10-Q 1 akam-20210930.htm 10-Q akam-20210930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________ 
FORM 10-Q
 ______________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to    
            

Commission file number 000-27275
______________________________________________ 
Akamai Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware 04-3432319
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
145 Broadway
Cambridge, MA 02142
(617) 444-3000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
______________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock - par value $0.01 per share
AKAMNasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filerNon-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  x
The number of shares outstanding of the registrant’s common stock as of November 2, 2021: 162,479,916
1

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS
 
  Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data) (unaudited)September 30,
2021
December 31,
2020
ASSETS
Current assets:
Cash and cash equivalents$1,264,590 $352,917 
Marketable securities 652,695 745,156 
Accounts receivable, net of reserves of $2,268 and $1,822 at September 30, 2021, and December 31, 2020, respectively
660,092 660,052 
Prepaid expenses and other current assets184,503 171,406 
Total current assets2,761,880 1,929,531 
Marketable securities 835,074 1,398,802 
Property and equipment, net1,543,301 1,478,272 
Operating lease right-of-use assets821,033 793,945 
Acquired intangible assets, net203,596 234,724 
Goodwill1,680,496 1,674,371 
Deferred income tax assets136,305 106,918 
Other assets133,790 147,567 
Total assets$8,115,475 $7,764,130 

3

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, continued

(in thousands, except share data) (unaudited)September 30,
2021
December 31,
2020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$98,305 $118,546 
Accrued expenses376,036 380,468 
Deferred revenue83,371 76,600 
Operating lease liabilities164,559 154,801 
Other current liabilities9,169 27,755 
Total current liabilities731,440 758,170 
Deferred revenue5,355 5,262 
Deferred income tax liabilities35,333 37,458 
Convertible senior notes1,958,558 1,906,707 
Operating lease liabilities722,294 715,404 
Other liabilities80,050 89,833 
Total liabilities3,533,030 3,512,834 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 700,000 shares designated as Series A Junior Participating Preferred Stock; no shares issued or outstanding
  
Common stock, $0.01 par value; 700,000,000 shares authorized; 164,733,227 shares issued and 162,424,440 shares outstanding at September 30, 2021, and 162,709,720 shares issued and outstanding at December 31, 2020
1,647 1,627 
Additional paid-in capital3,789,623 3,664,820 
Accumulated other comprehensive loss(53,726)(20,201)
Treasury stock, at cost, 2,308,787 shares at September 30, 2021, and no shares at December 31, 2020
(251,257) 
Retained earnings1,096,158 605,050 
Total stockholders’ equity4,582,445 4,251,296 
Total liabilities and stockholders’ equity$8,115,475 $7,764,130 

The accompanying notes are an integral part of the condensed consolidated financial statements.
4

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
    
 For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(in thousands, except per share data) (unaudited)2021202020212020
Revenue$860,333 $792,845 $2,555,865 $2,351,862 
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)316,866 283,439 943,553 828,825 
Research and development82,899 66,773 242,199 202,087 
Sales and marketing108,514 122,749 336,762 370,004 
General and administrative134,265 128,365 405,275 385,435 
Amortization of acquired intangible assets11,959 10,340 35,446 31,155 
Restructuring charge565 21 5,567 10,439 
Total costs and operating expenses655,068 611,687 1,968,802 1,827,945 
Income from operations205,265 181,158 587,063 523,917 
Interest income2,872 6,307 12,186 22,852 
Interest expense(18,144)(17,324)(54,015)(51,778)
Other income (expense), net3,635 (2,158)2,007 (7,869)
Income before provision for income taxes193,628 167,983 547,241 487,122 
Provision for income taxes(13,648)(8,801)(43,555)(41,764)
Loss from equity method investment(1,064)(559)(12,578)(1,674)
Net income$178,916 $158,623 $491,108 $443,684 
Net income per share:
Basic$1.10 $0.97 $3.01 $2.73 
Diluted$1.08 $0.95 $2.96 $2.69 
Shares used in per share calculations:
Basic162,767 162,757 162,967 162,387 
Diluted166,318 166,519 166,090 164,990 

The accompanying notes are an integral part of the condensed consolidated financial statements.
5

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
(in thousands) (unaudited)2021202020212020
Net income$178,916 $158,623 $491,108 $443,684 
Other comprehensive (loss) income:
Foreign currency translation adjustments(21,160)13,177 (28,444)(7,292)
Change in unrealized (loss) gain on investments, net of income tax benefit (provision) of $353, $559, $1,700, and $(3,120) for the three and nine months ended September 30, 2021 and 2020, respectively
(1,009)(1,724)(5,081)6,582 
Other comprehensive (loss) income(22,169)11,453 (33,525)(710)
Comprehensive income$156,747 $170,076 $457,583 $442,974 

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months
Ended September 30,
(in thousands) (unaudited)20212020
Cash flows from operating activities:
Net income$491,108 $443,684 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization408,933 350,681 
Stock-based compensation153,804 146,901 
Benefit for deferred income taxes(30,335)(22,548)
Amortization of debt discount and issuance costs49,284 47,057 
Other non-cash reconciling items, net12,015 16,284 
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable(15,225)(85,439)
Prepaid expenses and other current assets(15,099)(21,380)
Accounts payable and accrued expenses(16,263)49,818 
Deferred revenue8,263 14,803 
Other current liabilities(17,958)(1,638)
Other non-current assets and liabilities(10,864)(14,316)
Net cash provided by operating activities1,017,663 923,907 
Cash flows from investing activities:
Cash (paid) received for business acquisitions, net of cash acquired(15,638)106 
Cash paid for asset acquisition (36,376)
Purchases of property and equipment(265,131)(395,793)
Capitalization of internal-use software development costs(170,404)(168,634)
Purchases of short- and long-term marketable securities(611,732)(1,153,526)
Proceeds from sales of short- and long-term marketable securities438,370 29,809 
Proceeds from maturities of short- and long-term marketable securities823,255 1,301,354 
Other, net(1,665)(1,980)
Net cash provided by (used in) investing activities197,055 (425,040)
Cash flows from financing activities:
Proceeds related to the issuance of common stock under stock plans46,942 45,812 
Employee taxes paid related to net share settlement of stock-based awards(88,195)(77,299)
Repurchases of common stock(251,257)(121,078)
Other, net(268) 
Net cash used in financing activities(292,778)(152,565)
Effects of exchange rate changes on cash, cash equivalents and restricted cash(9,228)3,535 
Net increase in cash, cash equivalents and restricted cash912,712 349,837 
Cash, cash equivalents and restricted cash at beginning of period353,466 394,146 
Cash, cash equivalents and restricted cash at end of period$1,266,178 $743,983 

7

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 For the Nine Months
Ended September 30,
(in thousands) (unaudited)20212020
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds received of $14,261 and $16,674 for the nine months ended September 30, 2021 and 2020, respectively
$82,003 $31,634 
Cash paid for interest expense5,031 5,235 
Cash paid for operating lease liabilities167,457 144,322 
Non-cash activities:
Operating lease right-of-use assets obtained in exchange for operating lease liabilities173,427 128,177 
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses56,401 48,357 
Capitalization of stock-based compensation28,271 28,487 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$1,264,590 $742,521 
Restricted cash1,588 1,462 
Cash, cash equivalents and restricted cash$1,266,178 $743,983 

The accompanying notes are an integral part of the condensed consolidated financial statements.
8

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months Ended September 30, 2021
(in thousands, except share data) (unaudited)Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance at July 1, 2021163,018,768 $1,645 $3,743,743 $(31,557)$(154,416)$917,242 $4,476,657 
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes252,204 2 (11,868)(11,866)
Stock-based compensation57,748 57,748 
Repurchases of common stock(846,532)(96,841)(96,841)
Net income178,916 178,916 
Foreign currency translation adjustment(21,160)(21,160)
Change in unrealized loss on investments, net of tax(1,009)(1,009)
Balance at September 30, 2021162,424,440 $1,647 $3,789,623 $(53,726)$(251,257)$1,096,158 $4,582,445 

Three Months Ended September 30, 2020
(in thousands, except share data) (unaudited)Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance at July 1, 2020162,630,477 $1,638 $3,734,787 $(57,307)$(107,880)$333,057 $3,904,295 
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes289,304 3 (13,390)(13,387)
Stock-based compensation59,831 59,831 
Repurchases of common stock(119,997)(13,198)(13,198)
Net income158,623 158,623 
Foreign currency translation adjustment13,177 13,177 
Change in unrealized loss on investments, net of tax(1,724)(1,724)
Balance at September 30, 2020162,799,784 $1,641 $3,781,228 $(45,854)$(121,078)$491,680 $4,107,617 

9

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued

Nine Months Ended September 30, 2021
(in thousands, except share data) (unaudited)Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance at January 1, 2021162,709,720 $1,627 $3,664,820 $(20,201)$ $605,050 $4,251,296 
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes1,665,123 16 (88,763)(88,747)
Issuance of common stock under employee stock purchase plan358,384 4 31,527 31,531 
Stock-based compensation182,039 182,039 
Repurchases of common stock(2,308,787)(251,257)(251,257)
Net income491,108 491,108 
Foreign currency translation adjustment(28,444)(28,444)
Change in unrealized loss on investments, net of tax(5,081)(5,081)
Balance at September 30, 2021162,424,440 $1,647 $3,789,623 $(53,726)$(251,257)$1,096,158 $4,582,445 

10

AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued

Nine Months Ended September 30, 2020
(in thousands, except share data) (unaudited)Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossTreasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance as of January 1, 2020162,000,843 $1,620 $3,653,486 $(45,144)$ $47,996 $3,657,958 
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes1,667,888 17 (76,696)(76,679)
Issuance of common stock under employee stock purchase plan393,921 4 29,166 29,170 
Stock-based compensation175,272 175,272 
Repurchases of common stock(1,262,868)(121,078)(121,078)
Net income443,684 443,684 
Foreign currency translation adjustment(7,292)(7,292)
Change in unrealized gain on investments, net of tax6,582 6,582 
Balance as of September 30, 2020162,799,784 $1,641 $3,781,228 $(45,854)$(121,078)$491,680 $4,107,617 

The accompanying notes are an integral part of the condensed consolidated financial statements.
11

AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Akamai Technologies, Inc. (the “Company”) provides solutions to power and protect content and business applications over the internet. Its globally-distributed platform is comprised of more than 325,000 servers in over 130 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company currently operates in one industry segment: providing cloud services for delivering, optimizing and securing content and business applications over the internet.

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

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed in, or omitted from, these interim financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on February 26, 2021. The December 31, 2020 consolidated balance sheet included herein is derived from the Company's audited consolidated financial statements.

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

Recent Accounting Pronouncements

Convertible Instruments and Contracts in an Entity's Own Equity

In August 2020, the Financial Accounting Standards Board ("FASB") issued guidance that is expected to reduce complexity and improve comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The Company will adopt this guidance on January 1, 2022 on a modified retrospective basis.

Upon adoption, the convertible senior notes included on the Company's consolidated balance sheet will more closely reflect the principal amounts. Initially, the Company separated its convertible senior notes into a liability and equity component. The equity portion will be eliminated, such that convertible senior notes will increase and additional paid-in capital will decrease on the consolidated balance sheet. With the elimination of the debt discount created by the equity component, amortization of the debt discount will also be eliminated, which will have the impact of decreasing interest expense and increasing net income. Refer to Note 7 to the condensed consolidated financial statements for additional information regarding the initial accounting for the notes and balances as of September 30, 2021.

The new guidance also impacts the accounting for diluted net income per share, which the Company is continuing to evaluate, along with finalizing all impacts of adopting this new standard on its consolidated financial statements.

Business Combinations

In October 2021, the FASB issued guidance which requires contract assets and contract liabilities from contracts with customers that are acquired in a business combination to be recognized and measured as if the acquirer had originated the original contract. Previously, contract assets and contract liabilities were measured at fair value. The Company plans to early adopt this guidance in the fourth quarter of 2021, which will require retrospective adoption to all business combinations completed on or after January 1, 2021, and prospectively to all business combinations occurring after adoption. The adoption will not have a material impact to the Company's results of operations in 2021.

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2. Fair Value Measurements

The following is a summary of available-for-sale marketable securities held as of September 30, 2021 and December 31, 2020 (in thousands):

Gross UnrealizedClassification on Balance Sheet
Amortized CostGainsLossesAggregate
Fair Value
Short-Term
Marketable
Securities
Long-Term
Marketable
Securities
As of September 30, 2021
Commercial paper$79,744 $2 $(9)$79,737 $79,737 $ 
Corporate bonds1,097,056 3,100 (378)1,099,778 507,238 592,540 
U.S. government agency obligations285,903 44 (122)285,825 64,951 220,874 
$1,462,703 $3,146 $(509)$1,465,340 $651,926 $813,414 
As of December 31, 2020
Commercial paper$46,931 $13 $(8)$46,936 $46,936 $ 
Corporate bonds1,628,462 9,482 (262)1,637,682 607,403 1,030,279 
Municipal securities3,495  (6)3,489  3,489 
U.S. government agency obligations435,653 329 (63)435,919 89,951 345,968 
$2,114,541 $9,824 $(339)$2,124,026 $744,290 $1,379,736 

The Company offers certain eligible employees the ability to participate in a non-qualified deferred compensation plan. The mutual funds held by the Company that are associated with this plan are classified as restricted trading securities. These securities are not included in the available-for-sale securities table above but are included in marketable securities in the condensed consolidated balance sheets.

Unrealized gains and unrealized temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss in the condensed consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest income in the condensed consolidated statements of income. As of September 30, 2021, the Company held for investment one corporate bond with a fair value of $1.5 million, which was classified as an available-for-sale marketable security that had been in a continuous unrealized loss position for more than 12 months. The unrealized loss is attributed to changes in interest rates. Based on available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.
13


The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets as of September 30, 2021 and December 31, 2020 (in thousands):

Total Fair ValueFair Value Measurements at
Reporting Date Using
 Level 1Level 2
As of September 30, 2021
Cash Equivalents and Marketable Securities:
Money market funds$1,784 $1,784 $ 
Commercial paper121,537  121,537 
Corporate bonds1,099,778  1,099,778 
U.S. government agency obligations302,525  302,525 
Mutual funds22,429 22,429  
$1,548,053 $24,213 $1,523,840 
As of December 31, 2020
Cash Equivalents and Marketable Securities:
Money market funds$74,417 $74,417 $ 
Commercial paper75,785  75,785 
Corporate bonds1,637,682  1,637,682 
Municipal securities3,489  3,489 
U.S. government agency obligations435,919  435,919 
Mutual funds19,932 19,932  
$2,247,224 $94,349 $2,152,875 

As of September 30, 2021 and December 31, 2020, the Company grouped money market funds and mutual funds using a Level 1 valuation because market prices for such investments are readily available in active markets. As of September 30, 2021 and December 31, 2020, the Company grouped commercial paper, U.S. government agency obligations, corporate bonds and municipal securities using a Level 2 valuation because quoted prices for similar assets in active markets (or identical assets in an inactive market) are available. The Company did not have any transfers of assets between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the nine months ended September 30, 2021.

When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. When available, the Company uses quoted market prices to measure fair value. The valuation technique used to measure fair value for the Company's Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that primarily use market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

Contractual maturities of the Company’s available-for-sale marketable securities held as of September 30, 2021 and December 31, 2020 were as follows (in thousands):

September 30,
2021
December 31,
2020
Due in 1 year or less$651,926 $744,290 
Due after 1 year through 5 years813,414 1,379,736 
$1,465,340 $2,124,026 

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3. Accounts Receivable

Net accounts receivable consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
 
September 30,
2021
December 31,
2020
Trade accounts receivable$479,267 $473,474 
Unbilled accounts receivable183,093 188,400 
Gross accounts receivable662,360 661,874 
Allowances for current expected credit losses and other reserves(2,268)(1,822)
Accounts receivable, net$660,092 $660,052 

The following table summarizes the activity of the Company's allowance for current expected credit losses and other reserves during the nine months ended September 30, 2021 and 2020 (in thousands):

September 30,
2021
September 30,
2020
Beginning balance$1,822 $1,880 
Charges to income from operations3,510 10,354 
Collections from customers previously reserved and other(3,064)(8,538)
Ending balance$2,268 $3,696 

Charges to income from operations primarily represents charges to bad debt expense for increases in the allowance for current expected credit losses. The allowance for current expected credit losses has been developed using historical loss rates for the previous twelve months as well as expectations about the future where the Company has been able to develop forecasts to support its estimates.

4. Incremental Costs to Obtain a Contract with a Customer

The following table summarizes the deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of September 30, 2021 and December 31, 2020 (in thousands):

September 30,
2021
December 31,
2020
Deferred costs included in prepaid and other current assets$42,299 $54,516 
Deferred costs included in other assets27,551 23,200 
Total deferred costs$69,850 $77,716 

The following table summarizes additional information related to incremental costs to obtain a contract with a customer for each of the three and nine month periods ended September 30, 2021 and 2020 (in thousands):

 For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,
2021202020212020
Amortization expense related to deferred costs
$14,901 $14,816 $43,304 $45,007 
Incremental costs capitalized
$13,164 $16,550 $36,957 $39,925 

Amortization expense related to deferred costs is primarily included in sales and marketing expense in the condensed consolidated statements of income.

15

5. Acquired Intangible Assets and Goodwill

Acquired intangible assets that are subject to amortization consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):

 September 30, 2021December 31, 2020
 Gross
Carrying
Amount
Accumulated AmortizationNet
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Completed technology$179,254 $(123,963)$55,291 $172,346 $(111,435)$60,911 
Customer-related intangible assets355,189 (208,798)146,391 358,032 (186,733)171,299 
Non-compete agreements353 (170)183 373 (77)296 
Trademarks and trade names7,647 (5,916)1,731 7,658 (5,440)2,218 
Acquired license rights490 (490) 490 (490) 
Total$542,933 $(339,337)$203,596 $538,899 $(304,175)$234,724 

Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2021 was $12.0 million and $35.4 million, respectively. Aggregate expense related to amortization of acquired intangible assets for the three and nine months ended September 30, 2020 was $10.3 million and $31.2 million, respectively. Based on the Company’s acquired intangible assets as of September 30, 2021, aggregate expense related to amortization of acquired intangible assets is expected to be $12.1 million for the remainder of 2021, and $44.3 million, $36.9 million, $29.2 million and $23.7 million for 2022, 2023, 2024 and 2025, respectively.

The change in the carrying amount of goodwill for the nine months ended September 30, 2021 was as follows (in thousands):

Balance as of January 1, 2021$1,674,371 
Acquisition of Inverse, Inc. 10,741 
Measurement period adjustments related to acquisitions completed in prior years(267)
Foreign currency translation(4,349)
Balance as of September 30, 2021$1,680,496 

The Company tests goodwill for impairment at least annually. Through the date the interim condensed consolidated financial statements were issued, no triggering events had occurred that would indicate a potential impairment exists.

6. Acquisitions

Guardicore

In September 2021, the Company announced its intention to acquire Guardicore Ltd. ("Guardicore"), for approximately $600.0 million, net of cash acquired and subject to post-closing adjustments. Guardicore's micro-segmentation solution is designed to limit user access to only those applications that are authorized to communicate with each other, thereby limiting the spread of malware and protecting the flow of enterprise data across the network. The acquisition is intended to enhance the Company's security portfolio with the addition of Guardicore's micro-segmentation technology. The acquisition closed in October 2021. Due to the limited time since the acquisition date, and the size and complexity of the transaction, the accounting for the business combination is not yet complete as of the filing of these condensed consolidated financial statements. The Company is not able to provide the allocation of consideration paid to the assets acquired or liabilities assumed, but it is expected that the transaction will result in an increase to the Company’s acquired intangible assets and goodwill.

Inverse

In February 2021, the Company acquired Inverse, Inc. ("Inverse"), for $17.1 million. Inverse provides a data repository and algorithms capable of identifying device types accessing the internet. The acquisition enhances the Company's enterprise security capabilities. The Company allocated $10.7 million of the cost of the acquisition to goodwill and $7.6 million to a technology-related identifiable intangible asset. The acquired goodwill and intangible assets are partially offset by acquired
16

negative working capital balances. The value of the goodwill is primarily attributable to synergies related to the integration of Inverse technology onto the Company's platform as well as a trained technical workforce. The total amount of goodwill related to the acquisition of Inverse expected to be deductible for tax purposes is $10.7 million. Pro forma results of operations, as well as the revenue and earnings generated by Inverse since its acquisition and included in the Company's results of operations, were not presented since they are not material. The allocation of the purchase price has not been finalized as of the filing of these financial statements.

7. Debt

Convertible Notes Due 2027

In August 2019, the Company issued $1,150.0 million in par value of convertible senior notes due 2027 (the "2027 Notes"). The 2027 Notes are senior unsecured obligations of the Company, bear regular interest of 0.375%, payable semi-annually in arrears on March 1 and September 1 of each year and mature on September 1, 2027, unless repurchased or converted in accordance with their terms prior to maturity.

At their option, holders may convert their 2027 Notes prior to the close of business on the business day immediately preceding May 1, 2027, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ended December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2027 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

upon the occurrence of specified corporate events.

On or after May 1, 2027, holders may convert all or any portion of their 2027 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

Upon conversion, the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The initial conversion rate is 8.6073 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $116.18 per share, subject to adjustments in certain events, and represents a potential conversion into 9.9 million shares.

In accounting for the issuance of the 2027 Notes, the Company separated the 2027 Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar debt obligation that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2027 Notes. The difference between the principal amount of the 2027 Notes and the proceeds allocated to the liability component (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2027 Notes. The equity component is recorded in additional paid-in capital in the condensed consolidated balance sheet and will not be remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the 2027 Notes, the Company allocated the total transaction costs incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the 2027 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2027 Notes in stockholders’ equity.

17

The 2027 Notes consisted of the following components as of September 30, 2021 and December 31, 2020 (in thousands):

September 30,
2021
December 31,
2020
Liability component:
Principal$1,150,000 $1,150,000 
Less: debt discount and issuance costs, net of amortization(175,935)(196,359)
Net carrying amount$974,065 $953,641 
Equity component:$220,529 $220,529 

The estimated fair value of the 2027 Notes at September 30, 2021 and December 31, 2020 was $1,271.8 million and $1,277.8 million, respectively. The fair value was determined based on the quoted price of the 2027 Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 within the fair value hierarchy. Based on the closing price of the Company's common stock of $104.59 on September 30, 2021, the value of the 2027 Notes if converted to common stock was less than the principal amount of $1,150.0 million.

The Company used $100.0 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2027 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the board of directors. Additionally, $127.1 million of the proceeds was used for the net cost of the convertible note hedge and warrant transactions. The remaining net proceeds are intended to be used for working capital, share repurchases, potential acquisitions and strategic transactions and other corporate purposes.

Note Hedge

To minimize the impact of potential dilution upon conversion of the 2027 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in August 2019. The Company paid $312.2 million for the note hedge transactions. The note hedge transactions cover approximately 9.9 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2027 Notes, also subject to adjustment, and are exercisable upon conversion of the 2027 Notes. The Company determined that the note hedge meets the definition of a derivative and is classified in stockholders’ equity, as the note hedge is indexed to the Company's common stock, and the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The Company recorded the purchase of the hedge as a decrease to additional paid-in capital. The Company does not recognize subsequent changes in fair value of the note hedge in its condensed consolidated financial statements.

Warrants

Separately, in August 2019, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 9.9 million shares of the Company’s common stock at a strike price of approximately $178.74 per share. The Company received aggregate proceeds of $185.2 million from the sale of the warrants. The convertible note hedge and warrant transactions will generally have the effect of increasing the conversion price of the 2027 Notes to approximately $178.74 per share. The Company determined that the warrants meet the definition of a derivative and are classified in stockholders’ equity, as the warrants are indexed to the Company's common stock, and the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The Company recorded the proceeds from issuance of the warrants as an increase to additional paid-in capital. The Company does not recognize subsequent changes in fair value of the warrants in its condensed consolidated financial statements.

Convertible Notes Due 2025

In May 2018, the Company issued $1,150.0 million in par value of convertible senior notes due 2025 (the "2025 Notes"). The 2025 Notes are senior unsecured obligations of the Company, bear regular interest of 0.125%, payable semi-annually on May 1 and November 1 of each year, and mature on May 1, 2025, unless repurchased or converted prior to maturity.

18

At their option, holders may convert their 2025 Notes prior to the close of business on the business day immediately preceding January 1, 2025, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ended June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

upon the occurrence of specified corporate events.

On or after January 1, 2025, holders may convert all or any portion of their 2025 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.

Upon conversion, the Company, at its election, may pay or deliver to holders cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock. The initial conversion rate is 10.5150 shares of the Company's common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $95.10 per share, subject to adjustments in certain events, and represents a potential conversion into 12.1 million shares.

In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar debt obligation that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2025 Notes. The difference between the principal amount of the 2025 Notes and the proceeds allocated to the liability component (“debt discount”) is amortized to interest expense using the effective interest method over the term of the 2025 Notes. The equity component is recorded in additional paid-in capital in the condensed consolidated balance sheet and will not be remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the 2025 Notes, the Company allocated the total transaction costs incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to interest expense over the term of the 2025 Notes, and transaction costs attributable to the equity component are netted against the equity component of the 2025 Notes in stockholders’ equity.

The 2025 Notes consisted of the following components as of September 30, 2021 and December 31, 2020 (in thousands):

September 30,
2021
December 31,
2020