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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 June 30, 2023

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 000-25826
_____________________________________________________
HARMONIC INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________
Delaware77-0201147
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2590 Orchard Parkway
San Jose, CA 95131
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par valueHLITNASDAQ Global Select Market
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  ☒    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  ☒    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 filerAccelerated Filer
Non-accelerated filerSmaller reporting company
Emerging growth company 


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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  
The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on July 31, 2023 was 111,914,979.



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TABLE OF CONTENTS
 
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
June 30, 2023December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents$71,031 $89,586 
Accounts receivable, net119,203 108,427 
Inventories113,587 120,949 
Prepaid expenses and other current assets27,695 26,337 
Total current assets331,516 345,299 
Property and equipment, net37,626 39,814 
Operating lease right-of-use assets23,138 25,469 
Goodwill238,709 237,739 
Other non-current assets59,363 61,697 
Total assets$690,352 $710,018 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible debt, current$114,428 $113,981 
Other debts, current4,851 4,756 
Accounts payable37,108 67,455 
Deferred revenue66,218 62,383 
Operating lease liabilities, current6,624 6,773 
Other current liabilities58,460 66,724 
Total current liabilities287,689 322,072 
Other debts, non-current10,539 11,161 
Operating lease liabilities, non-current21,557 24,110 
Other non-current liabilities27,766 28,169 
Total liabilities347,551 385,512 
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding
  
Common stock, $0.001 par value, 150,000 shares authorized; 111,584 and 109,871 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
112 110 
Additional paid-in capital2,389,573 2,380,651 
Accumulated deficit(2,039,921)(2,046,569)
Accumulated other comprehensive loss(6,963)(9,686)
Total stockholders’ equity342,801 324,506 
Total liabilities and stockholders’ equity$690,352 $710,018 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 Three Months EndedSix Months Ended
 June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Revenue:
Appliance and integration$111,127 $121,868 $225,921 $234,852 
SaaS and service44,836 35,578 87,691 70,033 
Total net revenue155,963 157,446 313,612 304,885 
Cost of revenue:
Appliance and integration57,437 62,341 117,185 128,723 
SaaS and service13,586 12,704 27,433 24,579 
Total cost of revenue71,023 75,045 144,618 153,302 
Total gross profit84,940 82,401 168,994 151,583 
Operating expenses:
Research and development32,205 29,920 65,714 58,753 
Selling, general and administrative42,773 36,768 82,055 73,411 
Restructuring and related charges 631 83 1,801 
Total operating expenses74,978 67,319 147,852 133,965 
Income from operations9,962 15,082 21,142 17,618 
Interest expense, net(800)(1,394)(1,506)(2,827)
Other income (expense), net(136)4,274 (429)4,336 
Income before income taxes9,026 17,962 19,207 19,127 
Provision for income taxes7,471 3,122 12,559 5,816 
Net income$1,555 $14,840 $6,648 $13,311 
Net income per share:
Basic$0.01 $0.14 $0.06 $0.13 
Diluted$0.01 $0.14 $0.06 $0.12 
Weighted average shares outstanding:
Basic111,462 104,630 111,130 104,312 
Diluted119,255 108,984 118,508 109,774 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 Three Months EndedSix Months Ended
 June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Net income$1,555 $14,840 $6,648 $13,311 
Change in foreign currency translation adjustments667 (7,608)2,626 (9,310)
Other comprehensive income (loss) before tax667 (7,608)2,626 (9,310)
Provision for (benefit from) income taxes(25)305 (97)368 
Other comprehensive income (loss), net of tax692 (7,913)2,723 (9,678)
Total comprehensive income$2,247 $6,927 $9,371 $3,633 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Three Months Ended June 30, 2023
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at March 31, 2023111,332 $111 $2,384,806 $(2,041,476)$(7,655)$335,786 
Net income— — — 1,555 — 1,555 
Other comprehensive income, net of tax— — — — 692 692 
Issuance of common stock under award and purchase plans, net252 1 (1,292)— — (1,291)
Stock-based compensation— — 6,059 — — 6,059 
Balance at June 30, 2023111,584 $112 $2,389,573 $(2,039,921)$(6,963)$342,801 
Three Months Ended July 1, 2022
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at April 1, 2022104,603 $105 $2,362,873 $(2,073,288)$(5,037)$284,653 
Net income— — — 14,840 — 14,840 
Other comprehensive loss, net of tax— — — — (7,913)(7,913)
Issuance of common stock under stock option, award and purchase plans, net782 — 2,773 — — 2,773 
Repurchase of common stock(324)— — (2,872)— (2,872)
Stock-based compensation— — 5,355 — — 5,355 
Balance at July 1, 2022105,061 $105 $2,371,001 $(2,061,320)$(12,950)$296,836 
Six Months Ended June 30, 2023
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2022109,871 $110 $2,380,651 $(2,046,569)$(9,686)$324,506 
Net income— — — 6,648 — 6,648 
Other comprehensive income, net of tax— — — — 2,723 2,723 
Issuance of common stock under award and purchase plans, net1,713 2 (4,561)— — (4,559)
Stock-based compensation— — 13,483 — — 13,483 
Balance at June 30, 2023111,584 $112 $2,389,573 $(2,039,921)$(6,963)$342,801 

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Six Months Ended July 1, 2022
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2021102,959 $103 $2,387,039 $(2,087,957)$(3,272)$295,913 
Cumulative effect of ASU 2020-06 adoption— — (32,249)18,339 — (13,910)
Balance at January 1, 2022102,959 103 2,354,790 (2,069,618)(3,272)282,003 
Net income— — — 13,311 — 13,311 
Other comprehensive loss, net of tax— — — — (9,678)(9,678)
Issuance of common stock under stock option, award and purchase plans, net2,659 2 3,045 — — 3,047 
Repurchase of common stock(557)(5,013)(5,013)
Stock-based compensation— — 13,166 — — 13,166 
Balance at July 1, 2022105,061 $105 $2,371,001 $(2,061,320)$(12,950)$296,836 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Six Months Ended
 June 30, 2023July 1, 2022
Cash flows from operating activities:
Net income$6,648 $13,311 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation6,089 6,128 
Stock-based compensation13,483 13,161 
Amortization of convertible debt discount447 596 
Amortization of warrant870 863 
Foreign currency remeasurement991 (1,680)
Deferred income taxes, net1,321 1,401 
Provision for expected credit losses and returns1,121 1,648 
Provision for excess and obsolete inventories3,383 3,805 
Gain on sale of investment in equity securities (4,370)
Other adjustments(25)338 
Changes in operating assets and liabilities:
Accounts receivable(11,513)(21,386)
Inventories6,894 (15,429)
Other assets2,060 (1,367)
Accounts payable(30,527)(23,355)
Deferred revenues1,223 16,393 
Other liabilities(12,717)4,287 
Net cash used in operating activities(10,252)(5,656)
Cash flows from investing activities:
Proceeds from sales of investments 7,962 
Purchases of property and equipment(3,833)(5,504)
Net cash provided by (used in) investing activities(3,833)2,458 
Cash flows from financing activities:
Repurchase of common stock (5,013)
Proceeds from other debts3,829 3,499 
Repayment of other debts(4,721)(4,393)
Proceeds from common stock issued to employees3,084 6,130 
Taxes paid related to net share settlement of equity awards(7,643)(3,083)
Net cash used in financing activities(5,451)(2,860)
Effect of exchange rate changes on cash and cash equivalents981 (5,554)
Net decrease in cash and cash equivalents(18,555)(11,612)
Cash and cash equivalents at beginning of period89,586 133,431 
Cash and cash equivalents at end of period$71,031 $121,819 
Supplemental schedule of non-cash investing activities:
Capital expenditures incurred but not yet paid$1,189 $624 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HARMONIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). The accompanying 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 interim periods are not necessarily indicative of the results that may be expected for any subsequent quarter or for the fiscal year ending December 31, 2023.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements included in the 2022 Form 10-K. There have been no significant changes to these policies during the six months ended June 30, 2023.
NOTE 2: INVESTMENTS IN EQUITY SECURITIES
In May 2022, the Company sold its investment in Encoding.com, Inc. for total consideration of up to approximately $10.7 million. The Company received $7.8 million in May 2022 and recognized a gain of $4.2 million. The balance of the consideration of up to approximately $2.9 million will be payable to the Company within 18 months from the date of sale, subject to certain conditions and indemnity obligations, and will be recorded upon receipt by the Company.
NOTE 3: CONTRACT ASSETS AND DEFERRED REVENUE
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)June 30, 2023December 31, 2022
Contract assets$5,491 $5,580 
Deferred revenue$81,751 $80,471 
Contract assets and the non-current portion of deferred revenue are reported as components of “Prepaid expenses and other current assets” and “Other non-current liabilities,” respectively, on the condensed consolidated balance sheets.
Revenue recognized during the three months ended June 30, 2023 and July 1, 2022, that was included within the deferred revenue balance at January 1, 2023 and 2022 was $14.1 million and $11.3 million, respectively. Revenue recognized during the six months ended June 30, 2023 and July 1, 2022, that was included within the deferred revenue balance at January 1, 2023 and 2022 was $35.3 million and $34.8 million, respectively.
Remaining performance obligations represent contracted revenues that have not yet been recognized and include deferred revenue and unbilled amounts that will be recognized as revenue in the future. The aggregate balance of the Company’s remaining performance obligations as of June 30, 2023 was $663.8 million, a majority of which is expected to be recognized as revenue over the next 12 months and the remainder thereafter.
Refer to Note 10, “Segment Information” for disaggregated revenue information.
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NOTE 4: LEASES
The components of lease expense are as follows:
Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Operating lease cost$1,761 $2,148 $3,525 $4,035 
Variable lease cost425 431850 892
Total lease cost$2,186 $2,579 $4,375 $4,927 
Supplemental information related to leases are as follows:
Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Cash paid for amounts included in the measurement of operating lease liabilities$1,778 $1,962 $3,606 $3,878 
Right-of-use assets obtained in exchange for operating lease obligations$ $77 $ $206 
NOTE 5: OTHER FINANCIAL STATEMENT INFORMATION
The following tables provide details of selected balance sheet components:
Accounts receivable, net:As of
(in thousands)June 30, 2023December 31, 2022
Accounts receivable$121,605 $110,576 
Less: allowances for expected credit losses and sales returns(2,402)(2,149)
Total$119,203 $108,427 
Inventories:As of
(in thousands)June 30, 2023December 31, 2022
Finished goods$60,843 $65,308 
Raw materials43,367 46,081 
Work-in-process3,856 3,251 
Service-related spares5,521 6,309 
Total$113,587 $120,949 
Prepaid expenses and other current assets:As of
(in thousands)June 30, 2023December 31, 2022
Prepaid expenses$4,233 $5,558 
Contract assets5,491 5,583 
Other current assets17,971 15,196 
Total$27,695 $26,337 
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Property and equipment, net:As of
(in thousands)June 30, 2023December 31, 2022
Machinery and equipment$72,342 $75,589 
Capitalized software27,421 30,588 
Leasehold improvements39,495 39,199 
Furniture and fixtures2,596 2,739 
Construction-in-progress2,308 2,691 
Property and equipment, gross144,162 150,806 
Less: accumulated depreciation and amortization(106,536)(110,992)
Total$37,626 $39,814 
Other current liabilities:As of
(in thousands)June 30, 2023December 31, 2022
Accrued employee compensation and related expenses$24,271 $29,675 
Other34,189 37,049 
Total$58,460 $66,724 
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NOTE 6: CONVERTIBLE DEBT
2.00% Convertible Senior Notes due 2024 (the “2024 Notes”)
In September 2019, the Company issued $115.5 million of the 2024 Notes pursuant to an indenture (the “2024 Notes Indenture”), dated September 13, 2019, by and between the Company and U.S. Bank Trust Company, National Association (as successor in interest to U.S. Bank National Association), as trustee. The 2024 Notes bear interest at a rate of 2.00% per year, payable semi-annually on March 1 and September 1 of each year, beginning March 1, 2020. The 2024 Notes will mature on September 1, 2024, unless earlier repurchased by the Company, redeemed by the Company or converted pursuant to their terms.
The 2024 Notes were initially convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, at an initial conversion rate of 115.5001 shares of the Company’s common stock per $1,000 principal amount of the 2024 Notes (which is equivalent to an initial conversion price of approximately $8.66 per share). Pursuant to the supplemental indenture entered into by the Company and the trustee during the fourth quarter of the fiscal year ended December 31, 2021, the Company made an irrevocable election to settle the principal amounts of the 2024 Notes solely with cash and may pay or deliver, as the case may be, any conversion value greater than the principal amount in cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. 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.
The 2024 Notes will be convertible at certain times and upon the occurrence of certain events in the future, in each case, specified in the 2024 Notes Indenture. Further, on or after June 1, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2024 Notes may convert all or a portion of their 2024 Notes regardless of these conditions.
The 2024 Notes remained convertible as of June 30, 2023, 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 the last trading day of the immediately preceding fiscal quarter was greater than or equal to 130% of the conversion price of the 2024 Notes on each applicable trading day. All $114.4 million of the net carrying amount of the 2024 Notes outstanding as of June 30, 2023 was classified as a current liability as of that date.
The following table presents the components of the 2024 Notes:
As of
(in thousands, except for years and percentages)June 30, 2023December 31, 2022
Liability:
Principal amount$115,500 $115,500 
Less: Debt issuance costs, net of amortization(1,072)(1,519)
Carrying amount$114,428 $113,981 
The following table presents interest expense recognized for the 2024 Notes:
Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Contractual interest expense$578 $578 $1,156 $1,156 
Amortization of debt issuance costs224 217 447 434 
Total interest expense recognized$802 $795 $1,603 $1,590 
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NOTE 7: STOCKHOLDERS’ EQUITY
Share-based Compensation Plans
The following table sets forth the detailed allocation of the share-based compensation expense which was included in the Company’s condensed consolidated statements of operations:
 Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Cost of revenue$439 $604 $1,289 $1,131 
Research and development expense1,731 1,317 3,830 3,853 
Selling, general and administrative expense3,889 3,654 8,364 8,177 
Total$6,059 $5,575 $13,483 $13,161 
Restricted Stock Units:
(in thousands, except per share amounts)Number
of
Shares
Weighted Average
Grant-Date Fair Value
Per Share
Balance at December 31, 20223,499 $8.93 
Granted2,269 13.83
Vested(1,831)8.75
Forfeited(242)8.90
Balance at June 30, 20233,695 $11.91 
The Company’s stock benefit plans include the 2002 Employee Stock Purchase Plan (“ESPP”) and current active stock plans adopted in 1995 and 2002 (“1995 Stock Plan” and “2002 Director Plan”, respectively). Refer to Note 13, “Employee Benefit Plans” of Notes to Consolidated Financial Statements in the 2022 Form 10-K for details pertaining to each plan.
The Company’s stockholders approved an amendment to the ESPP at the 2023 annual meeting of stockholders to increase the number of shares of common stock reserved for issuance under the ESPP by 650,000 shares. As of June 30, 2023, an aggregate of 9,221,697 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 5,713,754 shares remained available for future grants. As of June 30, 2023, an aggregate of 637,671 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 451,077 shares remained available for future grants.
Share Repurchase Program
In February 2022, the Board of Directors of the Company (“Board”) authorized the Company to repurchase up to $100 million of the Company’s outstanding shares of common stock through February 2025. The Company is authorized to repurchase, from time-to-time, shares of its outstanding common stock through open market purchases and 10b5-1 trading plans, in accordance with applicable rules and regulations, at such time and such prices as management may decide. The program does not obligate the Company to repurchase any specific number of shares and may be discontinued at any time. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.
There were no repurchase activities during the six months ended June 30, 2023. As of June 30, 2023, approximately $94.9 million of the share repurchase authorization remained available for repurchases under this program.
NOTE 8: FAIR VALUE MEASUREMENTS
The Company’s financial instruments not measured at fair value on a recurring basis were as follows:
June 30, 2023December 31, 2022
CarryingFair ValueCarryingFair Value
(in thousands)
ValueLevel 1Level 2Level 3ValueLevel 1Level 2Level 3
2024 Notes$114,428 $ $218,586 $ $113,981 $ $181,139 $ 
The fair value of the Company’s convertible notes is influenced by interest rates, the price of the Company’s common stock 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.
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NOTE 9: EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted net income per share:
 Three Months EndedSix Months Ended
(in thousands, except per share amounts)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Numerator:
Net income
$1,555 $14,840 $6,648 $13,311 
Denominator:
Weighted average number of shares outstanding:
Basic111,462 104,630 111,130 104,312 
2022 Notes 2,365  2,537 
2024 Notes6,144 491 5,554 1,014 
Stock options 234  249 
Restricted stock units1,573 1,193 1,786 1,627 
Stock purchase rights under the ESPP76 71 38 35 
Diluted119,255 108,984 118,508 109,774 
Net income per share:
Basic$0.01 $0.14 $0.06 $0.13 
Diluted$0.01 $0.14 $0.06 $0.12 
The following table sets forth the potential dilutive shares that were excluded from the computation of diluted net income per share, because their effects were anti-dilutive:
 Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Restricted stock units37 48 55 53 
Stock purchase rights under the ESPP 398 150 404 
   Total37 446 205 457 
NOTE 10: SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated regularly by the Company’s Chief Operating Decision Maker (the “CODM”), which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. Based on the internal reporting structure, the Company consists of two operating segments: Video and Broadband. The operating segments were determined based on the nature of the products offered. The Video segment provides video processing, production and playout solutions and services worldwide to broadcast and media companies, new streaming media companies, broadband operators, and satellite and telecommunications (“telco”) Pay-TV service providers. The Broadband segment provides broadband access solutions and related services to broadband operators globally. A measure of assets by segment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.
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The following table provides summary financial information by reportable segment:
Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Video
Revenue$58,867 $76,215 $116,165 $142,057 
Gross profit36,303 48,136 70,917 86,820 
Operating income (loss)90 11,271 (1,336)14,410 
Broadband
Revenue$97,096 $81,231 $197,447 $162,828 
Gross profit49,076 34,936 99,366 65,947 
Operating income18,066 10,131 38,179 18,270 
Total
Revenue$155,963 $157,446 $313,612 $304,885 
Gross profit85,379 83,072 170,283 152,767 
Operating income18,156 21,402 36,843 32,680 
A reconciliation of the Company’s consolidated segment operating income to consolidated income before income taxes is as follows:
Three Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Total consolidated segment operating income$18,156 $21,402 $36,843 $32,680 
Unallocated corporate expenses(1)
(2,135)(745)(2,218)(1,901)
Stock-based compensation(6,059)(5,575)(13,483)(13,161)
Consolidated income from operations9,962 15,082 21,142 17,618 
Non-operating expense, net(936)2,880 (1,935)1,509 
Income before income taxes$9,026 $17,962 $19,207 $19,127 
(1) Together with stock-based compensation, the Company does not allocate restructuring and related charges and other non-recurring expenses 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 InformationThree Months EndedSix Months Ended
(in thousands)June 30, 2023July 1, 2022June 30, 2023July 1, 2022
Net revenue (1)
United States$101,908 $106,109 $207,649 $192,987 
Other countries54,055 51,337 105,963 111,898 
Total$155,963 $157,446 $313,612 $304,885 

(1)  Revenue is attributed to countries based on the location of the customer.
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NOTE 11: COMMITMENTS AND CONTINGENCIES
Legal proceedings
From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, 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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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 Quarterly Report on Form 10-Q are forward-looking statements that involve risk and uncertainties. The statements contained in this Quarterly Report on 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:
developing trends and demands in the markets we address, particularly emerging markets;
macroeconomic conditions, including inflation, rising interest rates, volatility and uncertainty in the banking and financial services sector, ongoing global supply chain disruptions, volatile capital markets and foreign currency fluctuations, particularly in certain geographies, and in financial markets;
the impact of geopolitical events, including the Russia-Ukraine conflict and rising tensions between China and Taiwan, on our business and the markets in which we operate;
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 Broadband and Video 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 or repurchasing our common stock.
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 Quarterly Report on 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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q.
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) broadband solutions that enable broadband 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 SaaS platform and support service revenue 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 Broadband. Our Video business sells video processing, production and playout solutions, and services worldwide to broadband operators and satellite and 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 Broadband business sells broadband access solutions and related services, including our CableOS software-based broadband access solution, to broadband operators globally.
Historically, our revenue has been dependent upon spending in the cable, satellite, telco, broadcast and media industries, including streaming media. Our customers’ spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the United States and international markets, and the impact of factors such as the Russia-Ukraine conflict, inflation, rising interest rates, potential supply chain disruptions, volatility in capital markets and foreign currency fluctuations; volatility and uncertainty in the banking and financial services sector; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; customers suspending or reducing spending in anticipation of new products or new standards; and 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 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 and suppliers, cloud service providers, 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.
More recently, the United States has experienced high levels of inflation, which may result in decreased demand for our products and services, increases in our operating costs including our labor costs, constrained credit and liquidity, reduced customer spending and volatility in financial markets. The Federal Reserve has raised, and may continue to raise, interest rates in response to concerns over inflation risk. There continues to be uncertainty in the changing market and economic conditions, including the possibility of additional measures that could be taken by the Federal Reserve and other government agencies, related to macroeconomic conditions, adverse business conditions and liquidity concerns, or bank failures or instability in the financial services sector, geopolitical disruptions and concerns over inflation risk.
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 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.
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Our Broadband strategy is focused on continuing to develop and deliver software-based broadband access technologies, which we refer to as our CableOS solutions, to our broadband operator customers. We believe our CableOS software-based broadband 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 and/or FTTH data, video and voice services. We believe our CableOS solutions resolve space and power constraints in broadband operator facilities, eliminate dependence on hardware upgrade cycles and significantly reduce total cost of ownership, and are helping us become a major player in the broadband access market. In the meantime, we believe our Broadband segment will continue to gain momentum in the marketplace as our customers adopt and deploy our virtualized DOCSIS, CMTS and FTTH solutions and distributed access architectures. We continue to make progress in the development of our CableOS solutions and in the growth of our Broadband business, with expanded commercial deployments, field trials, and customer engagements.
CRITICAL ACCOUNTING 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 estimates are disclosed in our 2022 Annual Report on Form 10-K, as filed with the SEC. There have been no significant changes to these estimates during the six months ended June 30, 2023.
ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 to the audited Consolidated Financial Statements included in the 2022 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net Revenue
Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Appliance and integration$111,127 $121,868 $(10,741)(9)%$225,921 $234,852 $(8,931)(4)%
as % of total net revenue71 %77 %72 %77 %
SaaS and service44,836 35,578 9,258 26 %87,691 70,033 17,658 25 %
as % of total net revenue29 %23 %28 %23 %
Total net revenue$155,963 $157,446 $(1,483)(1)%$313,612 $304,885 $8,727 %
Appliance and integration net revenue decreased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to a decrease in our Video segment net revenue, which was primarily due to a reduction in sales of appliance products. The decrease was partially offset by an increase in our Broadband segment net revenue as a result of increased penetration of existing customers and new customer deployments.
SaaS and service net revenue increased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to increasing SaaS usage from existing customers and activation of new SaaS customers for both segments.
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Gross Profit
Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Gross profit$84,940 $82,401 $2,539 %$168,994 $151,583 $17,411 11 %
as % of total net revenue (“gross margin”)54 %52 %%54 %50 %%
Our gross margins are dependent upon, among other factors, the proportion of software sales, product mix, supply chain impacts, customer mix, product introduction costs, price reductions granted to customers and achievement of cost reductions.
Our gross margin increased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to favorable product mix and lower freight costs in the current periods.
Research and Development Expenses
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Research and development$32,205 $29,920 $2,285 %$65,714 $58,753 $6,961 12 %
as % of total net revenue21 %19 %21 %19 %
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 of which are associated with the design and development of new products and enhancements of existing products. The research and development expenses are net of French Research and Development (“French R&D”) credits.
Research and development expenses increased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to higher employee compensation costs as a result of headcount increases and annual compensation adjustments to support the growth of our Broadband business and the strategic transition of our Video segment to SaaS business.
Selling, General and Administrative Expenses
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Selling, general and administrative$42,773 $36,768 $6,005 16 %$82,055 $73,411 $8,644 12 %
as % of total net revenue27 %23 %26 %24 %
Selling, general and administrative expenses increased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to higher employee compensation costs as a result of headcount increases to support the growth in Broadband and strategic transition to SaaS in Video, and annual compensation adjustments.
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Restructuring and Related Charges
We have implemented several restructuring plans in the past few years. The goal of these plans is to bring operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing appropriate expense control programs. We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges are included in “Cost of revenue” and “Operating expenses-restructuring and related charges” in the condensed consolidated statement of operations.
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Cost of revenue$— $114 $(114)(100)%$— $100 $(100)(100)%
Operating expenses
 Restructuring and related charges— 631 (631)(100)%83 1,801 (1,718)(95)%
Total restructuring and related charges$— $745 $(745)(100)%$83 $1,901 $(1,818)(96)%
Restructuring and related charges decreased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to higher severance and employee benefit costs recorded in conjunction with restructuring activities in fiscal 2022.
Interest Expense, Net
Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Interest expense, net$(800)$(1,394)$594 (43)%$(1,506)$(2,827)$1,321 (47)%
Interest expense, net decreased in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to the repayment of the 4.375% Convertible Senior Notes due 2022 upon their maturity.
Other Income (Expense), Net
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Other income (expense), net$(136)$4,274 $(4,410)(103)%$(429)$4,336 $(4,765)(110)%
Changes in other income (expense), net in the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, were primarily due to a gain of $4.2 million recorded on the sale of our investment in Encoding.com in fiscal 2022. Refer to Note 2 of the Notes to our Condensed Consolidated Financial Statement for details on the sale of Encoding.com.
Income Taxes
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Provision for income taxes$7,471 $3,122 $4,349 139 %$12,559 $5,816 $6,743 116 %
The provision for income taxes increased during the three and six months ended June 30, 2023, compared to the corresponding periods in 2022. The increase was largely driven by the decrease in tax loss and credit carry forwards available in the United States to offset taxable income. The mandatory capitalization and amortization of research and development expenses in the United States was required starting January 1, 2022, by the Tax Cuts and Jobs Act, which has resulted in income tax expense in the United States for both periods.
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Segment Financial Results
 Three Months EndedSix Months Ended
(in thousands, except percentages)June 30, 2023July 1, 2022ChangeJune 30, 2023July 1, 2022Change
Video
Revenue$58,867 $76,215 $(17,348)(23)%$116,165 $142,057 $(25,892)(18)%
as % of total revenue38 %48 %(10)%37 %47 %(10)%
Gross profit36,303 48,136 (11,833)(25)%70,917 86,820 (15,903)(18)%
Gross margin %62 %63 %(1)%61 %61 %— %
Operating income90 11,271 (11,181)(99)%(1,336)14,410 (15,746)109 %
Operating margin %— %15 %(15)%(1)%10 %(11)%
Broadband
Revenue$97,096 $81,231 $15,865 20 %$197,447 $162,828 $34,619 21 %
as % of total revenue62 %52 %10 %63 %53 %10 %
Gross profit49,076 34,936 14,140 40 %99,366 65,947 33,419 51 %
Gross margin %51 %43 %%50 %41 %%
Operating income18,066 10,131 7,935 78 %38,179 18,270 19,909 109 %
Operating margin %19 %12 %%19 %11 %%
Total
Revenue$155,963 $157,446 $(1,483)(1)%$313,612 $304,885 $8,727 %
Video
Our Video segment net revenue decreased during the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to a reduction in sales of appliance products attributed to non-recurring projects in fiscal 2022, partially offset by an increase in SaaS and service revenue, reflecting increased usage from existing customers and activation of new SaaS customers. Video segment operating margin decreased during the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to the decrease in revenue.
Broadband
Our Broadband segment net revenue increased during the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to increased penetration of our existing customers and new customer deployments, which was partially driven by an expansion of fiber-to-the-premises (“FTTP”). Our Broadband segment operating margin increased during the three and six months ended June 30, 2023, compared to the corresponding periods in 2022, primarily due to the increase in revenue and margin expansion driven by favorable mix and cost savings in freight.
Liquidity and Capital Resources
We expect to continue to manage our cash from operations effectively, together with deploying cash in working capital for growth. The cash we generate from our operations enables us to fund ongoing operations, our research and development projects for new products and technologies, working capital and other business activities. As part of our cash management strategy, we concentrate cash deposits with large financial institutions subject to the strictest regulations. We continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources in order to fund our operations, and the growth of our business, take advantage of unanticipated strategic opportunities, or strengthen our financial position, including through drawdowns on existing or new debt facilities or new financing (debt and equity) funds. 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. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early. We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following June 30, 2023, as well as in the long-term.
Material Cash Requirements
Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, stock repurchases, payments for payroll, restructuring expenses, and other operating expenses related to the development and marketing of our products, purchases of property and equipment, facility leases, and other contractual obligations for the foreseeable future.
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As of June 30, 2023, we had outstanding $130.9 million in aggregate principal amount of indebtedness, consisting of our 2024 Notes, and other debts, of which $119.3 million is scheduled to become due in the 12-month period following June 30, 2023. As of June 30, 2023, our total minimum lease payments are $34.1 million, of which $3.4 million is due before December 31, 2023.
In February 2022, the Board of Directors authorized us to repurchase, from time to time, up to $100 million of our outstanding shares of common stock through February 2025, at such time and such prices as management may decide. The program does not obligate us to repurchase any specific number of shares and may be discontinued at any time. As of June 30, 2023, approximately $94.9 million of the share repurchase authorization remained available for repurchases under this program.
Sources and Conditions of Liquidity
Our sources to fund our material cash requirements are predominately from our sales of our products and services and, when applicable, proceeds from debt facilities and debt and equity offerings.
As of June 30, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $71.0 million, accounts receivable, net, of $119.2 million, and our $25.0 million revolving credit facility with JPMorgan Chase Bank, N.A. This credit facility was renewed in October 2022 and will mature on October 28, 2025.
Our cash and cash equivalents of $71.0 million as of June 30, 2023 consisted of bank deposits held throughout the world, of which $62.6 million was held outside of the United States. At present, such foreign funds are considered to be indefinitely reinvested in foreign countries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the United States and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes in order to repatriate these funds.
Summary of Cash Flows
The table below sets forth selected cash flow data:
Six Months Ended
(in thousands)June 30, 2023July 1, 2022
Net cash provided by (used in):
Operating activities$(10,252)$(5,656)
Investing activities(3,833)2,458 
Financing activities(5,451)(2,860)
Effect of foreign exchange rate changes on cash and cash equivalents 981 (5,554)
Net decrease in cash and cash equivalents$(18,555)$(11,612)
Operating Activities
Net cash used in operating activities increased during the first six months of fiscal 2023, compared to the corresponding period in fiscal 2022, primarily due to lower net income in the first six months of fiscal 2023 and an increase in cash used in our working capital.
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, instability and uncertainty in the financial services sector, the Russia-Ukraine conflict and related macroeconomic conditions 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 increased during the first six months of fiscal 2023, compared to the corresponding period in 2022, primarily due to proceeds from sale of investments in Encoding.com in May 2022, partially offset by lower purchases of property and equipment in the first six months of fiscal 2023.
Financing Activities
Net cash used in financing activities increased during the first six months of fiscal 2023, compared to the corresponding period in 2022, primarily due to higher payment of tax withholding obligations related to net share settlement of restricted stock units and lower proceeds from issuance of common stock to employees through the employee stock purchase plan in the first six months of fiscal 2023, partially offset by lower stock repurchase transactions in fiscal 2023 in comparison to fiscal 2022.
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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 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, 2022. Our exposure related to foreign currency exchange risk and interest rate risk has not changed materially since December 31, 2022.
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) and 15d-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 Quarterly Report on 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.
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 period covered by this Quarterly Report on 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 June 30, 2023 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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, 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. Refer to Note 11 of the Notes to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for details on legal proceedings.
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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 Quarterly Report on Form 10-Q. If any of the following risks actually occurs (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment. 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.
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;
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 broadband 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;
We face risks associated with having outsourced engineering resources located in Ukraine; 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.
Risks Related to Our Business and Our Industry
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 and solutions 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 inflation, rising interest rates, lower consumer confidence, volatile capital markets, supply chain disruptions, uncertainty and volatility in the financial services sector and the impact of the Russia-Ukraine conflict, 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;
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customers suspending, reducing or shifting spending due to: (i) new video or broadband industry standards; (ii) industry trends and technology shifts, such as virtualization and cloud-based solutions, and (iii) new products and solutions, such as products and services based on our VOS software platform or our CableOS software-based broadband 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 telco, 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, such as the strengthening of the U.S. dollar; 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 effects of the COVID-19 pandemic;
weak or uncertain economic and financial conditions in the United States 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 certain customers;
emphasis by certain of our customers on generating revenue from existing subscribers or end-customers, rather than from new subscribers or end-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.
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 those caused by the effects of the COVID-19 pandemic, Russia-Ukraine conflict and related inflationary pressure, bank insolvency and related uncertainty and volatility in the financial services sector 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 United States, Europe or other key markets, remain uncertain or deteriorate, 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.
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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 and six months ended June 30, 2023 accounted for approximately 68% and 67% of our net revenue, respectively, compared to 70% and 69% for the corresponding periods in 2022. 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 and six months ended June 30, 2023, Comcast accounted for approximately 47% of our net revenue, compared to 37% and 34% in the corresponding periods in 2022. 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 slower 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, in most quarters, we are involved 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:
• 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.
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Our competitors in our Video appliance business are primarily comprised of providers of video delivery and video processing and compression products and solutions, broadcast equipment and solutions providers, and certain network infrastructure providers. Our competitors in our Video SaaS business include companies that offer video delivery and processing SaaS solutions, SaaS video streaming platform providers, and certain public cloud service providers. Our competitors in our Broadband business include a number of suppliers of networking and communications equipment and solutions to broadband service providers.
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 Amazon Web Services. With respect to our Broadband business, certain competitors are 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 effects of the COVID-19 pandemic, Russia-Ukraine conflict, bank insolvency and related uncertainty and volatility in the financial services sector and inflation. 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 us 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.
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;
continued adoption of public cloud SaaS platforms to stream video content to consumers, as well as for broadcast infrastructure workflows;
continued growth in targeted advertising as a key revenue source for video streaming service providers;
the pace of adoption and deployment of high-bandwidth technology, such as DOCSIS 3.x, DOCSIS 4.0, next generation LTE and FTTP;
the use of digital video by businesses, governments and educational institutions globally;
efforts by regulators and governments in the United States and internationally to encourage the adoption of broadband and digital technologies, including 5G broadband networks, as well as to regulate broadband access and delivery;
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the need to develop partnerships with other companies involved in video infrastructure workflow and broadband services;
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 broadband 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 broadband access solutions, supporting centralized, DAA or hybrid configurations, will significantly reduce broadband operator headend costs and increase operational efficiency, and are an important step in operators’ transition to all-IP networks. If we are unsuccessful in continuing to innovate and develop and deploy our broadband 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 our software-based broadband access solutions will continue to 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 broadband 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 broadband industry technology standards into competing broadband access solutions faster than we do, or promulgate a new or competitive architecture for next-generation broadband access solutions that renders our CableOS solution obsolete, our business may be adversely impacted.
The sales cycle for our CableOS solutions tends to be long. For broadband 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 United States, 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 impacts caused by the effects of the COVID-19 pandemic, the Russia-Ukraine conflict, rising tensions between China and Taiwan and China and the United States, bank insolvency and related uncertainty and volatility in the financial services sector, inflation and government and business responses thereto as well as related supply chain and labor shortage issues;
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;
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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 in our Video segment since, unlike Video appliance sales, SaaS revenue is recognized over the applicable subscription term based on service usage;
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 the European Union due to unrest or violence in Ukraine that the ongoing military conflict with the Russian Federation have caused, 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;