Bandwidth Inc. (BAND)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in this Annual Report on Form 10-K. Our fiscal year ends on December 31.

Overview

A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s APIs to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.

Bandwidth’s business benefits from multiple global megatrends, including enterprise migration to the cloud, adoption of CCaaS platforms, the need to be able to work from anywhere, reinvention of customer experience, growth in messaging applications to engage directly with consumers, and application of AI technologies to cloud communications use cases. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.

With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver mission-critical communications for global enterprises. In fact, Bandwidth already powers all the 2024 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of UCaaS and CCaaS.

Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) cross-sell and up-sell our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) focus on direct-to-enterprise growth to serve Global 2000 enterprises that directly leverage Bandwidth services to accelerate their digital transformations, and (3) aim to be the preferred provider for SaaS platforms that use conversational voice and messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.

For the years ended December 31, 2024, 2023 and 2022, total revenue was $748 million, $601 million and $573 million, respectively, representing an increase of 25% in 2024, and 5% in 2023. Net loss in 2024 and 2023 was $7 million and $16 million, respectively. Net income in 2022 was $20 million.

Repurchase of 2026 Convertible Notes

During May 2024, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes (the “2024 Repurchases”) to repurchase approximately $140 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $128 million. The 2024 Repurchases closed on May 9, 2024. Following the 2024 Repurchases and previous repurchases of the 2026 Convertible Notes, approximately $35 million principal amount of the 2026 Convertible Notes remain outstanding.

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Management’s Discussion and Analysis

The difference between the consideration used for the 2024 Repurchases and the carrying value of the 2026 Convertible Notes resulted in a gain of $10 million recorded within net gain on extinguishment of debt on our consolidated statements of operations for the year ended December 31, 2024.

Credit Agreement Amendment

On May 1, 2024, we entered into an amendment (the “Amendment”) to the credit agreement (the “Credit Agreement”), dated August 1, 2023, among the Company, as borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, swingline lender and letters of credit issuer Credit Agreement, which increased the aggregate revolving credit commitments from $50 million to $100 million; increased the swingline sublimit from $5 million to $10 million; increased the minimum liquidity from $75 million to $83 million; and extended the maturity date from August 1, 2028 to the earlier of (a) May 1, 2029 or (b) the date that is 91 days prior to the scheduled maturity date or mandatory conversion date of any of our outstanding convertible notes.

On October 28, 2024, we entered into a second amendment (the “Second Amendment”) to the Credit Agreement, which increased the aggregate revolving credit commitments to $150 million; modified the applicable margin for loans based on SOFR to between 2.0% and 2.5%, and modified the applicable margin for loans based on the base rate to between 1.0% and 1.50%; modified the quarterly commitment fee to between 0.2% and 0.25% on the unused portion of the borrowing commitment; replaced existing financial covenants to certain customary covenants; and modified the maturity date to the earlier of (a) May 1, 2029 or (b) the date that is 91 days prior to the scheduled maturity date or mandatory conversion date of any of the outstanding convertible senior notes due 2028.

As of December 31, 2024, we did not have any outstanding borrowings under the Credit Facility (as defined below), and we were in compliance with all financial and non-financial covenants for all periods presented. As of December 31, 2024, the available borrowing capacity under the Credit Facility was $150 million.

Key Performance Indicator

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

Net Retention Rate

We believe net retention rate is useful in evaluating our business. For the years ended December 31, 2024, 2023 and 2022, the net retention rate was 122%, 101% and 112%, respectively.

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generated revenue and seek to increase their use of our platform. We track our performance in this area by measuring the net retention rate for our customers who generate revenue. To calculate the net retention rate, we first identify the cohort of customers that generated revenue in the same quarter of the prior year. The net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. The net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters. Customers of acquired businesses are included in the subsequent year’s calendar quarter of acquisition. Our net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.

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Management’s Discussion and Analysis

As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for the purposes of calculating this metric.

Key Components of Statements of Operations

Revenue

Cloud communications revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, and (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services. Messaging surcharge revenue is derived from fees imposed by certain carriers within the messaging ecosystem, which are subsequently invoiced and passed through to customers.

For the years ended December 31, 2024, 2023 and 2022, we generated 74%, 72%, and 73%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 54%, 56%, and 45% of outstanding accounts receivable, net of allowance for doubtful accounts, as of December 31, 2024, 2023 and 2022, respectively.

Cost of Revenue and Gross Margin

Cost of revenue consists of fees paid to other network service providers, network operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.

Fees paid to other network service providers arise when we purchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits.

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

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

Gross margin is calculated by subtracting cost of revenue from revenue, divided by revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.

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Management’s Discussion and Analysis

Operating Expenses

The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars driven by the growth in our business.

Research and Development

Research and development expenses consist of salaries and related personnel costs for the design, development, testing and enhancement of our cloud network and software products. Research and development expenses include depreciation and allocated costs of facilities and information technology utilized by our research and development staff.

Sales and Marketing

Sales and marketing expenses consist of salaries and related personnel costs, commissions, and costs related to advertising, marketing, brand awareness activities, sales support and professional services fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.

General and Administrative

General and administrative expenses consist of salaries and related personnel costs for accounting, legal, human resources, corporate, and other administrative and compliance functions. General and administrative expenses include depreciation, expenditures for third party professional services, and allocated costs of facilities and information technology utilized by our corporate and administrative staff.

Income Taxes

For the years ended December 31, 2024, 2023 and 2022, our effective tax rate was 27.1%, 15.3%, and (13.1)%, respectively. The increase in the effective tax rate from 2023 to 2024 is primarily due to increased tax deductions from research expenditures which decreased U.S. cash tax liabilities when compared to an increase of $7 million in income before income taxes within the U.S. While we continue to recognize a valuation allowance in the U.S. against our deferred tax assets, changes to our current U.S. cash tax liabilities will cause effective tax rate fluctuations between financial periods.

Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of December 31, 2024, we continue to maintain a valuation allowance against our U.S. federal and state net deferred tax assets.

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Management’s Discussion and Analysis

Results of Operations

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

The following table sets forth selected consolidated statements of operations data as a percentage of our total revenue for the periods presented. *

(*) Columns may not foot due to rounding.

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Comparison of the Years Ended December 31, 2024 and 2023

Revenue

In 2024, our cloud communications revenue increased by $61 million, or 13%, compared with the same period in 2023. Within cloud communications revenue, our Global Voice Plans revenue grew by 3% and was driven by higher voice traffic on our network. Our Programmable Messaging revenue increased by 46% and was primarily fueled by higher political messaging related to the U.S. presidential election in November 2024. Our Enterprise Voice revenue grew by 29% as the flexibility from our Maestro product and our UCaaS/CCaaS vendor agnostic approach continues to resonate with customers.

In 2024, our messaging surcharges revenue increased by $87 million, or 71%, compared with the same period in 2023. This growth was primarily driven by higher messaging volumes from higher political messaging related to the U.S. presidential election.

In 2024, our average annual customer revenue was $0.2 million, which increased less than $0.1 million compared with the same period in 2023, primarily from higher political messaging related to the U.S. presidential election in November 2024.

Cost of Revenue and Gross Margin

In 2024, total cost of revenue increased by $104 million, compared with the same period in 2023, driven by higher pass-through messaging surcharges of $84 million largely from higher political messaging from the U.S. presidential election. The combination of changes in total revenue and total cost of revenue yielded gross profit of $280 million, which increased $44 million from the same period in 2023, driven by higher sales of election-related political messaging.

Our total gross margin percentage of 37% in 2024 declined by 2%, compared with the same period in 2023, driven by higher pass-through messaging surcharges within the total revenue mix.

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Operating Expenses

As a percentage of revenue, total operating expenses for the years ended December 31, 2024 and 2023 were 40% and 45%, respectively.

In 2024, research and development expenses increased by $14 million, or 14%, compared with the same period in 2023. This increase was primarily due to higher facilities expenses in support of our expanding research and development capabilities.

In 2024, sales and marketing expenses increased by $8 million, or 7%, compared with the same period in 2023, primarily due to higher facilities expenses in support of our sales force.

In 2024, general and administrative expenses increased by $6 million, or 10%, compared with the same period in 2023, driven by higher headcount expenses.

Interest Expense, Net

In 2024, interest expense, net of interest income increased by $1 million, or 130%, compared with the same period in 2023, primarily from higher interest expense from a draw on our Credit Facility to partially fund the 2024 Repurchases in May 2024.

Income Tax Benefit

In 2024, we recognized an income tax benefit of $2 million, a decrease of $1 million, compared with the same period in 2023. The resulting effective tax rate for the year ended December 31, 2024 was 27.1%, compared with 15.3% in 2023.

For the years ended December 31, 2024 and 2023, the effective tax rate of 27.1% and 15.3% differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Section 41 of the Code, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.2% for the year ended December 31, 2024. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Section 162(m) of the Code.

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include federal and state tax payable, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

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We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

Comparison of the Years Ended December 31, 2023 and 2022

Revenue

In 2023, our cloud communications revenue increased by $4 million, or 1%, compared with the same period in 2022. This growth was the result of higher sales in commercial messaging, which more than offset the absence of cyclical campaign messaging revenue in the prior year, and higher revenue from phone number and 911-enabled phone number services, which was partially offset by lower revenue from voice offerings.

In 2023, our revenue from messaging surcharges increased by $24 million, or 24%, compared with the same period in 2022. This growth was driven by higher pass-through messaging surcharges imposed by certain carriers related to higher sales of commercial messaging.

Cost of Revenue and Gross Margin

In 2023, total cost of revenue increased by $30 million, compared with the same period in 2022, driven by higher pass-through messaging surcharges of $25 million. The combination of changes in total revenue and total cost of revenue yielded gross profit of $236 million, which decreased $2 million from the same period in 2022, driven by higher network costs.

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

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Operating Expenses

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

In 2023, research and development expenses increased by $6 million, or 6%, compared with the same period in 2022. This increase was primarily due to higher information technology and facilities expenses in support of our expanding research and development capabilities.

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

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

Interest Expense, Net

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

Income Tax Benefit

In 2023, we recognized an income tax benefit of $3 million, an increase of less than $1 million, compared with the same period in 2022. The resulting effective tax rate for the year ended December 31, 2023 was 15.3% compared with (13.1)% in 2022. For the year ended December 31, 2023, the change to the effective tax rate was primarily due to increased operating losses outside of the U.S., where tax benefits are recognized and are not offset by a valuation allowance.

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For the years ended December 31, 2023 and 2022, the effective tax rates of 15.3% and (13.1)%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the year ended December 31, 2023. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code Section 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

Liquidity and Capital Resources

Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform. As of December 31, 2024, we had cash and cash equivalents of $82 million and marketable securities of $2 million.

On August 1, 2023, we entered into the Credit Agreement, which provides for a $50 million credit facility (the “Credit Facility”), including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions. On May 1, 2024, we amended the Credit Agreement by, among other things, upsizing the Credit Facility to $100 million. On October 28, 2024, we entered into the Second Amendment to further increase the aggregate revolving credit commitments to $150 million. As of December 31, 2024, we had no outstanding borrowings under the Credit Facility and the available borrowing capacity was $150 million. See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on the Credit Agreement.

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During May 2024, the Company entered into the 2024 Repurchases to repurchase approximately $140.0 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $128.5 million. Following the 2024 Repurchases and previous repurchases, approximately $35.0 million principal amount of the 2026 Convertible Notes remain outstanding. We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We believe that our cash, cash equivalents and marketable securities balances, and the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Our principal future commitments consist of (i) an aggregate of $285 million in Convertible Notes, (ii) $471 million in future minimum rent payments for our current office space, including a $464 million non-cancelable lease for our new corporate headquarters, which commenced in the third quarter of 2023 and which will continue for an initial twenty (20) year term, and (iii) $15 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers. For additional information on these future contractual obligations, see Note 8, “Debt,” and Note 12, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash Flows

The table below summarizes our cash flow information:

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Cash Flows from Operating Activities

In 2024, net cash provided by operating activities was $84 million and was generated by our aggregate results of $81 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, gain on sale of intangible asset, net gain on extinguishment of debt and (2) a $3 million cash inflow from higher operating liabilities and lower operating assets. Within operating liabilities, the net cash provided as a result of higher accrued expenses and other liabilities of $18 million during 2024 was primarily driven by timing of incurred expenses, which was partially offset with our operating right-of use-liability of $6 million. Within operating assets, the net cash used as a result of higher accounts receivable of $9 million during 2024 was driven by higher unbilled receivables balances, primarily from higher messaging sales.

In 2023, net cash provided by operating activities was $39 million and was generated by our aggregate results of $55 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, and net gain on extinguishment of debt and (2) a $16 million cash outflow from lower operating liabilities and higher operating assets. The net gain on extinguishment of debt was a result of the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes in March 2023. Within operating liabilities, the net cash used as a result of lower accrued expenses and other liabilities of $11 million during 2023 was driven by less advanced billings from customers utilizing their credit balances for invoice payments. The cash outflow related to the operating right-of-use liability was $10 million. This was partially offset by cash provided by accounts payable of $5 million and was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. Within operating assets, the net cash used as a result of higher accounts receivable of $3 million during 2023 was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of 2023. This was partially offset by cash provided as a result of lower prepaid expenses and other assets of $2 million during 2023 from timing throughout the year.

In 2022, net cash provided by operating activities was $35 million and was generated by our aggregate results of $40 million during the period, net of non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a net cash outflow from operating assets aggregating $19 million. The net gain on extinguishment of debt was a result of the repurchase of $160 million aggregate principal amount of the 2026 Convertible Notes. Within operating liabilities, the net cash provided as a result of higher accounts payable of $17 million during 2022 was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. The cash provided as a result of higher accrued expenses and other liabilities of $3 million during 2022 primarily related to higher accruals for lease incentives and higher advanced billings. This was partially offset by a cash outflow related to the operating right-of-use liability of $8 million. Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts. The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven by higher VAT receivables and the timing of advance payments for software and other services.

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Cash Flows from Investing Activities

In 2024 net cash used in investing activities was $1 million. Cash used in investing activities was primarily driven by (1) cash used for the purchase of property, plant and equipment of $14 million and cash used for capitalized software development costs of $11 million, driven by investments in the communications platform, (2) cash provided by the maturities of marketable securities, net of purchases, of $19 million to partially fund the 2024 Repurchases and (3) net cash provided by the refund of construction in progress deposits of $3 million related to the completion of construction for our Raleigh, NC headquarters.

In 2023, net cash provided by investing activities was $31 million. Cash provided by investing activities was driven by proceeds from the sales and maturities of marketable securities of $130 million to partially fund the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes. This was partially offset by cash used for the purchase of marketable securities of $81 million. Cash used for the purchase of property, plant and equipment was $9 million and cash used for capitalized software development costs was $11 million, driven by investments in the communications platform.

In 2022, net cash used in investing activities was $133 million. Cash used in investing activities included the purchase of marketable securities of $180 million partially offset by proceeds from the sales and maturities of marketable securities of $109 million. Cash used for deposits for construction in progress and the purchase of property, plant and equipment, primarily for our Raleigh, NC headquarters, was $60 million.

Cash Flows from Financing Activities

In 2024, net cash used in financing activities was $131 million, consisting primarily of $129 million of cash used to complete the 2024 Repurchases.

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

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

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Non-GAAP Financial Measures

We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. See below for a reconciliation of each of the non-GAAP financial measures described below.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of Statements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:

•depreciation and amortization;

•amortization of acquired intangible assets related to acquisitions; and

•stock-based compensation.

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

In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our core operating performance. The exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis. Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner we do.

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(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $540 million, $479 million, and $475 million for the years ended December 31, 2024, 2023 and 2022, respectively.

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Management’s Discussion and Analysis

Non-GAAP Net Income

We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:

•stock-based compensation;

•amortization of acquired intangible assets related to acquisitions;

•amortization of debt discount and issuance costs for convertible debt;

•acquisition related expenses;

•impairment charges of intangibles assets, if any;

•net cost associated with early lease terminations and leases without economic benefit;

•(gain) loss on sale of business;

•net (gain) loss on extinguishment of debt;

•gain on business interruption insurance recoveries;

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

•estimated tax impact of above adjustments, net of valuation allowances.

We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.

We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period’s performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.

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(1) Non-recurring items not indicative of ongoing operations and other include (i) $0.4 million, $0.8 million, and $0.5 million of losses on disposals of property, plant and equipment during the years ended December 31, 2024, 2023 and 2022, respectively, (ii) $1.0 million gain on the sale of an intangible asset during the year ended December 31, 2024, (iii) $0.4 million of expense resulting from the early termination of our undrawn SVB credit facility during the year ended December 31, 2023, and (iv) $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022.

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(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 18.1%, 10.1%, and 7.0% for the years ended December 31, 2024, 2023 and 2022, respectively. For the year ended December 31, 2024, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to the research and development tax credits generated in 2024. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of December 31, 2024, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.

(3) Non-GAAP net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share.

Adjusted EBITDA

We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:

•income tax (benefit) provision;

•interest (income) expense, net;

•depreciation and amortization expense;

•acquisition related expenses;

•stock-based compensation expense;

•impairment of intangible assets, if any;

•(gain) loss on sale of business;

•net cost associated with early lease terminations and leases without economic benefit;

•net (gain) loss on extinguishment of debt;

•gain on business interruption insurance recoveries; and

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

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Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.

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(1) Non-recurring items not indicative of ongoing operations and other include (i) $0.4 million, $0.8 million, and $0.5 million of losses on disposals of property, plant and equipment during the years ended December 31, 2024, 2023 and 2022, respectively, (ii) $1.0 million gain on the sale of an intangible asset during the year ended December 31, 2024, and (iii) $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022.

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Free Cash Flow

Free cash flow represents net cash provided by or used in operating activities less net cash used in the acquisition of property, plant and equipment and capitalized development costs of software for internal use. We believe free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used to invest in our business. Free cash flow has certain limitations because it is subject to working capital timing, it does not represent the total increase or decrease in the cash balance for the period, it does not take into consideration investment in long-term securities, nor does it represent residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.

________________________

(1) Represents the acquisition cost of property, plant and equipment and capitalized development costs for software for internal use.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions, and any such differences may be material.

We believe that the following assumptions, judgments and estimates have the greatest potential financial impact on our consolidated financial statements, and therefore, we consider these to be our critical accounting policies.

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

Revenue Recognition and Deferred Revenue

We generate revenue primarily from the sale of communications services to enterprise customers. Revenue recognition commences upon transfer of control of promised goods or services to customers in an amount that we expect to receive in exchange for those goods or services.

The majority of our revenue is generated from usage-based fees earned from customers accessing our communications platform. Access to the communications platform is considered a series of distinct services, with continuous transfer of control to the customer, comprising one performance obligation. Usage-based fees are recognized in revenue in the period the traffic traverses our network.

Revenue from service-based fees, such as the provision and management of phone numbers and emergency services access, is recognized on a ratable basis as the service is provided, which is typically one month.

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We enter into arrangements with customers that are typically 2 to 3 years in length with an auto-renewal feature. When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated period of benefit.

Our arrangements do not contain general rights of return or provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

We maintain a reserve for sales credits, which reserve historically has not been significant and continues to be consistent relative to total revenue. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience, contractual obligations and current trends of credit issuances. Adjustments to the reserve are recorded against revenue.

Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the aggregate fair value of consideration transferred in a business combination, over the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. We test goodwill for impairment annually on December 31 of each calendar year or more frequently if events or changes in business circumstances indicate the asset might be impaired. Goodwill is tested for impairment at the reporting unit level. Under ASC 350, we have the option to first assess qualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. In performing qualitative assessments, consistent with ASC 350-20-35-3C, we consider, among other factors, macroeconomic conditions (both in the United States and internationally), our overall financial performance (including, but not limited to, comparisons to prior periods, current period internal expectations, and comparable peer companies), broader industry and market considerations, and the trading price performance of our Class A common stock.

As of December 31, 2024, we completed a qualitative assessment under ASC 350 to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of our one reporting unit was less than its respective carrying value. We concluded that based on the relevant events and circumstances, it was more likely than not that the reporting unit’s fair value exceeded its related carrying value and therefore no quantitative assessment was required.

As of December 31, 2023, we completed a quantitative assessment under ASC 350 and determined that there was not an impairment of goodwill. The estimated fair value of our one reporting unit was based on the income approach and the market approach. Significant assumptions used within the discounted cash flow method under the income approach included estimated revenue projections and a risk adjusted discount rate. Significant assumptions used with the market approach included estimated revenue projections and an appropriate risk adjusted earnings multiple. A hypothetical 10% decrease in the estimated fair value of our one reporting unit used in the quantitative assessment would not have changed our conclusion.

We completed our annual goodwill impairment analysis in each of the years ended December 31, 2024, 2023 and 2022 and no impairment charges were recorded. As of December 31, 2024, goodwill was $317 million.

Long-Lived Assets

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

We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net

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cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. No indicators of impairment were identified for the years ended December 31, 2024, 2023 and 2022.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all the deferred tax asset. Quarterly, we review the deferred tax assets for recoverability for each jurisdiction in which we operate.

If we demonstrate cumulative pre-tax income in a particular jurisdiction over a three-year period, including the current and prior two years, management generally concludes that the deferred income tax assets will more likely than not be realized and no valuation allowance is recognized, unless there are known unusual or non-recurring items contributing to this income or known future operating developments or changes in tax law that would lead management to conclude otherwise. We have considered cancellation of debt income an unusual item for the purpose of the valuation allowance analysis.

If we demonstrate cumulative pre-tax losses in a particular jurisdiction in a three-year period, including the current and prior two years, management then considers the expected timing of the reversals of existing temporary differences, the implementation of prudent and feasible tax planning strategies, and projected future taxable income when determining if the deferred tax assets will be realized. The evaluation of the recoverability of deferred tax assets requires judgment in assessing future profitability. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed.

Using the aforementioned approach, we recorded $70 million and $68 million in valuation allowance on our deferred tax assets in 2024 and 2023, respectively.

We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. The tax benefit recognized is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax benefit in the accompanying consolidated statements of operations.

We recorded $7 million in unrecognized tax benefits for the year ended December 31, 2024 and $6 million for the year ended December 31, 2023.

Recently Issued Accounting Guidance

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in this Annual Report on Form 10-K. Our fiscal year ends on December 31.

Overview

A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 65 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s APIs to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first cloud communications provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.

Bandwidth’s business benefits from multiple global megatrends, including enterprise migration to the cloud, adoption of CCaaS platforms, the need to be able to work from anywhere, reinvention of customer experience, growth in messaging applications to engage directly with consumers, and application of AI technologies to cloud communications use cases. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.

With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver business-critical communications for global enterprises. In fact, Bandwidth already powers all the 2023 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of UCaaS and CCaaS.

Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) cross-sell and up-sell our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) focus on direct-to-enterprise growth to serve Global 2000 enterprises that directly leverage Bandwidth services to accelerate their digital transformations, and (3) aim to be the preferred provider for SaaS platforms that use conversational voice and messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.

For the years ended December 31, 2023, 2022 and 2021, total revenue was $601 million, $573 million, and $491 million, respectively, representing an increase of 5% in 2023 and 17% in 2022. Net loss in 2023 and 2021 was $16 million and $27 million, respectively. Net income in 2022 was $20 million.

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Revolving Credit Facility

On August 1, 2023, we entered into a credit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, swingline lender and letters of credit issuer. The Credit Agreement provides for a $50 million revolving credit facility (the “Credit Facility”), including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions. The Credit Facility matures on the earlier of (a) August 1, 2028 or (b) the date that is 91 days prior to the scheduled maturity date or mandatory conversion date of any of our Convertible Notes. Interest on borrowings under the Credit Facility accrues at an annual rate tied to a base rate or the Secured Overnight Financing Rate (“SOFR”), at our election. Loans based on SOFR bear interest at a rate equal to term SOFR for the applicable interest period plus 10 basis points plus an applicable margin between 2.25% and 2.75%, and loans based on the base rate bear interest at a rate equal to the base rate plus an applicable margin between 1.25% and 1.75%, in each case of the foregoing, depending upon our consolidated EBITDA for the most recent period of four consecutive fiscal quarters for which financial statements have been delivered under the Credit Agreement. We are required to pay a quarterly commitment fee equal to between 0.05% and 0.0625% on the unused portion of the borrowing commitment, depending upon our consolidated EBITDA for the most recent period of four consecutive fiscal quarters for which financial statements have been delivered under the Credit Agreement.

Business Interruption Insurance Recovery

Beginning in September 2021, our communications network was subjected to a DDoS Attack that caused intermittent communications services disruptions affecting certain of our markets and customers. During the period of the DDoS Attack, we maintained certain insurance coverage, including business interruption insurance, intended to cover such circumstances. In June 2023, we resolved our claim with an insurer, pursuant to which we were entitled to receive $4 million in proceeds from business interruption insurance. The proceeds of the insurance payment were received in full in July 2023 and were recorded within gain on business interruption insurance recoveries on our consolidated statements of operations in the year ended December 31, 2023.

Repurchase of 2026 Convertible Notes

During March 2023, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes to repurchase approximately $65 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $51 million. These repurchases closed on March 6, 2023. We entered into similar agreements to repurchase approximately $160 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $117 million, which closed in November 2022. Following both of these repurchases, approximately $175 million principal amount of the 2026 Convertible Notes remain outstanding.

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

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Key Performance Indicator

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

_______________________

(1) As a result of the change in revenue segment reporting, our KPI of net retention rate disclosed in previous SEC filings (previously described as “dollar-based net retention rate”), press releases and presentations prior to reporting periods ending March 31, 2022, will not be directly comparable to our KPI reported going forward. To facilitate comparison between the periods presented in the table above, net retention rate has been conformed to the current period methodology.

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

Net Retention Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generated revenue and seek to increase their use of our platform. We track our performance in this area by measuring the net retention rate for our customers who generate revenue. To calculate the net retention rate, we first identify the cohort of customers that generated revenue in the same quarter of the prior year. The net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. The net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters. Customers of acquired businesses are included in the subsequent year’s calendar quarter of acquisition. Our net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.

As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for the purposes of calculating this metric. For comparative purposes, the net retention rate presented in the table above has been updated to reflect the change in our reporting segments.

Key Components of Statements of Operations

Revenue

Cloud communications revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, and (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services. Messaging surcharge revenue is derived from fees imposed by certain carriers within the messaging ecosystem, which are subsequently invoiced and passed through to customers.

For the years ended December 31, 2023, 2022 and 2021, we generated 72%, 73%, and 73%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

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We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 56%, 45%, and 52% of outstanding accounts receivable, net of allowance for doubtful accounts, as of December 31, 2023, 2022 and 2021, respectively.

Cost of Revenue and Gross Margin

Cost of revenue consists of fees paid to other network service providers, network operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.

Fees paid to other network service providers arise when we purchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits.

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

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

Gross margin is calculated by subtracting cost of revenue from revenue, divided by revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.

Operating Expenses

The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars driven by the growth in our business.

Research and Development

Research and development expenses consist of salaries and related personnel costs for the design, development, testing and enhancement of our cloud network and software products. Research and development expenses include depreciation and allocated costs of facilities and information technology utilized by our research and development staff.

Sales and Marketing

Sales and marketing expenses consist of salaries and related personnel costs, commissions, and costs related to advertising, marketing, brand awareness activities, sales support and professional services fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.

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General and Administrative

General and administrative expenses consist of salaries and related personnel costs for accounting, legal, human resources, corporate, and other administrative and compliance functions. General and administrative expenses include depreciation, expenditures for third party professional services, and allocated costs of facilities and information technology utilized by our corporate and administrative staff.

Income Taxes

For the years ended December 31, 2023, 2022 and 2021, our effective tax rate was 15.3%, (13.1)%, and 12.3%, respectively. The increase in our effective tax rate from 2022 to 2023 is primarily due to increased operating losses outside of the U.S., where tax benefits are recognized and are not offset by a valuation allowance.

Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of December 31, 2023, we continue to maintain a valuation allowance against our U.S. federal and state net deferred tax assets.

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Results of Operations

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

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

(*) Columns may not foot due to rounding.

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Comparison of the Years Ended December 31, 2023 and 2022

Revenue

In 2023, our cloud communications revenue increased by $4 million, or 1%, compared with the same period in 2022. This growth was the result of higher sales in commercial messaging, which more than offset the absence of cyclical campaign messaging revenue in the prior year, and higher revenue from phone number and 911-enabled phone number services, which was partially offset by lower revenue from voice offerings.

In 2023, our revenue from messaging surcharges increased by $24 million, or 24%, compared with the same period in 2022. This growth was driven by higher pass-through messaging surcharges imposed by certain carriers related to higher sales of commercial messaging.

Cost of Revenue and Gross Margin

In 2023, total cost of revenue increased by $30 million, compared with the same period in 2022, driven by higher pass-through messaging surcharges of $25 million. The combination of changes in total revenue and total cost of revenue yielded gross profit of $236 million, which decreased $2 million from the same period in 2022, driven by higher network costs.

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

Operating Expenses

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

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In 2023, research and development expenses increased by $6 million, or 6%, compared with the same period in 2022. This increase was primarily due to higher information technology and facilities expenses in support of our expanding research and development capabilities.

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

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

Interest Expense, Net

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

Income Tax Benefit

In 2023, we recognized an income tax benefit of $3 million, an increase of less than $1 million, compared with the same period in 2022. The resulting effective tax rate for the year ended December 31, 2023 was 15.3% compared with (13.1)% in 2022. For the year ended December 31, 2023, the change to the effective tax rate was primarily due to increased operating losses outside of the U.S., where tax benefits are recognized and are not offset by a valuation allowance.

For the years ended December 31, 2023 and 2022, the effective tax rates of 15.3% and (13.1)%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recorded against our U.S. federal and state net deferred tax assets.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realized an estimated state effective tax rate of 4.3% for the year ended December 31, 2023. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax laws and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code Section 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

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Comparison of the Years Ended December 31, 2022 and 2021

Revenue

In 2022, our total revenue increased by $82 million, or 17%, compared with the same period in 2021. This growth was the result of higher usage of our core messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers. Growth in our revenue other than from pass-through messaging surcharges, compared with the same period in 2021, was led by our core messaging offerings, which grew 46%, and phone number and 911-enabled phone number services, mostly offset by lower revenue from voice offerings. The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to the U.S. midterm elections in November 2022. Compared with the same period last year, our voice offerings revenue in 2022 remained affected by lower usage arising from the 2021 DDoS incident as well as the absence of revenue from businesses divested earlier in 2022.

Active customer accounts increased 3% to 3,405 as of December 31, 2022, as compared with 3,300 active accounts as of December 31, 2021. Our net retention rate as of December 31, 2022 was 112%.

Cost of Revenue and Gross Margin

In 2022, total cost of revenue increased by $58 million, compared with the same period in 2021, driven by higher pass-through messaging surcharges of $56 million. In 2022, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $238 million, which increased by $25 million, or 11%, compared with the same period in 2021, driven by profit improvements from the combination of our revenue and cost of revenue derived other than from pass-through messaging surcharges.

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

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Operating Expenses

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

In 2022, research and development expenses increased by approximately $28 million, or 41%, compared with the same period in 2021. This increase was primarily due to increased personnel costs from greater numbers of employed staff of $22 million. The increase in headcount also contributed to higher allocated facilities and IT expenses of $7 million.

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

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

Interest Expense, Net

In 2022, interest expense, net of interest income, decreased by $26 million compared with the same period in 2021, due to a $24 million decrease in interest expense primarily related to the impact of the adoption of ASU 2020-06 on the Convertible Notes. See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.

Income Tax Benefit

For the year ended December 31, 2022, we recognized an income tax benefit of $2 million, a decrease of $2 million compared with the same period in 2021. The resulting effective tax rate for the year ended December 31, 2022 was (13.1)% compared with 12.3% in 2021. For the year ended December 31, 2022, the favorable change to the effective tax rate was primarily due to the split of earnings and losses between jurisdictions. In 2022, we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. This income resulted in nominal income tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance position. For the years ended December 31, 2022 and 2021, the effective tax rates of (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.

Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realize an estimated state effective tax rate of 4.3% for the year ended December 31, 2022. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC

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718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).

Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance include minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.

We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.

Liquidity and Capital Resources

Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property, plant and equipment to support growth on our communications platform and the purchase of land for our new corporate headquarters. As of December 31, 2023, we had cash and cash equivalents of $132 million and marketable securities of $21 million.

On August 1, 2023, we entered into the Credit Agreement, which provides for a $50 million Credit Facility, including a $15 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility has an accordion feature that allows for an increase in the total borrowing size up to $25 million, subject to certain conditions. See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and “Overview — Revolving Credit Facility,” included elsewhere in this Annual Report on Form 10-K, for additional information on the Credit Agreement.

On June 6, 2022, we entered into a credit agreement among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank (“SVB”), as administrative agent, issuing lender and swingline lender. This credit agreement provided for a $50 million revolving credit facility, including a $20 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. As a result, SVB ceased normal banking operations for a period of time. Given these circumstances, on March 14, 2023 (the “Notice Date”), we gave notice to SVB of our desire and intent to terminate the commitments (the “Termination”) under this credit agreement. As of the Notice Date, there were no outstanding borrowings under this credit agreement. The Termination became effective on March 15, 2023.

Additionally, we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes in February 2020 and the 2028 Convertible Notes in March 2021. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone. On March 6, 2023 and November 2, 2022, we repurchased $65 million and $160 million, respectively, of our 2026 Convertible Notes, as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We may, at any time and from time to time, seek to retire or purchase our 2026 Convertible Notes or 2028 Convertible Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

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We believe that our cash, cash equivalents and marketable securities balances, and the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

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

Statement of Cash Flows

The following table summarizes our cash flows for the periods indicated:

Cash Flows from Operating Activities

In 2023, net cash provided by operating activities was $39 million and was generated by our aggregate results of $55 million during the period, net of (1) non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred taxes and other, and net gain on extinguishment of debt and (2) a $16 million cash outflow from lower operating liabilities and higher operating assets. The net gain on extinguishment of debt was a result of the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes in March 2023. Within operating liabilities, the net cash used as a result of lower accrued expenses and other liabilities of $11 million during 2023 was driven by less advanced billings from customers utilizing their credit balances for invoice payments. The cash outflow related to the operating right-of-use liability was $10 million. This was partially offset by cash provided by accounts payable of $5 million and was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. Within operating assets, the net cash used as a result of higher accounts receivable of $3 million during 2023 was driven by higher unbilled receivables balances arising from higher usage amounts in the last month of 2023. This was partially offset by cash

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

In 2022, net cash provided by operating activities was $35 million and was generated by our aggregate results of $40 million during the period, net of non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a net cash outflow from operating assets aggregating $19 million. The net gain on extinguishment of debt was a result of the repurchase of $160 million aggregate principal amount of the 2026 Convertible Notes. Within operating liabilities, the net cash provided as a result of higher accounts payable of $17 million during 2022 was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. The cash provided as a result of higher accrued expenses and other liabilities of $3 million during 2022 primarily related to higher accruals for lease incentives and higher advanced billings. This was partially offset by a cash outflow related to the operating right-of-use liability of $8 million. Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts. The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven by higher VAT receivables and the timing of advance payments for software and other services.

In 2021, net cash provided by operating activities was $41 million consisting of net loss of $27 million adjusted for non-cash items of $76 million and offset by cash used by changes in operating assets and liabilities of $8 million. Cash used in operating assets and liabilities included an increase in accounts receivable of $7 million, a decrease in operating right-of-use liability of $6 million, and an increase in prepaid expenses and other assets of $7 million. Offsetting these cash use items in assets and liabilities was an increase in accrued expenses and other liabilities of $10 million, and an increase in accounts payable of $2 million. The non-cash items included depreciation and amortization expense of $37 million, amortization of debt discount and issuance costs of $27 million, stock-based compensation expense of $15 million, right-of-use asset amortization of $6 million, and loss on disposal of property, plant and equipment of $1 million, offset by a deferred tax benefit of $8 million.

Cash Flows from Investing Activities

In 2023, net cash provided by investing activities was $31 million. Cash provided by investing activities was driven by proceeds from the sales and maturities of marketable securities of $130 million to partially fund the repurchase of $65 million aggregate principal amount of the 2026 Convertible Notes. This was partially offset by cash used for the purchase of marketable securities of $81 million. Cash used for the purchase of property, plant and equipment was $9 million and cash used for capitalized software development costs was $11 million, driven by investments in the communications platform.

In 2022, net cash used in investing activities was $133 million. Cash used in investing activities included the purchase of marketable securities of $180 million partially offset by proceeds from the sales and maturities of marketable securities of $109 million. Cash used for deposits for construction in progress and the purchase of property, plant and equipment, primarily for our Raleigh, NC headquarters, was $60 million.

In 2021, net cash provided by investing activities was $3 million. Cash provided by investing activities included proceeds from sales and maturities of other investments of $40 million, proceeds from the sale of land of $17 million, offset by the purchase of land of $30 million, purchase of property, plant and equipment of $21 million and capitalized internally developed software costs of $4 million.

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Cash Flows from Financing Activities

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

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

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

Off-Balance Sheet Arrangements

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

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Non-GAAP Financial Measures

We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. See below for a reconciliation of each of the non-GAAP financial measures described below.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of Statements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:

•depreciation and amortization;

•amortization of acquired intangible assets related to acquisitions; and

•stock-based compensation.

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

In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our core operating performance. The exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis. Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner we do.

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

Non-GAAP Net Income

We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:

•stock-based compensation;

•amortization of acquired intangible assets related to acquisitions;

•amortization of debt discount and issuance costs for convertible debt;

•acquisition related expenses;

•impairment charges of intangibles assets, if any;

•net cost associated with early lease terminations and leases without economic benefit;

•(gain) loss on sale of business;

•net (gain) loss on extinguishment of debt;

•gain on business interruption insurance recoveries;

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

•estimated tax impact of above adjustments, net of valuation allowances.

We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.

We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period’s performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.

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