Edward McGowan
Executive Vice President and Chief Financial Officer at Akamai Technologies
Thank you, Tom. As Tom mentioned, Akamai delivered another solid quarter in Q2. Q2 revenue was $903 million, up 6% year-over-year or 9% in constant currency. Revenue was in line with our guidance and was led by our Security and Compute businesses. As we mentioned on our last call, we expected significant foreign exchange headwinds to impact our revenue in Q2. The much stronger U.S. dollar negatively impacted our year-over-year growth rate by 3 points or approximately $29 million of revenue year-over-year and $14 million on a sequential basis.
On a combined basis, our Security and Compute businesses represented 54% of total revenue, growing 26% year-over-year and 30% in constant currency. Security revenue was $381 million and grew 17% year-over-year and 21% in constant currency, with continued strength from our Zero Trust business led by Guardicore. Guardicore delivered approximately $14 million of revenue in Q2. Security represented 42% of total revenue in Q2, which is up 4 points from Q2 a year ago.
Compute revenue was $106 million in Q2, growing 74% year-over-year and 78% in constant currency. Linode contributed revenue of approximately $32 million in the second quarter. Delivery revenue was $417 million, down 11% year-over-year and 8% in constant currency. It's worth noting that while traffic on our network continued to grow, the rate of that traffic growth declined sequentially in Q2. As Tom mentioned, we believe that the current macroeconomic environment has had the greatest impact on customers in our media vertical, most notably in advertising and gaming. These challenges are most apparent in our delivery results.
Also, as we talked about at our Analyst Day in May, we started to align our pricing strategy with the new traffic growth rates we have seen on our network over the last two quarters. In addition to scaling back discounts provided upon renewal, we decided to turn away some business from a very small number of customers who have extreme traffic peaks compared to their daily usage patterns. While this will result in slightly less revenue, it will enable us to significantly lower our network capex as we focus on cash flow from our Delivery business to help accelerate our investments in faster-growing areas like Compute and Security.
Sales in our international markets represented 47% of total revenue in Q2, unchanged from Q1. International revenue grew 6% year-over-year or 13% in constant currency. Finally, revenue from our U.S. market was $477 million and grew 6% year-over-year.
Moving now to costs and profitability. Cash gross margin was 75%. GAAP gross margin, which includes both depreciation and stock-based compensation, was 62%. Non-GAAP cash operating expenses were $292 million. Adjusted EBITDA was $388 million and our adjusted EBITDA margin was 43%. Non-GAAP operating income was $262 million, and non-GAAP operating margin was 29%. It is worth noting that our non-GAAP operating margin was negatively impacted by approximately 1 point due to unfavorable foreign exchange.
Capital expenditures in Q2, excluding equity compensation and capitalized interest expense were $104 million. This was much better than we expected, partly due to some Linode specific capex that pushed from Q2 into Q3 as well as some savings from our strategy of being more selective on certain types of customer traffic. These savings were most apparent in our network capex, excluding Linode, which was only about 3% of revenue.
GAAP net income for the second quarter was $120 million or $0.74 of earnings per diluted share. Non-GAAP net income was $216 million or $1.35 of earnings per diluted share, down 5% year-over-year and up one half of 1% in constant currency. It's worth noting that foreign exchange negatively impacted our non-GAAP EPS by approximately $0.07. Taxes included in our non-GAAP earnings were $42 million based on a Q2 effective tax rate of approximately 16%. This was about 1.5 points higher than last year.
Moving now to cash and our use of capital. As of June 30, our cash, cash equivalents and marketable securities totaled approximately $1.3 billion. During the second quarter, we spent approximately $165 million to repurchase shares, buying back approximately 1.6 million shares. Our ongoing share repurchase activity has resulted in a net reduction in our non-GAAP fully diluted shares outstanding of approximately 4 million shares or roughly 2% on a year-over-year basis.
We ended Q2 with approximately $1.5 billion remaining on our current repurchase authorization. Our intention is to continue to buy back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases.
Before I provide our Q3 outlook and an update to our 2022 guidance, I want to highlight several factors. First, with nearly 50% of our revenue coming from outside the U.S., foreign exchange continues to be a significant headwind to our reported results. At current spot rates, our guidance now assumes foreign exchange will have a negative $114 million impact to revenue in 2022 on a year-over-year basis. As I mentioned previously, foreign exchange also impacts our margins and earnings. We estimate FX will negatively impact non-GAAP operating margin by approximately 1 point year-over-year and non-GAAP earnings by approximately $0.31 for the full year 2022.
Second, we are incrementally more cautious on the outlook for traffic growth in Q3 and Q4. Based on our year-to-date trend, plus what we are hearing from other large Internet companies, we are anticipating a slower-than-usual traffic growth rate for the remainder of 2022. Third, as a result of the expected slower traffic growth rate and our updating pricing strategy that we noted earlier, we anticipate capex to be significantly below our previous outlook.
Finally, as Tom mentioned, we expect the more challenging macroeconomic environment to dampen our revenue growth and margins in the near term. When combined with the impact of renewing 8 of our top 10 customers in the first half of the year, we expect Delivery revenue to decline at a slightly higher rate on a year-over-year basis for the next two quarters. As a result of these factors, we also expect margins to decline over the near term as well.
We believe strongly in the long-term opportunities in front of us, especially in Security and Compute, and therefore, planned to continue to invest to exploit the market opportunity in these areas. That said, as Tom highlighted, we are embarking on several major initiatives to reduce costs and improve operational efficiency. Potential savings for each of these areas is in the tens of millions of dollars.
Specifically, we are planning to do the following three things. First, significantly reduce our cloud spend with hyperscalers as we migrate internal Akamai workloads to Linode. Second, realized savings from our strategy of being more selective on certain types of customer traffic, which we expect will result in both lower capital expenditures and depreciation expense. And third, optimize our real estate footprint as the hybrid work experience becomes more permanent.
Now turning to our Q3 guidance. We are projecting revenue in the range of $868 million to $883 million or up 1% to 3% as reported or 5% to 7% in constant currency over Q3 2021. Foreign exchange fluctuations are expected to have a negative $11 million impact on Q3 revenue compared to Q2 levels and a negative $36 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 74%. In the short term, our gross margin is negatively impacted by our continued investment in Guardicore and the Linode-related headcount as well as higher third-party cloud costs. However, we are confident that this is a short-term impact only. We expect our gross margin to expand to the high 70% long-term target model as we see continued strong growth from both Guardicore and Linode as we reduce our third-party cloud costs over time.
Q3 non-GAAP operating expenses are projected to be $283 million to $291 million. We anticipate Q3 EBITDA margins of approximately 41%. We expect non-GAAP depreciation expense to be between $125 million to $128 million and we expect non-GAAP operating margin to be approximately 27% for Q3.
As mentioned previously, the near-term decline in operating margin is due to slower traffic and revenue growth, our annual merit-based wage increase, which become effective July 1, the negative impact from foreign exchange, investments associated with Guardicore and Linode and increased third-party cloud costs. As our Security and Compute business continue to grow and we reap the benefits of the cost savings actions I described earlier, we are confident that our operating margins will return to 30% and then grow from there.
Moving on to capex. We expect to spend approximately $109 million to $119 million, excluding equity compensation and capitalized interest in the third quarter. This represents approximately 13% of projected total revenue. And with the overall revenue and spend configuration I just outlined, we expect Q3 non-GAAP EPS in the range of $1.21 to $1.26. This EPS guidance assumes taxes of $37 million to $38 million based on an estimated quarterly non-GAAP effective tax rate of approximately 16%. It also reflects a fully diluted share count of approximately 160 million shares.
Looking ahead to the full year, we now expect revenue of $3.57 billion to $3.61 billion, which is up 3% to 4% year-over-year as reported or up 6% to 8% in constant currency. We continue to expect Security growth of approximately 20% in constant currency for the full year 2022. We now estimate non-GAAP operating margins to be approximately 28% to 29% and non-GAAP earnings per diluted share of $5.19 to $5.37. And this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 16% and a fully diluted share count of approximately 160 million shares. Finally, full year capex is anticipated to be approximately 12% to 13% of revenue.
In closing, while the macroeconomic backdrop has become more uncertain, we believe that we are in the right markets with differentiated products that remain highly valued by our customers.
Thank you. Tom and I would be happy to take your questions. Operator?
