akam-20200728
0001086222false00010862222020-07-282020-07-28

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report: July 28, 2020
(Date of earliest event reported)

AKAMAI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware0-2727504-3432319
(State or other jurisdiction of incorporation)(Commission File Number)(IRS Employer Identification No.)

145 Broadway
Cambridge, Massachusetts 02142
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (617) 444-3000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par valueAKAMNasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

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



Item 2.02 Results of Operations and Financial Condition

On July 28, 2020, Akamai Technologies, Inc. announced its financial results for the fiscal quarter ended June 30, 2020. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

The information provided under this Form 8-K (including Exhibit 99.1) shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

The following exhibit relating to Item 2.02 shall be deemed to be furnished, and not filed:

Exhibit No.Description
99.1
104Cover page interactive data file (the cover page XBRL tags are embedded within the inline XBRL document)





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:July 28, 2020AKAMAI TECHNOLOGIES, INC.
/s/ Edward McGowan
Edward McGowan
Chief Financial Officer



Document
Exhibit 99.1
FOR IMMEDIATE RELEASE

Contacts:
Gina SoriceTom Barth
Media RelationsInvestor Relations
Akamai TechnologiesAkamai Technologies
646-320-4107617-274-7130
gsorice@akamai.comtbarth@akamai.com


AKAMAI REPORTS SECOND QUARTER 2020 FINANCIAL RESULTS

Second quarter revenue of $795 million, up 13% year-over-year and up 14% when adjusted for foreign exchange*

Cloud Security Solutions revenue grew 27% year-over-year and 28% when adjusted for foreign exchange*

GAAP EPS of $0.98, up 42% year-over-year, and non-GAAP EPS* of $1.38, up 29% year-over-year


CAMBRIDGE, Mass. July 28, 2020 – Akamai (NASDAQ: AKAM), the intelligent edge platform for securing and delivering digital experiences, today reported financial results for the second quarter ended June 30, 2020.

“Akamai’s outstanding top and bottom line results in the second quarter were powered by the strong growth of our Security and Media solutions and our continued operational excellence,” said Dr. Tom Leighton, Akamai's chief executive officer. “Amidst the ongoing humanitarian crisis associated with COVID-19, we are proud to be supporting our customers – and billions of internet users – with exceptional services when they need them most.”

Akamai delivered the following financial results for the second quarter ended June 30, 2020:

Revenue: Revenue was $795 million, a 13% increase over second quarter 2019 revenue of $705 million and a 14% increase when adjusted for foreign exchange.*

Revenue by Division(1):

Web Division revenue was $404 million, up 7% year-over-year and up 8% when adjusted for foreign exchange*
Media and Carrier Division revenue was $390 million, up 19% year-over-year and up 20% when adjusted for foreign exchange*

Revenue from Cloud Security Solutions(2):

Cloud Security Solutions revenue was $259 million, up 27% year-over-year and up 28% when adjusted for foreign exchange*

Revenue from Internet Platform Customers(3):

Revenue from Internet Platform Customers was $51 million, up 10% year-over-year and when adjusted for foreign exchange*
Revenue excluding Internet Platform Customers was $744 million, up 13% year-over-year and up 14% when adjusted for foreign exchange*

Revenue by Geography:

U.S. revenue was $444 million, up 6% year-over-year
International revenue was $351 million, up 22% year-over-year and up 24% when adjusted for foreign exchange*

1


Income from operations: GAAP income from operations was $190 million, a 40% increase from second quarter 2019. GAAP operating margin for the second quarter was 24%, up 5 percentage points from the same period last year.

Non-GAAP income from operations* was $258 million, a 26% increase from second quarter 2019. Non-GAAP operating margin* for the second quarter was 32%, up 3 percentage points from the same period last year.

Net income: GAAP net income was $162 million, a 42% increase from second quarter 2019. Non-GAAP net income* was $227 million, a 29% increase from second quarter 2019.

EPS: GAAP EPS was $0.98 per diluted share, a 42% increase from second quarter 2019 and a 44% increase when adjusted for foreign exchange.* Non-GAAP EPS was $1.38 per diluted share, a 29% increase from second quarter 2019 and a 30% increase when adjusted for foreign exchange.*

Adjusted EBITDA*: Adjusted EBITDA was $355 million, a 21% increase from second quarter 2019. Adjusted EBITDA margin* for the second quarter was 45%, up 3 percentage points from the same period last year.

Supplemental cash information: Cash from operations for the second quarter of 2020 was $299 million, or 38% of revenue. Cash, cash equivalents and marketable securities was $2.4 billion as of June 30, 2020.

Share repurchases: Akamai spent $27 million in the second quarter of 2020 to repurchase 0.3 million shares of its common stock at an average price of $100.64 per share. The Company had 163 million shares of common stock outstanding as of June 30, 2020.


* See Use of Non-GAAP Financial Measures below for definitions

(1)    Revenue by Division – A customer-focused reporting view that reflects revenue from customers that are managed by the division

(2) Revenue from Cloud Security Solutions – A product-focused reporting view that reflects revenue from Cloud Security Solutions separately from all other solution categories

(3) Revenue from Internet Platform Customers – Revenue from large Internet platform companies: Amazon, Apple, Facebook, Google, Microsoft and Netflix



2


Quarterly Conference Call
Akamai will host a conference call today at 4:30 p.m. ET that can be accessed through 1-844-578-9671 (or 1-508-637-5655 for international calls) and using passcode 2481329. A live webcast of the call may be accessed at www.akamai.com in the Investor section. In addition, a replay of the call will be available for two weeks following the conference by calling 1-855-859-2056 (or 1-404-537-3406 for international calls) and using passcode 2481329. The archived webcast of this event may be accessed through the Akamai website.

About Akamai
Akamai secures and delivers digital experiences for the world’s largest companies. Akamai’s intelligent edge platform surrounds everything, from the enterprise to the cloud, so customers and their businesses can be fast, smart and secure. Top brands globally rely on Akamai to help them realize competitive advantage through agile solutions that extend the power of their multi-cloud architectures. Akamai keeps decisions, apps and experiences closer to users than anyone – and attacks and threats far away. Akamai’s portfolio of edge security, web and mobile performance, enterprise access and video delivery solutions is supported by unmatched customer service, analytics and 24/7/365 monitoring. To learn why the world’s top brands trust Akamai, visit www.akamai.com, blogs.akamai.com, or @Akamai on Twitter.
3


AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)June 30,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$572,288  $393,745  
Marketable securities800,321  1,143,249  
Accounts receivable, net644,659  551,943  
Prepaid expenses and other current assets175,731  142,676  
Total current assets2,192,999  2,231,613  
Marketable securities1,018,835  835,384  
Property and equipment, net1,281,392  1,152,153  
Operating lease right-of-use assets736,465  758,450  
Acquired intangible assets, net194,951  179,431  
Goodwill1,595,304  1,600,265  
Deferred income tax assets61,310  76,528  
Other assets143,542  173,062  
Total assets$7,224,798  $7,006,886  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$153,958  $138,946  
Accrued expenses263,646  334,861  
Deferred revenue93,648  71,223  
Operating lease liabilities138,478  139,463  
Other current liabilities
7,692  8,843  
Total current liabilities657,422  693,336  
Deferred revenue 4,536  4,368  
Deferred income tax liabilities29,556  29,187  
Convertible senior notes1,872,937  1,839,791  
Operating lease liabilities673,678  692,181  
Other liabilities82,374  90,065  
Total liabilities3,320,503  3,348,928  
Total stockholders' equity3,904,295  3,657,958  
Total liabilities and stockholders' equity
$7,224,798  $7,006,886  


4


AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months EndedSix Months Ended
(in thousands, except per share data)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Revenue$794,715  $764,302  $705,074  $1,559,017  $1,411,582  
Costs and operating expenses:
Cost of revenue(1) (2)
276,804  268,582  242,193  545,386  482,936  
Research and development(1)
64,090  71,224  61,439  135,314  127,580  
Sales and marketing(1)
123,469  123,786  135,106  247,255  261,382  
General and administrative(1) (2)
129,709  127,361  120,116  257,070  242,951  
Amortization of acquired intangible assets10,381  10,434  9,648  20,815  19,247  
Restructuring (benefit) charge(167) 10,585  790  10,418  7,179  
Total costs and operating expenses604,286  611,972  569,292  1,216,258  1,141,275  
Income from operations190,429  152,330  135,782  342,759  270,307  
Interest income9,502  7,043  6,410  16,545  15,045  
Interest expense(17,249) (17,205) (8,446) (34,454) (20,562) 
Other expense, net(1,603) (4,108) (578) (5,711) (67) 
Income before provision for income taxes181,079  138,060  133,168  319,139  264,723  
Provision for income taxes(18,671) (14,292) (19,253) (32,963) (43,678) 
Loss from equity method investment(493) (622) —  (1,115) —  
Net income$161,915  $123,146  $113,915  $285,061  $221,045  
Net income per share:
Basic$1.00  $0.76  $0.70  $1.76  $1.35  
Diluted$0.98  $0.75  $0.69  $1.74  $1.34  
Shares used in per share calculations:
Basic162,413  161,992  163,407  162,203  163,322  
Diluted164,768  163,684  165,019  164,226  164,903  

(1) Includes stock-based compensation (see supplemental table for figures)
(2)  Includes depreciation and amortization (see supplemental table for figures)

5


AKAMAI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Cash flows from operating activities:
Net income$161,915  $123,146  $113,915  $285,061  $221,045  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization115,580  116,208  106,065  231,788  214,270  
Stock-based compensation49,191  47,493  48,142  96,684  93,447  
Provision (benefit) for deferred income taxes14,282  (2,888) 15,626  11,394  24,608  
Amortization of debt discount and issuance costs15,677  15,633  8,010  31,310  19,628  
Other non-cash reconciling items, net2,752  12,052  1,301  14,804  1,180  
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable(31,633) (73,913) 5,639  (105,546) (38,127) 
Prepaid expenses and other current assets455  (10,434) (10,258) (9,979) (23,287) 
Accounts payable and accrued expenses(19,944) (27,458) 32,577  (47,402) (52,789) 
Deferred revenue(5,647) 26,989  (1,313) 21,342  27,973  
Other current liabilities(2,043) 928  (9,266) (1,115) (18,739) 
Other non-current assets and liabilities(1,894) (4,513) 7,491  (6,407) 9,570  
Net cash provided by operating activities298,691  223,243  317,929  521,934  478,779  
Cash flows from investing activities:
Cash received (paid) for business acquisitions, net of cash acquired—  106  55  106  (121,409) 
Cash paid for asset acquisition—  (36,376) —  (36,376) —  
Cash received (paid) for equity method investment—  —  4,205  —  (36,008) 
Purchases of property and equipment and capitalization of internal-use software development costs(120,239) (215,429) (133,349) (335,668) (275,778) 
Purchases of short- and long-term marketable securities(452,737) (389,779) (381,133) (842,516) (391,758) 
Proceeds from sales and maturities of short- and long-term marketable securities483,184  530,816  101,493  1,014,000  649,530  
Other non-current assets and liabilities155  (76) (698) 79  2,237  
Net cash used in investing activities(89,637) (110,738) (409,427) (200,375) (173,186) 








6



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

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Cash flows from financing activities:
Repayment of convertible senior notes—  —  —  —  (690,000) 
Proceeds from the issuance of common stock under stock plans10,259  19,546  8,998  29,805  28,772  
Employee taxes paid related to net share settlement of stock-based awards(13,095) (50,835) (11,317) (63,930) (49,956) 
Repurchases of common stock(27,330) (80,550) (81,375) (107,880) (116,247) 
Other non-current assets and liabilities—  —  —  —  (1,558) 
Net cash used in financing activities(30,166) (111,839) (83,694) (142,005) (828,989) 
Effects of exchange rate changes on cash, cash equivalents and restricted cash8,155  (8,983) 1,077  (828) 2,678  
Net increase (decrease) in cash, cash equivalents and restricted cash187,043  (8,317) (174,115) 178,726  (520,718) 
Cash, cash equivalents and restricted cash at beginning of period385,829  394,146  690,384  394,146  1,036,987  
Cash, cash equivalents and restricted cash at end of period$572,872  $385,829  $516,269  $572,872  $516,269  

7


AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA – REVENUE BY DIVISION

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31, 2020
June 30,
2019 (1)
June 30,
2020
June 30,
2019 (1)
Web Division$404,342  $405,995  $377,558  $810,337  $751,760  
Media and Carrier Division390,373  358,307  327,516  748,680  659,822  
Total revenue$794,715  $764,302  $705,074  $1,559,017  $1,411,582  
Revenue growth rates year-over-year:
Web Division%%%%%
Media and Carrier Division19    13   
Total revenue13 %%%10 %%
Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):
Web Division%10 %10 %%%
Media and Carrier Division20    14   
Total revenue14 %%%11 %%

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA – REVENUE FROM CLOUD SECURITY SOLUTIONS

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Cloud Security Solutions$259,316  $240,300  $204,811  $499,616  $394,904  
CDN and other solutions535,399  524,002  500,263  1,059,401  1,016,678  
Total revenue$794,715  $764,302  $705,074  $1,559,017  $1,411,582  
Revenue growth rates year-over-year:
Cloud Security Solutions27 %26 %32 %27 %29 %
CDN and other solutions  (1)  (1) 
Total revenue13 %%%10 %%
Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(2):
Cloud Security Solutions28 %28 %34 %28 %32 %
CDN and other solutions  —    
Total revenue14 %%%11 %%

(1) As of January 1, 2020, Akamai reassigned some of its customers between the Media and Carrier Division and the Web Division and revised historical results in order to reflect the most recent categorization and to provide a comparable view for all periods presented. As the purchasing patterns and required account expertise of customers change over time, Akamai may reassign a customer's division from one to another.
(2) See Use of Non-GAAP Financial Measures below for a definition
8


AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA – REVENUE FROM INTERNET PLATFORM CUSTOMERS

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Revenue from Internet Platform Customers$50,752  $44,702  $46,259  $95,454  $93,345  
Revenue excluding Internet Platform Customers743,963  719,600  658,815  1,463,563  1,318,237  
Total revenue$794,715  $764,302  $705,074  $1,559,017  $1,411,582  
Revenue growth rates year-over-year:
Revenue from Internet Platform Customers10 %(5)%%%%
Revenue excluding Internet Platform Customers13    11   
Total revenue13 %%%10 %%
Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(1):
Revenue from Internet Platform Customers10 %(5)%%%%
Revenue excluding Internet Platform Customers14  10   12   
Total revenue14 %%%11 %%

AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL REVENUE DATA – REVENUE BY GEOGRAPHY

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
U.S.$443,668  $428,930  $416,859  $872,598  $835,059  
International351,047  335,372  288,215  686,419  576,523  
Total revenue$794,715  $764,302  $705,074  $1,559,017  $1,411,582  
Revenue growth rates year-over-year:
U.S.%%%%— %
International22  16  15  19  16  
Total revenue13 %%%10 %%
Revenue growth rates year-over-year, adjusted for the impact of foreign exchange rates(1):
U.S.%%%%— %
International24  19  20  22  22  
Total revenue14 %%%11 %%

(1) See Use of Non-GAAP Financial Measures below for a definition

9


AKAMAI TECHNOLOGIES, INC.
SUPPLEMENTAL OPERATING EXPENSE DATA

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
General and administrative expenses:
Payroll and related costs$49,475  $48,599  $47,705  $98,074  $97,356  
Stock-based compensation15,377  13,957  14,565  29,334  27,193  
Depreciation and amortization20,654  20,465  18,778  41,119  37,151  
Facilities-related costs23,898  24,672  21,042  48,570  42,065  
Provision for doubtful accounts2,893  2,199  915  5,092  1,715  
Acquisition-related costs62  76  524  138  975  
Legal settlements275  —  —  275  —  
License of patent—  —  (4,452) —  (8,855) 
Professional fees and other expenses17,075  17,393  21,039  34,468  45,351  
Total general and administrative expenses$129,709  $127,361  $120,116  $257,070  $242,951  
General and administrative expenses–functional(1):
Global functions$46,818  $47,866  $49,462  $94,684  $98,930  
As a percentage of revenue%%%%%
Infrastructure79,677  77,220  72,332  156,897  144,659  
As a percentage of revenue10 %10 %10 %10 %10 %
Other3,214  2,275  (1,678) 5,489  (638) 
Total general and administrative expenses$129,709  $127,361  $120,116  $257,070  $242,951  
As a percentage of revenue16 %17 %17 %16 %17 %
Stock-based compensation:
Cost of revenue$6,254  $5,736  $5,793  $11,990  $11,362  
Research and development11,549  12,065  12,044  23,614  24,101  
Sales and marketing16,011  15,735  15,740  31,746  30,791  
General and administrative15,377  13,957  14,565  29,334  27,193  
Total stock-based compensation$49,191  $47,493  $48,142  $96,684  $93,447  

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


10


AKAMAI TECHNOLOGIES, INC.
OTHER SUPPLEMENTAL DATA

Three Months EndedSix Months Ended
(in thousands, except end of period statistics)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Depreciation and amortization:
Network-related depreciation$38,806  $36,397  $29,394  $75,203  $59,562  
Capitalized internal-use software development amortization38,164  40,769  40,640  78,933  81,897  
Other depreciation and amortization20,193  20,019  18,333  40,212  36,281  
Depreciation of property and equipment97,163  97,185  88,367  194,348  177,740  
Capitalized stock-based compensation amortization(1)
7,185  7,631  7,271  14,816  15,366  
Capitalized interest expense amortization(1)
851  958  779  1,809  1,917  
Amortization of acquired intangible assets10,381  10,434  9,648  20,815  19,247  
Total depreciation and amortization$115,580  $116,208  $106,065  $231,788  $214,270  
Capital expenditures, excluding stock-based compensation and interest expense(2)(3):
Purchases of property and equipment$142,310  $84,799  $99,614  $227,109  $179,949  
Capitalized internal-use software development costs53,692  50,909  52,955  104,601  102,440  
Total capital expenditures, excluding stock-based compensation and interest expense$196,002  $135,708  $152,569  $331,710  $282,389  
End of period statistics:
Number of employees
7,951  7,742  7,434  

(1) Amortization of capitalized stock-based compensation and interest expense in this table excludes amortization of capitalized stock-based compensation and interest expense capitalized as part of the implementation of cloud-computing arrangements. However, the amounts are included in our total amortization of capitalized stock-based compensation and interest expense that is excluded from our non-GAAP measures (see reconciliations of GAAP to non-GAAP measures).
(2) Capital expenditures presented in this table are reported on an accrual basis, which differs from the cash-basis presentation in the statements of cash flows. The primary difference between the two is the change in purchases of property and equipment and capitalization of internal-use software development costs accrued for, but not paid, at period end.
(3) See Use of Non-GAAP Financial Measures below for a definition
11


AKAMAI TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP INCOME FROM OPERATIONS AND NET INCOME

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Income from operations$190,429  $152,330  $135,782  $342,759  $270,307  
GAAP operating margin24 %20 %19 %22 %19 %
Amortization of acquired intangible assets10,381  10,434  9,648  20,815  19,247  
Stock-based compensation49,191  47,493  48,142  96,684  93,447  
Amortization of capitalized stock-based compensation and capitalized interest expense8,038  8,589  8,050  16,627  17,283  
Restructuring (benefit) charge(167) 10,585  790  10,418  7,179  
Acquisition-related costs 62  76  524  138  975  
Legal settlements275  —  —  275  —  
Transformation costs—  —  1,336  —  5,527  
Operating adjustments67,780  77,177  68,490  144,957  143,658  
Non-GAAP income from operations$258,209  $229,507  $204,272  $487,716  $413,965  
Non-GAAP operating margin32 %30 %29 %31 %29 %
Net income$161,915  $123,146  $113,915  $285,061  $221,045  
Operating adjustments (from above)67,780  77,177  68,490  144,957  143,658  
Amortization of debt discount and issuance costs15,677  15,633  8,010  31,310  19,628  
Loss (gain) on investments—  —  250  —  (440) 
Loss from equity method investment493  622  —  1,115  —  
Income tax-effect of above non-GAAP adjustments and certain discrete tax items(19,347) (20,445) (14,454) (39,792) (26,758) 
Non-GAAP net income$226,518  $196,133  $176,211  $422,651  $357,133  

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AKAMAI TECHNOLOGIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME PER DILUTED SHARE

Three Months EndedSix Months Ended
(in thousands, except per share data)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
GAAP net income per diluted share$0.98  $0.75  $0.69  $1.74  $1.34  
Adjustments to net income:
Amortization of acquired intangible assets0.06  0.06  0.06  0.13  0.12  
Stock-based compensation0.30  0.29  0.29  0.59  0.57  
Amortization of capitalized stock-based compensation and capitalized interest expense0.05  0.05  0.05  0.10  0.10  
Restructuring (benefit) charge—  0.06  —  0.06  0.04  
Acquisition-related costs—  —  —  —  0.01  
Legal settlements—  —  —  —  —  
Transformation costs—  —  0.01  —  0.03  
Amortization of debt discount and issuance costs0.10  0.10  0.05  0.19  0.12  
Loss (gain) on investments—  —  —  —  —  
Loss from equity method investment—  —  —  0.01  —  
Income tax effect of above non-GAAP adjustments and certain discrete tax items(0.12) (0.12) (0.09) (0.24) (0.16) 
Adjustment for shares(1)
0.01  —  —  0.01  —  
Non-GAAP net income per diluted share$1.38  $1.20  $1.07  $2.58  $2.17  
Shares used in GAAP diluted per share calculations164,768  163,684  165,019  164,226  164,903  
Impact of benefit from note hedge transactions(1)
(653) —  —  (326) —  
Shares used in non-GAAP diluted per share calculations(1)
164,115  163,684  165,019  163,900  164,903  

(1) Shares used in non-GAAP diluted per share calculations have been adjusted for the three and six months ended June 30, 2020, for the benefit of Akamai's note hedge transactions. During the three months ended June 30, 2020, Akamai's average stock price was in excess of $95.10, which is the initial conversion price of Akamai's convertible senior notes due in 2025. See Use of Non-GAAP Financial Measures below for further definition.

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AKAMAI TECHNOLOGIES, INC.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED EBITDA

Three Months EndedSix Months Ended
(in thousands)June 30,
2020
March 31,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Net income$161,915  $123,146  $113,915  $285,061  $221,045  
Interest income(9,502) (7,043) (6,410) (16,545) (15,045) 
Provision for income taxes18,671  14,292  19,253  32,963  43,678  
Depreciation and amortization97,163  97,185  88,367  194,348  177,740  
Amortization of capitalized stock-based compensation and capitalized interest expense8,038  8,589  8,050  16,627  17,283  
Amortization of acquired intangible assets10,381  10,434  9,648  20,815  19,247  
Stock-based compensation49,191  47,493  48,142  96,684  93,447  
Restructuring (benefit) charge(167) 10,585  790  10,418  7,179  
Acquisition-related costs62  76  524  138  975  
Legal settlements275  —  —  275  —  
Transformation costs—  —  1,336  —  5,527  
Interest expense17,249  17,205  8,446  34,454  20,562  
Loss (gain) on investments—  —  250  —  (440) 
Loss from equity method investment493  622  —  1,115  —  
Other expense, net1,603  4,108  328  5,711  507  
Adjusted EBITDA$355,372  $326,692  $292,639  $682,064  $591,705  
Adjusted EBITDA margin45 %43 %42 %44 %42 %

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Use of Non-GAAP Financial Measures

In addition to providing financial measurements based on generally accepted accounting principles in the United States of America (GAAP), Akamai provides additional financial metrics that are not prepared in accordance with GAAP (non-GAAP). 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 Akamai's 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 Akamai's 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 Akamai's 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 Akamai's ongoing operating results.

The non-GAAP financial measures do not replace the presentation of Akamai's GAAP financial results and should only be used as a supplement to, not as a substitute for, Akamai's financial results presented in accordance with GAAP. Akamai has provided a reconciliation of each non-GAAP financial measure used in its financial reporting and investor presentations to the most directly comparable GAAP financial measure. This reconciliation captioned “Reconciliation of GAAP to Non-GAAP Financial Measures” can be found on the Investor Relations section of Akamai's website.

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

Amortization of acquired intangible assets – Akamai has incurred amortization of intangible assets, included in its GAAP financial statements, related to various acquisitions Akamai has 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, Akamai excludes amortization of acquired intangible assets from its 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 Akamai's 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 Akamai's current financial results to previous and future periods difficult to interpret; therefore, Akamai believes it is useful to exclude stock-based compensation and amortization of capitalized stock-based compensation from its non-GAAP financial measures in order to highlight the performance of Akamai's core business and to be consistent with the way many investors evaluate its performance and compare its operating results to peer companies.

Acquisition-related costs – Acquisition-related costs include transaction fees, advisory fees, due diligence costs and other direct costs associated with strategic activities. In addition, subsequent adjustments to Akamai's initial estimated amounts of contingent consideration and indemnification associated with specific acquisitions are included within acquisition-related costs. These amounts are impacted by the timing and size of the acquisitions. Akamai excludes acquisition-related costs from its non-GAAP financial measures to provide a useful comparison of Akamai's operating results to prior periods and to its peer companies because such amounts vary significantly based on the magnitude of the acquisition transactions and do not reflect Akamai's core operations.

Restructuring charges – Akamai has incurred restructuring charges that are included in its GAAP financial statements, primarily related to workforce reductions and charges associated with exiting facility lease commitments. Akamai excludes these items from its non-GAAP financial measures when evaluating its 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 its business.

Amortization of debt discount and issuance costs and amortization of capitalized interest expense – In August 2019, Akamai issued $1,150 million of convertible senior notes due 2027 with a coupon interest rate of 0.375%. In May 2018, Akamai issued $1,150 million of convertible senior notes due 2025 with a coupon interest rate of 0.125%. In February
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2014, Akamai issued $690 million of convertible senior notes due 2019 with a coupon interest rate of 0%. The imputed interest rates of these convertible senior notes were 3.10%, 4.26% and 3.20%, respectively. This is a result of the debt discounts recorded for the conversion features that are required to be separately accounted for as equity under GAAP, thereby reducing the carrying value of the convertible debt instruments. The debt discounts are amortized as interest expense together with the issuance costs of the debt. The interest expense excluded from Akamai's non-GAAP results is comprised of these non-cash components and is excluded from management's assessment of the company's operating performance because management believes the non-cash expense is not representative of ongoing operating performance.

Gains and losses on investments – Akamai has recorded gains and losses from the disposition, changes to fair value and impairment of certain investments. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of Akamai's core business operations and ongoing operating performance.

Legal settlements – Akamai has incurred losses related to the settlement of legal matters. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of Akamai's core business operations.

Transformation costs – Akamai has incurred professional services fees associated with internal transformation programs designed to improve its operating margins and that are part of a planned program intended to significantly change the manner in which business in conducted. Akamai believes excluding these amounts from its non-GAAP financial measures is useful to investors as the types of events and activities giving rise to them occur infrequently and are not representative of Akamai's core business operations and ongoing operating performance.

Income and losses from equity method investment – Akamai records income or losses on its share of earnings and losses of its equity method investment. Akamai excludes such income and losses because it lacks control over the operations of the investment and the related income and losses are not representative of its 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. Akamai believes that applying the non-GAAP adjustments and their related income tax effect allows Akamai to highlight income attributable to its core operations.

Akamai's definitions of its non-GAAP financial measures are outlined below:

Non-GAAP income from operations GAAP income from operations adjusted for the following items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; amortization of capitalized interest expense; acquisition-related costs; restructuring charges; gains and losses on legal settlements; transformation costs; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP operating margin – Non-GAAP income from operations stated as a percentage of revenue.

Non-GAAP net income GAAP net income adjusted for the following tax-affected items: amortization of acquired intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; transformation costs; amortization of debt discount and issuance costs; amortization of capitalized interest expense; certain gains and losses on investments; income and losses from equity method investment; and other non-recurring or unusual items that may arise from time to time.

Non-GAAP net income per diluted share – Non-GAAP net income divided by weighted average diluted common shares outstanding. Diluted weighted average shares outstanding are adjusted in non-GAAP per share calculations for the shares that would be delivered to Akamai 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, the company 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 Akamai's 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.
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Adjusted EBITDA – GAAP net income excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; stock-based compensation; amortization of capitalized stock-based compensation; acquisition-related costs; restructuring charges; gains and losses on legal settlements; transformation costs; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses on equity method investment; and other non-recurring or unusual items that may arise from time to time.

Adjusted EBITDA margin – Adjusted EBITDA stated as a percentage of revenue.

Capital expenditures, or capex, excluding stock-based compensation and interest expense – Purchases of property and equipment and capitalization of internal-use software development costs presented on an accrual basis, which differs from the cash-basis presentation included in the statements of cash flows. The primary difference between the two is the change in purchases of property and equipment and capitalization of internal-use software development costs accrued for, but not paid, at period end versus prior periods.

Impact of Foreign Currency Exchange Rate – Revenue and earnings from international operations have historically been an important contributor to Akamai's financial results. Consequently, Akamai's 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.


Akamai Statement Under the Private Securities Litigation Reform Act
This release and/or our quarterly earnings conference call scheduled for later today contain information about future expectations, plans and prospects of Akamai's management that constitute forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, including statements about expected future financial performance. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, inability to continue to generate cash at the same level as prior years; changes in geo-political conditions that impact our customers' use of our solutions; failure of our investments in innovation to generate solutions that are accepted in the market; inability to increase our revenue at the same rate as in the past and keep our expenses from increasing at a greater rate than our revenues; impact of the COVID-19 pandemic; delay in developing or failure to develop new service offerings or functionalities, and if developed, lack of market acceptance of such service offerings and functionalities or failure of such solutions to operate as expected, and other factors that are discussed in the Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, and other documents periodically filed with the SEC.

In addition, the statements in this press release and on such call represent Akamai's expectations and beliefs as of the date of this press release. Akamai anticipates that subsequent events and developments may cause these expectations and beliefs to change. However, while Akamai may elect to update these forward-looking statements at some point in the future, it specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing Akamai's expectations or beliefs as of any date subsequent to the date of this press release.
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