ITEM 1A. RISK FACTORS
Investments in the
equity securities of publicly traded companies involve significant risks. Our business, prospects, financial condition or operating results could be materially adversely affected by the risks identified below, as well as other risks not currently
known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to
the information contained in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes, as well as our Annual Report on Form 10-K for the year ended December 31, 2011 and other
documents that we file from time to time with the SEC.
Risks Related to Our Business
We currently face competition from established competitors and may face competition from others in the future.
We compete in markets that are intensely competitive, rapidly changing and characterized by constantly declining prices and vendors
offering a wide range of content delivery solutions. We have experienced and expect to continue to experience increased competition, and particularly aggressive price competition. Many of our current competitors, as well as a number of our potential
competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do. As a consequence of the competitive
dynamics in our market we have experienced reductions in our prices, which in turn adversely affect our revenue, gross margin and operating results.
Our primary competitors for content delivery services include Akamai, Level 3 Communications, AT&T, Amazon, CDNetworks, Edgecast, and Internap Network Services Corporation, which acquired VitalStream.
Also, as a result of the growth of the content delivery market, a number of companies have recently entered or are currently attempting to enter our market, either directly or indirectly, some of which may become significant competitors in the
future. Given the relative ease by which customers typically can switch among content delivery service providers, differentiated offerings or pricing by competitors could lead to a rapid loss of customers. Some of our current or potential
competitors may bundle their offerings with other services, software or hardware in a manner that may discourage content providers from purchasing the services that we offer. In addition, as we expand internationally, we face different market
characteristics and competition with local content delivery service providers, many of which are very well positioned within their local markets. Increased competition could result in price reductions and revenue shortfalls, loss of customers and
loss of market share, which could harm our business, financial condition and results of operations.
Our primary competitors
for our SaaS services include Brightcove, Ooyala, Unicorn Media, Sitecore, Adobe, Crown Peak and Interwoven, as well as open source products such as Drupal. However, the competitive landscape is different from content delivery in this area in that
changing vendors can be costly and complicated for the customer, which could make it difficult for us to attract new customers and increase our market share. If we are unable to increase our customer base and increase our market share, our business,
financial condition and results of operations may suffer.
If we are unable to sell our services at acceptable prices relative to our
costs, our revenue and gross margins will decrease, and our business and financial results will suffer.
Prices for
content delivery services have fallen in recent years and are likely to fall further in the future. We have invested significant amounts in purchasing capital equipment to increase the capacity of our global computing network. For example, in 2009,
2010 and 2011 we invested $20.4 million, $33.5 million and $30.4 million, respectively, in capital expenditures primarily for computer equipment associated with the build-out and expansion of our global computing network. For the nine month
period ended September 30, 2012, we invested $17.4 million. 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.
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During 2012, as we further expand our global computing network and the suite of content
delivery services and VAS and begin to refresh our network equipment, we expect our capital expenditures to be approximately 9% to 11% of our total revenue. As a consequence, we are dependent on significant future growth in demand for our services
to justify these additional expenditures. If we fail to generate significant additional demand for our services, our results of operations will suffer, and we may fail to achieve planned or expected financial results. There are numerous factors that
could, alone or in combination with other factors, impede our ability to increase revenue, moderate expenses or maintain gross margins, including:
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continued price declines arising from significant competition with respect to content delivery services and our VAS;
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increasing settlement fees for certain peering relationships;
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failure to increase sales of our core content delivery services or to grow our VAS;
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increases in electricity, bandwidth and rack space costs or other operating expenses, and failure to achieve decreases in these costs and expenses
relative to decreases in the prices we can charge for our services and products;
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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 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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We expect a significant and increasing portion of our revenue to be derived from our VAS offerings. Our VAS tend to have higher gross
margins than our content delivery services. Our revenue from VAS offerings comprised approximately 26% of our total revenue for the year ended December 31, 2011. For the three and nine month periods ended September 30, 2012, VAS comprised
approximately 35% and 32%, respectively, of our total revenue. We do not have a long history of offering these VAS, and we may not be able to achieve the growth rates in such services revenue that we or our investors expect. There are numerous
companies that compete in providing VAS, and many of these companies have greater financial and sales resources than we do. We may not be successful in competing against current and new providers of VAS. If we are unable to achieve the growth rates
in our VAS revenue that we expect, our revenue and operating results could be significantly and negatively affected.
If we are unable
to develop new services and enhancements to existing services or fail to predict and respond to emerging technological trends and customers changing needs, our operating results may suffer.
The market for our content delivery services and VAS is characterized by rapidly changing technology, evolving industry standards and new
product and service introductions. Our operating results depend on our ability to predict user preferences or industry changes, and modify our solutions and services on a timely basis or develop and introduce new services into existing and emerging
markets. The process of developing new technologies is complex and uncertain. We must commit significant resources to developing new services or enhancements to our existing services before knowing whether our investments will result in services the
market will accept. Furthermore, we may not execute 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. As prices for content delivery services continue to fall, we will increasingly rely on new product offerings and other VAS to maintain or increase our gross margins. Failures in execution, delays in bringing new or improved
products or services to market, failure to effectively integrate service offerings or market acceptance of new services we introduce could result in competitors providing those solutions before we do, which could lead to loss of market share,
revenue and earnings.
Rapidly evolving technologies or new business models could cause demand for our content delivery services and VAS
to decline or could cause these services to become obsolete.
Customers or third parties may develop technological or
business model innovations that address content management and delivery requirements in a manner that is, or is perceived to be, equivalent or superior to our content delivery services and VAS. If competitors introduce new products or services that
compete with or surpass the quality or the price or performance of our services, we may be unable to renew our agreements with existing customers or attract new customers at the prices and levels that allow us to generate attractive rates of return
on our investment. 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 content delivery services, or even makes content delivery 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 content delivery or digital asset management 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.
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More individuals are using mobile devices to access the Internet, and the solutions developed for
these devices may not be widely deployed.
The number of people who access the Internet through devices other than
PCs, including mobile devices, game consoles and television set-top devices, has increased dramatically in the past few years. The lower resolution, functionality and memory associated with alternative devices make the use of our service offerings
through these devices more difficult and potentially less effective. If we are unable to deliver our service offerings to a substantial number of alternative device users or if we are slow to develop services and technologies that are more
compatible with mobile devices, we will fail to capture a significant share of an increasingly important portion of the market. Such a failure could limit our ability to compete effectively in an industry that is rapidly growing and changing.
Any unplanned interruption in the functioning of our network or services or attacks on our internal information technology systems
could lead to significant costs and disruptions that could reduce our revenue and harm our business, financial results and reputation.
Our business is dependent on providing our customers with fast, efficient and reliable distribution of content delivery and digital asset management services over the Internet. 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 or access, failure of our software or global computing platform infrastructure and power losses. In addition, we deploy our
servers in third party co-location facilities, and these third-party co-location providers could experience system outages or other disruptions that could constrain our ability to deliver our services. We may also experience disruptions caused by
software viruses, unauthorized hacking of our systems or other cyber attacks by unauthorized users. Any unauthorized hacking of our systems or other cyber attacks by unauthorized users could lead to the unauthorized release of confidential
information which could damage our business.
While we have not experienced any significant, unplanned disruption of our
services to date, our network may fail in the future. Despite our significant infrastructure investments, we may have insufficient communications and server capacity to address these or other disruptions, which could result in interruptions in our
services. Any widespread interruption of the functioning of our content delivery services and VAS 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 or security breaches could undermine confidence in our
services and cause us to lose customers or make it more difficult to attract new ones, either of which could harm our business and results of operations.
We are a party to a lawsuit with a significant competitor, and an adverse outcome in that lawsuit is possible, which could have a significant, adverse effect on our financial condition and
operations. If an injunction were entered against us, it could force us to cease providing some significant portion of our content delivery services.
We are currently a defendant in one significant lawsuit (see discussion in Legal Proceedings in Part II, Item 1 of this Quarterly Report on Form 10-Q). We cannot provide any
assurance that the ultimate outcome of the lawsuit with Akamai will not be materially adverse to us. The expenses of defending this lawsuit and other lawsuits to which we are or may become a party, particularly fees paid to our lawyers and expert
consultants, have been significant and may continue to adversely affect our operating results during the pendency of such lawsuits. Also, this litigation has been a distraction to our management in operating our business.
On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in Akamai Technologies, Inc. v. Limelight
Networks, Inc. The court stated that the trial court correctly determined that we did not directly infringe Akamais 703 patent, and as such it upheld the trial courts decision to vacate the original jurys damages award (see
discussion in Legal Proceedings in Part II, Item 1 of this Quarterly Report on Form 10-Q for a description of that damages award). The court also held that we did not infringe Akamais 413 or 645 patents.
A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers
to infringe Akamais patent under the courts new legal standard. We will file a petition to appeal this sharply divided Court of Appeals decision to the Supreme Court and will seek to stay any proceedings at the trial court until the
Supreme Court rules on that petition. We believe that we do not infringe Akamais patents and we will continue to vigorously defend against the allegation; however, we cannot provide any assurance that the lawsuit ultimately will be resolved in
our favor. An adverse ruling could seriously impact our ability to conduct our business and to offer our products and services to our customers. A permanent injunction could prevent us from operating our content delivery services or from delivering
certain types of traffic, which could impact the viability of our business. Any adverse ruling, in turn, would harm our revenue, market share, reputation, liquidity and overall financial position.
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We are from time to time party to other lawsuits in addition to that described above.
Lawsuits are expensive to defend and to prosecute, and require a diversion of management time and attention away from other activities to pursue the defense or prosecution of such matters. Adverse ruling in such lawsuits either alone or cumulatively
may have an adverse impact on our revenue, expenses, market share, reputation, liquidity and overall financial position.
We need to
defend our intellectual property and processes against patent or copyright infringement claims, which may cause us to incur substantial costs and threaten our ability to do business.
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. In addition, many of our agreements with customers require us to indemnify such customers for third-party intellectual property infringement claims against them. Pursuant to such agreements, we may be required to defend such customers
against certain claims which could cause us to incur additional significant costs. Any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources. See Legal Proceedings in Part II,
Item 1 of this Quarterly Report on Form 10-Q. 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 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, as of September 30, 2012, we have 42
currently issued U.S. patents. 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.
We use certain open-source software the use of which could result in our having to distribute our proprietary software, including our source code, to third parties on unfavorable terms
which could materially affect our business.
Certain of our service offerings use software that is subject to
open-source licenses. Open-source code is software that is freely accessible, usable and modifiable. Certain open-source code is governed by license agreements, the terms of which could require users of such open-source code to make any derivative
works of such open-source code available to others on unfavorable terms or at no cost. Because we use open-source code, we may be required to take remedial action to protect our proprietary software. Such action could include replacing certain
source code used in our software, discontinuing certain of our products or taking other actions that could divert resources away from our development efforts.
In addition, the terms relating to disclosure of derivative works in many open-source licenses are unclear. We periodically review our compliance with the open-source licenses we use and do not believe we
will be required to make our proprietary software freely available. However, if a court interprets one or more such open-source licenses in a manner that is unfavorable to us, we could be required to make our software available at no cost.
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If we fail to manage future growth effectively, we may not be able to market and sell our services
successfully.
Our future operating results depend to a large extent on our ability to manage expansion and growth
successfully. Risks that we face in undertaking this expansion include: training new sales personnel in our varied and increasing offerings, to become productive and generate revenue; forecasting revenue; controlling expenses and investments in
anticipation of expanded operations; implementing and enhancing our global computing platform 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.
If we fail to maintain
proper and effective internal controls or fail to implement our controls and procedures with respect to acquired or merged operations, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating
results, our ability to operate our business and investors views of us.
We must ensure that we have adequate
internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis. We are required to spend considerable effort on establishing and maintaining our internal controls, which is
costly and time-consuming and needs to be re-evaluated frequently.
We have operated as a public company since June 2007, and
we will continue to incur significant legal, accounting and other expenses as we comply with the Sarbanes-Oxley Act of 2002, as well as new rules implemented from time to time by the SEC and the Nasdaq Global Select Market. These rules impose
various requirements on public companies, including requiring changes in corporate governance practices, increased reporting of compensation arrangements and other requirements. Our management and other personnel will continue to devote a
substantial amount of time to these compliance initiatives. Moreover, new rules and regulations will likely increase our legal and financial compliance costs and make some activities more time-consuming and costly. These rules and regulations could
also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited
financial statements as of the end of each fiscal year. Furthermore, our independent registered public accounting firm, Ernst & Young LLP (E&Y), is required to report on whether it believes we maintained, in all material respects,
effective internal control over financial reporting as of the end of the year. We successfully completed our assessment and obtained E&Ys attestation as to the effectiveness of our internal control over financial reporting as of
December 31, 2011, 2010 and 2009, respectively. Our continued compliance with Section 404 will require that we incur substantial expense and expend significant management time on compliance related issues, including our efforts in
implementing controls and procedures related to acquired or merged operations. We currently do not have an internal audit group and use an international accounting firm to assist us with our assessment of the effectiveness of our internal controls
over financial reporting. In future years, if we fail to timely complete this assessment, or if E&Y cannot timely attest, there may be a loss of public confidence in our internal controls, the market price of our stock could decline, and we
could be subject to regulatory sanctions or investigations by the Nasdaq Global Select Market, the SEC or other regulatory authorities, which would require additional financial and management resources. In addition, any failure to implement required
new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
In the previously filed financial statements included in our Form 10-Q for the period ended March 31, 2012 and the period ended
June 30, 2012, we improperly classified cash collected from DG related to the sale of EyeWonder and chors as cash provided by operating activities of continuing operations in the unaudited Condensed Consolidated Statements of Cash Flows. As a
result of the error, we identified a material weakness in our system of internal controls over financial reporting with regard to evaluating the proper cash flow classification of cash collected from DG. The Company corrected the classification
error in its third quarter Form 10-Q and amended its March 31, 2012 Form 10-Q and June 30, 2012 Form 10-Q to reflect the correct classification.
Since the date of discovery of this material weakness and through the date of this Form 10-Q, we are taking steps which we feel will strengthen our internal controls, including implementing a stronger
review process around the preparation of our consolidated statement of cash flows and updating our processes and procedures to ensure that accounting personnel have sufficient guidance to remediate the material weakness.
The actions we are taking to remediate this 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.
We may lose customers if they elect to develop content delivery services and other competitive VAS solutions internally.
Our customers and potential customers may decide to develop their own content delivery, web and video content management and other
digital presence management solutions rather than outsource these solutions to 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. If we fail to offer content delivery, web and video content management and other related services that are competitive to in-sourced solutions, we may lose additional customers or fail to attract customers that may consider
pursuing this in-sourced approach, and our business and financial results would suffer.
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We may lose customers if they are unable to build business models that effectively monetize delivery
of their content.
Some of our customers will not be successful in selling advertising or otherwise monetizing the
content we deliver on their behalf and consequently may not be successful in creating a profitable business model. This will result in some of our customers discontinuing their Internet or web-based business operations and discontinuing use of our
services and solutions. Further, weakness and related uncertainty in the global financial markets and economy which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of
credit, substantial reductions and/or fluctuations in equity and currency values worldwide and concerns that portions of the worldwide economy may be in a prolonged recessionary period may materially adversely impact our customers
access to capital or willingness to spend capital on our services or in some cases, ultimately cause the customer to file for protection from creditors under applicable insolvency or bankruptcy laws or simply go out of business. This uncertainty may
also impact our customers levels of cash liquidity, which could affect their ability or willingness to timely pay for services that they will order or have already ordered from us. From time to time we discontinue service to customers for
non-payment of services. We expect further customers may discontinue operations or not be willing or able to pay for services that they have ordered from us. Further loss of customers may adversely affect our financial results.
Our business depends on a strong brand reputation, and if we are not able to maintain and enhance our brands, our business will suffer.
We believe that maintaining and enhancing the Limelight Networks brand is important to expanding our base
of customers and maintaining brand loyalty among customers, particularly in North America where brand perception can impact the competitive position in other markets worldwide, and that the importance of brand recognition will increase due to the
growing number of competitors providing similar services and solutions. Maintaining and enhancing our brand may require us to make substantial investments in research and development and in the marketing of our solutions and services and these
investments may not be successful. If we fail to promote and maintain the Limelight Networks brand, or if we incur excessive expenses in this effort, our business and results of operations could be adversely impacted. We anticipate that,
as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to be a technology leader and to continue to
provide high quality solutions and services, which we may not do successfully.
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 2009, 2010 and 2011, sales to our top 10 customers accounted for approximately 36%, 34% and 34%, respectively, of our total revenue. During the nine month period ended September 30, 2012, sales to our top 10 customers accounted for
approximately 32% of our total revenue. During the nine month period ended September 30, 2012, we had one customer, Netflix, which represented more than 10% of our total revenue. During that period, Netflix represented approximately 11% of our
total revenue. During 2011, we had one customer, Netflix, which represented more than 10% of our total revenue. For the year ended December 31, 2011, Netflix represented approximately 11% of our total revenue. During 2010, we had no customer
that accounted for more than 10% of our total revenue. During 2009 we had one customer, Microsoft, which represented more than 10% of our total revenue. For the year ended December 31, 2009, Microsoft represented approximately 14% of our total
revenue. Netflix, Microsoft and other large customers may not continue to be as significant going forward as they have been in the past. For example, during 2012, we anticipate that our revenue from Microsoft will decline from that earned in 2011
and 2010 and as a percent of our total 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.
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If we are unable to attract new customers or to retain our existing customers, our revenue could be
lower than expected and our operating results may suffer.
In addition to adding new customers, to increase our
revenue, we must sell additional services to existing customers and encourage existing customers to increase their usage levels. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, we
may not be able to retain our current customers or attract new customers. We sell our services pursuant to service agreements that generally include some form of financial minimum commitment. Our customers have no obligation to renew their contracts
for our services after the expiration of their initial commitment, and these service agreements may not be renewed at the same or higher level of service, if at all. Moreover, under some circumstances, some of our customers have the right to cancel
their service agreements prior to the expiration of the terms of their agreements. This fact, in addition to the changing competitive landscape in our market, means that we cannot accurately predict future customer renewal rates or usage rates. Our
customers renewal rates may decline or fluctuate as a result of a number of factors, including:
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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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discontinuation by our customers of their Internet or web-based content distribution business;
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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 may suffer. Similarly, our customer agreements often
provide for minimum commitments that are often significantly below our customers historical usage levels. Consequently, even if we have agreements with our customers to use our services, these customers could significantly curtail their usage
without incurring any penalties under our agreements. In this event, our revenue would be lower than expected and our operating results could suffer.
It also is an important component of our growth strategy to market our services and solutions to 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. In addition to the effects of other risks discussed in this section, fluctuations in our results of operations may be due to a number of factors, including:
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our ability to increase sales to existing customers and attract new customers to our content delivery services and VAS;
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the addition or loss of large customers, or significant variation in their use of our content delivery services and VAS;
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costs associated with current or future intellectual property lawsuits and other lawsuits;
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service outages or third party security breaches to our platform or to one or more of our customers platforms;
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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 content delivery services and VAS, 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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limitations of the capacity of our global computing platform 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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the potential write-down or write-off of goodwill associated with business operations that have been disposed of, such as goodwill currently on our
balance sheet associated with the initial acquisitions of EyeWonder and chors;
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general economic, industry and market conditions (such as the fluctuations experienced in the stock and credit markets during the recent deterioration
of global economic conditions) and those conditions specific to Internet usage;
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limitations on usage imposed by our customers in order to limit their online expenses; and
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war, threat of war or terrorist actions, including cyber terrorism targeted broadly, at us, or our customers, or both, and inadequate cyber security.
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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, 2007, 2008, 2010 and 2011 primarily due to increased share-based compensation expense and litigation costs, which could affect
our ability to achieve and maintain profitability in the future. We would have been unprofitable in 2009, had we not reversed a significant reserve for litigation.
Our adoption of ASC 718 (formerly FAS 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, 2007, 2008, 2010 and 2011 partially due to our share-based compensation expense which was $0.1 million in 2005, $9.2 million in 2006, $18.9 million in 2007, $18.1 million in
2008, $16.2 million in 2010, and $15.9 million in 2011. We were profitable in 2009 due to the reversal of a significant reserve for litigation; however, our share-based compensation was still significant at $17.5 million for the year. This
significant amount of share-based compensation expense reflects an increase in the level of stock options, restricted stock and restricted stock unit (RSU) grants. For the nine month period ended September 30, 2012, our share-based compensation
expense was approximately $10.8 million. Our unrecognized share-based compensation expense totaled $21.1 million at September 30, 2012 based on current outstanding stock options and restricted stock units, of which we expect to amortize
$3.6 million during the remainder of 2012, $9.2 million in 2013 and the remainder thereafter based upon the scheduled vesting of the options, restricted stock and RSUs outstanding at that time. Our 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, and, in December 2007, we were sued by Level 3 Communications alleging infringement
of certain patents. We have incurred, and will potentially continue to incur, significant costs associated with litigation. These costs were $3.1 million, $7.3 million, $20.8 million, $5.4 million, $2.1 million and $1.4 million,
respectively, in 2006, 2007, 2008, 2009, 2010 and 2011, respectively. For the nine month period ended September 30, 2012, we incurred approximately $0.2 million in litigation costs. These costs may continue to be significant during 2012.
We generate our revenue primarily from the sale of content delivery services, and the failure of the market for these services to
expand as we expect or the reduction in spending on those services by our current or potential customers would seriously harm our business.
While we offer our customers a number of services and solutions associated with our global computing platform, we generate the majority of our revenue from charging our customers for the content delivered
on their behalf through our global computing platform. We are subject to an elevated risk of reduced demand for these services. Furthermore, if the market for delivery of rich media content in particular does not continue to grow as we expect or
grows more slowly, then we may fail to achieve a return on the significant investment we are making to prepare for this growth. Our success, therefore, depends on the continued and increasing reliance on the Internet for delivery of media content
and our ability to cost-effectively deliver these services. Factors that may have a general tendency to limit or reduce the number of users relying on the Internet for media content, the amount of content consumed by our customers users or the
number of providers making this content available online include a general decline in Internet usage, litigation involving our customers and third party restrictions on online content, including copyright restrictions, digital rights management and
restrictions in certain geographic regions, system impairments or outages, including those caused by hacking or cyber attacks, as well as a significant increase in the quality or fidelity of offline media content beyond that available online to the
point where users prefer the offline experience. The influence of any of these factors may cause our current or potential customers to reduce their spending on content delivery services, which would seriously harm our operating results and financial
condition.
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 content delivery services and VAS.
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 websites. Our customers will not
continue to purchase our content delivery services and VAS if their investment in providing access to the media stored on or deliverable through our global computing platform does not generate a sufficient return on their investment. A reduction in
spending on services by our current or potential customers would seriously harm our operating results and financial condition.
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We may have difficulty scaling and adapting our existing architecture to accommodate increased traffic
and technology advances or changing business requirements, which could lead to the loss of customers and cause us to incur unexpected expenses to make network improvements.
Our content delivery services and VAS are highly complex and are designed to be deployed in and across numerous large and complex
networks. Our global computing platform infrastructure has to perform well and be reliable for us to be successful. The greater the user traffic and the greater the complexity of our solutions and services, the more resources we will need to invest
in additional infrastructure and support. Further, as a result of our on-going litigation in the Akamai Technologies, Inc. v. Limelight Networks, Inc. lawsuit (including the adverse jury verdict in February 2008 in that matter which verdict was
overturned by the courts April 24, 2009 order granting our motion for JMOL), we made significant investment in designing and implementing changes to our network architecture in order to implement our content delivery services in a manner
we believe does not infringe the claims of Akamais 703 patent as alleged in the February 2008 trial. We have spent and expect to continue to spend substantial amounts on the purchase and lease of equipment and data centers and the
upgrade of our technology and network infrastructure to handle increased traffic over our network, implement changes to our network architecture and integrate existing solutions and to roll out new solutions and services. This expansion is expensive
and complex and could result in inefficiencies, operational failures or defects in our network and related software. If we do not implement such changes or expand successfully, or if we experience inefficiencies and operational failures, the quality
of our solutions and services and user experience could decline. From time to time, we have needed to correct errors and defects in our software or in other aspects of our network. In the future, there may be additional errors and defects that may
harm our ability to deliver our services, including errors and defects originating with third party networks or software on which we rely. These occurrences could damage our reputation and lead us to lose current and potential customers. We must
continuously upgrade our infrastructure in order to keep pace with our customers evolving demands. Cost increases or the failure to accommodate increased traffic or these evolving business demands without disruption could harm our operating
results and financial condition.
Our operations are dependent in part upon communications capacity provided by third party
telecommunications providers. A material disruption of the communications capacity we have leased could harm our results of operations, reputation and customer relations.
We lease private line capacity for our backbone from a third party provider, Global Crossing. Our contracts for private line capacity
with Global Crossing generally have terms of three to four years. In January 2012, March 2011, and January and September 2009, we amended our agreement with Global Crossing to enhance the private line capacity for our backbone. 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. Further, Level 3 Communications
LLC, one of our direct competitors recently acquired Global Crossing. Although alternative providers are available, it would be time consuming and expensive to identify and obtain alternative third party connectivity, and accordingly we are
dependent on Global Crossing in the near term. Failure of Global Crossing could jeopardize utilization of the service fees pre-paid by us under our agreement with Global Crossing. Additionally, as we grow, we anticipate requiring greater private
line capacity than we currently have in place. If we are unable to obtain such capacity 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 global computing
platform to a large number of end-user access networks, known as peering, which we achieve through mutually beneficial cooperation with these networks. In some instances, network operators charge us for the peering connections. If, in the future, a
significant percentage of these network operators elected to no longer peer with our network or peer with our network on less favorable economic terms, then the performance of our infrastructure could be diminished, our costs could increase and our
business could suffer.
If our ability to deliver media files in popular proprietary content formats was restricted or became
cost-prohibitive, demand for our content delivery services could decline, we could lose customers and our financial results could suffer.
Our business depends on our ability to deliver media content in all major formats. If our legal right or technical ability to store and deliver content in one or more popular proprietary content formats,
such as Adobe Flash 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 and VAS 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.
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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. For example, in May 2009, we acquired substantially all of the assets of Kiptronic, Inc., a developer of mobility and monetization solutions for content publishers; in January 2010, we acquired chors, an on-line and direct marketing
solutions provider located in Germany; in April 2010, we acquired EyeWonder, a provider of interactive digital advertising products and services to advertisers; in July 2010, we acquired Delve, a provider of online video solutions to manage,
publish, measure and monetize high quality video content on the Internet; and in May 2011, we acquired Clickability, a SaaS provider of web content management located in San Francisco, California, and AcceloWeb, a provider of advanced technology
that helps speed the presentation of websites and applications located in Tel Aviv, Israel. We subsequently sold the EyeWonder and chors business operations in September 2011. Acquisitions involve a number of risks to our business, including the
difficulty of integrating the operations, services, solutions and personnel of the acquired companies, the potential disruption of our ongoing business, the potential distraction of management, the possibility that our business culture and the
business culture of the acquired companies will not be compatible, the difficulty of incorporating or integrating acquired technology and rights with or into our other services and solutions, expenses related to the acquisition and to the
integration of the acquired companies, the impairment of relationships with employees and customers as a result of any integration of new personnel, risks related to the businesses of acquired companies that may continue to impact the businesses
following the merger and potential unknown liabilities associated with acquired companies. Any inability to integrate services, solutions, operations or personnel in an efficient and timely manner could harm our results of operations.
In order to realize the expected benefits and synergies of our acquisition of acquired businesses, we must meet a number of significant
challenges, including:
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integrating the management teams, strategies, cultures, technologies and operations of the businesses;
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retaining and assimilating the key personnel of each company;
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retaining existing customers; and
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implementing and retaining uniform standards, controls, procedures, policies and information systems.
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It is possible that the integration process could result in the loss of the technical skills and management expertise of key employees,
the disruption of each companys ongoing businesses or inconsistencies in standards, controls, procedures and policies due to possible cultural conflicts or differences of opinions on technical decisions and services. A failure to integrate the
acquired organizations successfully could adversely affect our ability to maintain relationships with customers, suppliers and employees or to achieve the anticipated benefits of an acquisition. Even if we are able to integrate acquired business
operations successfully, these integrations may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from these integrations, and these benefits may not be
achieved within a reasonable period of time.
We have limited 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.
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. None of our other key employees is bound by an employment agreement for any specific term. There is increasing competition for
talented individuals with the specialized knowledge to deliver content delivery services and VAS 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.
We face risks associated with international operations that could harm our business.
We have operations in numerous foreign countries and may continue to expand our sales and support organizations internationally. As part
of our growth strategy, we intend to expand our sales and support organizations internationally, as well as to further expand our international network infrastructure. 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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challenges caused by distance, language and cultural differences;
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unexpected changes in regulatory requirements preventing or limiting us from operating our global computing platform or 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;
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potentially adverse tax consequences;
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credit risk and higher levels of payment fraud; and
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foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States.
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We are subject to the effects of fluctuations in foreign exchange rates, which could affect our operating results.
The financial condition and results of operations of our operating foreign subsidiaries are reported in the relevant local currency and
are then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated U.S. dollar financial statements. Also, although a large portion of our customer agreements are denominated in U.S. dollars, we may be
exposed to fluctuations in foreign exchange rates with respect to customer agreements with certain of our international customers. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do
so in the future. In addition to currency translation risk, we incur currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than the relevant local currency. Given the volatility of
exchange rates, we may be unable to manage our currency transaction risks effectively. Currency fluctuations could have a material adverse effect on our future international sales and, consequently, on our financial condition and results of
operations.
Internet-related and other laws relating to taxation issues, privacy, data security and consumer protection and liability
for content distributed over our network, could harm our business.
Laws and regulations that apply to communications
and commerce conducted over the Internet are becoming more prevalent, both in the United States and internationally, and may impose additional burdens on companies conducting business online or providing Internet-related services such as ours.
Increased regulation could negatively affect our business directly, as well as the businesses of our customers, which could reduce their demand for our services. For example, tax authorities abroad may impose taxes on the Internet-related revenue we
generate based on where our internationally deployed servers are located. In addition, domestic and international taxation laws are subject to change. Our services, or the businesses of our customers, may become subject to increased taxation, which
could harm our financial results either directly or by forcing our customers to scale back their operations and use of our services in order to maintain their operations. In addition, the laws relating to the liability of private network operators
for information carried on, processed by or disseminated through their networks are unsettled, both in the United States and abroad. Network operators have been sued in the past, sometimes successfully, based on the content of material disseminated
through their networks. We may become subject to legal claims such as defamation, invasion of privacy and copyright infringement in connection with content stored on or distributed through our network. In addition, our reputation could suffer as a
result of our perceived association with the type of content that some of our customers deliver. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results
could be negatively affected.
Several other federal laws also could expose us to liability and impose significant additional
costs on us. For example, the Digital Millennium Copyright Act has provisions that limit, but do not eliminate, our liability for the delivery of customer content that infringe copyrights or other rights, so long as we comply with certain statutory
requirements. In addition, the Childrens Online Privacy Protection Act restricts the ability of online services to collect information from minors and the Protection of Children from Sexual Predators Act of 1998 requires online service
providers to report evidence of violations of federal child pornography laws under certain circumstances. Also, there are emerging regulation and industry standards regarding the collection and use of personal information and protecting the security
of data on networks. Compliance with these laws, regulations and standards is complex and any failure on our part to comply with these regulations may subject us to additional liabilities.
Privacy concerns could lead to legislative and other limitations on our ability to use cookies and video player cookies that are crucial to our ability to provide services to
our customers.
Our ability to compile data for customers depends on the use of cookies and video player
cookies to identify certain online behavior that allows our customers to measure a website or videos effectiveness. A cookie is a small file of information stored on a users computer that allows us to recognize that
users browser or video player when the user makes a request for a web page or to play a video. Government authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of
cookies. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in United States Congress and many state legislatures. Attempts at such regulation may be drafted in such a way as to limit or
prohibit the use of technology like cookies, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the
collection of non-personally identifiable information and online privacy.
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Our foreign operations may also be adversely affected by regulatory action outside the
United States. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic
communications directive that imposes certain restrictions on the use of cookies and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to comply with the
provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling, and other countries, both in and out of the European Union,
may impose similar limitations.
Internet users may directly limit or eliminate the placement of cookies on their computers by
using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software and in their video player software. Internet browser software upgrades also may result in limitations on the use
of cookies. Technologies like the Platform for Privacy Preferences Project may limit collection of cookies. Plaintiffs attorneys also have organized class action suits against companies related to the use of cookies and several companies,
including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information. We may be subject to such suits in the future, which
could limit or eliminate our ability to collect such information. If our ability to use cookies were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use other technology or methods that allow the
gathering of user data in order to provide services to customers. This change in technology or methods could require significant reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In
addition, alternative technology or methods might not be available on commercially reasonable terms, if at all. If the use of cookies is prohibited and we are not able to efficiently and cost effectively create new technology, our business,
financial condition and results of operations would be materially adversely affected. In addition, any compromise of security that results in the release of Internet users and/or our customers data could seriously limit the adoption of
our service offerings as well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these types of events could
seriously harm our business is likely to increase as the amount of data stored for customers on our servers and the number of countries where we operate has been increasing, and we may need to expend significant resources to protect against security
breaches, which could have an adverse effect on our business, financial condition or results of operations.
If we are required to seek
funding, such funding may not be available on acceptable terms or at all.
We may need to obtain funding due to a
number of factors beyond our control, including a shortfall in revenue, increased expenses, final adverse judgments in litigation matters, increased investment in capital equipment or the acquisition of significant businesses or technologies. We
believe that our cash, cash equivalents and marketable securities classified as current plus cash from operations will be sufficient to fund our operations and proposed capital expenditures for at least the next 12 months. However, we may need or
desire funding before such time. If we do need to obtain funding, it may not be available on commercially reasonable terms or at all. If we are unable to obtain sufficient funding, our business would be harmed. Even if we were able to find outside
funding sources, we might be required to issue securities in a transaction that could be highly dilutive to our investors or we may be required to issue securities with greater rights than the securities we have outstanding today. We might also be
required to take other actions that could lessen the value of our common stock, including borrowing money on terms that are not favorable to us. If we are unable to generate or raise capital that is sufficient to fund our operations, we may be
required to curtail operations, reduce our capabilities or cease operations in certain jurisdictions or completely.
Our business
requires the continued development of effective business support systems to support our customer growth and related services.
The growth of our business depends on our ability to continue to develop effective business support systems. This is a complicated undertaking requiring significant resources and expertise. Business
support systems are needed for:
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implementing customer orders for services;
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delivering these services; and
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timely and accurate 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.
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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 adoption of ASC 718 (formerly FAS 123R)
in 2006 increased the amount of share-based compensation expense we recorded. 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 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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and
the Nasdaq Global Select Market, impose additional requirements on public companies, including requiring changes in corporate governance practices. For example, the listing requirements of the Nasdaq Global Select Market require that we satisfy
certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder
voting rights and codes of conduct. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and
make some activities more time-consuming and costly. For example, these rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance. These rules and regulations could also make it more
difficult for us to identify and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
Divestiture of our EyeWonder and chors rich media advertising services, or future divestitures of other businesses or product lines that we have
acquired or will acquire, may materially adversely affect our financial condition, results of operations or cash flows, or may result in impairment charges that may adversely affect our results of operations.
We continue to evaluate the performance of all of our businesses and may sell businesses or product lines in the future. For example, on
August 30, 2011, we announced that we entered into an agreement to sell our EyeWonder and chors rich media advertising unit to DG. The transaction closed on September 1, 2011. Divestitures involve risks, including difficulties in the
separation of operations, services, products and personnel, the diversion of managements attention from other business concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain contingent
liabilities related to the divested business, any of which could result in a material adverse affect to our financial condition, results of operations or cash flows. In addition, we have acquired goodwill and intangible assets in business
combinations, including the acquisitions of EyeWonder and chors in 2010. A substantial portion of this goodwill remains on our balance sheet. We follow the provisions of ASC 805,
Business Combinations
(ASC 805) and ASC 350,
Goodwill and Other Intangible Assets
(ASC 350). We also follow the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets (ASC 360). In accordance with these standards, goodwill
is not amortized. Under ASC 350, goodwill is subject to impairment testing annually or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. As of September 30, 2012, we had $79.9
million in goodwill which will be subject to potential future impairments which could have a material adverse effect on our financial condition and results of operations. Our intangible assets are carried at cost and are subject to
amortization. In accordance with ASC 360, our intangible assets are subject to impairment testing whenever changes in circumstances indicate that the carrying value may not be fully recoverable. Divestitures of previously acquired businesses,
such as the divestiture of the EyeWonder and chors rich media advertising services, may result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on
our financial condition and results of operations. Future impairment may result from, among other things, deterioration in the performance of the acquired business or product line, adverse market conditions and changes in the competitive landscape,
adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business or product line, changes in accounting rules and regulations, and a variety of other circumstances. The amount of any
impairment is recorded as a charge to the statement of operations. We may never realize the full value of our goodwill and intangible assets, and any determination requiring the write-off of a significant portion of these assets may have an adverse
effect on our financial condition and results of operations. We cannot assure you that we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line.
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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 are also
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 has been and will continue to 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 both inside and direct sales personnel with the sales skills and technical knowledge
that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of inside and direct sales personnel. We have expanded our sales
and marketing personnel from a total of 13 at December 31, 2004 to 168 at December 31, 2011. As of September 30, 2012, we had 200 sales and marketing personnel. New hires require significant training and, in most cases, take a
significant period of time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in
the markets where we do business. Our business will be seriously harmed if these expansion efforts do not generate a corresponding significant increase in revenue.
If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments about, among other things, taxes, revenue recognition, share-based compensation costs, contingent obligations and doubtful accounts. These estimates and judgments
affect the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, we may need to accrue additional charges or reduce the value of assets that
could adversely affect our results of operations, investors may lose confidence in our ability to manage our business and our stock price could decline.
Risks Related to Ownership of Our Common Stock
Our limited operating history makes
evaluating our business and future prospects difficult, and may increase the risk of your investment.
We were founded
in 2001. A significant amount of our growth, in terms of employees, operations and revenue, has occurred. For example, our revenue has grown from $5.0 million in 2003 to $65.2 million in 2006 to $171.3 million in 2011. 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 Quarterly Report on Form 10-Q. If we do not address these risks successfully, our business will be harmed.
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, our involvement in and uncertainties arising from, litigation, particularly our current litigation with Akamai and MIT;
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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.
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If securities or industry analysts do not publish research or reports about our business or if they
issue an adverse or misleading opinion or report, our stock, our stock price and trading volume could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock,
our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline.
Insiders have substantial control over us and will be able to influence corporate matters.
As of September 30, 2012, our directors and executive officers and their affiliates beneficially owned, in the aggregate,
approximately 43% of our outstanding common stock, including approximately 31% beneficially owned by investment entities affiliated with Goldman, Sachs & Co. These stockholders are able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit other stockholders
ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Because we may need to raise additional capital in the future to continue to expand our business and our research and
development activities, among other things, we may conduct additional equity offerings. If we or our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public market,
the market price of our common stock could fall. A decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
Management has broad discretion as to the use of the proceeds from our underwritten public offerings of our common stock, and we may
not use the proceeds effectively.
Our management has broad discretion in the application of the net proceeds from the
recently completed underwritten public offering of our common stock and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have
a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may
affect the trading price of our common stock.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions:
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establish that members of the board of directors may be removed only for cause upon the affirmative vote of stockholders owning a majority of our
capital stock;
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, thereby requiring stockholder actions to be taken at a meeting of the stockholders;
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establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at
stockholder meetings;
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provide for a board of directors with staggered terms; and
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provide that the authorized number of directors may be changed only by a resolution of our board of directors.
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In addition, Section 203 of the Delaware General Corporation Law, which imposes certain restrictions relating to transactions with
major stockholders, may discourage, delay or prevent a third party from acquiring us.