Bandwidth Inc

Previous wording

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 Application Programming Interfaces (“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.

Current wording

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 gross domestic product, innovative enterprises use Bandwidth’s Application Programming Interfaces (“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.

Previous wording

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.

Current wording

Bandwidth’s business benefits from multiple global megatrends, including enterprise migration to the cloud, adoption of Contact Centers as a Service (“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 artificial intelligence (“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.

Previous wording

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.

Current wording

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 Unified Communications as a Service (“UCaaS”) and CCaaS.

Previous wording

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.

Current wording

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 Software as a Service (“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.

Previous wording

For the three months ended September 30, 2024 and 2023, total revenue was$194 million and $152 million, respectively, representing an increase of 28%. For the three months ended September 30, 2024 and 2023, net income was less than $1 million and net loss was $5 million, respectively. For the nine months ended September 30, 2024 and 2023, total revenue was$539 million and $436 million, respectively, representing an increase of 24%. For the nine months ended September 30, 2024 and 2023, net loss was $5 million.

Current wording

For the three months ended March 31, 2025 and 2024, total revenue was$174 million and $171 million, respectively, representing an increase of 2%. For the three months ended March 31, 2025 and 2024, net loss was$4 million and$9 million, respectively.

Previous wording

During May 2024, we entered into 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, approximately$35 million principal amount of the 2026 Convertible Notes remain outstanding.

Current wording

During February 2025, we entered into the 2025 Repurchases to repurchase approximately $27 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $26 million. The 2025 Repurchases closed on February 24, 2025. Following the 2025 Repurchases and previous repurchases of the 2026 Convertible Notes, approximately $8 million aggregate principal amount of the 2026 Convertible Notes remains outstanding.

Previous wording

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 condensed consolidated statements of operations for the nine months ended September 30, 2024.

Current wording

The difference between the consideration used for the 2025 Repurchases and the carrying value of the 2026 Convertible Notes resulted in a gain of $1 million recorded within net gain on extinguishment of debt on our condensed consolidated statements of operations for the three months ended March 31, 2025.

Previous wording

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:

Current wording

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

Previous wording

For the three months ended September 30, 2024 and 2023, we generated 75% and 73%, respectively, of our cloud communications revenue from reoccurring sources. For the nine months ended September 30, 2024 and 2023, we generated 74% and 72%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

Current wording

For the three months ended March 31, 2025 and 2024, we generated 73% and 74%, respectively, of our cloud communications revenue from reoccurring sources. The large bulk of our remaining cloud communications revenue is generated from recurring monthly charges.

Previous wording

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 55% and 53% of outstanding accounts receivable, net of allowance for doubtful accounts, as of September 30, 2024 and 2023, respectively.

Current wording

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 57% and 54% of outstanding accounts receivable, net of allowance for doubtful accounts, as of March 31, 2025 and 2024, respectively.

Previous wording

For the three months ended September 30, 2024, our revenue from messaging surcharges increased by$23 million, or 73%, compared with the same period in 2023. This growth was primarily driven by higher messaging volumes.

Current wording

For the three months ended March 31, 2025, our messaging surcharges revenue decreased by$2 million, or 4%, compared with the same period in 2024. This growth was primarily driven by lower messaging volumes from less political messaging following the U.S. presidential election in November 2024.

Previous wording

For the three months ended September 30, 2024, total cost of revenue increased by $28 million, compared with the same period in 2023, driven by higher pass-through messaging surcharges of$22 million. Thecombination of changes in total revenue and total cost of revenue yielded gross profit of $73 million, which increased $14 million from the same period in 2023, driven by higher revenue from messaging, voice and phone numbers.

Current wording

For the three months ended March 31, 2025, total cost of revenue decreased by$3 million, compared with the same period in 2024, driven by lower messaging cost of revenue of$2 million from less political messaging following the U.S. presidential election. Thecombination of changes in total revenue and total cost of revenue yielded gross profit of $72 million, which increased$6 million from the same period in 2024, driven byongoing efficiencies and improved unit economics as we successfully scale larger volumes of voice traffic on our network.

Previous wording

Our total gross margin percentage of 38% for the three months ended September 30, 2024, declined by 1%, compared with the same period in 2023, driven by higher pass-through messaging surcharges within the total revenue mix.

Current wording

Our total gross margin percentage of 41% in 2025 increased by 3%, compared with the same period in 2024, driven by lower pass-through messaging surcharges within the total revenue mix.

Previous wording

As a percentage of revenue, total operating expenses for the three months ended September 30, 2024 and 2023 were 38% and 43%, respecti vely.

Current wording

As a percentage of revenue, total operating expenses for thethree months ended March 31, 2025 and 2024 were 44%.

Previous wording

For the nine months ended September 30, 2024, research and development expenses increased by$12 million, or 16%, 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.

Current wording

For the three months ended March 31, 2025, research and development expenses increased by$2 million, or 6%, compared with the same period in 2024. This increase was primarily due to higher headcount expenses in support of our expanding research and development capabilities.

Previous wording

For the nine months ended September 30, 2024, sales and marketing expenses increased by $6 million, or 8%, compared with the same period in 2023, primarily due to higher facilities expenses in support of our sales force.

Current wording

For the three months ended March 31, 2025, sales and marketing expenses decreased by $3 million, or 9%, compared with the same period in 2024, primarily due to lower headcount expenses.

Previous wording

For the three months ended September 30, 2024, general and administrative expenses increased by$2 million, or 11%, compared with the same period in 2023, driven entirely by higher headcount expenses.

Current wording

For the three months ended March 31, 2025, general and administrative expenses increased by$1 million, or 7%, compared with the same period in 2024, driven by higher headcount expenses.

Previous wording

For the nine months ended September 30, 2024, interest income, net of expense increased by less than $1 million, compared with the same period in 2023, primarily from higher interest income of less than $1 million and partially offset byhigher interest expense from a draw on our Credit Facility to partially fund the 2024 Repurchases in May 2024.

Current wording

For the three months ended March 31, 2025, interest expense, net of interest income increased by$1 million, compared with the same period in 2024, primarily from less interest income resulting from cash being utilized to fund the 2024 Repurchases in May 2024 and the 2025 Repurchases in February 2025.

Previous wording

For the nine months ended September 30, 2024, we recognized an income tax benefit of$1 million, a decrease of $2 million, compared with the same period in 2023. The resulting effective tax rate for the nine months ended September 30, 2024, was 21.0%, compared with 37.1% in 2023.

Current wording

For the three months ended March 31, 2025, we recognized an income tax benefit of less than $1 million, a decrease of less than $1 million, compared with the same period in 2024. The resulting effective tax rate for the three months ended March 31, 2025 was 1.8%, compared with 2.1% in 2024.

Previous wording

For the three months ended September 30, 2024 and 2023, the effective tax rate of 228.7%and 4.1%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.

Current wording

For the three months ended March 31, 2025, the effective tax rate of 1.8% 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.

Previous wording

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 rateof 4.3% for thenine months ended September 30, 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.

Current wording

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 rateof 4.4% for the three months ended March 31, 2025. 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.

Previous wording

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 September 30, 2024, we had cash and cash equivalents of $75 million and marketable securities of $5 million.

Current wording

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 March 31, 2025, we had cash and cash equivalents of $36 million and marketable securities of $6 million.

Previous wording

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. On May 1, 2024, we amended the Credit Agreement by upsizing the Credit Facility from $50 million to $100 million and extending the maturity date to May 1, 2029. As of September 30, 2024, we had $25 million in outstanding borrowings under the Credit Facility and the available borrowing capacity was $75 million. See Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information on the Credit Agreement.

Current wording

In August 2023, we entered into a credit agreement (as amended to date, the “Credit Agreement”), 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, which provides for a $150.0 million revolving credit facility (the “Credit Facility”). As of March 31, 2025, we had no outstanding borrowings under the Credit Facility and the available borrowing capacity was $150 million. See Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the Credit Agreement, including a summary of the current terms of the Credit Facility.

Previous wording

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 May 9, 2024, we completed the 2024 Repurchases, as further described in Note 8, “Debt,” to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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.

Current wording

During February 2025, we repurchased approximately$27 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately$26 million. Following the 2025 Repurchases and previous repurchases, approximately$8 million aggregate principal amount of the 2026 Convertible Notes remains 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.

Previous wording

Our principal future commitments consist of (i) an aggregate of $285 million in Convertible Notes, (ii)$25 million under our Credit Facility (iii) $479 million infuture minimum rent payments for ourcurrent office space, including a $471 millionnon-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 (iv) $12 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 thecondensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Current wording

Our principal future commitments consist of (i) an aggregate of $258 million in Convertible Notes, (ii) $468 million infuture minimum rent payments for ourcurrent office space, including a $461 millionnon-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) $19 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 thecondensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Previous wording

The table below summarizes our cash flow information:

Current wording

The table below summarizes our cash flow information for the periods presented:

Previous wording

For the nine months ended September 30, 2024, net cash provided by operating activities was$47 million and was generated by our aggregate results of $56 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$9 million cash outflow from lower operating liabilities and higher operating assets.

Current wording

For the three months ended March 31, 2025, net cash used in operating activities was$3 million and was generated by our aggregate results of $21 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, net gain on extinguishment of debt and (2) a$24 million cash outflow from lower operating liabilities and higher operating assets. Within operating liabilities, the net cash used as a result of lower accrued expenses and other liabilities of$8 million and lower accounts payable of $11 million during 2025 was primarily driven by timing of incurred expenses. Within operating assets, the net cash used as a result of higher prepaid expenses and other assets of$5 million during 2025 was driven by the prepayment of software license renewals.

Previous wording

For the nine months ended September 30, 2024, net cash provided by investing activities was $2 million. This was primarily driven by (1) cash used for the purchase of property, plant and equipment of $11 million and cash used for capitalized software development costs of $9 million, driven by investments in the communications platform, (2) cash provided by the maturities of marketable securities, net of purchases, of $17 million to partially fund the 2024 Repurchases, and (3) net cash provided by the refund of construction in progress deposits of $3 million.

Current wording

For the three months ended March 31, 2025 net cash used in investing activities was $14 million. Cash used in investing activities was primarily driven by (1) cash used for the purchase of property, plant and equipment of $7 million and cash used for capitalized software development costs of $3 million, driven by investments in the communications platform, and (2) cash used for purchases of marketable securities, net of maturities, of $4 million from diversifying into higher yielding investments.

Previous wording

For the nine months ended September 30, 2024, net cash used in financing activities was $106 million, consisting primarily of (1) $129 million of cash used to complete the 2024 Repurchases, offset by (2) cash provided of $25 million from net borrowing on our line of credit to partially fund the 2024 Repurchases.

Current wording

For the three months ended March 31, 2025, net cash used in financing activities was $29 million, consisting primarily of $26 million of cash used to complete the 2025 Repurchases.

Previous wording

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.

Current wording

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 significant 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.

Previous wording

(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $139 million and $396 million in the three and nine months ended September 30, 2024, respectively, and $120 million and $353 million for the three and nine months ended September 30, 2023, respectively.

Current wording

(1) Calculated by dividing Non-GAAP gross profit by cloud communications revenue of $133 million and $128 million for the three months ended March 31, 2025 and 2024, respectively.

Previous wording

(1)Non-recurring items not indicative of ongoing operations and other include (i) $1.0 million gain on the sale of an intangible asset and less than $0.1 million of losses on disposals of property, plant and equipment during the three months ended September 30, 2024, (ii) $0.1 million of losses on disposals of property, plant and equipment during the three months ended September 30, 2023, (iii) $1.0 million gain on the sale of an intangible asset and $0.2 million of losses on disposals of property, plant and equipment during the nine months ended September 30, 2024, and (iv) $0.4 million of expense resulting from the early termination of our undrawn SVB credit facility and $0.4 million of losses on disposals of property, plant and equipment during the nine months ended September 30, 2023.

Current wording

(1)Non-recurring items not indicative of ongoing operations and other include $0.5 million of nonrecurring litigation expense for the three months ended March 31, 2025, and less than $0.1 million and $0.1 million of losses on disposals of property, plant and equipment during the three months ended March 31, 2025 and 2024, respectively.

Previous wording

(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 15.5% and 11.0% for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 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 September 30, 2024, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.

Current wording

(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 19.4% and 13.0% for the three months ended March 31, 2025 and 2024, respectively. For the three months ended March 31, 2025, 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 2025. We analyze the Non-GAAP valuation allowance position on a quarterly basis. As of March 31, 2025, we have no valuation allowance against our deferred tax assets for Non-GAAP purposes.