Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below, and notes to our unaudited condensed consolidated financial statements included herein contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “should,” “forecasts,” “if,” “continues,” “goal,” “likely” or similar expressions indicates a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. See “Risk Factors” elsewhere in this quarterly report on Form 10-Q for a discussion of certain risks associated with our business. We disclaim any obligation to update forward-looking statements as a result of new information, future events or otherwise, including the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof.

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, which we have prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related items, including, but not limited to, revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, goodwill and acquired intangible assets, capitalized internal-use software development costs, impairment and useful lives of long-lived assets, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time they are made. Actual results may differ from our estimates. See the section entitled "Application of Critical Accounting Policies and Estimates" in our annual report on Form 10-K for the year-ended December 31, 2020 for further discussion of our critical accounting policies and estimates.

Overview

We provide solutions to power and protect content and business applications over the internet. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our security and performance offerings, increase media traffic on our network, effectively manage the prices we charge for our solutions, develop new products and carefully manage our capital spending and other expenses. The purpose of this discussion and analysis section is to describe and explain key trends, events and other factors that impacted our reported results and that are likely to impact our future performance.

Revenue

For most of our solutions, our customers commit to contracts having terms of a year or longer, which allows us to have a consistent and predictable base level of revenue. In addition to a base level of revenue, we are also dependent on media customers where usage of our solutions is more variable. As a result, our revenue is impacted by the amount of media and software download traffic we serve on our network, the rate of adoption of gaming, social media and video platform offerings, the timing and variability of customer-specific one-time events and geopolitical, economic and other developments that impact our customers' businesses. Seasonal variations that impact traffic on our network, such as holiday-related activities, can cause revenue fluctuations from quarter to quarter. Over the longer term, our ability to expand our product portfolio and to effectively manage the prices we charge for our solutions are key factors impacting our revenue growth.

We have observed the following trends related to our revenue in recent years:

Increased sales of our security solutions have made a significant contribution to revenue growth. We plan to continue to invest in this area with a focus on further enhancing our product portfolio and extending our go-to-market capabilities, particularly in certain markets and through our channel partners.
Over the past few years, we have experienced increases in the amount of traffic delivered for customers that use our solutions for video, gaming downloads and social media. During 2020, we saw a dramatic increase in traffic growth on our network related to the shutdowns and restrictions from the novel coronavirus, or COVID-19, pandemic. Primarily

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as a result of the rollback of many pandemic-related restrictions, we have seen the rate of traffic growth moderate during 2021. We expect year-over-year traffic and associated revenue growth to continue to moderate during the remainder of 2021, assuming the restrictions experienced in 2020 continue to lessen.

The prices paid by some of our customers have declined due to contract renewals and large media consolidations, reflecting the impact of competition and volume discounts. In the first nine months of 2021 as compared to the same period in 2020, we experienced a decline in revenue from website and application delivery solutions due to the above factors, particularly in the U.S. commerce vertical, and slowing media traffic growth. While we have increased committed recurring revenue from our solutions by upselling incremental solutions to our existing customers and adding new customers to offset the negative trends, we expect revenue challenges from our website and application performance solutions to continue during the remainder of 2021. In addition, there remains uncertainty about the negative impacts of the COVID-19 pandemic on some of our customers and how that uncertainty might impact purchases of our solutions.
Revenue from our international operations has been growing at a faster pace than from our U.S. operations, particularly in terms of new customer acquisition and cross-selling of incremental solutions. Because we publicly report in U.S. dollars, if the dollar strengthens, our reported revenue results will be negatively impacted. Conversely, a weaker dollar would benefit our reported results.
We have experienced variations in certain types of revenue from quarter to quarter. In particular, we typically experience higher revenue in the fourth quarter of each year for some of our solutions as a result of holiday season activity. In addition, we experience quarterly variations in revenue attributable to, among other things, the nature and timing of software and gaming releases by our customers; whether there are large live sporting or other events or situations (like the COVID-19 pandemic) that impact the amount of media traffic on our network; and the frequency and timing of purchases of custom solutions or licensed software.

Expenses

Our level of profitability is also impacted by our expenses, including direct costs to support our revenue such as bandwidth and co-location costs. We have observed the following trends related to our profitability in recent years:

Our profitability improved in the first nine months of 2021 and the full year 2020 as compared to prior periods due to higher overall revenue as well as the effects of cost savings and efficiency initiatives we have undertaken. More recently, we have also benefited from lower travel expenses because of pandemic-related shutdowns and restrictions. We will need to continue to undertake efforts intended to improve the efficiency of operations to manage our expense growth and profitability.
Network bandwidth costs represent a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs by reducing our network bandwidth costs per unit and investing in internal-use software development to improve the performance and efficiency of our network. Our total bandwidth costs may increase in the future as a result of expected higher traffic levels and serving more traffic from higher cost regions. We will need to continue to effectively manage our bandwidth costs to maintain current levels of profitability.
Co-location costs are also a significant portion of our cost of revenue. By improving our internal-use software and managing our hardware deployments to enable us to use servers more efficiently, we have been able to manage the growth of co-location costs. We expect to continue to scale our network in the future and will need to continue to effectively manage our co-location costs to maintain current levels of profitability.
Network build-out and supporting service costs represent another significant portion of our cost of revenue. These costs include maintenance and supporting services incurred as we continue to build-out our global network. We have seen these costs increase in the first nine months of 2021, as compared to the same period in 2020, as a result of our network expansion and pricing pressure from vendors. As we continue to invest in our network, we will need to effectively manage our network build-out and supporting costs.
We expect to continue to manage our headcount and payroll costs in the future to focus investments on certain areas of the business while maintaining efficient operations in others. We plan to continue to hire employees in support of our strategic initiatives but do not expect overall headcount to increase significantly in 2021.

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Depreciation expense related to our network equipment also contributes to our overall expense levels. During the first nine months of 2021, as compared to the same period in 2020, we saw higher depreciation expense due to accelerated deployment of equipment in 2020 to help meet the increased traffic demands arising during the COVID-19 pandemic. We expect to see higher depreciation expense for the remainder of 2021 to reflect such deployment of equipment. We plan to continue to invest in our network for the remainder of 2021, although not at the same levels we experienced in 2020, which will further increase our capital expenditures and resulting depreciation expense.

In October 2021, we acquired Guardicore Ltd., or 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. Guardicore has approximately 270 employees, and the acquisition is expected to be dilutive to our earnings per share at least through 2022.

Effective on March 1, 2021, we reorganized into two groups, both of which utilize the Akamai Intelligent Edge Platform and our global sales organization: the Security Technology Group and the Edge Technology Group. These groups are aligned with our product offerings. Revenue from the Security Technology Group was previously reported as revenue from Cloud Security Solutions, and revenue from the Edge Technology Group was previously reported as revenue from content delivery network (CDN) services and all other solutions. The Security Technology Group includes solutions that are designed to keep infrastructure, websites, applications and users safe, while the Edge Technology Group includes solutions that enable business online, including media delivery, web performance and edge computing solutions.

Nearly all of our employees are working remotely due to the COVID-19 pandemic, and we are not requiring employees whose roles do not require in-person presence to perform their jobs to return to offices before May 1, 2022. We have implemented a comprehensive evaluation process to determine whether offices in different locations should be open or closed. Our operations have not been significantly disrupted by the shift to remote working. While we have incurred and expect to continue to incur expenses associated with enabling remote work and reconfiguring work spaces to help ensure the safety and well-being of employees accessing our locations, we do not currently believe those costs will materially impact our financial condition or results of operations.

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Results of Operations

The following table sets forth, as a percentage of revenue, condensed consolidated statements of income data for the periods indicated:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	36.8		35.7		36.9		35.2
Research and development	9.6		8.4		9.5		8.6
Sales and marketing	12.6		15.5		13.2		15.7
General and administrative	15.6		16.2		15.9		16.4
Amortization of acquired intangible assets	1.4		1.3		1.4		1.3
Restructuring charge	0.1		—		0.2		0.4
Total costs and operating expenses	76.1		77.1		77.1		77.6
Income from operations	23.9		22.9		22.9		22.4
Interest income	0.3		0.8		0.5		1.0
Interest expense	(2.1)		(2.2)		(2.1)		(2.2)
Other income (expense), net	0.4		(0.3)		0.1		(0.3)
Income before provision for income taxes	22.5		21.2		21.4		20.9
Provision for income taxes	(1.6)		(1.1)		(1.7)		(1.8)
Loss from equity method investment	(0.1)		(0.1)		(0.5)		(0.1)
Net income	20.8	%	20.0	%	19.2	%	19.0	%

Revenue

Revenue by product group during the periods presented was as follows (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021		2020		% Change		% Change at Constant Currency		2021		2020		% Change		% Change at Constant Currency
Security Technology Group	$	334,649	$	265,869	25.9	%	25.3	%	$	969,996	$	765,485	26.7	%	24.6	%
Edge Technology Group	525,684		526,976		(0.2)		(0.6)		1,585,869		1,586,377		—		(1.4)
Total revenue	$	860,333	$	792,845	8.5	%	8.1	%	$	2,555,865	$	2,351,862	8.7	%	7.0	%

During the three- and nine-month periods ended September 30, 2021, the increases in our revenue as compared to the same periods in 2020 were primarily the result of continued strong growth in sales of solutions offered by our Security Technology Group.

The increases in Security Technology Group revenue for the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were due to growth across our security products portfolio, including Bot Manager, Kona Site Defender, Prolexic and our access control product suite.

The decrease in Edge Technology Group revenue for the three-month period ended September 30, 2021, as compared to the same period in 2020, was primarily due to reductions in sales of application performance solutions, partially offset by

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growth in edge application solutions. Edge Technology Group revenue for the nine-month period ended September 30, 2021, as compared to the same period in 2020, experienced strong traffic growth, driven by over-the-top, or OTT, video and gaming, as well as strong growth in our edge applications solutions. These increases were offset by a reduction in sales of website and application performance solutions.

Revenue derived in the U.S. and internationally during the periods presented was as follows (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021		2020		% Change		% Change at Constant Currency		2021		2020		% Change		% Change at Constant Currency
U.S.	$	448,792	$	437,381	2.6	%	2.6	%	$	1,361,525	$	1,309,979	3.9	%	3.9	%
International	411,541		355,464		15.8		14.8		1,194,340		1,041,883		14.6		10.9
Total revenue	$	860,333	$	792,845	8.5	%	8.1	%	$	2,555,865	$	2,351,862	8.7	%	7.0	%

For the three-month period ended September 30, 2021, approximately 47.8% of our revenue was derived from our operations located outside the U.S., compared to 44.8% for the three-month period ended September 30, 2020. For the nine-month period ended September 30, 2021, approximately 46.7% of our revenue was derived from our operations located outside the U.S., compared to 44.3% for the nine-month period ended September 30, 2020. We have seen strong revenue growth across all our international regions, particularly in the Asia Pacific region. No single country outside the U.S. accounted for 10% or more of revenue during either of these periods. Changes in foreign currency exchange rates impacted our revenue by a favorable $3.6 million and $38.9 million during the three- and nine-month periods ended September 30, 2021, respectively, as compared to the same periods in 2020.

Cost of Revenue

Cost of revenue consisted of the following for the periods presented (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021			2020			% Change		2021			2020			% Change
Bandwidth fees	$	52,030		$	49,815		4.4	%	$	159,920		$	147,671		8.3	%
Co-location fees	43,714			39,170			11.6		129,991			111,572			16.5
Network build-out and supporting services	38,640			34,112			13.3		115,896			97,969			18.3
Payroll and related costs	68,476			65,959			3.8		205,468			195,386			5.2
Stock-based compensation, including amortization of prior capitalized amounts	14,162			13,064			8.4		43,723			39,113			11.8
Depreciation of network equipment	58,138			42,991			35.2		165,635			118,194			40.1
Amortization of internal-use software	41,706			38,328			8.8		122,920			118,920			3.4
Total cost of revenue	$	316,866		$	283,439		11.8	%	$	943,553		$	828,825		13.8	%
As a percentage of revenue	36.8		%	35.7		%			36.9		%	35.2		%

The increases in cost of revenue for the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were primarily due to increased investment in our network to support current and anticipated future traffic growth, which resulted in increases to amounts paid for network build-out and supporting services, higher depreciation costs of our network equipment and increases to expenses related to our co-location facilities.

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During the remainder of 2021, we anticipate depreciation of network equipment to increase, compared to the same periods in 2020, due to increased investments in our network to address expected traffic increases as well as reflecting the impact of our equipment deployments in 2020. We plan to continue to focus our efforts on managing our operating margins, including continuing to manage our bandwidth, co-location and network build-out costs.

Research and Development Expenses

Research and development expenses consisted of the following for the periods presented (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021			2020			% Change		2021			2020			% Change
Payroll and related costs	$	112,380		$	103,817		8.2	%	$	338,169		$	305,293		10.8	%
Stock-based compensation	16,329			12,721			28.4		50,635			36,335			39.4
Capitalized salaries and related costs	(49,309)			(51,750)			(4.7)		(156,275)			(147,007)			6.3
Other expenses	3,499			1,985			76.3		9,670			7,466			29.5
Total research and development	$	82,899		$	66,773		24.2	%	$	242,199		$	202,087		19.8	%
As a percentage of revenue	9.6		%	8.4		%			9.5		%	8.6		%

The increases in research and development expenses during the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were due to increased payroll and related costs, including stock-based compensation, primarily due to headcount growth and the redeployment of some employees to research and development functions from sales and marketing activities as part of our March 2021 reorganization. These increases were partially offset by increases in capitalized salaries and related costs due to continued investment in internal-use software deployed on our network.

Research and development costs are expensed as incurred, other than certain internal-use software development costs eligible for capitalization. Capitalized development costs consist of payroll and related costs for personnel and external consulting expenses involved in the development of internal-use software used to deliver our services and operate our network. During the three-month periods ended September 30, 2021 and 2020, we capitalized $7.7 million and $9.0 million, respectively, of stock-based compensation. During the nine-month periods ended September 30, 2021 and 2020, we capitalized $24.8 million and $26.5 million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, which is generally two years, but can be up to seven years based on the software developed and its expected useful life.

We expect research and development costs to increase in the remainder of 2021 to support our innovation initiatives and due to the addition of Guardicore.

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Sales and Marketing Expenses

Sales and marketing expenses consisted of the following for the periods presented (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021			2020			% Change		2021			2020			% Change
Payroll and related costs	$	86,663		$	94,457		(8.3)	%	$	268,177		$	282,696		(5.1)	%
Stock-based compensation	10,973			16,809			(34.7)		34,998			48,555			(27.9)
Marketing programs and related costs	9,416			9,536			(1.3)		28,163			29,250			(3.7)
Other expenses	1,462			1,947			(24.9)		5,424			9,503			(42.9)

Total sales and marketing	$	108,514		$	122,749		(11.6)	%	$	336,762		$	370,004		(9.0)	%
As a percentage of revenue	12.6		%	15.5		%			13.2		%	15.7		%

During the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, payroll and related costs, including stock-based compensation, decreased as a result of headcount reductions and the redeployment of some employees from sales and marketing functions to research and development activities as a result of our March 2021 reorganization, which established a single global sales organization.

We expect sales and marketing costs to slightly increase in the fourth quarter of 2021, as compared to the prior three quarters in 2021, due to the acquisition of Guardicore. However, we plan to continue to carefully manage costs in an effort to manage our operating margins and to refine and optimize our go-to-market efforts.

General and Administrative Expenses

General and administrative expenses consisted of the following for the periods presented (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021			2020			% Change		2021			2020			% Change
Payroll and related costs	$	52,799		$	50,159		5.3	%	$	164,223		$	148,233		10.8	%
Stock-based compensation	14,978			14,302			4.7		47,463			43,636			8.8
Depreciation and amortization	20,549			20,554			—		61,947			61,673			0.4
Facilities-related costs	26,056			25,099			3.8		75,248			73,669			2.1
Provision (benefit) for doubtful accounts	275			(1,627)			116.9		986			3,465			(71.5)
Acquisition-related costs	1,316			1,051			25.2		1,520			1,189			27.8

Legal settlements	—			—			—		—			275			—

Professional fees and other expenses	18,292			18,827			(2.8)		53,888			53,295			1.1
Total general and administrative	$	134,265		$	128,365		4.6	%	$	405,275		$	385,435		5.1	%
As a percentage of revenue	15.6		%	16.2		%			15.9		%	16.4		%

The increases in general and administrative expenses for the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were primarily due to increased payroll and related costs, including stock-based compensation, as a result of annual merit increases and headcount growth.

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General and administrative expenses for the three- and nine-month periods ended September 30, 2021 and 2020 are broken out by category as follows (in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021			2020			% Change		2021			2020			% Change
Global functions	$	49,738		$	47,559		4.6	%	$	158,851		$	142,243		11.7	%

As a percentage of revenue	5.8		%	6.0		%			6.2		%	6.0		%
Infrastructure	82,928			81,365			1.9		243,915			238,262			2.4
As a percentage of revenue	9.6		%	10.3		%			9.5		%	10.1		%
Other	1,599			(559)			386.0		2,509			4,930			(49.1)
Total general and administrative	$	134,265		$	128,365		4.6	%	$	405,275		$	385,435		5.1	%
As a percentage of revenue	15.6		%	16.2		%			15.9		%	16.4		%

Global functions expense includes payroll, stock-based compensation and other employee-related costs for administrative functions, including finance, purchasing, order entry, human resources, legal, information technology and executive personnel, as well as third-party professional service fees. Infrastructure expense includes payroll, stock-based compensation and other employee-related costs for our network infrastructure functions, as well as facility rent expense, depreciation and amortization of facility and IT-related assets, software and software-related costs, business insurance and taxes. Our network infrastructure function is responsible for network planning, sourcing, architecture evaluation and platform security. Other expense includes acquisition-related costs and provision for doubtful accounts.

During the fourth quarter of 2021, we expect payroll and related costs of our general and administrative functions to increase as compared to 2020 as a result of headcount growth from 2020, but we plan to continue to carefully manage costs in an effort to manage our operating margins.

Amortization of Acquired Intangible Assets


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Amortization of acquired intangible assets	$	11,959		$	10,340		15.7	%	$	35,446		$	31,155		13.8	%
As a percentage of revenue	1.4		%	1.3		%			1.4		%	1.3		%

The increases in amortization of acquired intangible assets for the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were the result of amortization of assets related to our recent acquisitions. Based on our intangible assets at September 30, 2021, we expect amortization of acquired intangible assets 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. We anticipate that these amortization amounts will increase in future periods as a result of our acquisition of Guardicore, which closed in October 2021.

Restructuring Charge


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Restructuring charge	$	565		$	21		2,590.5	%	$	5,567		$	10,439		(46.7)	%
As a percentage of revenue	0.1		%	—		%			0.2		%	0.4		%

The restructuring charges for the three- and nine-month periods ended September 30, 2021were primarily the result of management actions initiated in late 2020 to better position us to become more agile in delivering our solutions. The restructuring charge for this action relates to certain headcount reductions and software charges for software not yet placed into

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service that will not be implemented due to this action. The restructuring charge for the nine-month period ended September 30, 2021 was partially offset by the release of a lease obligation for a facility previously exited as part of management actions initiated in late 2019.

The restructuring charges for the three- and nine-month periods ended September 30, 2020 were primarily the result of management actions initiated in the fourth quarter of 2019 to focus on investments having the potential to accelerate revenue growth. The restructuring charges relate to certain headcount reductions and an impairment of a right-of-use asset related to the exit of a leased facility. We do not expect material additional restructuring charges related to these actions.

Non-Operating Income (Expense)


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Interest income	$	2,872		$	6,307		(54.5)	%	$	12,186		$	22,852		(46.7)	%
As a percentage of revenue	0.3		%	0.8		%			0.5		%	1.0		%
Interest expense	$	(18,144)		$	(17,324)		4.7	%	$	(54,015)		$	(51,778)		4.3	%
As a percentage of revenue	(2.1)		%	(2.2)		%			(2.1)		%	(2.2)		%
Other income (expense), net	$	3,635		$	(2,158)		(268.4)	%	$	2,007		$	(7,869)		(125.5)	%
As a percentage of revenue	0.4		%	(0.3)		%			0.1		%	(0.3)		%

For the periods presented, interest income primarily consisted of interest earned on invested cash balances and marketable securities. The decreases in interest income for the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, were primarily the result of investing in marketable securities at lower rates of return due to lower market interest rates in 2021 as compared to the same periods in 2020.

Interest expense is related to our debt transactions, which are described in Note 7 to the condensed consolidated financial statements.

Other income (expense), net primarily represents net foreign exchange gains and losses mainly due to foreign exchange rate fluctuations on intercompany transactions and other non-operating expense and income items. The three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, includes a $3.7 million gain from an equity investment in 2021, partially offset by unfavorable impact of changes in foreign currency exchange rates.

Provision for Income Taxes


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Provision for income taxes	$	(13,648)		$	(8,801)		55.1	%	$	(43,555)		$	(41,764)		4.3	%
As a percentage of revenue	(1.6)		%	(1.1)		%			(1.7)		%	(1.8)		%
Effective income tax rate	(7.0)		%	(5.2)		%			(8.0)		%	(8.6)		%

For the three- and nine-month periods ended September 30, 2021, as compared to the same periods in 2020, our provision for income taxes increased due to an increase in profitability and a decrease in the excess tax benefit related to stock-based compensation. These amounts were partially offset by an increase in foreign income taxed at lower rates, the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations and equity method earnings.

For the three- and nine-month periods ended September 30, 2021, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation, the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation and state taxes.

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For the three- and nine-month periods ended September 30, 2020, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates, the excess tax benefit related to stock-based compensation, the benefit of U.S. federal, state and foreign research and development credits and additional benefits related to the issuance of certain final tax regulations under the Tax Cuts and Jobs Act, or TCJA, in July 2020. These amounts were partially offset by non-deductible stock-based compensation and state taxes.

In determining our net deferred tax assets and valuation allowances, annualized effective income tax rates and cash paid for income taxes, management is required to make judgments and estimates about domestic and foreign profitability, the timing and extent of the utilization of net operating loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Judgments and estimates related to our projections and assumptions are inherently uncertain; therefore, actual results could differ materially from our projections.

Loss from Equity Method Investment


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(in thousands)	2021			2020			% Change		2021			2020			% Change
Loss from equity method investment	$	(1,064)		$	(559)		90.3	%	$	(12,578)		$	(1,674)		651.4	%
As a percentage of revenue	(0.1)		%	(0.1)		%			(0.5)		%	(0.1)		%

The amounts reflected in loss from equity method investment relate to recognition of our share of losses from our investment with Mitsubishi UFJ Financial Group in a joint venture, Global Open Network, Inc., or GO-NET. GO-NET operates a new blockchain-based online payment network. The increase in our share of GO-NET's losses during the nine-month period ended September 30, 2021 includes our share of the long-lived asset impairment of certain technology recorded in the joint venture's financial statements. We expect to record additional losses in the fourth quarter of 2021 and beyond as GO-NET continues executing on the early stages of its business plan.

Non-GAAP Financial Measures

In addition to providing financial measurements based on GAAP, we provide additional financial metrics that are not prepared in accordance with GAAP, or non-GAAP financial measures. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, to measure executive compensation and to evaluate our financial performance. These non-GAAP financial measures are non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per share, Adjusted EBITDA, Adjusted EBITDA margin, capital expenditures and impact of foreign currency exchange rates, as discussed below.

Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparison of financial results across accounting periods and to those of our peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate our operating results and future prospects in the same manner as management. These non-GAAP financial measures may exclude expenses and gains that may be unusual in nature, infrequent or not reflective of our ongoing operating results.

The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.

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The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:

Amortization of acquired intangible assets** – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.
Stock-based compensation and amortization of capitalized stock-based compensation** – Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies.
Acquisition-related costs** – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to our initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. We exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of our operating results to prior periods and to our peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions and do not reflect our core operations.
Restructuring charges** – We have incurred restructuring charges that are included in our GAAP financial statements, primarily related to workforce reductions and charges associated with exiting facility lease commitments. We exclude these items from our non-GAAP financial measures when evaluating our continuing business performance as such items vary significantly based on the magnitude of the restructuring action and do not reflect expected future operating expenses. In addition, these charges do not necessarily provide meaningful insight into the fundamentals of current or past operations of our business.
Amortization of debt discount and issuance costs and amortization of capitalized interest expense** – In August 2019, we issued $1,150 million of convertible senior notes due 2027 with a coupon interest rate of 0.375%. In May 2018, we issued $1,150 million of convertible senior notes due 2025 with a coupon interest rate of 0.125%. The imputed interest rates of these convertible senior notes were 3.10% and 4.26%, respectively. This is a result of the debt discounts recorded for the conversion features that are required to be separately accounted for as equity under GAAP, thereby reducing the carrying values of the convertible debt instruments. The debt discounts are amortized as interest expense together with the issuance costs of the debt. The interest expense excluded from our non-GAAP results is comprised of these non-cash components and is excluded from management's assessment of our operating performance because management believes the non-cash expense is not representative of ongoing operating performance.
Gains and losses on investments** – We have recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to these gains and losses are not representative of our core business operations and ongoing operating performance.
Legal settlements** – We have incurred losses related to the settlement of legal matters. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations.
Endowment of Akamai Foundation** – We have incurred expenses to endow the Akamai Foundation, a private corporate foundation dedicated to encouraging the next generation of technology innovators by supporting math and science education. Our first endowment was in 2018 to enable a permanent endowment for the Akamai Foundation to allow it to expand its reach. In the fourth quarter of 2020 we supplemented the endowment to enable specific initiatives to increase diversity in the technology industry. We believe excluding these amounts

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from non-GAAP financial measures is useful to investors as these infrequent expenses are not representative of our core business operations.

Transformation costs** – We have incurred professional services fees associated with internal transformation programs designed to improve operating margins and that are part of a planned program intended to significantly change the manner in which business is conducted. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events and activities giving rise to them occur infrequently and are not representative of our core business operations and ongoing operating performance.
Income and losses from equity method investment** – We record income or losses on our share of earnings and losses from our equity method investment. We exclude such income and losses because we do not direct control over the operations of the investment and the related income and losses are not representative of our core business operations.
Income tax effect of non-GAAP adjustments and certain discrete tax items** – The non-GAAP adjustments described above are reported on a pre-tax basis. The income tax effect of non-GAAP adjustments is the difference between GAAP and non-GAAP income tax expense. Non-GAAP income tax expense is computed on non-GAAP pre-tax income (GAAP pre-tax income adjusted for non-GAAP adjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. We believe that applying the non-GAAP adjustments and their related income tax effect allows us to highlight income attributable to our core operations.

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The following table reconciles GAAP income from operations to non-GAAP income from operations and non-GAAP operating margin for the periods presented (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Income from operations	$	205,265		$	181,158		$	587,063		$	523,917
Amortization of acquired intangible assets	11,959			10,340			35,446			31,155
Stock-based compensation	49,018			50,217			153,804			146,901
Amortization of capitalized stock-based compensation and capitalized interest expense	8,815			7,913			27,253			24,540
Restructuring charge	565			21			5,567			10,439
Acquisition-related costs	1,316			1,051			1,520			1,189
Legal settlements	—			—			—			275


Non-GAAP income from operations	$	276,938		$	250,700		$	810,653		$	738,416

GAAP operating margin	24		%	23		%	23		%	22		%
Non-GAAP operating margin	32		%	32		%	32		%	31		%

The following table reconciles GAAP net income to non-GAAP net income for the periods presented (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	178,916	$	158,623	$	491,108	$	443,684
Amortization of acquired intangible assets	11,959		10,340		35,446		31,155
Stock-based compensation	49,018		50,217		153,804		146,901
Amortization of capitalized stock-based compensation and capitalized interest expense	8,815		7,913		27,253		24,540
Restructuring charge	565		21		5,567		10,439
Acquisition-related costs	1,316		1,051		1,520		1,189
Legal settlements	—		—		—		275


Amortization of debt discount and issuance costs	16,567		15,747		49,284		47,057
Gain on investments	(3,680)		—		(3,680)		—
Loss from equity method investment	1,064		559		12,578		1,674
Income tax effect of above non-GAAP adjustments and certain discrete tax items	(25,600)		(28,689)		(73,374)		(68,481)
Non-GAAP net income	$	238,940	$	215,782	$	699,506	$	638,433

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The following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the periods presented (in thousands, except per share data):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
GAAP net income per diluted share	$	1.08	$	0.95	$	2.96	$	2.69
Amortization of acquired intangible assets	0.07		0.06		0.21		0.19
Stock-based compensation	0.29		0.30		0.93		0.89
Amortization of capitalized stock-based compensation and capitalized interest expense	0.05		0.05		0.16		0.15
Restructuring charge	—		—		0.03		0.06
Acquisition-related costs	0.01		0.01		0.01		0.01
Legal settlements	—		—		—		—


Amortization of debt discount and issuance costs	0.10		0.09		0.30		0.29
Gain on investments	(0.02)		—		(0.02)		—
Loss from equity method investment	0.01		—		0.08		0.01
Income tax effect of above non-GAAP adjustments and certain discrete tax items	(0.15)		(0.17)		(0.44)		(0.42)
Adjustment for shares(1)	0.02		0.02		0.04		0.02
Non-GAAP net income per diluted share (2)	$	1.45	$	1.31	$	4.25	$	3.89

Shares used in GAAP per diluted share calculations	166,318		166,519		166,090		164,990
Impact of benefit from note hedge transactions(1)	(2,028)		(1,732)		(1,589)		(795)
Shares used in non-GAAP per diluted share calculations(1)	164,290		164,787		164,501		164,195

(1) Shares used in non-GAAP per diluted share calculations have been adjusted for the periods presented for the benefit of our note hedge transactions. During the periods presented Akamai's average stock price was in excess of $95.10, which is the initial conversion price of our convertible senior notes due in 2025. See further definition below.

(2) Amounts may not foot due to rounding.

Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by diluted weighted average common shares outstanding. GAAP diluted weighted average common shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to us pursuant to the note hedge transactions entered into in connection with the issuance of our convertible senior notes. Under GAAP, shares delivered under hedge transactions are not considered offsetting shares in the fully-diluted share calculation until they are delivered. However, we would receive a benefit from the note hedge transactions and would not allow the dilution to occur, so management believes that adjusting for this benefit provides a meaningful view of net income per share. Unless our weighted average stock price is greater than $95.10, the initial conversion price of the convertible senior notes due 2025, or $116.18, the initial conversion price of the convertible senior notes due 2027, there will be no difference between our GAAP and non-GAAP diluted weighted average common shares outstanding.

We consider Adjusted EBITDA to be another important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that we do not consider to be part of our core operations. We define Adjusted EBITDA as GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; costs incurred related to endowments to the Akamai Foundation; transformation costs; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses on equity method investment; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue.

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The following table reconciles GAAP net income to Adjusted EBITDA and Adjusted EBITDA margin for the periods presented (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Net income	$	178,916		$	158,623		$	491,108		$	443,684
Interest income	(2,872)			(6,307)			(12,186)			(22,852)
Provision for income taxes	13,648			8,801			43,555			41,764
Depreciation and amortization	119,055			100,644			346,399			294,992
Amortization of capitalized stock-based compensation and capitalized interest expense	8,815			7,913			27,253			24,540
Amortization of acquired intangible assets	11,959			10,340			35,446			31,155
Stock-based compensation	49,018			50,217			153,804			146,901
Restructuring charge	565			21			5,567			10,439
Acquisition-related costs	1,316			1,051			1,520			1,189
Legal settlements	—			—			—			275


Interest expense	18,144			17,324			54,015			51,778
Gain on investments	(3,680)			—			(3,680)			—
Loss from equity method investment	1,064			559			12,578			1,674
Other expense, net	45			2,158			1,673			7,869
Adjusted EBITDA	$	395,993		$	351,344		$	1,157,052		$	1,033,408

Adjusted EBITDA margin	46		%	44		%	45		%	44		%

Impact of Foreign Currency Exchange Rates

Revenue and earnings from our international operations have historically been important contributors to our financial results. Consequently, our financial results have been impacted, and management expects they will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, when the local currencies of our foreign subsidiaries weaken, generally our consolidated results stated in U.S. dollars are negatively impacted.

Because exchange rates are a meaningful factor in understanding period-to-period comparisons, management believes the presentation of the impact of foreign currency exchange rates on revenue and earnings enhances the understanding of our financial results and evaluation of performance in comparison to prior periods. The dollar impact of changes in foreign currency exchange rates presented is calculated by translating current period results using monthly average foreign currency exchange rates from the comparative period and comparing them to the reported amount. The percentage change at constant currency presented is calculated by comparing the prior period amounts as reported and the current period amounts translated using the same monthly average foreign currency exchange rates from the comparative period.

Liquidity and Capital Resources

To date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of September 30, 2021, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds, totaled $2.8 billion. Factoring in the $2.3 billion in principal amount of convertible senior notes we have outstanding, our net cash at September 30, 2021 was $452.4 million. We place our cash investments in instruments that meet high-quality credit standards, as specified in our investment policy. Our investment policy is also designed to limit the amount of our credit exposure to any one issue or issuer and seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity at all times.

Changes in cash, cash equivalents and marketable securities are dependent upon changes in, among other things, working capital items such as accounts receivable, deferred revenues, accounts payable and various accrued expenses, as well as changes in our capital and financial structure due to common stock repurchases, debt repayments and issuances, purchases and sales of marketable securities and similar events. To date, we have not seen a material impact to our liquidity from events related to the

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COVID-19 pandemic; however, we are continuing to monitor our customers' ability to pay as some of them may be unable to pay us for our services or may be unable to remit payments in a timely manner due to financial stresses the COVID-19 pandemic may have caused them. We believe that, particularly in situations like these, our strong balance sheet and cash position are important competitive differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times.

As of September 30, 2021, we had cash and cash equivalents of $556.6 million held in accounts outside the U.S. The TCJA establishes a territorial tax system in the U.S., which provides companies with the potential ability to repatriate earnings with minimal U.S. federal income tax impact. As a result, our liquidity is not expected to be materially impacted by the amount of cash and cash equivalents held in accounts outside the U.S.

Cash Provided by Operating Activities


	For the Nine Months Ended September 30,
(in thousands)	2021		2020
Net income	$	491,108	$	443,684
Non-cash reconciling items included in net income	593,701		538,375
Changes in operating assets and liabilities	(67,146)		(58,152)
Net cash provided by operating activities	$	1,017,663	$	923,907

The increase in cash provided by operating activities for the nine-month period ended September 30, 2021, as compared to the same period in 2020, was primarily due to increased profitability and timing of payments from customers, partially offset by the timing of vendor and income tax-related payments.

Cash Provided by (Used in) Investing Activities


	For the Nine Months Ended September 30,
(in thousands)	2021		2020
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 and capitalization of internal-use software development costs	(435,535)		(564,427)
Net marketable securities activity	649,893		177,637
Other investing activity	(1,665)		(1,980)
Net cash provided by (used in) investing activities	$	197,055	$	(425,040)

The increase in cash from investing activities during the nine-month period ended September 30, 2021, as compared to the same period in 2020, was driven by a decrease in purchases of property and equipment as we slowed expansion of our network and an increase in net marketable securities activities in anticipation of needing to fund our acquisition of Guardicore in October 2021.

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Cash Used in Financing Activities


	For the Nine Months Ended September 30,
(in thousands)	2021		2020

Activity related to stock-based compensation	$	(41,253)	$	(31,487)
Repurchases of common stock	(251,257)		(121,078)
Other financing activities	(268)		—
Net cash used in financing activities	$	(292,778)	$	(152,565)

The increase in cash used in financing activities during the nine-month period ended September 30, 2021, as compared to the same period in 2020, was primarily the result of increased share repurchases. Effective November 2018, our board of directors authorized a $1.1 billion share repurchase program through December 2021. In October 2021, our board of directors authorized a new $1.8 billion share repurchase program, effective January 1, 2022 through December 31, 2024. As of September 30, 2021, $320.6 million remained available for future share repurchases under the prior authorization, which is expiring on December 31, 2021. Our goals for the share repurchase programs are to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to shareholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities.

During the nine-month period ended September 30, 2021, we repurchased 2.3 million shares of common stock at a weighted average price of $108.83 per share for an aggregate of $251.3 million. The timing and amount of any future share repurchases will be determined by our management based on its evaluation of market conditions and other factors.

Convertible Senior Notes

In August 2019, we issued $1,150.0 million in principal amount of convertible senior notes due 2027 and entered into related convertible note hedge and warrant transactions. We intend to use the net proceeds of the offering for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.

In May 2018, we issued $1,150.0 million in principal amount of convertible senior notes due 2025 and entered into related convertible note hedge and warrant transactions. We used a portion of the net proceeds to repay at maturity all of our $690.0 million outstanding aggregate principal amount of convertible senior notes due in 2019.

The terms of the notes and hedge transactions are discussed more fully in Note 7 to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

Revolving Credit Facility

In May 2018, we entered into a $500.0 million, five-year revolving credit agreement, or the Credit Agreement. Borrowings under the facility may be used to finance working capital needs and for general corporate purposes. The facility provides for an initial $500.0 million in revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount.

Borrowings under the Credit Agreement bear interest, at our option, at a base rate plus a spread of 0.00% to 0.25% or an adjusted LIBOR rate plus a spread of 0.875% to 1.25%, in each case with such spread being determined based on our consolidated leverage ratio specified in the Credit Agreement. Regardless of what amounts, if any, are outstanding under the Credit Agreement, we are also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.075% to 0.15%, with such rate being based on our consolidated leverage ratio specified in the Credit Agreement.

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. Principal covenants include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. There were no outstanding borrowings under the Credit Agreement as of September 30, 2021.

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Liquidity Outlook

Based on our present business plan, we expect our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations to be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology, opportunistic business acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other long-term liabilities.

Contractual Obligations

Our principal commitments consist of service agreements with various vendors for bandwidth usage, obligations under leases with co-location facilities for data center capacity, obligations under leases for office space and open vendor purchase orders. Our minimum commitments related to bandwidth usage and co-location leases may vary from period to period depending on the timing and length of contract renewals with our vendors. As of September 30, 2021, there have been no significant changes in our future non-cancelable minimum payments under these commitments from those reported in our annual report on Form 10-K for the year ended December 31, 2020, other than normal period-to-period variations.

Off-Balance Sheet Arrangements

We have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, shareholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See also Note 13 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2020 for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during the nine months ended September 30, 2021 was determined to be immaterial.

As of September 30, 2021, we did not have any additional material off-balance sheet arrangements.

Significant Accounting Policies and Estimates

See Note 2 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our significant accounting policies and estimates from those reported in our annual report on Form 10-K for the year ended December 31, 2020.

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