What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-23 · 203 added, 192 removed, 398 unchanged (50% of the section changed)

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Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s APIs to easily embed voice, messaging and emergency services capabilities into software and applications.

Bandwidth was the first CPaaS provider to offer a robust selection of APIs built on our own cloud platform.

Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform.

Our award-winning support teams help businesses around the world solve complex communications challenges every day.

Bandwidth’s business benefits from multiple global megatrends, including the enterprise migration to the cloud, the adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience and the growth in messaging applications to engage directly with consumers.

Bandwidth’s business benefits from multiple global megatrends, including enterprise migration to the cloud, adoption of CCaaS platforms, the need to be able to work from anywhere, reinvention of customer experience, growth in messaging applications to engage directly with consumers, and application of AI technologies to cloud communications use cases.

We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.

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We will seek to do this in three ways:

(1) by cross-selling and up-selling within our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications;

(2) by focusing on direct-to-enterprise growth to serve Global 2000 enterprises that come directly to Bandwidth to leverage our services to accelerate their digital transformations, and (3) by aiming to be the preferred provider for SaaS platforms that use conversational messaging to create digital engagements that enhance the customer experience.

(1) cross-sell and up-sell our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications;

(2) focus on direct-to-enterprise growth to serve Global 2000 enterprises that directly leverage Bandwidth services to accelerate their digital transformations, and (3) aim to be the preferred provider for SaaS platforms that use conversational voice and messaging to create digital engagements that enhance the customer experience.

These three strategies are the foundation of the durable business we seek to build.

For the years ended December 31, 2023, 2022 and 2021, total revenue was $601 million, $573 million , and $491 million, respectively, representing an increase of 5% in 2023 and 17% in 2022.

Net income in 2022 was $20 million, and net loss in 2021 and 2020 was $27 million and $44 million , respectively.

As of December 31, 2022, 2021 and 2020, the number of active customer accounts was 3,405, 3,300, and 2,879, respectively, representing a year-over-year increase of 3% in 2022 and 15% in 2021.

Segment Reporting Update and Cost Alignment

As a result of certain changes in our business during the quarter ended March 31, 2022, we re-evaluated our segment reporting and determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”.

The primary drivers for this change were the strategic alignment of our operating departments and the sale of certain immaterial legacy businesses.

Net loss in 2023 and 2021 was $16 million and $27 million, respectively.

Net income in 2022 was $20 million.

Management ’ s Discussion and Analysis

Additionally, during the quarter ended March 31, 2022, we changed our presentation of certain costs to align with benchmarked definitions of cost of revenue, research and development, sales and marketing and general and administrative expenses.

See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

For both matters, prior period information has been conformed to the current period presentation.

The following is a comparison of the change in costs to the prior period:

Year ended December 31, 2021 Year ended December 31, 2020

As reported As previously reported As reported As previously reported

(In thousands)

Statement of Operations

Cost of revenue $ 277,094 $ 272,384 $ 189,203 $ 185,252

Research and development 69,505 55,173 54,555 42,059

Sales and marketing 82,333 51,817 61,216 40,552

General and administrative 64,212 113,770 51,644 88,755

Adoption of Accounting Standards Update 2020-06

We adopted Accounting Standards Update 2020-06 (“ASU 2020-06”) on January 1, 2022 using the modified retrospective approach resulting in decreases in accumulated deficit of $9 million, additional paid in capital of $156 million, and deferred tax liability of $1 million.

We also recorded an increase in the Convertible Notes balance of $148 million as a result of the reversal of the separation of the convertible debt between debt and equity.

The adoption of this standard decreased the amount of non-cash interest expense to be recognized in current and future periods as a result of eliminating the discount associated with the equity component.

For the year ended December 31, 2022, the combined interest expense of the 2026 Convertible Notes and 2028 Convertible Notes was $27 million lower upon the adoption of ASU 2020-06.

The number of diluted shares increased as a result of transitioning from the treasury stock method to the as-if converted method, which impacted the earnings per share for the year ended December 31, 2022.

The transition did not impact the years ended December 31, 2021 and 2020, as we incurred a net loss in both reporting periods.

See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.

Revolving Credit Facility

On August 1, 2023, we entered into a credit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, swingline lender and letters of credit issuer.

The Credit Agreement provides for a $50 million revolving credit facility (the “Credit Facility”), including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million.

The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions.

The Credit Facility matures on the earlier of (a) August 1, 2028 or (b) the date that is 91 days prior to the scheduled maturity date or mandatory conversion date of any of our Convertible Notes.

Interest on borrowings under the Credit Facility accrues at an annual rate tied to a base rate or the Secured Overnight Financing Rate (“SOFR”), at our election.

Loans based on SOFR bear interest at a rate equal to term SOFR for the applicable interest period plus 10 basis points plus an applicable margin between 2.25% and 2.75%, and loans based on the base rate bear interest at a rate equal to the base rate plus an applicable margin between 1.25% and 1.75%, in each case of the foregoing, depending upon our consolidated EBITDA for the most recent period of four consecutive fiscal quarters for which financial statements have been delivered under the Credit Agreement.

We are required to pay a quarterly commitment fee equal to between 0.05% and 0.0625% on the unused portion of the borrowing commitment, depending upon our consolidated EBITDA for the most recent period of four consecutive fiscal quarters for which financial statements have been delivered under the Credit Agreement.

Business Interruption Insurance Recovery

Beginning in September 2021, our communications network was subjected to a DDoS Attack that caused intermittent communications services disruptions affecting certain of our markets and customers.

During the period of the DDoS Attack, we maintained certain insurance coverage, including business interruption insurance, intended to cover such circumstances.

In June 2023, we resolved our claim with an insurer, pursuant to which we were entitled to receive $4 million in proceeds from business interruption insurance.

The proceeds of the insurance payment were received in full in July 2023 and were recorded within gain on business interruption insurance recoveries on our consolidated statements of operations in the year ended December 31, 2023.

Repurchase of 2026 Convertible Notes

During November 2022, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes to repurchase (the “Repurchases”) approximately $160 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $117 million.

The Repurchases closed on November 28, 2022.

Following the Repurchases, approximately $240 million aggregate principal amount of the 2026 Convertible Notes remains outstanding.

The difference between the consideration used to repurchase the 2026 Convertible Notes and the carrying value of the 2026 Convertible Notes resulted in a gain of $40 million recorded within other income (expense), net on our consolidated statements of operations included elsewhere in this Annual Report on Form 10-K.

COVID-19 Update

We believe COVID-19 has reduced to endemic levels globally however, while its persistent nature has diminished in the present period, it is possible it could potentially impact areas of the United States or the rest of the world to varying degrees in the future.

During the COVID-19 pandemic, its adverse effects were prevalent in the locations where we, our customers, suppliers and third-party business partners conduct business.

We acknowledge there may be additional impacts to the economy and our business going forward as a result of COVID-19 and that

During March 2023, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes to repurchase approximately $65 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $51 million .

These repurchases closed on March 6, 2023.

We entered into similar agreements to repurchase approximately $160 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $117 million, which closed in November 2022.

Following both of these repurchases, approximately $175 million principal amount of the 2026 Convertible Notes remain outstanding.

The difference between the consideration used to repurchase the 2026 Convertible Notes and the carrying value of the 2026 Convertible Notes resulted in gains of approximately $13 million and $40 million recorded within net gain on extinguishment of debt on our consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively.

Management ’ s Discussion and Analysis

there is uncertainty regarding potentially broad or unknown implications of COVID-19 on our results of operations and overall financial performance remain uncertain.

If the COVID-19 infection rate were to return to pandemic levels in the United States or in other global territories where we operate, we may experience curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods.

Specifically, this could result in enterprises reducing usage of our services or delaying decisions to implement our services.

See “Item 1A.

Risk Factors” for further discussion of the possible impact of COVID-19 on our business.

Beginning on September 25, 2021, our communications network was subjected to a distributed denial of service attack (the “DDoS Attack”) initially causing intermittent communications services disruptions affecting certain of our markets and customers.

A DDoS attack is a malicious attempt to disrupt the normal traffic of a targeted server, service or network by overwhelming the target or its surrounding infrastructure with a flood of unwanted internet traffic from multiple sources, resulting in the slowdown or blockage of legitimate traffic.

Our mitigation efforts, in conjunction with our partners from leading cybersecurity firms, have proven successful.

Our network has been largely stable and operating at normal service levels since the evening of September 29, 2021, although there have been some continued intermittent disruptions.

Key Performance Indicators

We monitor the following key performance indicators (“KPIs”) to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

We believe the following KPIs are useful in evaluating our business:

Key Performance Indicator

We monitor the following key performance indicator (“KPI”) to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

We believe the following KPI is useful in evaluating our business:

Year ended December 31,

2023 2022 2021

Number of active customers (as of period end) (1)

3,405 3,300 2,879

Dollar-based net retention rate (1)

Net retention rate (1)

101 % 112 % 117 %

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(1) As a result of the change in revenue segment reporting, our KPIs of number of active customers and dollar-based net retention rates disclosed in previous SEC filings, press releases and presentations prior to reporting periods ending March 31, 2022, will not be directly comparable to our KPIs reported going forward.

To facilitate comparison between the periods presented in the table above, number of active customers and dollar-based net retention rate have been conformed to the current period methodology.

Number of Active Customer Accounts

We define an active customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period.

We believe usage of our platform by an active customer at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage at levels below $100 per month.

A single organization may constitute multiple unique active customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active customer account.

Customers who pay after using our platform and customers that have credit balances are included in the number of active customer accounts.

For comparative purposes, the number of active customers presented in the table above has been updated to reflect the change in our reporting segments.

Management ’ s Discussion and Analysis

Dollar-Based Net Retention Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate revenue and seek to increase their use of our platform.

We track our performance in this area by measuring the dollar-based net retention rate for our customers who generate revenue.

To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate revenue and that were customers in the same quarter of the prior year.

The dollar-based net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year.

The dollar-based net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters.

(1) As a result of the change in revenue segment reporting, our KPI of net retention rate disclosed in previous SEC filings (previously described as “ dollar-based net retention rate ” ), press releases and presentations prior to reporting periods ending March 31, 2022, will not be directly comparable to our KPI reported going forward.

To facilitate comparison between the periods presented in the table above, net retention rate has been conformed to the current period methodology.

We previously reported active customer account as a KPI.

However, active customer count has diminished in relevance as we focus on larger customers and has been removed as a KPI.

Net Retention Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generated revenue and seek to increase their use of our platform.

We track our performance in this area by measuring the net retention rate for our customers who generate revenue.

To calculate the net retention rate, we first identify the cohort of customers that generated revenue in the same quarter of the prior year.

The net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year.

The net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters.

Customers of acquired businesses are included in the subsequent year ’ s calendar quarter of acquisition.

Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product.

Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.

Our net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product.

Our net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.

As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons.

As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for the purposes of calculating this metric.

For comparative purposes, the dollar-based net retention rate presented in the table above has been updated to reflect the change in our reporting segments.

For comparative purposes, the net retention rate presented in the table above has been updated to reflect the change in our reporting segments.

Key Components of Statements of Operations

Revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services, and (iii) other various communications services and products, indirect revenue and messaging surcharge revenue.

For the years ended December 31, 2022, 2021 and 2020, we generated 78%, 75%, and 74%, respectively, of our revenue from reoccurring sources.

The large bulk of our remaining revenue is generated from recurring monthly charges.

Cloud communications revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, and (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services.

Messaging surcharge revenue is derived from fees imposed by certain carriers within the messaging ecosystem, which are subsequently invoiced and passed through to customers.

For the years ended December 31, 2023, 2022 and 2021, we generated 72%, 73%, and 73%, respectively, of our cloud communications revenue from reoccurring sources.

The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

Management ’ s Discussion and Analysis

We recognize accounts receivable at the time the customer is invoiced.

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Network operations costs are incurred for web services and cloud infrastructure, capacity planning and management, software licenses, hardware and software maintenance fees, customer support and network-related facility rents.

Management ’ s Discussion and Analysis

Personnel costs (including non-cash stock-based compensation expenses) arise for employees who are responsible for the delivery of services and the operations and maintenance of the communications network.

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Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.

Management ’ s Discussion and Analysis

General and Administrative

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For the years ended December 31, 2023, 2022 and 2021, our effective tax rate was 15.3%, (13.1)%, and 12.3%, respectively.

The decrease in our effective tax rate is primarily due to the split of earnings and losses between jurisdictions.

In 2022 we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit.

However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S.

The income resulted in nominal tax expense in the U.S.

due to the utilization of tax attributes and the valuation allowance position.

The increase in our effective tax rate from 2022 to 2023 is primarily due to increased operating losses outside of the U.S., where tax benefits are recognized and are not offset by a valuation allowance.

Judgment is required in determining whether deferred tax assets will be realized in full or in part.

Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established.

As of December 31, 2022, we continue to maintain a valuation allowance for our U.S.

As of December 31, 2023, we continue to maintain a valuation allowance against our U.S.

federal and state net deferred tax assets.

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Results of Operations

Consolidated Results of Operations

The following table sets forth the consolidated statements of operations for the periods indicated.

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Net gain on extinguishment of debt 12,767 40,205 —

Gain on business interruption insurance recoveries 4,000 — —

Interest expense, net (808) (3,048) (28,784)

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Total other income (expense), net 16,154 41,630 (28,958)

Income (loss) before income taxes 17,306 (31,195) (28,972)

Income tax benefit (provision) 2,264 3,833 (15,005)

Net income (loss) $ 19,570 $ (27,362) $ (43,977)

(Loss) income before income taxes (19,303) 17,306 (31,195)

Income tax benefit 2,960 2,264 3,833

Net (loss) income $ (16,343) $ 19,570 $ (27,362)

The following table sets forth our results of operations as a percentage of our total revenue for the periods presented.

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Net gain on extinguishment of debt 2 % 7 % — %

Gain on business interruption insurance recoveries 1 % — % — %

Interest expense, net — % (1) % (6) %

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Total other income (expense), net 3 % 7 % (6) %

Income (loss) before income taxes 3 % (6) % (8) %

Income tax benefit (provision) — % 1 % (4) %

Net income (loss) 3 % (5) % (13) %

(Loss) income before income taxes (3) % 3 % (6) %

Income tax benefit — % — % 1 %

Net (loss) income (3) % 3 % (5) %

(*) Columns may not foot due to rounding.

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(Dollars in thousands)

Cloud communications $ 478,892 $ 474,576 $ 4,316 1 %

Messaging surcharges $ 122,225 $ 98,576 $ 23,649 24 %

Revenue $ 601,117 $ 573,152 $ 27,965 5 %

In 2022, our total revenue increased by $82 million , or 17%, compared with the same period in 2021.

This growth was the result of higher usage of our core messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers.

Growth in our revenue other than from pass-through messaging surcharges, compared with the same period in 2021, was led by our core messaging offerings, which grew 46%, and phone number and 911-enabled phone number services, mostly offset by lower revenue from voice offerings.

The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to the U.S.

midterm elections in November 2022.

Compared with the same period last year, our voice offerings revenue in 2022 remained affected by lower usage arising from the 2021 DDoS incident as well as the absence of revenue from businesses divested earlier in 2022.

Active customer accounts increased 3% to 3,405 as of December 31, 2022, as compared with 3,300 active accounts as of December 31, 2021.

Our dollar-based net retention rate as of December 31, 2022 was 112%.

In 2023, our cloud communications revenue increased by $4 million , or 1%, compared with the same period in 2022.

This growth was the result of higher sales in commercial messaging, which more than offset the absence of cyclical campaign messaging revenue in the prior year, and higher revenue from phone number and 911-enabled phone number services, which was partially offset by lower revenue from voice offerings.

In 2023, our revenue from messaging surcharges increased by $24 million, or 24%, compared with the same period in 2022.

This growth was driven by higher pass-through messaging surcharges imposed by certain carriers related to higher sales of commercial messaging.

Cost of Revenue and Gross Margin

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Total gross margin 39 % 42 %

In 2022, total cost of revenue increased $58 million, compared with the same period in 2021, driven by higher pass-through messaging surcharges of $56 million.

In 2022 , the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $25 million, or 11%, compared with the same period in 2021, driven by profit improvements from the combination of our revenue and cost of revenue derived other than from pass-through messaging surcharges.

Our total gross margin percentage of 42% in 2022 declined two percentage points, compared with the same period in 2021, as operating and product mix improvements were more than offset by the inclusion of higher pass-through messaging surcharges within total revenue.

Management ’ s Discussion and Analysis

In 2023, total cost of revenue increased by $30 million , compared with the same period in 2022, driven by higher pass-through messaging surcharges of $25 million .

The combination of changes in total revenue and total cost of revenue yielded gross profit o f $236 million , which decreased $2 million from the same period in 2022, driven by higher network costs.

Our total gross margin percentage of 39% in 2023 declined by 3% , compared with the same period in 2022, driven by higher network costs and higher pass-through messaging surcharges within the total revenue mix.

Operating Expenses

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Total operating expenses $ 271,614 $ 262,677 $ 8,937 3 %

As a percentage of revenue, total operating expenses for the years ended December 31, 2022 and 2021 were 46% and 44%, respectively.

In 2022, research and development expenses increased by approximately $28 million, or 41%, compared with the same period in 2021.

This increase was primarily due to increased personnel costs from greater numbers of employed staff of $22 million.

The increase in headcount also contributed to higher allocated facilities and IT expenses of $7 million.

In 2022, sales and marketing expenses increased by $14 million , or 17%, compared with th e same period in 2021, primarily due to an increase in sales personnel costs from a greater number of employed staff of $13 million.

In 2022, g eneral and administrative expenses increased $4 million, or 6%, compared with the same period in 2021, primarily due to an increase in personnel costs of $5 million .

Interest Expense, Net

In 2022, interest expense, net of interest income, decreased by $26 million compared with the same period in 2021, due to a $24 million decrease in interest expense primarily related to the impact of the adoption of ASU 2020-06 on the Convertible Notes.

See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

As a percentage of revenue, total operating expenses for the years ended December 31, 2023 and 2022 were 45% and 46%, respecti vely.

Management ’ s Discussion and Analysis

In 2023, research and development expenses increased by $6 million, or 6%, compared with the same period in 2022.

This increase was primarily due to higher information technology and facilities expenses in support of our expanding research and development capabilities.

In 2023, sales and marketing expenses increased by $5 million , or 6% , compared with th e same period in 2022, primarily due to higher labor and certain discretionary expenses along with higher information technology and facilities expenses in support of our expanding capabilities.

In 2023, g eneral and administrative expenses decreased by $3 million, or 4%, compared with the same period in 2022, driven by lower corporate administrative expenses.

Interest Expense, Net

In 2023, interest expense, net of interest income decreased by $2 million , compared with the same period in 2022, due to lower interest expense of $1 million as a result of the 2026 Convertible Notes repurchases of approximately $65 million in March 2023 and $160 million in November 2022, in addition to higher interest income of $1 million from higher interest rates on invested cash.

Income Tax Benefit

For the year ended December 31, 2022, we recognized an income tax benefit of $2 million, a decrease of $2 million compared with the same period in 2021 .

In 2023, we recognized an income tax benefit of $3 million , an increase of less than $1 million, compared with the same period in 2022 .

The resulting effective tax rate for the year ended December 31, 2023 was 15.3% compared with (13.1)% in 2022 .

For the year ended December 31, 2022, the favorable change to the effective tax rate was primarily due to the split of earnings and losses between jurisdictions.

In 2022 , we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit.

However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S.

This income resulted in nominal income tax expense in the U.S.

due to the utilization of tax attributes and the valuation allowance position.

For the years ended December 31, 2022 and 2021, the effective tax rates o f (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S.

primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.

For the year ended December 31, 2023, the change to the effective tax rate was primarily due to increased operating losses outside of the U.S., where tax benefits are recognized and are not offset by a valuation allowance.

For the years ended December 31, 2023 and 2022, the effective tax rates of 15.3% and (13.1)%, respectively, differed from the federal statutory rate of 21% in the U.S.

primarily due to the valuation allowance recorded against our U.S.

federal and state net deferred tax assets.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance.

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and other non-deductible expenditures in the U.S.

Excluding the impact of the valuation allowance, we realize an estimated state effective tax rate of 4.3%.

Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the year ended December 31, 2023.

In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S.

The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S.

The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S.

that involve a process of experimentation designed to discover new information intended to develop a new or improved business component.

Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2.

non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance included minimum state taxes, foreign tax benefits and foreign rate differentials.

non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code Section 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include minimum state taxes, foreign tax benefits and foreign rate differentials.

As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

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federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

Management ’ s Discussion and Analysis

Comparison of the Years Ended December 31, 2022 and 2021

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(Dollars in thousands)

Cloud communications $ 474,576 $ 449,656 $ 24,920 6 %

Messaging surcharges $ 98,576 $ 41,251 $ 57,325 139 %

Revenue $ 573,152 $ 490,907 $ 82,245 17 %

In 2022, our total revenue increased by $82 million , or 17%, compared with the same period in 2021.

This growth was led by increases in our core voice, messaging and related surcharges, and phone number services of $71 million, $41 million, and $26 million, respectively.

This growth was aided by a full year of revenue contribution from the acquisition of Voxbone in November 2020.

We believe our revenue results were lowered by approximately $10.0 million in 2021 from lost transaction volume and customer credits due to the previously disclosed 2021 DDoS Attack.

Management ’ s Discussion and Analysis

This growth was the result of higher usage of our core messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers.

The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to the U.S.

midterm elections in November 2022.

Active customer accounts increased 3% to 3,405 as of December 31, 2022, as compared with 3,300 active accounts as of December 31, 2021.

Our net retention rate as of December 31, 2022 was 112%.

Cost of Revenue and Gross Margin

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Total gross margin 42 % 44 %

In 2021 , total cost of revenue increased $88 million, compared with the same period in 2020.

This growth was driven by higher cost of revenue in our messaging business and related surcharges, network related costs, and core voice of $33 million, $24 million, and $23 million, respectively.

This growth was aided by a full year of cost of revenue contribution from the acquisition of Voxbone in November 2020.

In 2021, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $60 million , or 39%, compared with the same period in 2020, driven by higher revenue and improved operating leverage.

For the year ended December 31, 2021, total gross margin was 44.0% compared with 45.0% for the year ended December 31, 2020 and was impacted by higher pass-through messaging surcharges within total revenue.

In 2022, total cost of revenue increased by $58 million, compared with the same period in 2021, driven by higher pass-through messaging surcharges of $56 million.

In 2022, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $238 million, whic h increased by $25 million, or 11%, compared with the same period in 2021, driven by profit improvements from the combination of our revenue and cost of revenue derived other than from pass-through messaging surcharges.

Our total gross margin percentage of 42% in 2022 declined two percentage points compared with the same period in 2021 , as operating and product mix improvements were more than offset by the inclusion of higher pass-through messaging surcharges within total revenue.

Management ’ s Discussion and Analysis

Operating Expenses

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In 2022 , research and development expenses increased by approximately $28 million, or 41%, compared with the same period in 2021.

This increase was primarily due to increased personnel costs from greater numbers of employed staff of $10 million, which was driven by the acquisition of Voxbone in November 2020.

In 2021 , sales and marketing expenses increased by $21 million , or 34%, compared with th e same period in 2020, driven by the increase in sales personnel costs from a greater number of employed staff of $8 million from the acquisition of Voxbone in November 2020.

In 2021 , g eneral and administrative expenses increased by approximately $13 million , or 24%, compared with the same period in 2020 , main ly from higher headcount costs of $14 million, driven by the acquisition of Voxbone in November 2020.

This increase was primarily due to increased personnel costs from greater numbers of employed staff of $22 million.

The increase in headcount also contributed to higher allocated facilities and IT expenses of $7 million.

In 2022 , sales and marketing expenses increased by $14 million, or 17%, compared with the same period in 2021, primarily due to an increase in sales personnel costs from a greater number of employed staff of $13 million.

In 2022 , general and administrative expenses increased $4 million, or 6%, compared with the same period in 2021, primarily due to an increase in personnel costs of $5 million.

Interest Expense, Net

In 2021 , interest expense, net of interest income increased by $15 million compared with the same period in 2020 , due to a $12 million increase in interest expense related to the Convertible Notes and a $2 million decrease in interest income from the investment of follow-on equity offering proceeds.

See Note 8, “ Debt, ” to the consolidated financial statements, for additional details.

Income Tax Benefit (Provision)

In 2022 , interest expense, net of interest income, decreased by $26 million compared with the same period in 2021, due to a $24 million decrease in interest expense primarily related to the impact of the adoption of ASU 2020-06 on the Convertible Notes.

See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

Income Tax Benefit

For the year ended December 31, 2022, we recognized an income tax benefit of $2 million, a decrease of $2 million compared with the same period in 2021.

The resulting effective tax rate for the year ended December 31, 2022 was (13.1)% compared with 12.3% in 2021.

For the year ended December 31, 2022, the favorable change to the effective tax rate was primarily due to the split of earnings and losses between jurisdictions.

In 2022, we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit.

However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S.

This income resulted in nominal income tax expense in the U.S.

due to the utilization of tax attributes and the valuation allowance position.

For the years ended December 31, 2022 and 2021, the effective tax rates of (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S.

primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance.

These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S.

and other non-deductible expenditures in the U.S.

Excluding the impact of the valuation allowance, we realize an estimated state effective tax rate of 4.3% for the year ended December 31, 2022.

The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S.

that involve a process of experimentation designed to discover new information intended to develop a new or improved business component.

Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC

Management ’ s Discussion and Analysis

In 2021 , income tax expense decreased by $19 million compared with the same period in 2020.

The effective tax rate for the year ended December 31, 2021, was 12.3% compared with (51.8)% in the same period in 2020.

The increase in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.

718-740-35-2.

non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include minimum state taxes, foreign tax benefits and foreign rate differentials.

As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S.

increase or decrease in subsequent periods.

We will maintain a valuation allowance against all U.S.

federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

Liquidity and Capital Resources

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Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform and the purchase of land for our new corporate headquarters.

On June 6, 2022, we entered into a credit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank as administrative agent, issuing lender and swingline lender.

The Credit Agreement provides for a $50 million revolving credit facility (the “Credit Facility”), including a $20 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million.

The Credit Facility matures on June 6, 2025.

As of December 31, 2022, there were no borrowings under the Credit Facility.

Additionally, in the last three years we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes and the 2028 Convertible Notes in February 2020 and March 2021, respectively.

As of December 31, 2023, we had cash and cash equivalents of $132 million and marketable securities of $21 million.

On August 1, 2023, we entered into the Credit Agreement, which provides for a $50 million Credit Facility, including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million.

The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions.

See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and “Overview — Revolving Credit Facility,” included elsewhere in this Annual Report on Form 10-K, for additional information on the Credit Agreement.

On June 6, 2022, we entered into a credit agreement among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank (“SVB”), as administrative agent, issuing lender and swingline lender.

This credit agreement provided for a $50 million revolving credit facility, including a $20 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver.

As a result, SVB ceased normal banking operations for a period of time.

Given these circumstances, on March 14, 2023 (the “Notice Date”), we gave notice to SVB of our desire and intent to terminate the commitments (the “Termination”) under this credit agreement.

As of the Notice Date, there were no outstanding borrowings under this credit agreement.

The Termination became effective on March 15, 2023.

Additionally, we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes in February 2020 and the 2028 Convertible Notes in March 2021.

We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone.

On November 2, 2022, we repurchased $160 million of our 2026 Convertible Notes as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We may, at any time and from time to time, seek to retire or purchase our 2026 Notes or 2028 Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise.

On March 6, 2023 and November 2, 2022, we repurchased $65 million and $160 million, respectively, of our 2026 Convertible Notes, as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise.

Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

The amounts involved may be material.

We believe that our cash and cash equivalents balances and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Management ’ s Discussion and Analysis

We believe that our cash, cash equivalents and marketable securities balances, and the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.

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If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected .

Our principal future commitments consist of (i) an aggregate of $490 million in Convertible Notes (see Note 8, “Debt” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K , for a discussion of the 2026 Convertible Notes and the 2028 Convertible Notes), (ii) a $496 million non-cancelable lease for our future office headquarters, which is anticipated to commence in mid- 2023 and continue for an initial twenty (20) year term (the “ Headquarters Lease ” ) (see Note 5, “Right-of-Use Asset and Lease Liabilities” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our Headquarters Lease), (iii) $12 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers, and (iv) $17 million in future minimum rent payments for our current office space.

See Note 12, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for future lease commitments.

Management ’ s Discussion and Analysis

Our principal future commitments consist of (i) an aggregate of $425 million in Convertible Notes (see Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of the 2026 Convertible Notes and the 2028 Convertible Notes), (ii) $496 million in future minimum rent payments for our current office space, including a $487 million non-cancelable lease for our new corporate headquarters , which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term (the “ Headquarters Lease ” ) (see Note 5, “Leases,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our Headquarters Lease), and (iii) $23 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers (see Note 12, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on future contractual obligations).

Statement of Cash Flows

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Net cash provided by operating activities $ 39,001 $ 34,906 $ 40,803

Net cash (used in) provided by investing activities (133,449) 2,833 (455,085)

Net cash provided by (used in) investing activities 30,849 (133,449) 2,833

Net cash (used in) provided by financing activities (52,775) (120,005) 207,027

Effect of exchange rate changes on cash, cash equivalents and restricted cash 610 881 189

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (217,667) $ 250,852 $ (103,567)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 17,685 $ (217,667) $ 250,852

Cash Flows from Operating Activities

In 2023, net cash provided by operating activities was $39 million and was generated by our aggregate results of $55 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, and net gain on extinguishment of debt and (2) a $16 million cash outflow from lower operating liabilities and higher operating assets.

The net gain on extinguishment of debt was a result of the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes in March 2023.

Within operating liabilities, the net cash used as a result of lower accrued expenses and other liabilities of $11 million during 2023 was driven by less advanced billings from customers utilizing their credit balances for invoice payments.

T he cash outflow related to the operating right-of-use liability was $10 million.

This was partially offset by cash provided by accounts payable of $5 million and was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements.

W ithin operating assets, the net cash used as a result of higher accounts receivable of $3 million during 2023 was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of 2023.

This was partially offset by cash

Management ’ s Discussion and Analysis

provided as a result of lower prepaid expenses and other assets of $2 million during 2023 from timing throughout the year.

In 2022, net cash provided by operating activities was $35 million and was generated by our aggregate results of $40 million during the period, net of non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a net cash outflow from operating assets aggregating $19 million.

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This was partially offset by a cash outflow related to the operating right-of-use liability of $8 million.

W ithin operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts.

Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts.

The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven by higher VAT receivables and the timing of advance payments for software and other services.

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The non-cash items included depreciation and amortization expense of $37 million, amortization of debt discount and issuance costs of $27 million, stock-based compensation expense of $15 million, right-of-use asset amortization of $6 million, and loss on disposal of property, plant and equipment of $1 million, offset by a deferred tax benefit of $8 million.

In 2020, net cash provided by operating activities was $5 million consisting of net loss of $44 million a djusted for non-cash items of $62 million and offset by cash used changes in operating assets and liabilities of $13 million .

Cash generated in operating assets and liabilities included an increase in accrued expenses and other liabilities of $14 million .

Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $19 million , a decrease in operating right-of-use liability of $5 million , and an increase in prepaid expenses and other assets of $4 million .

The non-cash items included depreciation and amortization expense of $17

Management ’ s Discussion and Analysis

million , amo rtization of debt discount and issuance costs of $16 million, deferred tax expense of $14 million, stock-based compensation expenses of $10 million, and right-of-use amortization of $5 million.

Cash Flows from Investing Activities

In 2023, net cash provided by investing activities was $31 million .

Cash provided by investing activities was driven by proceeds from the sales and maturities of marketable securities of $130 million to partially fund the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes.

This was partially offset by cash used for the purchase of marketable securities of $81 million.

Cash used for the purchase of property, plant and equipment was $9 million and cash used for capitalized software development costs was $11 million, driven by investments in the communications platform.

In 2022, net cash used in investing activities was $133 million.

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Cash provided by investing activities included proceeds from sales and maturities of other investments of $40 million, proceeds from the sale of land of $17 million, offset by the purchase of land of $30 million, purchase of property, plant and equipment of $21 million and capitalized internally developed software costs of $4 million.

In 2020, net cash used in investing activities was $455 million, mainly from the costs related to the Voxbone acquisition of $400 million , net of cash.

In addition, cash used in investing activities was the purchase of other investments of $231 million , the purchase of property, plant and equipment of $12 million and capitalized internally developed software costs of $2 million , offset by the proceeds from sales and maturities of other investments of $191 million.

Management ’ s Discussion and Analysis

Cash Flows from Financing Activities

In 2023, net cash used in financing activities was $53 million, consisting primarily of $51 million net cash paid to repurchase $65 million aggregate principal amount of the 2026 Convertible Notes.

In 2022, net cash used in financing activities was $120 million, consisting primarily of $117 million net cash paid to repurchase $160 million aggregate principal amount of the 2026 Convertible Notes.

In 2021, net cash provided by financing activities was $207 million consisting primarily of $250 million in proceeds from the issuance of the 2028 Convertible Notes and $1 million in proceeds from the exercise of stock options, partially offset by $26 million in the purchase of the 2028 Capped Calls, $8 million in payments of debt issuance cost, $7 million in payment of holdback proceeds to former Voxbone shareholders, and $4 million in value of equity awards withheld for tax liabilities.

In 2020, net cash provided by financing activities was $347 million consisting primarily of $400 million in proceeds from the issuance of the 2026 Convertible Notes and $4 million in proceeds from the exercise of stock options, partially offset by $43 million in the purchase of the 2026 Capped Calls, $12 million in payments of debt issuances cost, and $2 million in value of equity awards withheld for tax liabilities.

Off-Balance Sheet Arrangements

With the acquisition of Voxbone, we have off-balance sheet agreements for short-term office leases in the amount of less than $1 million ending prior to December 31, 2023 .

With the acquisition of Voxbone, we have off-balance sheet agreements for short-term office leases in the amount of $1 million , ending prior to December 31, 2024 .

Management ’ s Discussion and Analysis

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• stock-based compensation.

We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges, expressed as a percentage of revenue.

We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by cloud communications revenue.

In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our core operating performance.

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2023 2022 2021

(In thousands)

(Dollars in thousands)

Gross Profit $ 236,157 $ 238,353 $ 213,813

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________________________

(1) Calculated by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges of $99 million, $41 million, and $11 million in the years ended December 31, 2022, 2021 and 2020, respectively.

(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $479 million, $475 million, and $450 million in the years ended December 31, 2023, 2022 and 2021, respectively.

Non-GAAP Net Income

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• net (gain) loss on extinguishment of debt;

• gain on business interruption insurance recoveries;

• non-recurring items not indicative of ongoing operations and other;

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( In thousands, except share and per share amounts )

Net income (loss) $ 19,570 $ (27,362) $ (43,977)

Net (loss) income $ (16,343) $ 19,570 $ (27,362)

Stock-based compensation 36,992 20,655 14,537

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Amortization of debt discount and issuance costs for convertible debt 2,004 2,977 26,672

Acquisition-related expenses — — 14,458

Gain on sale of business — (3,777) —

Net cost associated with early lease terminations and leases without economic benefit 3,954 — —

Net gain on extinguishment of debt (12,767) (40,205) —

Gain on business interruption insurance recoveries (4,000) — —

Non-recurring items not indicative of ongoing operations and other (1)

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Interest expense on Convertible Notes (3)

1,287 1,666 —

Numerator used to compute Non-GAAP diluted net income per share $ 24,047 $ 16,662 $ 25,711

Net income (loss) per share

Net (loss) income per share

Basic $ (0.64) $ 0.77 $ (1.09)

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________________________

(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.

(1) Non-recurring items not indicative of ongoing operations and other include (i) $0.8 million, $0.5 million, and $0.8 million of losses on disposals of property, plant and equipment during the years ended December 31, 2023, 2022 and 2021, respectively, (ii) $0.4 million of expense resulting from the early termination of our undrawn SVB credit facility during the year ended December 31, 2023 and (iii) $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022.

Management ’ s Discussion and Analysis

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The Non-GAAP effective income tax rate was 10.1%, 7.0%, and 14.2% for the years ended December 31, 2023, 2022 and 2021, respectively.

For the year ended December 31, 2022, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S.

primarily due to research and development tax credits generated in 2022.

For the years ended December 31, 2021 and 2020, these effective income tax rates differ from the federal statutory tax rate of 21% in the U.S.

For the years ended December 31, 2023 and 2022, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S.

primarily due to the research and development tax credits generated in 2023 and 2022.

For the year ended December 31, 2021, the effective income tax rate differed from the federal statutory tax rate of 21% in the U.S.

primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.

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As of December 31, 2023, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.

(3) Upon the adoption of ASU 2020-06, net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share.

See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on the adoption of ASU 2020-06.

(3) Upon the adoption of ASU 2020-06 on January 1, 2022, net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share.

Adjusted EBITDA

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• net (gain) loss on extinguishment of debt;

• gain on business interruption insurance recoveries;

• non-recurring items not indicative of ongoing operations and other.

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(In thousands)

Net income (loss) $ 19,570 $ (27,362) $ (43,977)

Income tax (benefit) provision (2,264) (3,833) 15,005

Net (loss) income $ (16,343) $ 19,570 $ (27,362)

Income tax benefit (2,960) (2,264) (3,833)

Interest expense, net 808 3,048 28,784

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Amortization 17,274 17,180 19,119

Acquisition-related expenses — — 14,458

Stock-based compensation 36,992 20,655 14,537

Gain on sale of business — (3,777) —

Net cost associated with early lease terminations and leases without economic benefit

Net gain on extinguishment of debt (12,767) (40,205) —

Gain on business interruption insurance recoveries (4,000) — —

Non-recurring items not indicative of ongoing operations and other (1)

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________________________

(1) Non-recurring items not indicative of ongoing operations and other include $0.8 million, $0.5 million, and $0.8 million of losses on disposals of property, plant and equipment during the years ended December 31, 2023, 2022 and 2021, respectively, $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022.

Management ’ s Discussion and Analysis

Free Cash Flow

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(2) Includes the net cash used from the purchase of land of $(30.0) million offset by the proceeds from the sale of land of $17.5 million from investing activities of the statement of cash flows for the year ended December 31, 2021.

Management ’ s Discussion and Analysis

Critical Accounting Policies and Significant Judgments and Estimates

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We enter into arrangements with customers that are typically 2 to 3 years in length with an auto-renewal feature.

When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated period of benefit.

When required as part of providing service, revenues and associated expenses related to nonrefundable,

Management ’ s Discussion and Analysis

upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated period of benefit.

Our arrangements do not contain general rights of return or provide customers with the right to take possession of the software supporting the applications.

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The measurement period ends once all information is obtained, but no later than one year from the acquisition date.

Management ’ s Discussion and Analysis

Goodwill and Intangible Assets

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Goodwill is tested for impairment at the reporting unit level.

In evaluating the recoverability of goodwill, we perform a qualitative analysis to determine whether events and circumstances exist that indicate that it is more likely than not that goodwill is impaired.

The qualitative factors we consider include but are not limited to, macroeconomic conditions, industry and market conditions, company-specific events and changes in circumstances.

Under ASC 350, we have the option to first assess qualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

In performing qualitative assessments, consistent with ASC 350-20-35-3C, we consider, among other factors, macroeconomic conditions (both in the United States and internationally), our overall financial performance (including, but not limited to, comparisons to prior periods, current period internal expectations, and comparable peer companies), broader industry and market considerations, and the trading price performance of our Class A common stock.

As of December 31, 2023, we completed a quantitative assessment under ASC 350 and determined that there was not an impairment of goodwill.

The estimated fair value of our one reporting unit was based on the income approach and the market approach.

Significant assumptions used within the discounted cash flow method under the income approach included estimated revenue projections and a risk adjusted discount rate.

Significant assumptions used with the market approach included estimated revenue projections and an appropriate risk adjusted earnings multiple.

We completed our annual goodwill impairment analysis in each of the years ended December 31, 2023, 2022 and 2021 and no impairment charges were recorded.

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Long-lived assets, including intangible assets with definite lives, are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise.

Management ’ s Discussion and Analysis

We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.

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If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

As of December 31, 2022, intangible assets, net of accumulated amortization, were $177 million, which consists primarily of client relationships, client contracts and developed technology.

As of December 31, 2023, intangible assets, net of accumulated amortization, were $167 million, which consists primarily of customer relationships and developed technology.

No indicators of impairment were identified for the years ended December 31, 2023, 2022 and 2021.

Internal-Use Software Development Costs

Internal-use software includes software that has been acquired, internally developed, or modified exclusively to meet the Company's needs.

Internal-use software includes software that has been acquired, internally developed, or modified exclusively to meet our needs.

We capitalize qualifying internal-use software development costs that are incurred during the application development stage.

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As of December 31, 2023, software development costs, net of accumulated amortization, were $15 million.

Capitalized costs of platform and other software applications are included in property, plant and equipment.

These costs are amortized over the estimated useful life of the software on a straight-line basis over three years, which is recorded in cost of revenue in the statement of operations.

Capitalized costs of platform and other software applications are included in property, plant and equipment, net.

These assets are placed into service when ready for use and amortized over the estimated useful life of the software on a straight-line basis over four years, which is recorded in cost of revenue in the consolidated statements of operations.

We evaluate the useful life of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which

Management ’ s Discussion and Analysis

the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

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We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.

Management ’ s Discussion and Analysis

Other Contingencies

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In addition, we record a provision for non-income based taxes and fees in jurisdictions where it is both probable that liability has been incurred and the amount of the exposure can be reasonably estimated.

As a result, we have recorded a liability of $8 million and $11 million as of December 31, 2022 and 2021, respectively, included in accrued expenses and other current liabilities.

As a result, we have recorded a liability of $8 million as of December 31, 2023, which is included in accrued expenses and other current liabilities.

These estimates are based on several key assumptions, including the taxability of our services, the jurisdictions in which we believe we have nexus and the sourcing of revenue to those jurisdictions.

1 unchanged sentence

Recently Issued Accounting Guidance

See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recently adopted accounting standards and recent accounting pronouncements not yet adopted.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis