No
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The aggregate market value of the voting and non-voting common stock held by non-affiliates of
the registrant was approximately $600.4 million based on the last reported sale price of the common
stock on the Nasdaq National Market on June 30, 2007.
The number of shares outstanding of the registrants Common Stock, par value $0.001 per share,
as of March 12, 2008: 82,790,264 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants 2008 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
LIMELIGHT NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2007
TABLE OF CONTENTS
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 statements
as to industry trends and future expectations of ours 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
. We undertake no
obligation to update any forward-looking statements to reflect events or circumstances after the
date of such statements.
PART I
Item 1. Business
Overview
Limelight Networks, Inc. is a provider of high-performance content delivery network services.
We deliver content for traditional and emerging media companies, or content providers, including
businesses operating in the television, music, radio, newspaper, magazine, movie, videogame and
software industries. Using Limelights content delivery network, or CDN, content providers are able
to provide their end-users with a high-quality media experience for rich media content including
video, music, games, software and social media. As consumer demands for media content over the
Internet has increased, and as enabling technologies such as broadband access to the Internet have
proliferated, consumption of rich media content has become increasingly important to Internet
end-users and therefore to the content providers that serve them. We developed our services and
architected our network specifically to meet the unique demands content providers face in
delivering rich media content to large audiences of demanding Internet end-users. Our comprehensive
solution delivers content providers a high-quality, highly scalable, highly reliable offering at a
low cost. We primarily derive income from the sale of services to customers executing 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. We believe that having a
consistent and predictable base level of revenue is important to our financial success.
Accordingly, to be successful, we must maintain the majority of our base of recurring revenue contracts and build on that base by adding
new customers and increasing the number of services, features and functionalities our existing
customers purchase. At the same time, we must ensure that our expenses do not increase faster than,
or at the same rate as, our revenues. Accomplishing these goals requires that we compete
effectively in the marketplace on the basis of price, quality and the attractiveness of our
services and technology.
We were formed as an Arizona limited liability company, Limelight Networks, LLC, in June 2001
and converted into a Delaware corporation, Limelight Networks, Inc., in August 2003. Our principal
executive offices are located at 2220 W. 14th Street, Tempe, Arizona 85281, and our telephone
number is (602) 850-5000. Our website address is www.limelightnetworks.com. We began development of
our infrastructure in 2001 and began generating meaningful revenue in 2002. As of December 31,
2007, we had 1,157 active customers and had a presence in 42 countries throughout the world.
Significant developments for us in 2007 included our Initial Public Offering or IPO which
occurred on June 8, 2007 in which we sold and issued 14,900,000 shares of our common stock and
selling stockholders sold 3,500,000 shares of our common stock, in each case at a price to the
public of $15.00 per share. The common shares began trading on the NASDAQ Global Market on June 8,
2007. We raised a total of $223.5 million in gross proceeds from the IPO, or approximately
$203.9 million in net proceeds after deducting underwriting discounts and commissions of
approximately $15.6 million and other offering costs of approximately $4.0 million. In addition, we
entered into a major new technology and services agreement with Microsoft under which we will help
improve the performance, scalability, and reliability of Internet delivery of media content and
online services, including video, music, games, software, and social media, across Microsofts
global Internet properties. Under the agreement, we agreed to cross-license certain technologies with
Microsoft, consider joint development projects in the future, and cooperate on extending and
improving our respective technology infrastructures. We have also entered into a five year
relationship under which we will continue to provide global media streaming and content delivery
services to Microsoft.
In February 2008, a jury returned a verdict in a patent infringement lawsuit filed by Akamai
Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, against us,
finding that we infringed four claims of the patent at issue and rejecting our invalidity defenses.
The jury awarded Akamai an aggregate of approximately $45.5 million in lost profits, reasonable
royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million that
we have recorded in 2007. A final judgment has not yet been entered. We are still pursuing a
number of equitable defenses, and we recently filed several motions seeking relief from the Court.
Akamai has filed motions for summary judgment on our remaining equitable defenses, which we will
oppose. We continue to believe that the claims of infringement asserted against us by Akamai and
MIT in the present litigation are without merit and that the jurys verdict is incorrect, and we
will continue to defend the case vigorously; however, we cannot assure you that this lawsuit
ultimately will be resolved in our favor. An adverse judgment or injunction 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 CDN to deliver certain types of traffic, which
could impact the viability of our business.
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These adverse outcomes, in turn, would harm our
revenue, market share, reputation, liquidity and overall financial position. Whether or not we
prevail in this case, we expect that the litigation will continue to be expensive, time-consuming
and a distraction to our management in operating our business. This lawsuit and other ongoing
legal proceedings are described under Legal Proceedings in Part 1, Item 3 of this annual report
on Form 10-K,
We are registered as a reporting company under the Securities Exchange Act of 1934, as
amended, which we refer to as the 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 Commissions Public Reference Room at 450 Fifth Street, NW, 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
information statements and other information regarding issuers, such as Limelight Networks Inc.,
that file electronically with the Commission. The address of this website is
http://www.sec.gov.
Our
Internet website address is
www.limelightnetworks.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.
Consumption and Distribution of Rich Media Content Expanding
Multiple forces have created, and continue to drive, a substantial unmet need to rapidly and
efficiently deliver large files and broadcast-quality media to large audiences over the Internet.
These forces include the following:
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Proliferation of broadband Internet connections.
According to a 2007
eMarketer report on online video consumption (Online Video: Seeing the
Whole Picture, August 2007), the number of U.S. broadband users will
increase from 133.4 million in 2006 to over 200 million in 2011. Of
them, 91% or 183 million will watch online videos. Additionally,
Forrester (Top Consumer Broadband Trends for 2008) predicts that
during 2008, broadband penetration will rise to more than 58% of U.S. households, or nearly 68 million households. Forrester states that the
popularity of broadband among consumers coupled with industry
advancements, like increased fiber rollouts and pair-bonding for DSL,
mean that more consumers will have access to even faster Internet
connections than ever before. This proliferation of broadband Internet
connections and increased broadband speeds provides an increasing
number of users with the capability to access rich media content
efficiently.
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Consumption of media via the Internet is rivaling consumption via
other media channels.
The proliferation of broadband Internet has
fundamentally changed the way that consumers access and interact with
media content. eMarketer (Online Video: Seeing the Whole Picture,
August 2007), projects that the number of online video viewers in the
United States alone will rise from 114 million in 2006 to 183 million in 2011.
This means that by 2011, 61% of U.S. television viewers and 91% of U.S.
broadband users will also be regular online video viewers.
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More interactive and engaging online advertising will drive increased
rich media creation and consumption.
According to Forrester (US
Interactive Marketing Forecast, 2007 to 2012), online video marketing
will grow from 2007 to 2012 at a 72% CAGR to reach $7.2 billion. While
this number seems large, it represents only 2% of projected
advertising spend and 12% of total interactive marketing spend.
Additionally, Forrester predicts that improved rich media creation
tools, combined with increased consumer broadband adoption, will boost
spend on interactive and rich media display ads to almost $6 billion
in 2012.
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Consumers desire on-demand access to a broad range of personalized
media content.
Through technologies like Internet search, personal
digital video recorders, video-on-demand and social media platforms,
consumers are increasingly accustomed to immediate, on-demand access
to media content, including videos, music and photos provided by media
or content providers or by users themselves.
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Proliferation of Internet-connected devices.
The proliferation of
devices that are capable of connecting to the Internet, such as MP3
players, mobile phones and videogame consoles, has given users even
more control and flexibility over how and where they access and use
media content from the Internet.
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Content providers have recognized this evolving shift in consumer behavior and the consumption
of rich digital media. Television,
music, radio, newspaper, magazine, movie, videogame, software and other traditional and
emerging media companies all have or are
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developing large libraries of rich media and video
content. The broad reach provided by the Internet allows these content providers to distribute
their content through content aggregators or directly to consumers. The Internet also enables
content providers to offer their entire content libraries to consumers. As a result, content
providers are able to monetize a much larger portion of their media content libraries than has been
possible under offline, non-Internet modes of distribution.
Alternatives for Delivering Rich Media Content over the Internet
Companies looking to deliver rich media content to users via the Internet have two primary
alternatives: deliver content using basic Internet connectivity, in some cases with significant
investment in additional infrastructure, or utilize a CDN.
Content Delivery via Basic Internet Connectivity
Basic Internet connectivity is capable of delivering media content to users, but is ill-suited
for delivering the large media files and broadcast-quality media that are commonplace today. The
Internet is a complex network of networks that was designed principally to connect every Internet
network point to every other Internet network point via multiple, redundant paths. To reach a given
user, content from a providers website must normally traverse multiple networks. These networks
include those of the websites Internet service provider, or ISP, one or more Internet backbone
carriers each of which provides a network of high-speed communication lines between major
interconnection points and the users ISP. At any point along this path, data packets associated
with the websites content can be lost or delayed, impeding the transfer of data to the user.
Internet protocols are designed to reliably transport data packets, but are not designed to ensure
end-to-end performance. These protocols are effective for delivery of many types of traditional
content, but are often ineffective for delivery of rich media content. When data packets are lost
or delayed during the delivery of rich media content, the result is noticeable to users because
playback is interrupted. This interruption causes songs to skip, videos to freeze and downloads to
be slower than acceptable for demanding consumers. This lack of performance and its dramatic effect
on user experience make the delivery of rich media content via the basic Internet extremely
challenging.
In response, some content providers have chosen to invest significant capital to build the
infrastructure of servers, storage and networks necessary to bypass, to the extent possible, the
public Internet cloud. This substantial capital outlay and the development of the expertise and
other technical resources required to manage such a complex infrastructure can be time-consuming
and prohibitively expensive for all but the largest of companies.
Content Delivery via Content Delivery Networks
A CDN offloads the delivery of content from a media providers central website infrastructure
to the CDNs service delivery infrastructure. In general, the infrastructure of a CDN is composed
of hundreds or thousands of servers distributed at various points around the Internet, linked
together by software that controls where media content objects are stored and how they should be
delivered to end-users. Deploying content objects in numerous, distributed locations can reduce the
network distance between users and the media content they seek, reducing the potential for
performance-inhibiting network congestion. The architecture of early CDNs reflected the importance
and prevalence, at the time, of web page objects such as photos and graphics. Early CDNs typically
deployed small server clusters in a large number of locations, relied on the public Internet to
connect the clusters, and stored only the most popular content objects in their local caches, which
are computing resources used to store frequently accessed data for rapid access. Because each
server cluster was small, with few servers available for the storage and delivery of content, and
with rarely more than a single network connection, some early CDNs employed optimization algorithms
in an effort to effectively manage and allocate these relatively scarce resources.
When a requested content object is unavailable on the server cluster, a cache miss, which is a
failed attempt to acquire a requested content object in a local cache, occurs. To handle a cache
miss, early CDNs were required to access the missing object over the Internet from the content
providers servers. A cache miss, and the time required to obtain the missing object over the
Internet, degrades the end-users experience and increases the computing resource cost of servicing
the end-users request. As the consumption of rich media has grown, the requirement to cache a
sufficient number of media objects to guarantee a high-quality end-user experience at an efficient
price has strained the architecture of early CDNs.
The New Requirements for Delivering Rich Media Content
We believe the unique characteristics of rich media content delivery and the rapid growth of
rich media consumption have created a new set of technical, management and economic requirements
for businesses seeking to deliver rich media content. These requirements include the following:
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Delivering a consistent high-quality media experience.
User
experience is critical for content providers because consumers
increasingly expect a high-quality experience, will not tolerate
interruptions or inconsistency in the delivery of content, and may
never return to a particular media provider if that provider is unable
to meet their expectations. A media stream, for example, should begin
immediately and play continuously without interruption every time a
customer accesses that stream.
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Delivering expansive content libraries of rich media.
Consumers,
particularly those who are accustomed to broadband-enabled Internet
services such as high-quality television and radio, increasingly
demand the ability to consume any form of media content online. To
meet this demand, traditional media companies are moving their
enormous libraries of content, such as television shows and movies,
online. At the same time, emerging content businesses, such as
user-generated content companies, are creating expansive libraries of
rich media. Users expect a consistent media experience across every
title in these large libraries, for each title regardless of its
popularity, each time it is viewed.
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Ability to scale content delivery capacity to handle rapidly
accelerating demand and diversity of audience interest.
Content
providers also need to scale delivery of their content smoothly as the
size of their audience increases. When a large number of users
simultaneously access a particular website, the content provider 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 major news or sporting event, or can be spread across an entire
library of content, such as when a social media website surges in
popularity.
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Reliability.
Throughout the path data must traverse to reach a user,
problems with the underlying infrastructure supporting the Internet
can occur. For instance, servers can fail, or network connections can
drop. Avoiding these problems is important to content providers
because network, datacenter, or service provider outages can mean
frustrated users, lost audiences and missed revenue opportunities.
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Flexibility and manageability.
Content providers are making
significant investments in preparing their media libraries for
delivery over the Internet. Once content is ready for Internet
distribution, content providers must be able to support a wide range
of formats, begin to distribute their content quickly, and monitor
their delivery activities.
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Managing delivery costs.
Managing the cost of content delivery is
important for content providers so that they can maximize profits. As
a result, the combination of major capital outlays and operating
expenditures required to build and maintain large server clusters,
peak period capacity, extensive Internet backbone networks and
multiple connections to global broadband access networks is simply not
practical for most companies. As users increasingly demand access to
large files and media streams, the infrastructure costs associated
with providing this content are rising.
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The capital, expertise, and other managerial effort necessary to meet these requirements can
be challenging. As demand for the delivery of rich media content increases, these challenges will
become increasingly difficult to meet. We believe, therefore, that there is a significant
opportunity for an outsourced Internet content delivery network optimized for the delivery of rich
media content.
The Limelight Networks Solution for Rich Media Content Delivery
We are a provider of high-performance content delivery network services. We deliver content
for traditional and emerging media companies, or content providers, including businesses operating
in the television, music, radio, newspaper, magazine, movie, videogame and software industries. We
designed our delivery solution specifically to handle the demanding requirements of delivering rich
media content over the Internet. Our solution enables content providers and aggregators to provide
their end-users with high-quality experiences across any media type, library size, or audience
scale without expending the capital and developing the expertise needed to build out and manage
their own networks.
In designing and building our content delivery network, we built and deployed a
globally-distributed network of thousands of servers specially configured for the delivery of rich
media content with the following design advantages:
Densely
Configured, High-Capacity Architecture.
Our network infrastructure consists of dense
clusters of specially configured servers organized into large, logical CDN locations. The extensive
storage capacity of these logical CDN locations leads to fewer cache misses than would occur in an
early CDN architecture and provides maximum scalability and responsiveness to surges in end-user
demand.
Many Connections to Other Networks.
Our logical CDN locations are directly connected to
hundreds of user access networks, which are computer networks connected to end-users. In addition,
for dedicated connectivity between our logical CDN locations, we lease our own private optical
backbone and metro area networks. Lastly, our infrastructure has multiple connections to the
Internet. In combination, these connections enable us to frequently bypass the often-congested
public Internet, improving the speed of content delivery.
Intelligent Software to Manage the Network.
We have developed proprietary software that
manages our content delivery system. This software intelligently manages the delivery of content
objects, storage and retrieval of customer content libraries, activity logging and information
reporting.
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Flexibility
to Meet Varying Customer Demands.
We support both download and streaming
deliveries, and do so across what we believe is one of the broadest range of formats in our
industry, including Adobe Flash, MP3 audio, QuickTime, RealNetworks RealPlayer and Windows Media.
All of the elements of our network work seamlessly together. Content providers either upload
content directly to us or store it on their own web servers. Upon request from an end-user, we
distribute that content to one or more massive storage server clusters which feed hundreds of
specially configured servers at each content delivery location around the world. The content is
then delivered directly to end-users through our relationships with
over 800 broadband Internet
service providers, or over the public Internet if appropriate. Our customers compensate us
for this service by paying us on a per-gigabyte basis, or on a variable basis based on peak
delivery rate for a fixed period of time, as our services are used.
Key Benefits of the Limelight Networks Solution
Our content delivery network architecture and service offering were designed and built
specifically to meet the demands of rich media content delivery. We are able to deliver the
following customer benefits:
High Quality User Experience
We
enable content providers to bypass much of the congestion typically
experienced in the busy public Internet and deliver rich
media content directly to their audiences. This
allows our customers to deliver engaging and reliable experiences to end-users around
the world. We accomplish this by delivering content from globally distributed servers that are
directly connected to over 800 broadband access networks the networks that users connect with to
reach the Internet. Tying it all together is a high-speed, dedicated global optical network that
interconnects our thousands of servers and provides just-in-time delivery of any part of a
customers library.
High Scalability Across the Four Dimensions of Delivery
At the technology level, our success is predicated on a high-speed,
highly scalable global
network that has been designed to address four dimensions of delivery object size, library size, audience size
and object popularity. For each dimension, our supporting technology takes an innovative approach:
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Object size.
Our network was designed with extensive storage capacity and substantial computing power to
handle the demands of delivering massive media files to users around the world.
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Library size.
Our regional content delivery centers use a multi-tiered cache
architecture to store large content libraries for immediate access.
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Audience size.
The current global delivery capability of our network exceeds 1.5 terabits per second,
enabling us to respond instantly to surges in end-user demand from large global
audiences.
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Object popularity.
Our CDN ensures that every object in a content library whether the most popular title or
the least popular will be consistently available to users, on demand.
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High Reliability
Our distributed CDN architecture, managed by our proprietary software, seamlessly and
automatically responds in real time to network and datacenter outages
and disruptions. All of our content delivery
network locations are interconnected via our global optical network and also connected to multiple
Internet backbone and broadband Internet service provider networks. Additionally, each location has
multiple redundant servers, enabling us to continue serving content even if a network connection or
server fails. Automatic failover and recovery not only provide uninterrupted customer service but
also simplify network maintenance and upgrades.
Comprehensive Solution
Enabled by a broad range of innovative products and services, customers can reach their
audiences in two ways: via streaming delivery, which allows the simultaneous delivery and viewing
of rich media such as live events and on-demand content; and via object
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delivery, for distributing such content as high-quality video and music, games, social media
and software downloads. We can also create customized, private CDNs to meet the specific needs of
highly customized content delivery requirements, including enabling Software as a Service (SaaS)
businesses, public sector entities and corporate organizations for whom security and privacy are
paramount. We support a broad variety of formats including Adobe Flash, MP3 audio, QuickTime,
RealNetworks RealPlayer and Windows Media. In addition, our value-added services include a
web-based customer portal that provides management information reports and a download manager that
simplifies the downloading process for the end user. We can begin delivery services for a new
customer within days of a customer placing an order.
Low Capital Investment
Our customers can take advantage of our robust network to handle their rich media content
delivery needs without having to invest in expensive equipment, software licenses, or support and
maintenance costs. Customers benefit from the lower cost associated with the delivery of content
using our infrastructure, which is designed specifically for delivering rich media content, and the
expertise we have acquired from serving our customers. Our customers pay for the traffic we deliver
for them, and they have the flexibility to purchase additional delivery capacity at any time to
support their changing business needs.
Services
Our services are purpose-built for the delivery of digital media to large, global audiences.
Our primary services are the following:
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LimelightDELIVER HTTP distribution of large and small media objects
to global audiences;
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LimelightSTREAM Fast, reliable and scalable streaming delivery; and
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LimelightCUSTOM-Private CDNs tailored for customer needs requirements.
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A customer typically chooses LimelightDELIVER for digital media files, such as purchased
movies and games, or standard http objects, such as gifs and jpegs, which are destined to reside,
either permanently or for some period of time, on a users computer or other device. A customer
typically chooses LimelightSTREAM for live events, Internet radio services, and other content that
is not intended to reside on the users device for even a short period of time. A customer
typically chooses LimelightCUSTOM if it has one or more unique requirements that are not commonly
supported by CDNs, such as the need to execute proprietary software from the edge servers of the
CDN. In many cases, a customer will choose more than one of these services, utilizing different
services for different content types or services.
LimelightDELIVER and LimelightSTREAM
LimelightDELIVER provides HTTP/web distribution of digital media files such as video, music,
games, software and social media.
LimelightSTREAM provides on-demand and/or live streaming for all major formats including Adobe
Flash, MP3 audio, QuickTime, RealNetworks RealPlayer and Windows Media. When media files are
streamed to an end-user, the files are not stored on the users computer, but rather are received
directly and played by the users media player software in real-time.
The following are additional options for customers of our LimelightDELIVER and LimelightSTREAM
services:
Advanced reporting and control
A flexible customer portal called the Limelight User eXchange, or LUX, provides detailed
information to help customers analyze their operations. A robust set of reports allow customers to
monitor various aspects of their streaming or content delivery, such as object-level details,
bandwidth and storage utilization, most requested content, and minutes listened or watched on each
stream. Customers can request raw logs every 24 hours or live logs every 15 minutes, both of which
are delivered in industry-standard format. For LimelightDELIVER, LUX provides download receipts
which allow customers to receive and parse data about each file transaction, including details such
as date, time, total bytes delivered, download time, and client IP address.
LUX also enables customers to control how we publish and present their content. For example,
to maintain content freshness or for managing exceptions, the Purge Utility allows authorized
individuals to delete content cached across our CDN. Multi-user access and permission controls give
customers the ability to limit access to reporting only, or to reporting and control functions.
MediaVault
We offer a highly scalable security option that protects customers content from unauthorized
access. With MediaVault, customers can associate a protected URL for each user and/or each request
as part of the download URL. This allows customers to provide authorized users access to content
without having to modify the content itself for each user. It also helps to prevent abuse from
spiders, bots, and deep linking. Additional MediaVault controls include settings for start and stop
dates/times, perfect for time-sensitive content and the ability to limit access for Windows Media
streams to a block of IP addresses. Because the system is token-based, it avoids unwanted three-way
handshakes, common to other methods of authentication that can lead to server latency.
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FLV Seek
With FLV Seek, customers can give their users more flexibility in how they play Flash Video
files. For example, if they want to skip the first half of the video and start at the halfway
point, only the second half of the file will be downloadedproviding faster access to desired
content and reducing the size of the download.
Headers
In customer-origin configurations, the Headers feature enables customers to set business rules
for how long their files remain in cache on our CDN, especially useful for highly volatile
content. Since the Header settings are on the customers server, the customer is always in
control.
Geo Reporting
With the Geo Reporting option, customers can assess traffic at the global, continent or
city-by-city levels. Customers may view geographic information in a selection of table and map
formats, including color-coded maps that show customers the active spots around the world.
Customers may choose to display all geographies at once or only the top 10 locations. As with the
LUX Reporting service, customers can compare locations based on number of requests, bytes sent, and
total seconds, or as a percent of total volume. Customers may view the map to see data associated
with that location, or click for more detail by country, state, or city. With quick and easy views
of traffic data in different geographies, customers are in a position to determine and deliver
targeted content and advertising to audiences around the world.
Geo-Compliance
The Geo-Compliance option uses a geo-IP database to match requestors IP address with
predefined rule sets. This makes it easy to ensure that customers content is not accessible
outside of a defined geographic areaideal for managing media licenses with geographic
restrictions. For sites where advertising is a primary driver, Geo-Compliance can help a customer
constrain its audience to the target geography of the customers sites advertisers.
User-generated content
We make it easy to add user-generated content to customers sitesin the customers choice of
major media formats, including Windows Media, Flash, RealPlayer, QuickTime, and 3GPP. Starting with
a customers source content, a customer can define its workflow: choose its encoding/transcoding
profile, specify one or more target formats, set the bit rate, and specify the destination sites or
devicesand the customers media is transformed and published automatically. As part of the
workflow, a customer can also choose to generate thumbnails, create titles, or add watermarks to
video content. Customers can customize the included workflow templates, or build their own.
LimelightCUSTOM
Our Custom CDN provides customized content delivery deployments and solutions, built with some
or all of our standard CDN components, but in a configuration unique to the customer. A typical
Custom CDN solution includes specific servers and related resources dedicated to a particular
customer so that custom applications or services may be placed on our network along with the
customers digital media content. Our Custom CDN offerings also include Limelight professional
services for implementing and managing the solution.
Complementary Partner Services
As a leader in the industry, we have attracted a list of partners that use our network to
enhance their own service offerings. Additionally, these partners offer services that complement
our core offerings. These partner services include digital rights management, content management
systems, advertising insertion, content encoding and transcoding, e-commerce systems and managed
hosting.
Technology
We have developed an innovative system for Internet-based delivery of digital media, based on
a content delivery network built specifically for large media files, high bit-rate media streams,
expanding content libraries and global audiences. This system and technology platform has the
following key elements:
Globally-Deployed Servers
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We have built and deployed a globally distributed network of more than
7,000 servers specially configured for the delivery of rich media
content at 62 points of presence, or POPs, and 19 logical CDN
locations, or a group of POPs, in the U.S., Europe and Asia.
Distributing servers around the world can eliminate much of the
Internet congestion and inconsistent network performance that would
otherwise affect the delivery of content. This reduces or eliminates
the visible symptoms of poor Internet performance, including slow
start times and stopping or skipping during playback.
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Densely-Configured, High-Capacity Architecture
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Our architecture consists of dense clusters of specially-configured
edge servers and storage servers deployed at each POP. A logical CDN
location is provisioned with hundreds of edge servers, which users
connect to and which store our customers most popular content files.
A logical CDN location also contains one or more intermediate storage
systems, which act as large, deep media file caches and store less
frequently requested content files. When an edge server in the logical
CDN location needs a file that it does not have, it can often retrieve
that object from the intermediate storage system, rather than from a
customers website servers or from another location in our system.
These retrievals from intermediate storage systems are very fast,
because they occur across a local area or metro area ethernet network,
rather than across our backbone or across the public Internet. This
architecture enables us to maximize the amount of content stored at
each CDN location without requiring that we store every content file
on every edge server.
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We have configured each of our CDN locations to connect with hundreds
of networks. They are also equipped with the capacity to support
additional network connections as needed. This design allows us to
provide maximum scalability and responsiveness as end-user demand
increases. In addition, any server within a CDN location can send and
receive data via any network at that location. This any-to-any
capability allows us to use our network connections to the greatest
extent possible, without having to simultaneously optimize servers and
networks, as some CDNs do. Each of our edge servers has access to
whichever locally attached network is best for each delivery.
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Connectivity
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In aggregate, our logical CDN locations are directly connected to over
800 broadband Internet access networks around the world. Whenever
possible, we use these interconnections to place content objects
directly on users access networks, which means those users requested
files reach them without ever traversing the public Internet.
We believe that there is no faster method available for delivering
content to a user. More than half of our total content delivery volume
is delivered in this fashion.
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When we are not connected directly to the users broadband Internet
access provider, we use commercial Internet carriers to deliver
content objects to the users broadband provider. We maintain
commercial relationships with many of the worlds largest Internet
carriers, including AT&T, Deutsche Telekom, France Telecom and Global
Crossing, with multiple commercial Internet carrier connections at
each of our CDN locations.
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Our CDN locations in the United States and Europe are connected
together via a dedicated optical backbone, which we operate, that
includes redundant 10 gigabit per second connections to every
location. Our logical CDN locations in Asia are connected to our
U.S./Europe network via managed circuits. By connecting all of our
locations with a network infrastructure that we operate and on which
we manage the traffic flows (rather than relying on the
often-congested public Internet), we are able to rapidly move objects
around our network when needed to service user requests. Also, using
our own network, rather than relying on the public Internet, means
that the stream our edge server acquires will be as high-quality as
the stream we receive from our customer.
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Intelligence
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We have developed proprietary software that manages our content
delivery system. This software consists of several components:
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Edge server software for managing download and streaming delivery of content objects;
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Software for assigning resources within our infrastructure and for systematically
improving our infrastructure over time as our customers and infrastructure
components change;
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Intermediate cache server systems and software for storing customer content
libraries; and
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Customer portal and customer reporting software.
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Flexibility
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Using our proprietary edge server software, we handle both download
and streaming deliveries across what we believe is one of the broadest
range of formats in our industry, including Adobe Flash, MP3 audio,
QuickTime, RealNetworks RealPlayer and Windows Media.
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Business Segments and Geographic Information
We operate in one business segment: providing content delivery network services. We operate in
three geographic areas the United States, Europe and Asia Pacific. For the years ended
December 31, 2007, 2006 and 2005, approximately 13%, 8% and 5%, respectively, of our total revenues
was derived from our operations outside the United States, of which 12%, 8% and 5% of overall
revenues, respectively, was derived from Europe. No single country outside of the United States
accounted for 10% or more of our revenues in any of such years. 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 16 thereto.
Sales, Service and Marketing
Our sales and service professionals are located in 3 offices in the United States with
additional locations in Europe and Asia. We sell our services directly through our telesales and
field sales forces. We also have customers who incorporate our services into their offerings and
function as resellers, as well as other distribution partners. We target media, high tech,
enterprise and government agencies and other providers of online media content through our:
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Telesales force.
Our telesales force is responsible for managing
direct sales opportunities within the mid-market within North America.
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Field sales force.
Our field sales force is responsible for managing
direct sales opportunities in major accounts in North America, Europe
and the Asia Pacific region.
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Distribution partners.
We have certain customers who incorporate our
services into their offerings, and we also maintain relationships with
a number of resellers and distribution partners.
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Our sales and service organization includes employees in telesales and field sales,
professional services, account management and solution engineering. As of December 31, 2007, we
had approximately 115 employees in our sales and support organization, including 47 telesales and
field sales representatives whose performance is measured on the basis of achievement of quota
objectives. 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 strategic alliances. We believe that the
complexity of our services will continue to require a number of highly trained global sales and
services personnel.
To support our sales efforts and promote the Limelight brand, we conduct comprehensive
marketing programs. Our marketing strategies include an active public relations campaign, print
advertisements, on-line advertisements, participation at trade shows, strategic alliances and
on-going customer communication programs. As of December 31, 2007, we had 6 employees in our global
marketing organization, which is a component of our sales and support organization.
Customers
Our core set of customers are media, software, web 2.0, enterprises and government agencies
and other providers of online media content. As of December 31, 2007, we had 1,157 active customers
worldwide, including many top names in the fields of video, digital music, new media, games, rich
media applications and software delivery. Based on 2007 revenue, our largest customers in each of
these fields included:
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Video:
MSNBC, Walt Disney Group, Amazon, Viacom.
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Music:
ABC Radio, Rhapsody
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Games:
Microsoft (XBOX), Valve Corporation, Electronic Arts, Sony
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Software:
Microsoft, Oracle.
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Social Media:
MySpace.com, Daily Motion.
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One customer, Microsoft, accounted for more than 10% of our revenue for the year ended
December 31, 2007. For the year ended December 31, 2006, we had one customer, CDN Consulting, which
acted as a reseller of our services primarily to MySpace.com, who accounted for more than 10% of
our revenue. No customer accounted for more than 10% of our revenue in 2005.
Competition
The
content delivery network market is highly competitive and is
characterized by constantly declining prices and multiple
types of vendors offering varying combinations of computing and bandwidth to content providers. A
few 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. Our
primary competitors include content delivery service providers such as Akamai, Level 3 Communications and Internap Network Services Corporation, which acquired
VitalStream. Also, as a result of the growth of the content delivery market, a number of companies
are attempting to enter our market, either directly or indirectly, some of which may become
significant competitors in the future. Internationally, we compete with local content delivery
service providers, many of which are very well positioned within their local markets.
We believe that the principal competitive factors affecting the content delivery market
include such attributes as:
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Performance, as measured by file delivery time and end-user media consumption rates;
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Scalability; both in terms of average capacity and special event capacity;
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Proprietary software designed to efficiently locate and deliver large media files;
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Ease of implementation;
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Flexibility in designing delivery systems for unique content types and mixes;
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Reliability; and
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Cost efficiency.
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While a few of our current competitors have longer operating histories, greater name
recognition and greater financial, technical and marketing resources than we do, we believe that we
compete favorably on the basis of these factors, taken as a whole. In particular, we believe that
our core focus on solving the unique challenges associated with the delivery of massive media files
has made our service offerings compete strongly in the areas of performance and scalability, which
are two of the most critical elements involved in the delivery of rich media content over the
Internet.
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 content delivery
network system. As of December 31, 2007, we had 23 employees in our research and development group,
substantially all of whom were located at our headquarters in Tempe, Arizona. Our engineering
efforts support product development across all major types of rich media content, including videos,
music, games, software and social media, in various file formats and protocols such as Adobe Flash,
MP3 audio, QuickTime, RealNetworks RealPlayer and Windows Media. We test our system to ensure
scalability in times of peak media demand. We use internally-developed and third-party software to
monitor and to track 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
approximately $5.5 million in 2007, $3.2 million in 2006 and $0.5 million in 2005, including
stock-based compensation expense of approximately $2.8 million in 2007 and $1.7 million in 2006. We
believe that the investments that we have made in research and development have been effectively
utilized. In the future, we anticipate that our research and development expenditures will increase
in absolute dollars and increase as a percentage of our revenue.
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, 2007, we have received 1 patent in the United States and we have 15 patent
applications pending. We have 54 pending applications in foreign countries and 2 patent
applications filed under the Patent Cooperation Treaty awaiting possible entry into the regional or
national phase. 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.
We have received 3 trademarks and have 4 pending trademark applications in the United States.
Our name, Limelight Networks,
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has been filed for multiple classes in the United States, Australia,
Canada, the European Union, India, Japan, South Korea and Singapore. We have 16 pending trademark
applications in foreign countries and 8 non-U.S. trademark applications have issued. 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 through intellectual
property rights and 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
intend to expand 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 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.
As described under Legal Proceedings in Part 1, Item 3 of this annual report on Form 10-K,
we are currently party to two separate lawsuits alleging aspects of our CDN infringe upon third-party patent rights. In one matter, Akamai Technologies, Inc. v. Limelight Networks, Inc., a jury
returned a verdict in February 2008 against us finding we infringed four claims of one patent at
issue in that lawsuit, and awarded damages of approximately
$45.5 million plus pre-judgment interest estimated to be
$2.6 million. We are pursuing a number
of equitable defenses and we have also filed several motions with the court seeking relief from the
jury verdict. We continue to believe the claims of infringement asserted against us are without
merit and that the jury verdict is incorrect. We will continue to defend this lawsuit vigorously,
but we cannot provide any assurance that the lawsuit will ultimately be resolved in our favor. In
December 2007, Level 3 Communications, LLC filed a lawsuit against us in the U.S. District Court
for the Eastern District of Virginia alleging we infringe three patents owned by it. We believe
the infringement claims in this lawsuit are also without merit, and we will defend the action
vigorously. Please refer to the Legal Proceedings section of this report referred to above for
more detailed information about these two lawsuits.
As we gain greater visibility and market exposure as a public company, we are likely to face
an increased risk of being the subject of intellectual property infringement claims from other
third parties.
Employees
As of December 31, 2007, we had 239 employees, including 121 in sales and marketing, 73 in
network engineering and operations, 23 in research and development and 22 in general and
administrative. Of these employees, 217 are based in the United States, 12 are based in the United
Kingdom and 10 are based in Japan. In addition, we have 1 sales and marketing consultant based in
Singapore. 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.
Competition for technical personnel in the industry in which we compete is intense. We believe that
our future success depends in part on our continued ability to hire, assimilate, and retain
qualified personnel. To date, we believe that we have been successful in recruiting and retaining
qualified employees, but there is no assurance that we will continue to be successful in the
future.
Executive Officers
Our executive officers and their ages and positions as of March 1, 2008 are as follows:
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Name
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Position
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Jeffrey W. Lunsford
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President, Chief Executive Officer and Chairman
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Nathan F. Raciborski
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Co-Founder, Chief Technical Officer and Director
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Michael M. Gordon
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Co-Founder and Chief Strategy Officer
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Matthew Hale
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Chief Financial Officer
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David M. Hatfield
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Senior Vice President of Worldwide Sales, Marketing and Services
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Philip C. Maynard
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Senior Vice President, Chief Legal Officer and Secretary
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Jeffrey W. Lunsford
has served as our President, Chief Executive Officer and Chairman since
November 2006. Prior to joining us, Mr. Lunsford served as Chairman and Chief Executive Officer of
WebSideStory, Inc., now known as Visual Sciences, Inc., a provider
of real-time data analytics and visualization applications, from April 2003 to November 2006.
Prior to that, he served as the Chief Executive Officer of TogetherSoft Corporation, a software
development company, from September 2002 to February 2003, and as the Senior Vice President of
Corporate Development of S1 Corporation, a provider of customer interaction software for financial
and payment services, from March 1996 to August 2002. He also currently serves on the board of
directors of
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Midtown Bank and Trust Company. Mr. Lunsford received a B.S.
in Information and Computer Sciences from the Georgia Institute of Technology.
Nathan F. Raciborski
, one of our Co-Founders in June 2001, has served as our Chief Technical
Officer since June 2001 and as a director since July 2006. Prior to co-founding Limelight,
Mr. Raciborski was the Co-Founder and Chief Technical Officer of Aerocast, Inc., from 1999 to 2000.
In 1997, he co-founded Entera and served on its board of directors until it was acquired by
Cacheflow in 2000. In 1993, Mr. Raciborski co-founded and served as President, Chief Executive
Officer and Director of Primenet Services for the Internet, which later merged with GlobalCenter,
Inc. where he served as President and Director. GlobalCenter was acquired in 1997 by Frontier
Communications, Inc., where he served as President of Network Services until 1998. He also
currently serves as a managing member of Cocoon Capital, LLC, a private venture fund.
Michael M. Gordon
, one of our Co-Founders in June 2001, has served as our Chief Strategy
Officer since January 2005. Prior to joining us in a full-time capacity, Mr. Gordon served as a
Consulting Expert to Keller Rohrback PLC, a law firm, from January 2003 through April 2004. Prior
to that, he served as Co-founder and Chief Executive Officer of Axient Communications, Inc. from
January 1999 through October 2002. Mr. Gordon received a B.S. in Finance from Ohio State
University.
Matthew Hale
has served as our Chief Financial Officer since December 2006. Prior to joining
us, Mr. Hale served as President of S1 Corporation, a provider of customer interaction software for
financial and payment services, from October 2005 to November 2006. He also previously served in
several senior financial positions at S1 Corporation from April 2000 to March 2006, most recently
as Chief Financial Officer from September 2001 to March 2006. Prior to that, from 1995 to 2000,
Mr. Hale served as Chief Financial Officer of CCI-Triad Systems, Inc., a provider of enterprise
inventory control and point of sale systems. Mr. Hale also spent over eight years with the
accounting firm of Ernst & Young LLP (formerly, Ernst & Whinney). He is a member of the California
and American Institutes of Certified Public Accountants. Mr. Hale received a B.B.A. in Accounting
from Idaho State University.
David M. Hatfield
has served as our Senior Vice President of Worldwide Sales, Marketing and
Services since March 2007. Prior to joining us, Mr. Hatfield served as Vice President-General
Manager of Symantec Professional Services for the Americas at Symantec Corporation from September
2006 to March 2007 and as the Vice President of Sales, Western Area, at Symantec from April 2005 to
September 2006. Prior to that, from December 2003 to April 2005, Mr. Hatfield served as Vice
President of Sales of VERITAS Software. From October 2001 to October 2003, he served as the Vice
President of Worldwide Field Operations at Reardon Commerce, Inc. (formerly Talaris Corporation).
Mr. Hatfield also served in a number of senior sales positions at Akamai Technologies, Inc. from
September 1999 to October 2001, most recently as the Director of North America Sales. Mr. Hatfield
received a B.S. in Political Science from Santa Clara University.
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 IBMs 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.
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
A jury has determined that we are infringing a competitors patent, and an injunction may be
entered against us that could force us to cease providing our CDN services.
In February 2008, a jury returned a verdict in a patent infringement lawsuit filed by Akamai
Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, against us,
finding that we infringed four claims of the patent at issue and rejecting our invalidity defenses.
The jury awarded Akamai an aggregate of approximately $45.5 million in lost profits, reasonable
royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million that
we have recorded in 2007. A final judgment has not
yet been entered. We are still pursuing a number of equitable defenses, and we recently filed
several motions seeking relief from the Court. Akamai has filed motions for summary judgment on
our remaining equitable defenses, which we will oppose. We continue to believe that the claims of
infringement asserted against us by Akamai and MIT in the present litigation are without merit and
that the jurys verdict is incorrect, and we will continue to defend the case vigorously; however,
we cannot assure you that this lawsuit
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ultimately will be resolved in our favor. An adverse
judgment or injunction 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
CDN to deliver certain types of traffic, which could impact the
viability of our business. These adverse outcomes, in turn, would harm our revenue,
market share, reputation, liquidity and overall financial position. Whether or not we prevail in
this case, we expect that the litigation will continue to be expensive, time consuming and a
distraction to our management in operating our business. This lawsuit and other ongoing legal
proceedings are described under Legal Proceedings in Part 1, Item 3 of this annual report on Form
10-K,
We may need to defend our intellectual property and processes against patent or copyright
infringement claims, which would cause us to incur substantial costs and threaten our ability to do
business.
Companies, organizations or individuals, including our competitors, 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. For example, in June 2006, we were
sued by Akamai and MIT alleging we infringed patents licensed to Akamai, and in February 2008 a
jury returned a verdict in this case, finding that we infringed four claims of the patent at issue
and rejecting our invalidity defenses. The jury awarded Akamai an aggregate of approximately $45.5
million in lost profits, reasonable royalties and price erosion damages, plus pre-judgment interest
estimated to be $2.6 million that we have recorded in 2007. Although a final judgment has not yet
been entered, an adverse judgment or injunction 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 CDN to deliver certain types of
traffic, which could impact the viability of our business. In addition, in December
2007, Level 3 Communications, or Level 3, filed a lawsuit against us alleging that we are
infringing three patents Level 3 allegedly acquired from Savvis Communications Corp. In addition
to monetary relief, including treble damages, interest, fees and costs, the complaint seeks an
order permanently enjoining us from conducting our business in a manner that infringes the relevant
patents. Any litigation or claims, whether or not valid, could result in substantial costs and
diversion of resources. See Legal Proceeding in Part I, Item 3 of this annual report on Form
10-K. In addition, if we are determined to have infringed upon a third partys 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;
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pay substantial damages;
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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
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redesign products or services.
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If we are forced to take any of these actions, our business may be seriously harmed. In the
event of a successful claim of infringement against us and our failure or inability to obtain a
license to the infringed technology, our business and operating results could be harmed.
Our limited operating history makes evaluating our business and future prospects difficult, and may
increase the risk of your investment.
Our company has only been in existence since 2001. A significant amount of our growth, in
terms of employees, operations and revenue, has occurred since 2004. For example, our revenue has
grown from $5.0 million in 2003 to $65.2 million in 2006 and to $103.1 million in 2007. As a
consequence, we have a limited operating history which makes it difficult to evaluate our business
and our future prospects. We have encountered and will continue to encounter risks and difficulties
frequently experienced by growing companies in rapidly changing industries, such as the risks
described in this annual report on Form 10-K. If we do not address these risks successfully, our
business will be harmed.
If we fail to manage future growth effectively, we may not be able to market and sell our services
successfully.
We have recently expanded our operations significantly, increasing our total number of
employees from 29 at December 31, 2004 to 239 at December 31, 2007, and we anticipate that further
significant expansion will be required. Our future operating results depend to a large extent on
our ability to manage this expansion and growth successfully. Risks that we face in undertaking
this expansion include: training new sales personnel to become productive and generate revenue;
forecasting revenue; controlling expenses and investments in anticipation of expanded operations;
implementing and enhancing our content delivery network, or CDN, and administrative infrastructure,
systems and processes; addressing new markets; and expanding international operations. A failure to
manage our growth effectively could materially and adversely affect our ability to market and sell
our products and services.
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 constantly declining prices and vendors offering a wide range of content delivery solutions. We have experienced and expect to
continue to experience increased competition. Many of our current competitors, as well as a number
of our potential competitors, have longer operating histories, greater name recognition, broader
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customer relationships and industry alliances and substantially greater financial, technical and
marketing resources than we do.
Our primary competitors include content delivery service providers such as Akamai, Level
3 Communications and Internap Network Services Corporation, which acquired VitalStream.
Also, as a result of the growth of the content delivery market, a number of companies are currently
attempting to enter our market, either directly or indirectly, some of which may become significant
competitors in the future. Our competitors may be able to respond more quickly than we can to new
or emerging technologies and changes in customer requirements. Given
the relative ease by which customers typically can switch among CDN
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.
We may lose customers if they elect to develop content delivery solutions internally.
Our customers and potential customers may decide to develop their own content delivery
solutions rather than outsource these solutions to CDN services providers like us. This is
particularly true as our customers increase their operations and begin expending greater resources
on delivering their content using third-party solutions. For example, MusicMatch was our most
significant customer in 2004 and one of our top 10 customers in 2005, but following its acquisition
by Yahoo! Inc., MusicMatchs content delivery requirements were in-sourced and it was not a
customer of ours at all in 2006. In 2006, one customer within our top 10 customers, MySpace.com,
which was contracted through a reseller of our services, CDN Consulting accounted for approximately
21% of our total revenue for that period. At the end of 2006, MySpace became a direct customer of
ours. During 2007, sales to the MySpace.com were approximately 3% of our total revenue. For the
year ended December 31, 2007, sales to the reseller CDN Consulting were less than 1% of revenue
after this change. If we fail to offer CDN 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.
Rapidly evolving technologies or new business models could cause demand for our CDN services to
decline or could cause these services to become obsolete.
Customers or third parties may develop technological or business model innovations that
address content delivery requirements in a manner that is, or is perceived to be, equivalent or
superior to our CDN services. If competitors introduce new products or services that compete with
or surpass the quality or the price/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. For example, one or more third parties
might develop improvements to current peer-to-peer technology, which is a technology that relies
upon the computing power and bandwidth of its participants, such that this technological approach
is better able to deliver content in a way that is competitive to our CDN services, or even that
makes CDN services obsolete. 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 CDN 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, which could harm our revenue, gross margin and operating results.
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. Recently, we have invested significant amounts in purchasing capital
equipment to increase the capacity of our content delivery services. For example, in 2006 we
invested $40.6 million in capital expenditures and invested $22.7 million in capital expenditures
during 2007, primarily for computer equipment associated with the build-out and expansion of our
CDN. 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.
In addition, during 2008 and beyond, we expect to increase our expenses, in absolute
dollars, in substantially all areas of our business, including sales and marketing, general and
administrative, and research and development. During 2008 and 2009, as we further expand our CDN,
and we begin to refresh our network equipment, we also expect our capital expenditures to be
generally consistent with the high level of expenditures we made in this area in 2006 and 2007. As
a consequence, we are dependent on significant future growth in demand for our services to provide
the necessary gross profit to pay these additional expenses. 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:
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failure to increase sales of our core services;
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significant increases in bandwidth and rack space costs or other operating expenses;
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inability to maintain our prices relative to our costs;
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failure of our current and planned services and software to operate as expected;
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loss of any significant customers or loss of existing customers at a rate greater than our
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increase in new customers or our sales to existing customers;
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failure to increase sales of our services to current customers as a result of their ability to reduce
their monthly usage of our services to their minimum monthly contractual commitment;
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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 services in accordance with their contractual commitments; and
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inability to attract high-quality customers to purchase and implement our current and planned services.
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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
may suffer.
The market for our CDN services is characterized by rapidly changing technology, evolving
industry standards and new product and service introductions. Our operating results depend on our
ability to 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. For example, during 2007 we introduced
our Geo-Compliance paid service option, and we do not yet know whether our customers will adopt
this offering in sufficient numbers to justify our development costs. Furthermore, we may not
execute successfully our technology initiatives 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. Failures in execution 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.
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. For example, in 2007, sales to our top 10 customers,
in terms of revenue, accounted for approximately 45% of our total revenue. During 2006, revenue
generated from sales to our top 10 customers, in terms of revenue, accounted for approximately 55%
of our total revenue. During 2007 one of these top 10 customers, Microsoft, represented
approximately 12% of our total revenue for that period. During 2006, one customer within our top 10
customers, CDN Consulting, which acted as a reseller of our services primarily to MySpace.com,
accounted for approximately 21% of our total revenue for that period. At the end of 2006, MySpace
became a direct customer of ours. During 2007, sales to the reseller CDN Consulting were less than
1% of revenue after this change. During 2007, sales to MySpace were approximately 3% of our
revenue. In the past, the customers that comprised our top 10 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 are generally one year in length. Our
customers have no obligation to renew their contracts for our services after the expiration of
their initial commitment period, 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. Because of our limited operating history,
we have limited historical data with respect to rates of customer service agreement renewals. This
fact, in addition to the changing competitive landscape in our market, means that we cannot
accurately predict future customer renewal rates. Our customers renewal rates may decline or
fluctuate as a result of a number of factors, including:
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their satisfaction or dissatisfaction with our services;
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the prices of our services;
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the prices of services offered by our competitors;
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mergers and acquisitions affecting our customer base; and
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reductions in our customers spending levels.
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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 will 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 CDN services to
industries, such as enterprise and the government. As an organization, we do not have significant
experience in selling our services into 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.
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.
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 CDN services;
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the addition or loss of large customers, or significant variation in their use of our CDN services;
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costs associated with current or future intellectual property lawsuits;
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service outages or security breaches;
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the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our
business, operations and infrastructure;
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the timing and success of new product and service introductions by us or our competitors;
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the occurrence of significant events in a particular period that result in an increase in the use of our CDN services,
such as a major media event or a customers online release of a new or updated video game;
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changes in our pricing policies or those of our competitors;
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the timing of recognizing revenue;
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share-based compensation expenses associated with attracting and retaining key personnel;
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limitations of the capacity of our content delivery network and related systems;
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the timing of costs related to the development or acquisition of technologies, services or businesses;
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general economic, industry and market conditions and those conditions specific to Internet usage and online businesses;
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limitations on usage imposed by our customers in order to limit their online expenses; and
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geopolitical events such as war, threat of war or terrorist actions.
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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.
After being profitable in 2004 and 2005, we were unprofitable in 2006 and 2007 primarily due in
part to increased stock-based compensation expense and litigation costs, which could affect our ability to achieve and
maintain profitability in the future.
Our adoption of SFAS 123R in 2006 substantially increased the amount of share-based
compensation expense we record and has had a significant impact on our results of operations. After
being profitable in 2004 and 2005, we were unprofitable in 2006 and 2007;
partially due to an increase in our share-based compensation expense, which increased from
$0.1 million in 2005 to $9.2 million in 2006 and further increased to $18.9 million in 2007. This
significant increase in share-based compensation expense reflects an increase in the level of
option and restricted stock grants coupled with a significant increase in the fair market value per
share at the date of grant. Our unrecognized share-based compensation expense totaled $47.4 million
at December 31, 2007, of which we expect to amortize $15.0 million in 2008, $15.5 million in 2009
and the remainder thereafter based upon the scheduled vesting of the options outstanding at that
time. We further expect our share-based compensation expense to decrease in 2008 and potentially to
increase
16
thereafter as we grant additional options or restricted stock awards. The increased
share-based compensation expense could adversely affect our ability to achieve and maintain
profitability in the future. In 2006, we were sued by Akamai and MIT
alleging infringement of certain patents. We have incurred, and will
continue to incur, significant costs associated with litigation.
These costs were $6.8 million and $3.2 million in 2007 and
2006, respectively, and we expect these costs to increase in 2008.
We generate our revenue almost entirely from the sale of CDN 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 associated with our CDN, we generated
nearly 100% of our revenue in 2006 and 2007, from charging our customers for the content delivered
on their behalf through our CDN. As we do not currently have other meaningful sources of revenue,
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 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, 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 CDN services, which would seriously harm our operating
results and financial condition.
Many of our significant current and potential customers are pursuing emerging or unproven business
models which, if unsuccessful, could lead to a substantial decline in demand for our CDN 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. For example, social media companies have been among our top
recent customers and are pursuing emerging strategies for monetizing the user content and traffic
on their web sites. Our customers will not continue to purchase our CDN services if their
investment in providing access to the media stored on or deliverable through our CDN does not
generate a sufficient return on their investment. A reduction in spending on CDN services by our
current or potential customers would seriously harm our operating results and financial condition.
Our business will 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. These legal protections
afford only limited protection, and we have only one currently issued patent. 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. We have
applied for patent protection in a number of foreign countries, but the laws in these jurisdictions
may not protect our proprietary rights as fully as in the United States. Furthermore, we 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.
Any unplanned interruption in the functioning of our network or services 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 application and content delivery services over the Internet. Many of our customers
depend primarily or exclusively on our services to operate their businesses. Consequently, any
disruption 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, failure of our software or
CDN delivery infrastructure and power losses. In addition, we deploy our servers in approximately
60 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 or other attacks by unauthorized users.
While we have not experienced any significant, unplanned disruption of our services to
date, our CDN 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 of the functioning of
our CDN and related 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
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 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.
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Our CDN services are highly complex and are designed to be deployed in and across
numerous large and complex networks. Our 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
products and services, the more resources we will need to invest in additional infrastructure and
support. 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 and to roll out new products 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 expand successfully, or if we experience inefficiencies
and operational failures, the quality of our products 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 CDN. 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 a third party provider, Global
Crossing Ltd. Our contracts for private line capacity with Global Crossing generally have terms of
three 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 provider. As it would be time consuming and expensive to
identify and obtain alternative third-party connectivity, we are dependent on Global Crossing in
the near term. 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 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, such as the deployment of a variety of filters,
that could degrade, disrupt or increase the cost of our or our customers access to certain of
these end-user access networks by restricting 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. 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 CDN to a large number of end-user access networks, known as peering, which we
achieve through mutually beneficial cooperation with these networks. If in the future a significant
percentage of these network operators elected to no longer peer with our CDN, the performance of
our infrastructure could be diminished 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 or Windows Media, was limited, our ability to serve our
customers in these formats would be impaired and the demand for our content delivery 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.
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. In particular, we are
dependent on the services of our Chief Executive Officer, Jeffrey W. Lunsford and also our Chief
Technical Officer, Nathan F. Raciborski. Neither of these officers nor any of our other key
employees is bound by an employment agreement for any
specific term. In addition, we do not have key person life insurance policies covering any of our
officers or other key employees, and we therefore have no way of mitigating our financial loss were
we to lose their services. There is increasing competition for talented individuals with the
specialized knowledge to deliver content delivery services and this competition affects both our
ability to retain key employees and hire new ones. 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.
Four members of our senior management team, our President and Chief Executive Officer,
Jeffrey W. Lunsford, our Chief Financial Officer, Matthew Hale, our Senior Vice President of
Worldwide Sales, Marketing and Services, David M. Hatfield, and our
Senior Vice President and Chief Legal Officer, Philip C. Maynard, have been hired since November 2006. As
a result, our senior management team has limited experience working together as a group. This lack
of shared experience could harm our senior management teams 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 and personnel in Japan, the United Kingdom and Singapore, and we
currently maintain network equipment in Australia, Canada, France, Germany, Hong Kong, Ireland,
Japan, the Netherlands and the United Kingdom. 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. We have limited experience in providing our services internationally and
such 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;
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competition from local content delivery service providers, many of which are very well
positioned within their local markets;
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unexpected changes in regulatory requirements resulting in unanticipated costs and delays;
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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;
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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
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corporate and personal liability for violations of local laws and regulations;
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currency exchange rate fluctuations; and
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potentially adverse tax consequences.
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Internet-related and other laws relating to taxation issues, privacy 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. In addition, the laws relating to the liability of private network operators for
information carried on 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 these risks, or are required to defend
ourselves against such claims, our financial results could be negatively affected.
If we are required to seek additional funding, such funding may not be available on acceptable
terms or at all.
We may need to obtain additional funding due to a number of factors beyond our control,
including a shortfall in revenue, increased
expenses, increase investment in capital equipment or the acquisition of significant businesses or
technologies. We believe that our cash, plus cash from operations will be sufficient to fund our
operations and proposed capital expenditures for at least the next 18 months. However, we may need
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
19
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. Further, the availability of our current cash will be
adversely affected if we are required to provide security for the
recent jury verdict in the Akamai trial in connection with a stay of
injunction, should an injunction and stay thereof be issued.
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;
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delivering these services; and
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timely billing for these services.
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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 rollout 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.
If we fail to maintain proper and effective internal controls, 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 very limited
experience in designing and testing our internal controls. For example, during the third quarter of
2007, we discovered material weaknesses in our system of internal controls over our revenue
recognition and stock-based compensation processes that required us to restate our previously
reported consolidated financial statements for the three and nine months ended September 30, 2006,
the three months and year ended December 31, 2006, the three months ended March 31, 2007, and the
three and six months ended June 30, 2007. We are in the process of documenting, reviewing and,
where appropriate, improving our internal controls and procedures. As a newly public company we
will be required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
which will require annual management assessments of the effectiveness of our internal control over
financial reporting. In addition, we will be required to file a report by our independent
registered public accounting firm addressing these assessments beginning with our Annual Report on
Form 10-K for the year ended December 31, 2008. Both we and our independent auditors will be
testing our internal controls in anticipation of being subject to Section 404 requirements and, as
part of that documentation and testing, may identify areas for further attention and improvement.
Implementing any appropriate changes to our internal controls may entail substantial costs to
modify our existing financial and accounting systems, take a significant period of time to
complete, and distract our officers, directors and employees from the operation of our business.
These changes may not, however, be effective in maintaining the adequacy of our internal controls,
and any failure to maintain that adequacy, or a consequent inability to produce accurate financial
statements on a timely basis, could increase our operating costs and could materially impair our
ability to operate our business. In addition, investors perceptions that our internal controls are
inadequate or that we are unable to produce accurate financial statements may seriously affect our
stock price.
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. For example, our recent adoption of SFAS 123R in 2006 has increased the
amount of stock-based compensation expense we record. This, in turn, has impacted our results of
operations for the periods since this adoption and has made it more difficult to evaluate our
recent financial results relative to prior periods.
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 newly public company, we have incurred, and will continue to incur, significant
accounting and other expenses that we did not
incur as a private company. These expenses include increased accounting, legal and other
professional fees, insurance premiums, investor relations costs, and costs associated with
compensating our independent directors. In addition, the Sarbanes-Oxley Act of 2002, as well as
rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Global
Market, impose additional requirements on public companies, including requiring changes in
corporate governance practices. For example, the listing requirements of the Nasdaq Global Market
require that we satisfy certain corporate governance requirements relating to independent
20
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.
Failure to effectively expand 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 expand our sales and marketing operations.
Historically, we have concentrated our sales force at our headquarters in Tempe, Arizona. However,
we have recently begun building a field sales force to augment our sales efforts and to bring our
sales personnel closer to our current and potential customers. Developing such a field sales force
will be expensive and we have limited knowledge in developing and operating a widely dispersed
sales force. As a result, we may not be successful in developing an effective sales force, which
could cause our results of operations to suffer.
We believe that there is significant competition for 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 direct sales personnel. We have expanded our sales and marketing
personnel from a total of 13 at December 31, 2004 to 121 at December 31, 2007. 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 these expansion efforts do
not generate a corresponding significant increase in revenue.
If the 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 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.
As part of our business strategy, we may acquire businesses or technologies and may have difficulty
integrating these operations.
We may seek to acquire businesses or technologies that are complementary to our business.
Acquisitions involve a number of risks to our business, including the difficulty of integrating the
operations and personnel of the acquired companies, the potential disruption of our ongoing
business, the potential distraction of management, expenses related to the acquisition and
potential unknown liabilities associated with acquired businesses. Any inability to integrate
operations or personnel in an efficient and timely manner could harm our results of operations. We
do not have prior experience as a company in this complex process of acquiring and integrating
businesses. 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.
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:
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variations in our operating results;
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announcements of technological innovations, new services or service enhancements, strategic
alliances or significant agreements by us or by our competitors;
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commencement or resolution of, or our involvement in, litigation, particularly our current
litigation with Akamai and MIT;
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21
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recruitment or departure of key personnel;
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changes in the estimates of our operating results or changes in recommendations by any securities
analysts that elect to follow our common stock;
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developments or disputes concerning our intellectual property or other proprietary rights;
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the gain or loss of significant customers;
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market conditions in our industry, the industries of our customers and the economy as a whole; and
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adoption or modification of regulations, policies, procedures or programs applicable to our business.
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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 that affect other companies in our industry
even if these events do not directly affect us.
We
are currently subject to a securities class action lawsuit, the unfavorable outcome of
which might have a material adverse effect on our financial condition, results of operations and
cash flows.
A putative class action lawsuit has been filed against us, certain of our officers
and directors, and the lead underwriters of our recent initial public offering, alleging, among
other things, securities laws violations. While we intend to
vigorously contest this lawsuit and
any similar lawsuits filed against us in the future, we cannot determine the outcome or resolution
of these claims or when they might be resolved. In addition to the expense and burden incurred in
defending this litigation and any damages that we may suffer, our managements efforts and
attention may be diverted from the ordinary business operations in order to address these claims.
If the final resolution of this litigation is unfavorable to us, our financial condition, results
of operations and cash flows may be materially adversely affected if our existing insurance
coverage is unavailable or inadequate to resolve the matter.
If securities or industry analysts do not publish research or reports about our business or if they
issue an adverse or misleading opinion regarding 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, 2007, our directors and executive officers and their affiliates
beneficially owned, in the aggregate, approximately 58% of our outstanding common stock, including
approximately 37% beneficially owned by investment entities affiliated with Goldman, Sachs & Co. As
a result, these stockholders will be 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.
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.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General
Corporation Law may discourage, delay or prevent a change in control by prohibiting us from
engaging in a business combination with an interested stockholder for a period of three years after
the person becomes an interested stockholder, even if a change in control would be beneficial to
our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage,
delay or prevent a change in our management or control over us that stockholders may consider
favorable. Our certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a
takeover attempt;
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provide for a classified board of directors, as a result of which the successors to the directors whose terms have
expired will be elected to serve from the time of election and qualification until the third annual meeting following
their election;
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require that directors only be removed from office for cause and only upon a majority stockholder vote;
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provide that vacancies on the board of directors, including newly created directorships, may be filled only by a
majority vote of directors then in office;
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22
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
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require supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws.
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Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our headquarters are located in three buildings with approximately 7,529, 13,341 and
10,696 square feet respectively, of leased office space in Tempe, Arizona. We also lease
approximately 8,224 square feet of space for a data center in Phoenix, Arizona. We lease offices
in several other locations in the United States, including in or near each of San Francisco
California; Chicago, Illinois; and New York, New York. We also lease offices in Europe and Asia in
or near the following cities: London, England and Tokyo, Japan. We believe that we will need
additional space within the next 12-18 months in Tempe, Arizona and we have ample options in the
Tempe area to expand our use of facilities space.
Item 3.
Legal Proceedings
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of
Technology, or MIT, filed a lawsuit against us in the U.S. District Court for the District of
Massachusetts alleging that we were infringing two patents assigned to MIT and exclusively licensed
by MIT to Akamai, U.S. Patent No. 6,553,413 (the 413 patent) and U.S. Patent No. 6,108,703 (the
703 patent). In September 2006, Akamai and MIT expanded their claims to assert infringement of a
third, recently issued patent, U.S. Patent No. 7,103,645 (the 645 patent). The two matters were
consolidated by the Court. In addition to monetary relief, including treble damages, interest,
fees and costs, the consolidated complaint sought an order permanently enjoining us from conducting
our business in a manner that infringes the relevant patents. A permanent injunction could prevent
us from operating our CDN to deliver certain types of traffic, which
could impact the viability of our business. The Court held a claim construction hearing, known as a
Markman hearing, in May 2007 and issued a claim construction order in June 2007. A trial date was
set for February 2008.
Prior to trial, the Court granted Limelights motion for summary judgment of non-infringement
of the 413 patent, and Akamai agreed to entry of a judgment that Limelight does not infringe the
645 patent. A three-week jury trial was held in February 2008 regarding the remaining claims of
infringement of the 703 patent. On February 28, 2008, the jury returned a verdict finding that
Limelight infringed four claims of the 703 patent and rejecting Limelights invalidity defenses.
The jury awarded Akamai $40,102,000 in lost profits, $1,424,946 in reasonable royalties, and
$4,000,000 in price erosion damages, plus pre-judgment interest estimated to be $2.6 million.
A final judgment has not yet been entered. Limelight is still pursuing its affirmative
defenses of laches, equitable estoppel, unclean hands, and inequitable conduct. In addition to
pursuing these equitable defenses, on March 14, 2008, Limelight filed several motions seeking
relief in the District Court from the jury verdict, including a Renewed Motion for Judgment as a
Matter of Law, a Motion for a New Trial, and a Motion for Judgment of Obviousness. On March 12,
2008, Akamai filed motions for summary judgment on Limelights remaining equitable defenses, which
Limelight will oppose.
We continue to believe that the claims of infringement asserted against us by Akamai and MIT
in the present litigation are without merit and that the jurys verdict is incorrect, and we will
continue to defend the case vigorously; however, we cannot assure you that this lawsuit ultimately
will be resolved in our favor. An adverse judgment or injunction could seriously impact our
ability to conduct our business and to offer our products and services to our customers. This, in
turn, would harm our revenue, market share, reputation, liquidity and overall financial position.
Whether or not we prevail in this case, we expect that the litigation will continue to be
expensive, time consuming and a distraction to our management in operating our business.
In August 2007, we, certain of our officers and current and former directors, and the firms
that served as the lead underwriters in our initial public offering were named as defendants in
several purported class action lawsuits filed in the U. S. District Courts for the District of
Arizona and the Southern District of New York. All of the New York cases were transferred to
Arizona and consolidated into a single action. The plaintiffs consolidated complaint asserts
causes of action under Sections 11, 12, and 15 of the Securities Act of 1933, as amended, on behalf
of a purported class of individuals who purchased our common stock in our initial public offering
and/or pursuant to our Prospectus. The complaint alleges, among other things, that we omitted
and/or misstated certain facts concerning the seasonality of our business and the loss of revenue
related to certain customers. On March 17, 2008, we and the individual defendants moved to dismiss
all of the plaintiffs claims. Although we believe that we and the individual defendants have
meritorious defenses to the plaintiffs claims and intend to contest the lawsuits vigorously, an
adverse resolution of the lawsuits may
have a material adverse effect on our financial position and results of operations in the
period in which the lawsuits are resolved. We are not able at this time to estimate the range of
potential loss nor do we believe that a loss is probable. Therefore, there is no provision for
these lawsuits in our financial statements.
23
In December 2007, Level 3 Communications, LLC, or Level 3, filed a lawsuit against us
in the U.S. District Court for the Eastern District of Virginia alleging that we are infringing
three patents Level 3 allegedly acquired from Savvis Communications Corp. In addition to monetary
relief, including treble damages, interest, fees and costs, the complaint seeks an order
permanently enjoining us from conducting our business in a manner that infringes the relevant
patents. Discovery has
begun, but the schedule for the case has not yet been set by the Court.
While we believe that the claims of infringement asserted against us by Level 3 in the
present litigation are without merit and intend to vigorously defend the action, we cannot assure
you that this lawsuit ultimately will be resolved in our favor. An adverse ruling could seriously
impact our ability to conduct our business and to offer our products and services to our customers.
This, in turn, would harm our revenue, market share, reputation, liquidity and overall financial
position. Whether or not we prevail in our litigation, we expect that the litigation will continue
to be expensive, time consuming and a distraction to our management in operating our business.
From time to time, we also may become involved in legal proceedings arising in the ordinary
course of our business.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, par value $0.001 per share, has traded on The NASDAQ Global Market under the
symbol LLNW since June 8, 2007. Prior to June 8, 2007, we were a privately held company and our
common stock was not traded on a principal United States Market or Exchange.
The following table sets forth, for the periods indicated, the high and low sale price per
share of the common stock on The NASDAQ Global Market:
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High
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Low
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2007:
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Second Quarter (beginning June 8, 2007)
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$
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24.33
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$
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15.13
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Third Quarter
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$
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23.82
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$
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6.72
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Fourth Quarter
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$
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13.68
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$
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6.70
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Holders
As of March 12, 2008, there were 82 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. We did not
repurchase any equity securities in 2007.
Use of Proceeds from Initial Public Offering of Common Stock
On June 8, 2007, we completed an initial public offering of our common stock in which we sold and
issued 14,900,000 shares of our common stock and selling stockholders sold 3,500,000 shares of
common stock, in each case at a price to the public of $15.00 per share. The common shares began
trading on the NASDAQ Global Market on June 8, 2007. We raised a total of $223.5 million in gross
proceeds from the IPO, or approximately $203.9 million in net proceeds after deducting underwriting
discounts and commissions of approximately $15.6 million and other offering costs of approximately
$4.0 million. On June 14, 2007, approximately $23.8 million of the net proceeds were used to repay
in full the outstanding balance of our equipment financing facility.
24
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock
between June 8, 2007 (the date our common stock began trading on NASDAQ) and December 31, 2007,
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 June 8,
2007 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 graph assumes the initial value of
our common stock on June 8, 2007 was the closing sales price of $22.18 per share.
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 June 8, 2007 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.
25
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. The selected consolidated statement of operations data for the year
ended December 31, 2003 and the selected consolidated balance sheet data as of December 31, 2003
have been derived from our unaudited consolidated financial statements that are not included
elsewhere in this Annual Report on Form 10-K.
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Limelight
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Limelight Networks, Inc.
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Networks, LLC
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Four Months
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Eight Months
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Ended
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Ended
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Year Ended December 31,
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December 31,
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August 31,
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2007
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2006
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2005
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2004
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2003
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2003
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In thousands, except per share amounts
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Consolidated Statement of
Operations Data:
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Revenue
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$
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103,111
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$
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65,243
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$
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21,303
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$
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11,192
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$
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1,677
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$
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3,353
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Cost of revenue:
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Cost of services(1)
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44,802
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25,662
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9,037
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4,834
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954
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1,909
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Depreciation network
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20,739
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10,316
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2,851
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775
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84
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168
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Total cost of revenue
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65,541
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35,978
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11,888
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5,609
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1,038
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2,077
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,570
|
|
|
|
29,265
|
|
|
|
9,415
|
|
|
|
5,583
|
|
|
|
638
|
|
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative(1)
|
|
|
31,827
|
|
|
|
18,388
|
|
|
|
4,107
|
|
|
|
2,147
|
|
|
|
432
|
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
25,462
|
|
|
|
6,841
|
|
|
|
3,078
|
|
|
|
2,078
|
|
|
|
345
|
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development(1)
|
|
|
5,504
|
|
|
|
3,151
|
|
|
|
462
|
|
|
|
231
|
|
|
|
51
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
857
|
|
|
|
226
|
|
|
|
100
|
|
|
|
69
|
|
|
|
13
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for litigation
(3)
|
|
|
48,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
111,780
|
|
|
|
28,606
|
|
|
|
7,747
|
|
|
|
4,525
|
|
|
|
840
|
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(74,210
|
)
|
|
|
659
|
|
|
|
1,668
|
|
|
|
1,058
|
|
|
|
(202
|
)
|
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,418
|
)
|
|
|
(1,828
|
)
|
|
|
(955
|
)
|
|
|
(189
|
)
|
|
|
(23
|
)
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,153
|
|
|
|
208
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(144
|
)
|
|
|
175
|
|
|
|
(16
|
)
|
|
|
(48
|
)
|
|
|
6
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
|
3,591
|
|
|
|
(1,445
|
)
|
|
|
(971
|
)
|
|
|
(236
|
)
|
|
|
(17
|
)
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(70,619
|
)
|
|
|
(786
|
)
|
|
|
697
|
|
|
|
822
|
|
|
|
(219
|
)
|
|
|
|
(439
|
)
|
Income tax expense
(benefit)(2)
|
|
|
2,401
|
|
|
|
2,591
|
|
|
|
300
|
|
|
|
306
|
|
|
|
(17
|
)
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
|
$
|
516
|
|
|
$
|
(202
|
)
|
|
|
$
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable
to common stockholders
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
240
|
|
|
$
|
351
|
|
|
$
|
(607
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limelight
|
|
|
|
Limelight Networks, Inc.
|
|
|
|
Networks, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
Eight Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
December 31,
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
2003
|
|
|
|
In thousands, except per share amounts
|
|
|
|
|
|
Net income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
common share basic
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
common share diluted
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used
in calculating net income
(loss) per common share-basic
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
34,737
|
|
|
|
34,687
|
|
|
|
34,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used
in calculating net income
(loss) per common
share-diluted
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
40,526
|
|
|
|
38,420
|
|
|
|
38,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limelight
|
|
|
|
Limelight Networks, Inc.
|
|
|
Networks, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
Eight Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Cost of revenue
|
|
$
|
1,489
|
|
|
$
|
459
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
General and administrative
|
|
|
10,653
|
|
|
|
6,794
|
|
|
|
94
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,948
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,820
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,910
|
|
|
$
|
9,248
|
|
|
$
|
94
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
In 2007 and 2006, approximately $10.5 million and $7.6 million,
respectively, in stock-based compensation expense was not deductible
for tax purposes by us, which resulted in us incurring income tax
expense despite our having generated a loss before income taxes in
this period. We expect to continue to incur non-deductible stock-based
compensation expense in the future. See Managements Discussion and
Analysis of Financial Condition and Results of Operations Basis of
Presentation Income Tax Expense.
|
|
(3)
|
|
In February 2008, a jury returned a verdict in a patent infringement
lawsuit filed by Akamai Technologies, Inc., or Akamai, and the
Massachusetts Institute of Technology, or MIT, against us, finding
that we infringed four claims of the patent at issue and rejecting our
invalidity defenses. The jury awarded Akamai an aggregate of
approximately $45.5 million in lost profits, reasonable royalties and
price erosion damages, plus pre-judgment interest estimated to be $2.6
million. A final judgment has not yet been entered. We are still
pursuing a number of equitable defenses, and we recently filed several
motions seeking relief from the Court.
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limelight Networks, Inc.
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
2003
|
|
|
(In thousands)
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and
marketable securities, current
|
|
$
|
197,097
|
|
|
$
|
7,611
|
|
|
$
|
1,536
|
|
|
$
|
536
|
|
|
|
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current marketable securities
|
|
|
87
|
|
|
|
285
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
|
154,501
|
|
|
|
14,596
|
|
|
|
(1,827
|
)
|
|
|
(695
|
)
|
|
|
|
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
46,968
|
|
|
|
41,784
|
|
|
|
11,986
|
|
|
|
3,018
|
|
|
|
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
273,428
|
|
|
|
74,424
|
|
|
|
19,583
|
|
|
|
5,718
|
|
|
|
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
20,491
|
|
|
|
8,809
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
45
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
194,037
|
|
|
|
37,039
|
|
|
|
1,823
|
|
|
|
1,239
|
|
|
|
|
|
|
|
174
|
|
28
Item 7.
Managements 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
the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements
as to industry trends and future expectations of ours 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
. We undertake no
obligation to update any forward-looking statements to reflect events or circumstances after the
date of such statements.
Overview
We were founded in 2001 as a provider of content delivery network, or CDN, services to
deliver digital content over the Internet. We began development of our infrastructure in 2001 and
began generating meaningful revenue in 2002. As of December 31, 2007, we had 1,157 active customers
worldwide. We primarily derive income from the sale of services to customers executing 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. Recently however, we have
entered into an increasing number of customer contracts that have minimum usage commitments that
are based on twelve-month or longer periods. We believe that having a consistent and predictable
base level of revenue is important to our financial success. Accordingly, to be successful, we must
maintain our base of recurring revenue contracts by eliminating or reducing any customer
cancellations or terminations and build on that base by adding new customers and increasing the
number of services, features and functionalities our existing customers purchase. At the same time,
we must ensure that our expenses do not increase faster than, or at the same rate as, our revenues.
Accomplishing these goals requires that we compete effectively in the marketplace on the basis of
price, quality and the attractiveness of our services and technology.
We primarily derive revenue from the sale of CDN services to our customers. These
services include delivery of digital media, including video, music, games, software and social
media. We generate revenue by charging customers on a per-gigabyte basis or on a variable basis
based on peak delivery rate for a fixed period of time, as our services are used. During 2007 we
entered into a multi-element arrangement which generates revenue by providing consulting services
related to the development of a Custom CDN solution, through the cross-license of certain
technologies, including certain components of our CDN software and technology, and post-contract
customer support (PCS) for both the custom CDN-solution and the software component. We also derive
some business from the sale of custom CDN services. These are generally limited to modifying our
network to accommodate non standard content player software or to establish dedicated customer
network components that reside both within our network or that operate within our customers
network.
In February 2008, a jury returned a verdict in a patent infringement lawsuit filed by Akamai
Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, against us,
finding that we infringed four claims of the patent at issue and rejecting our invalidity defenses.
The jury awarded Akamai an aggregate of approximately $45.5 million in lost profits, reasonable
royalties and price erosion damages, plus pre-judgment interest estimated to be $2.6 million that
we have recorded in 2007. A final judgment has not yet been entered. We are still pursuing a
number of equitable defenses, and we recently filed several motions seeking relief from the Court.
Akamai has filed motions for summary judgment on our remaining equitable defenses, which we will
oppose. We continue to believe that the claims of infringement asserted against us by Akamai and
MIT in the present litigation are without merit and that the jurys verdict is incorrect, and we
will continue to defend the case vigorously; however, we cannot assure you that this lawsuit
ultimately will be resolved in our favor. An adverse judgment or injunction 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 CDN to
deliver certain types of traffic, which could impact the viability of
our business.
These adverse outcomes, in turn, would harm our revenue, market share, reputation, liquidity and
overall financial position. Whether or not we prevail in this case, we expect that the litigation
will continue to be expensive, time consuming and a distraction to our management in operating our
business. This lawsuit and other ongoing legal proceedings are described under Legal Proceedings
in Part 1, Item 3 of this annual report on Form 10-K,
29
The following table sets forth our historical operating results, as a percentage of revenue
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
43
|
|
|
|
39
|
|
|
|
42
|
|
Depreciation network
|
|
|
20
|
|
|
|
16
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
64
|
|
|
|
55
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
36
|
|
|
|
45
|
|
|
|
44
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
31
|
|
|
|
28
|
|
|
|
19
|
|
Sales and marketing
|
|
|
25
|
|
|
|
10
|
|
|
|
14
|
|
Research and development
|
|
|
5
|
|
|
|
5
|
|
|
|
2
|
|
Depreciation and amortization
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Provision for Litigation
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
108
|
|
|
|
44
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(72
|
)
|
|
|
1
|
|
|
|
8
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Interest income
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(68
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
2
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(71)
|
%
|
|
|
(5)
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
Traffic on our network has grown in the last three years. This traffic growth is the result of
growth in the number of new contracts, as well as growth in the traffic delivered to existing
customers. Our revenue is generated by charging for traffic delivered.
Historically, we have derived a small portion of our revenue from outside of the United
States. Our international revenue has grown recently, 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, 2007, 2006 and 2005, respectively, revenue derived from customers outside the
United States accounted for approximately 12.8%, 8.0% and 5.0% respectively, of our total revenue,
of which nearly all was derived from operations in Europe. We expect foreign revenue as a
percentage of our total revenues to increase as a percentage of revenue in 2008. Our international
business is managed as a single geographic segment, and we report our financial results on this
basis.
During any given fiscal period, a relatively small number of customers typically account
for a significant percentage of our revenue. For example, in 2007, sales to our top 10 customers,
in terms of revenue, accounted for approximately 45% of our total revenue. During 2006, revenue
generated from sales to our top 10 customers, in terms of revenue, accounted for approximately 55%
of our total revenue. During 2007 one of these top 10 customers, Microsoft, represented
approximately 12% of our total revenue for that period. During 2007, we entered into a
multi-element arrangement with Microsoft which generates revenue by providing consulting services
related to the development of a Custom CDN solution, amortization of prepaid license and
amortization of prepaid post-contract customer support (PCS) for both the custom CDN-solution and
the software component. Revenue from this multi-element arrangement is being recognized over the
term of the software agreement which at December 31, 2007, had 38-months remaining. Our
relationship with Microsoft includes a minimum annual traffic commitment which runs through March
2012. During 2006, one customer within our top 10 customers, MySpace.com, which was contracted
through a reseller of our services, CDN Consulting accounted for approximately 21% of our total
revenue for that period. At the end of 2006, MySpace became a direct customer of ours. During 2007,
sales to the MySpace.com were approximately 3% of our total revenue. We anticipate customer
concentration levels will decline compared to prior years as our customer base continues to grow
and diversify. In addition to selling to our direct customers, we maintain relationships with a
number of resellers that purchase our services and charge a mark-up to their end customers. Revenue
generated from sales to direct and reseller customers accounted for approximately 99% and 1% for
the year ended December 31, 2007 compared to 79% and 21% of our revenue in 2006. This significant
reduction in the percentage of reseller revenue to total revenue is primarily the result of MySpace
becoming a direct customer in 2007.
In addition to these revenue-related business trends, our cost of revenue as a percentage
of revenue has risen in 2007 when compared to 2006. This increase is primarily the result of
increased cost of depreciation, network operations personnel costs and co-
location costs related to the increased investments to build out the capacity of our network.
Operating expense has increased in absolute dollars each period as revenue has increased. Beginning
in the second half of 2006 and in 2007, these increases accelerated due primarily to increased
stock based compensation, cost of litigation with Akamai and MIT and payroll and payroll-related
costs associated with additional general administrative and sales and marketing resources to
support our current and future growth.
We make our capital investment decisions based upon careful evaluation of a number of
variables, such as the amount of traffic we anticipate on our network, the cost of the physical
infrastructure required to deliver that traffic, and the forecasted capacity utilization of our
network. Our capital expenditures have varied over time, in particular as we purchased servers and
other network equipment associated with our network build-out. For example, in 2005, 2006 and 2007,
we made capital purchases of $10.9 million, $40.4 million and $26.5 million, respectively. The
substantial increase in capital expenditures in 2006, in particular, was related to a significant
increase in our network capacity, needed to support current growth and to support our expectation
for additional demand for
30
our services in future periods. We expect to have significant ongoing
capital expenditure requirements, as we continue to invest in and expand our CDN. We currently
anticipate making aggregate capital expenditures of approximately $28.0 million to $30.0 million in
2008.
Certain capital expenditures prior to January 2007, involved purchases from related
parties, in which we purchased an aggregate of $7.4 million and $29.9 million of server hardware in
2005 and 2006, respectively, from a supplier owned by one of our founders. As of December 31, 2006,
we were informed by our founders that there is no longer an ownership interest in this entity. In
other transactions unrelated to this supplier relationship, we have also generated revenue from
certain customers that are entities related to certain of our founders. The aggregate amounts of
revenue derived from these related party transactions were $0.2 million and $0.3 million in 2005
and 2006, respectively. Revenue derived from related parties was less than 1% for the year ended
December 31, 2007. We believe that all of our related party transactions reflected arms length
terms.
We are currently engaged in litigation with one of our principal competitors, Akamai
Technologies, Inc., or Akamai, and its licensor, the Massachusetts Institute of Technology, or MIT,
in which these parties have alleged that we are infringing three of their patents. In February
2008, a jury returned a verdict in this lawsuit, finding that we infringed four claims of the
patent at issue and rejecting our invalidity defenses. The jury awarded Akamai an aggregate of
approximately $45.5 million in lost profits, reasonable royalties and price erosion damages, plus
pre-judgment interest estimated to be $2.6 million that we have recorded in 2007. A final judgment
has not yet been entered. While we will continue to pursue multiple legal recourses
available to us which could reduce or even possibly eliminate the related financial exposure, if
we are not able to prevail in our efforts, there could be additional charges recorded by
us in future periods. Such charges would be dependent in part upon judicial
determinations made on the various elements of the matter and our activities in
future periods. During our financial statement close process, we will evaluate if
additional accrual amounts are required at each reporting period. We would record
additional accrual amounts to the extent we determine amounts are probable of being paid
and are also reasonably estimable. Such amounts could be, but are not limited to, damages
associated with post-judgment lost profits, price erosion, and royalties as well as interest
related to pre-and-post-judgment amounts. A key determinant in our ability to estimate
possible future charges will be the extent to which we are able to determine a correlation
between the jury awarded amount to the various elements of the
allegations. We are in the
process of investigating whether adequate information exists or is obtainable from which to make
determinations with respect to the probability of future expenses being incurred and the ability to
estimate the amount. Our legal and other expenses associated with this case have been significant
to date, including aggregate expenditures of $3.1 million in 2006 and $6.8 million in 2007. We have
reflected the full amount of these litigation expenses in 2006 and 2007 in general and
administrative expenses, as reported in our consolidated statement of operations. We expect that
these expenses will continue to remain significant and will increase with the actual cost of the
trial and the pending appeal. We expect to offset a small portion of the cash impact of these
litigation expenses through the availability of an escrow fund established in connection with our
Series B preferred stock financing. This escrow account was established with an initial balance of
approximately $10.1 million to serve as security for the indemnification obligations of our
stockholders tendering shares in that financing. In May 2007, we, the tendering stockholders and
the Series B preferred stock investors agreed to distribute $3.7 million of the escrow account to
the tendering stockholders upon the closing of our initial public offering. As of the closing of
our initial public offering, approximately $3.7 million of the escrow was paid to the tendering
stockholders. The escrow account has been drawn down as we incur Akamai-related litigation
expenses. Cash reimbursed from this escrow account is recorded as additional paid-in capital. For
the years ended December 31, 2007 and 2006, we recorded reimbursements from this escrow totaling
$4.6 million and $0.7 million respectively. At December 31, 2007, there is approximately $1.1
million remaining in the escrow and it is expected that it will be fully drawn during the first
quarter of 2008.
In December 2007, we were served with an infringement lawsuit by Level 3. During 2008, we
will incur costs similar to the Akamai litigation costs associated
with defending ourselves in this
suit. While we believe that the claims of infringement asserted against us by Level 3 in the
present litigation are without merit and intends to vigorously defend the action, there can be no
assurance that this lawsuit ultimately will be resolved in our favor. An adverse ruling could
seriously impact our ability to conduct our business and to offer our products and services to our
customers. This, in turn, would harm our revenue, market share, reputation, liquidity and overall
financial position. Whether or not we prevails in this litigation, we expect that the litigation
will continue to be expensive, time consuming and a distraction to our management in operating our
business.
We were profitable during 2005 and unprofitable in 2006 and 2007; the largest negative
impact to 2007 profitability was the jury awarded litigation charge of $45.5 million to Akamai for
lost profits, reasonable royalties and price erosion damages plus prejudgment interest of $2.6
million, our profitability was also impacted due to in part an increase in our share-based
compensation expense, which
increased from $0.1 million in 2005 to $9.2 million in 2006 and $18.9 million in 2007. Also,
litigation expenses increased to $7.3 million for year ended December 31, 2007 compared to $3.1
million for the year ended December 31, 2006. Further the Company was required to defer
$3.4 million of revenue from a large customer during the year ended December 31, 2007 offset by the
deferral of $0.9 million in related costs that further impacted our profitability. The significant
increase in share-based compensation expense and litigation expense reflects an increase in the
level of option and restricted stock grants coupled with a significant increase in the fair market
value per share at the date of grant and the cost of litigation which commenced in July 2006. The
deferral of revenue and related costs from one large customer reflects the impact of the accounting
for a multi-element arrangement.
Our future results will be affected by many factors identified in the section captioned Risk
Factors, in this annual report on Form 10-K, including our ability to:
31
|
|
|
Successfully implement technical changes in our methods to deliver customer traffic to
avoid further infringing on Akamai patents;
|
|
|
|
|
increase our revenue by adding customers and limiting customer cancellations and
terminations, as well as increasing the amount of monthly recurring revenue that we derive
from our existing customers;
|
|
|
|
|
manage the prices we charge for our services, as well as the costs associated with
operating our network in light of increased competition;
|
|
|
|
|
successfully manage our litigation with Level 3 to conclusion;
|
|
|
|
|
prevent disruptions to our services and network due to accidents or intentional attacks; and
|
|
|
|
|
continued ability to deliver a significant portion of our traffic through settlement free
peering relationships which significantly reduce our cost of delivery.
|
As a result, we cannot assure you that we will achieve our expected financial objectives,
including positive net income.
Basis of Presentation
Revenue
We primarily derive revenue from the sale of CDN services to our customers. These
services include delivery of digital media, including video, music, games, software and social
media. We generate revenue by charging customers for traffic or files delivered either on a
per-gigabytes transferred basis or on a variable basis based on peak delivery of mega-bits per
second delivered for a fixed period of time, as our services are used. Our customer agreements
relating to these recurring services generally have a term of one to three years. However, some of
our contracts with large customers operate on a month-to-month basis. The majority of our
agreements generally commits the customer to a minimum monthly level of usage and provides the rate
at which the customer must pay for actual usage above the monthly minimum. Our customer agreements
typically renew automatically at the end of the initial term for an additional contract period
unless the customer elects not to renew. Based on service usage experience, we and our customers
often negotiate revised monthly minimum usage levels or other modified services or terms during a
commitment period. For example, in exchange for increased minimum usage levels and increased
contract term, we often agree to a reduced per-gigabyte transferred pricing structure.
Historically, we have derived substantially all of our revenue from these recurring service
arrangements, which accounted for 98%, 99% and 99% of our revenue in 2005, 2006 and 2007,
respectively. During 2007 we entered into a multi-element arrangement with Microsoft which
generates revenue by providing, ongoing CDN traffic services, consulting services related to the
development of a Custom CDN solution, through the cross-license of certain technologies, including
certain components of our CDN software and technology, and post-contract customer support (PCS) for
both the custom CDN-solution and the software component. We also derive some business from the
sale of custom CDN services to others. These are generally limited to modifying our network to
accommodate non standard content player software or to establish dedicated customer network
components that reside both within our network or that operate within our customers network.
Cost of Revenue
Cost of revenue consists of costs related to the delivery of services, as well as the
depreciation costs associated with our network. Costs related to the delivery of our services
include:
|
|
|
fees for transit bandwidth provided by network operators;
|
|
|
|
|
fees paid for the lease of private line capacity for our backbone and metro fiber
rings to inter-connect our delivery zones;
|
|
|
|
|
fees paid for co-location services, which are the housing, electric and cooling
of servers and other equipment in third-party data centers;
|
|
|
|
|
network operations employee costs, including stock-based compensation expense; and
|
|
|
|
|
costs associated with third party software licenses.
|
We enter into contracts with third-party network and data center providers, with terms
typically ranging from several months to several years. Our contracts related to transit bandwidth
provided by network operators generally commit us to pay either a fixed monthly fee or monthly fees
plus additional fees for bandwidth usage above a contracted level. Our master contract with Global
Crossing provides for the lease of private lines of varying capacity for our backbone, at fixed
monthly fees with commitments ranging from 2 to 3 years. In addition to purchasing services from
communications providers, we connect directly too over 800 broadband Internet service providers, or
ISPs, generally without either party paying the other. This industry practice, known as settlement
free peering, benefits us by allowing us to place content objects directly on user access networks,
which helps us provide higher performance delivery for our customers and eliminate paying transit
bandwidth fees to network operators. This practice also benefits the ISP and its customers by
allowing them to receive improved content delivery through our local servers and eliminate cost of
transit bandwidth associated with delivery receipt of the traffic. We do not consider these
relationships to represent the culmination of an earnings process. Accordingly, we do not recognize
as revenue the value to the ISPs associated with the use of our servers nor do we recognize as
expense the value of the bandwidth received at discounted or no cost. These peering relationships
are mutually beneficial and are not contractual commitments.
32
During 2007, we continued to reduce our network transit bandwidth delivery costs per gigabyte
transferred by entering into new supplier contracts with lower pricing and amending existing
contracts to take advantage of price reductions from our existing suppliers associated with higher
purchase commitments. However, due to increased traffic delivered over our network, our total
transit bandwidth delivery costs increased during 2007. We anticipate our overall transit bandwidth
delivery costs will continue to increase in absolute dollars as a result of expected higher traffic
levels, partially offset by continued reductions in bandwidth costs per unit. We expect that our
overall transit bandwidth delivery costs as a percentage of revenue will remain relative constant
in 2008 compared to 2007. If we do not experience lower per unit transit bandwidth delivery pricing
and we are unsuccessful at effectively routing traffic over our network through lower cost
providers including our settlement free peering routes, network bandwidth costs could increase in
excess of our expectations in future periods.
Depreciation expense related to our network equipment has increased over time due to
additional equipment purchases each year. We anticipate depreciation expense related to our network
equipment will continue to increase in 2008 in absolute dollars and will remain relative constant
as a percentage of revenue. In 2009 and 2010, we expect that depreciation expense will increase in
absolute dollars and decrease as a percentage of revenue.
In total, we believe our cost of revenue will increase in 2008 in absolute dollars and will be
somewhat variable as a percentage of revenue associated with potential revenue reductions from
large customers and rollout of additional geographies where our network is located. Thereafter, we
expect that the cost of revenue will increase in absolute dollars. Each year we expect to deliver
more traffic on our network, which would result in higher transit bandwidth delivery cost
associated with the increased traffic; however, such costs are likely to be partially offset by
lower fixed costs per unit for such things as co-location, backbone and metro fiber rings.
Additionally, we expect increases in depreciation expense related to our network equipment, as well
as an increase in payroll and payroll-related costs, as we continue to make investments in our
network to service our expanding customer base.
General and Administrative Expense
General and administrative expense consists primarily of the following components:
|
|
|
payroll and related costs, including stock-based compensation expense
for executive, finance, business applications, human resources and
other administrative personnel;
|
|
|
|
|
fees for professional services and litigation expenses; and
|
|
|
|
|
other expenses such as insurance, allowance for doubtful accounts,
travel and corporate office rent.
|
We expect our general and administrative expense to increase in 2008 in absolute dollars and
decrease as a percentage of revenue. The increase is due to, payroll and related costs attributable
to increased hiring, rents and utilities as we expand our facilities, increased costs associated
with ongoing litigation, as well as increased accounting and legal and other costs associated with
public reporting requirements and compliance with the requirements of the Sarbanes-Oxley Act of
2002. In 2009 and in the longer term, we expect our general and administrative expense to decrease
as a percentage of revenue as our costs are expected to grow slower than our top line revenue.
Sales and Marketing Expense
Sales and marketing expense consists primarily of payroll and related costs, including
stock-based compensation expense and commissions and other variable compensation for personnel
engaged in marketing, sales and service support functions, as well as advertising, promotional and
travel expenses.
We anticipate our sales and marketing expense will continue to increase in future periods in
absolute dollars and remain constant as a percentage of revenue. The increase is due to an
expected increase in commissions on higher forecast sales, the increase in payroll and related
costs of sales and marketing personnel, increases in stock-based compensation expense and
additional expected increases in marketing costs such as advertising.
Research and Development Expense
Research and development expense consists primarily of payroll and related costs and
stock-based compensation expense associated with the design, development, testing and certification
of the software, hardware and network architecture of our CDN. Research and development costs are
expensed as incurred.
We anticipate our research and development expense will increase in future periods in absolute
dollars and increase as a percentage of revenue due to increased stock-based compensation expense
as well as increased payroll and related costs associated with continued hiring of research
development personnel and investments in our core technology and refinements to our other service
offerings.
33
Non-Network Depreciation Expense
Non-network depreciation expense consists of depreciation on equipment and furnishing used by
general administrative, sales and marketing and research and development personnel.
Provision for Litigation
Provision for litigation relates to our accrual for the adverse jury verdict in the Akamai
litigation. On February 29, 2008, a jury returned a verdict in favor of Akamai in the amount of
$45.5 million plus pre-judgment interest estimated to be $2.6 million that we have recorded in
2007.
Interest Expense
Interest expense includes interest paid on our debt obligations as well as amortization of
deferred financing costs.
Interest Income
Interest income includes interest earned on invested cash balances, cash equivalents and investment
securities. Interest income also includes the realized loss on investments. We anticipate interest
income to remain relative constant. While the average cash balance is expected to be higher in
2008, the earnings rate is expected to be much lower associated with
the recent and expected U.S. Federal Reserve interest rate reduction.
Other Income (Expense)
Our other income consists primarily of gains or losses from the disposal of assets.
Income Tax Expense (Benefit)
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/refundable on tax returns, or the
refund associated with a carryback of net operating loss, 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 in the years during which the
differences are expected to reverse.
Income tax expense depends on the statutory rate in the countries where we sell our services
as well as the expenses in any year that are not deductible in those jurisdictions. Historically,
we have primarily been subject to taxation in the United States because we have sold the majority
of our services to customers in the United States. In the future, we intend to further expand our
sales of services to customers located outside the United States, in which case we would become
further subject to taxation based on the foreign statutory rates in the countries where these sales
took place, and our effective tax rate could fluctuate accordingly.
In 2007, approximately $10.5 million of stock-based compensation expense was not deductible
for tax purposes, as certain executives and other employees made tax elections which established
tax bases in these awards at lower than the fair value recognized within the financial statements.
This permanent difference was material to our pre-tax net loss for the year of approximately
$70.6 million. Future non-tax deductible expenses related to these equity awards are expected to be
$2.6 million, $2.6 million and $0.6 million for 2008, 2009 and 2010, respectively, based upon the
unvested portion of the equity awards outstanding at December 31, 2007, and the anticipated vesting
at that time.
Management periodically evaluates if it is more likely than not that some or all of the
deferred tax assets will be realized. In making such determination, we consider all available
positive and negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and recent financial performance. During
2007, management determined there was sufficient negative evidence as a result of our cumulative
losses to conclude that it was more likely than not that approximately $25.3 million of net
deferred tax assets would not be realized and accordingly established a full valuation allowance.
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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. These principles require us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow
and related disclosure of contingent assets and liabilities. Our estimates include those related to
revenue recognition, accounts receivable reserves, income and other taxes, stock-based compensation
and equipment and contingent obligations. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates. To the extent that there are material differences between these
estimates and our actual results, our future financial statements will be affected.
34
We define our critical accounting policies as those U.S. generally accepted accounting
principles that require us to make subjective estimates about matters that are uncertain and are
likely to have a material impact on our financial condition and results of operations as well as
the specific manner in which we apply those principles. Our estimates are based upon assumptions
and judgments about matters that are highly uncertain at the time the accounting estimate is made
and applied and require us to continually assess a range of potential outcomes.
Revenue Recognition
We recognize service revenues in accordance with the SECs Staff Accounting Bulletin No. 104,
Revenue Recognition
, and the Financial Accounting Standards Boards (FASB) Emerging Issues Task
Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized when
the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is
performed and collectibility of the resulting receivable is reasonably assured.
At the inception of a customer contract for service, we make an assessment as to that
customers 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 for all of that customers unpaid invoices and ceases recognizing revenue for
continued services provided until cash is received.
We primarily derive revenue from the sale of content delivery network services to
customers executing contracts having terms of one year or longer. These contracts generally commit
the customer to a minimum monthly level of usage on a calendar month basis and provide the rate at
which the customer must pay for actual usage above the monthly minimum. For these services, 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 customers usage of our
services exceed the monthly minimum, we recognize revenue for such excess in the period of the
usage. We typically charge the customer an installation fee when the services are first activated.
The installation fees are recorded as deferred revenue and recognized as revenue ratably over the
estimated life of the customer arrangement. We also derive revenue from services 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.
We
have on one occasion entered into a multi-element arrangement. When we enter into such
arrangements, each element is accounted for separately over its respective service period or at the
time of delivery, provided that there is objective evidence of fair value for the separate
elements. Objective evidence of fair value includes the price charged for the element when sold
separately. If the fair value of each element cannot be objectively determined, the total value of
the arrangement is recognized ratably over the entire service period to the extent that all
services have begun to be provided, and other revenue recognition criteria has been satisfied.
We have entered into one multi-element arrangement which includes a significant software
component. In accounting for such an arrangement we apply the provisions of Statement of Position,
97-2, (SOP 97-2)
Software Revenue Recognition
, as amended by SOP 98-9,
Modifications of SOP 97-2
,
Software Revenue Recognition, With Respect to Certain Transactions
. We recognize software license
revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable and collection of the receivable is probable. If a software license contains an
undelivered element, the vendor-specific objective evidence (VSOE) of fair value of the undelivered
element is deferred and the revenue recognized once the element is delivered. The undelivered
elements are primarily software support and professional services. VSOE of fair value of software
support and professional services is based upon hourly rates or fixed fees charged when those
services are sold separately. If VSOE cannot be established for all elements to be delivered, we
defer all amounts received under the arrangement and do not begin to recognize revenue until the
delivery of the last element of the contract has started. Subsequent to commencement of delivery of
the last element, we commence revenue recognition. Amounts to be received under the contract are
then included in the amortizable base and then recognized as revenue ratably over the remaining
term of the arrangement until we have delivered all elements and have no additional performance
obligations.
This multi-element arrangement provided for consulting services related to the
development of a custom CDN solution, the cross-license of certain technologies, including certain
components of our CDN software and technology, and post-contract customer support (PCS) for both
the custom CDN solution and the software component (the Multi-Element Arrangement). The agreement
also contains a commitment by the customer to transmit a certain amount of traffic over our network
during a five-year period from commencement of
the agreement or be subject to penalty payments.
We do not have VSOE of fair value to allocate the fee to the separate elements of the
Multi-Element Arrangement as we have not licensed the intellectual property and software components,
nor PCS separately. Accordingly we will recognize the revenues related to the professional
services, license and PCS ratably over the four-year period over which the PCS has been contracted
as allowed for by paragraph 12 of SOP 97-2. Because delivery of the license and PCS elements of
this arrangement had not occurred at June 30, 2007, revenue on all services provided to this
customer during the three months ended June 30, 2007, including the ongoing content delivery
services, and the direct incremental costs incurred associated with these revenues, were deferred
until such time as delivery occurs and PCS had commenced. Concurrently with the signing of the
Multi-Element Arrangement, we also extended and amended a content delivery contract entered into
originally in 2005. The arrangement for transmitting content is not a required element of the new
software and node development project commencing under the Multi-Element Arrangement. We will
continue to receive payments on a
35
usage basis under the content delivery contract. Given that the services are priced at market rates
and subject to regular adjustments and are cancelable with thirty days notice, the amount of
revenue and pricing is considered variable and contingent until services are delivered. As such, we
have attributed revenue for the services as one that is contingent and becomes measurable as the
services are delivered under the terms of the content delivery contract. Accordingly, we will
record revenue on a monthly basis in an amount based upon usage. Because the content delivery
agreement was amended concurrently with the Multi-Element Arrangement, we deferred revenue
recognition until commencement of delivery of the last element of the Multi-Element Arrangement,
which was determined to be July 27, 2007. During the year ended December 31, 2007, we recognized
approximately $4.3 million in revenue and approximately $0.7 million in costs of revenue. As of
December 31, 2007, we had remaining deferred revenue related to the Multi-Element Arrangement of
$12.1 million, which is expected to be recognized ratably over the remaining original 44-month
period that commenced in July 2007 and had related deferred
costs of $0.2 million.
We also sell services through a reseller channel. Assuming all other revenue recognition
criteria are met, revenue from reseller arrangements is recognized over the term of the contract,
based on the resellers contracted non-refundable minimum purchase commitments plus amounts sold by
the reseller to its customers in excess of the minimum commitments. These excess commitments are
recognized as revenue in the period in which the service is provided. We record revenue under these
agreements on a net or gross basis depending upon the terms of the arrangement in accordance with
EITF 99-19,
Recording Revenue Gross as a Principal Versus Net as an Agent.
We typically record
revenue gross when it has risk of loss, latitude in establishing price, credit risk and is the
primary obligor in the arrangement.
From time to time, we enter into contracts to sell services to unrelated companies at or
about the same time we enter into contracts to purchase products or services from the same
companies. If we conclude that these contracts were negotiated concurrently, we record as revenue
only the net cash received from the vendor. For certain non-cash arrangements whereby we provide
rack space and bandwidth services to several companies in exchange for advertising we record barter
revenue and expense if the services are objectively measurable. The various types of advertising
include radio, Website, print and signage. We recorded barter revenue and expense of approximately
$854,000, $670,000 and $531,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
We may from time to time resell licenses or services of third parties. Revenue for these
transactions is recorded when we have risk of loss related to the amounts purchased from the third
party and we add value to the license or service, such as by providing maintenance or support for
such license or service. If these conditions are present, we recognize revenue when all other
revenue recognition criteria are satisfied.
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. Estimates are used in
determining these reserves and are based upon our review of outstanding balances on a
customer-specific, account-by-account basis. These estimates could change significantly if our
customers financial condition changes or if the economy in general deteriorates. The allowance for
doubtful accounts is based upon a review of customer receivables from prior sales with collection
issues where we no longer believe that the customer has the ability to pay for prior services
provided. We perform on-going credit evaluations of our customers primarily related to monitoring
payment history and the accounts receivable aging. If such an evaluation indicates that payment is
no longer reasonably assured for current services provided, any future services provided to that
customer will result in the deferral of revenue until payment is made or we determine payment is
reasonably assured. In addition, we recorded a reserve for service credits. Reserves for service
credits are measured based on an analysis of credits to be issued after the month of billing
related to managements estimate of the resolution of customer disputes and billing adjustments. We
do not have any off-balance sheet credit exposure related to our customers.
Share-Based Compensation
We account for our share-based compensation pursuant to SFAS No. 123 (revised 2004)
Share-Based Payment
, or SFAS No. 123R. SFAS No. 123R requires measurement of all employee
share-based payments awards using a 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. The weighted-average expected term for stock options granted
was calculated using the simplified method in accordance with the provisions of Staff Accounting
Bulletin No. 107,
Share-Based Payment.
The simplified method defines the expected term as the
average of the contractual term and the vesting period of the stock option. We have estimated the
volatility rates used as inputs to the model based on an analysis of the most similar public
companies for which we have data. We have used judgment in selecting these
companies, as well as in evaluating the available historical volatility data for these companies.
SFAS No. 123R requires us to develop an estimate of the number of share-based awards
which will be forfeited due to employee turnover. Annual changes in the estimated forfeiture rate
may have a significant effect on share-based payments expense, as the effect of adjusting the rate
for all expense amortization after January 1, 2006 is recognized in the period the forfeiture
estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate,
then an adjustment is made to increase the estimated forfeiture rate, which will result in a
decrease to the expense recognized in the financial statements. If the actual forfeiture rate is
lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated
forfeiture rate, which will result in an increase to the expense recognized in the financial
statements. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of
grant. We have never paid cash dividends, and do not currently intend to pay cash dividends, and
thus have assumed a 0% dividend yield.
36
We will continue to use judgment in evaluating the expected term, volatility and
forfeiture rate related to our own stock-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 stock-based compensation cost, or if different assumptions had been used, we
may have recorded too much or too little share-based compensation cost.
We recognize expense using the straight-line attribution method. We recorded share-based
compensation expense related to stock options and restricted stock under the fair value
requirements of SFAS No. 123R of $18.9 million, $9.2 million and $0.1 million respectively, during
the years ended December 31, 2007, 2006 and 2005, respectively. Unrecognized share-based
compensation expense totaled $47.4 million at December 31, 2007, which we expect to recognize over
a weighted average period of 3.05 years. We expect to amortize $15.0 million during 2008,
$15.5 million in 2009 and the remainder thereafter of the unrecognized share-based compensation at
December 31, 2007 based upon the scheduled vesting of the options outstanding at that time. Of
these charges, approximately $5.8 million in 2006 and $6.7 million in 2007 relate to options
granted to our four founders in connection with our Series B preferred stock financing in July
2006. We expect our share-based payments expense to decrease in 2008 and potentially to increase
thereafter as we grant additional stock options and restricted stock awards.
Contingencies
We record contingent liabilities resulting from asserted and unasserted claims against us,
when it is probable that a liability 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. With
regard to our litigation with Akamai and related outstanding jury
verdict, during our
financial statement close process, we will evaluate if additional accrual amounts are required at each
reporting period. We would record additional accrual amounts to the
extent we determine amounts are probable of being paid and also reasonably estimable. Such amounts could
be, but are not limited to post-judgment lost profits, price erosion, royalties and interest.
Deferred Taxes and Uncertain Tax Positions
We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109,
Accounting for Income Taxes,
or SFAS 109. We record net deferred tax assets to the extent we
believe these assets will more likely than not be realized. In making such determination, we
consider all available positive and negative evidence, including scheduled reversals of deferred
tax liabilities, projected future taxable income, tax planning strategies and recent financial
performance. SFAS 109 states that 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 concluded that a full valuation allowance against
our net deferred tax assets is appropriate. 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 adopted the provisions of FIN 48,
Accounting for Uncertainty in Income Taxes,
on January 1,
2007, which clarifies the accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 provides that
a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. Income tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. The adoption of FIN 48 did not result in the recognition of an adjustment for the
cumulative effect of adoption of a new accounting principle. We
recognized a foreign tax obligation which generated a corresponding
deferred tax asset in the United States of $240,000 upon our adoption
of FIN 48. The unrecognized tax benefit
increased $364,000 from January 1, 2007 to December 31, 2007. We anticipate our unrecognized tax
benefits will decrease within 12 months of the reporting date, as a result of settling potential
tax liabilities in certain foreign and state jurisdictions. We recognize interest and penalties
related to unrecognized tax benefits in our tax provision. As of
December 31, 2007, we had an interest and penalties accrual
related to unrecognized tax benefits of $166,000, which increased
$35,000 during 2007.
We follow the recognition threshold and measurement parameters of FIN 48 for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return, and related guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Prior to 2007 we recorded estimated income tax
liabilities to the
extent they were probable and could be reasonably estimated.
Our effective tax rate is influenced by the recognition and de-recognition of tax positions
pursuant to the more likely than not standard established by FIN 48 that such positions will be
sustained 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. During 2006 and 2007, we established
corporations in some of the foreign countries in which we conduct business. We have subjected the
profits of our foreign corporations to US tax. As a multinational corporation, we are subject to
taxation in multiple jurisdictions, and the calculation of our tax liabilities involves dealing
with
37
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 U.S. 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.
Results of Operations
Comparison of the Years Ended December 31, 2007 and 2006
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Percent
Change
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
103,111
|
|
|
$
|
65,243
|
|
|
$
|
37,868
|
|
|
|
58
|
%
|
Revenue increased 58%, or $37.9 million, to $103.1 million for the year ended December 31,
2007 as compared to $65.2 million for the year ended December 31, 2006. The increase in revenue for
the year ended December 31, 2007 as compared to 2006 was primarily attributable to an increase in
our recurring CDN service revenue of $37.7 million. The increase in CDN service revenue was
primarily attributable to an increase in the number of customers under recurring revenue contracts,
as well as an increase in traffic and additional services sold to new and existing customers. As of
December 31, 2007, we had 1,157 active customers under recurring CDN service revenue contracts as
compared to 693 as of December 31, 2006. During the year ended December 31, 2007, we deferred $3.4
million of custom CDN services revenue from one customer as the amounts were part of a
multi-element arrangement. Entering into the multi-element arrangement with this customer changed
the way we accounted for revenue earned from this customer during 2007. The revenue from the custom
CDN services is being recognized ratable over a 44 month period starting in July 2007. As new
service and or license fees are billed it is added to the deferred revenue and amortized over the
then remaining contract term. As of December 31, 2007, we had $3.0 million of deferred custom CDN
services revenue remaining of which approximately $1.0 million will be recognized in 2008, $1.0
million in 2009 and the remainder thereafter.
For the year ended December 31, 2007 and 2006, 12.8% and 8.0%, respectively, of our total
revenues were derived from our operations located outside of the United States, primarily from
Europe. No single country outside of the United States accounted for 10% or more of our total
revenues during these years.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Cost of revenue
|
|
$
|
65,541
|
|
|
$
|
35,978
|
|
|
$
|
29,563
|
|
|
|
82
|
%
|
Cost of revenue includes fees paid to network providers for bandwidth and co-location of our
network equipment. Cost of revenue also includes payroll and related costs, depreciation of network
equipment used to deliver our CDN services and equity-related compensation for network operations
personnel.
Cost of revenue increased 82%, or $29.6 million, to $65.5 million for the year ended
December 31, 2007 as compared to $36.0 million for the year ended December 31, 2006. These
increases were primarily due to an increase in aggregate bandwidth and co-
location fees of $14.8 million, due to higher traffic levels, an increase in depreciation expense
of network equipment of $10.4 million, due to increased investment in our network, an increase in
payroll and related employee costs of $2.6 million, associated with increased staff and an increase
in other costs of $1.2 million. Other costs include costs associated with the build-out of custom
CDN solutions for a specific customer. During the year ended December 31, 2007, we deferred
$0.9 million of costs associated with deferred revenue for one customer discussed above. During the
year ended December 31, 2007, $0.7 million of these deferred costs were recognized. The remaining
$0.2 million of deferred costs will be amortized ratably into cost of services over a 44 month
period that commenced in July 2007.
Additionally, for the years ended December 31, 2007 and 2006, cost of revenue includes
share-based compensation expense of approximately $1.5 million and $0.5 million, respectively,
resulting from our application of SFAS No. 123R.
38
Cost of revenue in 2007 and 2006 was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
Bandwidth and co-location fees
|
|
$
|
36.3
|
|
|
$
|
21.5
|
|
Depreciation network
|
|
|
20.7
|
|
|
|
10.3
|
|
Royalty Expenses
|
|
|
1.1
|
|
|
|
1.6
|
|
Payroll and related employee costs
|
|
|
4.3
|
|
|
|
1.7
|
|
Share-based compensation expense
|
|
|
1.5
|
|
|
|
0.5
|
|
Other costs
|
|
|
1.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
65.5
|
|
|
$
|
36.0
|
|
|
|
|
|
|
|
|
We believe cost of revenues will increase in 2008. We expect to deliver more traffic on our
network, which would result in higher expenses associated with the increased traffic; however, such
costs are likely to be partially offset by lower bandwidth costs per unit. Additionally, we
anticipate increases in depreciation expense related to our network equipment, along with increased
payroll and related costs, as we continue to make investments in our network to service our
customer base. The application of SFAS No. 123(R) will also result in continued expense associated
with the amortization of share-based compensation.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
General and administrative
|
|
$
|
31,827
|
|
|
$
|
18,388
|
|
|
$
|
13,439
|
|
|
|
73
|
%
|
General and administrative expenses consist primarily of the following components:
|
|
payroll, share-based compensation and other related costs, including
related expenses for executive, finance, business applications,
internal network management, human resources and other administrative
personnel;
|
|
|
fees for professional services and litigation expenses;
|
|
|
rent and other facility-related expenditures for leased properties.
|
|
|
depreciation of property and equipment we use internally;
|
|
|
the provision for doubtful accounts; and
|
|
|
non-income related taxes;
|
General and administrative expenses increased 73%, or $13.4 million, to $31.8 million for the
year ended December 31, 2007 as compared to $18.4 million for the year ended December 31, 2006. The
increase in general and administrative expenses was primarily due to an increase of $3.9 million in
share-based compensation expense, an increase of $6.4 million in professional fees and legal
expenses, an increase of $1.9 million in bad debt expense and an increase in other expenses of
$1.2 million. Our increase in professional fees of $1.8 million relates primary to increased
accounting and tax services fees, costs incurred to become compliant with the requirements of the
Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly traded company. Our
increase in legal fees of $4.6 million primary relates to our litigation with Akamai and MIT and
the class action lawsuits filed against us, including $3.4 million which is reimbursable to us from
an escrow fund established in connection with our 2006 stock repurchase, Other expenses include
such items as rent, utilities, telephone, insurance, travel and travel-related expenses, fees and
licenses and property taxes.
General and administrative expenses in 2007 and 2006 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
Share-based compensation expense
|
|
$
|
10.7
|
|
|
$
|
6.8
|
|
Professional fees
|
|
|
3.0
|
|
|
|
0.3
|
|
Litigation expenses
|
|
|
6.8
|
|
|
|
3.1
|
|
Payroll and related employee costs
|
|
|
3.7
|
|
|
|
3.7
|
|
Bad debt expense
|
|
|
2.6
|
|
|
|
0.7
|
|
Other expenses
|
|
|
5.0
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
$
|
31.8
|
|
|
$
|
18.4
|
|
|
|
|
|
|
|
|
39
We expect our general and administrative expense to increase in 2008 in absolute dollars and
decrease as a percentage of revenue. The increase is due to, payroll and related costs
attributable to increased hiring, rents and utilities as we expand our facilities, increased costs
associated with litigation, as well as increased accounting and legal and other costs associated
with public reporting requirements and compliance with the requirements of the Sarbanes-Oxley Act
of 2002. We expect that these increases will be off-set by expected lower share-based
compensation expense.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Sales and marketing
|
|
$
|
25,462
|
|
|
$
|
6,841
|
|
|
$
|
18,621
|
|
|
|
272
|
%
|
Sales and marketing expenses consist primarily of payroll and related costs, share-based
compensation and commissions for personnel engaged in marketing, sales and service support
functions, professional fees (consultants and recruiting fees), travel and travel-related expenses
as well as advertising and promotional expenses.
Sales and marketing expenses increased 272%, or $18.6 million, to $25.5 million for the
year ended December 31, 2007, as compared to $6.8 million for the year ended December 31, 2006. The
increase in sales and marketing expenses was primarily due to an increase of $9.8 million in
payroll and related employee costs, including $5.4 million in increased salaries and $3.9 million
in increased commissions on increased revenue. Additional increases included an increase of
$3.7 million in share-based compensation expense, an increase of $1.8 million in marketing
programs, an increase of $1.8 million in travel and travel-related expense reflecting our
investment in our field sales organization, an increase of $0.5 million in professional fees, and
an increase of $1.1 million in other expenses. Other expense included such items as rent and
property taxes for our Europe and Asia Pacific sales offices, telephone and office supplies. These
increases are consistent with the 58% increase in revenue for the year ended December 31, 2007 as
compared to the year ended December 31, 2006.
Sales and marketing expenses in 2007 and 2006 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
Payroll and related employee costs
|
|
$
|
14.1
|
|
|
$
|
4.3
|
|
Share-based compensation expense
|
|
|
4.0
|
|
|
|
0.3
|
|
Marketing programs
|
|
|
3.1
|
|
|
|
1.3
|
|
Travel and travel-related expenses
|
|
|
1.8
|
|
|
|
|
|
Professional fees
|
|
|
1.0
|
|
|
|
0.5
|
|
Reseller commissions
|
|
|
0.4
|
|
|
|
0.4
|
|
Other expenses
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing
|
|
$
|
25.5
|
|
|
$
|
6.8
|
|
|
|
|
|
|
|
|
We anticipate our sales and marketing expense will continue to increase in 2008 in absolute
dollars and remain constant as a percentage of revenue. The increase is due to an expected
increase in commissions on higher forecast sales, the increase in payroll and related costs of
sales and marketing personnel, increases in stock-based compensation expense under SFAS No. 123R
and additional expected increases in marketing costs such as advertising.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
5,504
|
|
|
$
|
3,151
|
|
|
$
|
2,353
|
|
|
|
75
|
%
|
Research and development expenses consist primarily of payroll and related costs and
share-based compensation expense for research and development personnel who design, develop, test
and enhance our services, network and software.
40
Research and development expenses increased 75%, or $2.4 million, to $5.5 million for the
year ended December 31, 2007, as compared to $3.2 million for year ended December 31, 2006 The
increase in research and development was primarily due to an increase of $1.1 million in
share-based compensation expense, $0.9 million in payroll and related employee costs associated
with our hiring of additional network and software engineering personnel and $0.3 million in other
costs. Other costs include such items as consulting, office supplies and telephone, licenses and
recruiting fees.
Research and development expenses in 2007 and 2006 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
Share-based compensation expense
|
|
$
|
2.8
|
|
|
$
|
1.7
|
|
Payroll and related employee costs
|
|
|
2.4
|
|
|
|
1.5
|
|
Other
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
|
|
$
|
5.5
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
We anticipate our research and development expense will increase in 2008 in absolute dollars
and remain constant as a percentage of revenue due to increased stock-based compensation expense as
well as increased payroll and related costs associated with continued hiring of research
development personnel and investments in our core technology and refinements to our other service
offerings. Additionally, research and development expenses are expected to decrease as a result of
lower share-based compensation expense under SFAS No. 123R.
Provision for Litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Provision for Litigation
|
|
$
|
48,130
|
|
|
$
|
|
|
|
$
|
48,130
|
|
|
|
N/A
|
|
Provision for litigation relates to our accrual for the adverse jury verdict in the Akamai
litigation. On February 29, 2008, a jury returned a verdict in favor of Akamai in the amount of
$45.5 million plus pre-judgment interest estimated to be $2.6 million that we have recorded in
2007.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest expense
|
|
$
|
1,418
|
|
|
$
|
1,828
|
|
|
$
|
(410
|
)
|
|
|
(22)
|
%
|
Interest expense includes interest paid on our debt obligations and the amortization of
deferred financing costs.
Interest expense decreased 22%, or $0.4 million to $1.4 million for the year ended December
31, 2007, as compared to $1.8 million for the year ended December 31, 2006. During the first 6
months of 2007, we incurred interest expense on borrowings, primarily to fund equipment purchases
to build out our network. On June 14, 2007, proceeds from our initial public offering were used to
pay in full the outstanding principal balance of our equipment financing facility. As a result of
the pay-down, we recognized approximately $0.5 million of expense related to the write-off of
remaining unamortized deferred financing fees related to our Equipment Facility. As of December
31, 2007, we had no outstanding balances due on any of our credit facilities. We do not expect to
have any interest expense related to debt obligations in 2008.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
5,153
|
|
|
$
|
208
|
|
|
$
|
4,945
|
|
|
|
2,376
|
%
|
Interest income includes interest earned on invested cash balances and marketable securities.
41
Interest income increased $4.9 million to $5.2 million for the year ended December 31,
2007, as compared to $0.2 million for the year ended December 31, 2006. The increase in interest
income was primarily due to an increase in our average cash balance and the investment of the net
proceeds from our initial public offering after the repayment of our outstanding credit facilities
off-set by the realized loss on investments of marketable securities of $0.4 million. During 2008,
we anticipate interest income to remain relative constant. While the average cash balance is
expected to be higher in 2008, the earnings rate is expected to be much lower associated with the
recent and expected United States Federal Reserve interest rate reduction.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Other income (expense)
|
|
$
|
(144
|
)
|
|
$
|
175
|
|
|
$
|
(319
|
)
|
|
|
(182
|
)%
|
The decrease in other income (expense) was primarily due to loss on disposal of assets and a
loss on foreign exchange translation.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Income tax expense
|
|
$
|
2,401
|
|
|
$
|
2,591
|
|
|
$
|
(190
|
)
|
|
|
(7
|
)%
|
We had an income tax expense during the year ended December 31, 2007 of $2.4 million or 3.4%
of our pre-tax loss of $70.6 million which was higher than our statutory income tax rate due
primarily to the effect of non-deductible stock compensation expenses and an increase in valuation
allowance, for the year ended December 31, 2007. For year ended December 31, 2006, we had an
income tax expense of $2.6 million despite having a pre-tax loss of $0.8 million because
approximately $7.6 million of stock-based compensation expense was not deductible by us for tax
purposes.
In 2007, approximately $10.5 million of stock-based compensation expense was not deductible
for tax purposes by us, as certain executives and other employees made tax elections which
established tax bases in these awards granted at lower than the fair value recognized within the
financial statements. This permanent difference was material to our pre-tax net loss for the year
of approximately $70.6 million. Future non-tax deductible expenses related to these equity awards
are expected to be $2.6 million, $2.6 million and $0.6 million for 2008, 2009 and 2010,
respectively, based upon the unvested portion of the equity awards outstanding at December 31,
2007, and the anticipated vesting at that time.
Comparison of the Years Ended December 31, 2006 and 2005
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
65,243
|
|
|
$
|
21,303
|
|
|
$
|
43,940
|
|
|
|
206
|
%
|
The increase in total revenue for 2006 as compared to 2005 was due to an increase in revenue
from the sale of our recurring CDN services. The increase in CDN services revenue was primarily
attributable to increases in the number of customers under recurring revenue contracts, as well as
increases in traffic and additional services sold to new and existing customers.
For the year ended December 31, 2006 and 2005, 8.0% and 5.0%, respectively, of our total
revenues were derived from our operations located outside of the United States, primarily from
Europe. No single country outside of the United States accounted for 10% or more of our total
revenues during these years.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
35,978
|
|
|
$
|
11,888
|
|
|
$
|
24,090
|
|
|
|
203
|
%
|
42
Cost of revenue increased 203%, or $24.1 million, to $36.0 million for the year ended
December 31, 2006 as compared to $11.9 million for the year ended December 31, 2005. The increase
in cost of revenue for 2006 as compared to 2005 was primarily due to an increase in aggregate
bandwidth and co-location fees of $13.7 million due to higher traffic levels, an increase in
depreciation expense of network equipment of $7.4 million due to increased investment in our
network, an increase of $1.6 million in royalty expenses, an increase in the payroll and related
employee costs of $1.2 million associated with increased staff, an increase of share-based
compensation expense of $0.5 million and an decrease of $0.3 million in other costs.
Cost of revenue in 2006 and 2005 was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
Bandwidth and co-location fees
|
|
$
|
21.5
|
|
|
$
|
7.8
|
|
Depreciation network
|
|
|
10.3
|
|
|
|
2.9
|
|
Royalty Expenses
|
|
|
1.6
|
|
|
|
|
|
Payroll and related employee costs
|
|
|
1.7
|
|
|
|
0.5
|
|
Share-based compensation expense
|
|
|
0.5
|
|
|
|
|
|
Other costs
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
36.0
|
|
|
$
|
11.9
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
General and administrative
|
|
$
|
18,388
|
|
|
$
|
4,107
|
|
|
$
|
14,281
|
|
|
|
348
|
%
|
General and administrative expenses increased 348%, or $14.3 million, to $18.4 million for the
year ended December 31, 2006 as compared to $4.1 million for the year ended December 31, 2005. The
increase in general and administrative expenses for 2006 as
compared to 2005 was primarily due to an increase of $6.7 million in share-based compensation
expense, an increase of $3.3 million in professional fees and legal expenses related to our
litigation with Akamai and MIT, including $1.6 million which is reimbursable to us from an escrow
fund established in connection with our 2006 stock repurchase, an increase of $1.8 million in
payroll and related employee costs as a result of headcount growth, an increase of $0.6 million in
bad debt expense and an increase in other expenses of $2.0 million.
General and administrative expenses in 2006 and 2005 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
Share-based compensation expense
|
|
$
|
6.7
|
|
|
$
|
0.1
|
|
Professional fees and legal expenses
|
|
|
3.5
|
|
|
|
0.2
|
|
Payroll and related employee costs
|
|
|
3.7
|
|
|
|
1.9
|
|
Bad debt expense
|
|
|
0.7
|
|
|
|
0.1
|
|
Other expenses
|
|
|
3.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18.4
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Sales and marketing
|
|
$
|
6,841
|
|
|
$
|
3,078
|
|
|
$
|
3,763
|
|
|
|
122
|
%
|
43
Sales and marketing expenses increased 122%, or $3.8 million, to $6.8 million for the year
ended December 31, 2006, as compared to $3.1 million for the year ended December 31, 2005. The
increase in sales and marketing expenses for 2006 as compared to 2005 was primarily due to an
increase of $2.1million in payroll and related employee costs, including $1.1 million in additional
salaries and $1.0 million in additional commissions on increased revenue. Additional increases were
due to an increase of $0.6 million in marketing programs, an increase of $0.3 million in
share-based compensation expense, an increase of $0.3 million in reseller commissions and an
increase of $0.4 million in other expenses. These increases are consistent with the 206% increase
in revenue for the period.
Sales and marketing expenses in 2006 and 2005 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
Payroll and related employee costs
|
|
$
|
4.3
|
|
|
$
|
2.2
|
|
Marketing programs
|
|
|
1.3
|
|
|
|
0.7
|
|
Share-based compensation expense
|
|
|
0.3
|
|
|
|
|
|
Reseller commissions
|
|
|
0.4
|
|
|
|
0.1
|
|
Other expenses
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6.8
|
|
|
$
|
3.1
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
3,151
|
|
|
$
|
462
|
|
|
$
|
2,689
|
|
|
|
582
|
%
|
Research and development expenses increased 582%, or $2.7 million, to $3.2 million for the
year ended December 31, 2006, as compared to $0.5 million for year ended December 31, 2005. The
increase in research and development expenses for 2006 as compared to 2005 was primarily due to an
increase of $1.7 million in share-based compensation expense and an increase of $1.0 million in
payroll and related employee costs associated with our hiring of additional network and software
engineering personnel.
Research and development expenses in 2006 and 2005 were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
Share-based compensation expense
|
|
$
|
1.7
|
|
|
$
|
|
|
Payroll and related employee costs
|
|
|
1.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3.2
|
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest expense
|
|
$
|
1,828
|
|
|
$
|
955
|
|
|
$
|
873
|
|
|
|
91
|
%
|
Interest expense increased 91%, or $0.9 million to $1.8 million for the year ended December
31, 2006, as compared to $1.0 million for the year ended December 31, 2005. The increase in
interest expense for 2006 as compared to 2005 was due to increased borrowings, primarily to fund
equipment purchases to build out our network.
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
208
|
|
|
$
|
|
|
|
$
|
208
|
|
|
|
N/A
|
|
44
The increase in interest income for 2006 as compared to 2005 was due to an increase in our
average cash balance. In 2005, we generally operated with a minimal cash balance not invested in
interest bearing accounts and therefore had no interest earnings.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
(in thousands)
|
|
Other income (expense)
|
|
$
|
175
|
|
|
$
|
(16
|
)
|
|
$
|
191
|
|
|
|
1,194
|
%
|
The increase in other income (expense) was primarily due to gain on disposal of assets in
2006.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Increase
|
|
Percent
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
Change
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
2,591
|
|
|
$
|
300
|
|
|
$
|
2,291
|
|
|
|
764
|
%
|
We had income tax expense in 2006 despite having a pre-tax loss of $0.8 million because
approximately $7.6 million of stock-based compensation expense was not deductible by us for tax
purposes. Our effective tax rate in 2005 was 43% and in 2006 was incalculable.
Liquidity and Capital Resources
To date, we have financed our operations primarily through the following transactions:
|
|
|
private sales of common and preferred stock and subordinated notes;
|
|
|
|
|
an initial public offering of our common stock in June 2007;
|
|
|
|
|
borrowing on credit facilities; and
|
|
|
|
|
cash generated by operations.
|
As of December 31, 2007, our cash, cash equivalents and marketable securities classified as
current totaled $197.1 million.
Cash Flow for the Years Ended December 31, 2007, 2006, and 2005
Operating Activities
Net cash provided by operating activities increased $18.7 million to $25.0 million for the
year ended December 31, 2007, compared to $6.3 million for the year ended December 31, 2006. The
increase in cash provided by operating activities was primarily due to our net loss for the year of
approximately $73.0 million, changes in working capital in
accounts receivable of $9.7 million,
prepaid expenses of $1.5 million, other assets of $0.7 million, and accounts payable of
$2.0 million off-set by non-cash charges of depreciation and amortization of $21.6 million,
stock-based compensation of $18.9 million and accounts receivable charges of $5.8 million, and
changes in working capital for our provision for litigation of $48.1 million, deferred revenue of
$12.2 million and other current liabilities of $3.6 million.
Net cash provided by operating activities increased $3.8 million to $6.3 million for the year
ended December 31, 2006, compared to $2.5 million for the year ended December 31, 2005. The
increase in cash provided by operating activities for 2006 was primarily due to our net loss for
the year of approximately $3.4 million offset by non-cash
charges of depreciation of $10.5 million
and stock-based compensation of $9.2 million.
We expect that cash provided by operating activities will continue to be positive as a
result of an upward trend in cash collections related to higher revenues, partially offset by an
expected increase in operating expenses that require cash outlays such as costs to deliver the
higher revenue, salaries in connection with expected increases in headcount and higher commissions.
The timing and amount of future working capital 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.
45
Investing Activities
Cash used in investing activities increased $64.4 million to $105.0 million for the year
ended December 31, 2007, compared to $40.6 million for the year ended December 31, 2006. Cash used
in investing was principally comprised of cash invested in short-term marketable securities from
the proceeds of our IPO and capital expenditures primarily for computer equipment associated with
the build-out and expansion of our content delivery network.
Cash used in investing activities increased $29.8 million to $40.6 million for the year ended
December 31, 2006, compared to $10.9 million for the year ended December 31, 2005. Cash used in
investing represented capital expenditures primarily for computer equipment associated with the
build-out and expansion of our content delivery network.
We expect to have significant ongoing capital expenditure requirements, as we continue to
invest in and expand our CDN. We currently anticipate making aggregate capital expenditures of
approximately $28.0 million to $30.0 million in 2008.
Financing Activities
Cash provided by financing activities increased $145.8 million to $186.2 million for the
year ended December 31, 2007, as compared to $40.4 million for the year ended December 31, 2006.
The increase is primarily due to net proceeds of approximately $203.9 million from the sale of
14,900,000 shares of common stock in our initial public offering, $4.6 million in reimbursement of
litigation expenses from our escrow account during the year ended December 31, 2007, off-set by a
repayment in borrowings of $23.8 million on our bank line.
Cash provided by financing activities increased $31.0 million to $40.4 million for the year
ended December 31, 2006, compared to $9.4 million for the year ended December 31, 2005. Cash
provided by financing activities in 2006 reflects net proceeds from our July 2006 private equity
transaction in which we received $126.3 million of net proceeds, as well as $12.2 million of net
borrowings on our bank line. These amounts were offset by $102.1 million in a share repurchase
transaction in 2006. We agreed to this repurchase transaction as a condition to the closing of our
Series B preferred stock financing in July 2006. Pursuant to this transaction, we repurchased
shares of common stock at a price of $3.26 per share from existing stockholders and holders of
vested stock options and warrants. The terms of these repurchases were established through
negotiation between us and the lead investors in the Series B preferred stock financing in order to
provide the investors with ownership of a specified percentage of our capital stock following the
financing and repurchase transactions.
Credit facilities with Silicon Valley Bank provided up to $25.0 million in the form of a term
loan and up to a $5.0 million revolving credit facility for working capital requirements. The
credit facility bears interest at a variable rate determined by using either the prime rate plus a
margin or the LIBOR rate plus a margin, at our choice. The prime rate and LIBOR rate margins range
from 0% to 1.5% or 2.0% to 3.25%, respectively, depending on our achievement of certain debt
coverage ratios and the type of borrowing. The loan agreement contains financial and non-financial
covenants, including maintaining a tangible net worth, as defined in the credit facility, of at
least $30.0 million plus 50% of each quarters net income going forward. During the year ended
December 31, 2007, we were in compliance with all required covenants. During the second quarter of
2007, we paid $25.3 million to extinguish the outstanding balances on all of our credit facilities.
At December 31, 2007 we had no outstanding balance on any of our credit facilities and we had an
unused line of credit of up to $5.0 million dollars. Under the terms of the line of credit, we can
borrow up to 50% of the cash balances we hold at the bank, up to a maximum of $5.0 million dollars.
We do not anticipate having to utilize the line of credit for the remainder of 2008.
In connection with our Series B preferred stock financing in July 2006, an escrow account
was established with an initial balance of approximately $10.1 million to serve as security for the
indemnification obligations of our stockholders tendering shares in that financing and to fund 50%
of the ongoing monthly expenses associated with the Akamai litigation. In May 2007, we, the
tendering stockholders and the Series B preferred stock investors agreed to distribute $3.7 million
of the escrow account to the tendering stockholders upon the closing of our initial public
offering. During the year ended December 31, 2007, we received reimbursements from this escrow of
approximately $4.6 million. At December 31, 2007, the balance outstanding in the escrow was $1.1
million. We expect to draw the $1.1 million from this escrow during 2008.
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 and cash equivalents will be sufficient to meet our
anticipated cash needs for at least the next 18 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. If additional funds are
raised through the issuance of equity or debt securities, these securities could have rights,
preferences and privileges senior to those accruing to holders of common stock, and the terms of
such debt could impose restrictions on our operations. The sale of additional equity or convertible
debt securities would also result in additional dilution to our stockholders. In the event that
additional financing is required from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital when desired, our
business, operating results and financial condition could be harmed.
46
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 2008 to 2013. We expect that the growth of our business will require us
to continue to add to and increase our long-term commitments in 2008 and beyond. As a result of our
growth strategies, we believe that our liquidity and capital resources requirements will grow in
absolute dollars but will be generally consistent with that of historical periods on an annual
basis as a percentage of net revenue.
The following table presents our contractual obligations and commercial commitments, as
of December 31, 2007 over the next five years and thereafter (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations as of December 31, 2007
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bandwidth leases
|
|
$
|
32,310
|
|
|
$
|
13,877
|
|
|
$
|
13,032
|
|
|
$
|
5,229
|
|
|
$
|
172
|
|
Rack space leases
|
|
|
25,981
|
|
|
|
11,742
|
|
|
|
14,239
|
|
|
|
|
|
|
|
|
|
Real estate leases
|
|
|
2,668
|
|
|
|
1,036
|
|
|
|
1,561
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating leases
|
|
|
60,959
|
|
|
|
26,655
|
|
|
|
28,832
|
|
|
|
5,300
|
|
|
|
172
|
|
Capital leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bank debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
60,959
|
|
|
$
|
26,655
|
|
|
$
|
28,832
|
|
|
$
|
5,300
|
|
|
$
|
172
|
|
Subsequent to the year ended December 31, 2007, we entered into a new operating lease for
additional office space in Tempe, Arizona with lease payments of approximately $103,000, $159,000,
$164,000 and $55,000 for 2008, 2009, 2010 and 2011, respectively. The lease provides to us a one
time termination provision at the end of the first 24 months of the lease for the payment of a
small fee. These additional costs are not reflected in the above table of contractual obligations
and commercial commitments.
Off Balance Sheet Arrangements
We do not have, and have never had, any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Use of Non-GAAP Financial Measures
In evaluating our business, we consider and use Non-GAAP revenue, Non-GAAP net income and
Adjusted EBITDA as a supplemental measure of our operating performance. We consider Non-GAAP
revenue and net income measurements to be an important indicator of our overall performance because
it allows us to illustrate the impact of revenue generated from our multi-element contract as well
as to eliminate the effects of stock based compensation, provision for litigation and litigation
defense expenses. We define EBITDA as GAAP net income before net interest income/expense, provision
for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA plus income
from our multi-element contract and expenses that we do not consider reflective of our ongoing
operations. We use Adjusted EBITDA as a supplemental measure to review and assess our operating
performance. We also believe use of Adjusted EBITDA facilitates investors use of operating
performance comparisons from period to period and company to company by backing out potential
differences caused by variations in such items as capital structures (affecting relative interest
expense and stock-based compensation expense), the book amortization of intangibles (affecting
relative amortization expense), the age and book value of facilities and equipment (affecting
relative depreciation expense) and other non cash expenses. We also present Adjusted EBITDA because
we believe it is frequently used by securities analysts, investors and other interested parties as
a measure of financial performance.
In our February 19, 2008 earnings press release as furnished on Form 8-K, we included
Non-GAAP revenue and net income,
EBITDA and Adjusted EBITDA. The terms Non-GAAP revenue and net income, EBITDA and Adjusted EBITDA
are not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and are not
measures of operating income, operating performance or liquidity presented in accordance with U.S.
GAAP. Our Non-GAAP revenue and net income, EBITDA and Adjusted EBITDA have limitations as
analytical tools, and when assessing our operating performance, you should not consider Non-GAAP
revenue and net income, EBITDA and Adjusted EBITDA in isolation, or as a substitute for net income
(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 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;
|
47
|
|
|
they do not reflect the interest expense, or the cash requirements necessary to
service interest or principal payments, on our debt;
|
|
|
|
|
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 often will have to be replaced in the future, and EBITDA
and Adjusted EBITDA do not reflect any cash requirements for such replacements;
|
|
|
|
|
while stock-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 assumed life of the options
and assumed volatility of our common stock: and
|
|
|
|
|
other companies may calculate EBITDA and Adjusted EBITDA differently
than we do, limiting their usefulness as comparative measures.
|
We compensate for these limitations by relying primarily on our GAAP results and using
Non-GAAP Net Income and Adjusted EBITDA only supplementally. Non-GAAP Net Income, EBITDA and
Adjusted EBITDA are calculated as follows for the periods presented in thousands:
Reconciliation of Non-GAAP Financial Measures
In accordance with the requirements of Regulation G issued by the Securities and Exchange
Commission, we are presenting the most directly comparable GAAP financial measures and reconciling
the non-GAAP financial metrics to the comparable GAAP measures.
Reconciliation of GAAP Revenue to Non-GAAP Revenue
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
GAAP revenue
|
|
$
|
103,111
|
|
|
$
|
65,243
|
|
|
$
|
21,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delivered CDN Services not yet recognized
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP revenue
|
|
$
|
106,164
|
|
|
$
|
65,243
|
|
|
$
|
21,303
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income (Loss)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
GAAP net income (loss)
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for litigation
|
|
|
48,130
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
18,910
|
|
|
|
9,248
|
|
|
|
94
|
|
Litigation defense expenses
|
|
|
7,295
|
|
|
|
3,121
|
|
|
|
|
|
Delivered CDN services not yet recognized
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
Deferred cost of traffic and services
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
4,103
|
|
|
$
|
8,992
|
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
|
48
Reconciliation of GAAP Net Income (Loss) to EBITDA to Adjusted EBITDA
(In thousands,)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
GAAP net income (loss)
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: depreciation and amortization
|
|
|
21,596
|
|
|
|
10,542
|
|
|
|
2,951
|
|
Add: interest expense
|
|
|
1,418
|
|
|
|
1,828
|
|
|
|
955
|
|
Plus (less) interest/other (income) expense
|
|
|
(5,009
|
)
|
|
|
(383
|
)
|
|
|
16
|
|
Add: income tax expense
|
|
|
2,401
|
|
|
|
2,591
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(52,614
|
)
|
|
$
|
11,201
|
|
|
$
|
4,619
|
|
Add: provision for litigation
|
|
|
48,130
|
|
|
|
|
|
|
|
|
|
Add: share-based compensation
|
|
|
18,910
|
|
|
|
9,248
|
|
|
|
94
|
|
Add: litigation defense expenses recoverable
from escrow (1)
|
|
|
3,394
|
|
|
|
1,561
|
|
|
|
|
|
Add: delivered CDN services not yet recognized
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
Less: deferred traffic and service costs
|
|
|
(265)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
20,608
|
|
|
$
|
22,010
|
|
|
$
|
4,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During 2006, we repurchased stock in a transaction with a total value
of $102.1 million. Selling stockholders agreed to hold $10.1 million
of the proceeds to offset specific claims for reimbursement associated
with the Akamai lawsuit and other undisclosed obligations that may
arise. For the twelve month periods ended December 31, 2007 and 2006,
we had $3.4 million and $1.6 million, respectively, of litigation
costs subject to reimbursement from this escrow. For the twelve month
period ended December 31, 2005, we did not incur any litigation costs
subject to reimbursement from this escrow. At December 31, 2007,
there was approximately $1.1 million remaining in the escrow and it is
expected that it will be fully drawn during the first quarter of 2008.
|
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement
(SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require
any new fair value measurement. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. We are in the process of determining the
effect, if any, that the adoption of SFAS No. 157 will have on the consolidated financial
statements. Because SFAS No. 157 does not require any new fair value measurements or remeasurements
of previously computed fair values, we do not believe the adoption of this Statement will have a
material effect on our results of operations or financial condition.
On February 15, 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets
and Financial Liabilities
(SFAS No. 159). Under this Statement, we may elect to report financial
instruments and certain other items at fair value on a contract-by-contract basis with changes in
value reported in earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities
that were previously required to use a different accounting method than the related hedging
contracts when the complex provisions of SFAS No. 133 hedge accounting are not met. SFAS No. 159 is
effective for years beginning after November 15, 2007. We do not believe the adoption of SFAS No.
159 will have a material impact on our financial position or results of operations.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110,
On Share-Based Payments
(SAB 110), which permits entities, under certain
circumstances, to continue to use the simplified method of estimating the expected term of plain
vanilla options as discussed in SAB No. 107 and in accordance with SFAS No. 123 (Revised 2004),
Share-Based Payment. The guidance in this release is effective January 1, 2008. We do not believe
the adoption of this standard will have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No.
141(R)).. SFAS No. 141(R) replaces SFAS No. 141 and, although it retains certain requirements of
that guidance, it is broader in scope. SFAS No. 141(R)
establishes principles and requirements in the recognition and measurement of the assets
acquired, the liabilities assumed and any non-controlling interests related to a business
combination. Among other requirements, direct acquisition costs and acquisition-related
restructuring costs must be accounted for separately from the business combination. In addition,
SFAS No. 141(R) provides guidance in accounting for step acquisitions, contingent liabilities,
goodwill, contingent consideration, and other aspects of business combinations. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008.
Accordingly, we will adopt SFAS No. 141(R) on January 1, 2009 and will apply its provisions
prospectively. We do not believe the adoption of this standard will have a material
impact on our consolidated financial statements.
49
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 requires that
ownership interests in subsidiaries held by parties other than the parent be presented separately
within equity in the consolidated balance sheet. SFAS No. 160 also requires that the consolidated
net income attributable to the parent and to the noncontrolling interests be identified and
displayed on the face of the consolidated income statement. Changes in ownership interests,
deconsolidation and additional disclosures regarding noncontrolling interests are also addressed in
the new guidance. SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Accordingly, we will adopt SFAS No. 160 on
January 1, 2009. As of December 31, 2007, we had no noncontrolling interests recorded in our
balance sheet. We do not believe the adoption of SFAS No. 160 will have a material impact on our
financial position or results of operations.
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. 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
Substantially all of our customer agreements are denominated in U.S. dollars, and
therefore our revenue is not subject to foreign currency risk. Because we have operations in Europe
and Asia, however, we may be exposed to fluctuations in foreign exchange rates with respect to
certain operating expenses and cash flows. Additionally, we may continue to expand our operations
globally and sell to customers in foreign locations, potentially with customer agreements
denominated in foreign currencies, which may increase our exposure to foreign exchange
fluctuations. At this time, we do not have any foreign hedge contracts because exchange rate
fluctuations have had little or no impact on our operating results and cash flows.
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.
Item 8.
Financial Statements and Supplementary Data
LIMELIGHT NETWORKS, INC.
Index to Consolidated Financial Statements and Schedule
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Limelight Networks, Inc.
We have audited the accompanying consolidated balance sheets of Limelight Networks, Inc. as of
December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2007. Our
audits also included the financial statement schedule listed in Item 15(a). These consolidated
financial statements and schedule are the responsibility of the Companys 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. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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, 2007 and
2006, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2007, 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.
As discussed in Note 2 to the consolidated financial statements, Limelight Networks, Inc. changed
its method of accounting on January 1, 2007 for income taxes in accordance with Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109.
As discussed in Note 2 to the consolidated financial statements, Limelight Networks, Inc. changed
its method of accounting for Share-Based Payments in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004) on January 1, 2006.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 21, 2008
51
Limelight Networks, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
113,824
|
|
|
$
|
7,611
|
|
Marketable securities
|
|
|
83,273
|
|
|
|
|
|
Accounts receivable, net of reserves of
$4,022 and $1,204 at December 31, 2007 and
2006, respectively
|
|
|
21,407
|
|
|
|
17,526
|
|
Income taxes receivable
|
|
|
1,960
|
|
|
|
2,980
|
|
Deferred income taxes
|
|
|
|
|
|
|
362
|
|
Prepaid expenses and other current assets
|
|
|
4,469
|
|
|
|
3,011
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
224,933
|
|
|
|
31,490
|
|
Property and equipment, net
|
|
|
46,968
|
|
|
|
41,784
|
|
Marketable securities, less current portion
|
|
|
87
|
|
|
|
285
|
|
Deferred income taxes
|
|
|
|
|
|
|
106
|
|
Other assets
|
|
|
1,440
|
|
|
|
759
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
273,428
|
|
|
$
|
74,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,523
|
|
|
$
|
6,419
|
|
Accounts payable, related parties
|
|
|
230
|
|
|
|
781
|
|
Deferred revenue, current portion
|
|
|
4,237
|
|
|
|
197
|
|
Credit facilities, current portion
|
|
|
|
|
|
|
2,938
|
|
Capital lease obligations, current portion
|
|
|
|
|
|
|
245
|
|
Provision for litigation
|
|
|
48,130
|
|
|
|
|
|
Other current liabilities
|
|
|
9,312
|
|
|
|
6,314
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
70,432
|
|
|
|
16,894
|
|
Deferred revenue, less current portion
|
|
|
8,189
|
|
|
|
|
|
Credit facilities, less current portion (net of
discount of $424 at December 31, 2006)
|
|
|
|
|
|
|
20,456
|
|
Capital lease obligations, less current portion
|
|
|
|
|
|
|
5
|
|
Other long-term liabilities
|
|
|
770
|
|
|
|
30
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
79,391
|
|
|
|
37,385
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.001
par value; 6,921 shares authorized; 0 and
5,070 shares issued and outstanding at
December 31, 2007 and 2006
|
|
|
|
|
|
|
5
|
|
Series B convertible preferred stock, $0.001
par value; 43,050 shares authorized; 0 and
39,870 issued and outstanding at
December 31, 2007 and 2006
|
|
|
|
|
|
|
40
|
|
Convertible preferred stock, $0.001 par
value; 7,500 shares authorized; 0 shares
issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 150,000
shares authorized at December 31, 2007;
82,541 and 21,832 shares issued and
outstanding at December 31, 2007 and 2006,
respectively
|
|
|
83
|
|
|
|
22
|
|
Additional paid-in capital
|
|
|
271,586
|
|
|
|
41,803
|
|
Accumulated other comprehensive income (loss)
|
|
|
106
|
|
|
|
(113
|
)
|
Accumulated deficit
|
|
|
(77,738
|
)
|
|
|
(4,718
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
194,037
|
|
|
|
37,039
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
273,428
|
|
|
$
|
74,424
|
|
|
|
|
|
|
|
|
See accompanying notes.
52
Limelight Networks, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue
|
|
$
|
103,111
|
|
|
$
|
65,243
|
|
|
$
|
21,303
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
44,802
|
|
|
|
25,662
|
|
|
|
9,037
|
|
Depreciation network
|
|
|
20,739
|
|
|
|
10,316
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
65,541
|
|
|
|
35,978
|
|
|
|
11,888
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
37,570
|
|
|
|
29,265
|
|
|
|
9,415
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
31,827
|
|
|
|
18,388
|
|
|
|
4,107
|
|
Sales and marketing
|
|
|
25,462
|
|
|
|
6,841
|
|
|
|
3,078
|
|
Research and development
|
|
|
5,504
|
|
|
|
3,151
|
|
|
|
462
|
|
Depreciation and amortization
|
|
|
857
|
|
|
|
226
|
|
|
|
100
|
|
Provision for litigation
|
|
|
48,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
111,780
|
|
|
|
28,606
|
|
|
|
7,747
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(74,210
|
)
|
|
|
659
|
|
|
|
1,668
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,418
|
)
|
|
|
(1,828
|
)
|
|
|
(955
|
)
|
Interest income
|
|
|
5,153
|
|
|
|
208
|
|
|
|
|
|
Other income (expense)
|
|
|
(144
|
)
|
|
|
175
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
3,591
|
|
|
|
(1,445
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(70,619
|
)
|
|
|
(786
|
)
|
|
|
697
|
|
Income tax expense
|
|
|
2,401
|
|
|
|
2,591
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocable to common stockholders
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share basic
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share diluted
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
34,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
40,526
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
53
Limelight
Networks, Inc.
Consolidated Statements of Stockholders Equity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
Series B Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Share-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2004
|
|
|
6,921
|
|
|
$
|
7
|
|
|
|
|
|
|
$
|
|
|
|
|
34,688
|
|
|
$
|
35
|
|
|
$
|
2,951
|
|
|
$
|
(16
|
)
|
|
$
|
|
|
|
$
|
(1,738
|
)
|
|
$
|
1,239
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
397
|
|
Unrealized losses on
investments, net of tax
of $47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326
|
|
Exercise of common
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Exercise of common
stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Tax benefit from
share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Value of warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
6,921
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
35,114
|
|
|
|
35
|
|
|
|
3,284
|
|
|
|
(91
|
)
|
|
|
(71
|
)
|
|
|
(1,341
|
)
|
|
|
1,823
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,377
|
)
|
|
|
(3,377
|
)
|
Unrealized losses on
investments, net of tax
of $28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,419
|
)
|
Reclassification due to
the adoption of SFAS
No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B
preferred stock net of
offering costs of $3,683
|
|
|
|
|
|
|
|
|
|
|
39,870
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
126,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,316
|
|
Conversion of Series A
preferred stock to
common stock
|
|
|
(1,851
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
1,851
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,240
|
|
|
|
5
|
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032
|
|
Exercise of unvested
common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,241
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,861
|
|
|
|
6
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,054
|
|
Issuance of restricted
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
Vesting of early
exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
Value of warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496
|
|
Tax benefit from share
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,627
|
|
Escrow funds returned
from share repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
729
|
|
Repurchase of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,320
|
)
|
|
|
(31
|
)
|
|
|
(102,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,121
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
5,070
|
|
|
|
5
|
|
|
|
39,870
|
|
|
|
40
|
|
|
|
21,832
|
|
|
|
22
|
|
|
|
41,803
|
|
|
|
|
|
|
|
(113
|
)
|
|
|
(4,718
|
)
|
|
|
37,039
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
Series B Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Share-Based
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,020
|
)
|
|
|
(73,020
|
)
|
Recognition of
other-than-temporary
impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
113
|
|
Unrealized gain on
investments, net of tax
of $74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
Foreign exchange
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,801
|
)
|
Issuance of common
stock, net of offering
costs of $3,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,900
|
|
|
|
15
|
|
|
|
203,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,865
|
|
Conversion of Series A
preferred stock to
common stock
|
|
|
(5,070
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
5,070
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B
preferred stock to
common stock
|
|
|
|
|
|
|
|
|
|
|
(39,870
|
)
|
|
|
(40
|
)
|
|
|
39,870
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
771
|
|
|
|
1
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
Exercise of common
stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Vesting of restricted
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,201
|
|
Vesting of early
exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
610
|
|
Excess tax benefit
related to stock option
exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,596
|
|
Escrow funds returned
from share repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,607
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
82,541
|
|
|
$
|
83
|
|
|
$
|
271,586
|
|
|
$
|
|
|
|
$
|
106
|
|
|
$
|
(77,738
|
)
|
|
$
|
194,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
55
Limelight Networks, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,596
|
|
|
|
10,542
|
|
|
|
2,951
|
|
Share-based compensation
|
|
|
18,910
|
|
|
|
9,248
|
|
|
|
94
|
|
Deferred income tax expense (benefit)
|
|
|
318
|
|
|
|
(471
|
)
|
|
|
(125
|
)
|
Excess tax benefits related to stock option exercises
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
Accounts receivable charges
|
|
|
5,805
|
|
|
|
1,162
|
|
|
|
293
|
|
Accretion of debt discount
|
|
|
424
|
|
|
|
143
|
|
|
|
6
|
|
Accretion of marketable securities
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
Loss on foreign exchange
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Loss on investment
|
|
|
387
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,686
|
)
|
|
|
(14,415
|
)
|
|
|
(3,677
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,458
|
)
|
|
|
(2,071
|
)
|
|
|
(707
|
)
|
Income taxes receivable
|
|
|
2,616
|
|
|
|
(2,980
|
)
|
|
|
|
|
Other assets
|
|
|
(687
|
)
|
|
|
(423
|
)
|
|
|
(153
|
)
|
Accounts payable
|
|
|
(1,982
|
)
|
|
|
3,725
|
|
|
|
2,064
|
|
Accounts payable, related parties
|
|
|
(551
|
)
|
|
|
419
|
|
|
|
3
|
|
Deferred revenue
|
|
|
12,229
|
|
|
|
|
|
|
|
|
|
Provision for litigation
|
|
|
48,130
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
3,595
|
|
|
|
4,966
|
|
|
|
1,301
|
|
Other long term liabilities
|
|
|
740
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,007
|
|
|
|
6,293
|
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(109,570
|
)
|
|
|
|
|
|
|
|
|
Sale of marketable securities
|
|
|
27,300
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(22,731
|
)
|
|
|
(40,609
|
)
|
|
|
(10,852
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(105,001
|
)
|
|
|
(40,609
|
)
|
|
|
(10,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on credit facilities
|
|
|
|
|
|
|
32,873
|
|
|
|
8,769
|
|
Payments on credit facilities
|
|
|
(23,818
|
)
|
|
|
(19,682
|
)
|
|
|
(642
|
)
|
Borrowings on line of credit
|
|
|
1,500
|
|
|
|
|
|
|
|
1,000
|
|
Payments on line of credit
|
|
|
(1,500
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(250
|
)
|
|
|
(242
|
)
|
|
|
(34
|
)
|
Borrowings on notes payable related parties
|
|
|
|
|
|
|
|
|
|
|
659
|
|
Payments on notes payable related parties
|
|
|
|
|
|
|
(195
|
)
|
|
|
(464
|
)
|
Escrow funds returned from share repurchase
|
|
|
4,607
|
|
|
|
729
|
|
|
|
|
|
Excess tax benefits related to stock option exercises
|
|
|
1,596
|
|
|
|
1,627
|
|
|
|
9
|
|
Proceeds from exercise of stock options and warrants
|
|
|
211
|
|
|
|
2,086
|
|
|
|
78
|
|
Net proceeds from preferred stock issuances
|
|
|
|
|
|
|
126,316
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(102,121
|
)
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs
|
|
|
203,865
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
186,207
|
|
|
|
40,391
|
|
|
|
9,375
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
106,213
|
|
|
|
6,075
|
|
|
|
1,000
|
|
Cash and cash equivalents, beginning of year
|
|
|
7,611
|
|
|
|
1,536
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
113,824
|
|
|
$
|
7,611
|
|
|
$
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
1,020
|
|
|
$
|
1,143
|
|
|
$
|
634
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
360
|
|
|
$
|
4,805
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment remaining in accounts payable
|
|
$
|
4,049
|
|
|
$
|
444
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
56
Limelight Networks, Inc.
Notes to Consolidated Financial Statements
December 31, 2007
1. Nature of Business
Limelight Networks, Inc. (the Company) is a provider of high-performance content
delivery network (CDN) services. The Company delivers content for traditional and emerging media
companies, or content providers, including businesses operating in the television, music, radio,
newspaper, magazine, movie, videogame, software and social media industries. The Company was formed
in June 2001 as an Arizona limited liability company, Limelight Networks, LLC, and converted into a
Delaware corporation, Limelight Networks, Inc., in August 2003. The Company 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 and Use of Estimates
Basis of Presentation
The consolidated financial statements include accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated. The accompanying consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). These principles require management to make
estimates, judgments and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, together with amounts disclosed in the related notes to the consolidated
financial statements. Actual results and outcomes may differ from managements estimates, judgments
and assumptions. Significant estimates used in these financial statements include, but are not
limited to, revenues, accounts receivable and related reserves, useful lives and realizability of
long-term asset, capitalized software, income and other taxes and the fair value of stock-based
compensation. Estimates are periodically reviewed in light of changes in circumstances, facts and
experience. The effects of material revisions in estimates are reflected in the consolidated
financial statements prospectively from the date of the change in estimate. 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, 2008 or for any future periods.
Revenue Recognition
The Company recognizes service revenues in accordance with the SECs Staff Accounting
Bulletin No. 104,
Revenue Recognition
, and the Financial Accounting Standards Boards
(FASB) Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed and collectibility of the resulting receivable is
reasonably assured.
At the inception of a customer contract for service, the Company makes an assessment as
to that customers 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 for all of that customers unpaid invoices and ceases
recognizing revenue for continued services provided until cash is received.
The Company primarily derives revenue from the sale of content delivery network services
to customers executing contracts having terms of one year or longer. These contracts generally
commit the customer to a minimum monthly level of usage on a calendar month basis and provide the
rate at which the customer must pay for actual usage above the monthly minimum. For these services,
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 customers
usage of the Companys services exceed the monthly minimum, the Company recognizes revenue for such
excess in the period of the usage. The Company typically charges the customer an installation fee
when the services are first activated. The installation fees are recorded as deferred revenue and
recognized as revenue ratably over the estimated life of the customer arrangement. The Company also
derives revenue from services 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.
The Company has on one occasion entered into a multi-element arrangement. When the
Company enters into such arrangements, each element is accounted for separately over its respective
service period or at the time of delivery, provided that there is objective evidence of fair value
for the separate elements. Objective evidence of fair value includes the price charged for the
element when sold separately. If the fair value of each element cannot be objectively determined,
the total value of the arrangement is recognized ratably over the entire service period to the
extent that all services have begun to be provided, and other revenue recognition criteria has been
satisfied.
57
The multi-element arrangement includes a significant software component. In accounting
for such an arrangement the Company applies the provisions of Statement of Position, 97-2, (SOP
97-2)
Software Revenue Recognition
, as amended by SOP 98-9, Modifications of SOP 97-2,
Software
Revenue Recognition, With Respect to Certain Transactions
. The Company recognizes software license
revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable and collection of the receivable is probable. If a software license contains an
undelivered element, the vendor-specific objective evidence (VSOE) of fair value of the undelivered
element is deferred and the revenue recognized once the element is delivered. The undelivered
elements are primarily software support and professional services. VSOE of fair value of software
support and professional services is based upon hourly rates or fixed fees charged when those
services are sold separately. If VSOE cannot be established for all elements to be delivered, the
Company defers all amounts received under the arrangement and does not begin to recognize revenue
until the delivery of the last element of the contract has started. Subsequent to commencement of
delivery of the last element, the Company commences revenue recognition. Amounts to be received
under the contract are then included in the amortizable base and then recognized as revenue ratably
over the remaining term of the arrangement until the Company has delivered all elements and has no
additional performance obligations.
The multi-element arrangement provided for consulting services related to the development
of a custom CDN solution, the cross-license of certain technologies, including certain components
of the Companys CDN software and technology, and post-contract customer support (PCS) for both the
custom CDN solution and the software component (the Multi-Element Arrangement). The agreement also
contains a commitment by the customer to transmit a certain amount of traffic over the Companys
network during a five-year period from commencement of the agreement or be subject to penalty
payments.
The Company does not have VSOE of fair value to allocate the fee to the separate elements
of the Multi-Element Arrangement as it has not licensed the intellectual property and software
components, nor PCS separately. Accordingly the Company will recognize the revenues related to the
professional services, license and PCS ratably over the four-year period over which the PCS has
been contracted as allowed for by paragraph 12 of SOP 97-2. Because delivery of the license and PCS
elements of this arrangement had not occurred at June 30, 2007, revenue on all services provided to
this customer during the three months ended June 30, 2007, including the ongoing content delivery
services, and the direct incremental costs incurred associated with these revenues, were deferred
until such time as delivery occurs and PCS has commenced. Concurrently with the signing of the
Multi-Element Arrangement, the Company also extended and amended a content delivery contract
entered into originally in 2005. The arrangement for transmitting content is not a required element
of the new software and node development project commencing under the Multi-Element Arrangement.
The Company will continue to receive payments on a usage basis under the content delivery contract.
Given that the services are priced at market rates and subject to regular adjustments and are
cancelable with thirty days notice, the amount of revenue and pricing is considered variable and
contingent until services are delivered. As such, the Company has attributed revenue for the
service as one that is contingent and becomes measurable as the services are delivered under the
terms of the content delivery contract. Accordingly, the Company will record revenue on a monthly
basis in an amount based upon usage. Because the content delivery agreement was amended
concurrently with the Multi-Element Arrangement, the Company deferred revenue recognition until
commencement of delivery of the last element of the Multi-Element Arrangement, which was determined
to be July 27, 2007. During the year ended December 31, 2007, the Company recognized approximately
$4.3 million in revenue and approximately $0.7 million in costs of revenue. As of December 31,
2007, the Company had remaining deferred revenue related to the Multi-Element Arrangement of
$12.1 million, which is expected to be recognized ratably over the remaining original 44-month
period that commenced in July 2007 and had related deferred
costs of $0.2 million.
The Company also sells services through a reseller channel. Assuming all other revenue
recognition criteria are met, revenue from reseller arrangements is recognized over the term of the
contract, based on the resellers contracted non-refundable minimum purchase commitments plus
amounts sold by the reseller to its customers in excess of the minimum commitments. These excess
commitments are recognized as revenue in the period in which the service is provided. The Company
records revenue under these agreements on a net or gross basis depending upon the terms of the
arrangement in accordance with EITF 99-19
Recording Revenue Gross as a Principal Versus Net as an
Agent.
The Company typically records revenue gross when it has risk of loss, latitude in
establishing price, credit risk and is the primary obligor in the arrangement.
From time to time, the Company enters into contracts to sell services to unrelated
companies at or about the same time the Company enters into contracts to purchase products or
services from the same companies. If the Company concludes that these contracts were negotiated
concurrently, the Company records as revenue only the net cash received from the vendor. For
certain non-cash arrangements whereby the Company provides rack space and bandwidth services to
several companies in exchange for advertising the Company records barter revenue and expense if the
services are objectively measurable. The various types of advertising include radio, Website, print
and signage. The Company recorded barter revenue and expense of approximately $854,000, $670,000
and $531,000, for the years ended December 31, 2007, 2006, and 2005, respectively.
The Company may from time to time resell licenses or services of third parties. Revenue
for these transactions is recorded when the Company has risk of loss related to the amounts
purchased from the third party and the Company adds value to the license or service, such as by
providing maintenance or support for such license or service. If these conditions are present, the
Company recognizes revenue when all other revenue recognition criteria are satisfied.
Cash and Cash Equivalents
The Company holds its cash and cash equivalents in checking and money market accounts,
and investments with a minimum credit
58
rating of A1/P1. The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Investments in Marketable Securities
The Company accounts for its investments in debt and equity securities under FASBs
Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in
Debt and Equity Securities
and FASB Staff Position, or FSP, SFAS No. 115-1,
The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.
Management determines
the appropriate classification of such securities at the time of purchase and reevaluates such
classification as of each balance sheet date. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the specific identification method and is
reported in the statements of operations.
The Company has classified its investments in equity and debt securities as
available-for-sale. Available-for-sale investments are initially recorded at cost with temporary
changes in fair value periodically adjusted through comprehensive income. 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.
The following is a summary of available-for-sale securities at December 31, 2007 and 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2007
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Government agency bonds
|
|
$
|
19,764
|
|
|
$
|
68
|
|
|
$
|
(3
|
)
|
|
$
|
19,829
|
|
Commercial paper
|
|
|
43,916
|
|
|
|
3
|
|
|
|
(10
|
)
|
|
|
43,909
|
|
Corporate notes and bonds
|
|
|
19,397
|
|
|
|
141
|
|
|
|
(3
|
)
|
|
|
19,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities
|
|
|
83,077
|
|
|
|
212
|
|
|
|
(16
|
)
|
|
|
83,273
|
|
Publicly traded common stock
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
83,164
|
|
|
$
|
212
|
|
|
$
|
(16
|
)
|
|
$
|
83,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
December 31, 2006
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Publicly traded common stock
|
|
$
|
474
|
|
|
$
|
|
|
|
$
|
(189
|
)
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
474
|
|
|
$
|
|
|
|
$
|
(189
|
)
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company evaluated its investment portfolio, and noted unrealized
losses of $16,000 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, 2007. The Companys intent is to hold these investments to
such time as these assets are no longer impaired.
Expected maturities can differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties, and the Company
views its available-for-sale securities as available for current operations.
At of December 31, 2007, the Company evaluated its investment portfolio in publicly traded
common stock to determine if there had been decline in market value that was considered to be
other-than-temporary. The Company concluded that $0.4 million of the decline associated with a
publicly traded common stock was other than temporary and recorded an impairment charge in interest
income.
The amortized cost and estimated fair value of the available-for-sale debt securities at
December 31, 2007, by maturity, are shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
64,092
|
|
|
$
|
16
|
|
|
$
|
(16
|
)
|
|
$
|
64,092
|
|
Due after one year and through five years
|
|
|
18,985
|
|
|
|
196
|
|
|
|
|
|
|
|
19,181
|
|
Due after five years and through ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,077
|
|
|
$
|
212
|
|
|
$
|
(16
|
)
|
|
$
|
83,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
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. The related charges are included as a component of general and administrative
expenses.
The Companys reserve for service credits increases as a result of specific 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 recorded as a reduction of revenues. Decreases to the reserve are the result of
actual credits being issued to customers, causing a corresponding reduction in accounts receivable.
The allowance for doubtful accounts is based upon a review of customer accounts
receivable where the Company no longer believes the customer has the ability to pay outstanding
balances. The Company performs ongoing credit evaluations of its customers. If such an evaluation
indicates that payment is no longer reasonably assured for services provided, any future services
provided to that customer will result in the deferral of revenue until the Company receives
consistent payments.
Estimates are used in determining both of these reserves and are based upon the Companys
review of outstanding balances on a customer specific, account-by-account basis.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation or amortization.
Depreciation and amortization are computed using the straight-line and accelerated methods over the
assets estimated useful lives of the applicable asset.
|
|
|
|
|
Network equipment
|
|
3 years
|
Computer equipment
|
|
3 years
|
Furniture and fixtures
|
|
3-5 years
|
Other equipment
|
|
3-7 years
|
Leasehold improvements are amortized over the shorter of the assets estimated useful life or
the respective lease term. Maintenance and repairs are charged to expense as incurred.
Long-Lived Assets
The Company reviews its long-lived assets for impairment annually and whenever events or
circumstances indicate that the carrying amount of an asset may not be fully recoverable. The
Company would recognize 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 assets at
December 31, 2007 and 2006 are fully realizable and has not recorded any impairment losses.
Deferred Rent and Lease Accounting
The Company leases office space in various locations. At the inception of each lease, the
Company evaluates the property 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, as determined above, 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
for housing network equipment in third-party network data centers, also known as co-location costs.
Cost of revenues also includes employee costs, network storage costs, cost of professional
services, costs of licenses, and depreciation of network equipment. The Company enters into
contracts for bandwidth with third-party network providers with terms typically ranging from
several months to two years. These contracts generally commit the Company to pay minimum monthly
fees plus additional fees for bandwidth usage above contracted minimums. A significant portion of
the CDN traffic delivery is completed through direct connection to internet service provider
networks, called peering, generally at no charge. This avoids entirely the bandwidth cost
associated with the delivery. The Company does not consider these
60
relationships to represent the culmination of an earnings process. Accordingly, the Company does
not recognize as revenue the value to the ISPs associated with the use of the Companys servers nor
does the Company recognize as expense the value of the rack space and bandwidth received at no
cost.
Research and Development and Software Development Costs
The Company charges research and development costs, other than certain software
development costs, to expense as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility and prior to the introduction into the Companys content
delivery network are capitalized and amortized to cost of revenue over the estimated useful life of
the related software. There were no costs capitalized at December 31, 2007 or 2006 because the
costs incurred from technological feasibility to the introduction into the network were immaterial.
Income Taxes
We account 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.
We record net deferred tax assets to the extent we believe these assets will more likely than
not be realized. In making such determination, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial operations. 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.
We adopted the provisions of FIN 48,
Accounting for Uncertainty in Income Taxes,
on January 1,
2007, which clarifies the accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 provides that
a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. Income tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Net Income (Loss) Per Share
The Company follows EITF Issue No. 03-6,
Participating Securities and the
Two-Class Method under FASB Statement 128
, which established standards regarding the computation of
earnings per share (EPS) by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the company. EITF
Issue No. 03-6 requires earnings available to common stockholders for the period, after deduction
of preferred stock dividends, to be allocated between the common and preferred shareholders based
on their respective rights to receive dividends. Basic net income (loss) per share is then
calculated by dividing income allocable to common stockholders (including the reduction for any
undeclared, preferred stock dividends assuming current income for the period had been distributed)
by the weighted-average number of common shares outstanding, net of shares subject to repurchase by
the Company, during the period. EITF Issue No. 03-6 does not require the presentation of basic and
diluted net income (loss) per share for securities other than common stock; therefore, the
following net income (loss) per share amounts only pertain to the Companys common stock. The
Company calculates diluted net income (loss) per share under the if-converted method unless the
conversion of the preferred stock is anti-dilutive to basic net income (loss) per share. To the
extent preferred stock is anti-dilutive, the Company calculates diluted net income (loss) per share
under the two-class method. Potential common shares include restricted common stock and incremental
shares of common stock issuable upon the exercise of stock options and warrants using the treasury
stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
Historical net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
397
|
|
Less: Income allocable to preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to common stockholders
|
|
$
|
(73,020
|
)
|
|
$
|
(3,377
|
)
|
|
$
|
240
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
57,982
|
|
|
|
25,975
|
|
|
|
34,737
|
|
Less: Weighted-average unvested common shares subject to
repurchase
|
|
|
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
34,737
|
|
Dilutive effect of stock options and shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
805
|
|
Dilutive effect of outstanding stock warrants
|
|
|
|
|
|
|
|
|
|
|
4,984
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
|
|
|
57,982
|
|
|
|
25,597
|
|
|
|
40,526
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(1.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options, common stock subject to repurchase and common stock
warrants were excluded from the computation of diluted net income (loss) per common share for the
periods presented because including them would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Options to purchase common stock and stock subject to repurchase
|
|
|
4,105
|
|
|
|
5,603
|
|
|
|
3,368
|
|
Stock warrants (as converted basis)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Other Comprehensive Income (Loss)
For the periods presented, accumulated other comprehensive gain (loss) consisted of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Net unrealized gain (loss) on investments, net of tax
|
|
$
|
110
|
|
|
$
|
(113
|
)
|
Foreign currency translation
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
106
|
|
|
$
|
(113
|
)
|
|
|
|
|
|
|
|
In
2007, the Company recognized in interest income an impairment loss of $0.4 million related to an
investment in a publicly traded equity security. At December 31,
2006, the Companys investment in the
public traded equity securities was recorded as an unrealized loss of $113,000.
Share-based compensation
The Company accounts for its share-based compensation pursuant to SFAS No. 123 (revised
2004)
Share-Based Payment
, or SFAS No. 123R. SFAS No. 123R requires measurement of all employee
share-based payments awards using a fair-value method. The grant date fair value is 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 weighted-average expected term for stock options granted
was calculated using the simplified method in accordance with the provisions of Staff Accounting
Bulletin No. 107,
Share-Based Payment.
The simplified method defines the expected term as the
average of the contractual term and the vesting period of the stock option. The Company has
estimated the volatility rates used as inputs to the model based on an analysis of the most similar
public companies for which it has data. The selection of representative companies as well as in
evaluating the available historical volatility data for these companies requires considerable
judgment by the Company.
SFAS No. 123R requires the Company to develop an estimate of the number of share-based
awards which will be forfeited due to employee turnover. Quarterly changes in the estimated
forfeiture rate may have a significant effect on share-based payments expense, as the effect of
adjusting the rate for all expense amortization after January 1, 2006 is recognized in the period
the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated
forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will
result in a decrease to the expense recognized in the financial statements. If the actual
forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease
the estimated forfeiture rate, which will result in an increase
62
to the expense recognized in the financial statements. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The Company has never paid cash dividends, and
does not currently intend to pay cash dividends, and thus have assumed a 0% dividend yield.
We will continue to use judgment in evaluating the expected term, volatility and
forfeiture rate related to our own stock-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 stock-based compensation cost, or if different assumptions had been used, we
may have recorded too much or too little share-based compensation cost.
The Company recognizes expense using the straight-line attribution method. The Company
recorded share-based compensation expense related to stock options and restricted stock under the
fair value requirements of SFAS No. 123R during the year ended December 31, 2007, 2006 and 2005 of
approximately $18.9 million, $9.2 million and $0.1 million, respectively. Unrecognized share-based
compensation expense totaled $47.4 million at December 31,
2007, which is expected to be recognized over a weighted average period of 3.05 years. Of these charges, approximately $6.7 million in 2007 and $5.8 million in
2006 relate to options granted to our four founders in connection with our Series B preferred stock
financing in July 2006. We expect our share-based payments expense to decrease in 2008 and
potentially to increase thereafter as we grant additional stock options and restricted stock
awards.
The following table summarizes the components of share-based compensation expense included in
the Companys consolidated statement of operations for the years ended December 31, 2007 and 2006
in accordance with SFAS No. 123R (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
15,709
|
|
|
$
|
7,193
|
|
Restricted stock
|
|
|
3,201
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
18,910
|
|
|
$
|
9,248
|
|
|
|
|
|
|
|
|
Effect of share-based compensation expense on income by line:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
1,489
|
|
|
$
|
459
|
|
General and administrative expense
|
|
|
10,653
|
|
|
|
6,794
|
|
Sales and marketing expense
|
|
|
3,948
|
|
|
|
334
|
|
Research and development expense
|
|
|
2,820
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
Total cost related to share-based compensation expense
|
|
$
|
18,910
|
|
|
$
|
9,248
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents approximate fair value due to the short
maturity of those instruments. The respective fair values of investments 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 because of the immediate or short-term maturity of these financial
instruments. Based on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of the Companys long-term debt also approximates fair value.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual results could
differ from those estimates. . Significant estimates used in these financial statements include,
but are not limited to, revenues, accounts receivable and related reserves, useful lives and
realizability of long-term asset, capitalized software, income and other taxes, the fair value of
stock-based compensation and other contingent liabilities.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement
(SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require
any new fair value measurement. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. The Company is in the process of
determining the effect, if any, that the adoption of SFAS No. 157 will have on the consolidated
financial statements. Because SFAS No. 157 does not require any new fair value measurements or
remeasurements of previously computed fair values, the Company does not believe the adoption of
this Statement will have a material effect on its results of operations or financial condition.
On February 15, 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets
and Financial Liabilities
(SFAS No. 159). Under this Statement, the Company may elect to report
financial instruments and certain other items at fair value on a
63
contract-by-contract basis with changes in value reported in earnings. This election is
irrevocable. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings that
is caused by measuring hedged assets and liabilities that were previously required to use a
different accounting method than the related hedging contracts when the complex provisions of SFAS
No. 133 hedge accounting are not met. SFAS No. 159 is effective for years beginning after
November 15, 2007. The Company does not believe the adoption of SFAS No. 159 will have a material
impact on our financial position or results of operations.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 110 (SAB 110) on share-based payments, which permits entities, under certain
circumstances, to continue to use the simplified method of estimating the expected term of plain
vanilla options as discussed in SAB No. 107 and in accordance with SFAS No. 123 (Revised 2004),
Share-Based Payment. The guidance in this release is effective January 1, 2008. The Company does
not believe the adoption of this standard will have a material impact on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No.
141(R)). SFAS No. 141(R) replaces SFAS No. 141 and, although it retains certain requirements of
that guidance, it is broader in scope. SFAS No. 141(R) establishes principles and requirements in
the recognition and measurement of the assets acquired, the liabilities assumed and any
non-controlling interests related to a business combination. Among other requirements, direct
acquisition costs and acquisition-related restructuring costs must be accounted for separately from
the business combination. In addition, SFAS No. 141(R) provides guidance in accounting for step
acquisitions, contingent liabilities, goodwill, contingent consideration, and other aspects of
business combinations. SFAS No. 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Accordingly, the Company will adopt SFAS No. 141(R) on January 1, 2009
and will apply its provisions prospectively. The Company does not believe the adoption of this
standard will have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 requires that
ownership interests in subsidiaries held by parties other than the parent be presented separately
within equity in the consolidated balance sheet. SFAS No. 160 also requires that the consolidated
net income attributable to the parent and to the noncontrolling interests be identified and
displayed on the face of the consolidated income statement. Changes in ownership interests,
deconsolidation and additional disclosures regarding noncontrolling interests are also addressed in
the new guidance. SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Accordingly, the Company will adopt SFAS No.
160 on January 1, 2009. As of December 31, 2007, the Company had no noncontrolling interests
recorded in its balance sheet. The Company does not believe the adoption of SFAS No. 160 will have
a material impact on its financial position or results of operations.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Non-income taxes receivable
|
|
$
|
2,109
|
|
|
$
|
1,087
|
|
Prepaid royalties and licenses
|
|
|
525
|
|
|
|
974
|
|
Interest receivable
|
|
|
506
|
|
|
|
|
|
Employee advances and prepaid recoverable commissions
|
|
|
118
|
|
|
|
|
|
Capitalized offering costs
|
|
|
|
|
|
|
120
|
|
Other
|
|
|
1,211
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
$
|
4,469
|
|
|
$
|
3,011
|
|
|
|
|
|
|
|
|
4. Property and Equipment
Property and equipment include:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Network equipment
|
|
$
|
79,676
|
|
|
$
|
54,764
|
|
Computer equipment
|
|
|
1,573
|
|
|
|
951
|
|
Furniture and fixtures
|
|
|
291
|
|
|
|
136
|
|
Leasehold improvements
|
|
|
1,411
|
|
|
|
526
|
|
64
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Other equipment
|
|
|
301
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
83,252
|
|
|
|
56,482
|
|
Less: accumulated depreciation
|
|
|
(36,284
|
)
|
|
|
(14,698
|
)
|
|
|
|
|
|
|
|
|
|
$
|
46,968
|
|
|
$
|
41,784
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was approximately $21.6 million, $10.5 million, and $3.0
million for the years ended December 31, 2007, 2006 and 2005, respectively.
5. Litigation
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of
Technology, or MIT, filed a lawsuit against the Company in the U.S. 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, U.S. Patent No. 6,553,413 (the 413 patent) and U.S.
Patent No. 6,108,703 (the 703 patent). In September 2006, Akamai and MIT expanded their claims
to assert infringement of a third, recently issued patent, U.S. Patent No. 7,103,645 (the 645
patent). The two matters were consolidated by the Court. In addition to monetary relief,
including treble damages, interest, fees and costs, the consolidated complaint sought an order
permanently enjoining the Company from conducting its business in a manner that infringes the
relevant patents. A permanent injunction could prevent the Company from operating its CDN to
deliver certain types of traffic, which could impact the viability of the Companys business. The
Court held a claim construction hearing, known as a Markman hearing, in May 2007 and issued a claim
construction order in June 2007. A trial date was set for February 2008. In February 2008, a jury
returned a verdict in this lawsuit, finding that the Company infringed four claims of the patent at
issue and rejecting the Companys invalidity defenses for the period April 2005 through December
31, 2007. The jury awarded an aggregate of approximately $45.5 million which includes lost
profits, reasonable royalties and price erosion damages. In addition the jury awarded pre-judgment
interest which the Company estimates to be $2.6 million at December 31, 2007. The Company has
recorded the aggregate $48.1 million as a provision for litigation as of December 31, 2007.
While the Company will continue to pursue multiple legal recourses available to it which could
reduce or even possibly eliminate the related financial exposure in the jury verdict, if the
Company is not able to prevail in its efforts, there could be additional charges recorded by the
Company in future periods. Such charges would be dependent in part upon judicial determinations
made on the various elements of the matter and the activities of the Company in future periods.
The Company, during its financial statement close process, will evaluate if additional accrual
amounts are required at each reporting period. The Company would record additional accrual amounts
to the extent the Company determines amounts are probable of being paid and are also reasonably
estimable. Such amounts could be, but are not limited to, damages associated with post-judgment
lost profits, price erosion, and royalties as well as interest related to pre-and-post-judgment
amounts. A key determinant in the Companys ability to estimate possible future charges will be the
extent to which the Company is able to determine a correlation between the jury awarded amount to
the various elements of the allegations. The Company is in the process of investigating whether
adequate information exists or is obtainable from which to make determinations with respect to the
probability of future expenses being incurred and the ability to estimate the amount.
In December 2007, Level 3 Communications, LLC, or Level 3, filed a lawsuit against the Company
in the U.S. District Court for the Eastern District of Virginia alleging that the Company is
infringing three patents Level 3 allegedly acquired from Savvis Communications Corp. In addition
to monetary relief, including treble damages, interest, fees and costs, the complaint seeks an
order permanently enjoining the Company from conducting its business in a manner that infringes the
relevant patents. Discovery has begun, but the schedule for the case has not yet been set by the
Court.
While the Company believes that the claims of infringement asserted against it by Level 3 in
the present litigation are without merit and intends to vigorously defend the action, there can be
no assurance that this lawsuit ultimately will be resolved in the Companys favor. An adverse
ruling could seriously impact the Companys ability to conduct its business and to offer its
products and services to its customers. This, in turn, would harm the Companys revenue, market
share, reputation, liquidity and overall financial position.
In August 2007, the Company, certain of its officers and current and former directors, and the
firms that served as the lead underwriters in the Companys initial public offering were named as
defendants in several purported class action lawsuits filed in the U. S. District Courts for the
District of Arizona and the Southern District of New York. All of the New York cases were
transferred to Arizona and consolidated
into a single action. The plaintiffs consolidated complaint asserts causes of action under
Sections 11, 12, and 15 of the Securities Act of 1933, as amended, on behalf of a purported class
of individuals who purchased the Companys common stock in its initial public offering and/or
pursuant to its Prospectus. The complaint alleges, among other things, that the Company omitted
and/or misstated certain facts concerning the seasonality of its business and the loss of revenue
related to certain customers. On March 17, 2008, the Company and the individual defendants moved
to dismiss all of the plaintiffs claims. Although the Company believes that it and the individual
defendants have meritorious defenses to the plaintiffs claims and intends to contest the lawsuits
vigorously, an adverse resolution of the lawsuits may have a material adverse effect on the
Companys financial position and results of operations in the period in which the lawsuits are
resolved. The Company is not able at this time to estimate the range of potential loss nor does it
believe that a loss is probable. Therefore, there is no provision for these lawsuits in the
Companys financial statements.
6. Other Current Liabilities
Other current liabilities include:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Accrued cost of revenue
|
|
$
|
3,007
|
|
|
$
|
845
|
|
Accrued compensation and benefits
|
|
|
1,900
|
|
|
|
675
|
|
Non income taxes payable
|
|
|
3,161
|
|
|
|
3,549
|
|
Proceeds from early exercise of stock options
|
|
|
|
|
|
|
610
|
|
Other accrued expenses
|
|
|
1,244
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
$
|
9,312
|
|
|
$
|
6,314
|
|
|
|
|
|
|
|
|
7. Notes Payable and Credit Facilities
Credit facilities include:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Equipment Facility
|
|
$
|
|
|
|
$
|
23,818
|
|
Working Capital Facility
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,818
|
|
Less: current portion
|
|
|
|
|
|
|
(2,938
|
)
|
Less: discount
|
|
|
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
20,456
|
|
|
|
|
|
|
|
|
65
Maturities of notes payable are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
2007(1)
|
|
$
|
|
|
|
$
|
2,938
|
|
2008
|
|
|
|
|
|
|
5,293
|
|
2009
|
|
|
|
|
|
|
5,293
|
|
2010
|
|
|
|
|
|
|
5,293
|
|
2011
|
|
|
|
|
|
|
5,001
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
23,818
|
|
|
|
|
|
|
|
|
Interest expense on notes payable was approximately $0.9 million, $1.5 million, and $0.6
million for the years ended December 31, 2007, 2006 and 2005, respectively.
Credit Facilities
At December 31, 2006, the Company had an aggregate outstanding balance under the
Equipment Facility agreements of $23.8 million. On June 14, 2007, the company used $23.8 million of
the net proceeds from its Initial Public Offering to repay in full the outstanding balance of the
Companys equipment financing facility. During the second quarter of 2007 the equipment facility
and the line of credit were extinguished.
In connection with its Credit Facilities, the Company granted warrants to purchase common
stock to the bank that holds the Equipment Facility. On August 31, 2005, the Company granted a
warrant to purchase 93,750 common shares at an exercise price of $0.27 per share with a term of
seven years. The warrants were determined to have a fair value at date of grant of $4,750. On
October 20, 2005, in conjunction with an additional extension of credit the Company issued
additional warrants to purchase 257,813 shares of common stock for an exercise price of $0.27 per
share with a term of seven years. The warrants were determined to have a fair value at date of
grant of approximately $13,000. On February 24, 2006, the Company issued additional warrants to
purchase 257,813 shares of common stock for an exercise price of $0.27 per share with a term of
seven years. The warrants were determined to have a fair value at date of grant of approximately
$287,000. The aggregate warrants to purchase 609,376 common shares were exercised by the holder in
November 2006 and no warrants are currently outstanding. The fair value amounts computed were
included as an increase to additional paid in capital with the related debt discount being
amortized to interest expense over the term of the debt. At December 31, 2006 there was remaining
unamortized debt discount of $207,000. During the second quarter of 2007, as result of the
repayment of the Companys Equipment Facility, the Company recognized as expense approximately
$200,000 of unamortized debt discount. As of December 31, 2007 there was no remaining unamortized
debt discount.
The loans under the Equipment Facility were collateralized by all equipment, accounts
receivable and intangible property of the Company.
Line of Credit Investment Fund
In August 2005, the Company obtained a line of credit with an investment fund that was
subsequently amended in October 2005. The amended agreement had a credit limit of $6,500,000 or up
to 65% of recurring revenues as measured monthly over a rolling 3-month period (the Extended
Borrowing Base). All loans under the Extended Borrowing Base were subject to the interest rate of
5.50% over the prime rate. There was no balance outstanding at December 31, 2006. In
February 2007, the agreement was amended to increase the credit line to $7,500,000. The line of
credit was extinguished during the second quarter of 2007.
In conjunction with this agreement, the Company issued warrants to purchase shares of
common stock to the investment fund. On August 31, 2005, the Company issued warrants to purchase
656,250 shares of common stock for an exercise price of $0.27 per share, term of 7 years and a
determined fair value at date of grant of approximately $33,000. On October 28, 2005, warrants to
purchase 468,750 common shares were issued with an exercise price of $0.27 per share, term of
7 years and determined fair value at date of grant of approximately $24,000. On February 24, 2006,
warrants to purchase 187,500 shares of common stock were issued with an exercise price of $0.27 per
share, a term of 7 years and determined fair value at date of grant of approximately $209,000. The
aggregate warrants to purchase 1,312,500 common shares were exercised by the holder in
November 2006 and no warrants are currently outstanding. The fair value amounts computed were
included as an increase to additional paid in capital with the related debt discount amortized to
interest expense over the term of the debt. At December 31, 2006 there was remaining unamortized
debt discount of $217,000. During 2007, as a result of the repayment of the Companys Equipment
Facility, the Company recognized as expense approximately $200,000 of unamortized debt discount.
As of December 31, 2007 the remaining unamortized debt discount was zero.
Line of Credit Bank
The Company has a $5,000,000 Line of Credit with a bank that bears an interest rate of
prime plus 0.75% with maturity of October 31, 2009. The Company can borrow up to 50% of the cash
balance it holds at the bank, up to a maximum of $5.0 million. At December 31, 2007 and 2006 the
Company had no outstanding balance on the line of credit.
66
The Line of Credit is collateralized by all equipment, accounts receivable and intangible
property of the Company.
The Company was subject to various debt covenants and was in compliance with covenants at
December 31, 2007.
8. Warrants
The Company has issued warrants to purchase common stock related to employee compensation
and in connection with various debt arrangements. Prior to 2005, the Company granted a total of
4,711,104 warrants in exchange for services. The following is a summary of activity related to
warrants granted:
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Exercise Price Range
|
|
|
(In thousands)
|
|
|
|
|
Outstanding at January 1, 2004
|
|
|
4,711
|
|
|
$
|
0.05 - $0.60
|
|
Issued
|
|
|
1,608
|
|
|
$
|
0.27
|
|
Exercised
|
|
|
(132
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
6,187
|
|
|
$
|
0.05 - $0.60
|
|
Issued
|
|
|
446
|
|
|
$
|
0.27
|
|
Exercised
|
|
|
(5,861
|
)
|
|
$
|
0.05 - $0.60
|
|
Expired
|
|
|
(674
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
98
|
|
|
$
|
0.15
|
|
Exercised
|
|
|
(98
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 there are no warrants outstanding.
9. Stockholders Equity
Initial Public Offering (IPO)
On June 8, 2007, the Company completed an initial public offering of its common stock in
which the Company sold and issued 14,900,000 shares of its common stock and selling stockholders sold 3,500,000 shares of the
Companys common stock, in each case at a price to the public of $15.00 per share. The common
shares began trading on the NASDAQ Global Market on June 8, 2007. The Company raised a total of
$223.5 million in gross proceeds from the IPO, or approximately $203.9 million in net proceeds
after deducting underwriting discounts and commissions of approximately $15.6 million and other
offering costs of approximately $4.0 million. On June 14, 2007, approximately $23.8 million of the
net proceeds were used to repay in full the outstanding balance of the Companys equipment
financing facility.
Stock Split
On May 14, 2007, the Company effected a 3-for-2 forward stock split of its outstanding
capital stock. All share and per-share data have been restated to reflect this stock split.
Conversion of Preferred Stock
On June 14, 2007, upon the closing of the Companys IPO, all outstanding shares of the
Companys Series A and Series B Convertible Preferred Stock automatically converted into 44,940,261
shares of common stock on a 1-for-1 share basis.
Common Stock
The Board of Directors has authorized 150,000,000 shares of $0.001 par value Common
Stock at December 31, 2007. The Company has reserved 8,474,000 unissued shares of Common Stock for
options outstanding under the incentive compensation plan.
Preferred Stock
On June 13, 2007, the Company amended its certificate of incorporation to authorize the
issuance of up to 7,500,000 shares of preferred stock. 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, 2007, the Board of Directors had not adopted any resolutions
for the issuance of preferred stock.
Series A Convertible Preferred Stock
In September 2003, the Companys Board of Directors adopted a resolution designating
7,500,000 shares as Series A Convertible
Preferred Stock (Series A Preferred).
67
At the time of issuance, the holders of record of the Series A Preferred were entitled to
receive, out of funds legally available, dividends at the annual rate of 10% of the Series A
Preferred price per share, if declared by the Companys Board of Directors. In connection with the
conversion of certain Series A Preferred Shares, Series A Preferred stockholders waived their right
to receive dividends if and when declared. No dividends had been declared by the Company through
date of waiver.
In the event of a liquidation of the Company, the holders of the Series A Preferred Stock
would be entitled to receive on a pro-rata basis for each share held, in preference to the holders
of the Common Stock, $0.1445 (the issue price) plus any accrued and unpaid dividends, and a premium
equal to 10% of the issue price per annum, compounded annually. In connection with the issuance of
the Series B Convertible Preferred Shares in 2006, the Company amended the articles of
incorporation whereby all Series Preferred Shares are covered under the set of terms and conditions
as it relates to liquidation, conversion, redemption and voting rights as described herein. As a
part of our initial public offering in June 2007 all the outstanding shares of Series A Convertible
Preferred shares were converted into common stock.
Series B Convertible Preferred Stock
In May 2006, the Companys Board of Directors adopted a resolution to authorize the
issuance of up to 43,050,000 shares of Series B Preferred Stock (Series B Preferred). The Company
subsequently issued 39,869,955 shares of Series B Preferred for aggregate gross proceeds of
$130,000,000.
Concurrent with the sale of the Series B Preferred, the Board of Directors authorized a
tender for the repurchase of up to an aggregate of 31,500,000 shares of common stock at a price of
$3.26 per share including common shares issued upon conversion of certain Series A Preferred shares
and from exercises of stock options and warrants. A total of 31,320,000 shares were repurchased for
$102,121,000.
The tender offer required a contribution of 10% of total amount paid or approximately
$10.1 million to selling stockholders be deposited in an escrow account to be available to the
Company for 18 months to fund any liabilities that were not estimable at the repurchase date, such
as the patent litigation, and any liabilities associated with breaches in the representations and
warranties made by the selling stockholders. At December 31, 2007 and December 31, 2006, the
Company had drawn an aggregate of $5.3 million and $0.7 million, respectively against the escrow.
The Company intends to make additional claims against the escrow funds but is not assured of
prevailing and receiving the requested funds. At December 31, 2007, $1.1 million remained in the
escrow and was available for reimbursement.
Reimbursements from the escrow account are recorded as an increase to Additional Paid-in
Capital of the Company.
In connection with the sale of Series B Preferred, the Board of Directors adopted the
2006 Sales Participation Plan. The plan calls for an allocation of the net consideration from a
liquidity transaction, excluding an initial public offering, to unit holders in an amount of 20% of
the proceeds in excess of $125,000,000 up to a maximum of $31.25 million. The purpose of the
program is to provide a means by which the Companys employees and consultants may be given a bonus
in the event of certain corporate transactions to provide a retention incentive to employees. The
Plan terminated upon the effectiveness of the Companys initial public offering with no such bonus
amounts awarded.
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 propriety interest in the Company. The Plans are
intended to be qualified plans under the Internal Revenue Code.
The Plans allows the Company to award stock option grants and restricted stock to
employees, directors and consultants of the Company. Through December 31, 2007 the Company has
granted awards to employees, directors and consultants. 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
Companys common stock on the date of the grant. Stock options and restricted stock are generally
subjected to 4 year vesting with the first 25% of the grant vesting on the first anniversary date
of the grant, with the remainder vesting monthly thereafter.
In connection with the preparation of the financial statements included in the Companys
registration of shares with the Securities and Exchange Commission, the Company reassessed the
estimated accounting fair value of common stock in light of the potential completion of the
offering. The valuation methodology that most significantly impacted the reassessment of fair value
was the market-based assessment of the valuation of existing comparable public companies. The
methodology also de-emphasized the $260 million liquidation preference available to preferred
stockholders in the event of a sale of the Company. In determining the reassessed fair value of the
common stock during 2006, the Company determined it appropriate to reassess the estimate of
accounting fair value for periods prior to December 31, 2006 based on operational achievements in
executing against the operating plan and market trends. Because of the impact the achievement of
unique milestones had on the valuation during the various points in time before the reassessment,
certain additional adjustments for factors unique to the Company were considered in the reassessed
values determined for the 12 months ended December 31, 2006, which impacted valuations throughout
the twelve month period ended December 31, 2006.
68
These included:
2006
|
|
In July a controlling interest is sold to an investor group led by Goldman, Sachs & Co.
through the issuance of shares of Series B Preferred Stock, at a price of $3.26 per share,
for total aggregate consideration of $130 million. As part of the transaction, the Company
repurchased 31,320,000 shares of common stock for an aggregate net consideration of
$102.1 million.
|
|
2006
|
|
In the Fall of 2006, the Company experienced significant increased revenue as a result of
new customer acquisitions and committed increases in network usage from existing
customers.
|
|
2006
|
|
In the fourth quarter the Company appoints both a Chief Executive Officer and a Chief
Financial Officer with past public company roles in a similar capacity.
|
|
2006
|
|
Revenue growth exceeds 200%, to $65.2 million compared to revenue in 2005 of $21.3 million.
|
Based upon the reassessment, the Company determined the SFAS No. 123R accounting fair value of
the options granted to employees from February 1, 2006 to December 31, 2006 was greater than the
initially determined amounts based upon using a higher fair value input for common stock in the
valuation model for certain of those options.
Based upon the reassessment discussed above, the Company determined the reassessed
accounting fair value of the options to purchase 8,078,313 shares of common stock granted to
employees during the period from February 1, 2006 to December 31, 2006 ranged from $1.21 to $6.25
per share.
Stock-based compensation expense for the year ended December 31, 2006 includes the
difference between the reassessed accounting fair value per share of the common stock on the date
of grant and the exercise price per share and is amortized over the vesting period of the
underlying options using the straight-line method. There are significant judgments and estimates
inherent in the determination of the reassessed accounting fair values. For this and other reasons,
the reassessed accounting fair value used to compute the stock-based compensation expense may not
be reflective of the fair market value that would result from the application of other valuation
methods, including accepted valuation methods for tax purposes.
Data pertaining to stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
3,305
|
|
|
$
|
0.15
|
|
Granted
|
|
|
3,653
|
|
|
|
0.27
|
|
Exercised
|
|
|
(295
|
)
|
|
|
0.15
|
|
Cancelled
|
|
|
(472
|
)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
6,191
|
|
|
|
0.21
|
|
Granted
|
|
|
8,078
|
|
|
|
2.19
|
|
Exercised
|
|
|
(8,481
|
)
|
|
|
0.23
|
|
Cancelled
|
|
|
(137
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
5,651
|
|
|
|
2.98
|
|
Granted
|
|
|
4,725
|
|
|
|
8.77
|
|
Exercised
|
|
|
(771
|
)
|
|
|
0.24
|
|
Cancelled
|
|
|
(1,131
|
)
|
|
|
5.42
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,474
|
|
|
$
|
6.17
|
|
|
|
|
|
|
|
|
69
The following table summarizes the information about stock options outstanding and exercisable
at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Shares
|
|
|
Exercise
|
|
Exercise Price
|
|
Number
|
|
|
Live (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
$0.00 $0.25
|
|
|
175
|
|
|
|
6.05
|
|
|
$
|
0.14
|
|
|
|
175
|
|
|
$
|
0.14
|
|
$0.26 $0.75
|
|
|
2,416
|
|
|
|
7.74
|
|
|
|
0.27
|
|
|
|
965
|
|
|
|
0.27
|
|
$0.76 $1.50
|
|
|
422
|
|
|
|
8.46
|
|
|
|
0.85
|
|
|
|
122
|
|
|
|
0.85
|
|
$1.51 $3.00
|
|
|
303
|
|
|
|
8.90
|
|
|
|
2.09
|
|
|
|
24
|
|
|
|
2.09
|
|
$6.01 $8.00
|
|
|
2,558
|
|
|
|
8.97
|
|
|
|
6.94
|
|
|
|
328
|
|
|
|
6.51
|
|
$8.01 $10.00
|
|
|
337
|
|
|
|
9.87
|
|
|
|
9.73
|
|
|
|
10
|
|
|
|
9.93
|
|
$10.01 $12.00
|
|
|
787
|
|
|
|
9.41
|
|
|
|
11.39
|
|
|
|
48
|
|
|
|
11.73
|
|
$12.01 $14.00
|
|
|
832
|
|
|
|
8.99
|
|
|
|
13.13
|
|
|
|
|
|
|
|
|
|
$14.01 $15.00
|
|
|
644
|
|
|
|
9.41
|
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,474
|
|
|
|
|
|
|
|
|
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the year ended December
31, 2007 and 2006 on a per-share basis was approximately $9.25 and $3.43. The total intrinsic value
of the options exercised during the years ended December 31, 2007, 2006 and 2005 was approximately
$3.0 million, $41.8 million and $0.1 million, respectively. The aggregate intrinsic value of
options outstanding at December 31, 2007 is $21.9 million.
Beginning on January 1, 2006, and upon the adoption for SFAS No. 123R, the fair value of each
new option awarded is estimated on the grant date using the Black-Scholes-Merton model using the
assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Expected volatility
|
|
|
84.47
|
%
|
|
|
84.47
|
%
|
|
NA
|
Expected term, years
|
|
|
5.79
|
%
|
|
|
5.79
|
%
|
|
NA
|
Risk-free interest
|
|
|
4.71
|
%
|
|
|
4.71
|
%
|
|
NA
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
NA
|
The Company recognizes expense using the straight-line attribution method. Unrecognized
share-based compensation related to stock options totaled $40.5 million at December 31, 2007. The
Company expects to amortize unvested stock compensation related to stock options over a weighted
average period of 3.22 years at December 31, 2007.
The Companys expected volatility is derived from historical volatilities of several
unrelated companies within the Internet services and network industry. Each companys historical
volatility is weighted based on certain qualitative factors and combined to produce a single
volatility factor used by the Company. The risk-free interest factor is based on the U.S. Treasury
yield curve in effect at the time of the grant for zero coupon U.S. Treasury notes with maturities
of approximately equal to each grants expected term. The expected term is calculated using the
short-cut method provided in the Securities Exchange Commissions Staff Accounting Bulletin No.
107, which takes into consideration the grants contractual life and the vesting periods. The
Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will
continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience,
analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate
adjustment will be recognized in full in the period of the adjustment. During the year ended
December 31, 2007 and 2006, the Company recorded share-based compensation related to stock options
under the fair value requirements of SFAS No. 123R of approximately $15.7 million and $7.2 million,
respectively.
The Company has also granted restricted stock awards to certain employees. Restricted
stock awards are valued at the deemed fair value of the Companys common stock on the date of grant
and the total value of the award is expensed ratably over the service period of the award. In 2006,
the Company granted 1,845,000 shares of restricted stock with a deemed fair value of $12.2 million.
There were no grants of restricted stock in the years ended December 31, 2007 or December 31, 2005.
Share-based payment compensation related to all restricted stock awards for the years
ended December 31, 2007 and 2006 was approximately $3.2 million and $2.1 million, respectively. At
December 31, 2007 there was $6.9 million of total unrecognized compensation costs related to
non-vested share-based compensation arrangements granted under the restricted stock plan. That cost
is expected to be recognized over a weighted-average period of 2.05 years and 3.17 years, as of
December 31, 2007 and 2006, respectively.
The Companys stock option plan contains an early exercise provision. Upon early
exercise of the option, the exercising holder receives restricted common stock. The restricted
stock shares vest over the same period as the original stock option award. If the restricted stock
does not vest because the required service period is unmet, the Company has the option to reacquire
the restricted common stock for the lesser of the amount paid to acquire it or the fair value of
the common stock at the call date. During 2006, the Company received $864,000 in cash resulting
from the early exercise of options to purchase 3,240,944 shares of restricted common stock. Because
the unvested portion of this common stock is subject to repurchase by the Company, unvested amounts
of $-0- and $0.6 million, as of December 31, 2007 and 2006, respectively have been recorded in
other liabilities in the accompanying consolidated
balance sheet.
70
10. Related Party Transactions
In July 2006, an aggregate of 39,869,960 shares of Series B Preferred 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 our initial public offering became holders of more than 10% of the
Companys common stock. On June 14, 2007, upon the closing of the Companys IPO, all outstanding
shares of the Companys Series B Convertible Preferred Stock automatically converted into shares of
common stock on a 1-for-1 share basis. As of December 31, 2007, Goldman, Sachs & Co. owned 37% of
the Companys outstanding common stock.
The Company leases office space from a company owned by two of the Companys executives.
Rent expense for the lease, including reimbursement for telecommunication lines, was approximately
$12,000, $20,000 and $26,000, for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company sells services to several entities owned, in whole or in part, by several
Company executives. Revenue received from these customers was approximately $337,000, $275,000 and
$234,000 during the years ended December 31, 2007, 2006 and 2005, respectively.
The Company purchases hardware and equipment from companies owned by one of the founders
of the Company. Hardware and equipment purchased from the entities during 2006 and 2005 was
approximately $29,900,000 and $7,400,000, respectively. As of December 31, 2006, the Company was
informed by this founder that there was no longer an ownership interest in the entity.
11. Leases and Commitments
Operating Leases
The Company is committed to various noncancelable operating leases for office space which
expire through 2011. 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, 2007 are as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
1,036
|
|
2009
|
|
|
898
|
|
2010
|
|
|
663
|
|
2011
|
|
|
71
|
|
2012
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
$
|
2,668
|
|
|
|
|
|
Subsequent to the year ended December 31, 2007, the Company entered into a new operating lease
for additional office space in Tempe, Arizona with lease payments of approximately $103,000,
$159,000, $164,000 and $55,000 for 2008, 2009, 2010 and 2011, respectively. These additional costs
are not reflected in the above table of operating leases. This lease provides to the Company a one
time termination provision at the end of the first 24 months of the lease for the payment of a
small fee.
Purchase Commitments
The Company has long-term commitments for bandwidth usage and co-location with various
networks and ISPs. The following summarizes minimum commitments as of December 31, 2007 for the
next five years (in thousands):
|
|
|
|
|
2008
|
|
$
|
25,619
|
|
2009
|
|
|
16,664
|
|
2010
|
|
|
10,607
|
|
2011
|
|
|
4,961
|
|
2012 and thereafter
|
|
|
440
|
|
|
|
|
|
Total minimum payments
|
|
$
|
58,291
|
|
|
|
|
|
Rent and operating expense relating to these operating lease agreements and bandwidth and
co-location agreements was approximately $36.8 million, $21.5 million and $8.3 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
71
Capital Leases
As of December 31, 2006, the Company leased certain equipment under capital lease agreements
with expiration dates in 2007 through 2009. The equipment acquired under these various financing
leases was capitalized using effective interest rates at the inception of the leases. The cost and
accumulated depreciation of the equipment capitalized under these leases approximated $726,000 and
$541,000, respectively, at December 31, 2006. The Company had no cost and accumulated depreciation
of the equipment capitalized under capital lease agreements at December 31, 2007.
During 2007, the Company paid in full certain lease arrangements with maturities through 2009.
In connection with the early repayment of these leases, the Company paid penalty amounts resulting
in additional interest expense. As of December 31, 2007, the company had no commitments under any
capital lease obligations.
Interest expense related to capital leases was approximately $85,000, $66,000 and
$290,000, for the years ended December 31, 2007, 2006 and 2005, respectively.
12. Concentrations
During the year ended December 31, 2007 and 2006, the Company had one major customer each
year for which revenue exceeded 10% of total revenues. The revenues for the years ended
December 31, 2007 and 2006, for these two customers totaled approximately $26.2 million and $19.2
million, respectively. There was no customer from which total revenue exceeded 10% in 2005.
Revenue from non-U.S. sources aggregated approximately $13.2 million, $5.1 million and
$1.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
13. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(72,083
|
)
|
|
$
|
(1,444
|
)
|
|
$
|
541
|
|
Foreign
|
|
|
1,464
|
|
|
|
658
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(70,619
|
)
|
|
$
|
(786
|
)
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,397
|
|
|
$
|
2,669
|
|
|
$
|
321
|
|
State
|
|
|
115
|
|
|
|
199
|
|
|
|
58
|
|
Foreign
|
|
|
421
|
|
|
|
194
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,933
|
|
|
|
3,062
|
|
|
|
425
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
399
|
|
|
|
(404
|
)
|
|
|
(112
|
)
|
State
|
|
|
69
|
|
|
|
(67
|
)
|
|
|
(13
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
468
|
|
|
|
(471
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
2,401
|
|
|
$
|
2,591
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys tax provision (benefit) to the expected tax provision
(benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax expense (benefit) at the federal statutory rate 35%
|
|
$
|
(24,717
|
)
|
|
$
|
(275
|
)
|
|
$
|
244
|
|
Share based compensation
|
|
|
4,143
|
|
|
|
2,729
|
|
|
|
|
|
State income taxes, net of the federal effect
|
|
|
(3,112
|
)
|
|
|
88
|
|
|
|
30
|
|
Valuation allowance changes affecting federal and state
income tax expense
|
|
|
25,723
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Contingency reserve
|
|
|
|
|
|
|
100
|
|
|
|
44
|
|
Uncertain tax positions
|
|
|
399
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(35
|
)
|
|
|
(51
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Tax provision
|
|
$
|
2,401
|
|
|
$
|
2,591
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys deferred tax assets and liabilities
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable reserves
|
|
$
|
1,015
|
|
|
$
|
280
|
|
Share-based compensation
|
|
|
3,707
|
|
|
|
498
|
|
Deferred Revenue
|
|
|
1,375
|
|
|
|
77
|
|
Provision for litigation
|
|
|
18,967
|
|
|
|
|
|
Fixed assets
|
|
|
280
|
|
|
|
53
|
|
Marketable equity securities
|
|
|
153
|
|
|
|
75
|
|
Foreign tax credit
|
|
|
504
|
|
|
|
|
|
Other
|
|
|
76
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26,077
|
|
|
|
988
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(354
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(354
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
(25,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
Netted by jurisdiction and reported as follows for the periods ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Current deferred tax assets
|
|
$
|
|
|
|
$
|
362
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
106
|
|
Non-current deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
A
deferred U.S. tax liability has not been provided on the
undistributed earnings of certain foreign subsidiaries because it is
the Companys intent to permanently reinvest such earnings. At
December 31, 2007, the Company expected a $1.1 million federal and state net operating loss. Under
the carryback provisions available for federal income tax purposes,
the Company anticipates the federal loss
will be carried back to the two preceding tax years and fully utilized. For state income tax
purposes, a carryback of the loss is not available; however, the state net operating loss can
generally be carried forward and used to offset future state taxable income. The state net
operating loss carryforwards will begin to expire in 2012.
SFAS No. 109 requires a reduction of 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 carryforward periods by jurisdiction, unitary versus stand alone state
tax filings, the Companys experience with loss carryforwards not expiring unutilized, and all tax
planning alternatives that may be available.
In
making the determination of whether the recoverability of the
Companys deferred tax assets was
likely under SFAS No. 109 as of December 31, 2007, management determined there was sufficient
negative evidence as a result of the
Companys cumulative losses to conclude that it was more likely than not
that approximately $25.7 million of the
Companys net deferred tax assets would not be realized and
accordingly established a full valuation allowance.
A summary of the activities associated with our FIN 48 reserve for unrecognized tax benefits,
interest and penalties follow (in thousands):
73
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
Balance at January 1, 2007
|
|
$
|
240
|
|
Increases related to current year tax positions
|
|
|
364
|
|
Expiration of statute of limitations for the
assessment of taxes
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
604
|
|
|
|
|
|
The Company adopted the provisions of FIN 48,
Accounting for Uncertainty in Income Taxes,
on
January 1, 2007. The adoption of FIN 48 did not result in the recognition of a cumulative effect of
adoption of a new accounting principle adjustment. The Company recognized a foreign tax obligation
which generated a corresponding deferred tax asset in the United States of $240,000 at adoption of
FIN 48. The unrecognized tax benefit increased $364,000 from January 1, 2007 to December 31, 2007.
The Company anticipates its unrecognized tax benefits will decrease within 12 months of the
reporting date, as a result of settling potential tax liabilities in certain foreign and state
jurisdictions. The Company recognizes interest and penalties related to unrecognized tax benefits
in its tax provision. As of December 31, 2007, the Company had an interest and penalties accrual
related to unrecognized tax benefits of $166,000, which increased $35,000 during 2007.
We file income tax returns in jurisdictions with varying statues of limitations. Tax years
2004 through 2007 generally remain subject to examination by federal and most state tax
authorities. As of December 31, 2007, the Company is not under examination.
14. Advertising and Marketing
Costs associated with advertising are expensed as incurred. Advertising expenses, which
are comprised of Internet, trade show and publications advertising, were approximately $2.7
million, $1.4 million and $0.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
15. 401(k) Plan
Effective January 1, 2004, the Company adopted 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. Through December 31,
2006, the Company was not obligated to make matching contributions. No matching contributions were
made by the Company in 2006 or 2005.
Effective January 1, 2007, the Company amended the plan to include a Company match. The
Company will match employee deferrals as follows: a dollar-for-dollar match on eligible employees
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 by up to 15%
or the statutory limit. The Company made matching contributions of $0.5 million during the year
ended December 31, 2007.
16. Segment Reporting
The Company operates in one industry segment content delivery network services. The
Company operates in three geographic areas the United States, Europe and Asia Pacific.
SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information about operating segments. 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 Companys chief operating decision
maker is its Chief Executive Officer. The Companys 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 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenue
|
|
$
|
89,867
|
|
|
$
|
60,152
|
|
|
$
|
20,303
|
|
International revenue
|
|
|
13,244
|
|
|
|
5,091
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
103,111
|
|
|
$
|
65,243
|
|
|
$
|
21,303
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic long-lived assets
|
|
$
|
44,158
|
|
|
$
|
39,198
|
|
|
$
|
10,343
|
|
International long-lived assets
|
|
|
2,810
|
|
|
|
2,586
|
|
|
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
46,968
|
|
|
$
|
41,784
|
|
|
$
|
11,986
|
|
|
|
|
|
|
|
|
|
|
|
17. Quarterly Financial Results (unaudited)
The following table sets forth certain unaudited quarterly results of operations of the
Company for the years ended December 31, 2007 and 2006. 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 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
Revenues
|
|
$
|
23,353
|
|
|
$
|
21,436
|
|
|
$
|
29,190
|
|
|
$
|
29,132
|
|
Gross margin
|
|
$
|
8,856
|
|
|
$
|
6,601
|
|
|
$
|
11,417
|
|
|
$
|
10,696
|
|
Net loss allocable to common stockholders
|
|
$
|
(3,905
|
)
|
|
$
|
(10,644
|
)
|
|
$
|
(3,125
|
)
|
|
$
|
(55,346
|
)
|
Basic net loss per share
|
|
$
|
( 0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.67
|
)
|
Diluted net loss per share
|
|
$
|
( 0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.67
|
)
|
Basic weighted average common shares outstanding
|
|
|
21,945
|
|
|
|
45,791
|
|
|
|
82,045
|
|
|
|
82,140
|
|
Diluted weighted average common shares outstanding
|
|
|
21,945
|
|
|
|
45,791
|
|
|
|
82,045
|
|
|
|
82,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
Revenues
|
|
$
|
10,838
|
|
|
$
|
14,841
|
|
|
$
|
17,454
|
|
|
$
|
22,110
|
|
Gross margin
|
|
$
|
5,558
|
|
|
$
|
7,575
|
|
|
$
|
7,254
|
|
|
$
|
8,878
|
|
Net income (loss) allocable to common stockholders
|
|
$
|
1,038
|
|
|
$
|
1,417
|
|
|
$
|
(1,390
|
)
|
|
$
|
(4,979
|
)
|
Basic net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.25
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.25
|
)
|
Basic weighted average common shares outstanding
|
|
|
35,188
|
|
|
|
31,648
|
|
|
|
15,670
|
|
|
|
19,882
|
|
Diluted weighted average common shares outstanding
|
|
|
42,951
|
|
|
|
39,606
|
|
|
|
15,670
|
|
|
|
19,882
|
|
75
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
We are responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in SEC Rule 13a-15(e). We maintain disclosure controls and
procedures, as such term is defined in SEC Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our reports under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. 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, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
During our third quarter ended September 30, 2007 we were notified by a customer of a
billing error. In response, we conducted an internal review of customer contracts and billings. We
also implemented a stock administration system during the quarter. In performing the above, we
identified material weaknesses in our system of internal controls over the revenue recognition and
stock-based compensation processes that required us to restate our previously reported consolidated
financial statements for the three and nine months ended September 30, 2006, the three months and
year ended December 31, 2006, the three-month period ended March 31, 2007 and the three-and
six-month periods ended June 30, 2007. A material weakness is defined as a deficiency, or
combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis.
Since the date of discovery of these material weaknesses and through the date of this Annual
Report on Form 10-K, we have taken steps which we feel have remediated the material weaknesses in
our internal controls, including the following actions:
|
|
|
We have implemented a reconciliation of monthly customer bookings to
monthly revenue results. We have established a process of senior
management review of revenue by customer on a monthly basis. Further,
we have implemented a practice of periodic reviews of customer
information in our billing system to customer contract files.
Additionally, we completed a reconciliation of the customer billing
file to the customer contract file covering a significant portion of
our monthly customer billings. No additional material errors were
found during this review.
|
|
|
|
|
Previously, we had relied on a manual system to calculate our
stock-based compensation expense. During the third quarter which ended
September 30, 2007, we engaged a third party company specializing in
stock option administration to take over the administration of our
stock option and restricted stock plan. In conjunction with this
change, we implemented the vendors automated stock option and
restricted stock accounting system. The implementation of this system
coupled with the reconciliation of the input data to the original
employee option and restricted stock agreements has improved the
accuracy of the stock option and restricted stock data. These
remediation actions are fully implemented and have been in operation
for a sufficient period of time to be evaluated and approved and
accordingly we feel that this previously identified material weakness
has been remediated.
|
|
|
|
|
Additionally, we have engaged an international accounting firm to
commence a review of our overall control environment and assist us in
our preparation for compliance under Section 404 of the Sarbanes-Oxley
Act.
|
Furthermore, SEC rules require that, as a publicly-traded company, we file periodic reports
containing our financial statements within a specified time following the completion of quarterly
and annual periods. Commencing with our year ending December 31, 2008, we must perform system and
process evaluations and testing of our internal controls over financial reporting to allow
management and our independent registered public accounting firm to report on the effectiveness of
our internal controls over financial reporting, as required under Section 404 of the Sarbanes-Oxley
Act. We may experience difficulty in meeting these reporting requirements in a timely manner,
particularly if a material weakness or significant deficiencies persist. Even if we are able to
report our financial statements accurately and timely, if we do not make all the necessary
improvements to address the material weaknesses, continued disclosure of our material weaknesses
will be required in future filings with the SEC.
The actions we have taken to remediate these material weaknesses are subject to continued
management review supported by confirmation and testing, as well as oversight by the Audit
Committee of our Board of Directors. We cannot assure you that material weaknesses or significant
deficiencies will not occur in the future and that we will be able to remediate such weaknesses or
deficiencies in a timely manner, which could impair our ability to accurately and timely report our
financial position, results of operations or cash flows. See the Risk Factor entitled
If we fail
to maintain proper and effective internal controls, 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 view of us
in this Annual Report on
Form 10-K.
Because we are not an
"accelerated filer" or "large accelerated filer" (as those terms are defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended), this annual report on Form 10-K does not include a report of management's
assessment regarding internal control over
financial reporting or an attestation report of our independent registered public accounting firm due to a transition
period established by the rules of the SEC for newly public companies.
Item 9B.
Other Information
None
76
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Information
required by this item is incorporated by reference to our Proxy
Statement for our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year
ended December 31, 2007.
Item 11.
Executive Compensation
Information
required by this item is incorporated by reference to our Proxy
Statement for our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year
ended December 31, 2007.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information
required by this item is incorporated by reference to our Proxy
Statement for our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year
ended December 31, 2007.
Equity Compensation Plan Information
The following table provides information regarding our current equity compensation plans as of
December 31, 2007 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Number of securities remaining
|
|
|
|
|
|
|
|
exercise price of
|
|
|
available for future issuance
|
|
|
|
Number of securities to be issued
|
|
|
outstanding
|
|
|
under equity compensation plans
|
|
|
|
upon exercise of outstanding
|
|
|
options, warrants and
|
|
|
(excluding securities reflected in
|
|
|
|
options, warrants and rights
|
|
|
rights
|
|
|
column (a)
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation
plans approved by
security holders
|
|
|
8,474
|
|
|
$
|
6.17
|
|
|
|
6,736
|
|
|
Equity compensation
plans not approved
by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,474
|
|
|
$
|
6.17
|
|
|
|
6,736
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
Certain Relationships, Related Transactions, and Director Independence
Information
required by this item is incorporated by reference to our Proxy
Statement for our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year
ended December 31, 2007.
Item 14.
Principal Accountant Fees and Services.
Information
required by this item is incorporated by reference to our Proxy
Statement for our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal year
ended December 31, 2007.
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:
|
|
|
|
|
|
Page
|
Schedule II Valuation and Qualifying Accounts
|
|
S-1
|
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.
77
SIGNATURES
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.
|
|
|
|
Date: March 24, 2008
|
|
By:
|
|
/s/ Matthew Hale
|
|
|
|
|
|
|
Matthew Hale
|
|
|
|
|
|
|
Chief Financial Officer and Secretary
|
|
|
|
|
|
|
(Principal Financial Officer)
|
|
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Jeffrey W. Lunsford and Matthew Hale 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
|
|
Date
|
|
|
|
|
|
/s/ Jeffrey W. Lunsford
|
|
President, Chief Executive Officer and
|
|
|
|
|
Chairman of the Board
(Principal Executive Officer)
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Matthew Hale
|
|
Chief Financial Officer
|
|
|
|
|
(Principal Financial Officer and
Principal Accounting Officer)
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Walter D. Amaral
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Joseph H. Gleberman
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Fredric W. Harman
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Mark A. Jung
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Allan M. Kaplan
|
|
Co-Founder and Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Douglas Lindroth
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Peter J. Perrone
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ David C. Peterschmidt
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
|
|
|
|
|
/s/ Nathan F. Raciborski
|
|
Co-Founder, Chief Technical Officer and Director
|
|
March 24, 2008
|
|
|
|
|
|
78
LIMELIGHT NETWORKS, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Deductions
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged
|
|
Write-Offs
|
|
|
|
|
Beginning
|
|
Costs and
|
|
Against
|
|
Net of
|
|
Balance at
|
Description
|
|
of Period
|
|
Expenses
|
|
Revenue
|
|
Recoveries
|
|
End of Period
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for accounts receivable
|
|
$
|
261
|
|
|
|
135
|
|
|
|
158
|
|
|
|
226
|
|
|
$
|
328
|
|
Deferred tax asset valuation allowance
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for accounts receivable
|
|
$
|
328
|
|
|
|
618
|
|
|
|
544
|
|
|
|
286
|
|
|
$
|
1,204
|
|
Deferred tax asset valuation allowance
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for accounts receivable
|
|
$
|
1,204
|
|
|
|
2,630
|
|
|
|
3,175
|
|
|
|
2,987
|
|
|
$
|
4,022
|
|
Deferred tax asset valuation allowance
|
|
$
|
|
|
|
|
25,723
|
|
|
|
|
|
|
|
|
|
|
$
|
25,723
|
|
S-1
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
3.1
|
*
|
|
Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect
|
|
|
|
|
|
|
3.2
|
**
|
|
Amended and Restated Bylaws of the Registrant, as currently in effect
|
|
|
|
|
|
|
4.1
|
#
|
|
Specimen Common Stock Certificate of the Registrant
|
|
|
|
|
|
|
4.2
|
#
|
|
Amended and Restated Investors Rights Agreement dated July 12, 2006
|
|
|
|
|
|
|
10.1
|
#
|
|
Form of Indemnification Agreement for directors and officers
|
|
|
|
|
|
|
10.2
|
#
|
|
Amended and Restated 2003 Incentive Compensation Plan and form of agreement thereunder
|
|
|
|
|
|
|
10.3
|
#
|
|
2007 Equity Incentive Plan and form of agreement thereunder
|
|
|
|
|
|
|
10.4
|
#
|
|
Employment Agreement between the Registrant and Jeffrey W. Lunsford dated October 20, 2006
|
|
|
|
|
|
|
10.5
|
#
|
|
Employment Agreement between the Registrant and Matthew Hale dated November 22, 2006
|
|
|
|
|
|
|
10.6
|
#
|
|
Lease between the Registrant and Bel de Mar, LLC dated November 18, 2002
|
|
|
|
|
|
|
10.7
|
#
|
|
Lease between the Registrant and Bel de Mar, LLC dated December 1, 2004
|
|
|
|
|
|
|
10.8
|
#
|
|
Lease between the Registrant and Calwest Industrial Properties, LLC dated September 7, 2005
|
|
|
|
|
|
|
10.9
|
#
|
|
Loan and Security Agreement dated April 15, 2005 between the Registrant and Silicon Valley
Bank, and amendments thereto
|
|
|
|
|
|
|
10.10
|
#
|
|
Bandwidth/Capacity Agreement between Registrant and Global Crossing Bandwidth, Inc., dated
August 29, 2001, and amendments thereto
|
|
|
|
|
|
|
10.11
|
#
|
|
Series B Convertible Preferred Stock Purchase Agreement dated May 18, 2006
|
|
|
|
|
|
|
10.12
|
#
|
|
Form of At-Will Employment, Confidential Information, Invention Assignment, and
Arbitration Agreement for officers and employees
|
|
|
|
|
|
|
10.13
|
#
|
|
Employment Agreement between the Registrant and David M. Hatfield dated March 27, 2007
|
|
|
|
|
|
|
10.14
|
#
|
|
Escrow Agreement Clarification dated May 9, 2007 among the Registrant, U.S. Bank, N.A.,
Michael Gordon as Stockholders Representative and GS Capital Partners V Fund, L.P. as
Purchasers Representative
|
|
|
|
|
|
|
10.15
|
##
|
|
Edge Computing Network Service and License Agreement dated March 1, 2007 between Limelight
Networks, Inc. and Microsoft Corporation, and Addendum to the Edge Computing Network
Service and License Agreement dated March 17, 2007
|
|
|
|
|
|
|
10.16
|
###
|
|
Employment Agreement with Philip Maynard effective October 22, 2007
|
|
|
|
|
|
|
21.1
|
#
|
|
List of subsidiaries of the Registrant
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
24.1
|
|
|
Power of Attorney (See signature page)
|
|
|
|
|
|
|
31.1
|
|
|
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
|
|
|
|
|
|
|
31.2
|
|
|
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
|
|
|
|
|
|
|
32.1
|
***
|
|
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
|
|
|
|
|
|
|
32.2
|
***
|
|
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
|
|
|
|
*
|
|
Incorporated by reference to Exhibit 3.2 of the Registrants 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 3.4 of the Registrants 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 the same number exhibit of the Registrants 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 10.15 of the Registrants Quarterly Report on Form 10-Q filed on November 14, 2007.
|
|
###
|
|
Incorporated by reference to Exhibit 99.2 of the Registrants Current Report on Form 8-K filed on November 13, 2007.
|
|
***
|
|
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 granted for portions of this exhibit by the Securities and Exchange Commission.
|
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