Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this annual report on Form 10-K. See “Risk Factors” elsewhere in this annual report on Form 10-K for a discussion of certain risks associated with our business. The following discussion contains forward-looking statements. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or other events that may be announced after the date hereof.
Overview
We develop and provide solutions for global enterprises to build, secure and accelerate their applications and digital experiences through our massively distributed global infrastructure, which underpins our security, delivery and cloud computing 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 across our security, delivery and cloud computing product portfolios, increase traffic on our network, continue to develop, scale and successfully bring to market our compute platform, including AIC and compute-to-edge solutions, that meet the needs of professional users and enterprises, including with respect to reliability, effectively manage the prices we charge for our solutions considering the market dynamics on our cost structure driven by hyperscalers, continuously develop new and existing products and appropriately manage our capital spending and other operational 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 cloud
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computing solutions portfolios. Our revenue is also impacted by customer renewals and the pricing for such 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 and traffic levels for customers with variable usage. Over the longer term, our ability to continually develop and expand our product portfolio, to successfully bring those products to market and to effectively manage the prices we charge for our solutions considering the market dynamics on our cost structure driven by hyperscalers, 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 our microsegmentation solutions, and increased sales of our cloud computing solutions, attributable to enhanced services on our compute platform, and growth in our Cloud Infrastructure Services, have made a significant contribution to revenue growth. Our security and cloud computing solutions continue to contribute to a large portion of revenue. We plan to continue to invest in these areas with a focus on higher growth security products and Cloud Infrastructure Services to further advance our product portfolios and sales capabilities.
• Traffic growth on our network has improved, but remains moderated as compared to prior years. We, and the industry more broadly, are seeing growth at a slower pace than we have experienced in the past. In particular, customers in verticals such as media and gaming have optimized their traffic to manage through underlying business challenges at a time of global macroeconomic and geopolitical headwinds. Some of our customers' businesses have been impacted by these headwinds, and as a result, they may continue to reduce their spending or optimize their traffic, which would reduce traffic on our network and revenue. However, we are seeing incremental traffic from contracts acquired as part of our recent asset acquisitions. We expect these traffic growth trends to continue in 2026.
• The prices paid by some of our delivery and security customers have declined in recent years at contract renewal due to competition, which negatively impacts our revenue growth rates. We have been able to mitigate some of the negative impacts to our revenue growth rates by upselling incremental solutions to our existing customers. We continue to take steps upon contract renewals to sign customers to multi-year contracts and to optimize how we charge customers to maintain alignment between customer traffic volumes, significant cost increases we have experienced due to market dynamics driven by hyperscalers 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 U.S. dollar strengthens and benefit when the U.S. dollar weakens.
• We have experienced variations in certain types of revenue from quarter-to-quarter. These quarterly variations in revenue are 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; holiday season activity; 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 experienced a significant increase in our co-location costs due to the market dynamics driven by the hyperscalers. We have entered into, and expect to continue to enter into, longer term leases that include certain financial commitments. 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 will need to continue to effectively manage our co-location costs to maintain or improve current levels of profitability.
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• Network bandwidth costs are also a significant portion of our cost of revenue. We have been able to manage these costs through investment in internal-use software development to improve the performance and efficiency of our network and, more recently, improved pricing on contract renewals with our bandwidth providers. We will need to continue to focus on effectively managing 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, as well as partner program costs, incurred as we continue to build out our compute platform and maintain our global network, and costs of third-party cloud providers used for some of our operations. We have seen some of these costs increase in recent years as a result of our network expansion, and particularly the build out of our compute platform. While we have previously experienced increased costs from third-party cloud providers, we have been able to manage those costs by migrating to our own compute solutions. We will need to continue to effectively manage our network build-out and supporting service costs in an effort to control costs.
• 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 our operations that we offer competitive compensation packages. However, we are focused on remaining disciplined in allocating our resources to support our faster growing security and cloud computing solutions, including maintaining operational efficiencies to mitigate the rising cost of talent. Over the past few years, we redesigned some of our compensation programs by shifting certain plans from a cash-based to stock-based program, such as our employer 401(k) match program in 2025. These programs are designed to better align employee incentives with the interests of our stockholders, which has 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 plan to continue investing in our faster growing Cloud Infrastructure Services, including support for a new enterprise cloud computing customer and our new AIC. With the build out of our compute platform, we are experiencing a significant increase in server and memory costs due to market dynamics driven by hyperscalers. These cost increases will increase our future capital expenditures and resulting depreciation expense.
• 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 U.S. dollar strengthens and are negatively impacted when the U.S. dollar weakens.
Recent Acquisitions
We acquired Fermyon in November 2025. With this acquisition we plan to deepen the integration between the edge functions platform and our performance and security products. The resulting cloud computing platform aims to make it even faster and easier for developers to build, deploy and secure applications at the edge that outperform cloud-native applications, for less money, the same way they can in core data centers today.
We acquired certain customer contracts from Edgio, Inc. ("Edgio") in December 2024 as part of a bankruptcy process. This acquisition is intended to further strengthen our existing delivery and other businesses as we transition the acquired customers to our platform and offer our portfolio of other services to them. We also acquired Noname Security in June 2024. 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.
We acquired certain customer contracts from Lumen Technologies, Inc. ("Lumen") in October 2023 and from StackPath, LLC ("StackPath") in August 2023. These acquisitions are intended to further strengthen our existing delivery and other businesses as we transition the acquired customers to our platform and offer our portfolio of other services to them. We also acquired Neosec in May 2023, which is intended to complement our application and API security portfolio by extending its visibility into the rapidly growing API threat landscape, and StorageOS, Inc. ("StorageOS"), also known as Ondat, in March 2023, which is intended to strengthen our compute offerings.
Revenue and earnings generated from these acquisitions are included in our financial results since the dates of the acquisitions, but were not material. However, delivery revenue was positively impacted by customer contracts acquired from Edgio, Lumen and Stackpath. Additionally, of note, we added approximately 200 employees from the acquisition of Noname Security.
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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, regulatory policies and resources that may negatively impact business, economic and political uncertainty, decreased consumer confidence and pressure on prices during contract renewals, uncertain energy supplies, heightened geopolitical tensions and conflict, potential for supply chain disruptions, changes in legislation and regulations, including U.S. and international tax laws, volatility and increasing tensions related to changing trade policies, including announced or expected tariffs, fluctuations in foreign exchange rates and elevated interest rates. To the extent these macroeconomic conditions continue, the impact may adversely affect our business, operations and financial results.
Results of Operations
The following sets forth, as a percentage of revenue, consolidated statements of income data for the years indicated:
Revenue
Costs and operating expenses:
Cost of revenue (exclusive of amortization of acquired intangible assets shown below)
Research and development
Sales and marketing
General and administrative
Amortization of acquired intangible assets
Restructuring charge
Total costs and operating expenses (1)
Income from operations (1)
Interest and marketable securities income, net
Interest expense
Other expense, net
Income before provision for income taxes (1)
Provision for income taxes
Gain from equity method investment
Net income (1)
(1) Amounts may not foot due to rounding.
Revenue
Revenue by solution category during the periods presented was as follows (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change at Constant Currency
% Change
% Change at Constant Currency
Security
Delivery
Cloud computing
Total revenue
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The increases in our revenue in 2025 as compared to 2024, and 2024 as compared to 2023, were primarily the result of continued growth in sales of our security and cloud computing solutions, partially offset by a decline in revenue from our delivery solutions due to downward pricing of renewals.
The increases in security solutions revenue for 2025 as compared to 2024, and 2024 as compared to 2023, were due to growth of sales in key products in our security solutions portfolio, including our API security, web application and Guardicore segmentation solutions.
The decreases in delivery solutions revenue for 2025 as compared to 2024, and 2024 as compared to 2023, were due to downward pricing of contract renewals. Additionally, we believe macroeconomic headwinds are causing some customers to increase their focus on cost optimization, which negatively impacted traffic on our network and had a negative impact on delivery revenue. In 2024, these headwinds caused a large social media customer to increase their focus on cost optimization and "do-it-yourself" solutions, which additionally reduced traffic on our network. The decrease for 2025 as compared to 2024 was partially offset by incremental revenue from contracts acquired as part of our asset acquisitions, such as Edgio in December 2024.
The increase in cloud computing solutions revenue in 2025 as compared to 2024 was due to growth in Cloud Infrastructure Services, which includes compute, storage, cloud-native and networking solutions, along with the Akamai EdgeWorkers serverless products and partner solutions running on our compute platform. The increase in cloud computing revenue in 2024 as compared to 2023 was due to growth in sales of Cloud Infrastructure Services, as well as cloud optimization solutions, to new and existing customers.
Revenue derived in the U.S. and internationally during the periods presented is as follows (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change at Constant Currency
% Change
% Change at Constant Currency
As a percentage of revenue
International
As a percentage of revenue
Total revenue
For each of the years ended December 31, 2025, 2024 and 2023, no single country outside of the U.S. accounted for 10% or more of revenue. Changes in foreign currency exchange rates positively impacted our revenue by $13.7 million in 2025 as compared to 2024, and negatively impacted our revenue by $22.5 million in 2024 as compared to 2023.
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Cost of Revenue
Cost of revenue consisted of the following for the periods presented (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change
Co-location costs
Bandwidth fees
Network build-out and supporting services
Payroll and related costs
Acquisition-related costs
Stock-based compensation, including amortization of prior capitalized amounts
Depreciation of network equipment
Amortization of internal-use software
Total cost of revenue
As a percentage of revenue
The increase in cost of revenue for 2025 as compared to 2024 was primarily due to:
• co-location costs and depreciation of network equipment as a result of investment in our network, particularly as we build out our compute platform to support future growth and scalability;
• network build-out and supporting services, particularly due to our partner program costs related to our cloud computing solutions; and
• payroll and related costs, including stock-based compensation, as a result of headcount growth, annual merit increases and increased achievement of our performance-based compensation plans; additionally, stock-based compensation increased due to the shift in some of our compensation programs from cash-based to stock-based for certain employees, including our employer 401(k) match program, effective in 2025, which partially offset the increase in payroll and related costs.
These increases were partially offset by lower bandwidth fees, resulting from improved pricing and operational efficiencies on our network.
The increase in cost of revenue for 2024 as compared to 2023 was primarily due to:
• co-location costs and depreciation of network equipment as a result of investment in our network, particularly as we are building out our compute platform to support future growth and scalability; and
• payroll and related costs, including stock-based compensation, as a result of headcount growth from our strategic initiatives and annual merit increases, as well as the shift in timing of our performance-based compensation. Additionally, stock-based compensation increased due to a shift in our compensation programs from cash-based to stock-based for certain employees.
The increase in cost of revenue for 2024 as compared to 2023 was partially offset by lower network build-out and supporting services due to a decrease in third-party cloud costs as we have migrated third-party cloud services onto our own compute platform and have focused on optimizing third-party cloud spending.
During 2026, we expect our cost of revenue to increase as compared to 2025. In particular, our co-location costs, bandwidth fees, depreciation of network equipment and amortization of internal-use software is expected to increase as we continue to invest in our compute platform to provide us the ability to scale. Due to the market dynamics driven by the hyperscalers, we are also experiencing price increases for co-location, server and memory costs, which will increase our co-location costs and depreciation of network equipment. Additionally, we expect network build-out and supporting services to increase due to our partner programs to support the growth of our cloud computing solutions.
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Research and Development Expenses
Research and development expenses consisted of the following for the periods presented (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change
Payroll and related costs
Stock-based compensation
Capitalized salaries and related costs
Acquisition-related costs
Other expenses
Total research and development
As a percentage of revenue
The increase in research and development expenses for 2025 as compared to 2024 was primarily due to higher payroll and related costs, including stock-based compensation, as a result of headcount growth from our strategic initiatives, annual merit increases and the increased achievement of our performance-based compensation plans. Additionally, stock-based compensation increased due to a shift in our employer 401(k) match program from cash-based to stock-based, effective in 2025, which partially offset the increase in payroll and related costs.
The increase in research and development expenses for 2024 as compared to 2023 was primarily due to higher payroll and related costs, including stock-based compensation, as a result of headcount growth from our strategic initiatives and annual merit increases, as well as the shift in timing of our performance-based compensation. These increases were 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.
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. For the years ended December 31, 2025, 2024 and 2023, we capitalized $114.8 million, $99.6 million and $77.0 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.
We expect our research and development costs to increase in 2026, in particular payroll and related costs, including stock-based compensation, in support of our faster growing security and cloud computing solutions. We also expect stock-based compensation to increase in 2026 as a result of a new stock-based retirement program effective in 2026. However, we plan to continue to carefully manage costs in an effort to manage our operating margins.
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Sales and Marketing Expenses
Sales and marketing expenses consisted of the following for the periods presented (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change
Payroll and related costs
Stock-based compensation
Marketing programs and related costs
Acquisition-related costs
Other expenses
Total sales and marketing
As a percentage of revenue
The increase in sales and marketing expenses for 2025 as compared to 2024 was primarily due to higher stock-based compensation as a result of the increased achievement of our performance-based compensation plans and a shift in our employer 401(k) match program from cash-based to stock-based, effective in 2025. Other expenses also increased as a result of professional service fees associated with our go-to-market transformation initiative.
The increase in sales and marketing expenses for 2024 as compared to 2023 was due to higher payroll and related costs, including stock-based compensation, as a result of annual merit increases and employees acquired through the Noname Security acquisition, as well as the shift in timing of our performance-based compensation. These increases were partially offset by a reduction in marketing programs and related costs as a result of the timing of events and advertising campaigns.
During 2026, we expect our sales and marketing expenses to increase as compared to 2025, in particular payroll and related costs, including stock-based compensation, primarily due to our reinvestment in headcount as part of our go-to-market strategy to drive acquisition of new customers for our faster growing security and cloud computing solutions. However, we plan to continue to carefully manage costs in an effort to manage our operating margins.
General and Administrative Expenses
General and administrative expenses consisted of the following for the periods presented (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
% Change
% Change
Payroll and related costs
Stock-based compensation
Depreciation and amortization
Facilities-related costs
Provision for doubtful accounts
Acquisition-related costs
Software and related service costs
Other expenses
Total general and administrative
As a percentage of revenue
The increase in general and administrative expenses for 2025 as compared to 2024 was primarily due to higher stock-based compensation as a result of the increased achievement of our performance-based compensation plans, an increase in the number of participants in the equity compensation program, as well as a shift in our employer 401(k) match program from cash-based to stock-based effective in 2025, which increased stock-based compensation and partially offset the increase in payroll and related costs. Additionally, software and related service costs increased as we transition to and expand usage of cloud-based
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applications to support our operations.
The increase in general and administrative expenses for 2024 as compared to 2023 was primarily due to higher payroll and related costs, including stock-based compensation, as a result of annual merit increases and the shift in timing of our performance-based compensation. Additionally, other expenses increased due to professional service fees to support our business. These increases were partially offset by decreased facilities-related costs as we exited certain facilities in connection with our FlexBase program.
During 2026, we expect our general and administrative expenses to increase as compared to 2025, to support the operations of the business. In particular, we expect stock-based compensation to increase in 2026 as a result of a new stock-based retirement program effective in 2026. However, we plan to continue to carefully manage costs in an effort to manage our operating margins.
Amortization of Acquired Intangible Assets
For the Years Ended December 31,
For the Years Ended December 31,
(in thousands)
% Change
% Change
Amortization of acquired intangible assets
As a percentage of revenue
The increase in amortization of acquired intangible assets for 2025 as compared to 2024, and 2024 as compared to 2023, was the result of amortization of acquired intangible assets related to our recent acquisitions. Based on acquired intangible assets as of December 31, 2025, future amortization is expected to be $100.2 million, $85.6 million, $79.0 million, $74.0 million and $66.7 million for the years ending December 31, 2026, 2027, 2028, 2029 and 2030, respectively.
Restructuring Charge
For the Years Ended December 31,
For the Years Ended December 31,
(in thousands)
% Change
% Change
Restructuring charge
As a percentage of revenue
The restructuring charge in 2025 was primarily driven by management's commitment to an action to restructure certain parts of the company to align investments and simplify organizational structure to long-term growth priorities. The charge included severance and related expenses for certain headcount reductions, as well as impairments of acquired intangible assets and capitalized internal-use software. We do not expect to incur material additional charges related to this action.
The restructuring charge in 2024 was primarily driven by management's commitment to an action with the primary intent to redeploy resources to support our strategic investments and as a result of our completed acquisitions. The restructuring charge included severance and related expenses for certain headcount reductions, as well as impairments of acquired intangible assets and capitalized internal-use software. We do not expect to incur material additional charges related to this action.
The restructuring charge in 2023 was primarily 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 the FlexBase program. Additionally, the restructuring charge in 2023 included the result of certain actions initiated in the first quarter of 2023. Management's commitment to an action to restructure certain parts of the company was to enable the prioritization of investments in the fastest growing areas of the business. The restructuring charge for this action includes severance and related expenses for certain headcount reductions. We do not expect to incur material additional charges related to these actions.
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Non-Operating Income (Expense)
For the Years Ended December 31,
For the Years Ended December 31,
(in thousands)
% Change
% Change
Interest and marketable securities income, net
As a percentage of revenue
Interest expense
As a percentage of revenue
Other expense, net
As a percentage of revenue
Interest and marketable securities income, net primarily 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 decrease to interest and marketable securities income, net for 2025 as compared to 2024, was due to a reduction of cash and marketable securities balances and re-positioning our investments to cash equivalents, yielding lower interest, in 2025 in order to repay our $1,150.0 million convertible senior notes that became due in May 2025. This decrease was partially offset by interest earned as a result of purchases of new marketable securities with the proceeds of our convertible senior notes that were issued in May 2025. The increase to interest and marketable securities income, net for 2024 as compared to 2023, was the result of increased cash, cash equivalents and marketable securities balances received from 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 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K. The increase to interest expense for 2025 as compared to 2024 was primarily due to the May 2025 issuance of $1,725.0 million in par value of convertible senior notes due 2033. The increase to interest expense for 2024 as compared to 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 the remeasurement of monetary assets and liabilities that are not denominated in the functional currency as well as other non-operating expense and income items. Other expense, net for 2025 and 2024 also includes a net gain of $9.4 million and impairments of $5.1 million, respectively, from cost method investments. Other expense, net may fluctuate in the future based on changes in foreign currency exchange rates or other events.
Provision for Income Taxes
For the Years Ended December 31,
For the Years Ended December 31,
(in thousands)
% Change
% Change
Provision for income taxes
As a percentage of revenue
Effective income tax rate
The increase in the provision for income taxes for 2025 as compared to 2024 was mainly due to a shortfall in the tax benefit related to stock-based compensation, the benefit from an intercompany sale of intellectual property in 2024 that did not recur in 2025, revaluation of deferred tax assets and a decrease in the benefit of U.S. federal and state research and development credits.
The decrease in the provision for income taxes for 2024 as compared to 2023 was mainly due to the benefit from an intercompany sale of intellectual property, an increase in the excess tax benefit related to stock-based compensation, lower profitability and an increase in the benefit of U.S. federal and state research and development credits. These amounts were partially offset by a decrease in foreign income taxed at lower rates, an increase in non-deductible transfer pricing and an increase in certain tax reserves.
For the year ended December 31, 2025, our effective income tax rate was higher than the federal statutory tax rate due to non-deductible stock-based compensation, revaluation of deferred tax assets and a shortfall in the tax benefit related to stock-
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based compensation. 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 year ended December 31, 2024, our effective income tax rate was lower than the federal statutory tax rate due to the benefit of U.S. federal, state and foreign research and development credits, an intercompany sale of intellectual property, foreign income taxed at lower rates and the excess tax benefit related to stock-based compensation. These amounts were partially offset by non-deductible stock-based compensation and non-deductible transfer pricing.
For the year ended December 31, 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 non-deductible stock-based compensation and the tax on global intangible low-taxed income.
Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the settlement of employee equity awards, tax law changes and settlements of tax audits and assessments. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ depending on the local statutory rates. The OECD and participating OECD member countries continue to work toward the enactment of a 15% global minimum corporate tax rate for large multinational enterprise groups, also known as "Pillar Two." Many of the participating countries have enacted legislation that became effective beginning in 2024, while other countries continue to work on defining the underlying rules and administrative procedures. Although the enactment and effective legislation in many countries was applicable to us beginning on January 1, 2024, and increased our effective income tax rate, the increase did not have a material impact on our overall results of operations or cash flows.
In July 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted into law. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others to be implemented through 2027. The OBBBA did not have a material impact on our consolidated financial statements for the annual period ending December 31, 2025.
Gain from Equity Method Investment
For the Years Ended December 31,
For the Years Ended December 31,
(in thousands)
% Change
% Change
Gain from equity method investment
As a percentage of revenue
The gain from equity method investment relates to our investment with MUFG in a joint venture, GO-NET. GO-NET intended to operate a blockchain-based online payment network. However, GO-NET operations were suspended in February 2022, and ultimately liquidated in August 2023. The gain from equity method investment in 2023 was related to the liquidation and disbursement of our portion of GO-NET's remaining assets, which were previously impaired. We do not expect additional activity related to this investment.
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") 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 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
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financial measures may exclude expenses and gains that may be unusual in nature, infrequent or not reflective of our ongoing operating results.
The non-GAAP financial measures do not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.
The non-GAAP adjustments, and our basis for excluding them from non-GAAP financial measures, are outlined below:
• Amortization of acquired intangible assets – We have incurred amortization of intangible assets, included in our GAAP financial statements, related to various acquisitions we have made. The amount of an acquisition's purchase price allocated to intangible assets and term of its related amortization can vary significantly and is unique to each acquisition; therefore, we exclude amortization of acquired intangible assets from our non-GAAP financial measures to provide investors with a consistent basis for comparing pre- and post-acquisition operating results.
• Stock-based compensation and amortization of capitalized stock-based compensation – Stock-based compensation is an important aspect of the compensation paid to our employees which includes long-term incentive plans to encourage retention, performance-based plans to encourage achievement of specified financial targets, short-term incentive awards with a one year vest and shares issued as part of a retirement savings program. The grant date fair value of the stock-based compensation awards 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 acquired intangible assets, 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 – The issuance costs of our 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 cost method investments – We have recorded gains and losses from the disposition, changes to fair value and impairment of cost method 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.
• Legal settlements – We have incurred losses related to the settlement of legal matters. We believe excluding these amounts from our non-GAAP financial measures is useful to investors as the types of events giving rise to them are not representative of our core business operations.
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• 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.
• 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 years ended December 31, 2025, 2024 and 2023 (in thousands):
Income from operations
Amortization of acquired intangible assets
Stock-based compensation
Amortization of capitalized stock-based compensation and capitalized interest expense
Restructuring charge
Acquisition-related costs
Legal settlements
Non-GAAP income from operations
GAAP operating margin
Non-GAAP operating margin
The following table reconciles GAAP net income to non-GAAP net income for the years ended December 31, 2025, 2024 and 2023 (in thousands):
Net income
Amortization of acquired intangible assets
Stock-based compensation
Amortization of capitalized stock-based compensation and capitalized interest expense
Restructuring charge
Acquisition-related costs
Legal settlements
Amortization of debt issuance costs
(Gain) loss on cost method investments, net
Gain from equity method investment
Income tax effect of above non-GAAP adjustments and certain discrete tax items
Non-GAAP net income
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The following table reconciles GAAP net income per diluted share to non-GAAP net income per diluted share for the years ended December 31, 2025, 2024 and 2023 (in thousands, except per share data):
GAAP net income per diluted share
Adjustments to net income:
Amortization of acquired intangible assets
Stock-based compensation
Amortization of capitalized stock-based compensation and capitalized interest expense
Restructuring charge
Acquisition-related costs
Legal settlements
Amortization of debt issuance costs
(Gain) loss on cost method investments, net
Gain from equity method investment
Income tax effect of above non-GAAP adjustments and certain discrete tax items
Adjustment for shares (1)
Non-GAAP net income per diluted share (2)
Shares used in GAAP per diluted share calculations
Impact of benefit from note hedge transactions (1)
Shares used in non-GAAP per diluted share calculations (1)
(1) Shares used in non-GAAP per diluted share calculations have been adjusted for the years ended December 31, 2024 and 2023, 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 which matured in May 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 issuances of our convertible senior notes. 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 2033, 2029 and 2027, and those that matured in 2025, unless our weighted average stock price is greater than $93.01, $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; legal settlements; foreign exchange gains and losses; interest expense; amortization of capitalized interest expense; gains and losses on cost method investments; gains 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 years ended December 31, 2025, 2024 and 2023 (in thousands):
Net income
Amortization of acquired intangible assets
Stock-based compensation
Amortization of capitalized stock-based compensation and capitalized interest expense
Restructuring charge
Acquisition-related costs
Legal settlements
Interest and marketable securities income, net
Interest expense
Provision for income taxes
Depreciation and amortization
(Gain) loss on cost method investments, net
Gain from equity method investment
Other expense, net
Adjusted EBITDA
Net income margin
Adjusted EBITDA margin
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 December 31, 2025, our cash, cash equivalents and marketable securities, which are detailed in Note 3 to the consolidated financial statements included elsewhere in this annual report on Form 10-K, 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, cash position and access to funds available under our revolving credit facilities are important competitive
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differentiators that provide the financial stability and flexibility to enable us to continue to make investments at opportune times. We expect to continue to evaluate strategic investments to strengthen our business.
As of December 31, 2025, we had cash and cash equivalents of $382.7 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 Years Ended December 31,
(in thousands)
Net income
Non-cash reconciling items included in net income
Changes in operating assets and liabilities
Net cash provided by operating activities
The decrease in cash provided by operating activities for 2025 as compared to 2024 was due to timing of customer collections and severance payments occurring in 2025 related to our restructuring action in the third quarter of 2024, as well as higher income tax payments driven by intercompany sales of intellectual property. These decreases were partially offset by the shift of our employer 401(k) match program from cash-based to stock-based effective in 2025.
The increase in cash provided by operating activities for 2024 as compared to 2023 was due to increased collections from customers as a result of increased revenue and timing of customer collections. The increase was also due to the shift in our performance-based compensation program from cash-based to stock-based, which led to cash performance-based program payments in 2023 that did not recur in 2024.
Cash Used in Investing Activities
For the Years Ended December 31,
(in thousands)
Cash paid for business acquisitions, net of cash acquired
Cash paid for asset acquisitions
Purchases of property and equipment and capitalization of internal-use software development costs
Net marketable securities activity
Other, net
Net cash used in investing activities
The decrease in cash used in investing activities in 2025 as compared to 2024 was due to:
• the acquisitions of Noname Security and Edgio in 2024; and
• a decrease in net marketable securities activity, primarily due to higher purchases compared to maturities and sales, which resulted from net proceeds from our convertible senior notes activities.
These decreases were partially offset by higher purchases of property and equipment related to network expansion, primarily for our compute infrastructure.
The decrease in cash used in investing activities in 2024 as compared to 2023 was due to an increase in cash proceeds from net marketable securities activity to fund the acquisition of Noname Security in 2024 and a reduction of purchases of property and equipment related to our compute platform build-out. Additionally, cash used in investing activities in 2023 included an increase in purchases of marketable securities with the proceeds from our August 2023 issuance of convertible senior notes. These decreases were partially offset by cash paid for the acquisition of Noname Security.
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Cash (Used in) Provided by Financing Activities
For the Years Ended December 31,
(in thousands)
Net convertible senior notes activity
Activity related to stock-based compensation
Repurchases of common stock
Other, net
Net cash (used in) provided by financing activities
The decrease in cash used in financing activities in 2025 as compared to 2024 was primarily due to net convertible senior notes activity and decreased employee taxes paid in 2025 driven by a reduction in stock price. During 2025, we issued $1,725.0 million in par value of convertible senior notes and repaid $1,150.0 million in convertible senior notes which were due in May 2025. These decreases were partially offset by the increase in repurchases of our common stock as part of our share repurchase program.
The increase in cash used in financing activities in 2024 as compared to 2023 was due to the net proceeds received in 2023 from our convertible senior notes due 2029 that did not recur in 2024 and increased employee taxes paid in 2024 related to vesting of stock awards driven by the shift in our performance-based compensation program from cash-based to stock-based and an increase in stock price. These increases were partially offset by a reduction in repurchases of our common stock as part of our share repurchase program.
In October 2021, our board of directors authorized a $1.8 billion share repurchase program that was 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, which was in addition to amounts remaining under the January 2022 program. As of December 31, 2025, the January 2022 program was fully utilized and $1.2 billion remains available for repurchase on the May 2024 program. During 2025, 2024 and 2023, we repurchased 10.0 million, 5.6 million and 7.8 million shares of our common stock, respectively, at an average price per share of $79.77, $99.14 and $83.83, respectively. 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
In May 2025, we issued $1,725.0 million in principal amount of convertible senior notes due 2033 and entered into related convertible note hedge and warrant transactions. We intend to use a portion of the net proceeds to repay at maturity our $1,150.0 million outstanding aggregate principal amount of convertible senior notes due in 2027. Additionally, we used a portion of the net proceeds to repay $250.0 million in borrowings made in April 2025 under our revolving credit agreement entered into in November 2022 ("2022 Credit Agreement") and for share repurchases.
As of December 31, 2025, we had $4,140.0 million of convertible senior notes outstanding that are senior unsecured obligations and bear interest payable semi-annually in arrears. These notes mature between September 2027 and May 2033. The terms of the notes and hedge and warrant transactions are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K.
Revolving Credit Facilities
In January 2025, we entered into a $150.0 million uncommitted revolving credit agreement ("2025 Credit Agreement"). Any outstanding borrowings are secured by collateral, consisting primarily of available-for-sale marketable securities. The 2025 Credit Agreement does not expire but is cancellable at any time and any borrowings can be due on demand. Borrowings under the 2025 Credit Agreement will bear a specified interest rate, based on the Secured Overnight Financing Rate, and interest period at the time of the confirmed borrowing. There were no outstanding borrowings under the 2025 Credit Agreement as of December 31, 2025.
In November 2022, we entered into a $500.0 million, five-year revolving credit agreement ("2022 Credit Agreement"), which allows us to borrow up to $500.0 million at various interest rates and contains customary representations and warranties,
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affirmative and negative covenants and events of default. The 2022 Credit Agreement was amended in May 2025 to increase the aggregate revolving commitments from $500.0 million to $1.0 billion and to extend the expiration one year to November 2028. As of December 31, 2025, we were in compliance with all covenants. There were no outstanding borrowings under the 2022 Credit Agreement as of December 31, 2025.
The terms of the revolving credit agreements are discussed more fully in Note 11 to the consolidated financial statements included elsewhere in this annual report on Form 10-K.
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. In addition, we have entered into an operating lease with a data center operator for space in the Virginia area that we contemporaneously subleased to an affiliate of a large social media customer. A portion of the space at the subleased data center commenced in 2025, with the remainder of the space commencing in January 2026. Both the lease payments and associated sublease income are expected to substantially offset each other.
As of December 31, 2025, the total obligation under these agreements was $1,865.9 million, of which $560.3 million is for the subleased data center. In the next 12 months, $342.5 million of the total obligation is payable, including $43.6 million for the subleased data center obligation. We have also executed additional operating leases of $465.1 million, of which substantially all are expected to commence in 2026, including $187.1 million for the subleased data center. The operating lease terms and maturities are discussed more fully in Note 12 to the consolidated financial statements included elsewhere in this annual report on Form 10-K.
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 locations.
Liquidity Outlook
Based on our present business plan, we expect our current cash, cash equivalents and marketable securities balances and our forecasted cash flows from operations to be sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating costs, include our expected capital expenditures, investments in information technology, potential strategic acquisitions, anticipated share repurchases, lease and purchase commitments and settlements of other liabilities.
Off-Balance Sheet Arrangements
We have entered into indemnification agreements with third parties, including vendors, customers, landlords, our officers and directors, stockholders of acquired companies, joint venture partners and third parties to which we license technology. Generally, these indemnification agreements require us to reimburse losses suffered by a third party due to various events, such as lawsuits arising from patent or copyright infringement or our negligence. These indemnification obligations are considered off-balance sheet arrangements in accordance with the authoritative guidance for guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. See Note 13 to our consolidated financial statements included elsewhere in this annual report on Form 10-K for further discussion of these indemnification agreements. The fair value of guarantees issued or modified during 2025 and 2024 was determined to be immaterial.
Significant Accounting Policies and Estimates
See Note 2 to the consolidated financial statements included elsewhere in this annual report on Form 10-K for information regarding recent and newly adopted accounting pronouncements.
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Application of Critical Accounting Policies and Estimates
Overview
Our MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, accounts receivable and related reserves, valuation and impairment of marketable securities, capitalized internal-use software development costs, goodwill and acquired intangible assets, income tax reserves, impairment and useful lives of long-lived assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates are made. Actual results may differ from these estimates. For a complete description of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report on Form 10-K.
Definitions
We define our critical accounting policies as those policies that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our consolidated financial statements. Our estimates are based upon assumptions and judgments about matters that are highly uncertain at the time an accounting estimate is made and applied and require us to assess a range of potential outcomes.
Review of Critical Accounting Policies and Estimates
Revenue Recognition
Our contracts with customers sometimes include promises to transfer multiple services to a customer. Determining whether services are distinct performance obligations often requires the exercise of judgment by management. Advanced features that enhance a main product or service and are highly interrelated are generally not considered distinct; rather, they are combined with the service they relate to into one performance obligation. Different determinations related to combining services into performance obligations could result in differences in the timing and amount of revenue recognized in a period.
Determination of the standalone selling price ("SSP") for each distinct performance obligation in a contract also requires the exercise of judgment by management. SSP is based on observable inputs such as the price we charge for the service when sold separately, or the discounted list price per management’s approved price list. In cases where services are not sold separately or price list rates are not available, a cost-plus-margin approach or adjusted market approach is used to determine SSP. Changes to SSP could result in differences in the allocation of transaction price among performance obligations, which could result in differences in the timing and amount of revenue recognized in a period.
From time to time, we enter into contracts to sell services or license technology to unrelated enterprises at or about the same time that we enter into contracts to purchase products or services from the same enterprises. Consideration payable to a customer is reviewed as part of the transaction price. If the payment to the customer does not represent payment for a distinct service, revenue is recognized only up to the net amount of consideration after customer payment obligations are considered. Different determinations on whether a payment represents a distinct service could result in differences in the amount of revenue recognized.
We may also resell licenses or services of third parties. If we are acting as an agent in an arrangement with a customer to provide third party services, the transaction price reflects only the net amount to which we will be entitled, after accounting for payments made to the third party responsible for satisfying the performance obligation. Different determinations on whether we are acting as an agent or a principal could change the amount of revenue recognized.
Accounts Receivable and Related Reserves
Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. In addition to trade accounts receivable, our accounts receivable balance includes unbilled accounts that represent revenue recorded for customers that is typically billed within one month. We record allowances against our accounts receivable balance, primarily for current expected credit losses. Increases and decreases in the allowance for current expected credit losses are included as a component of general and administrative expense in the consolidated statements of income.
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Estimates are used in determining our allowance for current expected credit losses using historical loss rates for the previous twelve months as well as expectations about the future where we have been able to develop forecasts to supports our estimates. In addition, the allowance for current expected credit losses considers outstanding balances on a customer-specific, account-by-account basis. We assess collectability based upon a review of customer receivables from prior sales with collection issues where we no longer believe that the customer has the ability to pay for services previously provided. We also perform ongoing credit evaluations of our customers. If such an evaluation indicates that payment is no longer reasonably assured for services provided, any future services provided to that customer will result in the creation of a cash basis reserve until we receive consistent payments.
Valuation and Impairment of Marketable Securities
We measure the fair value of our financial assets and liabilities at the end of each reporting period. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We have certain financial assets and liabilities recorded at fair value (principally cash equivalents and short- and long-term marketable securities) that have been classified as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we can access at the reporting date. Fair values determined by Level 2 inputs utilize data points other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Fair values determined by Level 3 inputs are based on unobservable data points for the asset or liability.
Marketable securities, which consist primarily of securities available-for-sale, are evaluated for impairment when the fair value declines below the cost basis. We periodically evaluate whether the decline is due to credit losses by considering available evidence regarding these investments including, among other factors, the extent to which, the fair value is less than the cost basis; the financial health of, and business outlook for, the issuer, including industry and sector performance and operational and financing cash flow factors. Additionally, we consider our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value. Assessing the above factors involves inherent uncertainty. If a portion of the unrealized loss is due to credit losses or we do not have the intent or ability to retain our investment in the security, an impairment will be recorded in interest and marketable securities income, net. Impairments, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio if, among other things, relevant information related to our investments was not publicly available or other factors not considered by us would have been relevant to the determination of .
Impairment of Long-Lived Assets
We review our long-lived assets, such as property and equipment, operating lease right-of-use assets and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets and expected future cash flows. Changes in these estimates could materially impact results from operations.
Goodwill and Acquired Intangible Assets
We test goodwill for impairment on an annual basis, as of December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer and the executive management team. We have assigned the entire balance of goodwill to our one reporting unit. The fair value of the reporting unit was based on our market capitalization as of each of December 31, 2025 and 2024, and it was substantially in excess of the carrying value of the reporting unit at each date.
Acquired intangible assets consist of completed technologies, customer relationships, trademarks and trade names, non-compete agreements and acquired license rights. We engage third party valuation specialists to assist us with the initial measurement of the fair value of acquired intangible assets. Fair value and amortization period determinations may be based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in calculating present values. The value of our acquired intangible assets could be different if we had used different assumption. Acquired intangible assets, other than goodwill, are amortized over their estimated useful lives based upon the estimated
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economic value derived from the related intangible assets.
Income Taxes
Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards by using expected tax rates in effect in the years during which the differences are expected to reverse or the carryforwards are expected to be realized.
We currently have net deferred tax assets, comprised of net operating loss ("NOL") carryforwards, tax credit carryforwards and deductible temporary differences. Our management periodically weighs the positive and negative evidence to determine if it is more-likely-than-not that some or all of the deferred tax assets will be realized. In determining our net deferred tax assets and valuation allowances, annualized effective 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 NOL 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.
We have recorded certain tax reserves to address potential exposures involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. Our estimate of the value of our tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be more or less than the amount that we estimated.
Uncertainty in income taxes is recognized in our consolidated financial statements using a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained based on technical merit, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that we believe has a greater than 50% likelihood of being realized upon ultimate settlement.
Stock-Based Compensation
We issue stock awards as part of our compensation program which includes restricted stock, restricted stock units, deferred stock units and employee stock purchases related to our employee stock purchase plan. For equity classified awards, we measure the fair value of these awards at the grant date and recognize such fair value as expense over the vesting period. For liability classified awards, the fair value is determined each reporting period beginning at the grant date until final vesting. We have selected the Black-Scholes option pricing model to determine the fair value of stock awards issued under our 1999 Employee Stock Purchase Plan and the Monte Carlo simulation model to determine the fair value of market-based restricted stock unit awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of the stock awards and the volatility of the underlying common stock. Our assumptions may differ from those used in prior periods. Changes to the assumptions may have an impact on the fair value of stock awards, which could have an impact on our financial statements. Judgment is also required in estimating the number of stock awards that are expected to be forfeited. Should our actual forfeiture rates differ significantly from our estimates, our stock-based compensation expense and results of operations could be materially impacted. In addition, for awards that vest and become exercisable only upon of specified performance conditions, we make judgments and estimates each quarter about the probability that such performance conditions will be met or . Changes to the estimates we make from time to time may have an impact on our stock-based compensation expense and our results of operations.
Capitalized Internal-Use Software Costs
We capitalize salaries and related costs, including stock-based compensation, of employees and consultants who devote time to the development of internal-use software development projects, as well as interest expense related to our outstanding debt. Capitalization begins during the application development stage, once the preliminary project stage has been completed. If a project constitutes an enhancement to previously-developed software, we assess whether the enhancement creates additional functionality to the software, thus qualifying the work incurred for capitalization. Once the project is available for general release, capitalization ceases and we estimate the useful life of the asset and begin amortization. We periodically assess whether triggering events are present to review internal-use software for impairment. Changes in our estimates related to internal-use software would increase or decrease operating expenses or amortization recorded during the period.
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