What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-14 compared with 2023-02-15 · 149 added, 123 removed, 189 unchanged (59% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NON-GAAP MEASURES

Our non-GAAP financial measures should only be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.

We believe that these measures help investors understand our core operating results and prospects, which is consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations.

They are not a substitute for financial measures prepared under U.S.

A reconciliation of GAAP and non-GAAP measures is located with each non-GAAP measure.

BUSINESS OVERVIEW

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Our powerful, low-code platform for workflow automation and artificial intelligence-powered decisioning enables the world’s leading brands and government agencies to hyper-personalize customer experiences, streamline customer service, and automate mission-critical business processes and workflows.

With Pega, our clients can leverage our intelligent technology and scalable architecture to accelerate their digital transformation.

With Pega, our clients can leverage our artificial intelligence (“AI”) technology and scalable architecture to accelerate their digital transformation.

In addition, our client success teams, world-class partners, and clients leverage our Pega Express™ methodology to design and deploy mission-critical applications quickly and collaboratively.

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Along with our partners, we deliver solutions tailored to the specific industry needs of our clients.

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements.

Until we fully complete our subscription transition, which we expect will occur in 2023, our operating results may be impacted.

Operating performance, revenue mix, and new arrangements in each period can fluctuate based on client preferences for our perpetual and subscription offerings.

See risk factor "If we fail to manage our transition to a more subscription-based business model successfully, our results of operations and/or cash flows could be negatively impacted" in Item 1A of this Annual Report for additional information.

Our direct financial exposure to Ukraine, Russia, and Belarus is not material.

In 2021, before Russia's invasion of Ukraine, we made a business decision to stop pursuing new clients in Russia and closed our local office.

However, the ultimate impact of Russia’s invasion of Ukraine on our business will depend on future developments, including the duration and spread of the conflict and the impact on our people, partners, clients, and vendors in neighboring countries and globally, all of which are uncertain and unpredictable.

Performance metrics

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ACV represents the annualized value of our active contracts as of the measurement date.

The contract's total value is divided by its duration in years to calculate ACV for subscription license and Pega Cloud contracts.

Maintenance revenue for the quarter then ended is multiplied by four to calculate ACV for maintenance.

ACV is a performance measure that we believe provides useful information to our management and investors, particularly during our subscription transition.

Remaining performance obligations (“Backlog”)

Reconciliation of GAAP Backlog and Constant Currency Backlog

(in millions, except percentages) Q4 2022 1 Year Growth Rate

Backlog $ 1,356 1 %

The contract's total value is divided by its duration in years to calculate ACV.

ACV is a performance measure that we believe provides useful information to our management and investors.

In 2023, the Company revised its ACV methodology for maintenance and all contracts less than 12 months as its overall client renewal rate exceeds 90%.

The impact of the change was $3 million or 0.3% of Total ACV or less for all quarters in 2022.

Previously disclosed ACV amounts have been updated to allow for comparability.

This simplification, made possible by improvements to the Company’s financial systems, ensures that ACV for all contract types and lengths is consistently calculated as the total contract value divided by the duration in years.

Previously, ACV for maintenance was calculated as the maintenance revenue for the quarter then ended, multiplied by four, and ACV for contracts less than 12 months was equal to the contract’s total value.

The Company believes the simplified methodology better represents the current value of its contracts and better aligns its definition with comparable companies.

Reconciliation of ACV and ACV (constant currency)

(in millions, except percentages) December 31, 2022 December 31, 2023 1-Year Change

ACV $ 1,126 $ 1,255 11 %

Impact of changes in foreign exchange rates — (11)

Backlog - Constant Currency $ 1,395 4 %

Constant currency measures are calculated by applying foreign exchange rates for the earliest period shown to all periods.

The above constant currency measures reflect foreign exchange rates applicable as of Q4 2021.

We believe that non-GAAP financial measures help investors understand our core operating results and prospects, consistent with how management measures and forecasts our performance without the effect of often one-time charges and other items outside our normal operations.

The supplementary non-GAAP financial measures are not meant to be superior to or a substitute for financial measures prepared under U.S.

Free Cash Flow (1)

(in thousands, except percentages) Year Ended

2022 2021 Change

ACV (constant currency)

$ 1,126 $ 1,244 11 %

ACV (constant currency) is calculated by applying the December 31, 2022 foreign exchange rates to all periods shown.

Starting in the third quarter of 2023, the Company calculated free cash flow as cash provided by operating activities less investments in property and equipment.

To ensure comparability, previously disclosed amounts have been updated.

Cash provided by operating activities $ 217,785 15 % $ 22,336 2 %

Investment in property and equipment (16,781) (35,379)

Free cash flow (1)

$ 201,004 14 % $ (13,043) (1) %

Supplemental information (3)

Restructuring $ 29,401 $ —

Legal fees 14,645 41,789

Interest on convertible senior notes 4,134 4,500

Facilities — (18,000)

Other 601 6,805

Free cash flow $ 40,051 $ 26,667 50 %

Total Revenue $ 1,317,845 $ 1,211,653

Free cash flow margin 3 % 2 %

* not meaningful

(1) Our non-GAAP free cash flow measures reflect the following adjustments:

• Investment in property and equipment :

$ 60,445 $ 60,739

Effect of supplemental information to Rule of 40 achievement (4)

(1) Our non-GAAP free cash flow is defined as cash provided by operating activities less investment in property and equipment.

Investment in property and equipment fluctuates in amount and frequency and is significantly affected by the timing and size of investments in our facilities.

We believe excluding these amounts provides a useful comparison of our operational performance in different periods.

We provide information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings.

This information is not a substitute for financial measures prepared under U.S.

Starting in the third quarter of 2023, the Company calculated free cash flow as cash provided by operating activities less investments in property and equipment.

To ensure comparability, previously disclosed amounts have been updated.

(2) Operating and free cash flow margin are calculated by comparing the respective cash flow to total revenue.

(3) The supplemental information discloses items that affect our cash flows and are considered by management not to be representative of our core business operations and ongoing operational performance.

• Restructuring :

Restructuring fluctuates in amount and frequency and is significantly affected by the timing and size of our restructuring activities.

• Legal fees:

Includes legal and related fees arising from proceedings outside of the ordinary course of business.

We believe excluding these expenses from our non-GAAP financial measures is useful to investors as the disputes giving rise to them are not representative of our core business operations and ongoing operating performance.

Legal and related fees arising from proceedings outside the ordinary course of business.

• Interest on convertible senior notes :

In February 2020, we issued convertible senior notes with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.

We believe excluding the interest payments provides a useful comparison of our operational performance in different periods.

• Facilities :

In February 2021, we agreed to accelerate our exit from our then Cambridge, Massachusetts headquarters to October 1, 2021, in exchange for a one-time payment from our landlord of $18 million, which was received in October 2021.

We believe excluding the impact from our non-GAAP financial measures is useful to investors as the modified lease, including the $18 million payment, is not representative of our core business operations and ongoing operating performance.

We have excluded capital advisory fees and fees incurred due to the cancellation of in-person sales and marketing events.

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 and ongoing operating performance.

In February 2020, we issued convertible senior notes, due March 1, 2025, in a private placement.

The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1.

Fees related to capital advisory services, canceled in-person sales and marketing events, and incremental costs incurred integrating acquisitions.

• Income taxes :

Direct income taxes paid net of refunds received.

(4) Rule of 40 :

A performance metric calculated by adding the annual contract value (“ACV”) growth rate and the free cash flow margin.

We also provide a table of supplemental information of other items that affect our cash flows and Rule of 40 achievement.

Remaining performance obligations (“Backlog”)

Reconciliation of Backlog and Constant Currency Backlog (Non-GAAP)

December 31, 2022 December 31, 2023 1 Year Growth Rate

Backlog - GAAP $ 1,356 $ 1,463 8 %

Impact of changes in foreign exchange rates — (16)

Constant currency backlog

$ 1,356 $ 1,447 7 %

Constant currency Backlog is calculated by applying the Q4 2022 foreign exchange rates to all periods shown.

RESULTS OF OPERATIONS

Subscription transition

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted revenue growth as revenue from subscription service arrangements, which includes Pega Cloud and maintenance, is typically recognized over the contract term, while revenue from license sales is recognized when the license rights become effective, typically upfront.

(Dollars in thousands) 2023 2022 Change

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$ 1,432,616 100 % $ 1,317,845 100 % $ 114,771 9 %

The revenue change in 2022 generally reflects the impact of our subscription transition.

Other factors impacting our revenue include:

dollar has strengthened against foreign currencies in our operating markets, which reduced total revenue growth by approximately 4 percent.

• The decrease in maintenance revenue was primarily due to the continuing shift to Pega Cloud.

• The increase in consulting revenue was primarily due to an increase in consultant billable hours in North America.

(Dollars in thousands) 2022 2021 Change

• The increase in Pega Cloud revenue in 2023 was primarily due to the growth of the hosted client base as our clients continued to expand their use of Pega Cloud.

• The increase in maintenance revenue in 2023 was primarily due to continued demand for our subscription license offerings, which are sold with maintenance committed for the full term of the subscription license

• The increase in subscription license revenue in 2023 was primarily due to high renewal activity, resulting in an increase in license deliveries.

• The decrease in perpetual license revenue in 2023 reflects our strategy of promoting subscription-based arrangements.

• The decrease in consulting revenue in 2023 was primarily due to lower consultant billable hours outside of North America and lower realization rates in North America.

(Dollars in thousands) Gross Profit % Gross Profit % Change

Pega Cloud $ 342,670 74 % $ 267,523 70 % $ 75,147 28 %

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$ 1,054,133 74 % $ 949,210 72 % $ 104,923 11 %

* not meaningful

The gross profit change in 2023 was primarily due to a shift in the revenue mix.

• The increase in Pega Cloud gross profit percent was primarily due to cost-efficiency gains as Pega Cloud grows and scales.

• The decrease in consulting gross profit percent was due to an increase in consultant availability.

Also contributing to the change was:

• The increase in Pega Cloud gross profit percent in 2023 was primarily due to an increase in cost efficiency, particularly for hosting services, as Pega Cloud continues to grow and scale.

• The decrease in maintenance gross profit percent in 2023 was primarily due to an increase in compensation and benefits as a result of an increase in headcount.

• The decrease in consulting gross profit percent in 2023 was primarily due to lower consultant billable hours outside of North America and lower realization rates in North America.

Operating expenses

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* not meaningful

• The decrease in selling and marketing was primarily due to a decrease in marketing programs of $12.1 million, partially offset by an increase in professional services of $4.9 million and an increase in facilities expense of $4.9 million.

• The increase in research and development was primarily due to an increase in compensation and benefits of $24.2 million, attributable to an increase in headcount and incentive compensation, and an increase in facilities expense of $4.2 million.

The increase in headcount reflects additional investments in developing our solutions.

• The increase in general and administrative was primarily due to an increase in compensation and benefits of $8.4 million, an increase in facilities expense of $2.9 million, and an increase in legal fees and related expenses arising from litigation proceedings outside the ordinary course of business of $16.4 million.

We have incurred and expect to continue to incur additional costs for these proceedings in 2023.

See "Note 20.

Commitments And Contingencies" in Item 8 and Item 1A.

“Risk Factors” in this Annual Report for additional information.

• During the fourth quarter of 2022, management committed to a restructuring plan aligned with our target organization go-to-market strategy and commitment to be a Rule of 40 managed company.

The plan resulted in a restructuring expense of $21.7 million in 2022, primarily associated with severance and benefits for impacted employees and expenses incurred as a result of the closure of our Salem, New Hampshire office.

• The decrease in selling and marketing in 2023 was primarily due to a decrease in compensation and benefits of $59.5 million due to reduced headcount as we optimize our go-to-market strategy.

For additional information, see "Note 12.

Restructuring" in Item 8 of this Annual Report.

• The decrease in general and administrative in 2023 was primarily due to a decrease of $20.7 million in legal fees and related expenses arising from proceedings outside the ordinary course of business.

We expect to continue to incur additional costs for these proceedings.

For additional information, see "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report.

• The restructuring in 2023 and 2022 was primarily due to our efforts to optimize our go-to-market organization.

For additional information, see "Note 12.

Restructuring" in Item 8 of this Annual Report.

Other income and expenses

(Dollars in thousands) 2023 2022 Change

Foreign currency transaction gain (loss) $ 4,560 $ (6,459) $ 11,019 *

Foreign currency transaction (loss) gain $ (5,242) $ 4,560 $ (9,802) *

Interest income 9,259 1,643 7,616 464 %

Interest expense (6,876) (7,792) 916 12 %

(Loss) gain on capped call transactions (57,382) (23,633) (33,749) (143) %

(Loss) on capped call transactions (1,348) (57,382) 56,034 98 %

Other income, net 18,693 6,579 12,114 184 %

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* not meaningful

• The increase in foreign currency transaction gain (loss) was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increase in interest income was primarily due to increases in market interest rates.

• The increase in (loss) gain on capped call transactions was due to fair value adjustments for our capped call transactions.

See "Note 14.

Fair Value Measurements" in Item 8 of this Annual Report for additional information.

• The increase in other income, net was due to gains on our venture investments.

Provision for (benefit from) income taxes

• The change in foreign currency transaction (loss) gain in 2023 was primarily due to the impact of fluctuations in foreign currency exchange rates associated with foreign currency-denominated cash and receivables held by our subsidiary in the United Kingdom.

• The increase in interest income in 2023 was primarily due to an increase in market interest rates.

• The decrease in interest expense in 2023 was due to our repurchases of convertible senior notes.

For additional information, see "Note 11.

Debt" in Item 8 of this Annual Report.

• The change in (loss) on capped call transactions in 2023 was due to fair value adjustments for our capped call transactions.

• The increase in other income, net in 2023, was due to a $7.9 million gain from repurchases of our convertible senior notes and a $10.9 million increase in the value of equity securities held in our venture investments portfolio.

For additional information, see "Note 11.

Debt" and "Note 13.

Fair Value Measurements" in Item 8 of this Annual Report.

Provision for income taxes

(Dollars in thousands) 2023 2022

Provision for (benefit from) income taxes $ 183,785 $ (68,947)

Effective income tax rate (benefit rate) 114 % (52) %

The change in the effective income tax rate (benefit rate) in 2022 was primarily due to the recognition of a full valuation allowance of $188.3 million on our U.S.

deferred tax assets.

Provision for income taxes $ 27,632 $ 183,785

Effective income tax rate 29 % 114 %

The effective income tax rate in the year ended December 31, 2023 was primarily driven by the valuation allowance on our deferred tax assets in the U.S.

and the taxable income position in the U.S and the UK., partially offset by available tax credits and losses in those jurisdictions.

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework that was supported by over 130 countries worldwide.

The effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive.

A significant number of countries are also implementing similar local legislation.

The Company is continuing to evaluate the potential impact of the Pillar Two Framework on future periods, pending legislative adoption by additional individual countries.

LIQUIDITY AND CAPITAL RESOURCES

(in thousands) 2023 2022

Cash (used in) provided by

Cash provided by (used in)

Operating activities $ 217,785 $ 22,336

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Financing activities (81,963) (46,989)

Effect of exchange rate on cash and cash equivalents (3,333) (1,712)

Net (decrease) in cash and cash equivalents $ (14,911) $ (11,934)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash 2,701 (3,333)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 87,773 $ (14,911)

(in thousands)

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Total cash, cash equivalents, and marketable securities 423,338 297,221

We believe that our current cash, cash flow from operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements.

Restricted cash 2,925 —

Total cash, cash equivalents, marketable securities, and restricted cash

$ 426,263 $ 297,221

We believe that our current cash, marketable securities, cash flow provided by operations, borrowing capacity, and ability to engage in capital market transactions will be sufficient to fund our operations, stock repurchases, and quarterly cash dividends for at least the next 12 months and to meet our known long-term cash requirements, including our convertible senior notes due March 1, 2025.

Whether these resources are adequate to meet our liquidity needs beyond that period will depend on our future growth, operating results, and the investments needed to support our operations.

We may utilize available funds or seek external financing if we require additional capital resources.

If it becomes necessary or desirable to repatriate these funds, we may be required to pay federal, state, and local income and foreign withholding taxes upon repatriation.

However, due to the complexity of income tax laws and regulations, it is impracticable to estimate the amount of taxes we would have to pay.

See risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report for additional information.

Cash provided by operating activities

We are transitioning our business to sell software primarily through subscription arrangements.

This transition has impacted and is expected to continue affecting our billings and cash collections.

Subscription licenses and services are typically billed and collected over the contract term, while perpetual license arrangements are generally billed and collected upfront when the license rights become effective.

The change in cash provided by operating activities in 2022 was primarily due to our subscription transition and increased costs as we invested in research and development to support the development of our offerings, partially offset by strong client collections.

In addition, in 2022 and 2021, we incurred $34.6 million and $18.2 million in legal fees and related expenses arising from proceedings that originated outside of the ordinary course of business.

If it becomes necessary or desirable to repatriate foreign funds, we may have to pay federal, state, and local income taxes as well as foreign withholding taxes upon repatriation.

However, estimating the taxes we would have to pay is impracticable due to the complexity of income tax laws and regulations.

For additional information, see risk factor "If it becomes necessary or desirable to repatriate our foreign cash balances to the United States, we may be subject to increased taxes, other restrictions, and limitations" in Item 1A of this Annual Report.

Operating activities

The change in cash provided by operating activities in 2023 was primarily due to growth in client collections, the impact of our cost-efficiency initiatives, and lower legal fees and related costs arising from proceedings outside the ordinary course of business.

We expect to continue to incur additional costs for these proceedings.

See "Note 20.

Commitments And Contingencies" in Item 8 and Item 1A.

“Risk Factors” in this Annual Report for additional information

For additional information, see "Note 12.

Restructuring" and "Note 20.

Commitments And Contingencies" in Item 8 of this Annual Report.

Investing activities

The change in cash provided by investing activities in 2022 was primarily driven by our investments in financial instruments and capital expenditures for our recently completed office in Waltham, Massachusetts.

See "Note 11.

Leases" in Item 8 of this Annual Report for additional information.

The change in cash (used in) provided by investing activities in 2023 was primarily due to our increased investments in financial instruments and reduced investment in property and equipment as we optimize our office space.

Financing activities

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In February 2020, we issued $600 million in aggregate principal amount of convertible senior notes, which mature on March 1, 2025.

In the year ended December 31, 2023, we paid $89 million to repurchase $97.7 million in aggregate principal amount of convertible senior notes.

As of December 31, 2023, we had $502 million in aggregate principal amount of convertible senior notes outstanding due on March 1, 2025.

For additional information, see "Note 11.

Debt" in Item 8 of this Annual Report.

In November 2019, and as since amended, we entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association.

As of December 31, 2022, we had no outstanding cash borrowings under the Credit Facility but had $27.3 million in outstanding letters of credit which reduce the available borrowing capacity.

See "Note 12.

Debt" in Item 8 of this Annual Report for additional information.

As of December 31, 2023 and December 31, 2022, we had $27.3 million in outstanding letters of credit, reducing available borrowing capacity under the Credit Facility, but no outstanding cash borrowings.

For additional information, see "Note 11.

Debt" in Item 8 of this Annual Report.

Stock repurchase program

Changes in the remaining stock repurchase authority:

(in thousands) 2022

(in thousands) Year Ended

December 31, 2023

December 31, 2022 $ 58,075

Authorizations (1)

Repurchases (2)

December 31, 2023 $ 60,000

(1) On June 2, 2022, we announced that our Board of Directors extended the current stock repurchase program’s expiration date to June 30, 2023.

(2) Purchases under this program have been made on the open market.

(1) On April 25, 2023, our Board of Directors extended the expiration date of our current share repurchase program from June 30, 2023 to June 30, 2024, and the amount of stock we are authorized to repurchase was increased to $60 million.

Common stock repurchases

(in thousands) Shares Amount Shares Amount

Repurchases paid 280 $ 24,508 422 $ 52,411

Repurchases unpaid at period end — — 10 1,199

Stock repurchase program — — 280 24,508

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44 $ 1,916 622 $ 45,128

During 2022 and 2021, instead of receiving cash from the equity holders for the exercise price of options, we withheld shares with a value of $14.3 million and $56.1 million, respectively.

These amounts have been excluded from the table above.

In 2023 and 2022, instead of receiving cash from the equity holders, we withheld shares with a value of $1.2 million and $14.3 million, respectively, for the exercise price of options.

These amounts are not included in the table above.

(in thousands) 2023 2022

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Operating lease obligations 17,971 15,602 11,164 10,114 39,549 — 94,400

Investment commitments 1,000 — — — — — 1,000

Venture investment commitments (3)

1,000 — — — — — 1,000

Liability for uncertain tax positions (4)

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(1) Includes principal and interest.

(2) Represents the fixed or minimum amounts due under purchase obligations for hosting services, software subscriptions, and sales and marketing programs.

(3) We are unable to reasonably estimate the timing of the cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

(2) Represents the fixed amount owed for purchase obligations of software licenses, hosting services, and sales and marketing programs.

(3) Represents the maximum funding under existing venture investment agreements.

Our venture investment agreements generally allow us to withhold unpaid funds at our discretion.

(4) We cannot reasonably estimate the timing of this cash outflow due to uncertainties in the timing of the effective settlement of tax positions.

A detailed discussion and analysis of the 2022 year-over-year changes can be found in "Item 7.

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We have concluded that the stand-alone selling prices of certain performance obligations, specifically software licenses and Pega Cloud arrangements, are highly variable.

In these instances, we estimate the stand-alone selling prices using the residual approach, determined based on the total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.

In these instances, we estimate the stand-alone selling prices using the residual approach, which is determined based on the total transaction price minus the stand-alone selling price of other performance obligations promised in the contract.

We update our stand-alone selling price analysis periodically, including a re-assessment of whether the residual approach used to determine the stand-alone selling prices for software licenses and Pega Cloud arrangements remains appropriate.

Changes in the assumptions or judgments used in determining the performance obligations in client contracts and stand-alone selling prices could significantly impact the timing and amount of revenue we report in a particular period.

For additional information see "Note 2.

Significant Accounting Policies", "Note 4.

Receivables, Contract Assets, And Deferred Revenue", and "Note 15.

Revenue" in Item 8 of this Annual Report for additional information.

Revenue" in Item 8 of this Annual Report

Goodwill and intangible assets impairment

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We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that such assets' carrying amount may not be recoverable.

In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to:

When evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to:

• whether there has been a significant adverse change in the business climate that affects the value of an asset;

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To date, there have been no impairments of goodwill or intangible assets.

For additional information see "Note 2.

Significant Accounting Policies" and "Note 7.

Goodwill And Other Intangible Assets" in Item 8 of this Annual Report for additional information.

Goodwill And Other Intangible Assets" in Item 8 of this Annual Report.

Accounting for income taxes

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Our deferred tax valuation allowance requires significant judgment and uncertainties, including assumptions about future taxable income based on historical and projected information.

We recognize deferred tax assets to the extent that we believe that they are more likely than not to be realized.

In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, our firm contractual backlog, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.

In 2022, we determined that the objectively and verifiable negative evidence outweighed the positive evidence, and we recorded a full valuation allowance of $188.3 million on our U.S.

We recognize deferred tax assets to the extent that we believe they are more likely than not to be realized.

In making such a determination, we consider all available objective and verifiable negative and positive evidence, including future reversals of existing taxable temporary differences, projected future taxable income (including the impact of enacted legislation), tax-planning strategies and results of recent operations.

The Company determined that the objectively and verifiable negative evidence outweighed the positive evidence, as such maintained a valuation allowance on our U.S.

deferred tax assets.

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We estimate our exposure to unfavorable outcomes related to these uncertainties and the probability of such outcomes.

Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals.

Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.

Although we believe our estimates are reasonable, there is no guarantee that the final tax outcome will not differ from what is reflected in our historical income tax provisions, returns, and accruals.

Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period such a determination is made.

For additional information see "Note 2.

Significant Accounting Policies" and "Note 18.

Income Taxes" in Item 8 of this Annual Report for additional information.

Income Taxes" in Item 8 of this Annual Report.

Capped call transactions

In February 2020, we issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement.

We also entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions cover 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of our common stock and are generally expected to reduce potential dilution of our common stock upon any conversion of the Notes.

The Capped Call Transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated following the governing documents, may not represent a fair value measurement.

As of December 31, 2023, we had $502.3 million in aggregate principal outstanding on our convertible senior notes.

Additionally, we had Capped Call Transactions that covered 3.7 million shares of our common stock, the number of shares for which the Notes are convertible.

These capped call transactions are generally expected to reduce the potential dilution of our common stock upon any conversion of the Notes.

The capped call transactions are accounted for as derivative instruments and do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value calculated following the governing documents may not represent a fair value measurement.

Applying the accounting framework for the Capped Call Transactions requires the exercise of judgment and the determination of the fair value of the Capped Call Transactions requires us to make significant estimates and assumptions.

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As of December 31, 2023, a hypothetical 10% increase in our stock price would have increased the fair value of the capped call to $1.6 million, while a hypothetical 10% decrease in our stock price would have decreased the fair value of the capped call to $0.5 million.

For additional information see "Note 2.

Significant Accounting Policies", "Note 11.

Debt", and "Note 13.

Fair Value Measurements" in Item 8 of this Annual Report for additional information.

Fair Value Measurements" in Item 8 of this Annual Report.

Loss Contingencies

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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