QUALYS, INC. 10-K

Item 8. Financial Statements and Supplementary Data Qualys, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Table of Contents Page Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 54 Consolidated Balance Sheets 56 Consolidated Statements of Operations 57 Consolidated Statements of Comprehensive Income 58 Consolidated Statements of Cash Flows 59 Consolidated Statements of Stockholders' Equity 60 Notes to Consolidated Financial Statements 61 53 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Qualys, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Qualys, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 22, 2024, expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2005. San Jose, California February 22, 2024 54 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Qualys, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Qualys, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and our report dated February 22, 2024 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP San Jose, California February 22, 2024 55 Table of Contents Qualys, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 203,665 $ 173,719 Restricted cash 1,500 — Short-term marketable securities 221,893 147,608 Accounts receivable, net of allowance of $ 778 and $ 736 as of December 31, 2023 and 2022, respectively 146,226 121,795 Prepaid expenses and other current assets 26,714 30,216 Total current assets 599,998 473,338 Long-term marketable securities 56,644 59,206 Property and equipment, net 32,599 47,428 Operating leases - right of use asset 22,391 33,752 Deferred tax assets, net 62,761 45,412 Intangible assets, net 9,715 12,801 Goodwill 7,447 7,447 Noncurrent restricted cash 1,200 2,700 Other noncurrent assets 19,863 18,857 Total assets $ 812,618 $ 700,941 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 988 $ 2,808 Accrued liabilities 43,096 42,592 Deferred revenues, current 333,267 293,728 Operating lease liabilities, current 11,857 13,060 Total current liabilities 389,208 352,188 Deferred revenues, noncurrent 31,671 23,490 Operating lease liabilities, noncurrent 16,885 29,121 Other noncurrent liabilities 6,680 7,013 Total liabilities 444,444 411,812 Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock: $ 0.001 par value; 20,000 shares authorized, no shares issued and outstanding as of December 31, 2023 and 2022 — — Common stock: $ 0.001 par value; 1,000,000 shares authorized, 36,909 and 37,362 shares issued and outstanding as of December 31, 2023 and 2022, respectively 37 37 Additional paid-in capital 597,921 512,486 Accumulated other comprehensive loss ( 1,704 ) ( 1,947 ) Accumulated deficit ( 228,080 ) ( 221,447 ) Total stockholders’ equity 368,174 289,129 Total liabilities and stockholders’ equity $ 812,618 $ 700,941 The accompanying notes are an integral part of these Consolidated Financial Statements. 56 Table of Contents Qualys, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2023 2022 2021 Revenues $ 554,458 $ 489,723 $ 411,172 Cost of revenues 107,485 102,788 89,439 Gross profit 446,973 386,935 321,733 Operating expenses: Research and development 110,472 101,186 81,289 Sales and marketing 111,691 97,221 76,487 General and administrative 61,741 57,981 76,274 Total operating expenses 283,904 256,388 234,050 Income from operations 163,069 130,547 87,683 Other income (expense), net: Interest income 16,905 5,191 2,287 Other expense, net ( 1,323 ) ( 2,038 ) ( 573 ) Total other income, net 15,582 3,153 1,714 Income before income taxes 178,651 133,700 89,397 Income tax provision 27,056 25,708 18,437 Net income $ 151,595 $ 107,992 $ 70,960 Net income per share: Basic $ 4.11 $ 2.81 $ 1.82 Diluted $ 4.03 $ 2.74 $ 1.77 Weighted average shares used in computing net income per share: Basic 36,879 38,453 39,030 Diluted 37,602 39,344 40,118 The accompanying notes are an integral part of these Consolidated Financial Statements. 57 Table of Contents Qualys, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2023 2022 2021 Net income $ 151,595 $ 107,992 $ 70,960 Other comprehensive income (loss), net of tax Net change in unrealized gains (losses) on available-for-sale debt securities, net of tax 2,813 ( 2,520 ) ( 1,409 ) Net change in unrealized gains (losses) on cash flow hedges, net of tax ( 2,570 ) ( 434 ) 2,900 Other comprehensive income (loss), net of tax 243 ( 2,954 ) 1,491 Comprehensive income $ 151,838 $ 105,038 $ 72,451 The accompanying notes are an integral part of these Consolidated Financial Statements. 58 Table of Contents Qualys, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2023 2022 2021 Cash flow from operating activities: Net income $ 151,595 $ 107,992 $ 70,960 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 26,991 34,622 35,897 Write off of noncurrent asset — — 625 Provision for credit losses 547 590 402 Loss on disposal of property and equipment — 6 12 Loss on non-marketable securities 533 — — Stock-based compensation, net of amounts capitalized 69,079 53,408 67,579 Amortization (accretion) of premiums (discount) on marketable securities, net ( 5,712 ) 833 3,869 Deferred income taxes ( 16,636 ) ( 20,251 ) ( 9,723 ) Changes in operating assets and liabilities: Accounts receivable ( 24,978 ) ( 13,387 ) ( 9,221 ) Prepaid expenses and other assets ( 3,407 ) 3,878 ( 15,665 ) Accounts payable ( 1,578 ) 2,107 ( 32 ) Accrued liabilities and other noncurrent liabilities 451 3,867 9,322 Deferred revenues 47,720 25,189 46,591 Net cash provided by operating activities 244,605 198,854 200,616 Cash flow from investing activities: Purchases of marketable securities ( 306,812 ) ( 178,788 ) ( 368,450 ) Sales and maturities of marketable securities 242,432 347,837 363,941 Purchases of property and equipment ( 8,786 ) ( 15,361 ) ( 24,424 ) Proceeds from disposal of property and equipment — — 6 Purchases of intangible assets — ( 8,620 ) ( 1,230 ) Maturity of note receivable — — 625 Net cash (used in) provided by investing activities ( 73,166 ) 145,068 ( 29,532 ) Cash flow from financing activities: Repurchase of common stock ( 170,800 ) ( 317,344 ) ( 129,977 ) Proceeds from exercise of stock options 45,576 24,483 49,994 Payments for taxes related to net share settlement of equity awards ( 22,346 ) ( 17,615 ) ( 27,815 ) Proceeds from issuance of common stock through employee stock purchase plan 6,077 4,445 — Principal payments under finance lease obligations — — ( 90 ) Net cash used in financing activities ( 141,493 ) ( 306,031 ) ( 107,888 ) Net increase in cash, cash equivalents and restricted cash 29,946 37,891 63,196 Cash, cash equivalents and restricted cash at beginning of period 176,419 138,528 75,332 Cash, cash equivalents and restricted cash at end of period $ 206,365 $ 176,419 $ 138,528 Supplemental disclosures of cash flow information Cash paid for income taxes, net of refunds $ 34,920 $ 39,739 $ 35,080 Non-cash investing and financing activities Purchases of intangible assets recorded in accrued liabilities and other noncurrent liabilities $ — $ 2,110 $ 120 Purchases of property and equipment recorded in accounts payable and accrued liabilities $ 144 $ 470 $ 2,086 The accompanying notes are an integral part of these Consolidated Financial Statements. 59 Table of Contents Qualys, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Total Stockholders’ Equity Shares Amount Balances at December 31, 2020 39,253 $ 39 $ 401,359 $ ( 484 ) $ 3,568 $ 404,482 Net income — — — — 70,960 70,960 Other comprehensive income, net of tax — — — 1,491 — 1,491 Issuance of common stock upon exercise of stock options 725 1 49,993 — — 49,994 Repurchase of common stock ( 1,148 ) ( 1 ) ( 13,793 ) — ( 116,183 ) ( 129,977 ) Issuance of common stock upon vesting of restricted stock units 530 — — — — — Taxes related to net share settlement of equity awards ( 248 ) — ( 27,815 ) — — ( 27,815 ) Stock-based compensation — — 67,579 — — 67,579 Balances at December 31, 2021 39,112 39 477,323 1,007 ( 41,655 ) 436,714 Net income — — — — 107,992 107,992 Other comprehensive loss, net of tax — — — ( 2,954 ) — ( 2,954 ) Issuance of common stock upon exercise of stock options 468 — 24,483 — — 24,483 Repurchase of common stock ( 2,460 ) ( 2 ) ( 29,558 ) — ( 287,784 ) ( 317,344 ) Issuance of common stock upon vesting of restricted stock units 329 — — — — — Taxes related to net share settlement of equity awards ( 132 ) — ( 17,615 ) — — ( 17,615 ) Issuance of common stock through employee stock purchase plan 45 — 4,445 — — 4,445 Stock-based compensation — — 53,408 — — 53,408 Balances at December 31, 2022 37,362 37 512,486 ( 1,947 ) ( 221,447 ) 289,129 Net income — — — — 151,595 151,595 Other comprehensive income, net of tax — — — 243 — 243 Issuance of common stock upon exercise of stock options 582 1 45,575 — — 45,576 Repurchase of common stock ( 1,342 ) ( 1 ) ( 12,990 ) — ( 158,228 ) ( 171,219 ) Issuance of common stock upon vesting of restricted stock units 414 — — — — — Taxes related to net share settlement of equity awards ( 167 ) — ( 22,346 ) — — ( 22,346 ) Issuance of common stock through employee stock purchase plan 60 — 6,077 — — 6,077 Stock-based compensation — — 69,119 — — 69,119 Balances at December 31, 2023 36,909 $ 37 $ 597,921 $ ( 1,704 ) $ ( 228,080 ) $ 368,174 The accompanying notes are an integral part of these Consolidated Financial Statements. 60 Table of Contents Qualys, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. The Company and Summary of Significant Accounting Policies Description of Business Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999 . The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a leading provider of cloud-based IT, security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on Qualys' Enterprise TruRisk Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures. Basis of Presentation The accompanying consolidated financial statements and footnotes have been prepared in accordance with U.S. GAAP as well as the instructions to Form 10-K and the rules and regulations of the SEC. Certain prior year amounts have been reclassified to conform with the current year presentation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, allowance for credit loss, the valuation of goodwill and intangible assets, leases, stock-based compensation and income tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying consolidated financial statements. Concentration of Credit Risk The Company invests its cash and cash equivalents with major financial institutions. Cash balances with any one institution at times may be in excess of federally insured limits. Cash equivalents are invested in high-quality investment grade financial instruments and are diversified. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk. Credit risk with respect to accounts receivable is dispersed due to the large number of customers. Collateral is not required for accounts receivable. As of December 31, 2023 and 2022, no customer or channel partner accounted for more than 10% of the Company's revenues and accounts receivable balance. Cash, Cash Equivalents, Restricted cash and Short-Term and Long-Term Marketable Securities Cash and cash equivalents include cash held in banks, highly liquid money market funds, and fixed-income U.S. Treasury and government agencies, all with original maturities of three months or less when acquired. The Company’s short-term and long-term marketable securities consist of fixed-income U.S. and foreign government agency securities, corporate bonds, asset-backed securities and commercial paper. Management determines the appropriate classification of the Company's investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies its marketable securities as either short-term or long-term based on each instrument's underlying remaining contractual maturity date. 61 Table of Contents As of December 31, 2023 and 2022, the Company had a restricted cash balance of $ 2.7 million, of which $ 1.5 million is related to cash held in escrow as part of the Blue Hexagon acquisition and $ 1.2 million in the form of a letter of credit issued to the landlord of the Company's California headquarter office lease as security deposit. Cash equivalents are stated at cost, which approximates fair market value. Short-term and long-term marketable securities are classified as available-for-sale debt securities (AFS debt securities) and are carried at fair value. Unrealized gains and losses in fair value of the AFS debt securities are reported in other comprehensive income (loss). When the AFS debt securities are sold, cost is based on the specific identification method, and the realized gains and losses are included in other income (expense), net in the consolidated statements of operations. AFS debt securities are reviewed quarterly for impairment. An investment is considered impaired when its fair value is below its amortized cost. Declines in fair value from amortized cost for AFS debt securities that the company intends to sell or will more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other income (expense), net in the period in which the loss occurs. Otherwise, the credit loss component of the impairment is recorded as allowance for credit losses with an offsetting entry charged to other income (expense), net, while the remaining loss is recognized in other comprehensive income (loss). Accounts Receivable Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for credit losses is determined on a collective basis where similar risk characteristics exist and on an individual basis when the Company identifies significant customers or invoices with collectability issues. The estimate for credit losses considers historical write-offs by aging category, that are adjusted for current conditions and reasonable and supportable forecasts of future losses. Any change in the assumptions used in analyzing credit losses may result in additional allowances being recognized in the period in which the change occurs. When the Company ultimately concludes that a receivable is uncollectible, the balance is written off against the allowance for credit losses. Payments subsequently received on such receivables are recognized in the period received. The allowance for credit losses recognized and write-offs charged against the allowance were not significant for the years ended December 31, 2023 and 2022. The balance of accounts receivable, net of allowance for credit losses was $ 146.2 million, $ 121.8 million and $ 109.0 million as of December 31, 2023, December 31, 2022 and December 31, 2021, respectively. Non-marketable securities In 2018, the Company invested $ 2.5 million in preferred stock of a privately-held company (the “Investee”). The fair value of the investment is not readily available, and there are no quoted market prices for the investment. The Company elected the measurement alternative to account for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment annually or whenever events or changes in circumstances indicate that the fair value of the investment is less than carrying value. The investment is included in other noncurrent assets in the consolidated balance sheets. The Company has not received any dividends from the investment. During the second quarter of 2023, the Company identified an observable price change in the investment and recognized an immaterial unrealized loss in other income (expense), net of the consolidated statement of operations. In 2019, the Company made an advance payment of $ 0.6 million to the Investee for it to perform certain technology development work, which should either be settled in the form of royalty fee charges when the technology materializes and is licensed to the Company or, otherwise, should be repaid to the Company in cash. The advance payment was recorded in other non-current assets in the consolidated balance sheet. During the fourth quarter ended December 31, 2021, the technology has not been developed and the Company decided to no longer pursue the development of the technology or the collection of the advanced amount. Accordingly, the entire amount of the advance payment was written off and recorded in the general and administrative expense during the year ended December 31, 2021. Property and Equipment, net Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years . Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. The Company purchases physical scanner appliances and other computer equipment that are provided to some customers on a subscription basis. This equipment is recorded within property and equipment and the depreciation is recorded in cost of revenues over an estimated useful life of three years . 62 Table of Contents Upon retirement or disposal, the cost of assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. Repairs and maintenance that do not extend the life of an asset are expensed as incurred and major improvements are capitalized as property and equipment. Leases The Company leases certain offices, computer equipment and its shared cloud platform facilities under finance leases and non-cancelable operating leases. For both operating and finance leases, the Company recognizes a right-of-use asset, which represents the Company's right to use the underlying asset for the lease term, and a lease liability, which represents the present value of the Company's obligation to make payments arising over the lease term. Many of the Company's leases include rental escalation clauses, renewal options and/or termination options that are factored into the Company's determination of lease payments and lease terms when appropriate. The present value of the lease payments is calculated using the incremental borrowing rate of the underlying leases determined at lease commencement. As most of the Company's leases do not provide a readily determinable implicit rate, the Company determines an incremental borrowing rate using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as the leases. Where the Company is the lessee, the Company elects to account for non-lease components associated with its leases (e.g., common area maintenance costs) and lease components separately for substantially all of its asset classes, except for shared cloud platforms, for which the Company elected to combine lease and non-lease components. For leases with a term of one year or less, the Company has elected not to record the right-of-use asset or liability. In arrangements where the Company is the lessor, the Company elected to apply the practical expedient to account for lease components (e.g., customer premise equipment) and non-lease components (e.g., service revenue) as combined components as revenue under ASC 606 as service revenues are the predominant components in the arrangements. Impairment of Long-Lived Assets The Company evaluates its long-lived assets, which consist of property and equipment, and intangible assets subject to amortization, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future undiscounted cash flows expected to be generated by such assets. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. For the years ended December 31, 2023, 2022 and 2021, there was no impairment of long-lived assets. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill and indefinite-lived intangible assets are not amortized but tested for impairment at least annually or more frequently if certain circumstances indicate a possible impairment may exist. The goodwill impairment tests are performed at the reporting unit level. The Company’s operations are organized as one reporting unit. In testing for a potential impairment of goodwill and the indefinite-lived intangible assets, the Company first performs a qualitative assessment to determine if it is more likely than not (a more than 50% likelihood) that the fair value of the reporting unit or the indefinite-lived intangible assets is less than their carrying amount. If the fair value is not considered to be less than the carrying amount, no further evaluation is necessary. Otherwise, the Company will perform a quantitative test. Goodwill impairment is measured as the amount by which the carrying value of the reporting unit or the indefinite-lived intangible assets exceeds their fair value. The Company performed the annual assessments on December 1, 2023 and 2022 and concluded there was no impairment of goodwill or the indefinite-lived intangible assets. Software Development Costs The costs to develop software that is marketed externally have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense on the Company's consolidated statements of operations. 63 Table of Contents Costs related to software developed, acquired or modified for internal use are capitalized and included in other noncurrent assets on the consolidated balance sheets. Costs incurred during the preliminary planning and evaluation stage of the project and during the post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. These capitalized costs consist of internal compensation related costs and external direct costs. Costs related to software developed for internal use are amortized over an estimated useful life of three years and recorded in cost of revenues. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. As of December 31, 2023 and 2022 , unamortized balances related to the Company's internally developed software costs are immaterial. Asset Acquisitions and Business Combinations The Company applies the provisions of ASC 805, Business Combinations, in accounting for its acquisitions. To determine whether transactions should be accounted for as asset acquisition or business combination, the Company evaluates whether substantially all of the fair value of gross assets included in a transaction is concentrated in a single asset (or a group of similar assets), resulting in an asset acquisition, if not, resulting in a business combination. In an asset acquisition, the cost of acquiring the asset group, including transaction costs, is allocated to the acquired assets or assumed liabilities based on their relative fair values without giving rise to goodwill. In a business combination, the Company recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to its consolidated statements of operations. Derivative Financial Instruments Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company uses foreign currency forward contracts, with maturities of 13 months or less, to mitigate the impact of foreign currency fluctuations of certain non-U.S. dollar denominated net asset positions, to date primarily cash, accounts receivable and operating lease liabilities, as well as to manage foreign currency fluctuation risk related to forecasted transactions. Open contracts are recorded within prepaid expenses and other current assets, other noncurrent assets, accrued liabilities or other noncurrent liabilities in the consolidated balance sheets. Gains and losses resulting from currency exchange rate movements on non-designated forward contracts are recognized in other income (expense), net. Any gains or losses from derivatives designated as cash flow hedges are first recorded within accumulated other comprehensive income (“AOCI”) and then reclassified into revenue or operating expenses when the hedged item impacts the consolidated statements of operations. Cash flows related to these forward contracts are classified in the Company's consolidated statements of cash flows in the same manner as the underlying hedged transaction within cash flows from operating activities. Stock-Based Compensation The Company recognizes the fair value of its stock options, restricted stock units (“RSUs”) and stock purchase rights under the ESPP on a straight-line basis over the requisite service periods. The fair value of each stock option or stock purchase right is estimated on the date of grant using the Black-Scholes-Merton option pricing model and the fair value of each RSU is based on the Company's common stock price on the date of grant. Compensation expenses for performance-based stock options (“PSOs”) and performance-based restricted stock units (“PSUs”) are recorded based on expected achievement of the performance metrics specified in the grant, which are assessed on a quarterly basis. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture materially differs from original estimates. 64 Table of Contents Revenue Recognition The Company derives revenues from subscriptions that require customers to pay a fee in order to access the Company’s cloud solutions. Contract period with customers generally are one year with occasional contracts ranging up to five years. The subscription fee entitles the customer to an unlimited number of scans for a specified number of networked devices or web applications and, if requested by a customer as part of their subscription, a specified number of physical or virtual scanner appliances. The Company’s physical and virtual scanner appliances are requested by certain customers as part of their subscriptions in order to scan IT infrastructures within their firewalls and do not function without, and are not sold separately from, subscriptions for the Company’s solutions. In some limited cases, the Company also provides certain computer equipment used to extend Qualys' Enterprise TruRisk Platform into its customers’ private cloud environment. Customers are required to return physical scanner appliances and computer equipment if they do not renew their subscriptions. The Company determines revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, the Company satisfies a performance obligation. At the inception of a customer contract, the Company makes an assessment as to that customer's ability to pay for the services provided. The Company assesses collectability based on several factors, including credit worthiness of the customer along with past transaction history. In addition, the Company performs periodic evaluations of its customers’ financial condition. Most of the Company’s revenue contracts are subscription based and contain a single performance obligation. The subscription contracts typically do not offer to the customers any future rights that would constitute material rights. Contract prices are generally composed of fixed consideration for a specific period of time as the Company in general does not offer refunds, volume rebates, customer loyalty programs or other forms of customer incentive payments. In limited situations, contract prices are contingent on future events, such as actual usage during the contract terms, which are accounted for as variable consideration and estimated based on the most likely amount of consideration that the Company is expected to be entitled to. Estimates are included in the contract price to the extent that it is considered probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Such estimates are made at contract inception and updated periodically when additional information becomes available. A cumulative catch-up adjustment is made when there is a change in the estimate of variable consideration. As the Company's cloud-based subscription services are delivered to customers electronically and over time, revenue is generally recognized ratably over the contract terms. When physical equipment is provided to the customers as part of the subscription service contract, the Company applies the practical expedient allowed under ASC 842 Leases to combine lease and nonlease components as a combined component to be accounted for under ASC 606, as the Company determined that the software subscription is the predominant component of the combined components. Therefore, the Company recognizes revenue for the physical equipment ratably over the related subscription period. Contract modifications happen when there is an upsell, where the customers subsequently enter into contract with the Company to purchase additional product offerings or additional scans for additional devices. Contract modifications related to upsells are accounted for prospectively. Deferred revenues consist of customer contracts billed or cash received that will be recognized in the future under subscriptions existing at the balance sheet date. The current portion of deferred revenues represents amounts that are expected to be recognized within one year of the balance sheet date. Costs of shipping and handling charges incurred by the Company associated with physical scanner appliances and other computer equipment are included in cost of revenues. Sales taxes and other taxes collected from customers to be remitted to government authorities are excluded from revenues. 65 Table of Contents Incremental direct costs of obtaining a contract, which consist of sales commissions primarily for new business and upsells, are deferred and amortized over the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company elected the practical expedient to expense commissions on renewals where the specific anticipated contract term amortization period is one year or less. The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years . The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its consolidated balance sheets. Advertising Expenses Advertising costs are expensed as incurred and are included in sales and marketing expense in the consolidated statements of operations. The Company incurred advertising costs of $ 3.0 million, $ 3.3 million and $ 2.1 million for the years ended December 31, 2023 , 2022 and 2021, respectively. Income Taxes The Company provides for the effect of income taxes in its consolidated financial statements using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryovers, and tax credit carry forwards. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this assessment, the Company takes into account predictions of the amount and category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company must make significant assumptions, judgments and estimates to determine its current income tax provision (benefit), its deferred tax assets and liabilities, and any valuation allowance to be recorded against its deferred tax assets. The Company's estimates and assumptions may differ from the actual results as reflected on its income tax returns and will record the required adjustments when they are identified or resolved. The Company applies a two-step approach to determining the financial statement recognition and measurement of uncertain tax positions. The Company only recognizes an income tax expense or benefit with respect to uncertain tax positions in its financial statements that the Company judges is more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make this judgment, the Company must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position meets the more likely than not recognition threshold, then the Company must measure the amount of the tax benefit to be recognized by determining the largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible settlement outcomes. To determine if a tax position is effectively settled after a tax examination has been completed, the Company must also estimate the likelihood that another taxing authority could review the respective tax position. The Company must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. These judgments are difficult because a taxing authority may change its behavior as a result of the Company's disclosures in its financial statements. The Company must reevaluate its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. 66 Table of Contents Comprehensive Income (Loss) Other comprehensive income (loss) consists of unrealized gains (losses) on marketable securities, net of tax, and derivative financial instruments designated as cash flow hedges, net of tax, which are not included in the Company’s net income. Total comprehensive income includes net income and other comprehensive income (loss) and is included in the consolidated statements of comprehensive income. Foreign Currency Transactions The Company’s operations are conducted in various countries around the world and the financial statements of its foreign subsidiaries are reported in the U.S. dollar as their respective functional currency. Monetary assets and liabilities denominated in foreign currencies have been re-measured into U.S. dollars using the exchange rates in effect at the balance sheet date, and income and expenses are re-measured at average exchange rates during the period. Foreign currency re-measurement gains and losses and foreign currency transaction gains and losses are recognized in other income (expense), net. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares outstanding plus potentially dilutive shares outstanding during the period. The potentially dilutive shares are computed by applying the treasury stock method to the Company's stock options, RSUs and the stock purchase rights under the ESPP. Any potential shares that would be anti-dilutive are excluded from the computation of diluted net income per share. Recently Adopted Accounting Pronouncements None. Recently Issued Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 requiring enhanced segment disclosures. The ASU requires disclosure of significant segment expenses regularly provided to the chief operating decision maker ("CODM") included within segment operating profit or loss. Additionally, the ASU requires a description of how the CODM utilizes segment operating profit or loss to assess segment performance. The requirements of the ASU are effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company's annual reporting requirements will be effective for fiscal 2024 and interim reporting requirements will be effective beginning with the first quarter of fiscal 2025. Early adoption is permitted and retrospective application is required for all periods presented. The Company is in the process of analyzing the impact of the ASU on related disclosures. In December 2023, the FASB issued ASU 2023-09 requiring enhanced income tax disclosures. The ASU requires disclosure of specific categories and disaggregation of information in the rate reconciliation table. The ASU also requires disclosure of disaggregated information related to income taxes paid, income or loss from continuing operations before income tax expense or benefit, and income tax expense or benefit from continuing operations. The requirements of the ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted and the amendments should be applied on a prospective basis. Retrospective application is permitted. The Company is in the process of analyzing the impact of the ASU on related disclosures. The Company does not believe any other new accounting pronouncements issued by the FASB that have not become effective will have a material impact on its consolidated financial statements. NOTE 2. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances. 67 Table of Contents The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities. Level 2 - Valuations based on other than quoted prices in active markets for identical assets and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable for substantially the full term of the assets or liabilities. Level 3 - Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The Company's financial instruments consist of assets and liabilities measured using Level 1 and 2 inputs. Level 1 assets include a highly liquid money market fund, which is valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. Treasury and government agency securities, commercial paper, corporate bonds, asset-backed securities, foreign government securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices of identical instruments in less active or inactive markets, quoted prices of similar instruments in active markets, or industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates. The following table sets forth by level within the fair value hierarchy the fair value of the Company's financial assets and liabilities measured at fair value on a recurring basis: December 31, 2023 Level 1 Level 2 Fair Value (in thousands) Money market funds $ 87 $ — $ 87 Commercial paper — 54,279 54,279 U.S. Treasury and government agencies — 208,536 208,536 Corporate bonds — 56,465 56,465 Asset-backed securities — 13,881 13,881 Foreign currency forward contracts — 111 111 Total assets $ 87 $ 333,272 $ 333,359 Foreign currency forward contracts $ — $ 1,986 $ 1,986 Total liabilities $ — $ 1,986 $ 1,986 68 Table of Contents December 31, 2022 Level 1 Level 2 Fair Value (in thousands) Money market funds $ 82,701 $ — $ 82,701 U.S. Treasury and government agencies — 156,662 156,662 Foreign government — 1,006 1,006 Corporate bonds — 63,910 63,910 Asset-backed securities — 15,027 15,027 Foreign currency forward contracts — 1,493 1,493 Total assets $ 82,701 $ 238,098 $ 320,799 Foreign currency forward contracts $ — $ 4,679 $ 4,679 Total liabilities $ — $ 4,679 $ 4,679 There were no transfers between Level 1, Level 2 and Level 3 categories during the years ended December 31, 2023 and 2022. Cash equivalent and investments The Company's cash equivalents and marketable securities consist of the following: December 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses Fair Value (in thousands) Cash equivalents: (1) Money market funds $ 87 $ — $ — $ 87 U.S. Treasury and government agencies 54,620 4 — 54,624 Total 54,707 4 — 54,711 Short-term marketable securities: Commercial paper 54,254 32 ( 7 ) 54,279 Corporate bonds 23,013 1 ( 149 ) 22,865 U.S. Treasury and government agencies 144,901 52 ( 204 ) 144,749 Total 222,168 85 ( 360 ) 221,893 Long-term marketable securities: Corporate bonds 33,337 285 ( 22 ) 33,600 Asset-backed securities 13,785 102 ( 6 ) 13,881 U.S. Treasury and government agencies 9,116 49 ( 2 ) 9,163 Total 56,238 436 ( 30 ) 56,644 Total $ 333,113 $ 525 $ ( 390 ) $ 333,248 (1) Excludes cash of $ 149.0 million. 69 Table of Contents December 31, 2022 Amortized Cost Unrealized Gains Unrealized Losses Fair Value (in thousands) Cash equivalents: (1) Money market funds $ 82,701 $ — $ — $ 82,701 U.S. Treasury and government agencies 29,787 4 — 29,791 Total 112,488 4 — 112,492 Short-term marketable securities: Corporate bonds 36,908 3 ( 337 ) 36,574 Asset-backed securities 726 — ( 2 ) 724 U.S. Treasury and government agencies 110,225 — ( 921 ) 109,304 Foreign government 1,008 — ( 2 ) 1,006 Total 148,867 3 ( 1,262 ) 147,608 Long-term marketable securities: Corporate bonds 28,146 — ( 810 ) 27,336 Asset-backed securities 14,435 — ( 132 ) 14,303 U.S. Treasury and government agencies 18,076 — ( 509 ) 17,567 Total 60,657 — ( 1,451 ) 59,206 Total $ 322,012 $ 7 $ ( 2,713 ) $ 319,306 (1) Excludes cash of $ 61.2 million. The following table summarizes the gross unrealized losses and fair value of the Company's marketable securities that were in an unrealized loss position aggregated by length of time: December 31, 2023 Less than 12 months 12 months or longer Total Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses (in thousands) Commercial paper $ 24,838 $ ( 7 ) $ — $ — $ 24,838 $ ( 7 ) Asset-backed securities — — 1,485 ( 6 ) 1,485 ( 6 ) Corporate bonds — — 20,717 ( 171 ) 20,717 ( 171 ) U.S. Treasury and government agencies 43,373 ( 18 ) 18,172 ( 188 ) 61,545 ( 206 ) Total $ 68,211 $ ( 25 ) $ 40,374 $ ( 365 ) $ 108,585 $ ( 390 ) 70 Table of Contents December 31, 2022 Less than 12 months 12 months or longer Total Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses (in thousands) Foreign government agencies $ 998 $ ( 2 ) $ — $ — $ 998 $ ( 2 ) Asset-backed securities 13,365 ( 124 ) 1,652 ( 10 ) 15,017 ( 134 ) Corporate bonds 33,800 ( 389 ) 26,326 ( 758 ) 60,126 ( 1,147 ) U.S. Treasury and government agencies 89,802 ( 1,175 ) 36,833 ( 255 ) 126,635 ( 1,430 ) Total $ 137,965 $ ( 1,690 ) $ 64,811 $ ( 1,023 ) $ 202,776 $ ( 2,713 ) The Company considered the extent to which any unrealized losses on its marketable securities were driven by credit risk and other factors, including market risk, and if it is more-likely-than-not that the Company would have to sell the security before the recovery of the amortized cost basis. At December 31, 2023 and 2022, the unrealized losses related to its marketable securities were due to rising market interest rates compared to when the investments were initiated. The Company does not believe the unrealized losses represent credit risk, and the Company does not intend to sell any of the securities in an unrealized loss position and it is not likely that the Company would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. Thus, no credit loss was recognized for the Company's marketable securities for the years ended December 31, 2023 and 2022. The following summarizes the fair value of marketable securities by contractual maturity: December 31, 2023 Amortized Cost Fair Value (in thousands) Due within One Year $ 276,875 $ 276,604 Due after One Year through Two Years 27,814 27,982 Mature over Two Years 14,639 14,781 Asset-backed securities 13,785 13,881 Total $ 333,113 $ 333,248 Derivative Financial Instruments Designated cash flow hedges The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuation from certain forecasted subscription revenue orders billed in GBP and EUR and operation expenses incurred in INR, which are designated as cash flow hedges. Hedge effectiveness is assessed at inception and at each reporting period utilizing regression analysis. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in accumulated other comprehensive income ("AOCI") and will be reclassified into revenues or operating expenses, respectively, in the same periods when the hedged transactions are recognized in earnings. As of December 31, 2023, the Company had designated cash flow hedge forward contracts with notional amounts of € 48.5 million, £ 14.6 million and Rs. 4,042.0 million. As of December 31, 2022, the Company had designated cash flow hedge forward contracts with notional amounts of € 37.4 million, £ 10.4 million and Rs. 3,411.0 million. 71 Table of Contents As of December 31, 2023 , a net amount of unrealized loss of $ 1.5 million before tax on the foreign currency forward contracts for GBP and EUR reported in AOCI is expected to be reclassified into revenue within the next 12 months. As of December 31, 2023 , an immaterial amount of unrealized loss before tax on the foreign currency forward contracts for INR reported in AOCI is expected to be reclassified into operating expenses within the next 12 months. Non-designated forward contracts The Company also uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities, which are not designated as cash flow hedges. Unrealized foreign exchange gain or losses related to the non-designated forward contracts are recorded in other income (expenses), net and offset the foreign exchange gain or loss on the underlying net monetary assets or liabilities. As of December 31, 2023, the Company had non-designated forward contracts with notional amounts of € 19.2 million, £ 6.0 million, Rs. 440.0 million, and C$ 1.0 million. As of December 31, 2022, the Company had non-designated forward contracts with notional amounts of € 40.2 million, £ 16.2 million, Rs. 484.0 million, and C$ 3.8 million. The following summarizes the fair value of derivative financial instruments as of December 31, 2023 and 2022: December 31, 2023 2022 (in thousands) Assets Foreign currency forward contracts designated as cash flow hedge $ 63 $ 1,041 Foreign currency forward contracts not designated as hedging instruments 48 452 Total $ 111 $ 1,493 Liabilities Foreign currency forward contracts designated as cash flow hedge $ 1,502 $ 2,634 Foreign currency forward contracts not designated as hedging instruments 484 2,045 Total $ 1,986 $ 4,679 The Company presents its derivative assets and derivative liabilities at gross fair values in the consolidated balance sheets. However, under the master netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The potential offset to both assets and liabilities under the right of set-off associated with the Company's foreign currency exchange contracts are immaterial as of December 31, 2023 and 2022. The derivatives held by the Company are not subject to any credit contingent features negotiated with its counterparties. The Company is not required to pledge nor is entitled to receive cash collateral related to the above contracts. The counterparties to these derivatives are large, global financial institutions that the Company believes are creditworthy, and therefore, it does not consider the risk of counterparty nonperformance to be material. The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense), net in the consolidated statements of operations: Year Ended December 31, 2023 2022 2021 (in thousands) Net (losses) gains from non-designated forward contracts $ ( 198 ) $ 5,093 $ 2,452 Other foreign currency transactions losses ( 499 ) ( 6,864 ) ( 2,749 ) Total foreign exchange losses, net $ ( 697 ) $ ( 1,771 ) $ ( 297 ) 72 Table of Contents NOTE 3. Accumulated Other Comprehensive Income (Loss) The components and changes in accumulated other comprehensive income (loss) were as follows: Available-for-sale debt securities Cash flow hedges Total (in thousands) Balances at December 31, 2020 $ 1,224 $ ( 1,708 ) $ ( 484 ) Change in unrealized gains (losses) during the period ( 1,854 ) 2,837 983 Amount reclassified into income during the period 22 933 955 Tax effect 423 ( 870 ) ( 447 ) Net change during the period ( 1,409 ) 2,900 1,491 Balances at December 31, 2021 ( 185 ) 1,192 1,007 Change in unrealized gains (losses) during the period ( 2,462 ) 581 ( 1,881 ) Amount reclassified into income during the period — ( 1,147 ) ( 1,147 ) Tax effect ( 58 ) 132 74 Net change during the period ( 2,520 ) ( 434 ) ( 2,954 ) Balances at December 31, 2022 ( 2,705 ) 758 ( 1,947 ) Change in unrealized gains (losses) during the period 2,858 ( 1,362 ) 1,496 Amount reclassified into income during the period ( 16 ) ( 1,957 ) ( 1,973 ) Tax effect ( 29 ) 749 720 Net change during the period 2,813 ( 2,570 ) 243 Balances at December 31, 2023 $ 108 $ ( 1,812 ) $ ( 1,704 ) The effects on income before income taxes of amounts reclassified from AOCI to the consolidated statements of operations were as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Reclassification of AOCI - Available-for-sale debt securities Other income (expense), net $ 16 $ — $ ( 22 ) Reclassification of AOCI - Cash flow hedges Revenues $ 3,077 $ 1,897 $ ( 1,667 ) Cost of revenues ( 258 ) ( 169 ) 149 Research and development ( 712 ) ( 478 ) 492 Sales and marketing ( 44 ) ( 30 ) 28 General and administrative ( 106 ) ( 73 ) 65 Total $ 1,957 $ 1,147 $ ( 933 ) 73 Table of Contents NOTE 4. Property and Equipment, Net Property and equipment, net, which includes assets under finance leases, consists of the following: December 31, 2023 2022 (in thousands) Computer equipment $ 179,002 $ 173,832 Computer software 26,133 25,808 Leasehold improvements 20,924 21,009 Scanner appliances 18,369 15,696 Furniture, fixtures and equipment 6,699 6,524 Total property and equipment 251,127 242,869 Less: accumulated depreciation and amortization ( 218,528 ) ( 195,441 ) Property and equipment, net $ 32,599 $ 47,428 As of December 31, 2023 and 2022, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had a net carrying value of $ 10.1 million and $ 6.7 million, respectively, including assets that had not been placed in service of $ 6.4 million and $ 4.0 million, respectively. Depreciation and amortization expenses relating to property and equipment were $ 23.9 million, $ 28.2 million and $ 28.5 million for the years ended December 31, 2023 , 2022 and 2021, respectively, which were mainly recorded in cost of revenues in the consolidated statements of operations. NOTE 5. Revenue from Contracts with Customers The Company records deferred revenue when cash payments are received or due in advance of its performance obligations offset by revenue recognized in the period. Revenues of $ 292.2 million and $ 254.9 million were recognized during the years ended December 31, 2023 and December 31, 2022 , respectively, which amounts were included in the deferred revenue balances of $ 317.2 million and $ 290.6 million as of December 31, 2022 and December 31, 2021 , respectively The Company's payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. In certain circumstances, based on the credit quality of the customer, the Company requires payment before the products or services are delivered to the customer. The following table sets forth the expected revenue from all remaining performance obligations as of December 31, 2023: (in thousands) 2024 $ 200,872 2025 122,465 2026 46,327 2027 4,291 2028 397 2029 and thereafter 63 Total $ 374,415 Revenues allocated to remaining performance obligations represents the transaction price of noncancelable orders for which service has not been performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less. 74 Table of Contents From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. The Company concluded that these contracts did not contain a financing component. Revenues by sales channel are as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Direct $ 314,988 $ 285,382 $ 243,389 Partner 239,470 204,341 167,783 Total $ 554,458 $ 489,723 $ 411,172 The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 13, "Segment and Geographic Area Information" for disaggregation of revenue by geographic area. Deferred costs to obtain contracts are as follows: December 31, 2023 2022 (in thousands) Current $ 5,858 $ 5,018 Noncurrent $ 11,844 $ 10,090 For the years ended December 31, 2023 , 2022 and 2021, the Company recognized $ 6.0 million, $ 5.0 million and $ 4.0 million, respectively, of amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the consolidated statements of operations. During the same periods, there was no impairment loss related to the deferred costs to obtain contracts. NOTE 6. Acquisitions On October 4, 2022, the Company acquired certain assets of Blue Hexagon Inc., a privately held company incorporated in Delaware, for $ 10.0 million in cash, of which $ 8.5 million was paid on the acquisition date and the remaining $ 1.5 million will be due eighteen months from the acquisition date, subject to potential adjustment from possible indemnity claims. In addition, the Company assumed $ 1.4 million deferred revenue. Blue Hexagon's AI/ML-driven network detection enables the Company to leverage its cloud platform with AI/machine learning to uncover behavior patterns including active vulnerability exploitation, identification of advanced network threats, and adaptive risk mitigation across all assets and application. The Company accounted for this transaction as an asset acquisition, as substantially all of the fair value is concentrated in developed technology acquired. The Company incurred $ 0.6 million transaction costs which is included as the cost of acquiring the intangible assets. The Company recognized intangible assets of $ 11.5 million for developed technology and $ 0.4 million for assembled workforce, which will be amortized over five years and two years , respectively. On August 19, 2021, the Company acquired certain developed technology intangible assets of TotalCloud, a privately held company incorporated in India, for a total cash consideration of $ 1.2 million, of which $ 1.1 million was paid on the acquisition 75 Table of Contents date and the remaining $ 0.1 million was deferred and paid in August 2022. TotalCloud's technology strengthens the Company's cloud security solution by allowing customers to build user-defined workflows for custom policies and execute them on-demand for simplified security and compliance. The acquired intangible assets will be amortized over five years . There were no changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022. NOTE 7. Intangible Assets, Net Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. The carrying values of intangible assets are as follows: December 31, 2023 (in thousands) Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value Developed technology 4.6 1.1 $ 40,141 $ ( 30,667 ) $ 9,474 Patent licenses 14.0 0.7 1,387 ( 1,322 ) 65 Assembled workforce 2.0 0.8 359 ( 223 ) 136 Total intangibles subject to amortization $ 41,887 $ ( 32,212 ) $ 9,675 Intangible assets not subject to amortization 40 Total intangible assets, net $ 9,715 December 31, 2022 (in thousands) Weighted Average Life (Years) Weighted Average Remaining Life (Years) Cost Accumulated Amortization Net Book Value Developed technology 4.6 1.4 $ 40,141 $ ( 27,860 ) $ 12,281 Patent licenses 14.0 1.7 1,387 ( 1,221 ) 166 Assembled workforce 2.0 1.7 359 ( 45 ) 314 Total intangibles subject to amortization $ 41,887 $ ( 29,126 ) 12,761 Intangible assets not subject to amortization 40 Total intangible assets, net $ 12,801 Intangible assets amortization expenses were $ 3.1 million, $ 5.7 million and $ 6.7 million for the years ended December 31, 2023, 2022 and 2021, respectively, which were recorded in the consolidated statements of operations. As of December 31, 2023, the Company expects amortization expense in future periods to be as follows: (in thousands) 2024 $ 2,904 2025 2,556 2026 2,477 2027 1,738 Total expected future amortization expense $ 9,675 76 Table of Contents NOTE 8. Leases The Company leases certain offices, computer equipment and its shared cloud platform facilities under non-cancelable operating leases for varying periods through 2028. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was $ 16.1 million, $ 14.9 million and $ 16.8 million for the years ended December 31, 2023 , 2022 and 2021, respectively. Supplemental cash flow information related to operating leases was as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Cash payments included in the measurement of lease liabilities $ 14,984 $ 15,751 $ 14,646 Lease liabilities arising from obtaining right-of-use assets $ 121 $ 8,669 $ 4,110 The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows: December 31, 2023 2022 Weighted average remaining lease term (years) 3.1 3.7 Weighted average discount rate 5.2 % 5.2 % Maturities of the Company's operating lease liabilities as of December 31, 2023 are as follows: (in thousands) 2024 $ 13,053 2025 7,747 2026 4,498 2027 4,353 2028 1,466 Total minimum lease payments 31,117 Less: interest ( 2,375 ) Present value of net minimum lease payments 28,742 Less: lease liabilities, current ( 11,857 ) Lease liabilities, noncurrent $ 16,885 77 Table of Contents NOTE 9. Commitment and Contingencies Purchase Obligation The Company has entered into agreements to purchase goods and services in the ordinary course of business. As of December 31, 2023, these remaining purchase commitments for future periods are as follows: (in thousands) 2024 $ 20,743 2025 18,768 2026 12,365 2027 9,784 Total purchase commitments $ 61,660 Indemnifications The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors. Legal Proceedings From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of the Company's business. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Legal expenses related to such matters are expensed as incurred. The Company provides disclosure if it is reasonably possible that a loss has been incurred and a range of loss or possible loss can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The Company reviews these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. As of December 31, 2023, there has not been at least a reasonable possibility that the Company has incurred a material loss from any ongoing legal proceedings, individually or taken together. However, litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company's control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters which could have a material impact on its results of operations, financial position and cash flows. NOTE 10. Stockholders' Equity and Stock-based Compensation Preferred Stock Effective October 3, 2012, the Company is authorized to issue 20.0 million shares of undesignated preferred stock with a par value of $ 0.001 per share. Each series of preferred stock will have such rights and preferences including dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price, and liquidation preferences as determined by the board of directors. As of December 31, 2023, and 2022, there were no issued or outstanding shares of preferred stock. 78 Table of Contents Common Stock Equity Incentive Plan 2012 Equity Incentive Plan The 2012 Equity Incentive Plan (“Previous 2012 Plan”) was adopted and approved in September 2012 and became effective on September 26, 2012. Under the Previous 2012 Plan, the Company is authorized to grant to eligible participant’s incentive stock options ("ISOs"), nonstatutory stock options ("NSOs"), stock appreciation rights (“SARs”), restricted stock awards, restricted stock units ("RSUs"), performance units and performance shares. The number of shares of common stock available for issuance under the Previous 2012 Plan is subject to an annual increase on January 1 of each year by an amount equal to the least of 3,050 thousand shares, 5 % of the outstanding shares of stock as of the last day of the immediately preceding fiscal year or an amount determined by the board of directors. For the year ended December 31, 2023, no shares were added to the Previous 2012 Plan. On June 8, 2022 ("Effective Date"), the Company's stockholders approved the Amended and Restated 2012 Equity Incentive Plan (the "Restated 2012 Plan"). Under the Restated 2012 Plan, the Company is authorized to grant to eligible participants ISOs, NSOs, restricted stock, RSUs, SARs, performance units and performance shares. Pursuant to the relevant plan provisions, 3,072 thousand shares were available for grant under the Restated 2012 Plan on the Effective Date. In addition, any outstanding awards or options granted under the Previous 2012 Equity Incentive Plan will be added back to the shares available for grant under the Restated 2012 Plan if they expire unexercised or are otherwise forfeited after the Effective Date. Any remaining shares of 9,689 thousand available for grant under the Previous 2012 Plan as of the Effective Date were no longer available for future grants under the Restated 2012 Plan. As of December 31, 2023, 1,824 thousand shares are available for future grants. Options may be granted with an exercise price that is at least equal to the fair market value of the Company's stock at the date of grant and are exercisable when vested. Options and RSU's granted generally vest over a period of up to four years . ISOs may only be granted to employees and any subsidiary corporations' employees. All other awards may be granted to employees, directors and consultants and subsidiary corporations' employees and consultants. Options, SARs, RSUs, performance units and performance awards may be granted with vesting terms as determined by the board of directors and expire no more than ten years after the date of grant or earlier if employment or service is terminated. 2021 Employee Stock Purchase Plan On June 9, 2021, the Company’s stockholders approved the 2021 ESPP. A total of 600 thousand shares were authorized for issuance to eligible participating employees upon adoption of the ESPP. The ESPP provides for consecutive 6 -month offering periods beginning on or about August 16 and February 16 of each year. Eligible employees who elect to participate can contribute from 1 % to 15 % of their eligible compensation through payroll withholding. During any offering period, contribution rates cannot be changed. However, eligible employees may withdraw from the current offering period. Any contributions made prior to each purchase date in the case of withdrawal or termination of employment will be refunded. On each purchase date, eligible participating employees will purchase the shares at a price per share equal to 85 % of the lesser of (i) the fair market value of the Company's stock on the first trading day of the offering period or (ii) the fair market value of the Company's stock on the purchase date (i.e., the last trading day of the offering period). During the year ended December 31, 2023, 60 thousand shares were issued in connection with the purchase of common stock by participating employees. As of December 31, 2023, 494 thousand shares were available for future purchase. 79 Table of Contents Stock-based Compensation The following table shows a summary of the stock-based compensation expenses included in the consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands) Cost of revenues $ 7,300 $ 5,305 $ 3,782 Research and development 21,091 14,585 10,750 Sales and marketing 12,234 9,837 6,323 General and administrative 28,454 23,681 46,724 Total stock-based compensation, net of amounts capitalized (1) $ 69,079 $ 53,408 $ 67,579 (1) Total stock-based compensation expense capitalized was de minimis during the year ended December 31, 2023. The income tax benefit related to the stock-based compensation expenses was $ 11.0 million, $ 8.3 million and $ 6.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. The tax benefit realized from stock-based compensation vested or exercised was $ 5.9 million , $ 7.0 million , and $ 4.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023 , the Company had unrecognized stock-based compensation expenses of $ 23.3 million, $ 94.3 million, $ 1.4 million, and $ 0.3 million related to options, RSUs, performance-based RSUs, and ESPP, respectively, which are expected to be recognized over weighted-average periods of 2.6 years, 2.8 years, 0.6 years, and 0.1 years, respectively. Performance-Based Stock Options and Restricted Stock Units On December 21, 2018, the Compensation and Talent committee of the Company's board of directors (“Compensation Committee”) granted the equity award for 2019 to the Company’s former chief executive officer, Philippe Courtot (“Mr. Courtot”). The first portion of the award consisted of 56 thousand RSUs that were scheduled to vest in 16 quarterly increments beginning on January 1, 2019. The second portion of the award consisted of a target number of 33 thousand PSUs, which were scheduled to vest at the end of the three-year performance period from January 2019 through December 2021. The actual number of PSUs eligible to vest ranged from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth during the three-year performance period from January 2019 through December 2021 and Adjusted EBITDA margin for the fiscal year of 2021. The third portion of the award consisted of a target number of 33 thousand PSUs, one third of which ( 11 thousand target PSUs) was scheduled to vest at the end of each fiscal year of 2019, 2020 and 2021. The actual number of PSUs eligible to vest at each vesting date ranged from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and Adjusted EBITDA margin for each of those years. On November 2, 2019, the Compensation Committee granted the equity award for 2020 to Mr. Courtot. The first portion of the award consisted of 49 thousand RSUs that were scheduled to vest in 16 quarterly installments beginning on December 1, 2019. The second portion of the award consisted of a target number of 124 thousand PSOs, which were scheduled to vest at the end of the three-year performance period from January 2020 through December 2022. The actual number of PSOs eligible to vest ranged from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period. On December 10, 2020, the Compensation Committee granted the equity award for 2021 to Mr. Courtot. The first portion of the award consisted of 69 thousand RSUs that were scheduled to vest in 16 quarterly installments beginning on November 1, 2020. The second portion of the award consisted of a target number of 224 thousand PSOs, which were scheduled to vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of PSOs eligible to vest ranged from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period. 80 Table of Contents The vesting of the above awards was conditioned on Mr. Courtot’s continued service through the vesting dates or, for PSOs and PSUs, the dates that performance is certified in addition to the achievement of performance goals. If Mr. Courtot’s employment was terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100 % of any unvested portions of these awards would vest, with any vesting in connection with change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company. In February 2021 and 2020, 22 thousand shares (representing 200 % of target number of awards) and 15 thousand shares (representing 135 % of target number of awards) under the equity award for 2019 for Mr. Courtot, vested as a result of the Company achieving the corresponding level of performance goals for 2020 and 2019, respectively. On March 19, 2021, Mr. Courtot resigned from the Company due to health issues. The Compensation Committee determined that Mr. Courtot’s termination of employment was on account of disability. In accordance with the grant agreements of the equity awards for 2021, 2020 and 2019 for Mr. Courtot, all remaining outstanding RSUs, PSUs and PSOs under these grants were subject to accelerated vesting and became fully vested at 100 % of the target number of awards as of the date of his termination of employment, which consist of 127 thousand RSUs, 44 thousand PSUs and 348 thousand PSOs. As a result, the Company recognized an additional $ 27.3 million of stock-based compensation expense due to the accelerated vesting in the consolidated statements of operations for the year ended December 31, 2021. On April 27, 2021, the Compensation Committee granted to the Company’s current president and chief executive officer an equity award consisting of certain RSUs and a target number of 10 thousand PSUs. The PSUs are scheduled to vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of the PSUs eligible to vest range from 0 % to 200 % of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period. If the Company's current president and chief executive officer is terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100 % of any unvested portions of the award will vest, with any vesting in connection with terminations due to change in control conditioned upon the effectiveness of a release of claims in favor of the Company. On October 28, 2021, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs and an aggregate target number of 73 thousand PSUs. The target PSUs are scheduled to vest in three equal annual installments over a three-year period from January 2022 through December 2024. Each annual installments at 200 % of the annual target will be considered granted when the performance targets for the corresponding performance year are determined and approved. The actual number of the PSUs eligible to vest each year range from 0 % to 200 % of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding to that year. The vesting and release of the first and second installment is capped at 100 % of the target number at the end of the first and second year, respectively, with cumulative achievement over 100 %, if any, to be vested and released at the end of the third year, together with the vesting of the third installment. On October 27, 2022, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs and an aggregate target number of 86 thousand PSUs. The target PSUs are scheduled to vest in three equal annual installments over a three-year period from January 2023 through December 2025. Each annual installments at 200 % of the annual target will be considered granted when the performance targets for the corresponding performance year is determined and approved. The actual number of the PSUs eligible to vest each year range from 0 % to 200 % of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding to that year. The vesting and release of the first and second installment is capped at 100 % of the target number at the end of the first and second year, respectively, with cumulative achievement over 100 %, if any, to be vested and released at the end of the third year, together with the vesting of the third installment. 81 Table of Contents On February 6, 2023 and July 27, 2023, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs and an aggregate target number of 6 thousand and 9 thousand PSUs, respectively. The target PSUs are scheduled to vest in three equal annual installments over a three-year period from January 2023 through December 2025. Each annual installments at 200 % of the annual target will be considered granted when the performance targets for the corresponding performance year are determined and approved. The actual number of the PSUs eligible to vest each year ranges from 0 % to 200 % of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding to that year. The vesting and release of the first and second installment is capped at 100 % of the target number at the end of the first and second year, respectively, with cumulative achievement over 100 %, if any, to be vested and released at the end of the third year, together with the vesting of the third installment. On October 26, 2023, the Compensation Committee approved to certain executive officers of the Company equity awards consisting of certain RSUs and an aggregate target number of 81 thousand PSUs. The target PSUs are scheduled to vest in three equal annual installments over a three-year period from January 2024 through December 2026. Each annual installments at 200 % of the annual target will be considered granted when the performance targets for the corresponding performance year is determined and approved. The performance targets are determined and approved each year in the first quarter of the corresponding performance year. Accordingly, such awards are not considered granted for accounting purposes as of December 31, 2023. The actual number of the PSUs eligible to vest each year range from 0 % to 200 % of the annual target number, depending on the level of achievement of goals related to revenue growth and adjusted EBITDA margin corresponding to that year. The vesting and release of the first and second installment is capped at 100 % of the target number at the end of the first and second year, respectively, with cumulative achievement over 100 %, if any, to be vested and released at the end of the third year, together with the vesting of the third installment. For the PSUs approved on October 28, 2021, October 27, 2022, February 6, 2023, July 27, 2023 and October 26, 2023, any unvested PSU award may be accelerated in part or in full upon the occurrence of certain events, such as death or disability, or a change in control, as defined in the grant agreement. For the years ended December 31, 2023 , 2022 and 2021, stock-based compensation expenses of $[ nil ], $[ nil ] and $ 13.3 million for PSOs, respectively, and $ 7.4 million, $ 3.9 million and $ 5.3 million for PSUs, respectively, were recognized. Stock Options The weighted-average grant date fair value of the Company’s stock options granted for the years ended December 31, 2023, 2022 and 2021 was $ 49.08 , $ 50.32 and $ 41.23 , respectively, using the Black-Scholes-Merton option-pricing model based on the following assumptions: Year Ended December 31, 2023 2022 2021 Expected term (in years) 3.8 to 3.9 4.3 to 4.4 5.2 to 5.5 Volatility 42 % to 43 % 40 % to 43 % 38 % to 41 % Risk-free interest rate 3.7 % to 4.9 % 1.7 % to 4.2 % 0.5 % to 1.2 % Dividend yield — — — The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates equal to the expected term at the grant date. The volatility was estimated using the historical volatility derived from the Company's common stock. The Company has not historically declared any dividends and does not expect to in the future. 82 Table of Contents A summary of the Company’s stock option activity is as follows: Outstanding Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) (Years) (in thousands) Balance as of December 31, 2022 1,807 $ 87.59 6.5 $ 58,024 Granted 345 $ 129.00 Exercised ( 582 ) $ 78.32 Canceled ( 123 ) $ 125.39 Balance as of December 31, 2023 1,447 $ 97.98 6.5 $ 142,302 Vested and expected to vest as of December 31, 2023 1,271 $ 93.44 6.2 $ 130,691 Exercisable as of December 31, 2023 739 $ 68.68 4.5 $ 94,272 The total intrinsic value of options exercised for the years ended December 31, 2023 , 2022 and 2021 was $ 41.7 million, $ 39.8 million and $ 42.5 million, respectively. Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price paid. Restricted Stock Units A summary of the Company’s RSU activity is as follows: Outstanding RSUs Weighted Average Grant Date Fair Value Per Share (in thousands) Balance as of December 31, 2022 1,183 (1) $ 124.42 Granted 488 (2) $ 140.08 Vested ( 414 ) (3) $ 116.92 Forfeited ( 183 ) (4) $ 128.46 Balance as of December 31, 2023 1,074 (5) $ 133.60 Outstanding and expected to vest as of December 31, 2023 863 $ 132.53 (1) Included 175 thousand PSUs granted to certain executive officers in 2022 and 2021. (2) Included 10 thousand PSUs granted to certain executive officers in 2023 (3) Included 24 thousand PSUs granted to certain executive officers in 2021. (4) Included 22 thousand PSUs granted to certain executive officers in 2022 and 2021. (5) Included 139 thousand PSUs granted to certain executive officers in 2023, 2022 and 2021. The aggregate fair value of RSUs vested for the years ended December 31, 2023, 2022 and 2021 was $ 55.7 million, $ 43.9 million and $ 59.5 million, respectively. 83 Table of Contents Employee Stock Purchase Plan The weighted-average grant date fair value of the Company’s ESPP for the year ended December 31, 2023 and 2022 was $ 34.50 and $ 39.14 , respectively, using the Black-Scholes-Merton option-pricing model based on the following assumptions: Year Ended December 31, 2023 2022 Expected term (in years) 0.5 0.5 Volatility 30.0 % to 43.8 % 41.1 % to 50.1 % Risk-free interest rate 5.0 % to 5.5 % 0.7 % to 3.1 % Dividend yield — — The expected term of the ESPP represents the six-month offering period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates equal to the expected term at the grant date. The volatility was estimated using the historical volatility derived from the Company's common stock. The Company has not historically declared any dividends and does not expect to in the future. Share Repurchase Program The Company's share repurchase program was authorized by the board of directors as follows: Announcement Date Authorized Dollar Value (in millions) February 12, 2018 $ 100.0 October 30, 2018 100.0 October 30, 2019 100.0 May 7, 2020 100.0 February 10, 2021 100.0 November 3, 2021 200.0 May 4, 2022 200.0 February 9, 2023 100.0 Total as of December 31, 2023 $ 1,000.0 Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act. All share repurchases have been made using cash resources. Repurchased shares are retired and reclassified as authorized and unissued shares of common stock. On retirement of the repurchased shares, common stock is reduced by an amount equal to the number of shares being retired multiplied by the par value. The excess amount that is retired over its par value is first allocated as a reduction to additional paid-in capital based on the original cost of additional paid-in capital per share of identified issuances. The remaining amount is allocated to accumulated deficit. On February 7, 2024, the Company announced that its Board of Directors authorized an additional $ 200.0 million under the share repurchase program, increasing the total amount of authorized repurchase to $ 1.2 billion. For the years ended December 31, 2023, 2022 and 2021, the Company repurch ased 1.3 million shares, 2.5 million shares and 1.1 million shares of its common stock for $ 170.8 million, $ 317.3 million and $ 130.0 million, respectively . As of December 31, 2023, $ 83.7 million remained available for share repurchases pursuant to the Company's share repurchase program. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 1% excise tax on stock repurchases net of issue, which was immaterial to the Company's financial results and cash flows for the year ended December 31, 2023. 84 Table of Contents NOTE 11. Employee Benefits Plan The Company’s 401(k) Plan was established in 2000 to provide retirement and incidental benefits for its employees. As allowed under section 401(k) of the Internal Revenue Code, the 401(k) Plan provides tax-deferred salary deductions for eligible employees. Contributions to the 401(k) Plan are limited to a maximum amount as set periodically by the Internal Revenue Service. For the years ended December 31, 2023 , 2022 and 2021, the Company made contributions to the 401(k) Plan of $ 4.1 million, $ 3.5 million and $ 2.4 million, respectively. The Company contributes to a Provident Fund Plan for its employees in India, which is a defined contribution plan set up in accordance with local labor and tax laws. Gratuity is also paid by the Company to eligible employees in India in accordance with Payment of Gratuity Act, 1972. For the years ended December 31, 2023 , 2022 and 2021, the Company contributed $ 2.3 million, $ 2.0 million and $ 1.7 million, respectively, to those plans. NOTE 12. Income Taxes The Company’s geographical breakdown of income before income taxes is as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Domestic $ 164,958 $ 122,013 $ 80,472 Foreign 13,693 11,687 8,925 Income before income taxes $ 178,651 $ 133,700 $ 89,397 Income tax provision consists of the following: Year Ended December 31, 2023 2022 2021 (in thousands) Current Federal $ 32,405 $ 35,286 $ 20,135 State 6,061 6,269 4,324 Foreign 5,218 4,606 3,701 Current income tax provision 43,684 46,161 28,160 Deferred Federal ( 13,584 ) ( 17,097 ) ( 7,342 ) State ( 2,009 ) ( 3,055 ) ( 1,722 ) Foreign ( 1,035 ) ( 301 ) ( 659 ) Deferred income tax benefit ( 16,628 ) ( 20,453 ) ( 9,723 ) Income tax provision $ 27,056 $ 25,708 $ 18,437 85 Table of Contents The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows: Year Ended December 31, 2023 2022 2021 Federal statutory rate 21.0 % 21.0 % 21.0 % State taxes 2.6 2.3 3.1 Stock-based compensation 2.7 3.4 10.3 Excess tax benefits related to stock-based compensation ( 2.9 ) ( 5.2 ) ( 5.4 ) Foreign source income 0.3 3.8 0.4 Change in valuation allowance 0.1 0.3 0.2 Foreign-derived intangible income deduction ( 4.4 ) ( 4.9 ) ( 7.0 ) Federal and state research and development credit ( 1.4 ) ( 1.3 ) ( 1.9 ) Accrual to return adjustments and Other ( 2.9 ) ( 0.2 ) ( 0.1 ) Income tax provision 15.1 % 19.2 % 20.6 % Deferred Income Taxes Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2023 2022 (in thousands) Deferred tax assets Research and development credit carryforwards $ 11,502 $ 10,957 Fixed assets 581 — Accrued liabilities 3,020 3,677 Deferred revenues 3,381 5,766 Operating lease liabilities 7,722 10,667 Intangible assets 3,549 3,465 Stock-based compensation 4,263 4,691 Capitalized research and development 47,793 30,234 Other 2,999 2,195 Gross deferred tax assets 84,810 71,652 Valuation allowance ( 12,375 ) ( 12,476 ) Total deferred tax assets 72,435 59,176 Deferred tax liabilities Fixed assets — ( 1,745 ) Operating leases - right of use asset ( 5,999 ) ( 8,359 ) Deferred commissions ( 3,675 ) ( 3,660 ) Total deferred tax liabilities ( 9,674 ) ( 13,764 ) Net deferred tax assets $ 62,761 $ 45,412 86 Table of Contents The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely than-not that some portion, or all, of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, it is more-likely-than-not that its California deferred tax assets will not be realized as of December 31, 2023 . Additionally, due to a lack of sufficient future income of the appropriate character, certain U.S. federal and state deferred tax assets are not more-likely-than-not to be realized. Accordingly, the Company has recorded a valuation allowance of $ 12.4 million and $ 12.5 million against such deferred tax assets as of December 31, 2023 and 2022, respectively. The decrease in valuation allowance was mainly associated with the California research and development credit generated during the year ended December 31, 2023 offset by a decrease in unrealized loss on available for sale securities that will not likely be realized in the foreseeable future. As of December 31, 2023 and 2022, the Company had $ 17.0 million and $ 16.2 million, respectively, of California research and development credit carryforwards. California research and development credits are carried forward indefinitely. As of December 31, 2023 and 2022, the Company had foreign tax credit carryforwards of $ 1.0 million and $ 0.9 million, respectively, which begin to expire in 2028. The following table summarizes the activity related to the Company’s unrecognized tax benefits: Year Ended December 31, 2023 2022 2021 (in thousands) Unrecognized tax benefits beginning balance $ 10,542 $ 9,676 $ 8,855 Gross increase for tax positions of prior years 262 89 — Gross decrease for tax positions of prior years — — ( 25 ) Gross increase for tax positions of current year 1,127 777 846 Lapse of statute of limitations ( 33 ) — — Total unrecognized tax benefits $ 11,898 $ 10,542 $ 9,676 The unrecognized tax benefits, if recognized, would impact the income tax provision by $ 6.1 million, $ 5.3 million and $ 4.9 million as of December 31, 2023 , 2022 and 2021, respectively. The remaining amount would result in the recognition of a corresponding deferred tax asset that is then offset by a full valuation allowance. As of December 31, 2023 , the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months. The Company has elected to include interest and penalties as a component of income tax expense. The amounts were not material for the years ended December 31, 2023 , 2022 and 2021. The Company files income tax returns in the United States, including various state jurisdictions. The Company’s subsidiaries file tax returns in India and various other foreign jurisdictions. The tax years 2001 through 2023 remain open to examination by the major taxing jurisdictions in which the Company is subject to tax. The Company is also currently subject to tax audits in various jurisdictions. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its income tax provision in the period such resolution occurs. As of December 31, 2023, the Company has undistributed earnings in certain foreign subsidiaries that the Company has indefinitely reinvested outside the United States. Due to U.S. tax rules related to taxation of foreign earnings, the unrecorded deferred tax liability is immaterial. The Company may be required to pay additional foreign withholding taxes if the Company repatriates those earnings in the future. 87 Table of Contents NOTE 13. Segment and Geographic Area Information Under ASC 280 Segment Reporting, operating segments are defined as components of an entity about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in one segment and has only one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis. All of the Company’s principal operations and decision-making functions are located in the United States. Revenue by geographic area, based on the customer's billing address, is as follows: Year Ended December 31, 2023 2022 2021 (in thousands) United States $ 332,315 $ 292,291 $ 252,428 Foreign 222,143 197,432 158,744 Total revenues $ 554,458 $ 489,723 $ 411,172 Long-lived assets, which consist of Property and equipment, net and Operating leases - right of use asset, by geographic area, are as follows: December 31, 2023 2022 (in thousands) United States $ 42,622 $ 58,775 India 9,952 16,057 Rest of world 2,416 6,348 Total Long-lived Assets $ 54,990 $ 81,180 NOTE 14. Net Income Per Share The computations for basic and diluted net income per share are as follows: Year Ended December 31, 2023 2022 2021 (in thousands, except per share data) Numerator: Net income $ 151,595 $ 107,992 $ 70,960 Denominator: Basic weighted average shares 36,879 38,453 39,030 Effect of potentially dilutive shares: Stock options 482 672 863 Restricted stock units 237 216 224 Employee stock purchase plan 4 3 1 Diluted weighted average shares 37,602 39,344 40,118 Net income per share: Basic $ 4.11 $ 2.81 $ 1.82 Diluted $ 4.03 $ 2.74 $ 1.77 88 Table of Contents Potentially dilutive shares not included in the calculation of diluted net income per share because doing so would be anti-dilutive are as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Stock options 763 686 534 Restricted stock units 140 90 61 Employee stock purchase plan 7 5 — Total anti-dilutive shares 910 781 595 89 Table of Contents Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.