Akamai Technologies : Reconciliation of GAAP to Non-GAAP Financial Measures, 4th Quarter 2019

Akamai Technologies, Inc.

Reconciliation of GAAP to Non-GAAP Financial Measures

December 31, 2019

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 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 comparing financial results across accounting periods and to those of 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 also 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.

Akamai provides forward-looking statements in the form of guidance during its quarterly earnings conference calls. This guidance is provided on a non-GAAP basis and cannot be reconciled to the closest GAAP measures without unreasonable effort because of the unpredictability of the amounts and timing of events affecting the items we exclude from non-GAAP measures. For example, stock-based compensation is unpredictable for Akamai's performance-based awards, which can fluctuate significantly based on current expectations of future achievement of performance-based targets. Amortization of intangible assets, acquisition-related costs and restructuring costs are all impacted by the timing and size of potential future actions, which are difficult to predict. In addition, from time to time, Akamai excludes certain items that occur infrequently, which are also inherently difficult to predict and estimate. It is also difficult to predict the tax effect of the items we exclude and to estimate certain discrete tax items, like the resolution of tax audits or changes to tax laws. As such, the costs that are being excluded from non-GAAP guidance are difficult to predict and a reconciliation or a range of results could lead to disclosure that would be imprecise or potentially misleading. Material changes to any one of the exclusions could have a significant effect on our guidance and future GAAP results.

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

Non-GAAPincome 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; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; transformation costs; and other non-recurring or unusual items that may arise from time to time.

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
.........................................Income from operations	$	135,322		$	143,289		$	120,288		$	548,918		$	362,499
Amortization of acquired intangible assets............		9,710			9,624			8,292			38,581			33,311
Stock-based compensation.....................................		46,878			46,815			44,998			187,140			183,813
Amortization of capitalized stock-based		8,700			8,455			8,168			34,438			28,603
compensation and capitalized interest expense......
Restructuring charge (benefit) ...............................		10,274			(300)			13,152			17,153			27,594
Acquisition-related costs........................................		726			219			896			1,920			2,868
Legal and stockholder matter costs........................		10,000			-			-			10,000			23,091
Endowment of Akamai Foundation.......................		-			-			-			-			50,000
Transformation costs..............................................		-			-			5,178			5,527			7,730
Non-GAAP income from operations
$	221,610		$	208,102		$	200,972		$	843,677		$	719,509

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

	Three Months Ended		Year Ended
	December		September		December		December		December
(in thousands)	31, 2019	30, 2019	31, 2018	31, 2019	31, 2018
..................................................................Revenue	$ 772,123		$ 709,912		$ 713,363		$ 2,893,617		$ 2,714,474
Non-GAAP income from operations .....................	221,610	208,102	200,972	843,677	719,509
Non-GAAP operating margin
29%	29%	28%	29%	27%

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Non-GAAPnet 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; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; 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.

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
..............................................................Net income	$	119,100		$	137,890		$	94,015		$	478,035		$	298,373
Amortization of acquired intangible assets.............		9,710			9,624			8,292			38,581			33,311
Stock-based compensation......................................		46,878			46,815			44,998			187,140			183,813
Amortization of capitalized stock-based		8,700			8,455			8,168			34,438			28,603
compensation and capitalized interest expense.......
Restructuring charge (benefit).................................		10,274			(300)			13,152			17,153			27,594
Acquisition-related costs.........................................		726			219			896			1,920			2,868
Legal and stockholder matter costs.........................		10,000			-			-			10,000			23,091
Endowment of Akamai Foundation ........................		-			-			-			-			50,000
Transformation costs...............................................		-			-			5,178			5,527			7,730
Amortization of debt discount and issuance costs ..		15,096			11,133			14,114			45,857			41,958
Loss on investments................................................		500			-			-			60			1,481
(Income) loss from equity method investment .......		(292)			1,388			-			1,096			-
Income tax-effect of above non-GAAP		(19,099)			(34,631)			(12,959)			(80,488)			(86,391)
adjustments and certain discrete tax items..............
Non-GAAP net income
$	201,593		$	180,593		$	175,854		$	739,319		$	612,431

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Non-GAAPnet income per share- Non-GAAP net income divided by basic weighted average or diluted common shares outstanding. Basic weighted average shares outstanding are those used in GAAP net income per share calculations. 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. 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 and until 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.

		Three Months Ended			Year Ended
		December		September			December			December		December
(in thousands, except per share data)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
........................GAAP net income per diluted share	$	0.73		$	0.84		$	0.57		$	2.90		$	1.76
Amortization of acquired intangible assets..............		0.06			0.06			0.05			0.23			0.20
Stock-based compensation.......................................		0.29			0.28			0.27			1.14			1.09
Amortization of capitalized stock-based		0.05			0.05			0.05			0.21			0.17
compensation and capitalized interest expense........
Restructuring charge (benefit) .................................		0.06			-			0.08			0.10			0.16
Acquisition-related costs..........................................		-			-			0.01			0.01			0.02
Legal and stockholder matter costs..........................		0.06			-			-			0.06			0.14
Endowment of Akamai Foundation.........................		-			-			-			-		0.30
Transformation costs................................................		-			-			0.03			0.03			0.05
Amortization of debt discount and issuance costs...		0.09			0.07			0.09			0.28			0.25
Loss on investments.................................................		-			-			-			-		0.01
(Income) loss from equity method investment ........		-			0.01			-			0.01			-
Income tax effect of above non-GAAP adjustments		(0.12)			(0.21)			(0.08)			(0.49)			(0.51)
and certain discrete tax items...................................
Non-GAAP net income per diluted share
$	1.23		$	1.10		$	1.07		$	4.49		$	3.62
Shares used in diluted per share calculations...........		163,930			164,558			164,540			164,573			169,188

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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; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; transformation costs; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; certain gains and losses on investments; income and losses on equity method investment; and other non- recurring or unusual items that may arise from time to time.

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
.............................................................Net income	$	119,100		$	137,890		$	94,015		$	478,035		$	298,373
Interest income.......................................................		(11,402)			(7,908)			(7,308)			(34,355)			(26,940)
Provision for income taxes.....................................		10,632			(960)			19,058			53,350			44,716
Depreciation and amortization...............................		97,390			92,525			99,834			367,655			372,606
Amortization of capitalized stock-based		8,700			8,455			8,168			34,438			28,603
compensation and capitalized interest expense......
Amortization of acquired intangible assets............		9,710			9,624			8,292			38,581			33,311
Stock-based compensation.....................................		46,878			46,815			44,998			187,140			183,813
Restructuring charge (benefit) ...............................		10,274			(300)			13,152			17,153			27,594
Acquisition-related costs........................................		726			219			896			1,920			2,868
Legal and stockholder matter costs........................		10,000			-			-			10,000			23,091
Endowment of Akamai Foundation.......................		-			-			-			-			50,000
Transformation costs..............................................		-			-			5,178			5,527			7,730
Interest expense......................................................		16,675			12,127			14,582			49,364			43,202
(Income) loss on investments.................................		500			-			-			60			1,481
Loss from equity method investment.....................		(292)			1,388			-			1,096			-
Other expense (income), net ..................................		109			752			(59)			1,368			1,667
Adjusted EBITDA
$	319,000		$	300,627		$	300,806		$	1,211,332		$	1,092,115

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

	Three Months Ended		Year Ended
	December		September		December		December		December
(in thousands)	31, 2019	30, 2019	31, 2018	31, 2019	31, 2018
..................................................................Revenue	$ 772,123		$ 709,912		$ 713,363		$ 2,893,617		$ 2,714,474
Adjusted EBITDA..................................................	319,000	300,627	300,806	1,211,332	1,092,115
Adjusted EBITDA margin
41%	42%	42%	42%	40%

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Cash operating expenses (cash opex)- GAAP operating expenses (consisting of research and development, sales and marketing, general and administrative, amortization of acquired intangible assets and restructuring charges), excluding stock- based compensation; amortization of acquired intangible assets; depreciation and amortization; acquisition-related costs; restructuring charges; gains and other activity related to divestiture of a business; gains and losses on legal settlements; costs from professional service providers related to a non-routine stockholder matter; costs incurred related to the establishment of an endowment to the Akamai Foundation; transformation costs; costs incurred with respect to Akamai's internal FCPA investigation; and other non-recurring or unusual items that may arise from time to time.

		Three Months Ended		Year Ended
		December		September			December		December		December
(in thousands)		31, 2019			30, 2019			31, 2018	31, 2019	31, 2018
.....................................GAAP operating expenses	$	379,051		$	319,685		$	349,148		$ 1,357,075		$ 1,398,490
Less:
Stock-based compensation................................		41,316			41,260			39,449	164,661	161,921
Amortization of acquired intangible assets.......		9,710			9,624			8,292	38,581	33,311
Depreciation and amortization..........................		22,167			19,269			20,273	78,587	80,014
Restructuring (benefit) charges.........................		10,274			(300)			13,152	17,153	27,594
Acquisition-related costs...................................		726			219			896	1,920	2,868
Legal and stockholder matter costs...................		10,000			-			-	10,000	23,091
Endowment of Akamai Foundation ..................		-			-			-		-	50,000
Transformation costs.........................................		-			-			5,178	5,527	7,730
Cash operating expenses
$	284,858	$	249,613	$	261,908	$ 1,040,646	$ 1,011,961

Cash cost of revenue- GAAP cost of revenue, excluding stock-based compensation and depreciation and amortization.

		Three Months Ended			Year Ended
		December		September		December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
...........................................GAAP cost of revenue	$	257,750		$	246,938		$	243,927		$	987,624		$	953,485
Less:.......................................................................
Stock-based compensation................................		5,562			5,555			5,549			22,479			21,892
Depreciation and amortization..........................		83,923			81,711			87,729			323,506			321,195
Cash cost of revenue
$	168,265	$	159,672		$	150,649	$	641,639	$	610,398

Cash gross profit- Revenue less cash cost of revenue.

		Three Months Ended		Year Ended
		December		September			December		December		December
(in thousands)		31, 2019			30, 2019			31, 2018	31, 2019	31, 2018
..................................................................Revenue	$	772,123		$	709,912		$	713,363		$ 2,893,617		$ 2,714,474
Cash cost of revenue..............................................		168,265			159,672			150,649	641,639	610,398
Cash gross profit
$	603,858	$	550,240	$	562,714	$ 2,251,978	$ 2,104,076

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Cash gross margin- Revenue less GAAP cost of revenue, excluding stock-based compensation and depreciation and amortization, stated as a percentage of revenue.

	Three Months Ended		Year Ended
	December		September		December		December		December
(in thousands)	31, 2019	30, 2019	31, 2018	31, 2019	31, 2018
..................................................................Revenue	$ 772,123		$ 709,912		$ 713,363		$ 2,893,617		$ 2,714,474
Cash gross profit ....................................................	603,858	550,240	562,714	2,251,978	2,104,076
Cash gross margin
78%	78%	79%	78%	78%

Free cash flow- Cash flows from operations less purchases of property and equipment and capitalization of internal-use software development costs included in the statements of cash flows.

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
....................Cash provided by operating activities	$	282,140		$	297,385		$	286,155		$	1,058,304		$	1,008,327
Less:.......................................................................
Purchases of property and equipment ...............		90,901			110,608			74,324			359,667			217,609
Capitalization of internal-use software		42,765			42,025			43,010			202,410			188,132
development costs.............................................
Free cash flow
$	148,474		$	144,752		$	168,821		$	496,227		$	602,586

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

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
....................Purchases of property and equipment	$	122,560		$	104,345		$	74,262		$	406,854		$	229,744
Capitalization of internal-use software		50,497			49,754			50,920			202,691			198,327
development costs..................................................
Capital expenditures, excluding stock-based
$	173,057	$	154,099	$	125,182	$	609,545	$	428,071
compensation and interest expense........................

Capex as a percentage of revenue- Capital expenditures, or capex, excluding stock-based compensation and interest expense, stated as a percentage of revenue.

	Three Months Ended		Year Ended
	December		September		December		December		December
(in thousands)	31, 2019	30, 2019	31, 2018	31, 2019	31, 2018
..................................................................Revenue	$ 772,123		$ 709,912		$ 713,363		$ 2,893,617		$ 2,714,474
Capital expenditures, excluding stock-based	173,057	154,099	125,182	609,545	428,071
compensation and interest expense........................
Capex as a percentage of revenue
22%		22%		18%		21%		16%

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Non-GAAPdepreciation- GAAP depreciation and amortization (which consists of depreciation and amortization of property and equipment, capitalized stock-based compensation, capitalized interest and acquired intangible assets), less depreciation and amortization excluded from non-GAAP results (which consists of depreciation and amortization of capitalized stock-based compensation, capitalized interest and acquired intangible assets).

		Three Months Ended			Year Ended
		December		September			December			December			December
(in thousands)		31, 2019			30, 2019			31, 2018			31, 2019			31, 2018
....................GAAP depreciation and amortization	$	115,800		$	110,604		$	116,294		$	440,674		$	434,520
Less:
Capitalized stock-based compensation		7,747			7,500			7,175			30,613			25,237
amortization ......................................................
Capitalized interest amortization ......................		953			955			993			3,825			3,366
Amortization of acquired intangible assets.......		9,710			9,624			8,292			38,581			33,311
Non-GAAP depreciation
$	97,390		$	92,525		$	99,834		$	367,655		$	372,606

Non-GAAPtax rate- GAAP tax rate excluding the tax effect of non-GAAP adjustments and certain discrete tax items.

	Three Months Ended		Year Ended
	December		September		December		December		December
	31, 2019	30, 2019	31, 2018	31, 2019	31, 2018
........................................................GAAP tax rate	8%		(1)%		17%		10%		13%
Income tax-effect of non-GAAP adjustments and	5	17	(2)	5	5
certain discrete tax items........................................
Non-GAAP tax rate
13%		16 %		15%		15%		18%

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.

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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 are 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 - Althoughstock-basedcompensation 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 excludestock-basedcompensation and amortization of capitalizedstock-basedcompensation from itsnon-GAAPfinancial 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-relatedcosts- 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 estimated costs of 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 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'snon-GAAPresults is comprised of thesenon-cashcomponents and is excluded from management's assessment of the company's operating performance because management believes thenon-cashexpense 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 and stockholder matter costs- Akamai has incurred losses related to the settlement of legal matters and costs from professional service providers related to a non-routine stockholder matter. 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.

Endowment of Akamai Foundation- During the second quarter of 2018, Akamai incurred a charge to endow the Akamai Foundation. Akamai believes excluding this amount from non-GAAP financial measures is useful to investors as this one-time expense is not representative of its core business operations.

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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 - Thenon-GAAPadjustments described above are reported on apre-taxbasis. The income tax effect ofnon-GAAPadjustments is the difference between GAAP and non- GAAP income tax expense.Non-GAAPincome tax expense is computed onnon-GAAPpre-taxincome (GAAPpre-taxincome adjusted fornon-GAAPadjustments) and excludes certain discrete tax items (such as recording or releasing of valuation allowances), if any. Akamai believes that applying thenon-GAAPadjustments and their related income tax effect allows Akamai to highlight income attributable to its core operations.

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