UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 2, 2021
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
Commission File No. 000-25826
_____________________________________________________
(Exact name of registrant as specified in its charter)
_____________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||
(408 ) 542-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | 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 ý No ¨
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 ý No ¨
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.
| Large accelerated filer | ¨ | ý | |||||||||
| 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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on May 3, 2021 was 101,087,383 .
TABLE OF CONTENTS
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
| April 2, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Convertible debt, current | $ | $ | |||||||||
| Other debts, current | |||||||||||
| Accounts payable | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities, current | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Convertible debt, non-current | |||||||||||
| Other debts, non-current | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Convertible debt (Note 6) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
Accumulated other comprehensive income | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
| Three months ended | |||||||||||
| April 2, 2021 | March 27, 2020 | ||||||||||
| Revenue: | |||||||||||
| Appliance and integration | $ | $ | |||||||||
| SaaS and service | |||||||||||
| Total net revenue | |||||||||||
| Cost of revenue: | |||||||||||
| Appliance and integration | |||||||||||
| SaaS and service | |||||||||||
| Total cost of revenue | |||||||||||
| Total gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Research and development | |||||||||||
| Selling, general and administrative | |||||||||||
| Amortization of intangibles | |||||||||||
| Restructuring and related charges | |||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Interest expense, net | ( | ( | |||||||||
| Other income (expense), net | ( | ||||||||||
| Loss before income taxes | ( | ( | |||||||||
| Provision for income taxes | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per share: | |||||||||||
| Basic and diluted | $ | ( | $ | ( | |||||||
| Shares used in per share calculation: | |||||||||||
| Basic and diluted | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
| Three months ended | |||||||||||
| April 2, 2021 | March 27, 2020 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Change in foreign currency translation adjustments | ( | ( | |||||||||
| Other comprehensive loss before tax | ( | ( | |||||||||
| Provision for (benefit from) income taxes | ( | ||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||
| Total comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Three Months Ended April 2, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Issuance of common stock under stock option, award and purchase plans | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Reclassification from equity to mezzanine equity for 2022 Notes | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance at April 2, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
Three Months Ended March 27, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Issuance of common stock under stock option, award and purchase plans | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of warrant | ( | — | — | ||||||||||||||||||||||||||||||||
| Reclassification from mezzanine equity to equity for 2020 Notes | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at March 27, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Three months ended | |||||||||||
| April 2, 2021 | March 27, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangibles | |||||||||||
| Stock-based compensation | |||||||||||
| Amortization of convertible debt discount | |||||||||||
| Amortization of warrant | |||||||||||
| Foreign currency remeasurement | ( | ( | |||||||||
| Deferred income taxes | |||||||||||
| Provision for expected credit losses and returns | |||||||||||
| Provision for excess and obsolete inventories | |||||||||||
| Other adjustments | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Deferred revenues | |||||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payment of convertible debt issuance costs | ( | ||||||||||
| Repayment of other debts | ( | ( | |||||||||
| Proceeds from common stock issued to employees | |||||||||||
| Payment of tax withholding obligations related to net share settlements of restricted stock units | ( | ( | |||||||||
| 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 | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Income taxes, net of refunds | $ | $ | |||||||||
| Interest payments | $ | $ | |||||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||||||
| Capital expenditures incurred but not yet paid | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
HARMONIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and include the accounts of Harmonic Inc. and its controlled subsidiaries (collectively, “Harmonic” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of balance sheet dates and its operating results and cash flows for the interim periods presented. Operating results for the three month period ended April 2, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB, or other standards setting bodies, that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
9
NOTE 3: CONTRACT ASSETS AND DEFERRED REVENUE
Contract Balances. Contract assets exist when the Company has satisfied a performance obligation but does not have an unconditional right to consideration (e.g., because the entity first must satisfy another performance obligation in the contract before it is entitled to invoice the customer). Deferred revenue represents the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer.
Contract assets and deferred revenue consisted of the following:
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Contract assets | $ | $ | |||||||||
| Deferred revenue | $ | $ | |||||||||
Contract assets and Deferred revenue (long-term) are reported as components of “Prepaid expenses and other current assets” and “Other non-current liabilities,” respectively, on the Condensed Consolidated Balance Sheets.
During the three months ended April 2, 2021 and March 27, 2020, the Company recognized revenue of $30.4 million and $18.0 million, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year.
In July 2019, Comcast elected enterprise license pricing for the Company’s CableOS® software under certain existing commercial agreements between the Company and Comcast (the “CableOS software license agreement”), which also includes maintenance and support services, and material rights. As of April 2, 2021, the aggregate amount of the transaction price under this agreement allocated to the remaining performance obligations is $68.3 million, and the Company will recognize this revenue as the related performance obligations are delivered over the next 27 months.
Refer to Note 9, “Segment Information” for disaggregated revenue information.
NOTE 4: LEASES
The components of lease expense are as follows:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Operating lease cost | $ | $ | |||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
Supplemental information related to leases are as follows:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Cash payments | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | |||||||||
10
NOTE 5: OTHER FINANCIAL STATEMENT INFORMATION
The following tables provide details of selected balance sheet components:
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Accounts receivable, net: | |||||||||||
| Accounts receivable | $ | $ | |||||||||
| Less: allowances for expected credit losses and sales returns | ( | ( | |||||||||
| Total | $ | $ | |||||||||
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Inventories: | |||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Service-related spares | |||||||||||
| Total | $ | $ | |||||||||
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Prepaid expenses and other current assets: | |||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Contract assets | |||||||||||
| Other current assets | |||||||||||
| Total | $ | $ | |||||||||
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Property and equipment, net: | |||||||||||
| Machinery and equipment | $ | $ | |||||||||
| Capitalized software | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Construction-in-progress | |||||||||||
| Property and equipment, gross | |||||||||||
| Less: accumulated depreciation and amortization | ( | ( | |||||||||
| Total | $ | $ | |||||||||
| As of | |||||||||||
| (in thousands) | April 2, 2021 | December 31, 2020 | |||||||||
| Other current liabilities: | |||||||||||
| Accrued employee compensation and related expenses | $ | $ | |||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
11
NOTE 6: CONVERTIBLE DEBT
In June 2020, the Company issued the 2022 Notes with an aggregate principal amount of $37.7 million in a non-cash exchange for its 2020 Notes with an equal principal amount pursuant to an indenture, dated June 2, 2020 (the “2022 Notes Indenture”), by and between the Company and U.S. Bank National Association, as trustee. The 2022 Notes bear interest at a rate of 4.375 % per year, payable in cash on June 1 and December 1 of each year. The 2022 Notes will mature on December 1, 2022, unless earlier repurchased or redeemed by the Company, or converted pursuant to their terms.
The 2022 Notes are convertible into cash, shares of the Company’s common stock, par value $0.001 (“Common Stock”), or a combination thereof, at the Company’s election, at an initial conversion rate of 173.9978 shares of Common Stock per $1,000 principal amount of 2020 Notes (which is equivalent to an initial conversion price of approximately $5.75 per share). The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances as set forth in the 2022 Notes Indenture.
Prior to the close of business on the business day immediately preceding September 1, 2022, the 2022 Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ended on June 26, 2020 (and only during such fiscal quarter), if the last reported sale price of Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of Common Stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. Commencing on September 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2022 Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.
As the 2022 Notes were issued in exchange for the 2020 Notes, which was accounted for as an extinguishment, the 2022 Notes were initially accounted for at fair value, which was estimated to be $44.4 million. In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the 2022 Notes was initially valued at $8.3 million and bifurcated from the host debt instrument and recorded in “Additional paid-in capital.” The remaining amount of $36.0 million, which represents the fair value of the liability component of the 2022 Notes, was recorded as the initial carrying value of the 2022 Notes. The initial debt discount on the 2022 Notes is $1.7 million, calculated as the difference between the stated principal amount of $37.7 million and the initial carrying value of the liability component of $36.0 million. The debt discount is being amortized to interest expense at the effective interest rate over the contractual term of the 2022 Notes.
| As of | |||||||||||
| (in thousands, except for years and percentages) | April 2, 2021 | December 31, 2020 | |||||||||
| Liability component: | |||||||||||
| Principal amount | $ | $ | |||||||||
| Less: Debt discount, net of amortization | ( | ( | |||||||||
| Less: Debt issuance costs, net of amortization | ( | ( | |||||||||
| Carrying amount | $ | $ | |||||||||
| Remaining debt discount amortization period (years) | |||||||||||
| Effective interest rate on liability component | % | % | |||||||||
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Contractual interest expense | $ | n/a | |||||||||
| Amortization of debt discount | n/a | ||||||||||
| Amortization of debt issuance costs | n/a | ||||||||||
| Total interest expense recognized | $ | n/a | |||||||||
12
The 2022 Notes became convertible as of April 2, 2021, as the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending on April 2, 2021 was greater than 130 % of the conversion price of the 2022 Notes on each applicable trading day. As a result of the 2022 Notes becoming convertible for cash up to the principal amount of $37.7 million, the Company reclassified the unamortized debt discount for the 2022 Notes in the amount of $1.6 million from “Additional paid-in-capital” to “Convertible Debt” in the mezzanine equity section in the Condensed Consolidated Balance Sheet as of April 2, 2021. Additionally, all $36.1 million of the net carrying amount of the liability component of the 2022 Notes outstanding as of April 2, 2021 was classified as a current liability as of that date.
In September 2019, the Company issued the 2024 Notes with an aggregate principal amount of $115.5 million pursuant to an indenture (the “2024 Notes Indenture”), dated September 13, 2019, by and between the Company and U.S. Bank National Association, as trustee. The 2024 Notes bear interest at a rate of 2.00 % per year, payable semiannually on March 1 and September 1 of each year. The 2024 Notes will mature on September 1, 2024, unless earlier repurchased or redeemed by the Company, or converted pursuant to their terms.
The 2024 Notes are convertible into cash, shares of the Company’s common stock, par value $0.001 (“Common Stock”), or a combination thereof, at the Company’s election, at an initial conversion rate of 115.5001 shares of Common Stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $8.66 per share). The conversion rate, and thus the effective conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes or a notice of redemption and under other circumstances, in each case, as set forth in the 2024 Notes Indenture.
Prior to the close of business on the business day immediately preceding June 1, 2024, the 2024 Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on December 31, 2019, and only during such fiscal quarter, if the last reported sale price of the Common Stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price for the 2024 Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Common Stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the 2024 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after June 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2024 Notes may convert all or any portion of their 2024 Notes regardless of the foregoing conditions.
In accordance with the accounting guidance on embedded conversion features, the conversion feature associated with the 2024 Notes was valued at $24.9 million and bifurcated from the host debt instrument and recorded in “Additional paid-in capital”. The resulting debt discount on the 2024 Notes is being amortized to interest expense at the effective interest rate over the contractual term of the 2024 Notes.
The following table presents the components of the 2024 Notes:
| As of | |||||||||||
| (in thousands, except for years and percentages) | April 2, 2021 | December 31, 2020 | |||||||||
| Liability component: | |||||||||||
| Principal amount | $ | $ | |||||||||
| Less: Debt discount, net of amortization | ( | ( | |||||||||
| Less: Debt issuance costs, net of amortization | ( | ( | |||||||||
| Carrying amount | $ | $ | |||||||||
| Remaining debt discount amortization period (years) | |||||||||||
| Effective interest rate on liability component | % | % | |||||||||
13
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Contractual interest expense | $ | $ | |||||||||
| Amortization of debt discount | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Total interest expense recognized | $ | $ | |||||||||
NOTE 7: FAIR VALUE MEASUREMENTS
The Company’s financial instruments not measured at fair value on a recurring basis were as follows:
| April 2, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Carrying | Fair Value | Carrying | Fair Value | ||||||||||||||||||||||||||||||||
(in thousands) | Value | Level 1 | Level 2 | Level 3 | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| 2022 Notes | $ | $ | — | $ | $ | — | $ | $ | — | $ | $ | — | |||||||||||||||||||||||
| 2024 Notes | $ | $ | — | $ | $ | — | $ | $ | — | $ | $ | — | |||||||||||||||||||||||
The fair value of the Company’s convertible notes is influenced by interest rates, the Company’s stock price and stock market volatility. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion as of each respective balance sheet date.
NOTE 8: EARNINGS PER SHARE
The diluted net loss per share was the same as basic net loss per share for the three months ended April 2, 2021 and March 27, 2020, as the inclusion of potential common shares outstanding would have been anti-dilutive due to the Company’s net losses for all periods presented. The following table sets forth the potential weighted common shares outstanding that were excluded from the diluted net loss per share computation:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Convertible debt | |||||||||||
| Stock options | |||||||||||
| Restricted stock units | |||||||||||
| Stock purchase rights under the ESPP | |||||||||||
| Total | |||||||||||
The Company applies the treasury stock method to determine the potential dilutive effect of its convertible debt on net earnings per share as a result of the Company's intent and stated policy to settle the principal amount of its convertible debt in cash. Under the treasury stock method, the Company’s convertible debt is excluded from the calculation of diluted earnings per share for the periods when its conversion price exceeds the average market price for the Company's common stock. Under the if-converted method, the Company’s convertible debt has potential dilutive effect of 19.9 million shares.
14
NOTE 9: SEGMENT INFORMATION
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Video | |||||||||||
| Revenue | $ | $ | |||||||||
| Gross profit | |||||||||||
| Operating income (loss) | ( | ||||||||||
| Cable Access | |||||||||||
| Revenue | $ | $ | |||||||||
| Gross profit | |||||||||||
| Operating income (loss) | ( | ||||||||||
| Total | |||||||||||
| Revenue | $ | $ | |||||||||
| Gross profit | |||||||||||
| Operating income (loss) | $ | $ | ( | ||||||||
A reconciliation of the Company’s consolidated segment operating income (loss) to consolidated loss before income taxes:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Total consolidated segment operating income (loss) | $ | $ | ( | ||||||||
Unallocated corporate expenses(1) | ( | ( | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
| Consolidated income (loss) from operations | ( | ( | |||||||||
| Non-operating expense, net | ( | ( | |||||||||
| Loss before income taxes | $ | ( | $ | ( | |||||||
(1) Together with amortization of intangibles and stock-based compensation, the Company does not allocate restructuring and related charges to the operating income (loss) for each segment because management does not include this information in the measurement of the performance of the operating segments.
Geographic Information
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
Net revenue (1) | |||||||||||
| United States | $ | $ | |||||||||
| Other countries | |||||||||||
| Total | $ | $ | |||||||||
(1) Revenue is attributed to countries based on the location of the customer.
15
NOTE 10: COMMITMENTS AND CONTINGENCIES
Indemnification
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, audits of royalty payments for licensed technology and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimated loss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which the Company is a party specify the damages claimed, such claims may not represent reasonably probable losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Harmonic,” “Company,” “we,” “us,” “its,” and “our,” as used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), refer to Harmonic Inc. and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.
Some of the statements contained in this Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:
•the impact of the COVID-19 pandemic, and related responses of businesses and governments to the pandemic, on our operations and personnel, on commercial activity in the markets in which we operate and worldwide and regional economies, and on our results of operations;
•developing trends and demands in the markets we address, particularly emerging markets;
•economic conditions, particularly in certain geographies, and in financial markets;
•new and future products and services;
•spending of our customers;
•our strategic direction, future business plans and growth strategy;
•industry and customer consolidation;
•expected demand for and benefits of our products and services;
•concentration of revenue sources;
•expectations regarding our CableOS solutions and SaaS solutions;
•potential future acquisitions and dispositions;
•anticipated results of potential or actual litigation;
•our competitive environment;
•the impact of our restructuring plans;
•the impact of governmental regulations, including with respect to tariffs and economic sanctions;
•anticipated revenue and expenses, including the sources of such revenue and expenses;
•expected impacts of changes in accounting rules;
•expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;
•expectations and estimates related to goodwill and intangible assets and their associated carrying value; and
•use of cash, cash needs and ability to raise capital, including repaying our convertible notes.
These statements are subject to known and unknown risks, uncertainties and other factors, any of which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “Risk Factors” in Item 1A of Part II of this Form 10-Q. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements.
17
OVERVIEW
We are a leading global provider of (i) versatile and high performance video delivery software, products, system solutions and services that enable our customers to efficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and streaming video services to consumer devices, including televisions, personal computers, laptops, tablets and smart phones and (ii) cable access solutions that enable cable operators to more efficiently and effectively deploy high-speed internet, for data, voice and video services to consumers’ homes.
We classify our total revenue in two categories, “Appliance and integration” and “SaaS and service.” The “Appliance and integration” revenue category includes hardware, licenses and professional services and is reflective of non-recurring revenue, while the “SaaS and service” category includes usage fees for our software-as-a-service (“SaaS”) platform and support revenue stream from our appliance-based customers and reflects our recurring revenue stream.
We conduct business in three geographic regions - the Americas, EMEA and APAC - and operate in two segments, Video and Cable Access. Our Video business sells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telecommunications (“telco”) Pay-TV service providers, which we refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming media companies. Our Video business infrastructure solutions are delivered either through shipment of our products, software licenses or as SaaS subscriptions. Our Cable Access business sells cable access solutions and related services, including our CableOS software-based cable access solution, primarily to cable operators globally.
Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. and international markets, including the impacts of the COVID-19 pandemic; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customers suspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our product portfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets in which we compete, our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with other equipment manufacturers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products for new applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/or contractual demands of our customers, which could result in higher operating costs for us.
The worldwide spread of COVID-19 has resulted in public health responses in affected regions, including travel bans and restrictions, social distancing requirements, and shelter-in-place orders, which have caused a global slowdown of economic activity and negatively impacted our business, operations and financial performance. In our Cable Access segment, COVID-19 led to delays in certain deployments and new engagements with some cable operators. In our Video segment, sales of video appliances and integration fell following the spread of COVID-19 as transactions or shipments were delayed and we were unable to complete certain field deployment projects as customer facilities closed in the first half of 2020. In the second half of fiscal 2020 and the first quarter of 2021, we experienced an increase in sales activities, transactions and deployments in both business segments due to the loosening of certain COVID-19 restrictions, and customer adaptation to such restrictions. We expect that the COVID-19 pandemic may continue to have an impact on our results of operations.
We continue to monitor the impact of the COVID-19 pandemic and we have adopted several measures in response to COVID-19, including instructing employees to work from home, making adjustments to our expenses and cash flow to correlate with declines in revenues, and restricting non-essential business travel by our employees. The extent to which our operations will be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the evolving severity of the pandemic in different countries and regions of the world, vaccination efforts, and other actions by governments and businesses in response to the pandemic. As such, given the uncertainty around the duration and severity of the impact on market conditions and the business environment, we cannot reasonably estimate the full impacts of the COVID-19 pandemic on our future results of operations. Refer to “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q for additional information.
We believe a material and growing portion of the opportunities for our Video business are linked to the industry and our customers (i) continuing to adopt streaming technologies to capture, process and deliver video content to consumers and, increasingly, utilizing public cloud solutions like our VOS®360 SaaS platform to do so; (ii) transforming existing broadcast infrastructure workflows into more flexible, efficient and cost-effective operations running in public clouds; and (iii) for those customers maintaining on-premise video delivery infrastructure, continuing to upgrade and replace aging equipment with next-generation software-based appliances that significantly reduce operational complexity. Our Video business strategy is focused on continuing to develop and deliver products, solutions and services to enable and support these trends.
18
Our Cable Access strategy is focused on continuing to develop and deliver software-based cable access technologies, which we refer to as our CableOS solutions, to our cable operator customers. We believe our CableOS software-based cable access solutions are superior to hardware-based systems and deliver unprecedented scalability, agility and cost savings for our customers. Our CableOS solutions, which can be deployed based on a centralized, DAA or hybrid architecture, enable our customers to migrate to multi-gigabit broadband capacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe our CableOS solutions resolve space and power constraints in cable operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and will help us become a major player in the cable access market. In the meantime, we believe our Cable Access segment is gaining momentum in the marketplace as our customers have begun to adopt new virtualized DOCSIS 3.1 CMTS solutions and distributed access architectures. We continue to make progress in the development of our CableOS solutions and in the growth of our CableOS business, with expanded commercial deployments, field trials, and customer engagements.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Our critical accounting policies, judgments and estimates are disclosed in our 2020 Annual Report on Form 10-K, as filed with the SEC. There have been no significant changes to these policies during the three months ended April 2, 2021.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, refer to Note 2 to the Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
RESULTS OF OPERATIONS
Net Revenue
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Appliance and integration | 79,976 | $ | 47,752 | $ | 32,224 | 67 | % | |||||||||||||
| as % of total net revenue | 72 | % | 61 | % | ||||||||||||||||
| SaaS and service | 31,600 | 30,665 | 935 | 3 | % | |||||||||||||||
| as % of total net revenue | 28 | % | 39 | % | ||||||||||||||||
| Total net revenue | $ | 111,576 | $ | 78,417 | $ | 33,159 | 42 | % | ||||||||||||
Appliance and integration net revenue increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to an increase in our Video segment net revenue reflecting the impact from the COVID-19 pandemic on results of the first quarter in fiscal 2020 and an increase in our Cable Access segment net revenue driven by the increased penetration of our existing CableOS customers and addition of new CableOS customer deployments.
SaaS and service net revenue did not change significantly.
Gross Profit
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Gross profit | $ | 55,145 | $ | 36,738 | $ | 18,407 | 50 | % | ||||||||||||
| as % of total net revenue (“gross margin”) | 49 | % | 47 | % | 3 | % | ||||||||||||||
Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.
Our gross margin increased in the three months ended April 2, 2021 compared to the corresponding period in 2020, primarily due to favorable product mix.
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Research and Development Expenses
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Research and development | $ | 23,528 | $ | 22,123 | $ | 1,405 | 6 | % | ||||||||||||
| as % of total net revenue | 21 | % | 28 | % | ||||||||||||||||
Our research and development expenses consist primarily of employee salaries and related expenses, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products. The research and development expenses are net of French R&D tax credits.
Research and development expenses increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to higher employee compensation costs as a result of headcount increases.
Selling, General and Administrative Expenses
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Selling, general and administrative | $ | 34,911 | $ | 31,218 | $ | 3,693 | 12 | % | ||||||||||||
| as % of total net revenue | 31 | % | 40 | % | ||||||||||||||||
Selling, general and administrative expenses increased in the three months ended April 2, 2021 compared to the corresponding period in 2020, primarily due to higher employee compensation costs as a result of headcount increases and higher stock-based compensation expense related to performance-based RSUs.
Amortization of Intangibles
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Amortization of intangibles | $ | 507 | $ | 770 | $ | (263) | (34) | % | ||||||||||||
| as % of total net revenue | — | % | 1 | % | ||||||||||||||||
The amortization of intangibles expense in the three months ended April 2, 2021 decreased compared to the corresponding period in 2020 as certain intangible assets became fully amortized.
Restructuring and Related Charges
We have implemented several restructuring plans in the past few years. The goal of these plans is to bring operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense control programs. We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating expenses-restructuring and related charges” in the Condensed Consolidated Statement of Operations.
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Cost of revenue | $ | (36) | $ | (73) | 37 | (51) | % | |||||||||||||
| Operating expenses-Restructuring and related charges | 43 | 676 | (633) | (94) | % | |||||||||||||||
| Total restructuring and related charges | $ | 7 | $ | 603 | (596) | (99) | % | |||||||||||||
Restructuring and related charges in the three months ended April 2, 2021 decreased compared to the corresponding period in 2020, primarily due to lower severance and employee benefit costs recorded in conjunction with restructuring activities during the first quarter of fiscal 2021.
20
Interest Expense, Net
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Interest expense, net | $ | (2,603) | $ | (2,903) | $ | 300 | (10) | % | ||||||||||||
Interest expense, net decreased in the three months ended April 2, 2021 compared to the corresponding period in 2020, primarily due to the repayment of the 2020 Notes in December 2020 upon their maturity.
Other Income (Expense), Net
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Other income (expense), net | $ | 1,019 | $ | (273) | $ | 1,292 | (473) | % | ||||||||||||
Other income (expense), net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currency of the reporting entity. Our foreign currency exposure is primarily driven by fluctuations in the foreign currency exchange rates of the Euro, British pound, Japanese yen and Israeli shekel. Change in other income (expense), net in the three months ended April 2, 2021 compared to the corresponding period in 2020 was primarily due to foreign currency exchange gains resulting from the fluctuation of the Euro against the U.S. dollar in 2021.
Income Taxes
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Provision for income taxes | $ | 696 | $ | 729 | $ | (33) | (5) | % | ||||||||||||
Change in provision for income taxes was insignificant. Our tax expense primarily consists of foreign income and withholding taxes which are materially consistent on quarterly basis.
21
Segment Financial Results
| Three months ended | ||||||||||||||||||||
| (in thousands, except percentages) | April 2, 2021 | March 27, 2020 | change | |||||||||||||||||
| Video | ||||||||||||||||||||
| Revenue | $ | 70,331 | $ | 54,372 | $ | 15,959 | 29 | % | ||||||||||||
| as % of total segment revenue | 63 | % | 69 | % | (6) | % | ||||||||||||||
| Gross profit | 38,774 | 27,907 | 10,867 | 39 | % | |||||||||||||||
| Gross margin % | 55 | % | 51 | % | 4 | % | ||||||||||||||
| Operating income (loss) | 3,772 | (6,267) | 10,039 | (160) | % | |||||||||||||||
| Operating margin % | 5 | % | (12) | % | 17 | % | ||||||||||||||
| Cable Access | ||||||||||||||||||||
| Revenue | $ | 41,245 | $ | 24,045 | $ | 17,200 | 72 | % | ||||||||||||
| as % of total segment revenue | 37 | % | 31 | % | 6 | % | ||||||||||||||
| Gross profit | 17,408 | 10,414 | 6,994 | 67 | % | |||||||||||||||
| Gross margin % | 42 | % | 43 | % | (1) | % | ||||||||||||||
| Operating income (loss) | 1,296 | (3,265) | 4,561 | (140) | % | |||||||||||||||
| Operating margin % | 3 | % | (14) | % | 17 | % | ||||||||||||||
| Total | ||||||||||||||||||||
| Segment revenue | $ | 111,576 | $ | 78,417 | $ | 33,159 | 42 | % | ||||||||||||
| Gross profit | 56,182 | 38,321 | 17,861 | 47 | % | |||||||||||||||
| Operating income (loss) | 5,068 | (9,532) | 14,600 | (153) | % | |||||||||||||||
A reconciliation of our consolidated total segment operating income (loss) to consolidated loss before income taxes is as follows:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Total consolidated segment operating income (loss) | $ | 5,068 | $ | (9,532) | |||||||
Unallocated corporate expenses (1) | (7) | (603) | |||||||||
| Stock-based compensation | (8,398) | (6,259) | |||||||||
| Amortization of intangibles | (507) | (1,655) | |||||||||
| Loss from operations | (3,844) | (18,049) | |||||||||
| Non-operating expense, net | (1,584) | (3,176) | |||||||||
| Loss before income taxes | $ | (5,428) | $ | (21,225) | |||||||
(1) Together with amortization of intangibles and stock-based compensation, we do not allocate restructuring and related charges, and certain other non-recurring charges, to the operating income (loss) for each segment because our management does not include this information in the measurement of the performance of the operating segments.
Video
Our Video segment net revenue increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to an increase in Video appliance and integration revenue reflecting the impact from the COVID-19 pandemic on results of the first quarter in fiscal 2020. Video segment operating margin increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to the increase in revenue and gross profit.
Cable Access
Our Cable Access segment net revenue increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily driven by the increased penetration of our existing CableOS customers and addition of new CableOS customer deployments. Cable Access segment operating margin increased in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to revenue growth partially offset by higher R&D expenses resulting from headcount increases.
22
Liquidity and Capital Resources
As of April 2, 2021, our principal sources of liquidity consisted of cash and cash equivalents of $100.8 million, accounts receivable, net, of $85.7 million, and our $25.0 million revolving credit facility with JPMorgan Chase Bank, N.A.
As of April 2, 2021, $68.0 million of the cash and cash equivalents balance was held outside of the United States. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these funds.
Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, payroll, restructuring expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment and other contractual obligations for the foreseeable future. We are monitoring and managing our cash position in light of ongoing market conditions due to COVID-19. We believe that our existing sources of liquidity will be sufficient to fund our principal uses of cash for at least the next 12 months. However, we may need to raise additional funds to fund our operations, to take advantage of unanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in, or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
The table below sets forth selected cash flow data:
| Three months ended | |||||||||||
| (in thousands) | April 2, 2021 | March 27, 2020 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,678 | $ | (11,041) | |||||||
| Investing activities | (3,645) | (11,224) | |||||||||
| Financing activities | 4,664 | 1,730 | |||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (565) | (811) | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 2,132 | $ | (21,346) | |||||||
Operating Activities
Net cash provided by operating activities increased $12.7 million in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to a decrease in net loss.
We expect that cash provided by or used in operating activities may fluctuate in future periods as a result of a number of factors, including, but not limited to, the impact of COVID-19 on demand for our offerings, fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, and the timing and amount of compensation and other payments.
Investing Activities
Net cash used in investing activities decreased $7.6 million in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to higher purchases of property and equipment relating to the leasehold improvements of the new headquarters which was under construction during fiscal 2020.
Financing Activities
Net cash provided by financing activities increased $2.9 million in the three months ended April 2, 2021, compared to the corresponding period in 2020, primarily due to higher proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of April 2, 2021.
23
Contractual Obligations
Future payments under contractual obligations as of April 2, 2021 are as follows:
| Payments due in | |||||||||||||||||||||||||||||
| (in thousands) | Total | 2021 (Remaining nine months) | 2022 and 2023 | 2024 and 2025 | Thereafter | ||||||||||||||||||||||||
| Convertible debt | $ | 153,207 | $ | — | $ | 37,707 | $ | 115,500 | $ | — | |||||||||||||||||||
Operating leases (1) | 40,334 | 5,893 | 11,579 | 9,831 | 13,031 | ||||||||||||||||||||||||
Purchase commitments (2) | 68,072 | 57,169 | 10,903 | — | — | ||||||||||||||||||||||||
Other debts (3) | 20,796 | 5,278 | 10,345 | 3,699 | 1,474 | ||||||||||||||||||||||||
| Interest on convertible debt | 11,385 | 2,805 | 6,270 | 2,310 | — | ||||||||||||||||||||||||
Other commitments (4) | 1,554 | 708 | 829 | 17 | — | ||||||||||||||||||||||||
| Total | $ | 295,348 | $ | 71,853 | $ | 77,633 | $ | 131,357 | $ | 14,505 | |||||||||||||||||||
(1) We lease facilities under operating leases expiring through March 2030. Certain of these leases provide for renewal options for periods ranging from one to five years in the normal course of business.
(2) Includes commitments to purchase inventory and property, plant and equipment. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain contract manufacturers and suppliers that allow them to purchase inventory and services based upon criteria defined by the Company.
(3) Includes financing from French government agencies related to various government incentive programs and the COVID-19 pandemic relief program loans in France and Switzerland.
(4) Primarily includes payments associated with lease arrangements with an initial term of twelve months or less.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our operating results, financial position or liquidity due to adverse changes in market prices and rates. We are exposed to market risk because of changes in interest rates, foreign currency exchange rates, when other currencies held by our subsidiaries are measured against the U.S. dollar, and to changes in the value of financial instruments held by us.
For quantitative and qualitative disclosures about market risk (including foreign currency exchange risk and interest rate risk) affecting the Company, see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Our exposure related to market risk has not changed materially since December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is 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 goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
24
Changes in Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer evaluated the changes in our internal control over financial reporting that occurred during the quarterly period covered by this Form 10-Q. Based on their evaluation, it is concluded that there had been no change in our internal control over financial reporting during the quarter ended April 2, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Although most of our employees are working remotely due to the COVID-19 pandemic, we have not experienced any material impact to our internal controls over financial reporting. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, audits of royalty payments for licensed technology and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, and commercial, employment, and other matters. While certain matters to which we are a party may specify the damages claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.
An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on our business, operating results, financial condition and cash flows.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and other intellectual property rights against us or our customers. Such assertions arise in the normal course of our operations. The resolution of any such assertions and claims cannot be predicted with certainty.
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ITEM 1A. RISK FACTORS
Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Annual Report on Form 10-K. If any of the following risks actually occurs (or if any of those listed elsewhere in this Annual Report on Form 10-K occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
•The COVID-19 pandemic has disrupted and harmed, and may continue to disrupt and harm, our business, financial condition and operating results;
•We depend on cable, satellite and telecommunications (“telco”), and broadcast and media industry spending for our revenue and any material decrease or delay in spending in any of these industries would negatively impact our operating results, financial condition and cash flows;
•The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger transactions could harm our business and our operating results;
•We need to develop and introduce new and enhanced products and solutions in a timely manner to meet the needs of our customers and to remain competitive;
•The markets in which we operate are intensely competitive;
•Our future growth depends on a number of video and broadband industry trends;
•Our software-based cable access product initiatives expose us to certain technology transition risks that may adversely impact our operating results, financial condition and cash flows;
•Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline;
•We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited sources, and we rely on contract manufacturers and other subcontractors; and
•We rely on resellers, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failure to develop and manage our relationships with these customers or the processes and procedures that support them could adversely affect our business.
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Risks Related to Our Business and Our Industry
The COVID-19 pandemic has disrupted and harmed, and may continue to disrupt and harm, our business, financial condition and operating results. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business, financial condition and operating results and the achievement of our strategic objectives.
Our business, operations and financial performance have been negatively impacted by the COVID-19 pandemic and related public health responses, such as travel bans and restrictions, social distancing requirements and shelter-in-place orders. The pandemic and these related responses have caused, and may continue to cause, decreased demand for our offerings or delayed purchasing decisions by our customers, a global slowdown of economic activity (including a decrease in demand for a broad variety of goods and services), supply chain constraints, and significant volatility and disruption of financial markets.
The COVID-19 pandemic has subjected our operations, financial performance and financial condition to a number of risks, including, but not limited to, those discussed below:
•Declines in demand for our offerings or delays in purchasing decisions as a result of COVID-19, which generally occurred in the first half of 2020 and may occur in the future, including as a result of social distancing requirements and shelter-in-place orders limiting our ability to deploy our products, and general economic uncertainty causing a number of businesses to delay or reduce costs.
•Delays in payments or defaults by our customers or if customers terminate their relationships with us or do not renew their agreements on economic or other terms that are favorable to us.
•Challenges in establishing certain new customer relationships due to travel and meeting restrictions as a result of COVID-19; and
•Our modified business practices in response to the pandemic, such as having most of our employees work remotely, canceling all non-essential employee travel, and cancelling, postponing or holding virtually events and meetings. We may in the future be required to, or choose voluntarily to, take additional actions for the health and safety of our workforce, whether in response to government orders or based on our own determinations of what is in the best interests of our employees. To the extent our current or future measures result in decreased productivity, harm our company culture or otherwise negatively affect our business, our financial condition and operating results could be adversely affected.
While we have seen improvement in our markets in recent periods, we remain cautious given recent COVID-19 surges across the globe and the impact the pandemic continues to have on global supply chains and the pricing and availability of certain materials and components. The severity, magnitude and duration of the COVID-19 pandemic, the vapublic health responses and its economic consequences continue to be uncertain, dynamic and difficult to predict, and the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our customers and on our business, operations and financial performance, depends on many factors that are not within our control, including, but not limited, to: government, business and individual actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport, prohibitions on, or voluntary cancellation of, large gatherings of people and social distancing requirements, and modified workplace activities); the impact of the pandemic and actions taken in response to local or regional economies, travel, and economic activity; the availability of government funding programs; general economic uncertainty in key markets and financial market volatility; volatility in our stock price, global economic conditions and levels of economic growth; and the success of vaccination efforts and pace of recovery in the regions and countries where we conduct business, including the impact of any faltering or unsuccessful reopening of economic activity or subsequent outbreaks of COVID-19. As a result of the uncertainty and disrupted market conditions due to the COVID-19 pandemic, our business, operating results and financial condition has been and may continue to be adversely affected.
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We depend on cable, satellite and telco, and broadcast and media industry spending for our revenue and any material decrease or delay in spending in any of these industries would negatively impact our operating results, financial condition and cash flows.
Our revenue has been derived from worldwide sales to service providers and broadcast and media companies, as well as, in recent years, streaming media companies. We expect that these markets will provide our revenue for the foreseeable future. Demand for our products will depend on the magnitude and timing of spending by customers in each of these markets for the purpose of creating, expanding or upgrading their systems. These spending patterns are dependent on a variety of factors, including:
•the impact of general economic conditions, actual and projected, including the impact of the COVID-19 pandemic and government and business responses thereto on the global economy and regional economies;
•access to financing;
•annual budget cycles of customers in each of the industries we serve;
•the impact of industry consolidation;
•customers suspending or reducing spending in anticipation of: (i) new video or cable industry standards; (ii) industry trends and technology shifts, such as virtualization and cloud-based solutions, and (iii) new products, such as products and services based on our VOS software platform or our CableOS software-based cable access solutions;
•delayed or reduced near-term spending as customers transition away from video appliance solutions and adopt new business and operating models enabled by software- and cloud-based solutions, including SaaS unified video processing solutions;
•federal, state, local and foreign government regulation of telecommunications, television broadcasting and streaming media;
•overall demand for communication services and consumer acceptance of new video and data technologies and services;
•competitive pressures, including pricing pressures;
•the impact of fluctuations in currency exchange rates; and
•discretionary end-user customer spending patterns.
In the past, specific factors contributing to reduced spending have included:
•uncertainty and deteriorated market conditions regionally and globally due to the COVID-19 pandemic;
•weak or uncertain economic and financial conditions in the U.S. or one or more international markets;
•uncertainty related to development of industry technology;
•delays in evaluations of new services, new standards and systems architectures by many operators;
•emphasis by operators on generating revenue from existing customers, rather than from new customers, through construction, expansion or upgrades;
•a reduction in the amount of capital available to finance projects of our customers and potential customers;
•proposed and completed business combinations and divestitures by our customers and the length of regulatory review of each;
•completion of a new system or significant expansion or upgrade to a system; and
•bankruptcies and financial restructuring of major customers.
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In the past, adverse economic conditions in one or more of the geographies in which we offer our products have adversely affected our customers’ spending in those geographies and, as a result, our business. During challenging economic times, such as the ongoing COVID-19 pandemic, and in tight credit markets, many customers have delayed and reduced and may continue to delay or reduce capital expenditures. This has resulted and could continue to result in reductions in revenue from our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies and increased price competition. If global economic and market conditions, or economic conditions in the U.S., Europe or other key markets, remain uncertain or deteriorate further, we could experience a material and adverse effect on our business, results of operations, financial condition and cash flows. Additionally, since most of our international revenue is denominated in U.S. dollars, global economic and market conditions may impact currency exchange rates and cause our products to become relatively more expensive to customers in a particular country or region, which could lead to delayed or reduced spending in those countries or regions, thereby negatively impacting our business and financial condition.
In addition, industry consolidation has in the past constrained, and may in the future constrain or delay, spending by our customers. Further, if our product portfolio and product development plans do not position us well to capture an increased portion of the spending of customers in the markets on which we focus, our revenue may decline.
As a result of these various factors and potential issues related to customer spending, we may not be able to maintain or increase our revenue in the future, and our operating results, financial condition and cash flows could be materially and adversely affected.
The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger transactions could harm our business and our operating results.
Historically, a significant portion of our revenue has been derived from relatively few customers, due in part to the consolidation of media customers. Sales to our top 10 customers in the three months ended April 2, 2021 and March 27, 2020 accounted for approximately 61% and 48% of revenue, respectively. Although we continue to seek to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation and customer concentration.
During the three months ended April 2, 2021 and March 27, 2020, Comcast accounted for 23% and 17% of our net revenue, respectively. During the three months ended April 2, 2021, SES accounted for 16% of our net revenue. During the three months ended March 27, 2020, Vodafone accounted for 12% of our net revenue. Further consolidation in the cable industry could lead to additional revenue concentration for us. The loss of any significant customer, or any material reduction in orders from any other significant customer, or our failure to qualify our new products with any significant customer could materially and adversely affect, either long term or in a particular quarter, our operating results, financial condition and cash flows. Further, while Comcast’s election to license our CableOS software contains commitments in license fees to us, if Comcast deploys our solutions more slowly or at a scale that is lower than we anticipate, our operating results, financial condition and cash flows could be materially and adversely effected.
In addition, we are involved in most quarters in one or more relatively large individual transactions. A decrease in the number of the relatively larger individual transactions in which we are involved in any quarter could materially and adversely affect our operating results for that quarter.
As a result of these and other factors, we may be unable to increase our revenues from some or all of the markets we address, or to do so profitably, and any failure to increase revenues and profits from these customers could materially and adversely affect our operating results, financial condition and cash flows.
We need to develop and introduce new and enhanced products and solutions in a timely manner to meet the needs of our customers and to remain competitive.
All of the markets we address are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must continually design, develop, manufacture and sell new or enhanced products and solutions that provide increasingly higher levels of performance and reliability and meet our customers changing needs. However, we may not be successful in those efforts if, among other things, our products and solutions:
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• are not cost effective;
• are not brought to market in a timely manner;
• are not in accordance with evolving industry standards;
• fail to meet market acceptance or customer requirements; or
• are ahead of the needs of their markets.
If new standards or some of our new products are adopted later than we predict or not adopted at all, or if adoption occurs earlier than we are able to deliver the applicable products or functionality, we risk spending significant research and development time and dollars on products or features that may never achieve market acceptance or that miss the customer demand window and thus do not produce the revenue that a timely introduction would have likely produced.
If we fail to develop and market new and enhanced products and solutions on a timely basis, our operating results, financial condition and cash flows could be materially and adversely affected.
The markets in which we operate are intensely competitive.
The markets for our products are extremely competitive and have been characterized by rapid technological change and declining average sales prices in the past.
Our competitors in our Video appliance business include ATEME, MediaKind, Synamedia, Grass Valley, Evertz Microsystems and Imagine Communications. Our competitors in our Video SaaS business include Amazon Web Services (AWS), Brightcove and Verizon Digital Media Services. Our competitors in our Cable Access business include CommScope, Casa Systems and Cisco Systems.
A number of our principal business competitors in both of our business segments are substantially larger and/or may have access to greater financial, technical, marketing or other resources than we have. Consolidation in the Video industry has led to the acquisition of a number of our historic competitors over the last several years by private equity firms and by AWS. With respect to our Cable Access business, our competitors are generally substantially larger than us.
In addition, some of our larger competitors may have more long-standing and established relationships with certain domestic and foreign customers. Many of these large enterprises are in a better position to withstand any significant reduction in spending by customers in our markets and may be better able to navigate periods of market uncertainty, such as the uncertainty caused by the COVID-19 pandemic. They often have broader product lines and market focus, and may not be as susceptible to downturns in a particular market. These competitors may also be able to bundle their products together to meet the needs of a particular customer, and may be capable of delivering more complete solutions than we are able to provide. To the extent large enterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise, competition would likely intensify.
Further, some of our competitors have offered, and in the future may offer, their products at lower prices than we offer for our competing products or on more attractive financing or payment terms, which has in the past caused, and may in the future cause, us to lose sales opportunities and the resulting revenue or to reduce our prices in response to that competition. Also, some competitors that are smaller than we are have engaged in, and may continue to engage in, aggressive price competition in order to gain customer traction and market share. Reductions in prices for any of our products could materially and adversely affect our operating margins and revenue.
Additionally, certain customers and potential customers have developed, and may continue to develop, their own solutions that may cause such customers or potential customers to not consider our product offerings or to displace our installed products with their own solutions. The growing availability of open source codecs and related software, as well as new server chipsets that incorporate encoding technology, has, in certain respects, lowered the barriers to entry for the video processing industry. The development of solutions by potential and existing customers and the reduction of the barriers to entry to enter the video processing industry could result in increased competition and adversely affect our results of operations and business.
If any of our competitors’ products or technologies were to become the industry standard, our business could be seriously harmed. If our competitors are successful in bringing their products to market earlier than us, or if these products are more technologically capable than ours, our revenue could be materially and adversely affected.
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Our future growth depends on a number of video and broadband industry trends.
Technology, industry and regulatory trends and requirements may affect the growth of our business. These trends and requirements include the following:
•convergence, whereby network operators bundle video, voice and data services to consumers, including mobile delivery options;
•continued strong consumer demand for streaming video services;
•service providers and broadcast and media companies utilizing public cloud SaaS platforms to deliver video content to consumers, as well as for broadcast infrastructure workflows;
•the pace of adoption and deployment of high-bandwidth technology, such as DOCSIS 3.x, DOCSIS 4.0, next generation LTE and fiber-to-the-premises (FTTP);
•the use of digital video by businesses, governments and educational institutions globally;
•efforts by regulators and governments in the U.S. and internationally to encourage the adoption of broadband and digital technologies, including 5G broadband networks, as well as to regulate broadband access and delivery;
•consumer interest in higher resolution video such as Ultra HD or retina-display technologies on mobile devices;
•the need to develop partnerships with other companies involved in video infrastructure workflow and broadband services;
•the continued adoption of the television and streaming video viewing behaviors of consumers in developed economies by the growing middle class across emerging economies;
•the extent and nature of regulatory attitudes towards issues such as network neutrality, competition between operators, access by third parties to networks of other operators, local franchising requirements for telcos to offer video, and other new services, such as mobile video; and
•the outcome of disputes and negotiations between content owners and service providers regarding rights of service providers to store and distribute recorded broadcast content, which outcomes may drive adoption of one technology over another in some cases.
If we fail to recognize and respond to these trends, by timely developing products, features and services required by these trends, we are likely to lose revenue opportunities and our operating results, financial condition and cash flows could be materially and adversely affected.
Our software-based cable access product initiatives expose us to certain technology transition risks that may adversely impact our operating results, financial condition and cash flows.
We believe our CableOS software-based cable access solutions, supporting centralized, DAA or hybrid configurations, will significantly reduce cable headend costs and increase operational efficiency, and are an important step in cable operators’ transition to all-IP networks. If we are unsuccessful in continuing to innovate and develop and deploy our cable access solutions in a timely manner, or are otherwise delayed in making our solutions available to our customers, our business may be adversely impacted, particularly if our competitors develop and market similar or superior products and solutions.
We believe software-based cable access solutions will, over time, replace and make obsolete current CMTS solutions, which is a market our products have historically not addressed, as well as cable edge-QAM products. If demand for our software-based cable access solutions is weaker than expected, our near and long-term operating results, financial condition and cash flows could be adversely impacted. Moreover, if competitors adapt new cable industry technology standards into competing cable access solutions faster than we do, or promulgate a new or competitive architecture for next-generation cable access solutions that renders our CableOS solution obsolete, our business may be adversely impacted.
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The sales cycle for our CableOS solutions tends to be long. For cable operators, upgrading or expanding network infrastructure is complex and expensive, and investing in a CableOS solution is a significant strategic decision that may require considerable time to evaluate, test and qualify. Potential customers need to ensure our CableOS solution will interoperate with the various components of its existing network infrastructure, including third-party equipment, servers and software. In addition, since we are a relatively new entrant into the CMTS market, we need to demonstrate significant performance, functionality and/or cost advantages with our CableOS solutions that outweigh customer switching costs. If sales cycles are significantly longer than anticipated or we are otherwise unsuccessful in growing our CableOS sales, our operating results, financial condition and cash flows could be materially and adversely affected.
Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline.
Our operating results have fluctuated in the past and are likely to continue to fluctuate in the future, on an annual and a quarterly basis, as a result of several factors, many of which are outside of our control. Some of the factors that may cause these fluctuations include:
•the level and timing of spending of our customers in the U.S., Europe and in other markets;
•economic and financial conditions specific to each of the cable, satellite and telco, and broadcast and media industries, as well as general economic and financial market conditions, including the global economic uncertainty caused by the COVID-19 pandemic and government and business responses thereto;
•changes in market acceptance of and demand for our products or our customers’ services or products;
•the timing and amount of orders, especially from large individual transactions and transactions with our significant customers;
•the mix of our products sold and the effect it has on gross margins;
•the timing of revenue recognition, including revenue recognition on sales arrangements and from transactions with significant service and support components, which may span several quarters;
•our transition to a SaaS subscription model for our Video business, which may cause near-term declines in revenue;
•the timing of completion of our customers’ projects;
•the length of each customer product upgrade cycle and the volume of purchases during the cycle;
•competitive market conditions, including pricing actions by our competitors;
•the level and mix of our domestic and international revenue;
•new product introductions by our competitors or by us;
•uncertainty in both the U.K. and the European Union due to the U.K.’s exit from the European Union and the impact of the U.K.’s transitional period following this exit, which could adversely affect our results, financial condition and prospects;
•changes in domestic and international regulatory environments affecting our business;
•the evaluation of new services, new standards and system architectures by our customers;
•the cost and timely availability to us of components, subassemblies and modules;
•the mix of our customer base, by industry and size, and sales channels;
•changes in our operating and extraordinary expenses;
•the timing of acquisitions and dispositions by us and the financial impact of such transactions;
•impairment of our goodwill and intangibles;
•the impact of litigation, such as related litigation expenses and settlement costs;
•write-downs of inventory and investments;
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•changes in our effective federal tax rate, including as a result of changes in our valuation allowance against our deferred tax assets, and changes in our effective state tax rates, including as a result of apportionment;
•changes to tax rules related to the deferral of foreign earnings and compliance with foreign tax rules;
•the impact of applicable accounting guidance on accounting for uncertainty in income taxes that requires us to establish reserves for uncertain tax positions and accrue potential tax penalties and interest; and
•the impact of applicable accounting guidance on business combinations that requires us to record charges for certain acquisition related costs and expenses and generally to expense restructuring costs associated with a business combination subsequent to the acquisition date.
The timing of deployment of our products by our customers can be subject to a number of other risks, including the availability of skilled engineering and technical personnel, the availability of third-party equipment and services, our customers’ ability to negotiate and enter into rights agreements with video content owners that provide our customers with the right to deliver certain video content, and our customers’ need for local franchise and licensing approvals.
We often recognize a substantial portion of our quarterly revenue in the last month of the quarter. We establish our expenditure levels for product development and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term. Accordingly, even small variations in the timing of revenue, particularly from relatively large individual transactions, can cause significant fluctuations in operating results in a particular quarter.
As a result of these factors and other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.
We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited sources, and we rely on contract manufacturers and other subcontractors.
Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on contractors for manufacturing and installation of our products, involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules; reduced control over costs, quality and timely delivery of components, subassemblies or modules; supplier discontinuation of components, subassemblies or modules we require; and timely installation of products. In addition, our financial results may be impacted by tariffs imposed by the U.S. on goods from other countries and tariffs imposed by other countries on U.S. goods. If any such tariffs are imposed on products or components that we import, including those obtained from a sole supplier or a limited group of suppliers, we could experience reduced revenues or may have to raise our prices, either of which could have an adverse effect on our business, financial condition and operating results.
These risks could be heightened during a substantial economic slowdown because our suppliers and subcontractors are more likely to experience adverse changes in their financial condition and operations during such a period. Further, these risks could materially and adversely affect our business if one of our sole sources, or a sole source of one of our suppliers or contract manufacturers, is adversely affected by a natural disaster or the outbreak of disease, epidemics and other pandemics, such as the COVID-19 pandemic, which has adversely impacted and may continue to adversely impact our supply chain. While we expend resources to qualify additional component sources, consolidation of suppliers and the small number of viable alternatives have limited the results of these efforts. Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during time periods in which demand for our products is increasing, especially if demand increases more quickly than we expect.
Plexus Services Corp. (“Plexus”), which manufactures our products at its facilities in Malaysia, currently serves as our primary contract manufacturer, and currently accounts for a majority, by dollar amount, of the products that we purchase from our contract manufacturers. Most of the products manufactured by our French and Israeli operations are outsourced to another third-party manufacturer in France and Israel, respectively. From time to time we assess our relationship with our contract manufacturers, and we do not generally maintain long-term agreements with any of our suppliers or contract manufacturers. Our agreement with Plexus has automatic annual renewals, unless prior notice is given by either party, and has been automatically renewed for a term expiring in October 2021.
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Difficulties in managing relationships with any of our current contract manufacturers, particularly Plexus, that manufacture our products off-shore, or any of our suppliers of key components, subassemblies and modules used in our products, could impede our ability to meet our customers’ requirements and adversely affect our operating results. An inability to obtain adequate and timely deliveries of our products or any materials used in our products, or the inability of any of our contract manufacturers to scale their production to meet demand, such as the inability of certain of our contract manufacturers to operate at capacity for periods of time due to the COVID-19 pandemic, which may occur again in future periods, or any other circumstance that would require us to seek alternative sources of supply, had negatively impacted and could continue to negatively affect our ability to ship our products on a timely basis, which could damage relationships with current and prospective customers and harm our business and materially and adversely affect our revenue and other operating results. Furthermore, if we fail to meet customers’ supply expectations, our revenue would be adversely affected and we may lose sales opportunities, both short and long term, which could materially and adversely affect our business and our operating results, financial condition and cash flows. Increases, from time to time, in demand on our suppliers and subcontractors from our customers or from other parties have, on occasion, caused delays in the availability of certain components and products. In response, we may increase our inventories of certain components and products and expedite shipments of our products when necessary. These actions could increase our costs and could also increase our risk of holding obsolete or excess inventory, which, despite our use of a demand order fulfillment model, could materially and adversely affect our business, operating results, financial condition and cash flows.
Operational Risks
We rely on resellers, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failure to develop and manage our relationships with these customers or the processes and procedures that support them could adversely affect our business.
We generate a significant percentage of our revenue through sales to resellers, VARs and systems integrators that assist us with fulfillment or installation obligations. We expect that these sales will continue to generate a significant percentage of our revenue in the future. Accordingly, our future success is highly dependent upon establishing and maintaining successful relationships with a variety of channel partners.
We generally have no long-term contracts or minimum purchase commitments with any of our reseller, VAR or system integrator customers, and our contracts with these parties do not prohibit them from purchasing or offering products or services that compete with ours. Our competitors may provide incentives to any of our reseller, VAR or systems integrator customers to favor their products or, in effect, to prevent or reduce sales of our products. Any of our reseller, VAR or systems integrator customers may independently choose not to purchase or offer our products. Many of our resellers, and some of our VARs and system integrators are small, are based in a variety of international locations, and may have relatively unsophisticated processes and limited financial resources to conduct their business. Any significant disruption of our sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, or their failure to properly manage their business with respect to the purchase of, and payment for, our products, or their ability to comply with our policies and procedures as well as applicable laws, could materially and adversely affect our business, operating results, financial condition and cash flows. In addition, our failure to continue to establish or maintain successful relationships with reseller, VAR and systems integrator customers could likewise materially and adversely affect our business, operating results, financial condition and cash flows.
We may not be able to effectively manage our operations.
As of April 2, 2021, we had 837 employees in our international operations, representing approximately 70% of our worldwide workforce. In recent years, we have expanded our international operations significantly. For example, upon the closing of our acquisition of Thomson Video Networks (“TVN”) on February 29, 2016, we added 438 employees, most of whom were based in France. Our ability to manage our business effectively in the future, including with respect to any future growth, our operation as both a hardware and increasingly software- and SaaS-centric business, the integration of any acquisition efforts such as our recent acquisition of TVN, and the breadth of our international operations, will require us to train, motivate and manage our employees successfully, to attract and integrate new employees into our overall operations, to retain key employees and to continue to improve and evolve our operational, financial and management systems. The COVID-19 pandemic has resulted in a significant majority of our employees working from home following shelter-in-place orders, which has required us to allocate additional resources towards IT and operations, and which may create new challenges for our operational and management systems. There can be no assurance that we will be successful in any of these efforts, and our failure to effectively manage our operations could have a material and adverse effect on our business, operating results, cash flows and financial condition.
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We face risks associated with having outsourced engineering resources located in Ukraine.
We outsource a portion of our research and development activities for both our Video and Cable Access business segments to a third-party partner with engineering resources located in Ukraine. Political, social and economic instability and unrest or violence in Ukraine, including the ongoing conflict with Russian-backed separatists or conflict with the Russian Federation directly, could cause disruptions to the business and operations of our outsourcing partner, which could slow or delay the development work our partner is undertaking for us. Instability, unrest or conflict could limit or prevent our employees from traveling to, from, or within Ukraine to direct and coordinate our outsourced engineering teams, or cause us to shift all or portions of the development work occurring in Ukraine to other locations or countries. The resulting delays could negatively impact our product development efforts, operating results and our business.
We face risks associated with having facilities and employees located in Israel.
As of April 2, 2021, we maintained facilities in Israel with a total of 205 employees, or approximately 17% of our worldwide workforce. Our employees in Israel engage in a number of activities, for both our Video and Cable Access business segments, including research and development, product development, product management, supply chain management for certain product lines and sales activities.
As such, we are directly affected by the political, economic and military conditions affecting Israel. Any significant conflict involving Israel could have a direct effect on our business or that of our Israeli contract manufacturers, in the form of physical damage or injury, restrictions from traveling or reluctance to travel to from or within Israel by our Israeli and other employees or those of our subcontractors, or the loss of Israeli employees to active military duty. Most of our employees in Israel are currently obligated to perform annual reserve duty in the Israel Defense Forces, and approximately 5% of those employees were called for active military duty in 2020. In the event that more of our employees are called to active duty, certain of our research and development activities may be significantly delayed and adversely affected. Further, the interruption or curtailment of trade between Israel and its trading partners, as a result of terrorist attacks or hostilities, conflicts between Israel and any other Middle Eastern country or organization, or any other cause, could significantly harm our business. Additionally, current or future tensions or conflicts in the Middle East could materially and adversely affect our business, operating results, financial condition and cash flows.
In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualified personnel.
Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. We must successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management. We cannot provide assurances that changes of management personnel in the future would not cause disruption to operations or customer relationships or a decline in our operating results.
We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualified personnel. Competition for qualified management, technical and other personnel is often intense, particularly in Silicon Valley, Israel and Hong Kong where we have significant research and development activities, and we may not be successful in attracting and retaining such personnel. Competitors and others have in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standard agreements concerning confidentiality, non-solicitation and ownership of inventions, we generally do not have non-competition agreements with our personnel. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business and operating results. Furthermore, a certain portion of our personnel in the U.S. is comprised of foreign nationals whose ability to work for us depends on obtaining the necessary visas. Our ability to hire and retain foreign nationals in the U.S., and their ability to remain and work in the U.S., is affected by various laws and regulations, including limitations on the availability of visas. Changes in U.S. laws or regulations affecting the availability of visas have, and may continue to adversely affect, our ability to hire or retain key personnel and as a result may impair our operations.
Our products include third-party technology and intellectual property, and our inability to acquire new technologies or use third-party technology in the future could harm our business.
In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensing agreements with third parties. Although companies with technology useful to us are often willing to enter into technology development or licensing agreements with respect to such technology, we cannot provide assurances that such agreements may be negotiated on commercially reasonable terms, or at all. The failure to enter, or a delay in entering, into such technology development or licensing agreements, when necessary or desirable, could limit our ability to develop and market new products and could materially and adversely affect our business.
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We incorporate certain third-party technologies, including software programs, into our products, and, as noted, intend to utilize additional third-party technologies in the future. In addition, the technologies that we license may not operate properly or as specified, and we may not be able to secure alternatives in a timely manner, either of which could harm our business. We could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our products, if we are able to do so at all. These delays, or a failure to secure or develop adequate technology, could materially and adversely affect our business, operating results, financial condition and cash flows.
Cybersecurity incidents, including data security breaches or computer viruses, could harm our business by disrupting our business operations, compromising our products and services, damaging our reputation or exposing us to liability.
Cyber criminals and hackers may attempt to penetrate our network security, misappropriate our proprietary information or cause business interruptions. Because the techniques used by such computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In the past, we have faced compromises to our network security, and companies are facing additional attacks as workforces become more distributed following shelter-in-place orders. While we have invested in and continue to update our network security and cybersecurity infrastructure and systems, if our cybersecurity systems fail to protect against unauthorized access, sophisticated cyber-attacks, phishing schemes, ransomware, data protection breaches, computer viruses, denial-of-service attacks and similar disruptions from unauthorized tampering or human error, our ability to conduct our business effectively could be damaged in a number of ways, including:
•our intellectual property and other proprietary data, or financial assets, could be stolen;
•our ability to manage and conduct our business operations could be seriously disrupted;
•defects and security vulnerabilities could be introduced into our product, software and SaaS offerings, thereby damaging the reputation and perceived reliability and security of our products; and
•personally identifiable data of our customers, employees and business partners could be compromised.
Should any of the above events occur, our reputation, competitive position and business could be significantly harmed, and we could be subject to claims for liability from customers, third parties and governmental authorities. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages. Consequently, our business, operating results, financial condition and cash flows could be materially and adversely affected. In addition, our business operations utilize and rely upon numerous third-party vendors, manufacturers, solution providers, partners and consultants, and any failure of such third parties’ cybersecurity measures could materially and adversely affect or disrupt our business.
Our operating results could be adversely affected by natural disasters affecting us or impacting our third-party manufacturers, suppliers, resellers or customers.