Calix, Inc 10-Q for FY2023 Q1
Calix, Inc (CALX)
10-Q
2023-04-24
For: 2023-04-01
View Original
Added on
April 10, 2026
About this 10-Q
Calix, Inc filed this 10-Q on April 24, 2023, covering the quarter ended April 1, 2023 (FY2023 Q1).
Headline figures
Quarter ended April 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $250.01M
- up 35.2% from $184.95M a year earlier
- Net income
- $9.6M
- up 18.2% from net income of $8.12M a year earlier
- Diluted EPS
- $0.14
- up 16.7% from $0.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended April 1, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-34674
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of Principal Executive Offices) (Zip Code)
(408 ) 514-3000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes : x No: o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes : x No: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller Reporting Company | |||||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: x
As of April 17, 2023, there were 66,244,076 shares of the Registrant’s common stock, par value $0.025, outstanding.
CALIX, INC.
FORM 10-Q
TABLE OF CONTENTS
3
PART I. FINANCIAL INFORMATION
ITEM 1.Financial Statements
CALIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| April 1, 2023 | December 31, 2022 | |||||||||||||
| (Unaudited) | (See Note 1) | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Marketable securities | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventory | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Right-of-use operating leases | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Other assets | ||||||||||||||
| $ | $ | |||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term portion of deferred revenue | ||||||||||||||
| Operating leases | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (See Note 6) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| $ | $ | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||
| Revenue | $ | $ | ||||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest income and other expense, net: | ||||||||||||||||||||||||||
| Interest income, net | ||||||||||||||||||||||||||
| Other expense, net | ( | ( | ||||||||||||||||||||||||
| Total interest income and other expense, net | ( | |||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income taxes | ||||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | ||||||||||||||||||||||||
| Diluted | $ | $ | ||||||||||||||||||||||||
| Weighted-average number of shares used to compute | ||||||||||||||||||||||||||
| net income per common share: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale marketable securities, net | ( | |||||||||||||||||||||||||
| Foreign currency translation adjustments, net | ( | |||||||||||||||||||||||||
| Total other comprehensive income, net of tax | ( | |||||||||||||||||||||||||
| Comprehensive income | $ | $ | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock under equity incentive plans, net of forfeitures | — | — | |||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock under equity incentive plans, net of forfeitures | — | — | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance as of April 2, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
CALIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Three Months Ended | ||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||
| Operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Net accretion of available-for-sale securities | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Inventory | ( | ( | ||||||||||||
| Prepaid expenses and other assets | ( | ( | ||||||||||||
| Accounts payable | ( | |||||||||||||
| Accrued liabilities | ( | |||||||||||||
| Deferred revenue | ||||||||||||||
| Other long-term liabilities | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
Investing activities | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Purchases of marketable securities | ( | ( | ||||||||||||
| Maturities of marketable securities | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Financing activities: | ||||||||||||||
| Proceeds from common stock issuances related to employee benefit plans | ||||||||||||||
| Repurchases of common stock | ( | |||||||||||||
| Payments related to financing arrangements | ( | ( | ||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | |||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
7
CALIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Company and Basis of Presentation
Company
Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is the leading global provider of a platform (cloud, software and systems) and managed services that focus on the subscriber-facing network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. This platform and managed services enable broadband service providers (“BSPs”) of all sizes to innovate and transform their businesses. The Company’s BSP customers are empowered to utilize real-time data and insights from the Calix platform to simplify their businesses and deliver experiences that excite their subscribers. These insights enable BSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited financial statements at that date.
The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 calendar with the first quarter ending on the Saturday closest to March 31st. As a result, the Company had one less day in the three months ended April 1, 2023 than for the three months ended April 2, 2022. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
2. Significant Accounting Policies
The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022. The Company’s significant accounting policies did not change during the three months ended April 1, 2023.
Newly Adopted Accounting Standard
The Company did not adopt any new accounting standards during the three months ended April 1, 2023 that were significant to the Company.
Recent Accounting Pronouncements Not Yet Adopted
There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended April 1, 2023 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, that are significant or potentially significant to the Company.
8
3. Cash, Cash Equivalents and Marketable Securities
The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as commercial paper, corporate debt securities, municipal securities and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent commercial paper, U.S. government agency securities, corporate debt securities, municipal securities and U.S. government securities with maturities greater than 90 days at date of purchase. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values.
Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations.
The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as other expense, net. There were no
Cash, cash equivalents and marketable securities consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Cash and cash equivalents: | ||||||||||||||
| Cash | $ | $ | ||||||||||||
| Commercial paper | ||||||||||||||
| Money market funds | ||||||||||||||
| U.S. government agency securities | ||||||||||||||
| Corporate debt securities | ||||||||||||||
| U.S. government securities | ||||||||||||||
| Total cash and cash equivalents | ||||||||||||||
| Marketable securities: | ||||||||||||||
| U.S. government securities | ||||||||||||||
| U.S. government agency securities | ||||||||||||||
| Commercial paper | ||||||||||||||
| Corporate debt securities | ||||||||||||||
| Municipal securities | ||||||||||||||
| Total marketable securities | ||||||||||||||
| $ | $ | |||||||||||||
The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.
9
The amortized cost and fair value of marketable securities were as follows (in thousands):
| As of April 1, 2023 | Amortized Cost | Gross Unrealized Gains/(Losses) | Fair Value | |||||||||||||||||
| U.S. government securities | $ | $ | ( | $ | ||||||||||||||||
| Commercial paper | ( | |||||||||||||||||||
| U.S. government agency securities | ( | |||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||
| Total marketable securities | $ | $ | ( | $ | ||||||||||||||||
| As of December 31, 2022 | Amortized Cost | Gross Unrealized Losses | Fair Value | |||||||||||||||||
| U.S. government securities | $ | $ | ( | $ | ||||||||||||||||
| Commercial paper | ( | |||||||||||||||||||
| U.S. government agency securities | ( | |||||||||||||||||||
| Corporate debt securities | ( | |||||||||||||||||||
| Municipal securities | ( | |||||||||||||||||||
| Total marketable securities | $ | $ | ( | $ | ||||||||||||||||
4. Fair Value Measurements
The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The fair value hierarchy also requires the Company to maximize the use of observable inputs, when available, and to minimize the use of unobservable inputs when determining inputs and determining fair value.
The following tables sets forth the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
| As of April 1, 2023 | Level 1 | Level 2 | Total | ||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
| U.S. government securities | |||||||||||||||||
| Commercial paper | |||||||||||||||||
| U.S. government agency securities | |||||||||||||||||
| Corporate debt securities | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
10
| As of December 31, 2022 | Level 1 | Level 2 | Total | ||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
| U.S. government securities | |||||||||||||||||
| Commercial paper | |||||||||||||||||
| U.S. government agency securities | |||||||||||||||||
| Corporate debt securities | |||||||||||||||||
| Municipal securities | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
5. Balance Sheet Details
Accounts receivable, net consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Allowance for doubtful accounts | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
Inventory consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Finished goods | ||||||||||||||
| $ | $ | |||||||||||||
Prepaid expenses and other current assets consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Supplier deposits | $ | $ | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| $ | $ | |||||||||||||
Property and equipment, net consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Test equipment | $ | $ | ||||||||||||
| Computer equipment | ||||||||||||||
| Software | ||||||||||||||
| Leasehold improvements | ||||||||||||||
| Furniture and fixtures | ||||||||||||||
| Total | ||||||||||||||
| Accumulated depreciation and amortization | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
11
Accrued liabilities consisted of the following (in thousands):
| April 1, 2023 | December 31, 2022 | |||||||||||||
| Compensation and related benefits | $ | $ | ||||||||||||
| Component inventory held by suppliers | ||||||||||||||
| Revenue share payments | ||||||||||||||
| Professional and consulting fees | ||||||||||||||
| Taxes payable | ||||||||||||||
| Current portion of warranty and retrofit | ||||||||||||||
| Customer advances or rebates | ||||||||||||||
| Operating leases | ||||||||||||||
| Product returns | ||||||||||||||
| Insurance | ||||||||||||||
| Freight | ||||||||||||||
| Business events | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||||||||||||||
Accruals for product warranty and retrofit | ||||||||||||||||||||||||||
Cost of warranty and retrofit claims | ( | ( | ||||||||||||||||||||||||
| Balance at end of period | $ | $ | ||||||||||||||||||||||||
In March 2018, and as amended in December 2020, the Company entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which the Company is obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $15.8 million. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales through March 2024. If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due. As of April 1, 2023, the liability, including accrued interest, was $10.5 million, which is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2022, the liability, including accrued interest, was $11.4 million, of which $7.2 million was included in “Accrued liabilities” and $4.2 million in “Other long-term liabilities.”
6. Commitments and Contingencies
Lease Commitments
The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of April 1, 2023 (in thousands):
| Period | Future Minimum Lease Payments | |||||||
| Remainder of 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 and thereafter | ||||||||
| Total future minimum lease payments | ||||||||
| Less imputed interest | ( | |||||||
| $ | ||||||||
12
As of April 1, 2023, the operating lease liability consisted of the following (in thousands):
| $ | ||||||||
| Operating leases | ||||||||
| $ | ||||||||
The Company leases its headquarters office space in San Jose, California under a lease agreement that expires in December 2025. The future minimum lease payments under the lease are $6.7 million and are included in the table above.
The weighted average discount rate for the Company’s operating leases as of April 1, 2023 was 5.8 %. The weighted average remaining lease term as of April 1, 2023 was 3.2 years.
Total rent expense of the Company was $1.2 million and $1.1 million for the three months ended April 1, 2023 and April 2, 2022, respectively. Cash paid within operating cash flows for operating leases was $1.2 million and $1.1 million for the three months ended April 1, 2023 and April 2, 2022, respectively.
Purchase Commitments
The Company’s suppliers, including contract manufacturers (“CMs”) and original design manufacturers (“ODMs”), place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of April 1, 2023 and December 31, 2022, the Company had approximately $305.7 million and $340.6 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within to two years .
The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $11.4 million and $10.3 million as of April 1, 2023 and December 31, 2022, respectively. The Company records the related charges in cost of revenue in its Condensed Consolidated Statements of Comprehensive Income.
Litigation
From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceeding that, if determined adversely to the Company, in management’s opinion, is currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.
7. Stockholders’ Equity
2019 Equity Incentive Award Plan
Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company’s Board of Directors, are eligible to receive awards under the 2019 Equity Incentive Award Plan (“the 2019 Plan”). The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards and dividend equivalents to eligible individuals. As of April 1, 2023, there were 4.4 million shares available for issuance under the 2019 Plan.
13
During the three months ended April 1, 2023, stock option awards exercisable for up to an aggregate of 0.4 million shares of common stock were granted with a grant date weighted-average exercise price of $51.77 per share. These stock option awards vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter over an additional three years .
In February 2023, performance-based stock option awards exercisable for up to an aggregate of 1.2 million shares of common stock were granted to certain Company executives with a grant date exercise price of $51.57 per share. The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net operating income for 2023 (collectively, the “2023 Performance Targets”) during the one-year performance period. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2023 Performance Targets, as to 25 % of the shares of common stock earned on the one year anniversary of the date of grant, and as to the remaining 75 % of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. If the non-GAAP net operating income target and the bookings target are each achieved below 80 % of target, no shares would be awarded, and the performance-based stock option awards would be forfeited in full. If either target is achieved at the minimum threshold of 80 % of target, then the shares are awarded at 50 % of the granted shares, with an increasing percentage of shares awarded above the minimum thresholds up to 125 % of the granted shares for each target. Each target result is then weighted by 50 % and the combined total determines the percent of target shares. The maximum combined award is 100 %. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of April 1, 2023, and stock-based compensation expense of $2.5 million was recognized for the three months ended April 1, 2023.
During the three months ended April 1, 2023, shares of common stock of 0.2 million were issued pursuant to the exercise of stock options at a weighted-average exercise price of $12.09 per share. As of April 1, 2023, unrecognized stock-based compensation expense of $105.1 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.3 years.
Employee Stock Purchase Plans
The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”).
The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 % of their eligible compensation subject to certain Internal Revenue Code limitations.
The offering periods under the ESPP are two six-month offering periods from August 15th through February 14th and February 15th through August 14th of each year. The price of common stock purchased under the ESPP is 85 % of the lower of the fair market value of the common stock on the commencement date and the end date of each six-month offering period. As of April 1, 2023, there were 4.6 million shares available for issuance under the ESPP. During the three months ended April 1, 2023, 0.1 million shares were purchased under the ESPP. As of April 1, 2023, unrecognized stock-based compensation expense of $1.0 million related to the ESPP is expected to be recognized over a remaining service period of 0.4 years.
The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their eligible recurring compensation. Eligible employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within the one year period immediately following the purchase date. The NQ ESPP provides quarterly offering periods from February 8th through May 7th, May 8th through August 7th, August 8th through November 7th and November 8th through February 7th of each year, with a maximum of 0.25 million shares allocated per purchase period. As of April 1, 2023, there were 2.9 million shares available for issuance under the NQ ESPP. During the three months ended April 1, 2023, 0.2 10.9 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.8 years.
14
Stock-Based Compensation
The following table summarizes stock-based compensation expense (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||
| Cost of revenue | $ | $ | ||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||
| Income tax benefit recognized | $ | $ | ||||||||||||||||||||||||
Stock Repurchase Program
In July 2022, the Company’s Board of Directors authorized a one-year stock repurchase program for up to $100 million of the Company’s common stock. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of the purchases depends on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy. The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. As of April 1, 2023, the remaining authorized amount for stock repurchases under this program was $98.8 million.
A summary of the stock repurchase activity under the repurchase program for the three months ended April 1, 2023 is as follows (in thousands, except per share amounts):
| Aggregate purchase price | $ | ||||
| Shares repurchased | |||||
| Average price paid per share | $ | ||||
8. Revenue from Contracts with Customers
The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Americas ex U.S. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Middle East & Africa | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Contract Asset
Contract assets include amounts recognized as revenue prior to the Company’s contractual right to bill the customer. Amounts are billed in accordance with the agreed-upon contractual terms. The closing balance as of April 1, 2023 was $5.5 million of which the Company expects to bill 77 % of the balance during the remainder of 2023. The contract asset balance may fluctuate depending on the timing of fulfilling the related performance obligations with the Company's customers.
15
Contract Liability
Deferred revenue was $69.6 million and $58.6 million as of April 1, 2023 and December 31, 2022, respectively. The increase in the deferred revenue balance for the three months ended April 1, 2023 is driven by cash payments received or due in advance of satisfying the Company’s performance obligations and balances reclassified to contract asset during the period offset by $13.0 million of revenue recognized that was included in the deferred revenue balance at the beginning of the period.
Revenue allocated to remaining performance obligations (“RPOs”) represents contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods but excludes variable consideration where the monthly invoicing is based on usage or where actual usage exceeds the minimum commitment. RPOs were $206.2 million as of April 1, 2023, and the Company expects to recognize as revenue 37 % of this amount over the next 12 months and the remainder thereafter.
Contract Costs
The Company capitalizes certain sales commissions related primarily to multi-year subscriptions and extended warranty support for which the expected amortization period is greater than one year. As of April 1, 2023 and December 31, 2022, the unamortized balance of deferred commissions was $10.3 million and $11.2 million, respectively. For the three months ended April 1, 2023 and April 2, 2022, the amount of amortization was $1.3 million and $0.8 million, respectively. There was no
Concentration of Customer Risk
No customer accounted for more than 10% of the Company’s revenue for the three months ended April 1, 2023 and April 2, 2022.
9. Income Taxes
The following table presents income taxes and the effective tax rates for the periods indicated (in thousands, except percentages):
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||
| Income before income taxes | $ | $ | ||||||||||||||||||||||||
| Income taxes | $ | $ | ||||||||||||||||||||||||
| Effective tax rate | % | % | ||||||||||||||||||||||||
The Company’s income taxes for the three months ended April 1, 2023 and April 2, 2022 were determined using an estimated effective tax rate adjusted for discrete items that occurred during the respective periods. The Company’s effective tax rate for the three months ended April 1, 2023 and April 2, 2022 differed from the statutory federal corporate tax rate of 21% primarily due to state taxes, the inclusion of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers offset by U.S. federal research tax credits and excess tax benefits from stock-based compensation.
The Company has net deferred tax assets that have arisen primarily as a result of temporary differences, net operating loss carryforwards, capitalized research and development costs and tax credits. The Company’s ability to realize a deferred tax asset is based on its ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. Management believes that it is more likely than not we will utilize a significant portion of our deferred tax assets.
The Company maintained a valuation allowance of $29.9 million on certain U.S. federal and state deferred tax assets that the Company believes are not more likely than not to be realized in future periods.
The Company considered scheduled reversals of deferred tax liabilities, historic profitability, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which its deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates, or if the Company decides to adjust these estimates in the future periods, further adjustments to its valuation allowance may be recorded, which could materially impact the Company’s financial position and net income in the period of the adjustment.
16
10. Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):
| Three Months Ended | ||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted-average common shares outstanding used to compute basic net income per share | ||||||||||||||||||||||||||
| Effect of dilutive common stock equivalents | ||||||||||||||||||||||||||
| Weighted-average common shares outstanding used to compute diluted net income per share | ||||||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||
| Basic net income per common share | $ | $ | ||||||||||||||||||||||||
| Diluted net income per common share | $ | $ | ||||||||||||||||||||||||
| Potentially dilutive shares excluded, weighted average | ||||||||||||||||||||||||||
Potentially dilutive shares have been excluded from the computation of diluted net income per common share when their effect is antidilutive. These antidilutive shares were from stock options.
17
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “could,” “may,” “will,” “would,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year ended December 31, 2022. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
Overview
We are the leading global provider of a broadband delivery platform (cloud, software and systems) and managed services that enable service providers of all types and sizes to innovate and transform their businesses. For our customers to successfully transform their businesses into the innovative BSPs of the future, they require actionable data for critical business functions such as network operations, customer support and marketing. However, this data is often trapped in disparate systems or departmental silos. Our Calix platform, which includes Calix Cloud, Revenue EDGE and Intelligent Access EDGE, gathers, analyzes and applies machine learning to deliver real-time insights seamlessly to each key business function. Our customers utilize these insights and data to simplify network operations, marketing and customer support and deliver experiences that excite their subscribers. This enables BSPs to grow their brand through increased subscriber acquisition, loyalty and revenue and to reduce their operating costs, creating value for their businesses and the communities they serve.
We market our Calix platform and managed services to communication service providers globally through our direct sales force as well as select resellers. Our customers range from smaller, regional service providers to some of the world’s largest service providers. We have enabled approximately 1,900 customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.
Our revenue and potential revenue growth will depend on our ability to develop, market and sell our platform and managed services to strategically aligned customers of all types such as WISPs, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally. Our growth is also highly dependent on the speed and willingness of customers to adopt the Calix platform and managed services.
Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including component and labor shortages and increasing lead times as well as disruptions as a result of pandemics or natural disasters, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers have in the past spent less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their networks or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.
Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that have impacted our cost of revenue for the three months ended April 1, 2023, and that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings as well as our customer success organization, changes in product warranty and incurrence of retrofit costs, amortization of intangibles, asset write-offs, support fees for silicon-related development work for our products, allowances for obligations to our suppliers and inventory write-downs. Given the ongoing supply-chain disruptions related to component shortages, longer
18
lead times as a result of increased global demand for certain components and disruptions related to the COVID-19 pandemic, we have experienced and, while improving, are continuing to experience product supply delays and related challenges, and we expect these delays and related challenges to persist in the foreseeable future. In addition, we periodically elect to ship by air versus by ocean in order to meet delivery commitments to our customers, which is more costly. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if our revenue declines.
Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory or accrual for supplier commitments) and have in the past been and may be negatively impacted by increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.
Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; investments in marketing programs; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.
Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates, which are revenue recognition, inventory valuation and supplier purchase commitments and income taxes, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022. For the three months ended April 1, 2023, there have been no significant changes in our critical accounting policies and estimates.
Recent Accounting Pronouncements
There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended April 1, 2023 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2022 that are significant or potentially significant to us.
Results of Operations
Comparison of the Three Months Ended April 1, 2023 and April 2, 2022
Revenue
The following table sets forth our revenue (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 250,008 | $ | 184,948 | $ | 65,060 | 35 | % | ||||||||||||||||||||||||||||||||||||||||||
Our revenue increased by $65.1 million for the three months ended April 1, 2023, respectively, as compared to the corresponding period in 2022. The increase in revenue was primarily due to higher revenue from our growing base of small and
19
medium BSP customers and the continuation of BSPs seeking to provide their subscribers a better experience by adopting our platform and managed services. During the second half of 2022, we added a new medium-sized customer that began to receive significant shipments during the second half of 2022 and the three months ended April 1, 2023.
For the three months ended April 1, 2023, revenue generated in the United States was $227.9 million, or 91% of our revenue, compared to $165.6 million, or 90% of our revenue for the same period in 2022. International revenue was $22.1 million, or 9% of our revenue, for the three months ended April 1, 2023, as compared to $19.3 million, or 10% of our revenue, for the same period in 2022.
No customer accounted for more than 10% of the Company’s revenue for the three months ended April 1, 2023 and April 2, 2022.
Gross Profit and Gross Margin
The following table sets forth our gross profit and gross margin (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 128,051 | $ | 91,792 | $ | 36,259 | 40 | % | ||||||||||||||||||||||||||||||||||||||||||
| Gross margin | 51.2 | % | 49.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Gross profit increased to $128.1 million for the three months ended April 1, 2023, from $91.8 million during the corresponding period in 2022. The increase in gross margin of 160 basis points for the three months ended April 1, 2023 compared to the corresponding period in 2022, was mainly due to the increase in revenue, an increase in contributions from our software and subscription offerings and our overall product mix.
Operating Expenses
Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing expenses | $ | 51,865 | $ | 36,091 | $ | 15,774 | 44 | % | ||||||||||||||||||||||||||||||||||||||||||
| Percent of revenue | 21 | % | 20 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses for the three months ended April 1, 2023 increased by $15.8 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $10.6 million, stock-based compensation of $1.9 million, travel expenses of $1.4 million and marketing expenses of $0.8 million.
We expect our investments in sales and marketing will increase in absolute dollars, but be relatively consistent as a percentage of revenue, as we extend our market reach and grow our business in support of our key strategic initiatives.
Research and Development Expenses
The following table sets forth our research and development expenses (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development expenses | $ | 43,173 | $ | 29,817 | $ | 13,356 | 45 | % | ||||||||||||||||||||||||||||||||||||||||||
| Percent of revenue | 17 | % | 16 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Percentage of gross profit | 34 | % | 32 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Research and development expenses for the three months ended April 1, 2023 increased by $13.4 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $8.2 million, outside services of $1.8 million, small equipment expenses of $1.3 million and depreciation and amortization of $0.7 million.
20
We expect our investments in research and development to increase in absolute dollars, but remain relatively consistent as a percentage of gross profit, as we seek to expand the functionality and capabilities of our platforms.
General and Administrative Expenses
The following table sets forth our general and administrative expenses (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | $ | 23,077 | $ | 16,031 | $ | 7,046 | 44 | % | ||||||||||||||||||||||||||||||||||||||||||
| Percent of revenue | 9 | % | 9 | % | ||||||||||||||||||||||||||||||||||||||||||||||
General and administrative expenses for the three months ended April 1, 2023 increased by $7.0 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $3.3 million, stock-based compensation of $3.1 million and outside services of $0.8 million. We plan to continue to invest in our information technology infrastructure and headcount due to the growth of our business.
We expect our general and administrative investments to increase in absolute dollars but decline slightly as a percentage of revenue over time in relation to increased revenue.
Interest and Other Income (Expense), net
The following table sets forth our interest and other expense, net (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest and other income (expense), net | $ | 1,473 | $ | (33) | $ | 1,506 | 4,564 | % | ||||||||||||||||||||||||||||||||||||||||||
| Percent of revenue | 1 | % | — | % | ||||||||||||||||||||||||||||||||||||||||||||||
Interest and other income (expense), net increased by $1.5 million as compared with the corresponding period in 2022 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities as well as a growing cash balance.
Income Taxes
The following table sets forth our income taxes (dollars in thousands):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Variance in Dollars | Variance in Percent | |||||||||||||||||||||||||||||||||||||||||||||||
| Income taxes | $ | 1,811 | $ | 1,701 | $ | 110 | 6 | % | ||||||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 15.9 | % | 17.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||
For the three months ended April 1, 2023, our income tax expense was $1.8 million for an effective tax rate of 15.9%, which differed from the statutory rate of 21% primarily due to state taxes, the inclusion of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers offset by U.S. federal research tax credits and excess tax benefits from stock-based compensation.
Our income taxes may be subject to fluctuation during the year and in future years as new information is obtained. This may affect the assumptions used to estimate the annual effective tax rate, including factors such as actual results differing from our estimates of pre-tax earnings in the various jurisdictions in which we operate, which could impact the recognition of our deferred tax assets, further benefits from stock option exercises, investments in our foreign operations, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where we conduct business.
Liquidity and Capital Resources
Historically, we have funded our operations and investing activities primarily through sales of our common stock, cash flow generated from operations and various borrowing arrangements. For the past few years, we have generated cash flow from our operations as our business has grown. As of April 1, 2023, we had cash, cash equivalents and marketable securities of $257.1 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S. government agency securities and commercial paper.
21
Operating Activities
Net cash provided by operating activities was $8.1 million for the three months ended April 1, 2023 and consisted of net income of $9.6 million and non-cash charges of $18.6 million offset by cash flow decreases of $20.0 million reflected in the net change in assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $16.2 million and depreciation and amortization of $3.7 million.
Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of a decrease in accrued liabilities of $12.3 million due to the payout of incentive compensation and payments related to our Calix ConneXions 2022 Customer Success and Innovation conference; an increase in inventory of $7.4 million to improve our responsiveness to our BSPs’ subscriber demand; a decrease in accounts payable of $5.9 million due to the timing of inventory purchases; and an increase in prepaid expenses and other assets of $7.1 million mainly due to the renewal of a software contract and reclassification of contract assets from deferred revenue. These changes were partially offset by a decrease in accounts receivable of $1.6 million due to continued strong shipment linearity and an increase in deferred revenue of $11.0 million primarily due to our platform subscriptions and support contracts and reclassification of contract assets to prepaid expenses and other assets.
Net cash provided by operating activities was $7.4 million for the three months ended April 2, 2022 and consisted of net income of $8.1 million partially offset by non-cash charges of $14.7 million and cash flow decreases of $15.4 million reflected in the net change in assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $10.5 million and depreciation and amortization of $3.9 million. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $16.1 million to support revenue growth and to mitigate supply chain shortages and disruptions and an increase in accounts receivable of $2.7 million in line with our revenue growth. In addition, there was an increase in prepaid expenses and other assets of $6.7 million mainly due to advanced payments to supply chain partners and a decrease in total accrued liabilities of $2.0 million. These changes were partially offset by an increase in accounts payable of $8.2 million due to increased inventory purchases and an increase in deferred revenue of $4.0 million primarily due to our platform subscriptions and support contracts.
Investing Activity
For the three months ended April 1, 2023, cash used in investing activities of $3.3 million consisted of net purchases of marketable securities of $1.3 million and capital expenditures of $4.6 million, consisting primarily of purchases of test and computer equipment.
For the three months ended April 2, 2022, cash used in investing activities of $20.1 million consisted of net purchases of marketable securities of $16.9 million and capital expenditures of $3.2 million, consisting primarily of purchases of test equipment and computer equipment.
Financing Activities
Net cash provided by financing activities of $10.2 million for the three months ended April 1, 2023 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $12.5 million. This was partially offset by repurchases of common stock of $1.2 million and payments related to a financing arrangement of $1.1 million.
Net cash provided by financing activities of $5.9 million for the three months ended April 2, 2022 primarily consisted of proceeds from the issuance of common stock related to our equity plans.
Working Capital and Capital Expenditure Needs
Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals, operating leases and revenue-share obligations. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. Furthermore, in July 2022, our Board of Directors authorized a one-year stock repurchase program for up to $100 million of our common stock. During the three months ended April 1, 2023, repurchases of $1.2 million were made under the program. Our stock repurchase program does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.
We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to terminate our repurchase program, limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.
22
Contractual Obligations and Commitments
Our principal commitments as of April 1, 2023 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation. The following table summarizes our contractual obligations as of April 1, 2023 (in thousands):
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||||||||||||||
Non-cancelable purchase commitments (1) | $ | 361,680 | $ | 244,587 | $ | 99,340 | $ | 11,394 | $ | 6,359 | ||||||||||||||||||||||
Operating lease obligations (2) | 14,155 | 4,805 | 7,797 | 1,553 | — | |||||||||||||||||||||||||||
Revenue share obligation (3) | 10,743 | 10,743 | — | — | — | |||||||||||||||||||||||||||
| $ | 386,578 | $ | 260,135 | $ | 107,137 | $ | 12,947 | $ | 6,359 | |||||||||||||||||||||||
(1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors. See Note 6, “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding purchase commitments related to our third-party manufacturers.
(2) Future minimum operating lease obligations in the table above primarily include payments for our office locations, which expire at various dates through 2028. See Note 6 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.
(3) Represents remaining payments related to a revenue-share obligation, including imputed interest associated with developed software product and related enhancements by an engineering service provider. See Note 5 “Balance Sheet Details” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our outstanding liability.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. As of April 1, 2023, we had cash, cash equivalents and marketable securities of $257.1 million, which was held primarily in cash, money market funds and highly liquid marketable securities such as U.S. government agency securities and commercial paper. Due to the nature of these money market funds and highly liquid marketable securities, we believe that we do not have any material exposure to changes in the fair value of our cash equivalents and marketable securities because of changes in interest rates.
Foreign Currency Exchange Risk
Our primary foreign currency exposures are described below.
Economic Exposure
The direct effect of foreign currency fluctuations on our sales and expenses has not been material because our sales and expenses are primarily denominated in U.S. dollars, or USD. However, we are indirectly exposed to changes in foreign currency exchange rates to the extent of our use of foreign CMs whom we pay in USD. Increases in the local currency rates of these vendors in relation to USD could cause an increase in the price of products that we purchase. Additionally, if the USD strengthens relative to other currencies, such strengthening could have an indirect effect on our sales to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker USD could have the opposite effect. The precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are influenced by many factors in addition to the impact of such currency fluctuations.
Translation Exposure
Our sales contracts are primarily denominated in USD and, therefore, most of our revenue is not subject to foreign currency risk. We are directly exposed to changes in foreign exchange rates to the extent such changes affect our expenses related to our foreign assets and liabilities with our subsidiaries in China, India and the United Kingdom, whose functional currencies are Chinese Renminbi, or RMB, Indian Rupee, or INR, and British Pounds Sterling, or GBP.
23
Our operating expenses are incurred primarily in the United States, in China associated with our research and development operations that are maintained there, in India for our center of excellence and in the United Kingdom for our international sales and marketing activities. Our operating expenses are generally denominated in the functional currencies of our subsidiaries in which the operations are located. The percentages of our operating expenses denominated in the following currencies for the indicated periods were as follows:
| Three Months Ended | ||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||
| USD | 91 | % | 92 | % | ||||||||||
| RMB | 5 | % | 6 | % | ||||||||||
| INR | 2 | % | — | % | ||||||||||
| GBP | 2 | % | 2 | % | ||||||||||
| 100 | % | 100 | % | |||||||||||
If USD had appreciated or depreciated by 10%, relative to RMB, INR and GBP, our operating expenses for the first three months of 2023 would have decreased or increased by approximately $1.1 million, or approximately 1%.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign operations are translated into USD in preparing our Condensed Consolidated Balance Sheets. The effect of foreign exchange rate fluctuations on our consolidated financial position for the three months ended April 1, 2023 was a net translation gain of $0.1 million. This gain is recognized as an adjustment to stockholders’ equity through “Accumulated other comprehensive loss.”
Transaction Exposure
We have certain assets and liabilities, primarily accounts receivables and accounts payable (including inter-company transactions) that are denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, cash flows and results of operations. Periodically, we use derivatives to hedge against fluctuations in foreign exchange rates. We do not enter into derivatives for speculative or trading purposes. We use foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain assets denominated in foreign currencies. These foreign exchange forward contracts typically have maturities of approximately one to two months. As of April 1, 2023, we had no forward contracts outstanding. Transaction gains and losses on these foreign currency denominated assets and liabilities are recognized each period within “Other income (expense), net” in our Condensed Consolidated Statements of Comprehensive Income. During the three months ended April 1, 2023, the net loss we recognized related to these foreign exchange assets and liabilities was approximately $0.2 million.
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of April 1, 2023, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Exchange Act) were effective at the reasonable assurance level.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurance that our disclosure controls and procedures will achieve their objectives. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. Our management recognizes that a control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of
24
controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For a description of our material pending legal proceedings, please refer to Note 6 “Commitments and Contingencies – Litigation” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.
ITEM 1A. Risk Factors
We have identified the following additional risks and uncertainties that may affect our business, financial condition and/or results of operations. The risks described below include any material changes to and supersede the description of the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on February 21, 2023. Investors should carefully consider the risks described below, together with the other information set forth in this Quarterly Report on Form 10-Q, before making any investment decision. The risks described below are not the only ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.
Business and Operational Risks
We face risks associated with being materially dependent upon third-party vendors; certain factors that affect our business as a result of those dependencies have in the past and could continue to disrupt our business and adversely impact our gross margin and results of operations.
We materially depend upon third-party vendors for our complex global supply-chain operations, including for services to develop, design and source components and materials, as well as manufacture, transport and deliver our products. If any of these vendors stop providing their services, for any reason, we would have to obtain similar services from other sources, which may not be available on commercially reasonable terms, if at all. We also have limited control over disruptions that may occur at the facilities of those providers, such as supply interruptions, labor shortages, strikes, shipping backlogs at ports and similar disruptions to transportation infrastructure, design and manufacturing failures, quality control issues, systems failures or even facility closures arising from pandemics or natural disasters. In addition, switching development firms or manufacturers could delay the manufacture and availability of products and/or require us to re-qualify our products with our customers, which would be costly and time-consuming. Any interruption in the development, supply or distribution of our products would adversely affect our ability to meet scheduled product deliveries to our customers and could result in lost revenue or higher costs, which would negatively impact our gross margin and operating results and harm our business.
Particular risks associated with management of our global supply chain operations include the following:
•Manufacturing constraints, shortages and other disruptions. We do not have internal manufacturing capabilities and rely solely on a small number of contract manufacturers, or CMs, and original design manufacturers, or ODMs, to manufacture and supply our products. Our business operations and ability to supply our products are highly dependent upon our ability to secure adequate third-party manufacturing capabilities and capacity and to effectively manage those third parties to meet our business needs. Our dependence solely on third-party manufacturers makes us vulnerable to possible supply and capacity constraints and reduces our control over manufacturing disruptions due to component availability, extended lead times delivery schedules, quality, manufacturing yields and increased costs. Some of these risks have occurred from time to time in our business, including recent increases in component costs. If these disruptions and constraints are prolonged, or if these manufacturers do not have the ability or business continuity plans to fulfill their obligations to us, our business could be disrupted. If we cannot effectively manage our vendors or if we fail to invest adequate resources to manage our supply chain operations, our ability to meet customer orders and generate revenue may be negatively impacted. A substantial portion of our manufacturing is done at facilities outside of the U.S., largely in Asia, which presents increased supply risk, including the risk of supply interruptions, delays, shortages or reductions in manufacturing quality or controls. In addition, these supply interruptions, delays and shortages could impair our ability to meet our customer requirements, require us to pay higher prices or incur expedite fees, which would harm our business and negatively impact our gross margin and results of operations. Our international manufacturing also creates risks and uncertainties associated with regulatory changes or government actions such as local business requirements, trade restrictions and tariffs, economic sanctions or related legislation, which may complicate our export and import activities, be disruptive to the operations of our manufacturers and logistics partners or result in higher product and shipping costs and variability of supply. For example, in 2022, substantially all our silicon suppliers had extended their lead times to 52 weeks and increased prices. Prices remain
26
high; however, many silicon suppliers have reduced their lead-times by 10 weeks or more. Manufacturing in Asia further heightens our risk of meeting customer delivery requirements as we rely upon third-party logistics companies to transport and import significant volumes of products to the U.S. where we generate a substantial majority of our revenue. These supply chain risks are further increased by periodic shipping backlogs at ports and similar disruptions to transportation infrastructure.
•Limited sources and sole-sourced supply. We are dependent upon sole-source or limited-source suppliers for some key product components such as chipsets and certain of our application-specific integrated circuit processors and resistor components, including certain components sourced solely through suppliers located in China and other Asian countries. Any of these suppliers could stop producing our components, raise the prices they charge us, be subject to higher product tariffs, epidemics or other conditions that disrupt their operations, cease operations or enter into exclusive arrangements with our competitors, consequently affecting our operations and results. For example, we have experienced disruptions in our supply of certain components that we source from suppliers in China and other Asian countries, causing delays in supply of our products due to production disruptions, factory closures and longer lead times for components and from uncertainty around trade and tariff policies between the U.S. and China. Being dependent upon a limited number of suppliers constrains our ability to mitigate these disruptions in our supply chain and such disruptions, particularly if prolonged. This may adversely affect our ability to obtain components and materials needed to manufacture our products at acceptable prices or at all. These risks would adversely affect our ability to meet scheduled product deliveries to our customers, increase costs and in turn harm our business and results of operations.
•Limitations on ability to manage third-party risks. Our business with certain third-party manufacturers may represent a relatively small percentage of their revenue. Consequently, our orders may not be given adequate priority if such manufacturers have to allocate limited capacity among competing customers. This could delay supplies of product to us or limit our ability to ramp product volumes within desired timeframes. If any of our manufacturing partners are unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative manufacturers. Having to take the time to qualify new third-party manufacturers could disrupt our ability to maintain continuous supply of product to meet customer requirements. An alternative manufacturer may not be available to us when needed or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. In addition, we and/or our manufacturers may not be able to negotiate commercially reasonable terms and sufficient quantities of component supplies with component and materials suppliers to meet our manufacturing needs because our purchase volumes may be too low for us to be considered a priority customer for securing supplies, particularly when there are shortages or limited availability of key components and materials. As a result, suppliers could stop selling to us and our manufacturers at commercially reasonable prices, or at all. We have worked to mitigate the cost impact of recent price increases, but those efforts may not be successful. Any such interruption or delay may force us and our manufacturers to seek components or materials from alternative sources, which may not be available, or result in higher prices. Switching suppliers could also force us to redesign our products to accommodate new components and could require us to re-qualify our products with our customers, which would be costly and time consuming. A significant interruption in manufacturing or supply availability for any of these reasons would reduce supply to our customers, which would result in lost revenue and harm our customer relationships.
•Ability to forecast and manage inventory liability with vendors. We have experienced increases in demand from many customers, in part as a result of higher consumer demand for internet services and improved Wi-Fi; in turn, this has resulted in our shipments being delayed. If we underestimate product demand from our customers, our manufacturers may have inadequate component inventory to meet our demand. If we are not able to adequately anticipate demand, this could interrupt our product manufacturing, increase our cost of revenue associated with expedite fees and air freight and/or result in delays or cancellation of customer orders. If we are unable to deliver products timely to our customers, we may lose customer goodwill or our customers may choose to purchase from other vendors, all of which may have a material negative impact on our revenue and operating results. If we overestimate our product demand, our third-party manufacturers may purchase excess components and build excess inventory, and we could be required to pay for these excess parts or products and their storage costs. Long lead times for component supply, which have been magnified by factory closures and shortages due to the COVID-19 pandemic as well as higher demand for certain components, and demand for our products have in the past and are expected to continue to impact our ability to accurately forecast our production requirements. We may incur liabilities for certain component inventory purchases that have been rendered excess or obsolete, which may have an adverse effect on our gross margin, financial condition and results of operations.
27
Security breaches and data loss may expose us to liability, harm our reputation and adversely affect our business.
As part of our business operations, we collect, store, process, use and/or disclose sensitive data relating to our business, including in connection with the provision of our cloud services and in our information systems and data centers (including third-party data centers). We also engage third-party providers to support various internal functions, such as human resources, finance, information technology and electronic communications, as well as the development and delivery of our products and cloud services, which includes collecting, handling, processing and/or storage of data on our behalf. These internal and external functions involve an array of software and systems (including cloud-based) that enable us to conduct, monitor and/or protect our business, operations, systems and information technology assets. Our cloud-based solutions enable us to host our customers’ subscriber data in third-party data centers. Hackers could steal proprietary or personal information related to our business, products, employees and customers, including information related to customers of our customers; hold data ransom; or otherwise interrupt our systems and services or those of our supply chain partners, vendors, customers or others. There have been increasing instances of cybersecurity attacks and security breaches, including sophisticated supply chain attacks. As we and our third-party providers continue to increase our reliance on virtual environments and communications systems and cloud-based solutions to support our work-from-anywhere culture and overall business needs, our exposures to third-party vulnerabilities and security risks also increase. Despite our on-going enhancement of security precautions, hackers are increasingly more sophisticated and aggressive, and our efforts may be inadequate to prevent all incidents of data breach or theft due, for example, to the increased use by attackers of tools and techniques that are specifically designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence.
We and certain of our third-party providers have in the past been subject to cyberattacks and security incidents. The theft, loss or misuse of proprietary or personal data collected, stored or processed by us or our service providers to run our business could result in significant security and remediation costs, regulatory fines and penalties, and/or litigation costs. Even if we and our third-party providers allocate, implement and manage reasonable security and data protection measures, we could experience data loss, unauthorized data disclosure or a breach of our systems, products or those of our third-party data centers that materially impact our business. The continued growth of our cloud-based platform and managed services portfolio and increased reliance on third-party development partners and third-party software and cloud-based solutions, increases the likely risks arising from security breaches or data loss. Any data loss or compromise of our systems that collect and process personal information (including personal information of customers of our customers), or third-party data centers where that personal information is stored, could result in loss of confidence in the security of our offerings and loss of customers or customer goodwill. Such losses also could damage our reputation, lead to liability given the increasing development of strict privacy and data security laws and regulations around the world, and adversely affect our business, financial condition, operating results and cash flows. Although we maintain insurance that may apply to cybersecurity risks and liabilities, there can be no guarantee that any or all costs or losses incurred will be partially or fully insured.
If we do not successfully increase our sales through adoption of our new platform and managed service offerings, our operating results, financial condition, cash flows and long-term growth may be negatively impacted.
We have platform and managed service offerings that are new and early in their life cycles and subject to uncertain market demand. If our customers are unwilling to adopt these new offerings, install our new products or deploy our new services, or if we are unable to achieve market acceptance of our products and platform, our business and financial results may be harmed. Moreover, adoption of our cloud product offerings, such as our Revenue EDGE, is dependent upon the success of our customers in investing, marketing, selling and deploying broader services—including managed services—to their subscribers, and our ability to differentiate our products from competing or substitutive product and service offerings. For example, our managed services include managed Wi-Fi, network security, parental controls and an ecosystem of services from partners including Arlo, Bark and Servify. However, if subscriber demand for such services does not grow as expected or declines, or our customers are unable or unwilling to invest in our platform to deploy and market these services, demand for our products may not grow at rates as we anticipate.
Changing market and customer requirements may adversely affect the valuation of our inventory as well as our supplier purchase commitments.
Customer demand for our products can change rapidly in response to market and technology developments. We may, from time to time, adjust inventory valuations downward or end of life certain of our products in response to our assessment of our business strategy as well as consideration of demand from our customers for specific products or product lines. We also periodically evaluate our supplier purchase commitments, which have increased significantly due to extended lead-times in the current supply-chain environment. We record a liability for excess and obsolete components based on our estimated future demand for our products, potential obsolescence of technology and product life cycles. If we fail to accurately plan our inventory levels, which becomes more challenging as component lead times increase, we may have to write off excess or obsolete inventory, or accrue a liability for component inventory held by our suppliers, both of which could have a material adverse effect on our financial condition and results of operations.
28
Business and operational risks associated with expanding our international operations could harm our business.
We are subject to business and operational risks associated with our international operations, including our global supply-chain operations and our international offices located in Nanjing, China and Bangalore, India. In addition, we are exposed to risk arising from dependence upon third-party development contractors in India and our growing Bangalore staff, and, to a lesser extent, dependence upon our international sales operations. The risks associated with our international operations also include costs of complying with differing and changing laws and regulatory requirements, tariffs, export quotas, custom duties and other trade restrictions; effects of inflation, currency controls and/or fluctuations in currency exchange rates; limited, inadequate or non-existent IP protection; and uncertainties associated with political conflicts and instabilities, variable economic conditions, terrorist attacks or acts of war. Our development operations and activities in China and India involve these and other significant risks, including: local labor conditions and regulations; knowledge transfer related to our technology and exposure to misappropriation of IP or confidential information, including information that is proprietary to us, our customers and third parties; heightened exposure to changes in the economic, security, political and pandemic conditions; international trade agreements and U.S. tax provisions that could adversely affect our international operations; complexities of managing development timelines and deliverables from abroad; and differences in local business practices and customs that may not align with our expectations and standards.
Along with the foregoing risks, our international sales operations involve risks associated with greater costs and complexity localizing and supporting our products and platform in local markets; evolving privacy regulations, trade regulations, compliance requirements and incremental costs applicable to the qualification, production, sale and delivery of our products; longer collection periods, financial instability and other difficulties impacting collection of accounts receivable in certain jurisdictions; more intense competition including from local equipment suppliers; and our reliance on value added resellers to sell and support our products in international markets given our limited presence and infrastructure outside the U.S. To expand our international operations, we will need to invest resources to attract key talent, build operational infrastructure, execute on our international strategy and drive international market demand for our products. If we invest substantial resources to expand our international operations and are unable to do so successfully and in a timely manner, our financial condition and results of operations may suffer.
If we do not successfully execute our business strategy to increase our sales to new and existing BSPs, our operating results, financial condition, cash flows and long-term growth may be negatively impacted.
Our growth depends upon our ability to increase sales to existing and new service providers of all types and sizes, and the execution of our strategy to increase sales to BSPs involves significant risk. The majority of our revenue is not recurring, and our customers generally have no committed purchase requirements, may cancel orders or cease purchasing our products at any time. If our customers stop purchasing our products for any reason, our business and results of operations would be harmed. If we are unable to increase our sales to new and existing BSPs, our operating results, financial condition, cash flows and long-term growth may be negatively impacted. Our strategy includes investing in regional sales teams and select channel partners to sell to smaller regional BSPs. A large portion of our current sales are to customers with smaller regional networks and limited capital expenditure budgets. The spending patterns of many of these customers are generally less formal than larger service providers and often characterized by small and sporadic purchases, and the potential revenue from any one of these customers is limited. We rely primarily on channel partners, including value added resellers, internationally and for certain U.S. markets. We face fierce competition for business with key channel partners. If we are unable to engage channel partners that we believe are key to our strategy, we may fail to grow our sales as planned. Furthermore, we rely on our channel partners to promote and sell our products. The loss of a key channel partner or the failure of our partners to provide adequate services could have a negative effect on customer satisfaction and could cause harm to our business.
Our selling efforts to larger BSPs require substantial investments of technical, marketing and sales resources through lengthy equipment qualification and sales cycles without any assurance of generating sales. We may be required to invest in costly upgrades to meet more stringent performance criteria and interoperability requirements, develop new customer-specific features or adapt our products to meet required standards. We have invested and expect to continue to invest considerable time, effort and expenditures, including investment in product research and development, related to these opportunities without any assurance that our efforts will result in revenue.
The quality of our support and services offerings is important to sustain and increase our sales to new and existing customers. Our services to customers have increasingly broadened to help them deploy our products within their networks. Once our products are deployed within our customers’ networks, they depend on our support organization to resolve any issues relating to those products. If we do not effectively assist our customers in deploying our products, succeed in helping them quickly resolve post-deployment issues or provide effective support, it could adversely affect our ability to sell our products to existing customers and harm our reputation with potential new customers. As a result, our failure to maintain high quality support and services could result in the loss of customers, which would harm our business.
29
We may have difficulty evolving and scaling our business and operations to meet customer and market demand, which could result in lower profitability or cause us to fail to execute on our business strategies.
In order to grow our business, we will need to continually evolve and scale our business and operations to meet customer and market demand. Evolving and scaling our business and operations places increased demands on our management as well as our financial and operational resources to effectively manage organizational change; design scalable processes; accelerate and/or refocus research and development activities; expand our manufacturing, supply chain and distribution capacity; increase our sales and marketing efforts; broaden our customer-support and services capabilities; maintain or increase operational efficiencies; scale support operations in a cost-effective manner; implement appropriate operational and financial systems; and maintain effective financial disclosure controls and procedures. If we cannot evolve and scale our business and operations effectively, we may not be able to execute our business strategies in a cost-effective manner and our business, financial condition, profitability and results of operations could be adversely affected.
Our business and results of operations have been, and may continue to be, negatively affected by the COVID-19 pandemic and related impacts on the global economy and supply chain, and the demand for broadband products may not be sustained.
The COVID-19 pandemic and the resulting containment measures caused economic, financial and supply chain disruptions globally, including in most regions in which we sell our products and services and conduct our business operations. Although COVID-19 related containment measures have generally subsided, we continue to manage through sustained shortages of components and materials, including extended lead times and higher supply chain costs, which may have a material negative impact on our ability to supply products to meet customer requirements and could materially adversely affect our business and results of operations. Although demand for our products has been strong as subscribers sought more bandwidth and better Wi-Fi at home for work and entertainment, there are no assurances that the demand for our products will remain strong. For example, BSPs may not invest in our platform or delay infrastructure improvements due to the resulting uncertainty in the global economy. To the extent we experience a renewed or worsening disruption to our business and operations and other adverse residual impacts of a pandemic or further future disruptions, it could have a material adverse effect on our business, results of operations and financial condition.
We could become subject to litigation that could harm our business or negatively impact our results of operations.
In the ordinary course of business, we are subject to legal claims and litigation, and may become involved in regulatory proceedings, related to disputes over commercial, competition, IP, labor and employment and other matters. Regardless of the merits of any such claims, litigation and regulatory proceedings are inherently uncertain, and can be costly, disruptive to our business and operations, harmful to our reputation, and distracting to management. In particular, as a technology company, we may be subject to IP claims asserting patent, copyright, trademark and/or other infringement claims that are costly to defend and could limit our ability to use some technologies in the future. The risk of such claims is heightened as we expand our products and services and increasingly rely on more technologies, including third-party IP rights that we license and incorporate into our products and services. Third parties from whom we license IP may be unable or unwilling to indemnify us for such claims or offer any other remedy to us. Increasingly, patent infringement claims are asserted by patent assertion entities and non-practicing entities, or NPEs, that do not conduct business as an operating company and hold and own patents only for the purpose of aggressively pursuing royalties through infringement assertions or patent infringement litigation. Further, in our industry, the number of assertions by NPEs continues to increase due in part to patent sales by operating companies to NPEs and availability of litigation financing. We have received and expect to continue to receive assertions from NPEs and other third parties alleging that we may be infringing their patents or other IP rights; offering licenses to such IP; and/or threatening litigation. If our products are found to infringe, these claims could also result in the suspension of our ability to import, market and sell our products and services, product shipment delays or requirements to modify our products or enter into costly settlements or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all. Furthermore, we may additionally be financially responsible for claims made against our customers, including costs of litigation and damages awarded, under indemnity obligations which could further negatively impact our results of operations. Protracted litigation could cause us to incur significant defense costs, which would negatively impact our results of operations.
We have a history of fluctuations in our gross margin and operating results, which can make it difficult to predict our future performance and could cause the market price of our stock to decline.
We have a history of fluctuations in our quarterly and annual gross margin and operating results, including fluctuations due to factors outside of our control. Factors that impact variability of our operating results include our ability to predict our revenue and reduce and control our costs, our ability to predict product functions and features desired by our customers, the impact of global economic conditions, our ability to effectively manage our global supply chain operations, our ability to effectively manage third parties upon whom we depend to conduct our business, our customers’ spending patterns and purchasing decisions, the impact of competition, customer adoption of our products, our ability to manage our legal, contractual and regulatory obligations and liabilities, and other risk factors identified in the lead-in to “Management’s Discussion and Analysis
30
of Financial Condition and Results of Operations” above and in this “Risk Factors” section. Our gross margin is further impacted by customer, geographic and product mix, the impact of competition on our prices, our ability to manage our costs associated with components and materials, excess and obsolescence, expedite fees and logistics-related activities, contractual commitments and other product costs. Fluctuating results make it difficult to predict our future performance and could cause the market price of our stock to decline. We expect to continue to incur significant expenses and cash outlays in connection with our anticipated growth as we expand our business and operations and target new customer opportunities. Given our anticipated growth and the intense competitive pressures we face, we may be unable to adequately control our operating expenses or maintain positive operating income. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the market price of our stock would likely decline.
We are exposed to customer credit risks that could adversely affect our operating results and financial condition.
We generally extend credit terms for sales to our customers which exposes us to credit risk. If we are unable to collect our accounts receivable balances as anticipated, our operating results and financial condition will be harmed. A number of factors contribute to this risk, including our ability to adequately assess a customer’s creditworthiness and financial condition, changes in a customer’s financial condition and/or liquidity, our ability to timely collect our accounts receivable from customers, disagreements with customers on invoiced balances and economic downturns or other unanticipated events impacting a customer’s ability to pay. Furthermore, some of our international customers operate in countries with developing economies, volatile financial markets or currency regulations that impact their ability to make payments in U.S. dollars. While we take measures to pursue collections on our accounts receivable, we have from time to time written down accounts receivable and written off doubtful accounts and may need to do so in future periods. The determination of allowances for doubtful accounts involves significant judgment, and if we underestimate our allowance for doubtful accounts, we will have to make further write-downs. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our cash flow or our financial condition.
If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted.
Our success depends, in large part, on the continued contributions of our key personnel who are highly skilled and would be difficult to replace. Competition for skilled personnel, particularly in software and cloud development and engineering, is intense. We cannot be certain that we will be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively, both individually and as a group. If we are unable to effectively recruit, hire and utilize new employees to align with our company objectives, execution of our business strategy and our ability to react to changing market conditions may be impeded, and our business, financial condition and results of operations may suffer. We have operated using a “work-from-anywhere” model since the first half of 2020, and if we do not continue to effectively manage our distributed workforce, we could face challenges maintaining our corporate culture, which could increase attrition or limit our ability to attract personnel. None of our key personnel are bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key person life insurance covering our key personnel. If we lose the services of any key personnel, our business, financial condition and results of operations may suffer.
If we experience disruptions with our enterprise resource planning system, we may not be able to effectively transact business or produce financial statements, which would adversely affect our business, results of operations and cash flows.
In January 2020, we migrated our Oracle enterprise resource planning, or ERP, system to Oracle’s cloud platform. In 2022, we implemented a software billing application on Salesforce.com. With these implementations, we are highly dependent upon Oracle and Saleforce.com to host, manage and maintain our ERP system and supporting applications. Any disruptions to their business or processes, or delays in their ability to provide services to us, may in turn disrupt our business operations or increase costs. Furthermore, we receive quarterly system updates and enhancements on the cloud platform according to Oracle’s release timeline and change management processes, which if not managed properly may disrupt our business operations and delay our ability to process transactions and produce reports necessary to conduct our business. We are highly dependent upon our ERP system for critical business functions, including order processing and management, supply chain and procurement operations, financial planning, accounting and reporting; accordingly, protracted disruption in functionality or processing capabilities of the ERP system could materially impair our ability to process transactions timely or produce accurate financial statements on a timely basis. If our systems suffer prolonged interruption, our results of operations and cash flows would be adversely affected.
31
As a public company we are subject to significant accounting, legal and regulatory requirements; our failure to comply with these requirements may adversely affect our operating results and financial condition.
We are subject to significant accounting, legal and regulatory requirements, including requirements and rules under the Sarbanes-Oxley Act, or SOX, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, among other rules and regulations implemented by the SEC, as well as listing requirements of the New York Stock Exchange, or NYSE. We incur significant accounting, legal and other expenses and must invest substantial time and resources to comply with public company reporting and compliance requirements, including costs to ensure we have adequate internal controls over accounting and financial reporting, proper documentation and testing procedures among other requirements. We cannot be certain that the actions we have taken to implement internal controls over financial reporting will be sufficient. We have in the past discovered, and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement, particularly as we enhance, automate and improve functionality of our processes and internal applications. New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of SOX and Dodd-Frank and rules adopted by the SEC and the NYSE, would likely result in increased costs to us as we respond to their requirements. We continue to invest resources to comply with evolving laws and regulations, and this investment may result in increased general and administrative expense.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our operating results and our stock price.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected. If we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
Risks Related to Our Products
Our products are highly technical and may contain undetected hardware or software defects or software bugs, which could harm our reputation and adversely affect our business.
Our products, including our platform (cloud, software and systems) and managed services, are highly technical and, when deployed, are critical to the operation of many networks. Our products have contained and may contain undetected defects, bugs or security vulnerabilities, which risks may be exacerbated as we continue to expand our cloud and software portfolio and include services from third-party partners. Some defects in our products may only be discovered after a product has been installed and used by customers and may in some cases only be detected under certain circumstances or after extended use. Any errors, bugs, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty and retrofit costs, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for security and data breach, product liability, tort or breach of warranty. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
32
If we are unable to ensure that our products interoperate properly and as required within our customers’ networks, our business will be harmed.
Our products must interoperate with our customers’ existing and planned networks, which often have varied and complex specifications, utilize multiple protocol standards, include software applications and customizations and products from multiple vendors and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing and planned networks. To meet these requirements, we must undertake development efforts, including test protocols, that require substantial capital investment and employee resources. We may not accomplish these development goals quickly or cost-effectively, if at all. If we fail to maintain interoperability, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and market share. We rely upon interoperability arrangements with equipment and software vendors for the use or integration of their technology with our products. If these relationships fail, we may have to devote substantially more resources to developing alternative products and processes and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other vendors are either direct competitors or companies that have extensive relationships with our existing and potential customers and influence the purchasing decisions of those customers. Some of our competitors have stronger relationships with some of our interoperability partners, and as a result, our ability to have successful interoperability arrangements with these companies may be harmed, which in turn may harm our ability to successfully sell and market our products.
Our estimates regarding warranty or product obligations are highly subjective. If our estimates change, the liability for warranty or product obligations may be increased, impacting future cost of revenue.
Our products are highly complex, and our product testing may not be adequate to detect all defects, errors, failures and quality issues. Accordingly, our estimates regarding future warranty or product obligations are highly subjective, and if our estimates change, the liability for warranty or product obligations may be increased, impacting future cost of revenue. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results and financial position. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty or other product obligations arise due to reliability or quality issues arising from defects in software, faulty components or improper manufacturing methods, our operating results and financial position could be negatively impacted by cost associated with fixing software or hardware defects; high service and warranty expenses; high inventory obsolescence expense; delays in collecting accounts receivable; payment of liquidated damages for performance failures; and loss of customer goodwill and future sales.
Our business and operations depend on proprietary technologies, and our financial performance may suffer if we cannot protect and enforce our IP rights.
Our success and ability to compete depend on proprietary technology. We rely significantly upon patent, copyright, trademark, trade secret and other IP laws, IP registration rights and agreements with our employees, customers, partners, suppliers and other parties, to establish and maintain IP rights necessary for our business and operations. U.S. IP laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent or at all. Our patent applications may not result in issued patents, and our issued patents may not be enforceable. Our IP rights could be challenged, invalidated, infringed or circumvented, any of which could impair or harm our business and operations and be costly to defend. Our failure to adequately protect our IP rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.
We and our third-party providers may be unable to adequately prevent unauthorized third-party copying or use of our IP. For example, contractual provisions protecting our IP could be breached, or our IP could be reverse engineered or unlawfully distributed. It may become more difficult to adequately protect our IP as we expand our reliance on third parties for the design, development and/or manufacture of our products. In addition, we may become subject to increased risks arising from or related to security breaches, data loss or theft of our data or our IP, and have greater difficulty protecting our IP as our work-from-anywhere workforce and work product become more distributed. Policing the unauthorized use and distribution of our IP is difficult and costly. Litigation, which could result in substantial costs, diversion of resources and harm to our business, may be necessary to enforce our IP rights, protect our trade secrets or determine the validity and scope of proprietary rights.
33
If we are unable to obtain third-party technology licenses needed for our products and platform solutions, our business and operations will be impaired, and our operating results could be adversely affected.
We increasingly rely on technology licensed from third parties for our products and platform solutions. We may not be able to secure or maintain necessary technology licenses from these third parties on commercially reasonable terms or at all. Third parties may also choose to not renew licenses with us, demand unreasonable license fees or cease to offer technologies that we require. The inability to obtain necessary third-party licenses or to secure reasonable license terms at a cost acceptable to us could harm the competitiveness of our products and solutions, result in lost revenue and adversely affect our operating results. For example, we may be forced to forego product features or platform offerings, including features and offerings we believe are critical to our strategy, accept substitute technology of lower quality or performance standards or incur higher costs, or the time-to-market of our products or product features could be delayed. Furthermore, our ability to utilize third-party technology may be disrupted by disputes over IP rights, including claims of IP infringement, which could prevent us from offering or selling the products that utilize the disputed technology and adversely affect our operating results.
Our use of open-source software could impose limitations on our ability to commercialize our products.
We incorporate open-source software into our products. The terms of many open-source software licenses have not been interpreted by the courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenue and operating expenses.
Macroeconomic and Industry Risks
Adverse global economic, market and industry conditions, geopolitical issues and other conditions that impact our increasingly global operations could have a negative effect on our business, results of operations and financial condition and liquidity.
As a global company, our performance is affected by global economic, market and industry conditions (including the current inflationary economic environment, rising interest rates and disruptions related to the banking industry) as well as geopolitical issues and other conditions with global reach. In recent years, concerns about the global economic outlook have adversely affected market and business conditions in general. Macroeconomic weakness and uncertainty make it more difficult for us to manage our operations and accurately forecast revenue, gross margin and operating expenses. Further, adverse developments that affect financial institutions, transactional counterparties, or other third parties, or concerns or rumors about these events, have led to market-wide liquidity problems. We have no borrowing or deposit exposure to directly impacted institutions and have not experienced an adverse impact to our liquidity or to our business operations, financial condition, or results of operations as a result of these recent events. However, uncertainty may remain over liquidity concerns in the broader financial services industry, and there may be unpredictable impacts to our business and our industry.
Geopolitical issues, such as the Russian invasion of Ukraine, relations between the United States and China, tariff and trade policy changes, and increasing potential of conflict involving countries in Asia that are critical to our supply-chain operations, such as Taiwan and China, have resulted in increasing global tensions and create uncertainty for global commerce. The on-going global impact of the COVID-19 pandemic continues to create shortages in component and supplies and otherwise disrupt and delay our global supply-chain operations. In addition, rising inflation in the United States has affected businesses across many industries, including ours, by increasing the costs of labor, employee healthcare, components and freight and shipping, which may further constrain our customers’ or prospective customers’ budgets. To the extent there is a sustained general economic downturn, and our platform and services are perceived by customers or potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in spending. Sustained or worsening of global economic conditions and geopolitical issues may increase our cost of doing business, materially disrupt our supply chain operations, cause our customers to reduce or delay spending and intensify pricing pressures. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, demand for our products, and our business, financial condition and results of operations, could be adversely affected.
We face intense competition that could reduce our revenue and adversely affect our financial results.
The market for our products is highly competitive, and we expect competition from both established and new companies to increase. Our ability to compete successfully depends on a number of factors, including our ability to successfully develop new products and solutions that anticipate BSP and market requirements and changes in technology and industry standards; BSP acceptance and adoption of our products and solutions; our ability to differentiate our products from our competitors’ offerings
34
based on performance, features, cost-effectiveness or other factors; our product capabilities to meet customer network requirements and preferences; and our success in marketing and selling our products and platform solutions.
Many of our current or potential competitors have longer operating histories, greater name recognition, broader product lines, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to acquire and offer complementary products and services. As the broadband access equipment market has undergone and continues to undergo consolidation, our competitors have merged, grown and been able to offer more comprehensive solutions than they individually had offered. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features, because the products that we and our competitors offer require a substantial investment of time and funds to qualify and install. The demand on network capacity due to the shift towards a remote workforce may attract new market entrants with competitive or substitutive products, which may lead to increased sales cycles, cause pricing pressure and impact adoption of our platform due to the broader availability of product offerings. Some of our competitors may offer substantial discounts or rebates to win or retain customers. If we are forced to reduce prices to retain existing customers or win new customers, we may be unable to sustain gross margin at desired levels or profitability. Competitive pressures could result in increased pricing pressure, reduced profit margin, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely affect our financial results.
Our industry is characterized by rapid technological advance, and if we fail to develop new products or enhancements that meet changing BSP requirements, we could experience lower sales.
Our industry is characterized by rapid technological change, changing needs of BSPs, evolving industry standards and frequent introductions of new products and platform offerings. We invest significant amounts to pursue innovative technologies that we believe will be adopted by BSPs. For example, we have invested and continue to invest resources in our platform offerings. In addition, on an ongoing basis, we expect to reposition our product and service offerings and introduce new offerings as we encounter rapidly changing BSP requirements and increasing competitive pressures. If we cannot increase sales of our new platform and services, keep pace with rapid technological developments to meet customer needs and compete with evolving standards or if the technologies we choose to invest in fail to meet customer needs or are not adopted by customers in the timeframes that we expect, our financial condition and results of operations would be adversely affected.
Developing our products is complex and involves uncertainties, including pricing risks for key materials, component shortages and limited suppliers. We may experience design, manufacturing, software development quality, support, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline. If we are unable to anticipate and develop new products or enhancements to our existing products on a timely and cost-effective basis, our products may become technologically obsolete more rapidly than anticipated over time, resulting in lower sales which would harm our business. Furthermore, the introduction of new or enhanced products also requires that we manage the transition from older products in accordance with customer requirements. If we fail to maintain compatibility requirements in our customers’ networks, demand for our products would decline, which would reduce our revenue opportunities and market share.
We use third-party development partners both for their key skills and to augment our employee developers. Using third-party development partners for our broadband platform and managed services allow us to accelerate development and leverage the third parties’ expertise, but increases our risks due to reduced direct control over the third party’s work. This product development approach may cause unforeseen issues in product design, as well as challenges arising from integration and support of third-party features in our products. In addition, our revenue based on the third parties’ product development work may take several years to cover our out-of-pocket expenses, if ever.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially, which may cause our operating results to fluctuate significantly.
The timing of our revenue is difficult to predict. Our sales efforts often involve educating BSPs about the use and benefits of our platform (cloud, software and systems) and managed services. BSPs typically undertake a significant evaluation process, which frequently involves not only our platform and managed services, but also those of our competitors and results in a lengthy sales cycle. Sales cycles for larger customers are relatively longer and require considerably more time and expense. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. The timing of revenue related to sales of products and services that have installation requirements may be difficult to predict due to interdependencies that may be beyond our control, such as BSP testing and turn-up protocols or other vendors’ products, services or installations of equipment upon which our products and services rely. Such delays may result in fluctuations in our quarterly revenue. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, we may not achieve our revenue forecasts, and our financial results would be adversely affected.
35
Our business depends upon the capital spending patterns and decisions of BSPs, and any decrease or delay in capital spending by BSPs due to the timing and availability of capital and other causes would reduce our revenue and harm our business.
Demand for our products depends on the magnitude and timing of capital spending by BSPs as they construct, expand, upgrade and maintain their access networks as well as BSPs’ adoption of our platform and managed services. Capital spending is cyclical in our industry, sporadic among individual BSPs and can change on short notice, which gives us little visibility into changes in spending behavior in any particular quarter. Capital spending for network infrastructure projects could be delayed or canceled in response to factors outside our control, such as reduced consumer spending, challenging capital markets or declining liquidity trends. BSP spending is also affected by reductions in budgets, including as a result of a general economic downturn, delays in purchasing cycles, access to government funding programs or capital markets, and seasonality and delays in capital allocation decisions. Historically, our customers may spend less or have less deployments in the first quarter due to pending annual budgets or, in certain regions, due to weather conditions that inhibit outside fiber deployment, resulting in weaker demand for our products in the first quarter. Softness in demand in any of our customer markets, including due to macro-economic conditions beyond our control or uncertainties associated with regulatory reforms, has in the past and could in the future lead to unexpected decline or slowdown in customer capital expenditure. Further, BSPs may pursue capital investment in network technologies other than those offered by us or may choose not to adopt our products and platform solutions in their networks. Reductions in capital expenditures by BSPs would have a material negative impact on our revenue and results of operations and slow our rate of revenue growth. As a consequence, our results for a particular period may be difficult to predict, and our prior results are not necessarily indicative of results in future periods.
Historically, our customer base has been concentrated, and the loss of any of our key customers may adversely impact our revenue and results of operations, and any delays in payment by a key customer could negatively impact our cash flows and working capital.
Historically, a large portion of our sales has been, and in the future may be, to a limited number of large customers. Changes in the BSP market, such as financial difficulties, spending cuts or corporate consolidations that impact purchasing decisions by these customers have and may again negatively impact our revenue, and as a result, revenue from such customers may remain flat or continue to decline. For example, sales to Lumen, our only greater than 10% customer in 2020, declined in 2021 and sales to other BSP customers increased such that Lumen was not a 10% customer in 2021 or 2022. Any decrease or delay in purchases of any of our key customers, particularly if prolonged or sustained, or our inability to grow our sales with them, may have a material negative impact on our revenue and results of operations.
In addition, some larger customers may demand discounts and rebates or desire to purchase their access systems and software from multiple providers. As a result of these factors, our future revenue opportunities may be limited, and we may face pricing pressures, which in turn could adversely impact our gross margin and our profitability. The loss of, reduction in, or pricing discounts associated with orders from any larger customer could significantly reduce our revenue and harm our business. Furthermore, delays in payment and/or extended payment terms from any of our larger customers could have a material negative impact on our cash flows and working capital to support our business operations.
Government-sponsored programs and U.S. federal government shutdowns could impact the timing and buying patterns of BSPs, which may cause fluctuations in our operating results.
We sell to BSPs, including U.S.-based independent operating companies, or IOCs, which rely significantly upon interstate and intrastate access charges and federal and state subsidies in the form of grants and other funding such as the Federal Communications Commission’s, or FCC’s, Rural Digital Opportunity Fund, the CARES Act or the American Rescue Plan Act. The FCC and some states may change such payments and subsidies, which could reduce IOC revenue. Furthermore, many IOCs use or expect to use government-supported loan programs or grants, such as Rural Utility Service loans and grants, to finance capital spending. These government-supported loan programs and grants generally include conditions such as deployment criteria, domestic preference provisions and other requirements that apply to the project and selected equipment as conditions for funding. For example, the U.S. government recently introduced legislation imposing domestic content requirements for infrastructure programs that receive federal funding. Changes to the terms or administration of these programs, including uncertainty from government and administrative change, increasing focus on domestic requirements by the U.S. that may require re-assessment of compliance, potential funding limitations that impact our ability to meet program requirements or delays due to U.S. federal government shutdowns could reduce the ability of IOCs to access capital or secure funding these programs to purchase our products and services and thus reduce our revenue opportunities. Customers may curtail purchases if they receive less funding than planned, are negatively impacted by federal government shutdowns or changes in government regulations and subsidies, or as funding winds down, any of which could have an adverse effect on our operating results and financial condition.
36
Government and Regulatory Risks
Increasing data privacy regulations could impact our business and expose us to increased liability.
Government authorities in the United States and around the world have implemented and are continuing to implement broader and more stringent laws and regulations concerning data protection. The interpretation and application of these data protection laws and regulations are often uncertain and changing, and it is possible that they may be interpreted and applied in a manner that is inconsistent with our data practices. For example, the General Data Protection Regulation, or EU GDPR, adopted by the European Union, or EU, and the UK General Data Protection Regulation, or UK GDPR, adopted by the United Kingdom, or UK, (the EU GDPR and UK GDPR hereinafter referred to as the GDPR) and national data protection supplementing laws in these jurisdictions impose specific duties and requirements upon companies that collect, process or control personal data of individuals located in the EU/UK, including a principle of accountability and the obligation to demonstrate compliance through policies, procedures, training and audit. Although we currently do not have material operations or business in the EU or the UK, we are in the process of expanding in these jurisdictions, and we have incurred and will continue to incur substantial costs in this respect. Furthermore, the GDPR imposes significant penalties for noncompliance of at least €20 million (for the EU GDPR) or £17.5 million (for the UK GDPR), or up to 4% of a company’s worldwide revenue; thus, any non-compliance with the GDPR could result in a material adverse effect on our business, financial condition and results of operations. Twice, the Court of Justice of the European Union, or the CJEU, has invalidated regulations designed to facilitate the transfer of data from European countries to the United States, and in July 2020, the CJEU held that transfers must be assessed on a case-by-case basis and reliance on standard contractual clauses (a standard form of contract approved by the European Commission as an adequate mechanism for personal data transfers) may not be sufficient in all circumstances. In March 2022, the U.S. and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not yet been implemented beyond an executive order signed by President Biden on October 7, 2022 on Enhancing Safeguards for United States Signals Intelligence Activities. We currently rely on the standard contractual clauses and the UK International Data Transfer Agreement (or Addendum) to transfer personal data outside the European Economic Area and the UK respectively, including to the United States. As the enforcement landscape further develops, and supervisory authorities issue further guidance on – and revised standard contractual clauses for – international data transfers. Our current contracts may not be sufficient, and we could suffer additional costs, complaints and/or regulatory investigations or fines; we may have to stop using certain tools and vendors and make other operational changes; we have had to and will have to implement revised standard contractual clauses for existing intragroup, customer and vendor arrangements within required time frames; our customers may not use our services in a manner that is compliant with applicable data privacy laws and regulations; our services may not be competitive in certain markets; and/or it could otherwise affect the manner in which we provide our services, and could adversely affect our business, operations and financial condition.
We and/or our customers are also subject to evolving EU and UK privacy laws on cookies, tracking technologies, e-marketing and electronic communications. Recent European court and regulator decisions are driving increased attention to cookies and tracking technologies. If the trend of increasing enforcement by regulators of the strict approach to opt-in consent for all but essential use cases, as seen in recent guidance and decisions continues, this could lead to substantial costs, require significant systems changes, limit the effectiveness of marketing activities conducted on behalf of our customers, divert the attention of our technology personnel, adversely affect our margins, and subject us to additional liabilities. In addition, new security regulations, such as the EU’s Network and Information Security 2 Directive (NIS2) and the UK’s Telecommunications (Security) Act 2021 together with its implementing regulations (currently in draft form) imposes further security obligations on electronic communications networks. We may be required to implement (and contractually commit to) additional security measures to remain a competitive vendor, as customers will need to ensure its vendors are able to meet the obligations that they are themselves subject to, or customers may choose different vendors due to our security measures. This could result in additional costs and require operational changes which could adversely affect our business, operations and financial condition.
In light of the complex and evolving nature of EU, EU Member State and UK privacy laws, there can be no assurances that we will be successful in our efforts to comply with such laws; violations of such laws could result in regulatory investigations, fines, orders to cease/change our use of technologies, as well as lead to civil claims including class actions, and reputational damage.
Since 2020, a number of U.S. states, including California, Colorado, Connecticut, Iowa, Utah and Virginia, have enacted laws and regulations to protect consumers’ personal information, and efforts to enact a comprehensive federal privacy law have intensified. Most of the new or proposed laws include restrictions on processing consumer information for targeted advertising, which could negatively affect our marketing cloud product. Complying with new and changing laws could cause us to incur substantial costs in order to market and sell our cloud-based solutions in the U.S. and internationally, deter customers from adopting our cloud-based solutions or require us to redesign our platform in order to meet customer requirements related to such laws. Regulatory actions or claims involving our practices in the collection, storage, processing, use or disclosure of consumer information or other personal data, even if unfounded, could damage our reputation and adversely affect our
37
operating results. The failure or perceived failure to comply may result in government or civil proceedings or actions against us, or could cause us to lose customers, which could have an adverse effect on our business.
If we fail to comply with evolving industry standards, sales of our products would be adversely affected.
Our products are subject to a significant number of domestic and international standards, which evolve as new technologies are developed and deployed. As we expand into new global markets, we are likely to encounter additional standards. Our products must comply with these standards in order to be widely marketable. In some cases, we are required to obtain certifications or authorizations before our products can be introduced, marketed or sold in new markets or to new customers. For example, our ability to maintain Operations System Modification for Intelligent Network Elements certification for our products will affect our ongoing ability to continue to sell our products to large BSPs. In addition, our ability to expand our international operations may be limited by standards in countries or may require us to redesign our products or develop new products to meet local standards. We may not be able to design our products to comply with local requirements, which would impede or prevent our ability to grow our business in those locations. Moreover, as we expand our business and operations globally, we must increase investments to maintain compliance with evolving standards across all of our markets. The costs of complying with evolving standards or failure to obtain timely authorizations or certification could prevent us from selling our products where these standards or regulations apply, which would result in lower revenue and lost market share.
Our failure or the failure of our manufacturers to comply with environmental and other legal regulations could adversely impact our results of operations.
The manufacture, assembly and testing of our products may require the use and disposal of hazardous materials that are subject to environmental, health and safety regulations, or materials subject to laws restricting the use of conflict minerals. We substantially depend upon our third-party manufacturers to comply with these requirements. Any failure by us or our third-party manufacturers to comply with these requirements could result in regulatory penalties, legal claims or disruption of production of our products. In addition, any failure to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future environmental regulations and other legal requirements may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in additional international markets.
Our products are subject to U.S. export and trade controls and restrictions. International shipments of certain of our products may require export licenses or are subject to additional export requirements. In addition, the import laws of other countries may limit our ability to distribute our products, or our customers’ ability to buy and use our products, in those countries. Changes in our products or changes in export and import regulations or duties may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations, duties or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could negatively impact our ability to sell, profitably or at all, our products to existing or potential international customers.
Regulatory and physical impacts of climate change and other natural events may affect our customers and our manufacturers, resulting in adverse effects on our operating results.
As emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the global climate, any new regulation of greenhouse gas emissions may result in additional costs to our customers and our manufacturers. In addition, the physical impacts of climate change and other natural events, including changes in weather patterns, drought, rising ocean and temperature levels, earthquakes and tsunamis may impact our customers, suppliers and manufacturers, and our operations. These potential physical effects may adversely affect our revenue, costs, production and delivery schedules, and cause harm to our results of operations and financial condition.
Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could harm our business.
The FCC has jurisdiction over our U.S. customers, and FCC regulatory policies that create disincentives for investment in access network infrastructure or impact the competitive environment in which our customers operate may harm our business. For example, adoption of regulations that affect providers of broadband Internet access services could impede the penetration of our customers into certain markets or affect the prices they may charge in such markets. Similarly, changes to regulatory tariff requirements or other regulations relating to pricing or terms of carriage on communication networks could slow the development or expansion of network infrastructures, which could adversely affect the sale of our products and services. Many
38
of our customers are subject to FCC rate regulation of interstate telecommunications services and are recipients of government stimulus payments. Limits or restrictions on access to these programs could affect the ability of IOCs to access capital, which would in turn reduce our revenue opportunities. In addition, many of our customers are subject to state and federal regulation of their businesses, including rates for such services, and may also receive funding from state universal service funds. Changes in state or federal rate regulations or universal service funding rules could adversely affect our customers’ revenue and capital spending plans. Moreover, various international regulatory bodies have jurisdiction over certain of our customers outside the U.S. Changes in any of these standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against BSPs based on changed standards, laws and regulations could adversely affect the development of broadband networks and services. This, in turn, could directly or indirectly adversely impact the communications industry in which our customers operate.
Risks Related to Ownership of Our Common Stock and Other Risks
Our stock price may continue to be volatile, and the value of an investment in our common stock may decline.
The trading price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time and could fluctuate widely in response to various factors, some of which are beyond our control. These factors include those discussed above and others such as quarterly variations in our results of operations or those of our competitors; failure to meet any guidance that we have previously provided regarding our anticipated results; changes in earnings estimates or recommendations by securities analysts; failure to meet securities analysts’ estimates; announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments; developments with respect to IP rights; our ability to develop and market new and enhanced products on a timely basis; our commencement of, or involvement in, litigation and developments relating to such litigation; changes in governmental regulations; and a slowdown in the communications industry or the general economy.
Recently, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price and volatility of our common stock, regardless of our actual operating performance. Historically, following periods of volatility in the market price of a company’s securities, there is increased risk that stockholders may initiate securities class action litigation against the company. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of our management and Board of Directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management or our Board of Directors. These provisions include: (1) a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our Board of Directors; (2) no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; (3) the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; (4) the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; (5) a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; (6) the requirement that a special meeting of stockholders may be called only by the chairman of the Board of Directors, the chief executive officer or the Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and (7) advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. We are also subject to certain anti-takeover provisions under Delaware law, which prohibits a corporation, in general, from engaging in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction.
We may need additional capital in the future to finance our business.
While our working capital needs to support our business operations and growth have been funded from operating cash flows in the near term, we may need additional capital if our current plans and assumptions change. In January 2022, we terminated our loan and security agreement with Bank of America, N.A. If our financial position deteriorates, we may not be able to secure a similar source of financing to support our working capital needs on acceptable terms or at all. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer dilution. If we raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. If we are unable to sustain positive operating
39
income and cash flows from operations, our liquidity, results of operations and financial condition may be adversely affected. Furthermore, if we are unable to generate sufficient cash flows to support our operational needs, we may need to cease our repurchase program or seek additional sources of liquidity, including borrowings, to support our working capital needs, even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which would adversely impact our business and growth.
We do not currently intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay a cash dividend on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, our stockholders are not likely to receive any dividends on our common stock for the foreseeable future.
Our failure to adequately address and resolve risks and uncertainties associated with acquisitions could have a material adverse impact on our financial condition and results of operations.
We may in the future acquire businesses, products or technologies to expand our product offerings and capabilities, customer base and business. We have evaluated and expect to continue to evaluate a wide array of potential strategic transactions. Such investments may involve significant risks and uncertainties, including distraction of management from current operations, unanticipated costs, and legal and regulatory challenges, all of which could have a material adverse impact on our financial condition and results of operations. In addition, the anticipated benefit of any acquisition may never materialize or the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures.
We cannot guarantee that our stock repurchase program will be utilized to the full value approved or that it will enhance long-term stockholder value. Repurchases we consummate could increase the volatility of the price of our common stock and could have a negative impact on our available cash balance.
In July 2022, our Board of Directors authorized a one-year stock repurchase program for up to $100 million of our common stock. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of the purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations consistent with our capital allocation strategy. Stock repurchases could have an impact on our common stock trading prices, increase the volatility of the price of our common stock, or reduce our available cash balance such that we will be required to seek financing to support our operations. The repurchase program does not obligate us to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at our discretion, which may result in a decrease in the trading prices of our common stock. Even if our share repurchase program is fully implemented, it may not enhance long-term stockholder value.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In July 2022, the Company’s Board of Directors authorized a one-year stock repurchase program for up to $100 million of the Company’s common stock. The Company’s repurchases for the three months ended April 1, 2023 are disclosed below (in thousands, except per share amounts):
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||
| January 1, 2023 to January 31, 2023 | — | — | — | $ | 100,000 | ||||||||||||||||||
| February 1, 2023 to February 28, 2023 | — | — | — | 100,000 | |||||||||||||||||||
| March 1, 2023 to April 1, 2023 | 25 | 48.05 | 25 | 98,818 | |||||||||||||||||||
| 25 | 25 | ||||||||||||||||||||||
ITEM 3. Defaults Upon Senior Securities
None.
40
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
41
ITEM 6. Exhibits
| Exhibit Number | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 10.1* | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 101.INS | XBRL Instance Document | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
* Indicates management contract or compensatory plan or arrangement.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CALIX, INC. (Registrant) | |||||||||||
| Date: April 24, 2023 | By: | /s/ Michael Weening | |||||||||
| Michael Weening | |||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: April 24, 2023 | By: | /s/ Cory Sindelar | |||||||||
| Cory Sindelar | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
43
Exhibit 10.1
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (the “Agreement”) is made effective as of May 11, 2023 (“Effective Date”) by and between CALIX, INC., a Delaware corporation (“Company”) and MICHAEL EVERETT, an individual (“Consultant”), for the purpose of setting forth the terms and conditions by which Company will engage Consultant to perform services (“Services”) on a temporary basis.
1.WORK AND PAYMENT.
1.1Project Assignment. Attached to this Agreement as Exhibit A is a project assignment describing the Services that Consultant will perform (“Project Assignment”). This Project Assignment will be subject to the terms and conditions of this Agreement.
1.2Services. Subject to the terms of this Agreement, Consultant will render the Services set forth in the Project Assignment. The manner and means by which Consultant chooses to complete projects are in Consultant’s sole discretion and control. In performing the Services and completing the projects, Consultant will use Consultant’s own equipment, tools and other materials at Consultant’s own expense.
2.CONFIDENTIAL INFORMATION.
2.1Definition. During the term of this Agreement and in the course of Consultant’s performance hereunder, Consultant may receive and otherwise be exposed to Confidential Information. “Confidential Information” shall include confidential and proprietary information relating to Company’s business practices, customer lists, strategies, designs, products, processes, trade secrets, know-how, technologies and inventions, and communications and information protected from disclosure by attorney-client privilege and/or the attorney work product doctrine. Any of such information, in whatever form and whether or not marked as confidential or proprietary, and all derivatives, improvements and enhancements to any of the above, whether provided to Consultant, or created or developed by Consultant under this Agreement, as well as information of third parties as to which Company has an obligation of confidentiality, shall all be treated as the confidential and proprietary information of Company.
2.2Restrictions on Use and Disclosure. Consultant acknowledges the confidential and secret character of the Confidential
Information, and agrees that the Confidential Information is the sole, exclusive and extremely valuable property of Company. Accordingly, Consultant agrees not to use or reproduce the Confidential Information except as necessary in the performance of this Agreement, and not to disclose all or any part of the Confidential Information in any form to any third party, either during or after the term of this Agreement, without the prior written consent of Company. In addition, Consultant represents that during Consultant’s provision of Services, even if before the execution of this Agreement, Consultant has not used the Confidential Information except in the performance of this Agreement without the prior written consent of Company, and has not disclosed all or any part of the Confidential Information in any form to any third party.
2.3Exceptions. The obligations of confidentiality set forth in Section 2.2 will not apply to the extent that such Confidential Information: (a) was generally available to the public or otherwise part of the public domain at the time of disclosure; (b) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of Consultant; (c) was already known to Consultant, without confidentiality restrictions, at the time of disclosure; (d) was disclosed to Consultant, without confidentiality restrictions, by a third party who had no obligation not to disclose such information to others; or (e) was developed independently by Consultant without any use of or reference to the Confidential Information, as shown by Consultant’s contemporaneous written records.
2.4Third Party Information. Consultant shall not disclose or otherwise make available to Company in any manner any confidential information received by Consultant under obligations of confidentiality from a third party.
3.OWNERSHIP; LICENSES.
3.1Work Product; Assignment. Consultant agrees that Company shall be the sole and exclusive owner of all right, title and interest in and to all ideas, inventions, works of authorship, work product, materials, and other deliverables (i) conceived, made, developed, reduced to practice, or worked on by Consultant in the course of providing services for Company prior to the date of this Agreement, (ii) that Consultant conceives, makes, develops or works on in the course of providing the
CALIX CONFIDENTIAL Page 1 of 5
Services for Company following execution of this Agreement, and (iii) all patent, copyright, trademark, trade secret and other intellectual property rights in any of the foregoing, whether now known or hereafter recognized in any jurisdiction (collectively, “Work Product”). Consultant hereby assigns to Company all of Consultant’s right, title and interest in and to any and all Work Product. Consultant hereby waives any applicable moral rights in the Work Product.
3.2Assistance. Consultant agrees to execute all papers, including patent applications, invention assignments and copyright assignments, and otherwise agrees to assist Company as reasonably required at Company’s reasonable expense to perfect in Company the right, title and other interest in Work Product expressly granted to Company under this Agreement.
3.3License to Perform Services. Company hereby grants to Consultant a non-exclusive, limited license during the term of this Agreement, under all intellectual property rights owned or controlled by Company, solely to the extent required for Consultant to perform Services in accordance with the terms of this Agreement. With the exception of the foregoing limited license, no right, title or interest in or to any intellectual property rights of the Company are granted to Consultant under this Agreement.
4.TERM AND TERMINATION. The initial term of this Agreement shall begin on the Effective Date and continue for a period of one (1) year unless terminated under this Section 4. Following the initial term, this Agreement shall automatically renew for additional ninety (90) day terms, unless earlier terminated under this Section 4. Either party may terminate this Agreement at any time upon ninety (90) calendar days’ advance written notice. Sections 2 through 6 shall survive expiration or any termination of this Agreement.
5.INDEPENDENT CONTRACTOR. Consultant’s relationship with Company will be that of an independent contractor and nothing in this Agreement should be construed to create a partnership, joint venture, or employer-employee relationship. Consultant is not the agent of Company in performing its duties under this Agreement, and is not authorized to make any representation, warranty, contract, or commitment on behalf of Company in its capacity as a Consultant hereunder. Consultant will be solely responsible for all tax returns and payments required to be filed with or made to any federal, state or local tax authority with respect to Consultant’s performance of services and receipt of fees under this Agreement. Because Consultant is an
independent contractor, Company will not withhold or make payments for social security, make unemployment insurance or disability insurance contributions, or obtain worker’s compensation insurance on Consultant’s behalf. Consultant agrees to accept exclusive liability for complying with all applicable state and federal laws governing self-employed individuals, including obligations such as payment of taxes, social security, disability and other contributions based on fees paid to Consultant under this Agreement.
6.GENERAL.
6.1Assignment. The parties’ rights and obligations under this Agreement will bind and inure to the benefit of their respective successors, heirs, executors, administrators and permitted assigns. Company may freely assign this Agreement, and Consultant expressly agrees that any intellectual property rights licensed to Company are transferable to Company’s assignee without Consultant’s consent. Consultant shall not assign this Agreement or Consultant’s rights or obligations hereunder without the prior written consent of Company. Any such purported assignment not in accordance with this Section 6.1 shall be null and void.
6.2Governing Law; Jurisdiction. The rights and obligations of the parties under this Agreement shall be governed in all respects by the laws of the State of California without regard to conflict of law principles. Consultant agrees that, upon Company’s request, all disputes arising hereunder shall be adjudicated in the state and federal courts having jurisdiction over disputes arising in San Francisco, California, and Consultant hereby agrees to consent to the personal jurisdiction of such courts.
6.3Notices. All notices or reports permitted or required under this Agreement shall be in writing and shall be delivered by personal delivery, electronic mail, facsimile transmission or by certified or registered mail, return receipt requested, and shall be deemed given upon personal delivery, five days after deposit in the mail, or upon acknowledgment of receipt of electronic transmission. Notices shall be sent to such address as either party may specify in writing.
6.4Entire Agreement; Waiver and Modification; Severability; Construction. This Agreement may not be waived, modified or amended unless mutually agreed upon in writing by both parties. As used in this Agreement, the words “include” and “including,” and variations thereof, will be deemed to be followed by the words “without limitation.” In the event any provision of
CALIX CONFIDENTIAL Page 2 of 5
this Agreement is found to be legally unenforceable, such unenforceability shall not prevent enforcement of any other provision of this Agreement. The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be applied in the construction or interpretation of this Agreement. This agreement may be executed in two or more counterparts, each of which will be considered an original, but all of which together will constitute one and the same instrument. This Agreement and any
Project Assignments agreed upon by the parties constitute the parties’ final, exclusive and complete understanding and agreement with respect to the subject matter hereof, and supersede all prior and contemporaneous understandings and agreements relating to its subject matter. In the event of any conflict between this Agreement and any Project Assignment, this Agreement shall govern.
(Signature Page Follows)
CALIX CONFIDENTIAL Page 3 of 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.
| CALIX, INC. | MICHAEL EVERETT | ||||
By: /s/ Cory Sindelar | By: /s/ Michael Everett | ||||
| Name: Cory Sindelar | |||||
| Title: Chief Financial Officer | |||||
Date: March 30, 2023 | Date: March 30, 2023 | ||||
SIGNATURE PAGE TO
CALIX, INC. CONSULTING AGREEMENT
CALIX CONFIDENTIAL Page 4 of 5
Appendices
Exhibit A
Project Assignment
Initial term: One (1) year.
Work to be performed: Consulting and advisory services with respect to Company strategic audit and legal matters, and such other matters based on Consultant’s experience and expertise as may be agreed between Company and Consultant from time to time.
Payment: For performance of the Services, the Company to pay Consultant the sum of $21,000 per quarter (payable in arrears).
Expenses to be reimbursed: Reasonable and necessary expenses related to travel and other direct expenses incurred in connection with rendering the Work to be Performed, not to exceed $15,000 for the initial term unless approved in advance by the Company in writing.
APPROVED BY:
| CALIX, INC. | MICHAEL EVERETT | ||||
By: /s/ Cory Sindelar | By: /s/ Michael Everett | ||||
| Name: Cory Sindelar | |||||
| Title: Chief Financial Officer | |||||
Date: March 30, 2023 | Date: March 30, 2023 | ||||
SIGNATURE PAGE TO EXHIBIT A TO
CALIX, INC. CONSULTING AGREEMENT
CALIX CONFIDENTIAL Page 5 of 5
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michael Weening, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Calix, Inc. for the quarter ended April 1, 2023;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 24, 2023 | /s/ Michael Weening | |||||||||||||
| Michael Weening | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Cory Sindelar, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Calix, Inc. for the quarter ended April 1, 2023;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 24, 2023 | /s/ Cory Sindelar | |||||||||||||
| Cory Sindelar | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Weening, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Calix, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended April 1, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company.
| Date: April 24, 2023 | /s/ Michael Weening | |||||||||||||
| Michael Weening | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
I, Cory Sindelar, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Calix, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended April 1, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company.
| Date: April 24, 2023 | /s/ Cory Sindelar | |||||||||||||
| Cory Sindelar | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Calix, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.