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 interim condensed consolidated financial statements included herein contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. 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,” “could,” “expects,” “anticipates,” “intends,” “plans,” “projects,” “estimates,” “forecasts,” “if,” “continues,” “goal,” “likely,” “may,” “will” 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 and in our other reports with the Securities and Exchange Commission 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 interim 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 ("GAAP"), for interim periods and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The preparation of these unaudited interim 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, 2022 for further discussion of our critical accounting policies and estimates.

Overview

We provide solutions to power and protect life online through our massively distributed worldwide network of servers, or our Akamai Connected Cloud. The Akamai Connected Cloud is comprised of an edge and cloud architecture for cloud computing, security and content delivery, and central to our financial success. The key factors that influence our financial success are our ability to build on recurring revenue commitments for our security and performance offerings, increase traffic on our network, continue to develop, scale and successfully bring to market our cloud computing platform and compute-to-edge solutions that meet the needs of professional users and enterprises, effectively manage the prices we charge for our solutions, develop new products and appropriately manage our capital spending and other expenses. The purpose of this discussion and analysis section is to provide material information relevant to an assessment of our financial condition and results of operations from management’s perspective, including 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 delivery customers, and to a lesser extent some security and computing customers, where usage of our solutions is more variable. As a result, our revenue is impacted by the amount of traffic we serve on our network and the usage of cloud computing services, 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, led by application security solutions and segmentation solutions from our acquisition of Guardicore Ltd., and increased sales of our compute solutions, primarily attributable to our acquisition of Linode Limited Liability Company ("Linode") in early 2022, have made a significant contribution to revenue growth. During the first quarter of 2023, security represented the largest share of revenue with security and compute revenue representing over half of our total revenue. We plan to continue to invest in these areas with a focus on further enhancing our product portfolios and extending our go-to-market capabilities, particularly in certain markets and through our channel partners.

• Traffic on our network continues to grow as compared to prior years, however, the rate of traffic growth is impacted by a number of external factors. Most recently, as we and our customers manage through a time of economic headwinds and uncertainty, we expect traffic growth rates to be impacted. Conversely, our rate of traffic growth increased significantly during the height of the COVID-19 pandemic in 2020 and 2021. These traffic fluctuations may continue to impact our delivery revenue. We expect traffic growth rates to improve for the remainder of 2023 as compared to last year.

• The prices paid by some of our customers have declined in recent years due to competition and contract renewals, which negatively impacts our revenue growth rates. We have been able to mitigate some of the negative impacts to our revenue growth rates by upselling incremental solutions to our existing customers. We are taking steps to try to maintain alignment between customer traffic volumes and unit pricing.

• Revenue from our international operations has generally been growing at a faster pace in recent years than from our U.S. operations, particularly from 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 that impact the amount of media traffic on our network; the timing of large customer contract renewals; 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, which includes energy to power our network. We have observed the following trends related to our profitability in recent years:

• 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. We will need to continue to effectively manage our bandwidth costs to maintain or improve current levels of profitability.

• Co-location costs are also a significant portion of our cost of revenue. As we build out our new compute locations to provide us with the ability to scale our platform, we expect to continue to enter into longer term leases that include certain financial commitments in order to achieve more favorable unit economics. The costs of the financial commitments are expensed ratably over the life of the lease, and, as a result, in some cases, we are incurring costs in advance of these compute locations being fully utilized. We continue to improve our internal-use software and remain disciplined in managing our hardware deployments, particularly for our delivery platform, which enables us to use servers more efficiently. With these efficiencies we have been able to minimize the impact of rising energy costs. We expect to continue to scale our network in the future, which will allow us to effectively manage our co-location costs to maintain or improve 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 compute infrastructure and maintain our global network, and costs of third-party cloud providers used for some of our operations. We have seen these costs increase in recent years as a result of our network expansion and increased use of third-party cloud services. As we continue to build out our compute infrastructure, we plan to migrate third-party cloud services to our own cloud solutions, which may reduce our costs over time. We will need to effectively manage our network build-out and supporting costs to improve current levels of profitability.

• Our employees are core to the operations of our business, and payroll and related costs, including stock-based compensation, is one of our largest expenses. It is important to the success of operations that we offer competitive compensation packages. However, we remain disciplined in allocating our resources to support our faster growing security and compute solutions, including maintaining operational efficiencies to mitigate the rising cost of talent. Beginning in 2023, we have redesigned one of our performance-based compensation programs to better align employee incentives with the interests of our stockholders by shifting certain employees from a cash-based program to a stock-based program.

• Depreciation expense related to our network equipment also contributes to our overall expense levels. In recent years we have invested in our network as traffic levels have increased, which increased our capital expenditures and resulting depreciation expense. We plan to continue to make investments in capital expenditures, however, the focus is to further invest in support of our faster growing compute solutions. Due to the software and hardware initiatives we have undertaken to manage our global network more efficiently, the useful lives of our servers have been extended, which will partially offset increased depreciation expense from the build out of our compute infrastructure.

• Growth in our international operations incrementally increases our exposure to foreign currency fluctuations. Because we report in U.S. dollars, if the dollar strengthens, our expenses will be positively impacted. Conversely, a weaker dollar would negatively impact our expenses.

Recent Acquisitions

In March 2023, we acquired StorageOS, Inc., also known as Ondat, and in May 2023, we acquired Neosec, Inc. These acquisitions are expected to be slightly dilutive to our earnings per share.

Global Developments

Global macroeconomic and geopolitical conditions continue to impact our business and revenue growth rates. We, along with our customers, continue to manage through an uncertain period of inflation, growing recessionary concerns, supply chain challenges, uncertain energy supplies, heightened geopolitical tensions, fluctuations in foreign exchange rates and rising interest rates. As a result of the uncertain macroeconomic environment, we have experienced elongated sales cycles with our customers and prospects, and expect to continue to experience elongated sales cycles in 2023. To the extent these macroeconomic conditions continue, we expect that it may continue to adversely affect our business, operations and financial results.

Results of Operations

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

			For the Three Months Ended March 31,
			2023						2022
Revenue			100.0		%				100.0		%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)			39.5						36.8
Research and development			10.0						11.1
Sales and marketing			14.1						13.6
General and administrative			16.0						17.0
Amortization of acquired intangible assets			1.7						1.5
Restructuring charge			4.9						0.9
Total costs and operating expenses			86.2						80.8
Income from operations			13.8						19.2
Interest and marketable securities income (loss), net			0.6						—
Interest expense			(0.3)						(0.3)
Other expense, net			(0.3)						(1.1)
Income before provision for income taxes			13.9						17.8
Provision for income taxes			(3.3)						(2.2)
Loss from equity method investment			—						(0.8)
Net income			10.6		%				14.8		%

Revenue

Revenue by solution category during the periods presented was as follows (in thousands):

			For the Three Months Ended March 31,
			2023						2022						% Change						% Change at Constant Currency
Security			$	405,552					$	381,567					6.3		%				8.9		%
Delivery			394,384						444,148						(11.2)						(9.1)
Compute			115,762						77,932						48.5						50.7
Total revenue			$	915,698					$	903,647					1.3		%				3.6		%

During the three-month period ended March 31, 2023, the increase in our revenue as compared to the same period in 2022 was primarily the result of continued growth in sales of our security solutions, in addition to the acquisition of Linode in March 2022 driving growth in compute solutions. These increases were partially offset due to a decline in revenue from our delivery solutions due to the pricing impact of renewals.

The increase in security solutions revenue for the three-month period ended March 31, 2023, as compared to the same period in 2022, was due to growth in a number of key products in our security solutions portfolio, including our web application firewall and segmentation solutions.

The decrease in delivery solutions revenue for the three-month period ended March 31, 2023, as compared to the same period in 2022, was due to a reduction in the traffic growth rate, particularly among our largest customers, which we believe was attributed to macroeconomic challenges our customers are experiencing and the pricing impact of renewals.

The increase in compute solutions revenue for the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily due to our acquisition of Linode in the March 2022.

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

			For the Three Months Ended March 31,
			2023						2022						% Change						% Change at Constant Currency
U.S.			$	473,833					$	481,007					(1.4)		%				(1.4)		%
International			441,865						422,640						4.5						9.4
Total revenue			$	915,698					$	903,647					1.3		%				3.6		%

For the three-month period ended March 31, 2023, approximately 48.3% of our revenue was derived from our operations located outside the U.S., compared to 46.8% for the three-month period ended March 31, 2022. We have generally seen revenue growth across all our international regions. 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 an unfavorable $20.8 million during the three-month period ended March 31, 2023, as compared to the same period in 2022.

Cost of Revenue

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

			For the Three Months Ended March 31,
			2023						2022						% Change
Bandwidth fees			$	55,716					$	51,082					9.1		%
Co-location fees			56,919						48,498						17.4
Network build-out and supporting services			53,781						42,919						25.3
Payroll and related costs			81,197						74,481						9.0
Acquisition-related costs			1,461						175						734.9
Stock-based compensation, including amortization of prior capitalized amounts			16,477						13,458						22.4
Depreciation of network equipment			52,176						61,386						(15.0)
Amortization of internal-use software			43,589						40,753						7.0
Total cost of revenue			$	361,316					$	332,752					8.6		%
As a percentage of revenue			39.5		%				36.8		%

The increase in cost of revenue for the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily due to:

• network build-out and supporting services, particularly related to increased supporting services for third-party cloud applications use for some of our operations;

• co-location fees as a result of investment in the Akamai Connected Cloud, particularly as we build-out our compute infrastructure; and

• payroll and related costs as a result of increased headcount from 2022 hiring, and from our acquisition of Linode, to support our network.

These increases were partially offset by lower depreciation expense of network equipment due to software and hardware initiatives we have implemented to manage our global network more efficiently. We increased the expected average useful life of our servers from five to six years effective January 1, 2023, which resulted in a reduction to depreciation expense of $16.7 million for the three months ended March 31, 2023.

During the remainder of 2023, we expect our cost of revenue to increase as compared to 2022, in particular co-location costs, due to investments in our network to support the continued growth of our compute solutions. Additionally, stock-based compensation will increase in 2023 due to the expected achievement of our performance-based compensation plans and the shift in one of our programs from cash-based to stock-based. We plan to continue to focus our efforts on managing our operating margins, including our bandwidth and network build-out costs. In particular, we are taking steps to shift workloads to our own cloud solutions, which we expect will reduce third-party cloud application expense.

Research and Development Expenses

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

			For the Three Months Ended March 31,
			2023						2022						% Change
Payroll and related costs			$	124,633					$	122,248					2.0		%
Stock-based compensation			21,844						20,232						8.0
Capitalized salaries and related costs			(61,755)						(48,670)						26.9
Acquisition-related costs			(31)						76						(140.8)
Other expenses			7,172						6,049						18.6
Total research and development			$	91,863					$	99,935					(8.1)		%
As a percentage of revenue			10.0		%				11.1		%

The decrease in research and development expenses during the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily due to increased capitalized salaries and related costs as we focused resources to work on development activities related to our platform.

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 March 31, 2023 and 2022, we capitalized $13.2 million and $7.2 million, respectively, of stock-based compensation. These capitalized internal-use software development costs are amortized to cost of revenue over their estimated useful lives, ranging from two to seven years based on the software developed and its expected useful life.

During the remainder of 2023, we expect our research and development costs to increase to support the continued growth of our compute and security solutions. Additionally, stock-based compensation will increase in 2023 due to the expected achievement of our performance-based compensation plans and the shift in one of our programs from cash-based to stock-based.

Sales and Marketing Expenses

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

			For the Three Months Ended March 31,
			2023						2022						% Change
Payroll and related costs			$	95,126					$	94,861					0.3		%
Stock-based compensation			13,545						12,326						9.9
Marketing programs and related costs			13,840						11,558						19.7
Acquisition-related costs			635						76						735.5
Other expenses			5,961						3,898						52.9
Total sales and marketing			$	129,107					$	122,719					5.2		%
As a percentage of revenue			14.1		%				13.6		%

The increase in sales and marketing expenses during the three-month period ended March 31, 2023, as compared to the same period in 2022, was due to increased marketing programs and related costs due to increased marketing and advertising spend in anticipation of upcoming events and increased travel expenses such as airfare, lodging and other costs related to in-person customer events and meetings.

During the remainder of 2023, we expect our sales and marketing expenses to increase as compared to 2022, due to our continued investment in go-to-market efforts. However, we plan to continue to carefully manage costs in an effort to improve our operating margins.

General and Administrative Expenses

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

			For the Three Months Ended March 31,
			2023						2022						% Change
Payroll and related costs			$	57,690					$	53,317					8.2		%
Stock-based compensation			17,165						17,436						(1.6)
Depreciation and amortization			16,721						19,678						(15.0)
Facilities-related costs			23,989						26,579						(9.7)
(Benefit) provision for doubtful accounts			(83)						1,288						(106.4)
Acquisition-related costs			4,703						10,616						(55.7)
Software and related service costs			13,871						11,024						25.8
Other expenses			12,083						13,324						(9.3)
Total general and administrative			$	146,139					$	153,262					(4.6)		%
As a percentage of revenue			16.0		%				17.0		%

The decrease in general and administrative expenses for the three-month period ended March 31, 2023, as compared to the same period in 2022, was due to acquisition-related costs related to our acquisition of Linode in the first quarter of 2022 and facilities-related costs as a result of growth in sublease income from the execution of our FlexBase strategy.

These decreases were partially offset by increased payroll and related costs as a result of headcount growth and increased software-related costs to support our operations.

General and administrative expenses for the three-month periods ended March 31, 2023 and 2022 are broken out by category as follows (in thousands):

			For the Three Months Ended March 31,
			2023						2022						% Change
Global functions			$	56,950					$	56,131					1.5		%
As a percentage of revenue			6.2		%				6.2		%
Infrastructure			84,569						85,199						(0.7)
As a percentage of revenue			9.2		%				9.4		%
Other			4,620						11,932						(61.3)
Total general and administrative			$	146,139					$	153,262					(4.6)		%
As a percentage of revenue			16.0		%				17.0		%

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 related service 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, provision for doubtful accounts and legal settlements.

During the remainder of 2023, we expect our general and administrative expenses to increase as compared to 2022 as a result of payroll and related costs due to headcount growth and annual merit increases. Additionally, we expect stock-based compensation to increase due to the expected achievement of our performance-based compensation plans and the shift in one of our programs from cash-based to stock-based. We expect these increases to be partially offset by a decrease in facility-related costs from reduced real estate expenses from our FlexBase program.

Amortization of Acquired Intangible Assets

			For the Three Months Ended March 31,
(in thousands)			2023						2022						% Change
Amortization of acquired intangible assets			$	15,912					$	13,644					16.6		%
As a percentage of revenue			1.7		%				1.5		%

The increase in amortization of acquired intangible assets for the three-month period ended March 31, 2023, as compared to the same period in 2022, was the result of amortization of acquired intangible assets related to our recent acquisitions. Based on acquired intangible assets at March 31, 2023, we expect amortization of acquired intangible assets to be approximately $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. We expect amortization expense to increase in future periods as a result of our acquisition of Neosec, which closed in May 2023.

Restructuring Charge

			For the Three Months Ended March 31,
(in thousands)			2023						2022						% Change
Restructuring charge			$	44,723					$	8,016					457.9		%
As a percentage of revenue			4.9		%				0.9		%

The restructuring charge for the three-month period ended March 31, 2023 was primarily the result of management's commitment to an action to restructure certain parts of the company to enable the prioritization of investments in the fastest

growing areas of the business. The restructuring charge for this action includes severance and related expenses for certain headcount reductions. We do not expect to incur material additional charges related to this action.

In addition, in connection with our FlexBase program, we identified certain facilities that were no longer needed, resulting in impairments of right-of-use-assets and leasehold improvements. We are continuing to evaluate our facility footprint, including our plans and ability to sublease space, but we do not currently believe such charges will materially impact our financial condition or results of operation.

The restructuring charge for the three-month period ended March 31, 2022 was related to software impairment charges related to the suspension of Global Open Network, Inc., or GO-NET. We do not expect to incur any additional restructuring charges related to this action.

Non-Operating Income (Expense)

			For the Three Months Ended March 31,
(in thousands)			2023						2022						% Change
Interest and marketable securities income (loss), net			$	5,292					$	(211)					(2,608.1)		%
As a percentage of revenue			0.6		%				—		%
Interest expense			$	(2,681)					$	(2,695)					(0.5)		%
As a percentage of revenue			(0.3)		%				(0.3)		%
Other expense, net			$	(2,363)					$	(9,565)					(75.3)		%
As a percentage of revenue			(0.3)		%				(1.1)		%

Interest and marketable securities income (loss), net consists of interest earned on invested cash and marketable securities balances and income and losses on mutual funds that are associated with our employee non-qualified deferred compensation plan. The increase for the three-month period ended March 31, 2023, as compared to the same period in 2022, was due to increased gains associated with the non-qualified deferred compensation plan and higher interest earned on invested cash balances and marketable securities as a result of increased interest rates.

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

Other 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 as well as gains and losses on equity investments. The decrease in other expense, net for the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily due to an $8.9 million impairment from an equity investment during the three-month period ended March 31, 2022, partially offset by an unfavorable impact of changes in foreign currency exchange rates.

Provision for Income Taxes

			For the Three Months Ended March 31,
(in thousands)			2023						2022						% Change
Provision for income taxes			$	(29,780)					$	(19,837)					50.1		%
As a percentage of revenue			(3.3)		%				(2.2)		%
Effective income tax rate			(23.5)		%				(12.3)		%

For the three-month period ended March 31, 2023, as compared to the same period in 2022, our provision for income taxes increased 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 NOLs and a decrease in the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by a decrease in profitability, a decrease in intercompany sales of intellectual property and an increase in foreign income taxed at lower rates.

For the three-month period ended March 31, 2023, our 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 to 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-month period ended March 31, 2022, 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 and the benefit of U.S. federal, state and foreign research and development 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.

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 March 31,
(in thousands)			2023						2022						% Change
Loss from equity method investment			$	—					$	(7,635)					(100.0)		%
As a percentage of revenue			—		%				(0.8)		%

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 ("MUFG") in a joint venture, GO-NET. GO-NET intended to operate a blockchain-based online payment network. In February 2022, MUFG, the majority owner of GO-NET, announced it was preparing to suspend the operations of GO-NET and to ultimately liquidate it. The loss from equity method investment for the three-month period ended March 31, 2022 was the result of our impairment of our investment in GO-NET in the first quarter of 2022 since the operations will no longer generate future cash flows. We do not expect additional material impacts related to this investment.

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 ("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 diluted 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.

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, as well as certain additional compensation costs payable to employees acquired from the Linode acquisition if employed for a certain period of time. The additional compensation cost was initiated by and determined by the seller and is in addition to normal levels of compensation, including retention programs, offered by Akamai. Acquisition-related costs are impacted by the timing and size of the acquisitions, and we exclude acquisition-related costs from our non-GAAP financial measures to provide a useful comparison of operating results to prior periods and to peer companies because such amounts vary significantly based on the magnitude of our acquisition transactions and do not reflect our core operations.

• Restructuring charge** – We have incurred restructuring charges from programs that have significantly changed either the scope of the business undertaken by us or the manner in which that business is conducted. These charges include severance and related expenses for workforce reductions, impairments of long-lived assets that will no longer be used in operations (including right-of-use assets, other facility-related property and equipment and internal-use software) and termination fees for any contracts cancelled as part of these programs. 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 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 issuance costs of the convertible senior notes are amortized to interest expense and are excluded from our non-GAAP results because management believes the non-cash amortization 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.

• 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 have 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.

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 March 31,
			2023						2022 (1)
Income from operations			$	126,638					$	173,319
Amortization of acquired intangible assets			15,912						13,644
Stock-based compensation			61,883						56,227
Amortization of capitalized stock-based compensation and capitalized interest expense			7,913						7,947
Restructuring charge			44,723						8,016
Acquisition-related costs			6,768						10,943
Non-GAAP income from operations			$	263,837					$	270,096
GAAP operating margin			13.8		%				19.2		%
Non-GAAP operating margin			28.8		%				29.9		%

(1) Net income and income tax effect of above non-GAAP adjustments and certain discrete tax items for the three months ended March 31, 2022 have been revised to reflect the correction of an error of provision for income taxes related to an intercompany sale of intellectual property that occurred in 2022.

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

			For the Three Months Ended March 31,
			2023						2022 (1)
Net income			$	97,106					$	133,376
Amortization of acquired intangible assets			15,912						13,644
Stock-based compensation			61,883						56,227
Amortization of capitalized stock-based compensation and capitalized interest expense			7,913						7,947
Restructuring charge			44,723						8,016
Acquisition-related costs			6,768						10,943
Amortization of debt issuance costs			1,098						1,119
(Gain) loss on investments			(174)						8,901
Loss from equity method investment			—						7,635
Income tax effect of above non-GAAP adjustments and certain discrete tax items			(16,915)						(23,013)
Non-GAAP net income			$	218,314					$	224,795

(1) Net income and income tax effect of above non-GAAP adjustments and certain discrete tax items for the three months ended March 31, 2022 have been revised to reflect the correction of an error of provision for income taxes related to an intercompany sale of intellectual property that occurred in 2022.

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 March 31,
			2023						2022 (1)
GAAP net income per diluted share			$	0.62					$	0.82
Amortization of acquired intangible assets			0.10						0.08
Stock-based compensation			0.40						0.34
Amortization of capitalized stock-based compensation and capitalized interest expense			0.05						0.05
Restructuring charge			0.29						0.05
Acquisition-related costs			0.04						0.07
Amortization of debt issuance costs			0.01						0.01
(Gain) loss on investments			—						0.05
Loss from equity method investment			—						0.05
Income tax effect of above non-GAAP adjustments and certain discrete tax items			(0.11)						(0.14)
Adjustment for shares (2)			—						0.02
Non-GAAP net income per diluted share (3)			$	1.40					$	1.39
Shares used in GAAP per diluted share calculations			156,135						163,637
Impact of benefit from note hedge transactions (2)			—						(1,822)
Shares used in non-GAAP per diluted share calculations (2)			156,135						161,815

(1) Net income and income tax effect of above non-GAAP adjustments and certain discrete tax items for the three months ended March 31, 2022 have been revised to reflect the correction of an error of provision for income taxes related to an intercompany sale of intellectual property that occurred in 2022.

(2) Shares used in non-GAAP per diluted share calculations have been adjusted for the three-months ended March 31, 2022 for the benefit of our note hedge transactions. During this period, our 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.

(3) Amounts may not foot due to rounding.

Non-GAAP net income per diluted share is calculated as non-GAAP net income divided by weighted average diluted common shares outstanding. 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 issuances of $1,150 million of convertible senior notes due 2027 and 2025, respectively. 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 operating performance. With respect to the convertible senior notes due in each of 2027 and 2025, unless our weighted average stock price is greater than $116.18 and $95.10, respectively, the initial conversion price, there will be no difference between 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 and marketable securities income and losses; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; 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.

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 March 31,
			2023						2022
Net income			$	97,106					$	133,376
Interest and marketable securities (income) loss, net			(5,292)						211
Provision for income taxes			29,780						19,837
Depreciation and amortization			111,887						121,188
Amortization of capitalized stock-based compensation and capitalized interest expense			7,913						7,947
Amortization of acquired intangible assets			15,912						13,644
Stock-based compensation			61,883						56,227
Restructuring charge			44,723						8,016
Acquisition-related costs			6,768						10,943
Interest expense			2,681						2,695
(Gain) loss on investments			(174)						8,901
Loss from equity method investment			—						7,635
Other expense, net			2,537						664
Adjusted EBITDA			$	375,724					$	391,284
Net income margin			10.6		%				14.8		%
Adjusted EBITDA margin			41.0		%				43.3		%

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, 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 March 31, 2023, our cash, cash equivalents and marketable securities, which primarily consisted of commercial paper, corporate bonds and U.S. government agency obligations, totaled $1.1 billion. 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, cash paid for acquisitions and similar events. We believe 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. We expect to continue to evaluate strategic investments to strengthen our business.

As of March 31, 2023, we had cash and cash equivalents of $220.2 million held in accounts outside the U.S. The U.S. Tax Cuts and Jobs Act 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 Three Months Ended March 31,
(in thousands)			2023						2022
Net income			$	97,106					$	133,376
Non-cash reconciling items included in net income			224,791						201,283
Changes in operating assets and liabilities			(88,398)						(112,208)
Net cash provided by operating activities			$	233,499					$	222,451

The increase in cash provided by operating activities for the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily due to lower annual bonus payouts in the first quarter of 2023 due to lower attainment and an increase in collections from customers. These increases were partially offset by lower profitability and higher income tax payments.

Cash Used in Investing Activities

			For the Three Months Ended March 31,
(in thousands)			2023						2022
Cash paid for acquisitions, net of cash acquired			$	(20,070)					$	(872,099)
Purchases of property and equipment and capitalization of internal-use software development costs			(222,245)						(131,359)
Net marketable securities activity			142,695						691,802
Other, net			(20,268)						(5,242)
Net cash used in investing activities			$	(119,888)					$	(316,898)

The decrease in cash used in investing activities during the three-month period ended March 31, 2023, as compared to the same period in 2022, was driven by cash paid for the acquisition of Linode in March 2022, which was partially offset by net marketable securities activity as we sold marketable securities during the three-month period ended March 31, 2022 to fund the acquisition. These decreases were partially offset by an increase in purchases of property and equipment related to our compute infrastructure build-out.

Cash Used in Financing Activities

			For the Three Months Ended March 31,
(in thousands)			2023						2022
Net proceeds from borrowings and repayments under revolving credit facility			$	—					$	75,000
Activity related to stock-based compensation			(8,637)						(32,878)
Repurchases of common stock			(348,600)						(102,853)
Other, net			(52)						(104)
Net cash used in financing activities			$	(357,289)					$	(60,835)

The increase in cash used in financing activities during the three-month period ended March 31, 2023, as compared to the same period in 2022, was primarily the result of increases in share repurchases. Effective January 2022, our board of directors

authorized a new $1.8 billion share repurchase program through December 2024. As of March 31, 2023, $0.8 billion remained available for future share repurchases under this authorization. Our goal for the share repurchase program is to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to stockholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities.

During the three-month period ended March 31, 2023, we repurchased 4.6 million shares of common stock at a weighted average price of $76.52 per share for an aggregate of $348.6 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 interim condensed consolidated financial statements.

Revolving Credit Facility

In May 2018, we entered into a $500.0 million, five-year revolving credit agreement ("2018 Credit Agreement"). Borrowings under the 2018 Credit Agreement bore 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 2018 Credit Agreement. Regardless of what amounts, if any, were outstanding under the 2018 Credit Agreement, we were 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 2018 Credit Agreement.

In November 2022, we entered into a $500.0 million, five-year revolving credit agreement ("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 revolving loans. Under specified circumstances, the facility can be increased to up to $1.0 billion in aggregate principal amount.

Borrowings under the 2022 Credit Agreement bear interest, at our 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 our consolidated leverage ratio specified in the 2022 Credit Agreement. Regardless of what amounts, if any, are outstanding under the 2022 Credit Agreement, we are 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 our 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. The 2022 Credit Facility expires, and any amounts outstanding thereunder will become due and payable, in November 2027, subject to up to two one-year extensions at our request and with the consent of the lenders party thereto. As of March 31, 2023, we had no outstanding borrowings under the 2022 Credit Agreement. In April 2023, we borrowed $90.0 million under the 2022 Credit Agreement.

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, potential strategic acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other 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, and on our plans for network expansion, including our expansion plans related to our compute business. As of March 31, 2023, 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, 2022, other than normal period-to-period variations and increases to our co-location commitments related to our expansions plans for our compute business.

Off-Balance Sheet Arrangements

We have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, stockholders 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, 2022 for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during the three months ended March 31, 2023 was determined to be immaterial.

As of March 31, 2023, we did not have any additional material off-balance sheet arrangements.

Significant Accounting Policies and Estimates

See Note 1 to the interim condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for information regarding significant accounting policy updates, including our expected average useful life increase of our servers. See also Note 2 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2022. Other than the expected average useful life change of our servers, 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, 2022.