Item 1. Financial Statements (Unaudited)

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Item 1. Financial Statements (Unaudited)

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share data) (unaudited)	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	298,800	$	542,337
Marketable securities	453,113		562,979
Accounts receivable, net of reserves of $5,557 and $5,917 at March 31, 2023, and December 31, 2022, respectively	705,817		679,206
Prepaid expenses and other current assets	239,981		185,040
Total current assets	1,697,711		1,969,562
Marketable securities	298,699		320,531
Property and equipment, net	1,654,608		1,540,182
Operating lease right-of-use assets	850,282		813,372
Acquired intangible assets, net	432,233		441,716
Goodwill	2,781,859		2,763,838
Deferred income tax assets	334,733		337,677
Other assets	133,208		116,522
Total assets	$	8,183,333	$	8,303,400

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS, continued


(in thousands, except share data) (unaudited)	March 31, 2023		December 31, 2022















LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	202,129	$	145,420
Accrued expenses	256,924		367,017
Deferred revenue	140,927		105,109

Operating lease liabilities	205,055		196,094
Other current liabilities	31,218		5,228
Total current liabilities	836,253		818,868
Deferred revenue	23,754		22,117
Deferred income tax liabilities	20,439		18,400
Convertible senior notes	2,286,369		2,285,258
Operating lease liabilities	735,808		693,265
Other liabilities	109,369		105,305
Total liabilities	4,011,992		3,943,213
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; 157,299,369 shares issued and 152,743,828 shares outstanding at March 31, 2023, and 156,494,816 shares issued and outstanding at December 31, 2022	1,573		1,565
Additional paid-in capital	2,625,244		2,578,603
Accumulated other comprehensive loss	(121,161)		(140,332)
Treasury stock, at cost, 4,555,541 shares at March 31, 2023, and no shares at December 31, 2022	(351,772)		—
Retained earnings	2,017,457		1,920,351
Total stockholders’ equity	4,171,341		4,360,187
Total liabilities and stockholders’ equity	$	8,183,333	$	8,303,400

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	For the Three Months Ended March 31,
(in thousands, except per share data) (unaudited)	2023		2022
Revenue	$	915,698	$	903,647
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)	361,316		332,752
Research and development	91,863		99,935
Sales and marketing	129,107		122,719
General and administrative	146,139		153,262
Amortization of acquired intangible assets	15,912		13,644
Restructuring charge	44,723		8,016
Total costs and operating expenses	789,060		730,328
Income from operations	126,638		173,319
Interest and marketable securities income (loss), net	5,292		(211)
Interest expense	(2,681)		(2,695)
Other expense, net	(2,363)		(9,565)
Income before provision for income taxes	126,886		160,848
Provision for income taxes	(29,780)		(19,837)
Loss from equity method investment	—		(7,635)
Net income	$	97,106	$	133,376
Net income per share:
Basic	$	0.62	$	0.83
Diluted	$	0.62	$	0.82
Shares used in per share calculations:
Basic	155,637		160,494
Diluted	156,135		163,637

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	For the Three Months Ended March 31,
(in thousands) (unaudited)	2023		2022
Net income	$	97,106	$	133,376
Other comprehensive income (loss):
Foreign currency translation adjustments	11,722		2,036
Change in unrealized gain (loss) on investments, net of income tax (provision) benefit of $(2,399) and $4,948 for the three months ended March 31, 2023 and 2022, respectively	7,449		(21,542)
Other comprehensive income (loss)	19,171		(19,506)
Comprehensive income	$	116,277	$	113,870

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Three Months Ended March 31,
(in thousands) (unaudited)	2023		2022
Cash flows from operating activities:
Net income	$	97,106	$	133,376
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	135,457		142,595
Stock-based compensation	61,883		56,227
Provision (benefit) for deferred income taxes	4,925		(27,792)
Amortization of debt issuance costs	1,098		1,119
(Gain) loss on investments	(174)		16,536
Other non-cash reconciling items, net	21,602		12,598
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(25,251)		(39,198)
Prepaid expenses and other current assets	(26,009)		(64,695)
Accounts payable and accrued expenses	(97,263)		(66,938)
Deferred revenue	36,449		55,394
Other current liabilities	25,834		(1,441)
Other non-current assets and liabilities	(2,158)		4,670
Net cash provided by operating activities	233,499		222,451
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(20,070)		(872,099)


Purchases of property and equipment	(141,700)		(51,005)
Capitalization of internal-use software development costs	(80,545)		(80,354)
Purchases of short- and long-term marketable securities	(134,191)		—
Proceeds from sales of short- and long-term marketable securities	185,249		571,369
Proceeds from maturities and redemptions of short- and long-term marketable securities	91,637		120,433
Other, net	(20,268)		(5,242)
Net cash used in investing activities	(119,888)		(316,898)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility	—		75,000



Proceeds related to the issuance of common stock under stock plans	21,257		21,941
Employee taxes paid related to net share settlement of stock-based awards	(29,894)		(54,819)
Repurchases of common stock	(348,600)		(102,853)
Other, net	(52)		(104)
Net cash used in financing activities	(357,289)		(60,835)
Effects of exchange rate changes on cash, cash equivalents and restricted cash	2,297		(1,462)
Net decrease in cash, cash equivalents and restricted cash	(241,381)		(156,744)
Cash, cash equivalents and restricted cash at beginning of period	543,022		537,751
Cash, cash equivalents and restricted cash at end of period	$	301,641	$	381,007

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued


	For the Three Months Ended March 31,
(in thousands) (unaudited)	2023		2022






































Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds received of $225 and $1,025 for the three months ended March 31, 2023 and 2022, respectively	$	86,066	$	50,533
Cash paid for interest expense	2,156		2,156
Cash paid for operating lease liabilities	55,167		54,285
Non-cash activities:
Operating lease right-of-use assets obtained in exchange for operating lease liabilities	102,952		38,582
Purchases of property and equipment and capitalization of internal-use software development costs included in accounts payable and accrued expenses	101,196		48,326
Capitalization of stock-based compensation	14,611		7,803

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	298,800	$	377,811
Restricted cash	2,841		3,196
Cash, cash equivalents and restricted cash	$	301,641	$	381,007

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

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


	Three Months Ended March 31, 2023
(in thousands, except share data) (unaudited)	Common Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders' Equity
Shares		Amount
Balance at January 1, 2023	156,494,816		$	1,565	$	2,578,603	$	(140,332)	$	—	$	1,920,351	$	4,360,187

Issuance of common stock upon the vesting of restricted and deferred stock units, net of shares withheld for employee taxes	804,553		8		(31,344)								(31,336)

Stock-based compensation					77,985								77,985



Repurchases of common stock	(4,555,541)								(351,772)				(351,772)

Net income											97,106		97,106
Foreign currency translation adjustment							11,722						11,722
Change in unrealized gain on investments, net of tax							7,449						7,449
Balance at March 31, 2023	152,743,828		$	1,573	$	2,625,244	$	(121,161)	$	(351,772)	$	2,017,457	$	4,171,341

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued


	Three Months Ended March 31, 2022
(in thousands, except share data) (unaudited)	Common Stock				Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Treasury Stock		Retained Earnings		Total Stockholders' Equity
Shares		Amount
Balance at January 1, 2022	160,512,111		$	1,605	$	3,340,822	$	(69,105)	$	—	$	1,256,692	$	4,530,014
Cumulative-effect adjustment from adoption of new accounting pronouncement					(375,414)						139,987		(235,427)
Issuance of common stock upon the exercise of stock options and vesting of restricted and deferred stock units, net of shares withheld for employee taxes	948,150		10		(54,649)								(54,639)

Stock-based compensation					63,770								63,770



Repurchases of common stock	(924,492)								(102,853)				(102,853)

Net income											133,376		133,376
Foreign currency translation adjustment							2,036						2,036
Change in unrealized loss on investments, net of tax							(21,542)						(21,542)
Balance at March 31, 2022	160,535,769		$	1,615	$	2,974,529	$	(88,611)	$	(102,853)	$	1,530,055	$	4,314,735

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

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 life online. Its massively distributed edge and cloud platform comprises more than 4,200 locations across more than 130 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. The Company is currently organized and operates as one reportable and operating segment.

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 the accompanying interim condensed consolidated financial statements.

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 interim 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, 2022, filed with the Securities and Exchange Commission on February 28, 2023. The December 31, 2022 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 interim 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.

Revision of Previously Issued Financial Statements

During the preparation of the financial statements for the year ended December 31, 2022, an error was identified in the Company’s accounting for an intercompany sale of intellectual property that occurred during 2022. During each of the first three quarters of 2022, the Company failed to record a deferred tax asset in the jurisdiction where the intellectual property was sold for the step up in tax basis that was achieved with the sale. This caused net deferred taxes to be understated in the interim condensed consolidated balance sheets, the provision for income taxes to be overstated and net income and earnings per share to be understated in the interim condensed consolidated statements of income. Management evaluated the error and determined that the related impact was not material to any of the Company's previously issued financial statements.

Changes to the interim condensed consolidated statements of income for the three months ended March 31, 2022, as a result of the error, were as follows (in thousands, except per share data):


	For the Three Months Ended March 31, 2022
	As Previously Reported		Adjustment		As Revised
Provision for income taxes	$	(34,050)	$	14,213	$	(19,837)
Net income	119,163		14,213		133,376
Net income per share:
Basic	$	0.74	$	0.09	$	0.83
Diluted	$	0.73	$	0.09	$	0.82

The condensed consolidated statements of comprehensive income, condensed consolidated statements of cash flows and condensed consolidated statements of shareholders' equity for the three months ended March 31, 2022 were also revised to reflect the impact to net income as stated in the table above. The benefit for deferred income tax line was also adjusted in the interim condensed consolidated statement of cash flows, however, the error had no net impact on cash flows from operating, investing or financing activities for the three months ended March 31, 2022.

Significant Accounting Policies Update

The Company's significant accounting policies are detailed in Note 2 of its annual report on Form 10-K for the year ended December 31, 2022. The following policy has been updated as of January 1, 2023.

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Property and equipment generally includes purchases of items with a per-unit value greater than $1,000 and a useful life greater than one year. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets. The Company periodically reviews the estimated useful lives of property and equipment. Changes to the estimated useful lives are recorded prospectively from the date of the change. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in income from operations.

The Company has implemented software and hardware initiatives to manage its global network more efficiently and, as a result, the expected average useful life of its servers increased from five years to six years, effective January 1, 2023. These changes decreased depreciation expense by $16.7 million and increased net income by $14.0 million, or $0.09 per share, for the three months ended March 31, 2023.

2. Fair Value Measurements

Available-for-sale marketable securities held as of March 31, 2023 and December 31, 2022 were as follows (in thousands):


			Gross Unrealized						Classification on Balance Sheet
	Amortized Cost		Gains		Losses		Aggregate Fair Value		Short-Term Marketable Securities		Long-Term Marketable Securities
As of March 31, 2023

Commercial paper	$	960	$	1	$	—	$	961	$	961	$	—
Corporate bonds	508,508		336		(14,722)		494,122		254,986		239,136
U.S. government agency obligations	243,717		47		(7,232)		236,532		196,843		39,689
	$	753,185	$	384	$	(21,954)	$	731,615	$	452,790	$	278,825

As of December 31, 2022
Time deposit	$	19,530	$	—	$	—	$	19,530	$	19,530	$	—

Corporate bonds	624,082		—		(21,029)		603,053		362,458		240,595
U.S. government agency obligations	252,573		—		(10,391)		242,182		180,320		61,862
	$	896,185	$	—	$	(31,420)	$	864,765	$	562,308	$	302,457

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 interim 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 interim condensed consolidated balance sheets. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to interest and marketable securities income, net in the interim condensed consolidated statements of income. As of March 31, 2023, the Company held for investment corporate bonds and U.S. government agency obligations with a fair value of $597.0 million, which are classified as available-for-sale marketable securities and have been in a continuous unrealized loss position for more than 12 months. The unrealized losses related to these securities were $21.7 million and are included in accumulated other comprehensive loss as of March 31, 2023. The unrealized losses are attributable to changes in interest rates. Based on the evaluation of available evidence, the Company does not believe any unrealized losses represent other than temporary impairments.

The fair value measurements within the fair value hierarchy of the Company’s financial assets as of March 31, 2023 and December 31, 2022 were as follows (in thousands):


	Total Fair Value			Fair Value Measurements at Reporting Date Using
			Level 1			Level 2
As of March 31, 2023
Cash Equivalents and Marketable Securities:
Money market funds	$	635		$	635		$	—
Time deposit	25,576			—			25,576
Commercial paper	961			—			961
Corporate bonds	494,122			—			494,122

U.S. government agency obligations	236,532			—			236,532
Mutual funds	20,198			20,198			—
	$	778,024		$	20,833		$	757,191




As of December 31, 2022
Cash Equivalents and Marketable Securities:
Money market funds	$	999		$	999		$	—
Time deposit	285,830			—			285,830

Corporate bonds	603,053			—			603,053

U.S. government agency obligations	242,182			—			242,182
Mutual funds	18,745			18,745			—
	$	1,150,809		$	19,744		$	1,131,065

As of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, the Company grouped time deposits, commercial paper, U.S. government agency obligations and corporate bonds 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 or liabilities between Level 1 or Level 2 of the fair value measurement hierarchy during the three months ended March 31, 2023.

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 use primarily 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 the 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 March 31, 2023 and December 31, 2022 were as follows (in thousands):


	March 31, 2023		December 31, 2022
Due in 1 year or less	$	452,790	$	562,308
Due after 1 year through 5 years	278,825		302,457
	$	731,615	$	864,765

3. Accounts Receivable

Net accounts receivable consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Trade accounts receivable	$	516,398	$	490,162
Unbilled accounts receivable	194,976		194,961
Gross accounts receivable	711,374		685,123
Allowances for current expected credit losses and other reserves	(5,557)		(5,917)
Accounts receivable, net	$	705,817	$	679,206

A summary of activity in the accounts receivable allowance for current expected credit losses and other reserves for the three months ended March 31, 2023 and 2022 was as follows (in thousands):


	March 31, 2023		March 31, 2022
Beginning balance	$	5,917	$	1,397
Charges to income from operations	1,397		1,951
Collections from customers previously reserved and other	(1,757)		(69)
Ending balance	$	5,557	$	3,279

Charges to income from operations primarily represents charges to provision for doubtful accounts for increases in the allowance for current expected credit losses.

4. Incremental Costs to Obtain a Contract with a Customer

Deferred costs associated with obtaining customer contracts, specifically commission and incentive payments, as of March 31, 2023 and December 31, 2022 were as follows (in thousands):


	March 31, 2023		December 31, 2022
Deferred costs included in prepaid expenses and other current assets	$	37,226	$	37,316
Deferred costs included in other assets	29,870		29,069
Total deferred costs	$	67,096	$	66,385

Information related to incremental costs to obtain a contract with a customer for the three months ended March 31, 2023 and 2022 were as follows (in thousands):


	For the Three Months Ended March 31,
	2023		2022
Amortization expense related to deferred costs	$	12,175	$	15,022
Incremental costs capitalized	12,417		9,484

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

5. Acquired Intangible Assets and Goodwill

Acquired intangible assets that are subject to amortization consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Completed technologies	$	333,647	$	(170,930)	$	162,717	$	327,848	$	(162,323)	$	165,525
Customer-related intangible assets	481,965		(251,001)		230,964		480,817		(244,158)		236,659
Non-compete agreements	249		(208)		41		244		(183)		61
Trademarks and trade names	14,650		(7,980)		6,670		14,642		(7,585)		7,057
Acquired license rights	34,810		(2,969)		31,841		34,810		(2,396)		32,414
Total	$	865,321	$	(433,088)	$	432,233	$	858,361	$	(416,645)	$	441,716

Aggregate expense related to amortization of acquired intangible assets for the three months ended March 31, 2023 and 2022 was $15.9 million and $13.6 million, respectively. Based on the Company’s acquired intangible assets as of March 31, 2023, aggregate expense related to amortization of acquired intangible assets is expected to be $48.0 million for the remainder of 2023, and $59.9 million, $62.4 million, $58.0 million and $44.8 million for 2024, 2025, 2026 and 2027, respectively.

The changes in the carrying amount of goodwill for the three months ended March 31, 2023 were as follows (in thousands):


Balance as of January 1, 2023	$	2,763,838
Acquisition of StorageOS, Inc.	14,989


Foreign currency translation	3,032
Balance as of March 31, 2023	$	2,781,859

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 that a potential impairment exists.

6. Acquisitions

Acquisition-related costs during the three months ended March 31, 2023 were $2.2 million and are included in general and administrative expense in the interim condensed consolidated statements of income. Pro forma results of operations for the acquisition completed during the three months ended March 31, 2023 have not been presented because the effects of the acquisition were not material to the Company's consolidated financial results. Revenue and earnings of the acquired company since the date of the acquisition that are included in the Company's interim condensed consolidated statements of income are also not presented separately because they are not material.

Neosec

In May 2023, the Company acquired Neosec, Inc. ("Neosec") for approximately $86.7 million, net of cash acquired and subject to post-closing adjustments. Neosec is an API detection and response platform based on data and behavioral analytics. The acquisition is intended to complement the Company's application and API security portfolio by extending its visibility into the rapidly growing API threat landscape. The allocation of the purchase price has not been finalized as of the filing of these interim condensed consolidated financial statements. The Company expects the majority of the purchase price to be allocated to acquired intangible assets and goodwill.

StorageOS

In March 2023, the Company acquired StorageOS, Inc. ("StorageOS"), also known as Ondat, a privately-held cloud-based storage technology provider for $20.6 million in cash. The acquisition of StorageOS's cloud storage technology and its industry-recognized talent is intended to strengthen the Company's cloud computing offerings. Storage is a key component of any cloud

computing offering, and this acquisition will help enhance the Company's storage capabilities, allowing us to offer a fundamentally different approach to cloud that integrates core and distributed computing sites with a massively scaled edge network. The Company allocated $15.0 million of the cost of the acquisition to goodwill and $3.5 million to a technology-related identifiable intangible asset with a useful life of 8.8 years. The value of the goodwill is primarily attributable to synergies related to the integration of StorageOS technology onto the Company's platform as well as a trained technical workforce. All of the goodwill related to the acquisition of StorageOS is expected to be deductible for tax purposes. The allocation of the purchase price has not been finalized as of the filing of these interim condensed consolidated financial statements.

7. Debt

Convertible Senior 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.

Each $1,000 principal amount of the notes will be convertible into 8.6073 shares of the Company's common stock, which is equivalent to a conversion price of approximately $116.18 per share, subject to adjustments in certain events. 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 will pay the principal amount in cash and will pay, or deliver, as the case may be, any amount in excess of the principal amount in cash, shares of common stock or a combination of cash and shares of the Company stock, at the Company's election.

In accounting for the issuance of the 2027 Notes, the principal less debt issuance costs are recorded as debt on the Company's interim condensed consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the 2027 Notes.

The 2027 Notes consisted of the following as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022

Principal	$	1,150,000	$	1,150,000
Less: issuance costs, net of amortization	(8,239)		(8,707)
Net carrying amount	$	1,141,761	$	1,141,293

The estimated fair value of the 2027 Notes at March 31, 2023 and December 31, 2022 was $1,057.9 million and $1,111.0 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 $78.30 on March 31, 2023, 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 share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.

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 receive 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 interim 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 or 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 interim condensed consolidated financial statements.

Convertible Senior 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.

Each $1,000 principal amount of the notes will be convertible into 10.5150 shares of the Company's common stock, which is equivalent to a conversion price of approximately $95.10 per share, subject to adjustments in certain events. 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.

In accounting for the issuance of the 2025 Notes, the principal less debt issuance costs are recorded as debt on the Company's interim condensed consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the 2025 Notes.

The 2025 Notes consisted of the following components as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022

Principal	$	1,150,000	$	1,150,000
Less: issuance costs, net of amortization	(5,392)		(6,035)
Net carrying amount	$	1,144,608	$	1,143,965

The estimated fair value of the 2025 Notes at March 31, 2023 and December 31, 2022 was $1,151.5 million and $1,209.1 million, respectively. The fair value was determined based on the quoted price of the 2025 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 $78.30 on March 31, 2023, the value of the 2025 Notes if converted to common stock was less than the principal amount of $1,150.0 million.

The Company used $46.2 million of the proceeds from the offering to repurchase shares of its common stock, concurrent with the issuance of the 2025 Notes. The repurchase was made in accordance with a share repurchase program previously approved by the board of directors. Additionally, $141.8 million of the proceeds was used for the net cost of convertible note hedge and warrant transactions. The Company also used a portion of the net proceeds to repay at maturity $690.0 million in par value of convertible senior notes due in 2019. The remaining net proceeds are intended to be used for share repurchases, working capital and general corporate purposes, including potential acquisitions and other strategic transactions.

Note Hedge

To minimize the impact of potential dilution upon conversion of the 2025 Notes, the Company entered into convertible note hedge transactions with respect to its common stock in May 2018. The Company paid $261.7 million for the note hedge transactions. The note hedge transactions cover approximately 12.1 million shares of the Company’s common stock at a strike price that corresponds to the initial conversion price of the 2025 Notes, also subject to adjustment, and are exercisable upon conversion of the 2025 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 receive 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 interim condensed consolidated financial statements.

Warrants

Separately, in May 2018, the Company entered into warrant transactions, whereby the Company sold warrants to acquire, subject to anti-dilution adjustments, up to 12.1 million shares of the Company’s common stock at a strike price of approximately $149.18 per share. The Company received aggregate proceeds of $119.9 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 2025 Notes to approximately $149.18 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 or 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 interim condensed consolidated financial statements.

Revolving Credit Facility

In May 2018, the Company entered into a $500.0 million five-year, revolving credit agreement (the “2018 Credit Agreement”). Borrowings under the 2018 Credit Agreement bore interest, at the Company's 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 the Company's consolidated leverage ratio specified in the 2018 Credit Agreement. Regardless of what amounts, if any, outstanding under the 2018 Credit Agreement, the Company was 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 the Company's consolidated leverage ratio specified in the 2018 Credit Agreement.

In November 2022, the Company entered into a $500.0 million five-year, revolving credit agreement (the “2022 Credit Agreement”). The 2022 Credit Agreement replaces the 2018 Credit Agreement. Borrowings under the 2022 Credit Agreement may be used to finance working capital needs and for general corporate purposes. The 2022 Credit Agreement 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. The 2022 Credit Agreement expires, and any amounts outstanding thereunder will become due and payable, on November 22, 2027, subject to up to two one-year extensions at the Company's request and with the consent of the lenders party thereto.

Borrowings under the 2022 Credit Agreement bear interest, at the Company's option, and subject to a credit spread adjustment, at a term benchmark rate plus a spread of 0.75% to 1.125%, a reference rate plus a spread of 0.75% to 1.125%, or a base rate plus a spread of 0.00% to 0.125%, in each case with such spread being determined based on the Company's consolidated leverage ratio specified in the 2022 Credit Agreement. Regardless of what amounts, if any, are outstanding under the 2022 Credit Agreement, the Company is also obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.07% to 0.125%, with such rate being based on the Company's consolidated leverage ratio specified in the 2022 Credit Agreement.

The 2022 Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The negative covenants include restrictions on subsidiary indebtedness, liens and fundamental changes. These covenants are subject to a number of important exceptions and qualifications. The principal financial covenant requires a maximum consolidated leverage ratio. There were no outstanding borrowings under the 2022 Credit Agreement as of March 31, 2023. In April 2023, the Company borrowed $90.0 million under the 2022 Credit Agreement.

Interest Expense

The 2027 Notes bear interest at a fixed rate of 0.375%, with interest payable semi-annually on March 1 and September 1 of each year. The 2025 Notes bear interest at a fixed rate of 0.125%, with interest payable semi-annually on May 1 and November 1 of each year. The Company is also obligated to pay ongoing commitment fees under the terms of its credit agreements, in addition to interest payable on outstanding borrowings. Interest expense included in the interim condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 was as follows (in thousands):


	For the Three Months Ended March 31,
	2023		2022
Amortization of debt issuance costs	$	1,166	$	1,168
Coupon interest payable on 2025 Notes	359		359
Coupon interest payable on 2027 Notes	1,078		1,078
Interest payable under the credit agreements	146		139
Capitalization of interest expense	(68)		(49)
Total interest expense	$	2,681	$	2,695

8. Restructuring

During the first quarter of 2023, management committed to an action to restructure certain parts of the Company to enable it to prioritize investments in the fastest growing areas of the business. As a result, certain headcount reductions were necessary.

The Company incurred expenses of $23.6 million for the three months ended March 31, 2023. The Company does not expect to incur material additional charges related to this action.

The Company launched its FlexBase program in May 2022, which is a flexible workspace arrangement that allows employees to choose to work from their home office, a Company office or a combination of both. This is a significant change to the way employees worked prior to the program, and prior to office shutdowns as part of the COVID-19 pandemic. The Company began to identify certain facilities that were no longer needed in the fourth quarter of 2021. As a result, impairments of right-of-use assets and leasehold improvements were recognized. The Company has incurred $25.9 million of total expenses related to this action, of which $18.5 million was incurred during the three months ended March 31, 2023. As the Company executes its FlexBase program, additional charges related to this action are expected to occur over the next 12 months.

The Company also recognizes restructuring charges for redundant employees, facilities and contracts associated with completed acquisitions.

The Company's accrual for employee severance and related benefits for all restructuring actions during the three months ended March 31, 2023 was as follows (in thousands):


Balance as of January 1, 2023	$	541
Costs incurred	23,937
Cash disbursements	(556)
Translation adjustments and other	7
Balance as of March 31, 2023	$	23,929

9. Stockholders’ Equity

Share Repurchase Program

Effective January 2022, the board of directors of the Company authorized a $1.8 billion share repurchase program through December 2024. During the three months ended March 31, 2023, the Company repurchased 4.6 million of its common stock for $348.6 million. The Company's goals for the share repurchase program are to offset the dilution created by its employee equity compensation programs over time and provide the flexibility to return capital to stockholders as business and market conditions warrant, while still preserving its ability to pursue other strategic opportunities.

Stock-Based Compensation

Components of total stock-based compensation included in the Company’s interim condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 were as follows (in thousands):


	For the Three Months Ended March 31,
	2023		2022
Cost of revenue	$	9,329	$	6,233
Research and development	21,844		20,232
Sales and marketing	13,545		12,326
General and administrative	17,165		17,436
Total stock-based compensation	61,883		56,227
Provision for income taxes	(11,413)		(14,043)
Total stock-based compensation, net of income taxes	$	50,470	$	42,184

During 2023, the Company redesigned one of its performance-based compensation programs from a cash-based to a stock-based program that vests in one year.

In addition to the amounts of stock-based compensation reported in the table above, the Company’s interim condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 include stock-based compensation reflected as a component of amortization primarily consisting of capitalized internal-use software of $7.5 million and $7.6

million, respectively, before taxes.

10. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss, net of tax, which is reported as a component of stockholders' equity, for the three months ended March 31, 2023 were as follows (in thousands):


	Foreign Currency Translation		Net Unrealized (Losses) Gains on Investments		Total
Balance as of January 1, 2023	$	(116,474)	$	(23,858)	$	(140,332)
Other comprehensive income	11,722		7,449		19,171
Balance as of March 31, 2023	$	(104,752)	$	(16,409)	$	(121,161)

There were no amounts reclassified from accumulated other comprehensive loss to net income for the three months ended March 31, 2023.

11. Revenue from Contracts with Customers

The Company sells its services through a sales force located both domestically and abroad. Revenue derived from operations outside of the U.S. is determined based on the country in which the sale originated. Other than the U.S., no single country accounted for 10% or more of the Company’s total revenue for any reported period. Revenue by geography included in the Company’s interim condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 was as follows (in thousands):


	For the Three Months Ended March 31,
	2023		2022
U.S.	$	473,833	$	481,007
International	441,865		422,640
Total revenue	$	915,698	$	903,647

The Company reports its revenue in three solution categories: security, delivery and compute. Security includes solutions that are designed to protect business online by keeping infrastructure, websites, applications and users safe. Delivery includes solutions that are designed to enable business online, including media delivery and web performance. Compute includes cloud computing, edge applications, cloud optimization and storage. Revenue by solution category included in the Company’s interim condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 was as follows (in thousands):


	For the Three Months Ended March 31,
	2023		2022
Security	$	405,552	$	381,567
Delivery	394,384		444,148
Compute	115,762		77,932
Total revenue	$	915,698	$	903,647

Most security, delivery and compute services represent obligations that are satisfied over time as the customer simultaneously receives and consumes the services provided by the Company. Accordingly, the majority of the Company's revenue is recognized over time, generally ratably over the term of the arrangement due to consistent monthly usage commitments that expire each period. Any usage over a given commitment is recognized in the period in which the units are served. A small percentage of the Company's contracts are satisfied at a point in time, such as one-time professional services contracts, integration services and most license sales where the primary obligation is delivery of the license at the start of the term. In these cases, revenue is recognized at a point in time of delivery or satisfaction of the performance obligation.

During the three months ended March 31, 2023 and 2022, the Company recognized $57.5 million and $56.2 million of revenue that was included in deferred revenue as of December 31, 2022 and 2021, respectively.

As of March 31, 2023, the aggregate amount of remaining performance obligations from contracts with customers was $3.3 billion. The Company expects to recognize approximately 70% of its remaining performance obligations as revenue over the next 12 months. The remainder of the balance is expected to be recognized over the next two to three years. Remaining performance obligations represent the amount of the transaction price under contracts with customers that are attributable to performance obligations that are unsatisfied or partially satisfied at the reporting date. This consists of future committed revenue for monthly, quarterly or annual periods within current contracts with customers, as well as deferred revenue arising from consideration invoiced in prior periods for which the related performance obligations have not been satisfied. It excludes estimates of variable consideration, such as usage-based contracts with no committed contract, as well as anticipated renewed contracts. Revenue recognized during the three months ended March 31, 2023 and 2022, related to performance obligations satisfied in previous periods was not material.

12. Income Taxes

The Company's effective income tax rate is based on estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods. Potential discrete adjustments include tax charges or benefits related to stock-based compensation, changes in tax legislation, settlements of tax audits or assessments, uncertain tax positions and acquisitions, among other items.

The Company’s effective income tax rate was 23.5% and 12.3% for the three months ended March 31, 2023 and 2022, respectively. The higher effective tax rate for the three months ended March 31, 2023 was primarily due to a decrease in the excess tax benefit related to stock-based compensation, an increase in the valuation allowance recorded against tax credits and foreign net operating loss carryforwards (NOLs) and an increase in the revaluation of certain foreign income tax liabilities due to foreign exchange rate fluctuations.

For the three months ended March 31, 2023, the effective income tax rate was higher than the federal statutory tax rate due to tax on global intangible low taxed income, non-deductible stock-based compensation, a shortfall related to stock-based compensation and an increase in the valuation allowance recorded against tax credits and foreign NOLs. These amounts were partially offset by foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits.

For the three months ended March 31, 2022, the 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 and the benefit of U.S. federal, state and foreign research and development tax credits. These amounts were partially offset by an intercompany sale of intellectual property, the tax on global intangible low taxed income and non-deductible stock-based compensation.

13. Net Income per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, restricted stock units (“RSUs”), deferred stock units (“DSUs”), convertible senior notes and warrants issued by the Company. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method and the dilutive effect of the convertible securities is reflected in diluted earnings per share by application of the if-converted method.

The components used in the computation of basic and diluted net income per share for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except per share data):


	For the Three Months Ended March 31,
	2023		2022
Numerator:
Net income	$	97,106	$	133,376
Denominator:
Shares used for basic net income per share	155,637		160,494
Effect of dilutive securities:
Stock options	—		1
RSUs and DSUs	498		1,320
Convertible senior notes	—		1,822

Shares used for diluted net income per share	156,135		163,637
Basic net income per share	$	0.62	$	0.83
Diluted net income per share	$	0.62	$	0.82

For the three months ended March 31, 2023 and 2022, certain potential outstanding shares from service-based RSUs and warrants were excluded from the computation of diluted net income per share because the effect of including these items was anti-dilutive. Additionally, certain market- and performance-based RSUs were excluded from the computation of diluted net income per share because the underlying market and performance conditions for such RSUs had not been met as of these dates. The number of potentially outstanding shares excluded from the computation of diluted net income per share for the three months ended March 31, 2023 and 2022 were as follows (in thousands):


	For the Three Months Ended March 31,
	2023	2022

Service-based RSUs	7,867	2,234
Market- and performance-based RSUs	1,580	1,054

Warrants related to issuance of convertible senior notes	21,991	21,991
Total shares excluded from computation	31,438	25,279

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