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,” “seeks,” “projects,” “estimates,” “should,” “would,” “forecasts,” “if,” “continues,” “goal,” “likely,” “may,” “will,” variations of such words or similar expressions are intended to identify 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 as a result of various factors, including, but not limited to: potential slowing revenue growth, global economic and geopolitical conditions, our ability to acquire or develop new solutions, our ability to compete effectively, including our ability to continue to grow our compute solutions, security risks stemming from ineffective information technology systems or cybersecurity breaches, risks of maintaining global operations, regulatory developments, intellectual property claims or disputes, investment related risks and maintaining an effective system of internal controls. 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, 2023 for further discussion of our critical accounting policies and estimates.

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Overview

We provide solutions to power and protect life online through our massively distributed edge and cloud platform, which we refer to as Akamai Connected Cloud. Akamai Connected Cloud underpins our cloud computing, security and content delivery solutions, and is 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

We primarily derive revenue from the sale of services to customers pursuant to contracts having terms of one year or longer, which allows us to have a consistent and predictable base level of revenue. Services included in our contracts consist of security solutions, the delivery of content, applications and software over the internet, cloud computing solutions and professional services. In addition to a base level of revenue, we are also dependent on our ability to increase our product offerings and to cross-sell additional services to our new and existing customers, particularly for our security and compute solutions portfolios. Our revenue is also impacted by customer renewals, the rate of adoption and timing of customer offerings, variability of one-time events, usage of cloud computing services and the amount of traffic we serve on our network. Geopolitical, economic and other developments that impact our customers' businesses can also impact our ability to attract new customers or continue to cross-sell additional services to existing customers. 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, attributable to our acquisition of Linode Limited Liability Company ("Linode") and enhanced services on our compute platform, have made a significant contribution to revenue growth. Our security and compute solutions represented almost two-thirds of our total revenue during the first half of 2024. We plan to continue to invest in these areas with a focus on further advancing our product portfolios and sales capabilities.

• Traffic on our network continues to grow as compared to prior years, but we, and the content delivery industry more broadly, are seeing growth at a more moderate pace than we've experienced in the past. We and our customers have been managing through a time of global economic and geopolitical headwinds and uncertainty. In particular, a large social media customer has taken steps to lower costs and reduce reliance on U.S. providers by optimizing its platform, including using a “do-it-yourself” component, which has reduced traffic on our network and negatively impacted our delivery revenue. If our customers increase their reliance on “do-it-yourself” solutions, it may negatively impact traffic on our network and delivery revenue.

• The prices paid by some of our delivery and security 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 delivery and security customers. We continue to take steps upon contract renewals to optimize how we charge certain high-volume traffic delivery customers, including charging a premium for higher-cost destinations and continuing to maintain alignment between customer traffic volumes and unit pricing.

• Revenue from our international operations continues to grow, particularly from new customer acquisition and cross-selling of incremental solutions. Because we publicly report in U.S. dollars our reported revenue results are negatively impacted when the dollar strengthens and benefit when the dollar weakens.

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• 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 timing of large customer contract renewals; the frequency and timing of purchases of custom solutions or licensed software; the nature and timing of software and gaming releases by our customers; and whether there are large live sporting or other events or situations that impact the amount of media traffic on our network.

Expenses

Our level of profitability is 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:

• Co-location costs are a significant portion of our cost of revenue. As we continue to build out our new compute locations to provide us with the ability to scale our platform, we have entered into, and 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 lease term, 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, which enables us to use servers more efficiently. We expect to continue to scale our network in the future, which we believe will allow us to effectively manage our co-location costs to maintain or improve current levels of profitability.

• Network bandwidth costs are also a significant portion of our cost of revenue. Historically, we have been able to mitigate increases in these costs through investment 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.

• 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 particularly the build out of our compute infrastructure. We previously experienced increased costs from third-party cloud providers, but have recently begun to mitigate those costs by migrating to our own cloud solutions and optimizing third-party cloud spend. We will need to continue to effectively manage our network build-out and supporting service costs and continue to migrate third-party cloud services to Akamai Connected Cloud to maintain or 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 our largest expense. 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. In 2023, we redesigned one of our non-executive short-term incentive compensation programs by shifting certain employees from a cash-based to stock-based program. We also introduced a non-executive incentive program tied to our initiative to migrate certain third-party cloud services onto Akamai Connected Cloud. These programs were designed to better align employee incentives with the interests of our stockholders, which increased our stock-based compensation.

• Depreciation expense related to our network equipment also contributes to our overall expense levels. In recent years, we have invested in our network, particularly as part of building out our compute infrastructure, which increased our capital expenditures and resulting depreciation expense. We are also experiencing an increase in certain server component costs that support our compute build out. 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 and to manage our server costs.

• Growth in our international operations incrementally increases our exposure to foreign currency fluctuations. Because we publicly report in U.S. dollars, our expenses are positively impacted when the dollar strengthens and are negatively impacted when the dollar weakens.

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Recent Acquisition

In June 2024, we acquired Noname Gate Ltd. ("Noname Security") for $452.3 million, subject to post-closing adjustments. Noname Security is intended to expand our existing API Security offering by providing more flexible deployment options, extensive vendor integrations and enhanced attack analysis. We believe this acquisition will accelerate our ability to meet increasing customer and market demand. Noname Security has approximately 200 employees. The acquisition is expected add approximately $20.0 million of revenue for 2024 and will be dilutive to our earnings per share through 2024.

Global Economic Conditions

Global macroeconomic and geopolitical conditions continue to impact our customers, as well as our business and revenue growth rates. We, along with our customers, continue to manage through an uncertain period of fluctuating inflation, regulations that may negatively impact business, economic uncertainty, uncertain energy supplies, heightened geopolitical tensions, potential for supply chain disruptions, changes in international tax laws, fluctuations in foreign exchange rates and elevated interest rates. To the extent these macroeconomic conditions continue, we expect that it may 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 June 30,												For the Six Months Ended June 30,
			2024						2023						2024						2023
Revenue			100.0		%				100.0		%				100.0		%				100.0		%
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)			41.1						39.9						40.6						39.7
Research and development			11.6						10.6						11.7						10.3
Sales and marketing			14.2						14.6						13.9						14.3
General and administrative			15.7						16.2						15.6						16.1
Amortization of acquired intangible assets			2.2						1.7						2.1						1.7
Restructuring charge			0.1						1.0						0.1						2.9
Total costs and operating expenses			84.9						84.0						84.0						85.1
Income from operations			15.1						16.0						16.0						14.9
Interest and marketable securities income, net			2.7						0.5						2.8						0.5
Interest expense			(0.7)						(0.3)						(0.7)						(0.3)
Other expense, net			(0.1)						(0.1)						—						(0.2)
Income before provision for income taxes			17.0						16.0						18.1						15.0
Provision for income taxes			(3.6)						(2.3)						(2.4)						(2.8)
Net income			13.4		%				13.8		%				15.6		%				12.2		%

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Revenue

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

			For the Three Months Ended June 30,																								For the Six Months Ended June 30,
			2024						2023						% Change						% Change at Constant Currency						2024						2023						% Change						% Change at Constant Currency
Security			$	498,708					$	432,946					15.2		%				16.5		%				$	989,389					$	838,498					18.0		%				18.8		%
Delivery			329,399						379,698						(13.2)						(12.3)						681,157						774,082						(12.0)						(11.3)
Compute			151,473						123,077						23.1						23.8						296,004						238,839						23.9						24.5
Total revenue			$	979,580					$	935,721					4.7		%				5.7		%				$	1,966,550					$	1,851,419					6.2		%				7.0		%

During the three and six months ended June 30, 2024, the increase in our revenue, as compared to the same periods in 2023, was primarily the result of continued growth in sales of our security and compute solutions, partially offset by a decline in revenue from our delivery solutions due to impacts from economic and geopolitical uncertainty our customers are facing.

The increase in security solutions revenue for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to growth in sales of key products in our security solutions portfolio, including our segmentation and web application solutions.

The decrease in delivery solutions revenue for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to our customers' economic and geopolitical headwinds which resulted in moderation of traffic growth rates and the continued pricing impact of renewals. These headwinds are also causing a large social media customer to increase their focus on cost optimization and "do-it-yourself" solutions, which reduced traffic on our network and had a negative impact on our delivery revenue.

The increase in compute solutions revenue for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to growth in sales of compute products, including cloud optimization solutions, to new and existing customers.

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

			For the Three Months Ended June 30,																								For the Six Months Ended June 30,
			2024						2023						% Change						% Change at Constant Currency						2024						2023						% Change						% Change at Constant Currency
U.S.			$	508,696					$	480,062					6.0		%				6.0		%				$	1,021,043					$	953,895					7.0		%				7.0		%
As a percentage of revenue			51.9		%				51.3		%																51.9		%				51.5		%
International			470,884						455,659						3.3						5.5						945,507						897,524						5.3						6.9
As a percentage of revenue			48.1		%				48.7		%																48.1		%				48.5		%
Total revenue			$	979,580					$	935,721					4.7		%				5.7		%				$	1,966,550					$	1,851,419					6.2		%				7.0		%

For the three and six months ended June 30, 2024 and 2023, no single country outside the U.S. accounted for 10% or more of revenue during these periods. Changes in foreign currency exchange rates unfavorably impacted our revenue by $9.8 million and $13.6 million during the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023.

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Cost of Revenue

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

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
			2024						2023						% Change						2024						2023						% Change
Co-location fees			$	75,335					$	65,094					15.7		%				$	147,996					$	122,013					21.3		%
Bandwidth fees			61,259						55,910						9.6						122,431						111,626						9.7
Network build-out and supporting services			46,224						53,453						(13.5)						92,337						107,234						(13.9)
Payroll and related costs			83,149						79,823						4.2						166,637						161,020						3.5
Stock-based compensation, including amortization of prior capitalized amounts			25,486						18,878						35.0						47,385						35,355						34.0
Acquisition-related costs			—						572						(100.0)						—						2,033						(100.0)
Depreciation of network equipment			68,936						55,212						24.9						134,611						107,388						25.4
Amortization of internal-use software			42,499						44,333						(4.1)						86,234						87,922						(1.9)
Total cost of revenue			$	402,888					$	373,275					7.9		%				$	797,631					$	734,591					8.6		%
As a percentage of revenue			41.1		%				39.9		%										40.6		%				39.7		%

The increase in cost of revenue for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was primarily due to co-location fees and depreciation of network equipment as a result of investment in Akamai Connected Cloud, particularly as we build out our compute infrastructure to support future growth and scalability, as well as stock-based compensation as a result of the shift in one of our compensation programs from cash-based to stock-based for certain employees in 2024. These increases were partially offset by lower network build-out and supporting services due to a decrease in third-party cloud costs as we have been migrating third-party cloud services onto our own cloud solutions and optimizing third-party cloud spending. Additionally, the increase in stock-based compensation for the six months ended June 30, 2024, as compared to the same period in 2023, was a result of the timing of our performance-based equity award grants.

During the remainder of 2024, we expect our cost of revenue to increase as compared to 2023, in particular our co-location costs and depreciation of network equipment, due to investments in our network to support the continued growth of our compute solutions. We plan to continue to focus our efforts on managing our operating margins, including our bandwidth and network build-out costs. Specifically, we are continuing to migrate third-party cloud services onto Akamai Connected Cloud, which we expect will continue to reduce third-party cloud services costs.

Research and Development Expenses

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

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
			2024						2023						% Change						2024						2023						% Change
Payroll and related costs			$	137,933					$	120,542					14.4		%				$	283,114					$	245,175					15.5		%
Stock-based compensation			36,951						32,258						14.5						74,996						54,102						38.6
Capitalized salaries and related costs			(68,107)						(59,776)						13.9						(141,018)						(121,531)						16.0
Acquisition-related costs			—						248						(100.0)						—						217						(100.0)
Other expenses			6,575						5,769						14.0						13,192						12,941						1.9
Total research and development			$	113,352					$	99,041					14.4		%				$	230,284					$	190,904					20.6		%
As a percentage of revenue			11.6		%				10.6		%										11.7		%				10.3		%

The increase in research and development expenses during the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to higher payroll and related costs, including stock-based compensation, as a result of headcount growth from our strategic initiatives and prior year annual merit increases, partially offset by increases in capitalized salaries and related costs as we had additional resources focused on development activities related to our platform and solutions.

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Additionally, the increase in stock-based compensation for the six months ended June 30, 2024, as compared to the same period in 2023, was a result of the timing of our performance-based equity award grants.

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 months ended June 30, 2024 and 2023, we capitalized $25.5 million and $20.1 million, respectively, of stock-based compensation. During the six months ended June 30, 2024 and 2023, we capitalized $50.3 million and $33.3 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 ten years based on the software developed and its expected useful life.

During the remainder of 2024, we expect our research and development costs to increase as compared to 2023, in particular payroll and related costs, in support of our faster growing security and compute solutions. However, we plan to continue to focus our efforts on managing our operating margins.

Sales and Marketing Expenses

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

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
			2024						2023						% Change						2024						2023						% Change
Payroll and related costs			$	94,454					$	92,227					2.4		%				$	193,372					$	187,353					3.2		%
Stock-based compensation			18,976						17,723						7.1						37,787						31,268						20.8
Marketing programs and related costs			16,122						16,165						(0.3)						26,731						30,005						(10.9)
Acquisition-related costs			—						249						(100.0)						—						884						(100.0)
Other expenses			9,487						10,190						(6.9)						15,719						16,151						(2.7)
Total sales and marketing			$	139,039					$	136,554					1.8		%				$	273,609					$	265,661					3.0		%
As a percentage of revenue			14.2		%				14.6		%										13.9		%				14.3		%

The increase in sales and marketing expenses during the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to higher payroll and related costs as a result of prior year annual merit increases. Additionally, the increase during the six months ended June 30, 2024, as compared to the same period in 2023, was due to stock-based compensation as a result of the timing of our performance-based equity award grants, partially offset by a reduction in marketing programs as a result of the timing of events and advertising spend.

During the remainder of 2024, we expect our sales and marketing expenses to increase as compared to 2023 due to to our continued investment in go-to-market efforts and the sales and marketing personnel added from the Noname Security acquisition. However, we plan to continue to carefully manage costs in an effort to manage our operating margins.

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General and Administrative Expenses

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

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
			2024						2023						% Change						2024						2023						% Change
Payroll and related costs			$	55,195					$	51,817					6.5		%				$	113,513					$	109,507					3.7		%
Stock-based compensation			26,675						26,124						2.1						50,461						43,289						16.6
Depreciation and amortization			16,504						16,231						1.7						33,063						32,952						0.3
Facilities-related costs			20,946						22,883						(8.5)						42,496						46,872						(9.3)
Provision for doubtful accounts			760						1,991						(61.8)						2,081						1,908						9.1
Acquisition-related costs			2,179						1,271						71.4						2,351						5,974						(60.6)
Software and related service costs			14,501						13,526						7.2						28,601						27,397						4.4
Other expenses			17,094						17,968						(4.9)						33,718						30,051						12.2
Total general and administrative			$	153,854					$	151,811					1.3		%				$	306,284					$	297,950					2.8		%
As a percentage of revenue			15.7		%				16.2		%										15.6		%				16.1		%

The increase in general and administrative expenses during the three and six months ended June 30, 2024, as compared to the same periods in 2023, was due to higher payroll and related costs as a result of prior year merit increases, partially offset by decreased facilities-related costs as we exited certain facilities in connection with our FlexBase program. Additionally, the increase during the six months ended June 30, 2024, as compared to the same period in 2023, was due to stock-based compensation as a result of the timing of our performance-based equity award grants.

During the remainder of 2024, we expect our general and administrative expenses to increase as compared to 2023, to support the operations of the business. However, we plan to continue to control costs in an effort to manage our operating margins.

Amortization of Acquired Intangible Assets

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
(in thousands)			2024						2023						% Change						2024						2023						% Change
Amortization of acquired intangible assets			$	21,076					$	15,898					32.6		%				$	42,099					$	31,810					32.3		%
As a percentage of revenue			2.2		%				1.7		%										2.1		%				1.7		%

The increase in amortization of acquired intangible assets for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was the result of amortization of acquired intangible assets related to our recent acquisitions. Based on acquired intangible assets at June 30, 2024, we expect amortization of acquired intangible assets to be approximately $43.1 million for the remainder of 2024, and $82.7 million, $84.1 million, $79.3 million and $74.2 million for 2025, 2026, 2027 and 2028, respectively.

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Restructuring Charge

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
(in thousands)			2024						2023						% Change						2024						2023						% Change
Restructuring charge			$	1,385					$	9,357					(85.2)		%				$	1,929					$	54,080					(96.4)		%
As a percentage of revenue			0.1		%				1.0		%										0.1		%				2.9		%

The restructuring charge for the three and six months ended June 30, 2024 was driven by our FlexBase program as we exited certain facilities that were no longer needed, resulting in impairments of right-of-use-assets and leasehold improvements. We do not expect to incur material additional charges related to this program.

The restructuring charge for the three and six months ended June 30, 2023 was primarily related to impairments of right-of-use assets and leasehold improvements that are no longer needed as a result of our FlexBase program. Additionally, the restructuring charge for the six months ended June 30, 2023 included 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 the action included severance and related expenses for certain headcount reductions. We do not expect to incur material additional charges related to the action.

Non-Operating Income (Expense)

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
(in thousands)			2024						2023						% Change						2024						2023						% Change
Interest and marketable securities income, net			$	26,628					$	4,509					490.6		%				$	54,469					$	9,801					455.7		%
As a percentage of revenue			2.7		%				0.5		%										2.8		%				0.5		%
Interest expense			$	(6,829)					$	(3,157)					116.3		%				$	(13,647)					$	(5,838)					133.8		%
As a percentage of revenue			(0.7)		%				(0.3)		%										(0.7)		%				(0.3)		%
Other expense, net			$	(949)					$	(1,130)					(16.0)		%				$	(438)					$	(3,493)					(87.5)		%
As a percentage of revenue			(0.1)		%				(0.1)		%										—		%				(0.2)		%

Interest and marketable securities income, 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 and six months ended June 30, 2024, as compared to the same periods in 2023, was the result of increased cash, cash equivalents and marketable securities balances as a result of our August 2023 issuance of $1,265.0 million in par value of convertible senior notes due 2029 and higher interest rates, as well as increased gains associated with the non-qualified deferred compensation plan.

Interest expense is related to our debt transactions, which are described in Note 7 to the interim condensed consolidated financial statements. The increase to interest expense for the three and six months ended June 30, 2024, as compared to the same periods in 2023, was primarily due to the August 2023 issuance of $1,265.0 million in par value of convertible senior notes due 2029.

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. Other expense, net may fluctuate in the future based on changes in foreign currency exchange rates or other events.

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Provision for Income Taxes

			For the Three Months Ended June 30,																		For the Six Months Ended June 30,
(in thousands)			2024						2023						% Change						2024						2023						% Change
Provision for income taxes			$	(35,148)					$	(21,191)					65.9		%				$	(47,992)					$	(50,971)					(5.8)		%
As a percentage of revenue			(3.6)		%				(2.3)		%										(2.4)		%				(2.8)		%
Effective income tax rate			(21.1)		%				(14.1)		%										(13.5)		%				(18.4)		%

For the three months ended June 30, 2024, as compared to the same period in 2023, our provision for income taxes increased due to higher profitability, a decrease in foreign income taxed at lower rates and the impact of the enactment of a 15% global minimum corporate income tax that the Organisation for Economic Co-operation and Development ("OECD") and OECD member countries have begun implementing and which was effective for us beginning January 1, 2024. These items were partially offset by an increase in the benefit of U.S. federal, state and foreign research and development credits. For the six months ended June 30, 2024, as compared to the same period in 2023, our provision for income taxes decreased due to an increase in the excess tax benefit related to stock-based compensation, a decrease in the tax on global intangible low-taxed income and a decrease in the valuation allowance recorded against state and foreign credits. These items were partially offset by an increase in profitability and the 15% global minimum corporate income tax.

For the three months ended June 30, 2024, our effective income tax rate was higher than the federal statutory tax rate due to non-deductible stock-based compensation, tax on an intercompany transaction and the 15% global minimum corporate income tax. 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 six months ended June 30, 2024, our effective income tax rate was lower than the federal statutory tax rate due to the excess tax benefit related to stock-based compensation, foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by non-deductible stock-based compensation and the 15% global minimum corporate income tax.

For the three and six months ended June 30, 2023, our effective income tax rate was lower than the federal statutory tax rate due to foreign income taxed at lower rates and the benefit of U.S. federal, state and foreign research and development credits. These amounts were partially offset by tax on global intangible low-taxed income, non-deductible stock-based compensation and a shortfall related to 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.

Use of 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.

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

• Amortization of acquired intangible assets** – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.

• Stock-based compensation and amortization of capitalized stock-based compensation** – Although stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the stock price at the time of grant, varying valuation methodologies, subjective assumptions and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our core business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies.

• Acquisition-related costs** – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities, 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 capitalized interest expense** – We have convertible senior notes outstanding that mature in 2029, 2027 and 2025. 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.

• Gains and losses from equity method investment** – We record income or losses on our share of earnings and losses from our equity method investment, and any gains from returns of investments or impairments. 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.

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• 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 the impact of intercompany sales of intellectual property related to our acquisitions), 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 June 30,												For the Six Months Ended June 30,
			2024						2023						2024						2023
Income from operations			$	147,986					$	149,785					$	314,714					$	276,423
Amortization of acquired intangible assets			21,076						15,898						42,099						31,810
Stock-based compensation			98,466						87,444						191,726						149,327
Amortization of capitalized stock-based compensation and capitalized interest expense			10,434						8,217						20,557						16,130
Restructuring charge			1,385						9,357						1,929						54,080
Acquisition-related costs			2,179						2,340						2,351						9,108
Non-GAAP income from operations			$	281,526					$	273,041					$	573,376					$	536,878
GAAP operating margin			15.1		%				16.0		%				16.0		%				14.9		%
Non-GAAP operating margin			28.7		%				29.2		%				29.2		%				29.0		%

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

			For the Three Months Ended June 30,												For the Six Months Ended June 30,
			2024						2023						2024						2023
Net income			$	131,688					$	128,816					$	307,106					$	225,922
Amortization of acquired intangible assets			21,076						15,898						42,099						31,810
Stock-based compensation			98,466						87,444						191,726						149,327
Amortization of capitalized stock-based compensation and capitalized interest expense			10,434						8,217						20,557						16,130
Restructuring charge			1,385						9,357						1,929						54,080
Acquisition-related costs			2,179						2,340						2,351						9,108
Amortization of debt issuance costs			1,660						1,098						3,342						2,196
Loss (gain) on investments			66						(27)						66						(201)
Income tax effect of above non-GAAP adjustments and certain discrete tax items			(24,306)						(25,152)						(71,033)						(42,067)
Non-GAAP net income			$	242,648					$	227,991					$	498,143					$	446,305

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

			For the Three Months Ended June 30,												For the Six Months Ended June 30,
			2024						2023						2024						2023
GAAP net income per diluted share			$	0.86					$	0.84					$	1.97					$	1.46
Amortization of acquired intangible assets			0.14						0.10						0.27						0.21
Stock-based compensation			0.64						0.57						1.23						0.96
Amortization of capitalized stock-based compensation and capitalized interest expense			0.07						0.05						0.13						0.10
Restructuring charge			0.01						0.06						0.01						0.35
Acquisition-related costs			0.01						0.02						0.02						0.06
Amortization of debt issuance costs			0.01						0.01						0.02						0.01
Loss (gain) on investments			—						—						—						—
Income tax effect of above non-GAAP adjustments and certain discrete tax items			(0.16)						(0.16)						(0.46)						(0.27)
Adjustment for shares (1)			—						—						0.03						—
Non-GAAP net income per diluted share (2)			$	1.58					$	1.49					$	3.23					$	2.88
Shares used in GAAP per diluted share calculations			153,588						153,454						155,527						154,795
Impact of benefit from note hedge transactions (1)			(199)						—						(1,157)						—
Shares used in non-GAAP per diluted share calculations (1)			153,389						153,454						154,370						154,795

(1) Shares used in non-GAAP per diluted share calculations have been adjusted for the three and six months ended June 30, 2024, for the benefit of our note hedge transactions. During these periods, 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.

(2) 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 issuance of $1,265 million of convertible senior notes due 2029 and 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 2029, 2027 and 2025, unless our weighted average stock price is greater than $126.31, $116.18 and $95.10, respectively, the initial conversion prices, 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 from equity method investments; and other non-recurring or unusual items that may arise from time to time. Adjusted EBITDA margin represents Adjusted EBITDA stated as a percentage of revenue.

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

			For the Three Months Ended June 30,												For the Six Months Ended June 30,
			2024						2023						2024						2023
Net income			$	131,688					$	128,816					$	307,106					$	225,922
Interest and marketable securities income, net			(26,628)						(4,509)						(54,469)						(9,801)
Provision for income taxes			35,148						21,191						47,992						50,971
Depreciation and amortization			127,326						115,208						252,663						227,095
Amortization of capitalized stock-based compensation and capitalized interest expense			10,434						8,217						20,557						16,130
Amortization of acquired intangible assets			21,076						15,898						42,099						31,810
Stock-based compensation			98,466						87,444						191,726						149,327
Restructuring charge			1,385						9,357						1,929						54,080
Acquisition-related costs			2,179						2,340						2,351						9,108
Interest expense			6,829						3,157						13,647						5,838
Loss (gain) on investments			66						(27)						66						(201)
Other expense, net			883						1,157						372						3,694
Adjusted EBITDA			$	408,852					$	388,249					$	826,039					$	763,973
Net income margin			13.4		%				13.8		%				15.6		%				12.2		%
Adjusted EBITDA margin			41.7		%				41.5		%				42.0		%				41.3		%

Impact of Foreign Currency Exchange Rates

Revenue and earnings from our international operations have historically been an important contributor 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 international subsidiaries weaken, generally our consolidated results stated in U.S. dollars are negatively impacted.

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

Liquidity and Capital Resources

To date, we have financed our operations primarily through public and private sales of debt and equity securities and cash generated by operations. As of June 30, 2024, our cash, cash equivalents and marketable securities, which primarily consisted of corporate bonds, U.S. government agency obligations, time deposits and money market funds, totaled $1.9 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 revenue, accounts payable, various accrued expenses and operating lease obligations, 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

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enable us to continue to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business.

As of June 30, 2024, we had cash and cash equivalents of $319.6 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 Six Months Ended June 30,
(in thousands)			2024						2023
Net income			$	307,106					$	225,922
Non-cash reconciling items included in net income			517,303						464,967
Changes in operating assets and liabilities			(41,568)						(91,079)
Net cash provided by operating activities			$	782,841					$	599,810

The increase in cash provided by operating activities for the six months ended June 30, 2024, as compared to the same period in 2023, was due to increased profitability, timing of collections from customers and the shift in our performance-based compensation program from cash-based to stock-based.

Cash Used in Investing Activities

			For the Six Months Ended June 30,
(in thousands)			2024						2023
Cash paid for business acquisitions, net of cash acquired			$	(434,066)					$	(106,326)
Cash paid for asset acquisition			(4,796)						—
Purchases of property and equipment and capitalization of internal-use software development costs			(337,291)						(398,534)
Net marketable securities activity			333,353						157,384
Other, net			4,535						(20,766)
Net cash used in investing activities			$	(438,265)					$	(368,242)

The increase in cash used in investing activities during the six months ended June 30, 2024, as compared to the same period in 2023, was driven by cash paid for the acquisition of Noname Security, partially offset by an increase in cash proceeds from net marketable securities activity to fund the acquisition and a reduction of purchases of property and equipment related to our compute infrastructure build-out during the first half of 2023.

Net Cash Used in Financing Activities

			For the Six Months Ended June 30,
(in thousands)			2024						2023
Net revolving credit facility activity			$	—					$	20,000
Activity related to stock-based compensation			(112,981)						(8,275)
Repurchases of common stock			(253,258)						(485,958)
Other, net			(10,187)						(256)
Net cash used in financing activities			$	(376,426)					$	(474,489)

The decrease in cash used in financing activities during the six months ended June 30, 2024, as compared to the same period in 2023, was due to a decrease in repurchases of our common stock as part of our share repurchase program, partially

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offset by increased employee taxes paid related to vesting of stock awards driven by the shift in our performance-based compensation program from cash-based to stock-based and the increase in stock price.

Our board of directors authorized a share repurchase program that is effective from January 2022 through December 2024. In May 2024, our board of directors authorized a new $2.0 billion share repurchase program, effective May 2024 through June 2027. During the six months ended June 30, 2024, we repurchased 2.5 million shares of common stock at a weighted average price of $101.38 per share for an aggregate of $253.3 million. As of June 30, 2024, $2.3 billion remained available for future share repurchases under the authorization programs. Our goals for the share repurchase programs are to offset the dilution created by our employee equity compensation programs over time and provide the flexibility to return capital to stockholders as business and market conditions warrant, while still preserving our ability to pursue other strategic opportunities. 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

As of June 30, 2024, we had $3,565.0 million of convertible senior notes outstanding that are senior unsecured obligations and bear interest payable semi-annually in arrears. These notes mature between May 2025 and February 2029. The terms of the notes and hedge and warrant transactions are discussed more fully in Note 7 to the interim condensed consolidated financial statements.

Revolving Credit Facility

In November 2022, we entered into a $500.0 million, five-year revolving credit agreement ("2022 Credit Agreement"). The 2022 Credit Agreement allows us to borrow up to $500.0 million at various interest rates and contains customary representations and warranties, affirmative and negative covenants and events of default. As of June 30, 2024, we were in compliance with all covenants. There were no outstanding borrowings under the 2022 Credit Agreement as of June 30, 2024. The terms of the revolving credit agreements are discussed more fully in Note 7 to the interim condensed consolidated financial statements.

Operating Leases

We have entered into operating leases for real estate assets related to office space and co-location assets related to space or racks at co-location facilities and related equipment for our servers and other networking equipment. As of June 30, 2024, there have been no significant changes in our obligations under these operating lease arrangements from those reported on Form 10-K for the year ended December 31, 2023, other than normal period-to-period variations, particularly as we execute on our expansion plans for our compute solutions.

Purchase Commitments

We enter into long-term agreements with network and internet service providers for bandwidth, as well as execute purchase orders for the purchase of goods or services in the ordinary course of business, which may contain minimum commitments. These minimum commitments 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.

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, settlements of other liabilities and repayment of our $1,150.0 million convertible senior notes due in May 2025. We intend to repay these notes using a portion of the net proceeds from our $1,265.0 million convertible senior notes due in 2029.

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

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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, 2023 for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during the six months ended June 30, 2024 was determined to be immaterial.

As of June 30, 2024, we did not have any additional material off-balance sheet arrangements.

Significant Accounting Policies and Estimates

See Note 2 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2023. 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, 2023.