Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.15pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.40pp
Lean +
Net-tone change vs last year's 10-K.
MD&A
-0.10pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+8
loss+8
termination+7
delay+6
terminate+5
Positive rising
effective+8
successful+4
achieve+4
beneficial+3
satisfied+3
Risk Factors (Item 1A)
25,537 words
ITEM 1A. RISK FACTORS
Investing in our securities involves a high degree of risk. A description of the risks and uncertainties associated with our business is set forth below. These risks, together with many other factors described in this report and in our other public filings, and additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, could adversely affect our operations, performance and financial condition. Our actual results could differ materially from our forward-looking statements.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results.
Merger-Related Risk Factors
• Because the exchange ratios provided in the Merger Agreement are fixed and will not be adjusted, our stockholders cannot be certain of the precise value of the consideration in the form of Nokia American Depositary Shares ("ADSs") that they may receive in the Merger.
• The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms.
• Failure to complete the Merger could negatively impact our future business and financial results and the trading prices of our common stock.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
losses+4
termination+4
decline+3
restructuring+2
limitations+1
Positive rising
effective+2
satisfaction+2
leading+1
benefit+1
able+1
MD&A (Item 7)
8,839 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, but are not limited to, statements related to the Merger, including statements related to the timing of completion of the Merger, or the receipt of necessary approvals to complete the Merger; the significance and timing of costs related to the Merger; the impact on us of litigation or other stockholder action related to the Merger; the effects on us and our stockholders if the Merger is not completed; our expectations regarding revenue, gross margin, operating expenses, cash flows and other financial items and the drivers related to these; the competitive advantages derived from sales of our vertically integrated products; demand growth for additional network capacity, the level and timing of customer capital spending and the impact on customer demand from customers holding excess inventory beyond normalized levels; the magnitude and duration of supply constraints, including delays, shortages and increased costs and our ability to mitigate such supply constraints, and the extent to which supply-related impacts could materially and affect our business operations, financial performance, results of operations, financial position, and stock price; the impact inflation and higher interest rates may have on us by increasing costs beyond what we can recover through price increases; of strategic objectives, any statements regarding our plans, strategies and objectives; the impact of new customer network footprint on our gross margin; factors that may affect our operating results; anticipated customer acceptance of our solutions; statements concerning new products or services, including new product features; our beliefs about who we may compete with and how we are differentiated from those competitors; our ability to respond to technological changes; statements regarding our relationships with contract manufacturers and other third-party partners; statements regarding our production capacity and facilities requirements; statements related to capital expenditures; statements related to working capital and liquidity; the sufficiency of our cash to operate our business and our ability to raise capital; expectations regarding research and development investments and initiatives; our ability to realize deferred tax assets; statements related to future economic conditions, performance, market growth, competitor consolidation or our sales cycle; our ability to identify, attract, upskill and retain highly skilled personnel; the extent to which public health emergencies could materially and affect our business operations, financial performance, results of operations, financial position, stock price and personnel; our ability to protect our technology and intellectual property, the frequency of related to our intellectual property and the value of our intellectual property; statements related to our convertible senior notes and our Credit Facility; our ability to prevent and respond to data and cyber-attacks; statements related to the impact of tax regulations; statements related to our internal control over financial reporting and material ; statements related to our disclosure controls and procedures; statements related to the effects of trade sanctions and similar regulations; statements related to the proliferation and impact of environmental, social and governance regulation; statements related to the effects of on our financial position, results of operations or cash flows; the impacts of any plans or other strategic efforts on our business; statements regarding governmental grants, our ability to obtain funding thereto or our ability to comply with such grants; statements related to factors beyond our control, such as natural , acts of war or terrorism, epidemics, pandemics and armed , such as between Russia and Ukraine and recent in the Middle East; statements related to new accounting standards; expectations about the outcome of legal proceedings; statements as to industry trends and other matters that do not relate strictly to historical facts; and statements of assumptions underlying any of the foregoing. These statements are often identified using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” "should," "will," or "would," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. Such forward-looking statements speak only as of the date of this report. We any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
• Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated.
• The Merger and related uncertainty may cause customers and other partners to delay or defer commercial decisions.
• Failure to attract, motivate and retain executives and other key employees could harm the business.
• Our directors and executive officers have interests and arrangements in the Merger that may be different from, or in addition to, the interests of our stockholders generally.
• Lawsuits have been filed in connection with the Merger and further litigation may arise, which could be costly, prevent the consummation of the Merger, divert management’s attention and otherwise harm our business.
• The Nokia Shares to be received in the form of Nokia ADSs by electing stockholders as a result of the Merger will have rights different from our common stock.
Business and Operational Risk Factors
• Our quarterly results may vary significantly from period to period.
• Our ability to increase our revenue will depend upon continued demand growth for additional network capacity and on the level and timing of customer capital spending.
• Any delays in the development, introduction or acceptance of our new products or in releasing enhancements to our existing products may harm our business.
• Aggressive business tactics by our competitors and new entrants may harm our business.
• The markets in which we compete are highly competitive and we may be unable to compete effectively.
• If we lose key personnel or fail to attract qualified personnel, our business may be harmed.
• We are dependent on a small number of key customers for a significant portion of our revenue.
• Supply chain and logistics issues could harm our business and operating results.
• Product performance problems, deployment delays and product security vulnerabilities could harm our business and reputation.
• The manufacturing process for our optical engine and the assembly of our products are very complex.
• If our contract manufacturers do not perform as we expect, our business may be harmed.
• Increased consolidation among our customers and suppliers in the communications networking industry has had, and could continue to have, an adverse effect on our business and results of operations.
• We rely on various third-party service partners to help complement our global operations.
• We must respond to rapid technological change for our products to be successful.
• Failure to accurately forecast manufacturing requirements or customer demand could raise costs.
• Actions that we are taking or may in the future take to restructure or streamline our business may not be as effective as anticipated and may have negative consequences.
• Our large customers have substantial negotiating leverage, which may harm our results of operations.
• Our sales cycle can be long and unpredictable, which could result in unexpected revenue shortfalls.
• If we are not successful in securing the funding contemplated by grants we have received or may receive from governments, agencies or research organizations, or if we are unable to comply with the terms of those grants, then our business might be harmed.
Financial and Macroeconomic Risk Factors
• We may be unable to generate the cash flow necessary to make anticipated capital expenditures, service our debt or grow our business.
• Unfavorable macroeconomic and market conditions may adversely affect our financial results.
• Inflation may increase our costs beyond what we can recover through price increases.
• If we need additional capital in the future, it may not be available to us on favorable terms, or at all.
• Our Loan Agreement (as defined below) and any other debt agreements into which we may enter may restrict our operations.
• Our debt obligations may adversely affect our ability to raise additional capital and strain cash flow.
• Our international sales and operations subject us to additional risks.
• We may be adversely affected by fluctuations in currency exchange rates.
• Our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.
• We may issue additional shares of our common stock in connection with conversions of the 2027 Notes and the 2028 Notes (as defined below).
• The fundamental change provisions of the 2027 Notes and the 2028 Notes may delay or prevent an otherwise beneficial takeover attempt of us.
Legal and Regulatory Risk Factors
• We are subject to various governmental export control, trade sanctions and import laws and regulations that could impair our ability to compete in international markets or subject us to liability.
• If we fail to protect our intellectual property rights, our competitive position could be harmed, or we could incur significant expense to enforce our rights.
• Claims by others that we infringe their intellectual property rights could harm our business.
• Security incidents, such as data breaches and cyber-attacks, could cause significant damage to our business and reputation.
• If we fail to remediate our material weaknesses or discover additional weaknesses or otherwise fail to maintain an effective system of internal controls, the accuracy and timing of our financial reporting may be adversely affected.
General Risk Factors
• Events that are outside of our control could harm our operations.
For a more complete discussion of the material risks facing our business, see below.
Risks Related to the Merger
Because the exchange ratios provided in the Merger Agreement are fixed and will not be adjusted, our stockholders cannot be certain of the precise amount or value of the consideration in the form of Nokia ADSs that they may receive in the Merger.
Subject to the terms of the Merger Agreement, at the Effective Time each share of our common stock that is issued and outstanding as of immediately prior to the Effective Time will be automatically canceled, extinguished and converted into, at the election of the holder, the right to receive the following consideration, subject to proration in accordance with the Merger Agreement: (1) the Cash Consideration; (2) the Share Consideration or (3) the Mixed Consideration.
The Nokia Shares will be delivered in the form of Nokia ADSs, with each Nokia ADS representing the right to one Nokia Share. The election right for holders of our common stock with respect to the Mixed Consideration and the Share Consideration will be subject to proration pursuant to the terms of the Merger Agreement and described further in the definitive proxy statement/prospectus filed with the SEC on August 21, 2024 (the “Proxy Statement/Prospectus”), such that the maximum number of Nokia ADSs that may be delivered as Merger Consideration is equal to (i) 0.5355 multiplied by (ii) the aggregate number of shares of our common stock issued and outstanding as of the date that is ten (10) business days prior to the closing date of the Merger (subject to certain exclusions as set forth in the Merger Agreement). In the Merger: (1) no more than 30 percent of the aggregate Merger Consideration will be paid in the form of Nokia Shares and (2) at least 70 percent of the aggregate Merger Consideration will be paid in cash. Accordingly, some of the Merger Consideration that one of our stockholders receives may differ from the type of consideration selected and such difference may be significant, and there is no assurance that one of our stockholders that has made a valid election will receive the form of consideration elected with respect to the shares of our common stock held by such stockholder.
The exchange ratios with respect to the Mixed Consideration and the Share Consideration are each fixed and will not be adjusted for changes in the market price of either Nokia ADSs or shares of our common stock. Because the exchange ratios are fixed, the market value of the Nokia ADSs issued to our stockholders will fluctuate and, as a result, could be greater than, less than or the same as the value of the Nokia ADSs on the date of this Annual Report on Form 10-K.
It is impossible to accurately predict the market price of Nokia ADSs at the completion of the Merger and, therefore, impossible to accurately predict the market value of Nokia ADSs that our stockholders will receive as a portion of the Merger Consideration in the Merger. Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in Nokia’s or our respective businesses, operations or prospects; legislative and regulatory developments in the industries in which Nokia and we operate; general market, industry and economic conditions; potential shareholder litigation relating to the Merger or otherwise relating to Nokia or to us; market assessments of the likelihood that the Merger will be completed; interest rates and other factors generally affecting the respective prices of Nokia ADSs and shares of our common stock; and the timing of the Merger and receipt of required regulatory approvals.
Many of these factors are beyond our control, and we are not permitted to terminate the Merger Agreement solely due to a decline in the market price of our common stock or Nokia ADSs.
The market price of Nokia ADSs will continue to fluctuate after the Merger.
Upon completion of the Merger, our stockholders who elect to receive the Share Consideration or elect to receive the Mixed Consideration will become holders of Nokia ADSs. Each Nokia ADS represents the right to one Nokia Share. The market price of the Nokia ADSs and the Nokia Shares underlying the Nokia ADSs will continue to fluctuate, potentially significantly, following the completion of the Merger, including for the reasons described above. As a result, our former stockholders could lose some or all of the value of their investment in our common stock. In addition, any significant price or volume fluctuations in the stock market generally could have a material adverse effect on the market for, or the liquidity of, the Nokia ADSs (or the Nokia Shares) received in the Merger, regardless of the combined company’s actual operating performance.
The Merger may not be completed and the Merger Agreement may be terminated in accordance with its terms.
The Merger is subject to a number of conditions that must be satisfied or waived prior to the completion of the Merger, as specified in the Merger Agreement. These conditions to the completion of the Merger, some of which are beyond our control, may not be satisfied or waived in a timely manner or at all, and, accordingly, the Merger may be delayed or not completed.
Additionally, either we or Nokia may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the parties fail to secure the regulatory approvals required to consummate the Merger. If the Merger Agreement is terminated under certain circumstances, we may be required to pay Nokia a termination fee of $65.0 million, or Nokia may be required to pay us a termination fee of $130.0 million.
Failure to complete the Merger could negatively impact our future business and financial results of and the trading prices of our common stock.
If the Merger is not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the expected benefits of having completed the Merger, we would be subject to a number of risks, including the following:
• we may experience negative reactions from the financial markets, including negative impacts on our stock price;
• we may experience negative reactions from our customers, partners, suppliers, other business partners and employees;
• we will be required to pay our costs relating to the Merger, such as legal, accounting and financial advisory costs, and associated fees and expenses;
• there may be disruptions to our business resulting from the announcement and pendency of the Merger, and any adverse changes in our relationships with our customers, partners, suppliers, other business partners or employees may continue or intensify; and
• we will have committed substantial time and resources to matters relating to the Merger (including integration planning) which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.
Our stockholders who elect to receive Nokia ADSs in the Merger will have rights as Nokia shareholders that differ from their current rights as our stockholders.
Upon completion of the Merger, our stockholders who receive Nokia ADSs will no longer be our stockholders and will instead become holders of Nokia ADSs (each Nokia ADS representing the right to one Nokia Share), and such Nokia Shares will be governed by Nokia’s Articles of Association. Holders of Nokia ADSs are not direct shareholders of Nokia, and their rights and obligations are governed by the deposit agreement for the Nokia ADSs. There are differences in the rights of Nokia shareholders under Nokia’s Articles of Association and the deposit agreement for the Nokia ADSs as compared to the rights of our stockholders under our charter or bylaws.
Until the completion of the Merger or the termination of the Merger Agreement in accordance with its terms, we are prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us and our stockholders.
From and after the date of the Merger Agreement and prior to the effective time of the Merger, the Merger Agreement restricts us from taking specified actions without the consent of Nokia and requires that our business and the business of our subsidiaries be conducted in the ordinary course. These restrictions may prevent us from taking actions during the pendency of the Merger that would have been beneficial. Adverse effects arising from these restrictions during the pendency of the Merger could be exacerbated by any delays in consummation of the Merger or termination of the Merger Agreement.
Delays in obtaining required regulatory approvals and satisfyingclosing conditions may cause Nokia, as enlarged by the completion of the Merger (the “Enlarged Company”), to not realize all of the benefits of the Merger.
The Merger is subject to a number of conditions to closing as specified in the Merger Agreement. There can be no assurance as to when these conditions will be satisfied or waived, if at all, or that other events will not intervene to delay or result in the failure to complete the transaction. Any delay in completing the Merger could cause the Enlarged Company not to realize, or to be delayed in realizing, some or all of the benefits that Nokia expects to achieve if the Merger is successfully completed within its expected time frame.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on us following the Merger.
Before the Merger may be completed, various approvals, consents and non-actions must be obtained, including approvals under applicable antitrust and foreign investment laws in certain jurisdictions. We are required to make certain additional regulatory filings and obtain approvals or authorizations in connection with certain foreign investment laws or other laws in the U.S. and other specified locations, including, but not limited to, filings with the Defense Counterintelligence and Security Agency of the United States Department of Defense and foreign investment authorities in certain non-U.S. jurisdictions and other applicable regulatory authorities. In determining whether to grant these approvals, regulators consider a variety of factors, including the regulatory standing of each party. On September 13, 2024, the applicable waiting period for U.S. antitrust purposes applicable to the Merger under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended, expired. On October 7, 2024, the parties received approval from CFIUS with respect to the Merger. On October 22, 2024, relevant authorities indicated that a filing would not be required under antitrust laws in the United Kingdom at this time. Other approvals could be delayed or not obtained at all, including due to any or all of the following: an adverse development in either party’s regulatory standing, or any other factors considered by regulators in g ranting such approvals; governmental, political or community group inquiries, investigations or opposition; changes in legislation; or adverse developments in the political environment.
Even if those approvals are granted, they may impose terms and conditions, limitations, obligations or costs, or require changes to the terms of the transactions contemplated by the Merger Agreement. Any such terms and conditions, limitations, obligations or restrictions could delay the completion of the transactions contemplated by the Merger Agreement or otherwise reduce the anticipated benefits of the Merger or even result in the abandonment of the Merger. Additionally, the completion of the Merger is conditioned on the absence of certain orders, injunctions or decrees by any governmental entity of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the Merger Agreement.
The Merger, and uncertainty regarding the Merger, may cause customers, partners, suppliers or other business partners to delay or defer decisions concerning us, which could adversely affect our ability to effectively manage our business.
The Merger will happen only if the conditions to closing are met. Many of the conditions are outside of our control, and both parties also have certain rights to terminate the Merger Agreement. Accordingly, there may be uncertainty regarding the completion of the Merger. This uncertainty is causing, and may continue to cause, customers, partners, suppliers or other business partners to delay or defer entering into contracts with us or making other decisions concerning us or seek to change or cancel existing business relationships with us, any of which could negatively affect our business. Any delay or deferral of those decisions or changes in existing agreements could have a material adverse effect on our business regardless of whether the Merger is ultimately completed.
Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the Merger.
The success of the Merger will depend in part on the retention of personnel critical to the business and operations of the Enlarged Company due to, for example, their technical skills or management expertise. Competition for qualified personnel can be intense.
Current and prospective employees of each company may experience uncertainty about their future role with the Enlarged Company until strategies with regard to these employees are announced or executed, and this may impair our and Nokia’s ability to attract, retain and motivate key management, technical, business development, operational and customer-facing employees and other personnel prior to and following the Merger. If we and Nokia are unable to retain personnel, we and Nokia could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the Merger.
If key employees of either company depart, the integration of the companies may be more difficult and the Enlarged Company’s business following the Merger may be harmed. Furthermore, the Enlarged Company may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to our business or the business of Nokia, and the Enlarged Company’s ability to realize the anticipated benefits of the Merger may be adversely affected. In addition, there could be disruptions to or distractions for the workforce and management associated with activities of labor unions or integrating employees into the Enlarged Company. Accordingly, no assurance can be given that the Enlarged Company will be able to attract or retain key employees of ours and Nokia to the same extent that our companies have been able to attract or retain our own employees in the past.
Our directors and executive officers have interests and arrangements that may be different from, or in addition to, the interests of our stockholders generally.
Our stockholders should be aware that our directors and executive officers may have interests in the Merger that are different from, or in addition to, those of our stockholders. In (1) evaluating and negotiating the Merger Agreement; (2) approving the Merger Agreement and Merger; and (3) recommending that the Merger be adopted by our stockholders, the Board of Directors of the Company (the "Board") was aware of and considered these interests to the extent they existed at the time, among other matters. These interests include: (a) for our executive officers, the treatment of their outstanding Infinera equity awards in the Merger as described in more detail in the Proxy Statement/Prospectus; (b) for our non-employee directors, the accelerated vesting, as of immediately prior to the Effective Time, of their RSUs, and other treatment of such awards in the Merger, as described in more detail in the Proxy Statement/Prospectus; (c) for our executive officers, their rights to deemed satisfaction of certain performance criteria for our PSUs in connection with the Merger; (d) for certain of our executive officers, their continued employment by Nokia following the Merger; (e) for our executive officers, their rights to severance payments and benefits in the event of a qualifying termination of employment within a period of 3 months before to 18 months after the Effective Time of the Merger; and the continued indemnification and insurance coverage for our directors and executive officers from Infinera and Nokia under the terms of the Merger Agreement. The interests of our directors and executive officers are described in more detail in the Proxy Statement/Prospectus.
We may waive one or more of the closing conditions without re-soliciting stockholder approval.
We may determine to waive, in whole or part, one or more of the conditions of our obligations to consummate the Merger. We currently expect to evaluate the materiality of any waiver and its effect on our stockholders in light of the facts and circumstances at the time to determine whether any amendment of the Proxy Statement/Prospectus or any re-solicitation of stockholder approval of the Merger Agreement, as so amended, for adoption by our stockholders is required in light of such waiver. Any determination whether to waive any condition to the Merger or to amend the Proxy Statement/Prospectus or re-solicit stockholder approval as a result of a waiver will be made by us at the time of such waiver based on the facts and circumstances as they exist at that time.
The Merger has involved and will continue to involve substantial costs.
We have incurred and expect to continue to incur a number of non-recurring costs associated with the Merger. These costs and expenses include fees paid to financial, legal, and accounting advisors; systems consolidation costs, severance and other potential employment-related costs, including payments that may be made to certain of our executives; and filing fees, printing expenses and other related charges. These costs are payable by us regardless of whether the Merger is completed.
The Enlarged Company will also incur integration costs in connection with the Merger. There are processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger and the integration of the two companies’ businesses. While both Nokia and we have assumed that a certain level of expenses would be incurred in connection with the Merger and the other transactions contemplated by the Merger Agreement, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.
There may also be additional unanticipated significant costs in connection with the Merger that the Enlarged Company may not recoup. These costs and expenses could reduce the realization of efficiencies, strategic benefits and additional income Nokia and we expect to achieve from the Merger. Although we and Nokia expect that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.
The opinion rendered to us by Centerview will not reflect changes in circumstances between the date of such opinion and the completion of the Merger.
We have received an opinion from Centerview Partners, LLC (“Centerview”), our financial advisor, in connection with the signing of the Merger Agreement but have not obtained, nor will we obtain, an updated opinion regarding the fairness, from a financial point of view, of the Merger Consideration as of any date other than that specified in Centerview’s opinion. Centerview’s opinion does not address any other term or aspect of the Merger Agreement or the transaction, including, without limitation, the allocation of the Merger Consideration as among holders of our common stock who receive the Cash Consideration, the Share Consideration or the Mixed Consideration, or the relative fairness of the Cash Consideration, the Share Consideration or the Mixed Consideration, and does not constitute a recommendation to any of our stockholders or any other person as to how such stockholder or other person should vote with respect to the Merger or otherwise act with respect to the transaction or any other matter, including, without limitation, whether such stockholder or person should elect to receive the Cash Consideration, the Share Consideration or the Mixed Consideration, or make no election, in the transaction. Changes in our operations and prospects, general market and economic conditions and other factors that may be beyond our control, and on which Centerview’s opinion was based, may significantly alter our value or the prices of the shares of our common stock or the prices of the Nokia ADSs by the time the Merger is completed. Centerview’s opinion does not speak as of any date other than the date of such opinion. Because we do not currently anticipate asking Centerview to update its opinion, the opinion will not address the fairness of the Merger Consideration or the applicable exchange ratio, as applicable, from a financial point of view at the time the Merger is completed.
Lawsuits filed against us, and members of our Board, challenging the Merger, and an adverse ruling in any such lawsuit may prevent the Merger from becoming effective or from becoming effective within the expected time frame.
Lawsuits have been filed in connection with the Merger and further litigation or other legal proceedings may arise in the future, including actions alleging that our Board breached its fiduciary duties to its stockholders by entering into the Merger Agreement, by failing to obtain a greater value in the transaction for its stockholders or otherwise. We, our management and members of our Board, have been and may be subject, along with others (including Nokia), to various claims and litigation related to the Merger. We will defendagainst the lawsuits filed, but might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on our business, results of operation or financial position, including through the possible diversion of our resources or distraction of key personnel.
Third parties may terminate or alter existing contracts with us in connection with the Merger.
We have contracts with customers, suppliers, vendors, landlords, licensors and other business partners which may require us to obtain consent or waivers from such counterparties in connection with the Merger, including under change of control provisions. If these consents or waivers cannot be obtained, the Enlarged Company may suffer a loss of potential future revenue and may lose rights that are material to its business and the business of the Enlarged Company. In addition, third parties with whom we currently have relationships may terminate or otherwise reduce the scope of their relationship with us in anticipation of consummation of the Merger. Any such disruptions could limit the Enlarged Company’s ability to achieve the anticipated benefits of the Merger. The adverse effect of such disruptions could also be exacerbated by a delay in the completion of the Merger or the termination of the Merger Agreement.
The Nokia Shares to be received by our stockholders as a result of the Merger will have rights different from our common stock.
Upon consummation of the Merger, the rights of our stockholders, who will become shareholders of Nokia, will be governed by the Nokia Articles of Association. The rights associated with our common stock are different from the rights associated with Nokia Shares. In addition, the Nokia Shares to be received as Merger Consideration will be delivered in the form of Nokia ADSs. Holders of Nokia ADSs are not direct shareholders of Nokia, and their rights and obligations are governed by the deposit agreement for the Nokia ADSs.
Our financial projections may not prove to be reflective of actual future results.
In connection with the Merger, our management prepared and considered, among other things, internal financial projections for us. These forecasts speak only as of the date made and will not be updated. These financial projections were not prepared with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, at all or within projected timeframes.
Holders of our common stock who elect to receive some or all of their Merger Consideration in the form of Nokia ADSs may not receive sufficient cash consideration with which to pay their potential tax liabilities resulting from the Merger.
The exchange of our common stock by our stockholders for Cash Consideration, Share Consideration or Mixed Consideration in the Merger will be a taxable transaction for U.S. federal income tax purposes. The amount of gain or loss recognized by a holder of our common stock in the Merger generally will depend on the amount of any cash and the fair market value of any Nokia ADSs received by such holder in the Merger and the adjusted tax basis of our common stock exchanged by such holder in the Merger. To the extent that one of our stockholders elects to receive some or all of his or her or its Merger Consideration in the form of Nokia ADSs, it is possible that such stockholder may not receive sufficient cash consideration with which to pay its potential tax liabilities resulting from the Merger.
Business and Operational Risk Factors
Our quarterly results may vary significantly from period to period, which could make our future results difficult to predict and could cause our operating results to fall below investor, analyst or our expectations.
Our quarterly results and, in particular, our revenue, gross margins, operating expenses, operating margins, net income (loss) and cash flow, have historically varied significantly from period to period and may continue to do so in the future. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our budgeted expense levels are based, in large part, on our expectations of future revenue and the development efforts associated with that future revenue. Consequently, if our revenue does not meet projected levels in the short term, our inventory levels, cost of goods sold and operating expenses would be high relative to revenue, resulting in potential operating losses. If our revenue or operating results do not meet the expectations of investors or securities analysts or fall below any guidance we provide to the market, the price of our common stock may decline substantially.
Factors that may contribute to fluctuations in our quarterly results, many of which are outside our control and may be difficult to predict, include:
• fluctuations in demand, sales cycles and prices for products and services, including discounts given in response to competitive pricing pressures or to secure long-term customer relationships, as well as the timing of purchases by our key customers;
• changes in customers’ budgets for optical transport network purchases and changes or variability in their purchasing cycles;
• the timing, market acceptance and rate of adoption of our new product releases and our competitors' new product releases;
• the price, quality, lead times, timing of delivery and availability of key components from suppliers, including any price or shipping cost increases or delays in the supply of components that may result from supply disruptions as well as impacts due to consolidations amongst our suppliers;
• fluctuations in our customer, product or geographic mix, including the impact of new customer deployments, which typically carry lower gross margins, customer consolidation, which may affect our ability to grow revenue, and products powered by our next-generation technologies, which initially tend to be lower margin due to higher per unit production costs and may have greater variability in production yields;
• our ability to manage manufacturing costs, maintain or improve quality, and increase volumes and yields on products manufactured in our internal manufacturing facilities;
• our ability to manage inventory while timely meeting customer demand and avoiding charges for excess or obsolete inventory;
• our ability to control costs, including our operating expenses, the costs and availability of components and materials we purchase for our products and our capital expenditures;
• our ability to successfullyrestructure or transform our operations within our anticipated time frame and realize our anticipated savings;
• order cancellations or reductions or delays in delivery schedules by our customers;
• any significant changes in the competitive dynamics of the markets we serve, including any new entrants, new technologies, or customer or competitor consolidation, as well as aggressive pricing and bundling tactics by our competitors;
• any delay in collecting or failure to collect accounts receivable;
• readiness of customers for installation of our products, which has been impacted by the resource and personnel constraints of our customers;
• the timing of revenue recognition and revenue deferrals;
• any future changes in GAAP or new interpretations of existing accounting rules;
• the impact of a significant natural disaster or public health emergency, as well as interruptions or shortages in the supply of utilities such as water and electricity, in a key location such as our Northern California facilities, which are located near major earthquake fault lines, in areas of high fire risk and in a designated flood zone; and
• general economic, market and political conditions in domestic and international markets, including those related to any policy changes by the federal government or by the presidential administration in the U.S., and other factors beyond our control, including the ongoing effects of continuing inflation, high interest rates and tariffs.
Our ability to increase our revenue will depend upon continued growth of demand by consumers and businesses for additional network capacity, on the level and timing of capital spending by our customers, and on the continued demand for our services support.
Our future success depends on factors that increase the amount of data transmitted over communications networks and the growth of optical transport networks to meet the increased demand for optical capacity. These factors include the growth of mobile, video and cloud-based services, increased broadband connectivity and the continuing adoption of high-capacity, revenue-generating services. If demand for such bandwidth does not continue, or slows down, the market for optical transport networking equipment may not continue to grow and our product sales would be negatively impacted.
In addition, demand for our products depends on the level and timing of capital spending in optical networks by service providers as they construct, expand and upgrade the capacity of their optical networks. Capital spending is cyclical in our industry and spending by customers can change on short notice. Customer demand is dependent in part on the level of inventory held by customers and, to the extent that such inventory levels have been or will be built up by customers to address global supply issues or otherwise, overall customer demand may be dampened in subsequent periods until the level of inventory held by such customers returns to more normalized levels. Any future decisions by our customers to reduce capital spending, whether caused by lower customer demand, weakening economic conditions, high borrowing costs, inflation, customer-specific supply chain issues, changes in government regulations relating to telecommunications and data networks, or other reasons, could have a material adverse effect on our business, financial condition and results of operations.
Revenue we receive for our services offerings is highly dependent on product sales and the implementation processes of our customers. If our customers have internal services teams or if our products such as our pluggables do not otherwise require our services support, our revenue related to services and our related gross margins may be impacted and our results of operations may be harmed.
Any delays in the development, introduction or acceptance of our new products or in releasing enhancements to our existing products may harm our business.
Our products are based on complex technologies, including, in many cases, the development of next-generation PICs, DSPs and specialized application-specific integrated circuits (“ASICs"), each of which are key components of our optical engines. In addition, we may also depend on technologies from outside suppliers, all of which may cause us to experience unanticipateddelays in developing, improving, manufacturing or deploying our products. The development process for our optical engines is lengthy, and any modifications entail significant development cost and risks.
At any given time, various new product introductions and enhancements to our existing products are in the development phase and are not yet ready for commercial manufacturing or deployment. We rely on third parties, some of which are relatively early-stage companies, to develop, manufacture and deliver components for our next-generation products, which can often require custom development. The development process from laboratory prototype to customer trials, and subsequently to general availability, involves a significant number of simultaneous efforts. These efforts often must be completed in a timely and coordinated manner so that they may be incorporated into the product development cycle for our systems, and include:
• completion of product development, including the development and completion of our next-generation optical engines, and the completion of associated module development;
• the qualification and multiple sourcing of critical components;
• validation of manufacturing methods and processes;
• extensive quality assurance and reliability testing and staffing of testing infrastructure;
• validation of software; and
• establishment of systems integration and systems test validation requirements.
Each of these steps, in turn, presents risks of failure, rework or delay, any one of which could decrease the speed and scope of product introduction, the conversion of design wins into purchase orders, or marketplace acceptance of our products. New generations of our optical engines as well as intensive software testing are important to the timely introduction of new products and enhancements to our existing products, which are subject to these development risks. In addition, unexpected intellectual property disputes, inability to obtain licenses to utilize third party development tools or other intellectual property on commercially acceptable terms, failure of critical design elements, limited or constrained engineering resources, changes in product designs and a host of other development execution risks may delay, or even prevent, the introduction of new products or enhancements to our existing products. If we have longer development lead times than our competitors for comparable products, or if we do not develop and successfully introduce or enhance products ahead of our competitors or in a timely manner, including the successful development of our next generation optical engine, our competitive position will suffer.
As we transition customers to new products and technologies, we face significant risk that our new products or technologies may not be accepted by our current or new customers. To the extent that we fail to introduce new and innovative products and technologies that are adopted by customers, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which could be difficult or impossible to regain. Similarly, we may face decreased revenue, gross margins and profitability due to a rapid decline in sales of current products as customers hold spending to focus purchases on new product platforms. In addition, the sale of new products and technologies may result in the cannibalization of sales for existing products, which may harm our results of operations. We could also incur significant costs in completing the transition, including costs of inventory write-downs of the current product as customers transition to new product platforms. In addition, products or technologies developed by others may render our products noncompetitive or obsolete and result in significant reduction in orders from our customers and the loss of existing and prospective customers. Any delays in the introduction of new components that we are developing for use in our other products as part of our vertical integration strategy may also prevent us from realizing the anticipated cost savings of such development. This may negatively impact our gross margins and harm our business and operating results.
Aggressive business tactics by our competitors and new entrants may harm our business.
The markets that we compete in are extremely competitive, which often results in aggressive business tactics by our competitors and new entrants, including:
• aggressively pricing their optical transport products and other portfolio products, including offering significant one-time discounts and guaranteed future price decreases;
• offering optical products at a substantial discount or for free when bundled together with broader technology purchases, such as router or wireless equipment purchases;
• marketing product availability on aggressive timelines to influence customer purchasing decisions;
• providing financing, marketing and advertising assistance to customers; and
• influencing customer requirements to emphasize different product capabilities, which better suit their products.
The level of competition and pricing pressure tend to increase when competing for large or high-profile opportunities or during periods of economic weakness when there are fewer network build-out projects. If we fail to compete successfullyagainst our current and future competitors, or if our current or future competitors continue or expand their aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders or we could be required to reduce our prices to compete in the market.
The markets in which we compete are highly competitive and we may not be able to compete effectively.
The optical networking equipment market is competitive. Our main competitors in the optical transport systems market include dense wavelength division multiplexing system suppliers, such as ADTRAN, Ciena Corporation, Cisco Systems, Fujitsu, Huawei, Nokia, Ribbon Communications and ZTE. Competition in the optical subsystems and pluggable optics market includes, but is not limited to, Cisco (via their acquisition of Acacia), Lumentum, Marvell and Coherent, as well as a wide range of China-based suppliers. Moreover, other companies have developed, or may in the future develop, products that are or could be competitive with our products. We also could encounter competitor consolidation in the markets in which we compete, which could lead to a changing competitive landscape, capabilities and market share, and could impact our results of operations.
Competition in the markets we serve is based on any one or a combination of the following factors:
• the ability of products and services to meet customers’ immediate and future network requirements;
• price and other commercial terms;
• optical reach and capacity performance;
• features and functionality;
• the availability of components required to manufacture key products;
• existing business and customer relationships;
• power consumption, heat dissipation, form factor and density;
• installation and operational simplicity;
• network and service manageability;
• quality and reliability;
• service and support;
• security and encryption requirements;
• scalability and investment protection; and
• product availability and lead times.
Some of our competitors have substantially greater name recognition and technical, financial, sales and marketing resources. Many of our competitors have more resources and more experience in developing or acquiring new products and technologies, customizing product features specific to certain geographic requirements and in creating market awareness for those products and technologies. In addition, many of our competitors have the financial resources to offer competitive products at aggressive pricing levels or have the ability to provide financing to customers, which could prevent us from competing effectively. Further, many of our competitors have built long-standing relationships with some of our prospective and existing customers and could, therefore, have an inherent advantage in selling products to those customers.
We also compete with low-cost producers that may increase pricing pressure on us and with a number of smaller companies that provide competition for a specific product, customer segment or geographic market. In addition, we may also face increased competition from system and component companies that develop products based on off-the-shelf hardware that offers the latest commercially available technologies. Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly than we can and may provide attractive alternatives to our customers.
If we lose key personnel or fail to attract, upskill and retain qualified personnel when needed, our business may be harmed.
Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, and finance personnel, many of whom will be approaching retirement age in the next decade and many of whom would be difficult to replace. For example, senior members of our engineering team have unique technical experience that would be difficult to replace. Because our products are complex, we must also hire and retain highly trained customer service and support personnel to ensure that the deployment of our products does not result in network disruption for our customers. We believe our future success will depend in large part upon our ability to identify, attract, upskill and retain highly skilled and diverse personnel, and competition for these individuals is intense in our industry, especially in the San Francisco Bay Area where we are headquartered and, increasingly, in certain cities and regions where we have operations outside the U.S. as well. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions. These risks may be exacerbated due to a strong labor market with a competitive wage environment and attrition or a decline in the pool of available talent. In addition, we do not have long-term employment contracts or key person life insurance covering any of our key personnel. If we are unable to identify, attract and retain qualified personnel, we may be unable to manage our business effectively, and our results of operations could suffer.
We are dependent on a small number of key customers for a significant portion of our revenue from period to period and the loss of, or a significant reduction in, orders from one or more of our key customers would reduce our revenue and harm our operating results.
A relatively small number of customers accounts for a large percentage of our revenue from period to period. For example, for the year ended December 28, 2024, our top ten end-customers accounted for approximately 53% of our total revenue and one end-customer accounted for 12% of our total revenue. For 2023, our top ten end-customers accounted for approximately 52% of our total revenue and one end-customer accounted for 10% of our total revenue. For 2022, our top ten end-customers accounted for approximately 48% of our total revenue and one end-customer accounted for 11% or more of our revenue.
Our business will likely be harmed if any of our key customers, for whatever reason, substantially reduce, delay or stop their orders from us. In addition, our business will be harmed if we fail to maintain our competitive advantage with our key customers or do not add new large and medium customers over time. We continue to expect a relatively small number of customers to continue to account for a large percentage of revenue from period to period. However, customer consolidation could reduce the number of key customers that generate a significant percentage of our revenue and may increase the risks relating to dependence on a small number of customers.
Our ability to continue to generate revenue from our key customers will depend on our ability to maintain strong relationships with these customers and to introduce competitive new products at competitive prices ahead of or on a similar timeline as our competitors. In most cases, our sales are made to these customers pursuant to standard purchase agreements, which may be canceled or reduced readily, rather than long-term purchase commitments that would require these customers to purchase any minimum or guaranteed volumes orders. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business. Our operating results will continue to depend on our ability to sell our products to our key customers. In addition, we must regularly compete for and win business with existing and new customers across all of our customer segments.
In addition, global economic conditions may affect the network spending, procurement strategies, or business practices of our key customers. If any of our key customers experience a loss in revenue due to weakening economic conditions, their corporate borrowing costs being materially impacted by high interest rates, or other adverse occurrences, they may reduce or delay capital spending generally or with respect to our products, which could materially adversely affect our business and results of operations.
Supply chain and logistics issues could harm our business and operating results.
We are reliant on our global supply chain for the production of components for our products. Disruptions to the global supply chain have negatively impacted our revenue and our results of operations. For example, the global supply chain experienced disruptions beginning in 2020 as a result of the COVID-19 pandemic, which led to delays, shortages, longer than normal lead times, unfavorable contractual terms relating to refundability and cancellation, discontinued components and increased costs. As a result, shortages of and longer lead times for certain key components adversely affected our ability to deliver products to customers in a timely manner. Additionally, price increases within our supply chain have continued to negatively affect our gross margin. Any efforts that we make to mitigate supply chain issues, such as making additional or long-term purchase commitments with our suppliers or holding higher levels of inventory, could negatively impact our cash flow and financial results if we do not accurately forecast customer demand, or if our customers change their purchasing patterns in response to the evolving supply chain environment. While the overall availability of components in the supply chain has continued to improve, we continue to monitor supply chain categories and key suppliers to manage our risks.
We currently purchase several key components for our products from sole or limited sources. In particular, we rely on our own production of certain components of our products, such as PICs, and on third parties, including sole source and limited source suppliers, for certain of the components of our products, including ASICs, field-programmable gate arrays, processors, and other semiconductor and optical components. We have increased our reliance on third parties to develop and manufacture components for certain products, some of which require custom development. We purchase most of these components on a purchase order basis and generally only have long-term contracts with these sole source or limited source suppliers. If any of our sole source or limited source suppliers suffer from capacity constraints, materials shortages, lower than expected yields, deployment delays, geopolitical-related disruptions, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedule, which could result in lost revenue, additional product costs and deployment delays that could harm our business and customer relationships. In addition, these same suppliers may decide to no longer manufacture or support specific components necessary for some of our legacy products, which could lead to our inability to fulfill demand without increased engineering and material costs necessary to replace such components or cause us to transition such products to end-of-life status sooner than planned. Further, our suppliers could enter into exclusive arrangements with our competitors, refuse to sell their products or components to us at commercially reasonable prices or at all, go out of business or discontinue their relationships with us. If any of these developments were to occur, we may be unable to develop alternative sources for these components within a suitable time frame to be able to operate our business, or at all. For risks concerning our international operations that may also impact our supply chain, see also the Risk Factor titled "Our international sales and operations subject us to additional risks that may harm our operating results."
Product performance problems, including undetectederrors in our hardware or software, or deployment delays, and product security vulnerabilities could harm our business, results of operations and reputation.
The development and production of products with high technology content is complicated and often involves problems with hardware, software, components and manufacturing methods. Complex hardware and software systems that are built with and include increasingly sophisticated technology, such as our products, can often contain undetectederrors or bugs when first introduced or as new versions are released. In addition, errors associated with components we purchase from third parties, including customized components, may be difficult to resolve. We have experienced issues in the past in connection with our products, including failures due to the receipt of components from our suppliers that are either faulty or do not meet our product specifications, and performance issues related to software updates. From time to time, we have had to replace certain components or provide software remedies or other remediation in response to errors or bugs, and we may have to do so again in the future. In addition, performance issues can be heightened during periods where we are developing and introducing multiple new products to the market, as any performance issues we encounter in one technology or product could impact the performance or timing of delivery of other products. Our products may also sufferdegradation of performance and reliability over time.
If reliability, quality, security or network monitoring problems develop, a number of negative effects on our business could result, including:
• reduced orders from existing customers;
• declining interest from potential customers;
• delays in our ability to recognize revenue or in collecting accounts receivables;
• increased costs associated with fixing hardware or software defects or replacing products;
• high service and warranty expenses;
• delays in shipments;
• high inventory excess and obsolescence expense;
• high levels of product returns;
• diversion of our engineering personnel from our product development efforts; and
• payment of liquidateddamages, performance guarantees or similar penalties.
Because we outsource the manufacturing of certain components of our products, we may also be subject to product performance problems as a result of the acts or omissions of third parties, and we may not have adequate compensating remedies against such third parties or otherwise implement effective measures to mitigate such problems.
From time to time, we encounter interruptions or delays in the activation of our products at a customer’s site. These interruptions or delays may result from product performance problems or from issues with installation and activation, some of which are outside our control, such as supply chain disruptions affecting our customers or us. We may also experience project delays due to incomplete customer readiness and the unavailability of certain customer resources and customer furnished prerequisites required for project implementation. If we experience significant interruptions or delays that we cannot promptly resolve, the associated revenue for these installations may be delayed.
In addition, our products are subject to security vulnerabilities and attempts by third parties to identify additional vulnerabilities. Such vulnerabilities are not always mitigated before they become known by us, our customers or the users of our products. Mitigation techniques designed to address security vulnerabilities in our products, including software and firmware updates or other preventative measures, are not always available on a timely basis - or at all - and at times do not operate as intended or effectively resolvevulnerabilities. Security vulnerabilities and any limitations or adverse effects of mitigation techniques may result in warranty or other claims, litigation, or regulatory actions, and may adversely affect our results of operations, financial condition, customer relationships, prospects, and reputation in a number of ways, any of which may be material.
The manufacturing process for our optical engine and the assembly of our finished products are complex. The partial or complete loss of any of our manufacturing facilities, a reduction in yields of our PICs or an inability to scale capacity to meet customer demands could harm our business.
The manufacturing process for our optical engine, including the PICs, DSPs and specialized ASICs, and the assembly of our finished products are complex. In the event that any of our manufacturing facilities utilized to build these components and assemble our finished products was fully or partially destroyed, or shut down, as a result of a natural disaster, work stoppage or otherwise, it could severely limit our ability to deliver and sell our products or support new product development. Because of the complex nature of our manufacturing facilities, such loss would take a considerable amount of time to repair or replace. The partial or complete loss of any of our manufacturing facilities, or an event causing the interruption in our use of any such facilities, whether as a result of a natural disaster, a public health crisis, work stoppage or otherwise, for any extended period of time, could cause our business, financial condition and results of operations to be harmed.
Minor deviations in the PIC manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. In the past, we have had significant variances in our PIC yields, including production interruptions and suspensions, and may in the future have continued yield variances, including additional interruptions or suspensions. Lower than expected yields from our PIC manufacturing process or defects, integration issues or other performance problems in our products could limit our ability to satisfy customer demand requirements and could damage customer relations and harm our business, reputation and operating results.
Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with third parties, could also harm our relationships with our customers, our business and our results of operations. Additionally, if we are unable to fully utilize our own manufacturing facilities, this may also reduce our efficiency and lower our gross margins.
If our contract manufacturers do not perform as we expect, our business may be harmed.
We rely on third-party contract manufacturers to perform a portion of the manufacturing of our products, and our future success will depend on our ability to have sufficient volumes of our products manufactured in a cost-effective and quality-controlled manner. We have engaged third parties to manufacture certain elements of our products at multiple contract manufacturing sites located around the world but do not have long-term agreements in place with some of our manufacturers and suppliers that would guarantee product availability, or the continuation of particular pricing or payment terms. We face a number of risks due to our dependence on contract manufacturers, including:
• reduced control over delivery schedules, particularly for international contract manufacturing sites;
• risks related to dependency on certain contract manufacturers;
• reliance on the quality assurance procedures of third parties;
• potential uncertainty regarding manufacturing yields and costs;
• potential lack of adequate capacity during periods of high demand or inability to fulfill manufacturing orders due to supply issues;
• potential variability of pricing or payment terms due to agreement length;
• risks and uncertainties associated with the locations or countries where our products are manufactured or otherwise operate, including potential disruptions caused by geopolitical events, military actions, work stoppages or other social factors, natural disasters, environmental factors, or public health emergencies;
• counterparty risk, particularly if our contract manufacturers are sensitive to inflation and interest-rate risk;
• limited warranties on components; and
• potential misappropriation of our intellectual property.
Any of these risks could impair our ability to fulfill orders. Our products are built with and incorporate increasingly sophisticated technology and any delays by our contract manufacturers or their inability to meet our product specifications or quality standards may cause us to be unable to meet the delivery requirements of our customers, which could decrease customer satisfaction and harm our product sales. In addition, if our contract manufacturers are unable or unwilling to continue manufacturing our products or components of our products in required volumes or our relationship with any of our contract manufacturers is discontinued for any reason, we would be required to identify and qualify alternative manufacturers, which could cause us to be unable to meet our supply requirements to our customers and result in the breach of our customer agreements. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming. If we are required to change or qualify a new contract manufacturer, we could lose revenue and damage our customer relationships.
Increased consolidation among our customers and suppliers in the communications networking industry has had, and could continue to have, an adverse effect on our business and results of operations.
We have seen increased consolidation in the communications networking industry over the past few years, which has adversely affected our business and results of operations. Customer consolidation in the past has led to changes in buying patterns, slowdowns in spending, redeployment of existing equipment and re-architecture of parts of existing networks or future networks, as the combined companies evaluate the needs of the combined business. Moreover, the significant purchasing power of these large companies can increase pricing and competitive pressures for us, including the potential for decreases in our average selling prices. If one of our customers is acquired by another company that does not rely on us to provide it with products or relies on another provider of similar products, we may lose that customer’s business. Such consolidation may further reduce the number of customers that generate a significant percentage of our revenue and may exacerbate the risks relating to dependence on a small number of customers. Any of the foregoing results will adversely affect our business, financial condition and results of operations.
In addition, our suppliers in the communications networking industry have continued to consolidate in recent years. Supplier consolidation may lead to increased prices of components for our products, deployment delays or a disruption in output. In addition, such consolidation may exacerbate the risks relating to our dependence on a small number of suppliers for certain components and materials that are required to manufacture our products.
We rely on various third-party service partners to help complement our global operations, and failure to adequately manage these relationships could adversely impact our financial results and relationships with customers.
We rely on a number of third-party service partners, both domestic and international, to complement our global operations. We rely upon these partners for certain installation, maintenance, logistics and support functions. Services provided by these partners typically relate to the design, construction and operation of customer networks. We must successfully identify, assess, train and certify qualified service partners in order to ensure the proper installation, deployment and maintenance of our products. The vetting and certification of these partners, particularly outside the U.S., can be costly and time-consuming, and certain partners may not have the same operational history, financial resources and scale as we have. Additionally, certain service partners may provide similar services for other companies, including our competitors. We may not be able to manage our relationships with our service partners effectively, and we cannot be certain that they will be able to deliver services in the manner or time required, that we will be able to maintain the continuity of their services, or that they will adhere to our approach to ethical business practices. We may also be exposed to a number of risks or challenges relating to the performance of our service partners, including:
• delays in recognizing revenue;
• liability for injuries to persons, damage to property or other claims relating to the actions or omissions of our service partners;
• our services revenue and gross margin may be adversely affected; and
• our relationships with customers could suffer.
If we do not effectively manage our relationships with third-party service partners, or if they fail to perform the services we request in the manner or time required, our financial results and relationships with our customers could be adversely affected.
We must respond to rapid technological change and comply with evolving industry standards and requirements for our products to be successful.
The optical transport networking equipment market is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We continually invest in research and development to sustain or enhance our existing products, but the introduction of new communications technologies and the emergence of new industry standards or requirements could render our products obsolete. Further, in developing our products, we have made, and will continue to make, assumptions with respect to which standards or requirements will be adopted by our customers and competitors. If the standards or requirements adopted by our prospective customers are different from those on which we have focused our efforts, market acceptance of our products would be reduced or delayed, and our business would be harmed. We are continuing to invest a significant portion of our research and development efforts in the development of our next-generation products. We expect our competitors will continue to improve the performance of their existing products and introduce new products and technologies and to influence customers’ buying criteria so as to emphasize product capabilities that we do not, or may not, possess. To be competitive, we must increase our understanding of competitive dynamics in our markets, better anticipate future customer requirements and continue to invest significant resources in research and development, sales and marketing, and customer support. The demand for investment resources may also increase as the technologies we develop and utilize become more complex and the skills required to undertake such development become more scarce and expensive to obtain. If we do not anticipate or meet these future customer requirements, including with respect to the energy efficiency of our products, and invest in the technologies, including artificial intelligence and machine learning, necessary to enable us to create, manufacture and sell the appropriate solutions on a timely basis, our competitive position and future sales may be limited, which would have an adverse effect on our business and financial condition. We may not have sufficient resources to undertake these investments, and we may not be able to make the technological advances necessary to be competitive and successful in the markets we serve.
Failure to accurately forecast our manufacturing requirements or customer demand could increase our costs, including inventory write-downs or equipment write-offs, or lose customers or orders to competitors, which would adversely affect our business and results of operations.
We generate forecasts of future demand for our products several months prior to the scheduled delivery to our prospective customers. This requires us to make significant investments before we know if corresponding revenue will be recognized. Lead times vary significantly for materials and components, including ASICs, that we need to order for the manufacture of our products and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. In the past, we have experienced lengthened lead times for certain components, which makes forecasting more challenging. We may be required to purchase increased levels of such components to satisfy our delivery commitments to our customers as a result of longer lead times for components. In addition, we must manage our inventory to ensure we continue to meet our commitments as we introduce new products or make enhancements to our existing products.
If we overestimate market demand for our products, including as a result of customers changing the timing or volume of their purchases in response to the evolving supply chain environment or broader macroeconomic conditions, and, as a result, increase our inventory in anticipation of customer orders that do not materialize, we will have excess inventory. This could result in increased risk of obsolescence and significant inventory write-downs. If we underestimate demand for our products, we will have inadequate inventory, which could slow down or interrupt the manufacturing of our products, cause delays in shipments and our ability to recognize revenue, and result in potential loss of customers or orders to competitors. In addition, we may be unable to meet our supply commitments to customers, which could result in a loss of certain customer opportunities or a breach of our customer agreements.
Actions that we may in the future take to restructure or streamline our business to cut costs and align our operating structure with current or future opportunities may not be as effective as anticipated and may have negative consequences.
We have incurred, and may in the future incur, substantial costs in connection with restructuring plans. Although such restructuring initiatives may be taken to improve our operating efficiency and to reallocate resources to align more closely with our evolving business model and current and future opportunities, they may not result in the benefits we anticipate. We incur substantial costs to implement restructuring plans, and our restructuring activities, if any, may subject us to reputational and litigation risks. Our past restructuring plans do not provide any assurance that we will realize anticipated cost savings or other benefits from any restructuring plans we may implement. In addition, restructuring plans may have other consequences, such as attrition beyond any planned reductions in workforce or a negative effect on employee morale and productivity or our ability to attract highly skilled employees. Restructuring presents other potential significant risks such as the actual or perceived disruption of service or reduction in service standards to customers, loss of sales, the failure to preserve supplier relationships and diversion of management attention. In addition, as a result of any restructuring actions we may take, our ability to execute on product development, address key market opportunities or meet customer demand could be materially and adversely affected. Further, any anticipated benefits from any restructuring initiatives we may take may be realized later than expected or not at all, and the ongoing costs of implementing these measures, if any, may be greater than anticipated. As a result, current or future restructuring plans may affect our revenue and other operating results.
Our large customers have substantial negotiating leverage, which may cause us to agree to terms and conditions that result in lower average selling prices and potentially increased cost of sales leading to lower gross margin, each of which would harm our results of operations.
Many of our customers are large service providers and ICPs that have substantial purchasing power and leverage in negotiating contractual arrangements with us. In addition, customer consolidation in the past few years has created combined companies that are even larger and have greater negotiating leverage. Our customers have sought and may continue to seek advantageous pricing, payment and other commercial terms. This may further impact our profitability if we are unable to recover through price increases passed along to these customers any additional costs we have incurred from inflationary pressures to the supply chain or shipping and freight. We have also occasionally agreed and may continue to agree to unfavorable commercial terms with these customers, including the potential of reducing the average selling price of our products, increasing cost of sales or agreeing to extended payment terms in response to these commercial requirements or competitive pricing pressures. Continued inflation could decrease the profitability of customer contracts, particularly those with extended payment terms, that are not indexed to inflation. If we are compelled to agree to disadvantageous terms and conditions, unable to comply with such terms and conditions, or unable to adapt our business model and operations to such terms and conditions, then our operating results will be negatively impacted.
Our sales cycle can be long and unpredictable, which could result in an unexpected revenue shortfall in any given quarter.
Our products can have a lengthy sales cycle, which can extend from six to twelve months and may take even longer for larger prospective customers. Our prospective customers conduct significant evaluation, testing, implementation and acceptance procedures before they purchase our products. We incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale. Supply chain disruptions have also at times lengthened, and may in the future lengthen, our sales cycle due to delays in the customer certification process for our products.
Because our sales cycle is long, we are likely to recognize higher inflation-related costs before recognizing the benefits of any price increases that we implement for our products. Moreover, the costs associated with our sales cycle may increase faster than our ability to increase prices. In addition, changes in regulatory requirements or uncertainty associated with the regulatory environment could delay or impede investment in network infrastructures and adversely affect our business, financial condition and results of operations.
Because the purchase of our equipment involves substantial cost, most of our customers wait to purchase our equipment until they are ready to deploy it in their network. As a result, it is difficult for us to accurately predict the timing of future purchases by our customers. In addition, product purchases are often subject to budget constraints, multiple approvals and unplanned administrative processing and other delays, including the need for the customer to obtain external financing. If sales expected from customers for a particular quarter are not realized in that quarter or at all, our revenue will be negatively impacted.
We have received and may receive additional grants from governments, agencies or research organizations. If we are not successful in securing the funding contemplated by those grants, or if we are unable to comply with the terms of those grants, then our business might be harmed.
From time to time, we may receive grants from national, state and local governments, agencies, or research organizations. For example, we entered into a Direct Funding Agreement (the “DFA”) with the U.S. Department of Commerce (the “Department of Commerce”) on January 16, 2025, to receive grants under the CHIPS and Science Act (“CHIPS Act”) for expansion and modernization of our semiconductor facilities in both Silicon Valley, California and Lehigh Valley, Pennsylvania. Our receipt of these grants remains subject to the terms and conditions of the DFA. It is possible that we will not receive any money pursuant to the CHIPS Act grants contemplated in the DFA and, even if we receive such CHIPS Act grants, we may not pursue the full amount of the available grants. Furthermore, noncompliance with the terms of the DFA or other grants that we may receive could result in our forfeiture of all or a portion of any future amounts to be received, as well as obligate us to repay all or a portion of amounts already received pursuant to the grants. Failure to obtain grants that we seek, to fully utilize available grants, or to comply with the terms of grants, including pursuant to the CHIPS Act, could impact our ability to achieve our goals for the projects that would otherwise benefit from grant funding and could have an adverse effect on our business, results of operations or financial or tax position (including the loss of any investment tax credits that might have otherwise been available under the CHIPS Act).
Compliance with the terms of the DFA and any other grant that we might receive could add complexity to our operations and increase our costs. For example, the DFA restricts our ability to pay dividends and make share repurchases, restricts our ability to expand semiconductor manufacturing capacity in certain foreign countries, places restrictions on joint research and technology licensing with certain foreign entities, restricts our use or installation of prohibited equipment that is manufactured or assembled by certain foreign entities, requires our compliance with various federal regulations and requirements, and limits our disposition of the projects that receive DFA awards.
Any acquisitions or strategic transactions that we undertake could disrupt our business and harm our financial condition and results of operations.
We have made strategic acquisitions of businesses, technologies and other assets in the past, including most recently the Coriant Acquisition. We may engage in acquisitions, divestitures or other strategic transactions in the future. In order to undertake certain of these transactions, we may use cash, issue equity that could dilute our current stockholders, or incur debt or assume indebtedness. If we are unable to achieve the anticipated efficiencies and strategic benefits of such transactions, it could adversely affect our business, financial condition and results of operations. In addition, the market price of our common stock could be adversely affected if investors and securities analysts react unfavorably to a strategic transaction or if the integration or the anticipated financial and strategic benefits of such transactions are not realized as rapidly as or to the extent anticipated by investors and securities analysts.
Acquisitions, divestitures or other strategic transactions can also result in adverse tax consequences, warranty or product liability exposure related to acquired assets, additional stock-based compensation expense, and write-up of acquired inventory to fair value. Divestitures can also result in contractual, employment or intellectual property liability related to divested assets. In addition, we may record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges in the future. If our actual results, or the plans and estimates used in future impairment analyses, are less favorable than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
Acquisitions, divestitures or other strategic transactions also involve numerous risks that could disrupt our ongoing business and distract our management team, including:
• problems integrating the acquired operations, technologies or products with our own;
• challenges in divesting assets and intellectual property without negatively affecting our retained business;
• diversion of management’s attention from our core business;
• adverse effects on existing business relationships with suppliers and customers;
• risks associated with entering new markets or exiting existing markets; and
• loss of key employees.
Our failure to adequately manage the risks associated with an acquisition, divestment or strategic transaction could have an adverse effect on our business, financial condition and results of operations.
Financial and Macroeconomic Risk Factors
We may be unable to generate the cash flow necessary to make anticipated capital expenditures, service our debt or grow our business.
We may not be able to generate sufficient cash flow from operations to make anticipated capital expenditures, service our debt or grow our business. Our ability to pay our expenses, service our debt and fund planned capital expenditures will depend on our future performance, which will be affected by general economic, competitive, legislative, political, regulatory and other factors beyond our control, and our ability to continue to realize synergies and anticipated cost savings. If we are unable to generate sufficient cash flow from operations to service our debt or to make anticipated capital expenditures, we may be required to sell assets, reduce capital expenditures, borrow additional funds or evaluate alternatives for efficiently funding our capital expenditures and ongoing operations, including the issuance of equity, equity-linked and debt securities.
Unfavorable macroeconomic and market conditions may adversely affect our industry, business and financial results.
In the past, unfavorable macroeconomic and market conditions, including recessionary environments, have resulted in sustained periods of decreased demand for optical communications products and slowdowns in the telecommunications industry in which we operate. Such slowdowns may result in:
• reduced or delayed demand for our products as a result of constraints on capital spending by our customers or excess inventory held by our customers;
• increased price competition for our products, not only from our competitors, but also as a result of the utilization of inventoried or underutilized products by our customers or potential customers, which could put additional downward pressure on our near-term gross profits;
• risk of excess or obsolete inventories;
• our customers facing financial difficulties, including bankruptcy;
• delayed collections of accounts receivable amounts or payment defaults;
• excess internal manufacturing capacity and higher associated overhead costs as a percentage of revenue; and
• more limited ability to accurately forecast our business, operating capital needs and future financial performance.
Inflation, high interest rates, and other signs of economic disruption or recession, have also contributed to adverse global macroeconomic conditions.
Our customers may delay or cancel their purchases or increase the time they take to pay or default on their payment obligations due to a lack of liquidity in the capital markets, the continued uncertainty in the global economic environment or inflationary concerns, which could result in a higher level of bad debt expense and would negatively affect our business and operating results. In addition, currency fluctuations could negatively affect our international customers’ ability or desire to purchase our products.
A lack of liquidity and economic uncertainty may also adversely affect our suppliers or the terms on which we purchase products from these suppliers. These impacts could limit our ability to obtain components for our products from these suppliers and could adversely impact our supply chain or the delivery schedule to our customers. Suppliers could also require us to purchase more expensive components, or re-design our products, which could cause increases in the cost of our products and delays in the manufacturing and delivery of our products. Such events could harm our gross margin and harm our reputation and our customer relationships, either of which could harm our business and operating results.
Inflation may adversely affect us by increasing costs beyond what we can recover through price increases.
Inflation, which has continued in the U.S. and globally, can adversely affect us by increasing the costs of labor, supplies and other costs of doing business, and price increases within our supply chain have negatively affected our gross margin . In an inflationary environment, our ability to raise prices or add additional cost-recovery surcharges of a magnitude sufficient to match the rate of inflation, on a timely basis, may be constrained by customer resistance and competitive concerns, as well as industry-specific and other economic conditions, which would reduce our profit margins. Moreover, even if we seek to implement price increases in response to inflationary pressures, because of our long sales cycle, we may recognize increased costs as a result of inflation before we are able to recognize the benefits of any such price increases. We have experienced increases in the prices of labor, supplies and other costs of doing business and continued inflationary pressures could continue to adversely impact our profitability.
If we need additional capital in the future, it may not be available to us on favorable terms, or at all.
Our business requires significant capital. We have historically relied on outside debt or equity financing as well as cash flow from operations to fund our operations, capital expenditures and expansion. For example, in March 2020, we issued our 2.5% Convertible Senior Notes due 2027 (the “2027 Notes") to raise additional funds for general corporate purposes, including working capital to fund growth and potential strategic projects. On August 12, 2020, we entered into an Open Market Sales Agreement with Jefferies LLC ("Jefferies") under which we issued and sold through Jefferies, acting as agent or principal, shares of our common stock having an aggregate offering price of $96.3 million, to raise funds for general corporate purposes, including working capital and capital expenditures. In August 2022, we issued our 3.75% Convertible Senior Notes due 2028 (the "Existing 2028 Notes") to repurchase existing convertible notes, for general corporate purposes, including working capital and to fund growth and potential strategic projects. In June 2023, we issued additional 3.75% Convertible Senior Notes due 2028 (the "Additional 2028 Notes," together with the Existing 2028 Notes, the "2028 Notes," and the 2028 Notes, together with the 2027 Notes, the “convertible senior notes”) to repurchase existing convertible notes, for general corporate purposes, including working capital and to fund growth and potential strategic projects.
We may require additional capital from equity or equity-linked financing, debt financing or other financings in the future to fund our operations, respond to competitive pressures or strategic opportunities or to refinance our existing debt obligations. In the event that we require additional capital, we may not be able to secure timely additional financing, or restructure existing debt, on favorable terms, or at all, and may be affected by the impacts on capital markets of global economic uncertainty, uncertainty in the financial and banking industry and inflationary pressures. The terms of any additional financings or restructurings may place limits on our financial and operating flexibility and we may not be able to obtain terms as favorable as the terms of our existing debt, including any debt being refinanced. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be limited and our business will be harmed.
Our Loan Agreement, the DFA and any other debt agreements into which we may enter in the future may restrict our operations, particularly our ability to respond to changes or to take certain actions regarding our business.
Our Loan, Guaranty and Security Agreement, dated as of June 24, 2022, by and among us and other obligators party thereto, the lenders party thereto, and Bank of America, N.A., as agent (the "Loan Agreement") and the DFA each contain a number of restrictive covenants that impose operating and financial restrictions on us and limit our ability to engage in acts that may be in our long-term interest, including restrictions on our ability to incur debt, restrictions on our ability to pay dividends and make share repurchases, create liens and encumbrances, engage in certain fundamental changes, dispose of assets, prepay certain indebtedness, make restricted payments, make investments, and engage in transactions with affiliates and certain foreign entities, in each case, subject to limitations and exceptions set forth in the Loan Agreement or the DFA, as applicable. The Loan Agreement also contains a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio.
The Loan Agreement also contains customary events of default, such as the failure to pay obligations when due, a material breach of representations and warranties or covenants, the entry of material judgments against certain of our subsidiaries, the initiation of bankruptcy or insolvency proceedings of certain of our subsidiaries, defaults on certain other indebtedness, a change of control, the failure of the guaranty of certain of our subsidiaries to be in effect or the failure of the security documents to create valid and perfected liens or the loan documents to be valid and enforceable, which could have a material adverse effect on our business, operations, and financial results. Upon an event of default, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral, which could force us into bankruptcy or liquidation. In the event that our lenders accelerated the repayment of the borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the Loan Agreement would likely have a material adverse effect on us and may constitute a default under our convertible debt securities. As a result of these restrictions, we may be limited in how we conduct business, unable to raise additional debt or equity financing to operate during general economic or business downturns, or unable to compete effectively or to take advantage of new business opportunities.
The DFA provides that in the event of certain significant breaches by us, such as violating the CHIPS Act program requirements, the completion of a Change of Control (as defined in the DFA), or project abandonment, among other things, the U.S. Department of Commerce may have termination rights and other remedies. Such rights and remedies vary depending on the nature of such breach, but can include: (i) requiring the repayment of some of all of the awards made to us under the DFA (“Awards”); (ii) imposing additional conditions on the Awards; (iii) suspending or terminating all or any portion of the Awards; (iv) withholding or suspending a disbursement of the Awards; (v) terminating the DFA and the Awards; and (vi) taking other actions available to the U.S. Department of Commerce.
In addition, we may enter into other credit agreements or other debt arrangements from time to time which contain similar or more extensive restrictive covenants and events of default, in which case we may face similar or additional limitations as a result of the terms of those credit agreements or other debt arrangements.
Our debt obligations may adversely affect our ability to raise additional capital and strain cash flow, particularly if we elect to settle these obligations in cash upon conversion or upon maturity or required repurchase.
As of December 28, 2024, the outstanding aggregate principal amount of the 2027 Notes and the 2028 Notes was $200.0 million and $473.8 million, respectively. The degree to which we are leveraged could have important consequences, including, but not limited to, the following:
• our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, litigation, general corporate or other purposes may be limited; and
• a substantial portion of our future cash balance may be dedicated to the payment of the principal of our indebtedness as we have stated the intention to pay the principal amount of each series of convertible senior notes in cash upon conversion or when otherwise due, such that we would not have those funds available for use in our business.
Our ability to meet our payment obligations under our debt instruments, including the convertible senior notes, depends on our future cash flow performance. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that may be beyond our control. There can be no assurance that our business will generate positive cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations. As a result, we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.
Our international sales and operations subject us to additional risks that may harm our operating results.
Sales of our products into international markets continue to be an important part of our business. During 2024, 2023 and 2022, we derived approximately 41%, 38% and 45%, respectively, of our revenue from end-customers outside of the U.S. We expect that significant management attention and financial resources will be required for our international activities over the foreseeable future as we continue to operate in international markets. In some countries, our success in selling our products and growing revenue will depend in part on our ability to form relationships with local partners. Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our products could impact our ability to maintain or increase international market demand for our products. In addition, many of the companies we compete against internationally have greater name recognition and a more substantial sales and marketing presence.
We have sales and support personnel in the Americas, EMEA (with offices in the Middle East) and APAC (including China). In addition, we have established development centers in Canada, China, Finland, Germany, India, Portugal and Sweden. There is no assurance that our reliance upon development resources in international locations will enable us to achieve meaningful cost reductions or greater resource efficiency. We are also aggressively pursuing opportunities with customers in additional geographies, including EMEA, APAC and Latin America. Our efforts to increase our sales and capture market share in international markets may ultimately be unsuccessful and may limit our growth and adversely impact our business, financial condition and results of operations.
New or continuing disruptions of the global supply chain or the manufacture of our customer’s components caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products or provide installation and maintenance services to our customers.
In addition, our operations in Russia have been impacted by sanctions and other trade controls imposed by the U.S. and other governments in response to Russia's military operations in Ukraine which started in February 2022. The imposition of these sanctions and controls have prevented us from performing existing contracts. For the year ended December 28, 2024, less than 1% of our revenue was derived from customers in Russia. A de minimis percentage of our revenue is derived from Russian customers including channel partners and customers in other countries whose contracts with us may involve Russian entities.
Geopolitical tension in the Middle East may broaden into a regional conflict that could impact our ability to maintain and expand our customer base in the Middle East. For example, the recent armed conflict in the Middle East has impacted our sales and operations in the Middle East and caused us to implement travel restrictions there.
Our international operations are subject to inherent risks, and our future results could be adversely affected by a variety of factors, many of which are outside of our control, including:
• greaterdifficulty in collecting accounts receivable and longer collection periods;
• difficulties of managing and staffing international offices, and the increased travel, infrastructure and legal compliance costs associated with such international locations;
• political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;
• tariff and trade barriers and other regulatory requirements, contractual limitations, or customer specifications impacting our ability to sell or develop our products in certain foreign markets;
• less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries;
• potentially adverse tax consequences;
• natural disasters, acts of war or terrorism, and public health crises;
• changes to free trade agreements, trade protection measures, tariffs, export compliance, domestic preference procurement requirements, qualification to transact business and additional regulatory requirements, including changes related to policy and other changes made by the federal government in the U.S., other national governments or multinational bodies; and
• effects of changes in currency exchange rates, particularly relative increases in the exchange rate of the U.S. dollar compared to other currencies that could negatively affect our financial results and cash flows.
The concentration of the storage and distribution of our inventory primarily in one location in southeastern Asia also increases the risks of our global operations. As a result, our operations are susceptible to local and regional risks there, including accidents, system failures and weather conditions, natural disasters (including floods and earthquakes and related fires), acts of war and other unforeseen events and circumstances. Any significant interruption in the operations or availability of the storage and distribution facilities in which our inventory is held could lead to logistical and fulfillment issues or increased costs, which could have a material adverse effect on our results of operations, financial condition and cash flows.
International customers may also require that we comply with certain testing or customization of our products to conform to local standards. The product development costs to test or customize our products could be extensive and a material expense for us.
Our international operations are also subject to increasingly complex foreign and U.S. laws and regulations, including, but not limited to, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), and the United Kingdom Bribery Act 2010, as amended (the “UK Bribery Act”), antitrust or competition laws, anti-money laundering laws, various trade controls, national security related regulations, and data privacy laws, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our reputation, our international expansion efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies, procedures and training designed to ensure compliance with these laws and regulations, there can be no complete assurance that any individual employee, contractor or agent will not violate our policies. Additionally, the costs of complying with these laws (including the costs of investigations, auditing and monitoring) could also adversely affect our current or future business.
As we continue to expand our business globally, our success will depend, in large part, on our ability to effectively anticipate and manage these and other risks and expenses associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, financial condition and results of operations.
We may be adversely affected by fluctuations in currency exchange rates.
A portion of our sales and expenses stem from countries outside of the U.S., and are in currencies other than U.S. dollars, and therefore subject to foreign currency fluctuation. Accordingly, fluctuations in foreign currency rates could have a material impact on our financial results in future periods. We have from time to time entered into foreign currency exchange forward contracts to reduce the impact of foreign currency fluctuations on certain non-functional currency account balances. Even if we have forward contracts in place, while they may reduce some of the impact of currency exchange rate movements on certain transactions, they would not cover all foreign-denominated transactions and therefore may not entirely eliminate the impact of fluctuations in exchange rates on our results of operations and financial condition.
Our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.
Our effective tax rate can be adversely affected by several factors, many of which are outside of our control, including:
• changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;
• changes in the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
• changing tax laws, regulations, rates and interpretations in multiple jurisdictions in which we operate;
• changes to the financial accounting rules for income taxes;
• the tax effects of acquisitions; and
• the resolution of issues arising from tax audits.
In August 2022, the U.S. enacted the Inflation Reduction Act, which, among other changes, implements a 1% excise tax on certain stock buybacks, that applies to repurchases of stock by U.S. corporations.
Many countries and organizations, such as the Organization for Economic Cooperation and Development ("OECD"), are actively considering changes to existing tax laws or have proposed or enacted new laws, including an agreement to implement a 15% global minimum corporate tax, that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. While it is uncertain if the U.S. will adopt the minimum tax directive, several countries in which we operate have adopted the minimum tax directive, and other countries are in the process of introducing legislation to implement the minimum tax directive. Although we currently do not anticipate any materially adverse impacts on our business or results of operations, we cannot provide any assurances that these provisions will not have a materially adverse impact on our effective tax rate in the future years. We continue monitoring developments and evaluating the impacts these new rules may have on our tax rate. Any additional changes in U.S. federal or state or international tax laws or tax rulings could adversely affect our effective tax rate and our results of operations.
Beginning January 1, 2022, the Jobs Act eliminated the right to deduct research and development expenditures for tax purposes in the period the expenses were incurred and instead requires all U.S. and foreign research and development expenditures to be amortized over five and 15 tax years, respectively. This provision may materially increase our effective tax rate and reduce our operating cash flows over time as we continue to utilize available net operating losses and tax credits. Furthermore, our federal and state net operating loss carryforwards and tax credits may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986 and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards and tax credits that may be used in any given year in the event of special occurrences, including significant ownership changes.
We may issue additional shares of our common stock in connection with conversions of the 2027 Notes or the 2028 Notes, and thereby dilute our existing stockholders and potentially adversely affect the market price of our common stock.
In the event that some or all of each series of convertible senior notes are converted and we elect to deliver shares of common stock to the extent permitted, the ownership interests of existing stockholders will be diluted, and any sales in the public market of any shares of our common stock issuable upon such conversion could adversely affect the prevailing market price of our common stock. In addition, the anticipated conversion of any series of convertible senior notes we have issued could depress the market price of our common stock.
The fundamental change provisions of the 2027 Notes and the 2028 Notes may delay or prevent an otherwise beneficial takeover attempt of us.
If a fundamental change (as defined in the applicable indenture governing our convertible senior notes), such as an acquisition of our company, occurs prior to the maturity of the 2027 Notes or the 2028 Notes, as applicable, holders of the applicable series of convertible senior notes will have the right, at their option, to require us to repurchase all or a portion of their convertible senior notes of such series. In addition, if such fundamental change also constitutes a make-whole fundamental change, the conversion rate for the applicable series of convertible senior notes may be increased upon conversion of the such series of convertible senior notes in connection with such make-whole fundamental change. Any increase in the conversion rate will be determined based on the date on which the make-whole fundamental change occurs or becomes effective and the price paid (or deemed paid) per share of our common stock in such transaction. Any such increase will be dilutive to our existing stockholders. Our obligation to repurchase any series of convertible senior notes or increase the conversion rate upon the occurrence of a make-whole fundamental change may, in certain circumstances, delay or prevent a takeover of us that might otherwise be beneficial to our stockholders.
Legal and Regulatory Risk Factors
We are subject to various governmental export control, trade sanctions, and import laws and regulations that could impair our ability to compete in international markets or subject us to liability if we violate these controls.
In some cases, our products are subject to U.S. and foreign export control laws and regulations that may limit where and to whom we are permitted to sell our products, including the Export Administration Regulations administered by the U.S. Department of Commerce, and our activities may be subject to trade and economic sanctions, including those administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (collectively, “Trade Controls”). As such, a license may be required to export or re-export our products, or provide related services, to certain countries and end-users, and for certain end-uses. Further, our products incorporating encryption functionality may be subject to special controls applying to encryption items or certain reporting requirements.
We have procedures in place designed to ensure our compliance with Trade Controls, with respect to which failure to comply could subject us to both civil and criminalpenalties, including substantial fines, possible incarceration of responsible individuals for willful violations, possible loss of our export or import privileges, or reputational harm. Further, the process for obtaining necessary licenses may be time-consuming or unsuccessful, potentially causing delays in sales or losses of sales opportunities. Trade Controls are complex and dynamic regimes, and monitoring and ensuring compliance can be challenging, particularly given that our products are widely distributed throughout the world. Although we have no knowledge that our activities have resulted in material violations of Trade Controls, any failure by us or our partners to comply with applicable laws and regulations would have negative consequences for us, including reputational harm, government investigations and penalties.
In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products and certain product features or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in U.S. and foreign import and export regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the import and export of our products to certain countries altogether. For example, the U.S. has imposed tariffs on a large variety of products originating from China, including some on components that are supplied to us from China. Additionally, the current U.S. presidential administration has announced, and in certain cases implemented, tariffs on products originating from a number of countries. Depending upon the duration and implementation of these and future tariffs, as well as our ability to mitigate their impact, these tariffs could materially affect our business, including in the form of increased cost of goods sold, increased pricing for customers and reduced sales. Additionally, the U.S. government has continued to expand controls affecting the ability to send certain products and technology related to semiconductors, semiconductor manufacturing and supercomputing to China without an export license and adding additional entities to restricted party lists. It remains unclear what additional actions, if any, will be taken by the governments of the U.S. or China with respect to such trade and tariff matters in connection with the change in the U.S. presidential administration or otherwise. Any change in import and export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies impacted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Failure to comply with these and similar laws on a timely basis, or at all, or any limitation on our ability to develop, export or sell our products would adversely affect our business, financial condition and results of operations.
If we fail to protect our intellectual property rights, our competitive position could be harmed, or we could incur significant expense to enforce our rights.
We depend on our ability to protect our proprietary technology. We rely on a combination of methods to protect our intellectual property, including limiting access to certain information, and utilizing trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may be inadequate to precludemisappropriation or unauthorized disclosure of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation, unauthorized disclosure or infringement is uncertain, particularly in countries outside of the U.S. This is likely to become an increasingly important issue as we expand our operations, product offerings and product development into countries that provide a lower level of intellectual property protection. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with a competitive advantage, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future.
Protecting against the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult, time consuming and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity or scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management resources, either of which could harm our business, financial condition and results of operations. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
Claims by others that we infringe on their intellectual property rights could harm our business.
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. In particular, many leading companies in the optical transport networking industry, including our competitors, have extensive patent portfolios with respect to optical transport networking technology. In addition, non-practicing patent holding companies seek to monetize patents they have purchased or otherwise obtained. We expect that infringementclaims may increase as the number of products and competitors in our market increases and overlaps in technology implementation occur. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to our business or seek to invalidate the proprietary rights that we hold. Competitors or other third parties have asserted, and may continue to assert, claims or initiate litigation or other proceedings against us or our manufacturers, suppliers or customers alleginginfringement of their proprietary rights, or seeking to invalidate our proprietary rights, with respect to our products and technology. In addition, in the past we have had certain patent licenses with third parties that have not been renewed, and if we cannot successfully renew these licenses, we could face claims of infringement. In the event that we are unsuccessful in defendingagainst any such claims, or any resulting lawsuits or proceedings, we could incur liability for damages or have valuable proprietary rights invalidated. For additional information regarding certain of the legal proceedings in which we are involved, see the information set forth under the heading “Legal Matters” in Note 12, Commitments and Contingencies, in Part II, Item 8 of this Annual Report on Form 10-K.
Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defendingagainst the claim, and could distract our management from running our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages or could include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which would require significant effort and expense and may ultimately not be successful. Any of these events could harm our business, financial condition and results of operations.
Competitors and other third parties have and may continue to assert infringementclaimsagainst our customers and sales partners. Any of these claims may require us to initiate or defend potentially protracted and costlylitigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and sales partners from claims of infringement of proprietary rights of third parties. If any of these claimssucceed, we may be forced to pay damages on behalf of our customers or sales partners, which could have an adverse effect on our business, financial condition and results of operations.
We also incorporate free and open source licensed software into our products. Although we monitor our use of such open source software closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In addition, non-compliance with open source software license terms and conditions could subject us to potential liability, including intellectual property infringement or contract claims. In such events, we may be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished in a timely manner, any of which could adversely affect our business, financial condition and results of operations.
Security incidents, such as data breaches and cyber-attacks, could compromise our intellectual property and proprietary or confidential information and cause significant damage to our business and reputation.
In the ordinary course of our business, we maintain sensitive data on our networks and systems, including data related to our intellectual property and data related to our business, customers and business partners, which may be considered proprietary or confidential information. This sensitive data includes certain personal information and other data relating to our employees and others. We also utilize third-party service providers to host, transmit, or otherwise process data in connection with our business activities, including our supply chain processes, operations, and communications. Companies, especially in the technology industry, have been increasingly subject to a wide variety of security incidents, cyber-attacks, malicious activity, including ransomware, malware and viruses, and other attempts to gainunauthorized access and disrupt systems and the confidentiality, security, and integrity of information, and we and our third-party service providers and suppliers have faced and may continue to face security threats and attacks from a variety of sources. Geopolitical tensions or conflicts have in the past led to, and may in the future lead to, increased risk of cybersecurity attacks. Moreover, advancements in technology, such as artificial intelligence and machine learning, are changing and may continue to change the way companies are subjected to attempts to gainunauthorized access and disrupt systems, thereby increasing the risks of security threats and attacks. In accordance with our flexible approach to work arrangements, many of our employees are also working from home and accessing our corporate network via remote devices, which may be less secure than those used in our offices and thus could increase the potential for such events to occur.
While the secure maintenance of this information and the security of the systems used in our business are critical to our business and reputation, our network and storage applications, and those systems and other business applications maintained by our third-party providers, may be subject to unauthorized access by hackers or breached or otherwise compromised due to operator error, malfeasance or other system disruptions. It may be difficult to anticipate or immediately detect such security incidents or breaches and to prevent or mitigate damage caused as a result. Accordingly, a data breach, security incident, cyber-attack, attack using ransomware or other malware, or any other unauthorized access to systems used in our business or unauthorized acquisition, disclosure, or other processing of our information or other information that we or our third-party vendors maintain or otherwise process could compromise our intellectual property, disrupt our operations, or result in loss of or unauthorized access to or acquisition, disclosure, modification, misuse, corruption, unavailability, or destruction of proprietary or confidential information. While we work to safeguard our internal networks and systems and validate the security of our third-party suppliers and providers in order to mitigate these potential risks, including through information security policies and employee awareness and training, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches or incidents, and we cannot guarantee that our systems and networks or our third-party service providers’ systems and networks have not been breached or that they or any components of our supply chain do not contain exploitable defects or bugs, including defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support our operations. We and third-party service providers also may face difficulties or delays in identifying or responding to security breaches and other security-related incidents. We have been subjected in the past to a range of immaterial incidents resulting from, for example, phishing, emails purporting to come from an executive or vendor seeking payment requests, malware and communications from look-alike corporate domains. While they have not had a material effect on our business or our network security to date, security breaches or incidents involving access to or improper use of our systems, networks or products, or those of third-party service providers, could compromise confidential or otherwise protected information, result in unauthorized acquisition, disclosure, modification, misuse, corruption, unavailability, destruction, or other processing of data, cause payments to be diverted to fraudulent accounts, or otherwise disrupt our operations. Security breaches or incidents, or any reports or perceptions that they have occurred, could cause us to incur significant costs and expenses to remediate and otherwise respond to any actual or suspectedbreach or incident, subject us to regulatory actions and investigations, disrupt key business operations, result in claims, demands, and liability, and divert attention of management and key information technology resources, any of which could cause significant harm to our business and reputation. Even the perception of inadequate security may damage our reputation and negatively impact our business. Further, we could be required to expend significant capital and other resources to address any security incident or breach and to attempt to prevent future security incidents and breaches.
Although we maintain insurance coverage that may cover certain liabilities in connection with some security breaches and other security incidents, we cannot be certain our insurance coverage will be adequate for liabilities actually incurred, including any consequential damages that may arise from such security incidents, that insurance will continue to be available to us on commercially reasonable terms (if at all) or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claimsagainst us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage could have a material adverse effect on our business, including our financial condition, results of operations and reputation.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the identified material weaknesses, or if we experience additional material weaknesses or deficiencies in the future or if we otherwise fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and the rules and regulations of The Nasdaq Stock Market LLC. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We continue to develop and refine our disclosure controls, internal control over financial reporting and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.
As described under the heading "Controls and Procedures" in Part II, Item 9A of this Annual Report on Form 10-K, we identified control deficiencies within the revenue portion of our quote to cash cycle (revenue cycle), inventory cycle and financial statement close process, and with respect to these, our internal resources, expertise and policies required to maintain an effective control environment, that, individually or in the aggregate, constitute material weaknesses in our internal control over financial reporting, resulting in the determination that our disclosure controls and procedures were not effective as of December 28, 2024. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of a company's annual or interim financial statements would not be prevented or detected on a timely basis. In particular, we determined that (i) within the revenue cycle, controls over the establishment of the stand-alone selling prices (“SSPs”) for our performance obligations were not designed or operating effectively to include an adequate review of the underlying data used to develop and establish SSPs in conformity with ASC 606, Revenue from Contracts with Customers , (ii) within the inventory cycle, controls over judgements used in the estimation of reserves for excess and obsolete inventory were not operating effectively to support such judgements, (iii) as related to both our revenue and inventory cycles, certain key controls were not operating effectively to assess the completeness and accuracy of Information Produced by the Entity ("IPE") and (iv) within the design and operating effectiveness of controls related to our financial statement close process, controls were not designed to ensure appropriate segregation of duties or to evaluate the completeness and accuracy of manual journal entry postings made to our general ledger system. These material weaknesses indicate that we had insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with the complexity of our business and our financial accounting and reporting requirements, which impacted our ability to adequately design, implement and monitor financial reporting controls related to our financial statement close process.
In response to the identified material weaknesses, management has implemented or plans to implement the remediation measures described under the heading "Controls and Procedures" in Part II, Item 9A of this Annual Report on Form 10-K. While management believes these remediation measures will remediate the identified material weaknesses and strengthen our overall internal control over financial reporting, the identified material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management and our external auditors have concluded, through testing, that these controls are operating effectively. As management continues to evaluate and work to enhance our internal control over financial reporting, management may take additional measures to address control deficiencies or we may modify some of the remediation measures. Despite these efforts, we may nevertheless be unsuccessful in remediating the identified material weaknesses. Further, additional weaknesses in our internal control over financial reporting or disclosure controls and procedures may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. For example, we were unable to file our Quarterly Report on Form 10-Q for the period ended March 30, 2024 by the initial deadline of May 9, 2024, due to the reasons described in the Notification of Late Filing on Form 12b-25, filed with the SEC on May 10, 2024. Our failure to file periodic and certain current reports with the SEC in a timely manner could impact our operations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our securities and could adversely impact our business.
In order to restore, maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, we have expended and anticipate that we will continue to expend significant resources and undertake various actions, implementing a remediation plan, incurring accounting-related costs and implementing new internal controls and procedures, and providing significant management oversight. As part of our remediation plan, we are reviewing and enhancing our personnel with the appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with the complexity of our business and our financial accounting and reporting requirements, particularly in areas related to our revenue and inventory cycles. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business and could have a material and adverse effect on our operating results and could cause a decline in the price of our securities. In addition, if we are unable to continue to meet these requirements, we may not be able to maintain our listing on the Nasdaq Global Select Market.
We are subject to environmental regulations that could adversely affect our business.
We are subject to complex U.S. and foreign environmental rules and regulations or other social initiatives that impact how and where we manufacture our products. In particular, our manufacturing operations use substances that are regulated by various federal, state, local, foreign and international laws and regulations governing health, safety and the environment, including U.S. Environmental Protection Agency regulations and the Waste Electrical and Electronic Equipment Directive, Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment ("RoHS") and Registration, Evaluation, Authorization, and Restriction of Chemicals regulations adopted by the E.U. From time to time, the E.U. restricts or considers restricting certain substances under these directives. For example, InP has been considered for restriction under RoHS. Any restriction of InP or any other substance integral to our systems could materially adversely affect our business, financial condition and operating results. In addition, if we experience a problem complying with these laws and regulations, it could cause an interruption or delay in our manufacturing operations or it could cause us to incur liabilities or costs related to health, safety or environmental remediation or compliance. We could also be subject to liability if we do not handle these substances in compliance with safety standards for handling, storage and transportation and applicable laws and regulations. If we experience a problem or fail to comply with such safety standards or laws and regulations, our business, financial condition and operating results may be harmed.
Regulations relating to environmental, social and governance matters, as well as customer, supplier, investor or other stakeholder demands, may add operational complexity for us.
There has been an increased focus on environmental, social and governance (“ESG”) matters that affect companies globally, including by the SEC, the E.U. and certain state governments. A number of customers have adopted, or may adopt, procurement policies that include ESG provisions or requirements that may impose additional burdens and costs on us as suppliers. Moreover, many investors now require companies to disclose corporate ESG policies, practices, goals and metrics. In addition, various governmental authorities are developing ESG and disclosure-related laws or regulations that could cause us to incur significant compliance costs and other direct and indirect costs. Recent political changes, including but not limited to the change in U.S. Presidential administration, have generated uncertainty about government and investor policies related to ESG laws, regulations and initiatives. Any disclosed goals and aspirations related to ESG are subject to assumptions that could change over time, may evolve as the Company and global ESG practices change, and may not be achieved. In addition, ESG-related standards and regulations are continuing to evolve and may not be adequately harmonized. Our efforts to abide by these regulations, to report against these standards and to accomplish our ESG-related goals and aspirations present operational, reputational, financial, audit, legal and other risks. Our processes and controls may not always align with evolving standards, laws and regulations, our interpretation thereof may differ from governmental authorities and other parties and the regulations and standards may continue to evolve, any of which could result in significant revisions to our goals, reported progress toward those goals, or other ESG information we disclose. In addition, any failure or perceived failure to pursue or fulfill previously stated goals and aspirations may result in reputational damage and loss of business, and could expose us to government enforcement actions, private litigation or other adverse consequences, and may adversely affect our business and results of operations.
We are subject to global laws and regulations governing privacy, data protection, cybersecurity and artificial intelligence that could adversely affect our business or subject us to liability.
Data privacy, data protection, cybersecurity and artificial intelligence ("AI") are areas of increasing focus for our customers, governmental regulators and privacy advocates, and many jurisdictions, including the E.U., the U.S., China and other regions, are evaluating or have implemented laws and regulations relating to cybersecurity, privacy and data protection, which can affect the market and requirements for networking and communications equipment. For example, the General Data Protection Regulation (“GDPR”) in effect in the E.U., regulatory standards similar to the GDPR in effect in the United Kingdom, the Personal Information Protection Law ("PIPL") in China, the California Consumer Privacy Act (“CCPA”) and the California Privacy Rights Act (“CPRA”), other enacted or proposed legislation in the U.S., including comprehensive privacy legislation similar to the CCPA proposed, and in certain cases enacted, in numerous states, and enacted or proposed legislation in other jurisdictions, have created new compliance obligations with respect to data processing, privacy, data protection, and cybersecurity.
The laws, rules, regulations, standards, and other actual and asserted obligations relating to privacy, data protection, cybersecurity and AI to which we may be subject, or that otherwise apply to our business, are constantly evolving, and we expect that there will continue to be new proposed laws, regulations, and industry standards concerning these matters in the U.S., the E.U., and other jurisdictions. We cannot fully predict the impact of the GDPR, the PIPL, the CCPA, the CPRA, or other laws or regulations, including those that may be modified or enacted in the future, or new or evolving industry standards or actual or asserted obligations, relating to cybersecurity, privacy, or data protection or processing on our business or operations. These laws, regulations, and standards have required us to modify our practices and policies relating to privacy, data protection, cybersecurity, AI and data processing, and to incur substantial costs and expenses in an effort to comply, and we expect to continue to incur such costs and expenses in the future and may find it necessary or appropriate to further modify our relevant practices and policies. Any actual or perceived failure by us or our customers, partners, or vendors to comply with laws, regulations, or other actual or asserted obligations relating to cybersecurity, AI, privacy, or data protection could result in claims, litigation, and regulatory investigations and other proceedings, as well as damage to our reputation. These could result in substantial costs, diversion of resources, fines, penalties, and other damages, and harm to our customer relationships, our market position, and our ability to attract new customers. Any of these could harm our business, financial condition, and results of operations.
Integrating AI and machine learning presents risks to our business.
We leverage AI and machine learning technologies in our operations and continue to explore new opportunities for the responsible use of AI. However, the evolving nature of AI and the regulatory landscape present risks that could impact our business.
The incorporation of AI into our systems and those of our vendors (potentially without our knowledge) exposes us to the possibility that AI providers may not comply with current or rapidly changing regulatory and industry standards, particularly regarding privacy and data protection. This could result in the loss of intellectual property, exposure of confidential or proprietary information, security breaches, and diminished service quality.
Regulatory changes or reinterpretations may introduce new compliance challenges, including potential government enforcement actions or civil lawsuits. Additionally, failing to effectively deploy AI or integrate it into new products and services in a timely manner could hinder our competitiveness, especially in response to evolving consumer demands and industry trends. Our competitors' quicker or more effective adoption of AI could also place us at a disadvantage.
A portion of our revenue is generated by sales to government entities, which are subject to a number of uncertainties, challenges, and risks.
We currently sell many of our solutions to various government entities, and we may in the future increase sales to government entities. Sales to government entities are subject to a number of risks, including risks related to a highly competitive, expensive, and time-consuming sales process, which often requires significant upfront time and expense without any assurance that we will complete a sale. Additionally, the sales process may be delayed by a shutdown of the U.S. federal government. If we are successfully awarded a government contract, such award may be subject to appeals, disputes, or litigation, including, but not limited to, bid protests by unsuccessful bidders. Government demand and payment for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delaysadversely affecting public sector demand for our solutions. Government entities may also have statutory, contractual, or other legal rights to terminate contracts for convenience or due to a default. For purchases by the U.S. federal government, the government may require certain products to be made in, or be products of, the U.S. or other high-cost manufacturing locations, and all of our products may not be made in or products of jurisdictions that meet government requirements, and as a result, our business and results of operations may suffer. Contracts with government entities may also include preferential pricing terms, including, but not limited to, “most favored customer” pricing.
Additionally, we may be required to obtain special certifications to sell some or all of our solutions to government or quasi-government entities. Such certification requirements for our solutions may change, thereby restricting our ability to sell into the applicable government sector until we have attained the revised certification. If our products and subscriptions are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards before us, we may be disqualified from selling our products to such governmental entities, or be at a competitive disadvantage, which would harm our business, financial condition and results of operations. There are no assurances that we will find the terms for obtaining such certifications to be acceptable or that we will be successful in obtaining or maintaining the certifications.
As a government contractor or subcontractor, we must comply with laws, regulations, and contractual provisions relating to the formation, administration, and performance of government contracts and inclusion on government contract vehicles, which affect how we and our partners do business with government agencies. The laws, regulations, and other requirements with which we and our partners must comply can change, sometimes substantially. The current U.S. Presidential administration has and may continue to effectuate changes to policy that create uncertainty with respect to certain laws, regulations, and other requirements with which we and our partners must comply. As a result of actual or perceived noncompliance with government contracting laws, regulations, or contractual provisions, we may be subject to non-ordinary course audits and internal investigations which may prove costly to our business financially, divert management time, or limit our ability to continue selling our products and services to our government customers. These laws and regulations may impose other added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, downward contract price adjustments or refund obligations, civil or criminalpenalties, termination of contracts or suspension or debarment from government contracting for a period of time with government agencies. Any such damages, penalties, disruption, or limitation in our ability to do business with a government would adversely impact, and could have a material adverse effect on, our business, financial condition, results of operations, reputation and growth prospects.
Our business could be adversely affected if our employees cannot obtain and maintain required security clearances or we cannot maintain a required facility security clearance, or we do not comply with legal and regulatory obligations regarding the safeguarding of classified information.
Our U.S. government contract revenue includes income derived from contracts that require our employees to maintain various levels of security clearances and may require us to maintain a facility security clearance, to comply with Department of Defense (“DoD”) requirements. The DoD has strict security clearance requirements for personnel who perform work in support of classified programs. In general, access to classified information, technology, facilities, or programs are subject to additional contract oversight and potential liability. In the event of a security incident involving classified information, technology, facilities, programs, or personnel holding clearances, we may be subject to legal, financial, operational and reputational harm. We are limited in our ability to provide specific information about these classified programs, their risks, or any disputes or claims relating to such programs. As a result, investors have less insight into our classified programs than our other businesses and therefore less ability to fully evaluate the risks related to our classified business or our business overall. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit, and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain their clearances or terminate employment with us, then a customer requiring classified work could terminate an existing contract or decide not to renew the contract upon its expiration. To the extent we are not able to obtain or maintain a facility security clearance, we may not be able to bid on or win new classified contracts, and existing contracts requiring a facility security clearance could be terminated.
Failure to comply with anti-bribery, anti-corruption, anti-money laundering laws, and similar laws, could subject us to penalties and other adverse consequences.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the UK Bribery Act, and possibly other anti-bribery and anti-money laundering laws in the U.S. and in countries outside of the U.S. in which we conduct our activities. Anti-corruption and anti-bribery laws have historically been enforced aggressively and interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. On February 10, 2025, the current U.S. Presidential administration issued an executive order directing the Attorney General of the U.S. to pause FCPA investigations and enforcement actions until the Attorney General issues updated FCPA enforcement guidance, which creates some uncertainty about FCPA enforcement, although we are still subject to the FCPA because it is still applicable law. In addition, because of our international operations and use of third parties to conduct our business internationally, we also remain subject to the anti-bribery laws of non-US jurisdictions.
We sometimes leverage third parties to sell our products and conduct our business abroad. We or our employees, agents, representatives, business partners or third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these employees, agents, representatives, business partners or third-party intermediaries even if we do not explicitly authorize such activities. We cannot assure you that all of our employees and agents will refrain from taking actions in violation of applicable law for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.
These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Any allegations or violation of the FCPA or other applicable anti-bribery, anti-corruption or anti-money laundering laws, could result in whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, fines, damages, adverse media coverage, investigations, loss of export privileges, severecriminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, results of operations, and prospects. Responding to any investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.
General Risk Factors
Events that are outside our control could harm our operations.
Our headquarters and the majority of our infrastructure, including our PIC fabrication manufacturing facility, are located in Northern California, an area that is susceptible to earthquakes, fires, floods and other natural disasters. Further, attacks and violence aimed at Northern California or at the U.S. energy or telecommunications infrastructure could hinder or delay the development and sale of our products. In the event that an earthquake, targeted attack or other man-made or natural catastrophe were to destroy any part of our or our contract manufacturers’ or suppliers' facilities, destroy or disrupt vital infrastructure systems, or interrupt our operations or supply chain for any extended period of time, our business, financial condition and results of operations would be harmed. For related risks concerning the operations and availability of the storage facilities in which our inventory is held, see also the Risk Factor titled "Our international sales and operations subject us to additional risks that may harm our operating results."
The trading price of our common stock has been volatile in the past and may be volatile in the future.
The trading prices of our common stock and the securities of other technology companies have been and may continue to be highly volatile. Factors affecting the trading price of our common stock include:
• mergers and acquisitions by us, by our competitors or by our customers or suppliers;
• market conditions in our industry, the industries of our customers and the economy as a whole, including inventory adjustments, supply chain disruptions, global trade tariffs, and fluctuations in currency exchange rates, interest rates or inflation rates;
• variations in our operating results;
• announcements of technological innovations, new services, service or manufacturing enhancements or government funding opportunities, strategic alliances or agreements by us or by our competitors;
• the gain or loss of customers;
• recruitment or departure of key personnel;
• changes in the estimates of our future operating results or external outlook on those results or changes in recommendations or business expectations by any securities analysts that elect to follow our common stock;
• social, geopolitical, environmental or health factors, including pandemics or other public health emergencies where we operate; and
• adoption or modification of regulations, policies, procedures or programs applicable to our business.
An economic downturn, negative financial news, continued inflation, high interest rates, declines in income or asset values, market conditions, changes to fuel and other energy costs, and other economic factors, may lead to market volatility and associated uncertainty. In addition, if the market for technology stocks or the broader stock market experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. Each of these factors, among others, could harm the value of an investment in our common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention and resources.
Future sales of our common stock could cause our stock price to fall.
We have sold, and may in the future sell, shares of our common stock in underwritten offerings and have established, and may in the future establish, “at-the-market” offering programs pursuant to which we may offer and sell shares of our common stock. Sales of securities have resulted and will continue to result in dilution of our existing stockholders, and such sales could cause our stock price to fall.
In addition, if our existing stockholders sell, or indicate an intent to sell, a large number of shares of our common stock in the public market, it could cause our stock price to fall. We may also issue shares of common stock or securities convertible into our common stock from time to time in connection with financings, acquisitions, investments or otherwise. Any such issuance would result in dilution to our existing stockholders and could cause our stock price to fall.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the General Corporation Law of the State of Delaware (the "DGCL"), which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws:
• authorize the issuance of “blank check” convertible preferred stock that could be issued by our board of directors to thwart a takeover attempt;
• establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
• require that directors only be removed from office for cause;
• provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;
• prevent stockholders from calling special meetings; and
• prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.
Our amended and restated bylaws designate the Court of Chancery of the State of Delaware and the federal district courts of the U.S. as the exclusive forums for substantially all disputes between us and our stockholders, which will restrict our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware or, if such court lacks jurisdiction, any other state or federal court located in the State of Delaware, is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action arising pursuant to the DGCL, our amended and restated certificate of incorporation or our
amended and restated bylaws; or any action asserting a claim governed by the internal affairs doctrine. However, such exclusive forum provisions would not apply to any such claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within 10 days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than such court or for which such court does not have subject matter jurisdiction.
These provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act of 1933, as amended (the “Securities Act”) creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. Our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. To prevent having to litigateclaims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the U.S. will be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find such exclusive-forum provisions to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could harm our business.
adversely
adverse
achievement
adversely
claims
breaches
weaknesses
litigation
restructuring
disasters
conflicts
conflict
disclaim
Overview
We are a semiconductor manufacturer and global supplier of networking solutions comprised of networking equipment, optical semiconductors, software and services. Our portfolio of solutions includes optical transport platforms, converged packet-optical transport platforms, compact modular platforms, optical line systems, coherent optical engines and subsystems, a suite of automation software offerings, and support and professional services. Leveraging our U.S.-based compound semiconductor fabrication plant ("fab") and in-house test and packaging capabilities, we design, develop and manufacture industry-leading indium phosphide-based photonic integrated circuits ("PICs") for use in our vertically integrated, high-capacity optical communications products.
Our customers include operators of fixed line and mobile networks, including telecommunications service providers, internet content providers (“ICPs”), cable providers, wholesale carriers, research and education institutions, large enterprises, utilities and government entities. Our networking solutions enable our customers to build infrastructure networks that support and deliver high-bandwidth business and consumer communications services. Our edge-to-core portfolio of networking solutions also enables our customers to scale their transport networks as consumer and business services and applications continue to drive growth in demand for network bandwidth. These consumer and business services and applications include, but are not limited to, high-speed internet access, 4G/5G mobile broadband, cloud-based services, high-definition video streaming services, virtual and augmented reality, the Internet of Things (“IoT”), artificial intelligence ("AI"), machine learning ("ML"), business Ethernet services and data center interconnect ("DCI").
As an optical semiconductor manufacturer, we specialize in the manufacturing of optical compound semiconductors using indium phosphide ("InP"). This technology is used in infrastructure networks to transmit massive amounts of data and support delivery of consumer and business communications services. We have made significant investments in our unique research, development, fabrication and packaging facilities, including our optical compound semiconductor fab in Silicon Valley and advanced test and packaging center in Allentown, Pennsylvania. We optimize the manufacturing process by using InP to build our PICs, which enables the integration of hundreds of optical functions onto a single, monolithic optical semiconductor chip. The unique capabilities of our optical semiconductor fab, which has provided our customers with a critical and secure source of U.S.-produced optical semiconductors and strengthened the supply chain, have enabled us to consistently pioneer critical technology advancements. For example, our latest generation of technology has made it possible to transmit information at a rate of 1.2 terabits per second (“Tb/s”) using a single laser. Our ongoing research and development initiatives continue to create a path to higher speed transmission and lower cost per bit performance for our customers. These initiatives include a new line of high-speed intra-data center optics based on monolithic InP PIC technology designed to dramatically lower cost and power per bit while providing intra-data center connectivity at speeds of 1.6 Tb/s and greater.
We support U.S. government efforts to advance and increase the domestic manufacturing base for semiconductors as a matter of economic and national security. Compound semiconductors – including those based in InP – are an important part of the domestic semiconductor industry and will enable the next-generation of leading-edge technologies. Domestic manufacturing is critical to reduce our reliance on foreign sources of compound semiconductor materials and components, which is essential to economic growth and to the security of our domestic communications infrastructure.
The large-scale integration of our PICs and advanced DSPs enables us to develop and manufacture high-performance optical engines that are used in our coherent optical networking system and subsystem solutions. These solutions include features that customers care about the most, including lowest cost per bit, lowest power per bit, reduced footprint and increased flexibility, reliability and security. Coherent optical solutions are becoming increasingly important across the network as our customers transition to 1.2 Tb/s and 800 gigabits per second ("Gb/s") per wavelength transmission speeds and beyond in the network core, 400 Gb/s in the metro networks, and 100 Gb/s in the access market segment. We believe our vertical integration strategy provides a competitive advantage by enablingleading optical performance at higher optical speeds with increased spectral efficiency, greater control over our supply chain, and an overall lower cost structure.
We have grown our solutions portfolio through internal development as well as acquisitions, including the acquisition of Telecom Holding Parent LLC (“Coriant”), a privately held global supplier of open network solutions for the largest global network operators (the “Acquisition”). These developments positioned us to be one of the leading providers of vertically integrated optical networking solutions in the world with the ability to serve a broader global customer base with accelerated delivery of the innovative solutions our customers demand. In 2021, we announced an expansion of our portfolio with the introduction of a suite of coherent optical pluggables. Pluggable optics are optical transmission solutions packaged in smaller and more versatile form factors. They are designed to seamlessly address the rapidly growing market for point-to-point optical transport solutions as well as create a new category of point-to-multipoint solutions that can enable a dramatically more cost-efficient network architecture. Based on our vertically integrated optical semiconductor technology and supporting a range of high-speed transport rates that include 1.2 Tb/s, 800 Gb/s, 400 Gb/s and 100 Gb/s, this suite of coherent optical pluggables builds on our history of delivering innovative, vertically integrated optical engine technology that powers our differentiated optical networking solutions.
Our products are designed to be managed by a suite of software solutions that enable simplified network management, increased service agility and automated operations. We also provide software-enabled programmability that offers differentiated capabilities such as Instant Bandwidth. Combined with our differentiated hardware solutions, Instant Bandwidth enables our customers to purchase and activate bandwidth as needed through our unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives: (1) limit their initial network startup costs and investments; and (2) instantly activate new bandwidth as their customers’ and their own network needs evolve.
We sell our products via a direct sales force and through indirect channel partners.
We believe our systems and subsystems solutions benefit our customers by providing a unique combination of highly scalable capacity and advanced networking features that address edge-to-core transport network applications and ultimately simplify and automate network operations. Our high-performance optical transport solutions leverage the industry shift to open optical network architectures and enable our customers to efficiently and cost-effectively keep pace with bandwidth demands, which continue to grow 30% or more year-over-year.
Merger with Nokia Corporation
On June 27, 2024, we, Nokia and Merger Sub entered into the Merger Agreement that provides for the Merger, with us surviving the Merger as a wholly owned subsidiary of Nokia.
Upon and subject to the terms of the Merger Agreement, at the Effective Time, each share of Common Stock that is issued and outstanding as of immediately prior to the Effective Time will be automatically canceled, extinguished and converted into, at the election of the holder, the right to receive the following consideration, subject to proration in accordance with the Merger Agreement:
• Cash Consideration;
• Share Consideration; or
• Mixed Consideration.
In each case, the Nokia Shares will be delivered in the form of Nokia ADSs, with each Nokia ADS representing the right to one Nokia Share. The election right for holders of Common Stock with respect to the Mixed Consideration and the Share Consideration will be subject to proration pursuant to the terms of the Merger Agreement.
Completion of the Merger is subject to customary conditions, including but not limited to the satisfaction of certain domestic and foreign regulatory approvals, filings and authorizations; the absence of a law or order preventing, materially enjoining, materially restraining or materially impairing the consummation of the Merger; and performance by the parties in all material respects of all their obligations under the Merger Agreement.
The Merger Agreement includes certain customary termination rights for the Company and Nokia. Upon termination of the Merger Agreement in certain circumstances, the Company may be required to pay Nokia a termination fee of $65.0 million, and Nokia may be required to pay the Company a termination fee of $130.0 million.
On February 18, 2025, the Company issued a press release announcing that the Merger is anticipated to be completed on or about February 28, 2025, which date remains subject to receipt of remaining outstanding regulatory approvals and the satisfaction of other remaining customary closing conditions.
The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.2 of this Annual Report on Form 10-K.
Financial and Business Highlights
Total revenue was $1,418.4 million in 2024 as compared to $1,614.1 million in 2023, representing a 12% decrease. The total year-over-year decrease in revenue was due to a continued decline in our Tier 1, other service provider and Cable verticals slightly offset by an increase in the ICP vertical. In 2025, we anticipate benefiting from a more diversified customer base and see several prospective opportunities to grow revenue by driving adoption of new and existing vertically integrated solutions. Our results will depend on overall market conditions and, as is typical, quarter-over-quarter revenue could be volatile, affected by, among other factors, customer buying patterns, component availability within our supply chain and the timing of customer network deployments.
One end-customer accounted for 12% of our revenue in fiscal year 2024. One end-customer accounted for 10% of our revenue in 2023 and one end-customer accounted for 11% of our revenue in fiscal year 2022.
Gross margin was relatively flat at 38% in 2024 and 39% in 2023. In 2025, we intend to continue to expand our vertical integration capabilities into a broader range of our optical networking solutions utilizing our own internally developed optical engines. We remain focused on improving our gross margin over time through engineering design efforts to lower component costs in our supply chain as well as driving other efficiencies within our operations.
Operating expenses increased to $628.2 million 2024 from $627.8 million in 2023. The increase was primarily attributable to integration expenses and higher outside professional fees slightly offset by lower employee-related costs and lower depreciation expense. In 2025, we intend to continue to balance prudent cost management with strategic investments in technology innovation and in our go-to-market efforts globally to expand our customer reach and drive additional market share gains in the long term.
We primarily sell our products through our direct sales force, with the remainder sold through channel partners. We derived 63% and 66% of our revenue from direct sales to customers in 2024 and 2023, respectively. In the future, we expect to continue generating a majority of our revenue from direct sales.
We are headquartered in San Jose, California, with employees located throughout North America, LATAM, EMEA and APAC.
Results of Operations
A discussion regarding our financial condition and results of operations for the fiscal year ended December 28, 2024 compared to our fiscal year ended December 30, 2023 is presented below. A discussion regarding our financial condition and results of operations for our fiscal year ended December 30, 2023 compared to our fiscal year ended December 31, 2022 can be found under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, filed with the SEC on May 17, 2024.
The following tables set forth, for the periods presented, certain consolidated statements of operations information (in thousands, except percentages):
Years Ended
December 28, 2024
% of total
revenue
December 30,
% of total
revenue
Change
% Change
Revenue:
Product
Services
Total revenue
Cost of revenue:
Product
Services
Amortization of intangible assets
Restructuring and other related costs
Total cost of revenue
Gross profit
Years Ended
December 30,
% of total
revenue
December 31, 2022
% of total
revenue
Change
% Change
Revenue:
Product
Services
Total revenue
Cost of revenue:
Product
Services
Amortization of intangible assets
Restructuring and other related costs
Total cost of revenue
Gross profit
Revenue
2024 Compared to 2023. Product revenue decreased by $201.1 million, or 15%, in 2024 from 2023. This decrease was primarily driven by continued decline in our Other Service Provider, Tier 1 and Cable verticals slightly offset by an increase in the ICP vertical, and mostly tied to lower deployments with domestic customers.
Services revenue increased by $5.4 million, or 2%, in 2024 from 2023. This increase was primarily attributable to higher amortized services maintenance revenue mainly driven by growth of existing end-customer renewals.
Revenue will be lower in the first quarter of 2025 as compared to the fourth quarter of 2024 due to the seasonality of our business.
Revenue by geographic region is based on the shipping address of the end-customer. The following tables summarize our revenue by geography and sales channel for the periods presented (in thousands, except percentages):
Years Ended
December 28, 2024
% of total
revenue
December 30,
% of total revenue
Change
% Change
Total revenue by geography
Domestic
International
Total revenue by sales channel
Direct
Indirect
Years Ended
December 30,
% of total revenue
December 31, 2022
% of total revenue
Change
% Change
Total revenue by geography
Domestic
International
Total revenue by sales channel
Direct
Indirect
2024 Compared to 2023. Domestic revenue decreased by $159.8 million, or 16%, in 2024 compared to 2023, driven primarily by decreased revenue from each of our Other Service Provider and Tier 1 verticals.
International revenue decreased by $35.8 million, or 6%, in 2024 compared to 2023, primarily from declines in the other Americas and APAC regions.
Direct revenue decreased by $167.1 million, or 16%, in 2024 compared to 2023, primarily from lower revenue from Tier 1, Other Service Provider and ICP domestic customers.
Indirect revenue decreased $28.5 million, or 5%, related to a decline in revenue within the Other Service Provider and Tier 1 verticals, which was largely offset by higher revenue from ICP customers.
2024 Compared to 2023 . Gross profit decreased by $78.4 million, with gross margin relatively flat at 38% in 2024 and 39% in 2023. In 2025, we intend to continue to expand our vertical integration capabilities, drive down direct material costs through cost reduction initiatives coupled with improved product mix. We believe we will be able to improve our gross margin over time as our level of vertical integration and product volume increases.
In any given quarter, gross margins can fluctuate based on a number of factors, including the mix of optical line system footprint versus capacity utilization, product mix, customer mix and overall volume.
Amortization of Intangible Assets
2024 Compared to 2023. Amortization of intangible assets decreased by $10.6 million, or 100%, in 2024 from 2023. The decrease was due to certain developed technology assets that were fully amortized in 2023.
Restructuring and Other Related Costs
2024 Compared to 2023. Restructuring and other related costs decreased by $1.6 million in 2024 from 2023. The decrease is primarily the result of the lower severance and related costs of the 2024 Restructuring Plan compared to the 2023 Restructuring Plan. See Note 8, “Restructuring and Other Related Costs” to the notes to consolidated financial statements for more information on our restructuring plans.
Operating Expenses
The following tables summarize our operating expenses for the periods presented (in thousands, except percentages):
Years Ended
December 28, 2024
% of total
revenue
December 30, 2023
% of total
revenue
Change
% Change
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Merger-related charges
Restructuring and other related costs
Total operating expenses
Years Ended
December 30,
% of total
revenue
December 31,
% of total
revenue
Change
% Change
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Restructuring and other related costs
Total operating expenses
The following table summarizes the stock-based compensation expense included in our operating expenses for the periods presented (in thousands):
Years Ended
December 28, 2024
December 30, 2023
December 31,
Research and development
Sales and marketing
General and administration
Total
Research and Development Expenses
2024 Compared to 2023. Research and development expenses decreased by $16.4 million, or 5%, in 2024 from 2023. The decrease was primarily attributable to decreases in employee-related expenses; and outside professional services, partially offset by slightly higher development costs and depreciation expense. In 2025, we expect to make additional targeted investments focused on product enhancements to both new and existing products. Our goal is to continue expanding the breadth and performance of our product portfolio while simultaneously driving down component costs through design innovation, which we believe will ultimately result in additional market share capture.
Sales and Marketing Expenses
2024 Compared to 2023. Sales and marketing expenses decreased by $8.1 million, or 5%, in 2024 from 2023. This decrease was driven by lower employee-related expenses, lower trials and marketing-related costs slightly offset by increased travel expenses. In 2025, we plan to modestly grow this spend and strategically invest in our go-to-market programs in an effort to expand our customer reach to drive long-term market share gains.
General and Administrative Expenses
2024 Compared to 2023. General and administrative expenses increased by $7.8 million, or 6%, in 2024 from 2023. The increase was attributable to higher outside professional fees and facilities expenses offset by lower employee-related expenses and lower depreciation expense. In 2025, we anticipate a decrease in general and administrative expenses as we benefit from investments in system automation initiatives and decreased outside professional services.
Amortization of Intangible Assets
2024 Compared to 2023. Amortization of intangible assets decreased by $3.3 million or 27%, in 2024 from 2023. The decrease was largely due to lower amortization of certain customer relationships and backlog being fully amortized in the first quarter of 2023.
Merger-related charges
Merger-related charges represent charges incurred in connection with the pending Merger with Nokia. We incurred $23.0 million in related charges in 2024, primarily related to outside professional services and employee-related expenses.
Restructuring and Other Related Costs
2024 Compared to 2023. Restructuring and other related costs decreased by $2.5 million, or 38%, in 2024 compared to 2023. The decrease is primarily the result of the lower severance and related costs of the 2024 Restructuring Plan compared to the 2023 Restructuring Plan and lower lease-related impairment charges in 2024. See Note 8, “Restructuring and Other Related Costs” to the notes to consolidated financial statements for more information on our restructuring plans.
Other Income (Expense), Net
Years Ended
December 28, 2024
December 30, 2023
December 31,
(In thousands)
Interest income
Interest expense
Gain on extinguishment of debt
Other gain (loss), net
Total other income (expense), net
2024 Compared to 2023. Interest income increased by $0.7 million in 2024 compared to 2023 primarily due to increased interest from investments in money market funds.
Interest expense increased by $1.7 million in 2024 compared to 2023. The increase in interest expense was primarily due to interest paid on certain trade payables.
The change in other gain (loss), net, 2024 compared to 2023, was $35.8 million primarily due to an increase in foreign exchange losses driven by foreign currency exchange rate changes.
Provision for Income Taxes
We recognized an income tax expense of $17.3 million on a loss before income taxes of $133.0 million, and $7.8 million on a loss before income taxes of $17.4 million, in 2024 and 2023, respectively. The resulting effective tax rates were (13.0)% and (44.8)% for 2024 and 2023, respectively. The 2024 and 2023 effective tax rates differ from the expected statutory rate of 21% based on state income taxes, tax credits, stock-based compensation expenses, foreign income taxed at different rates, impact due to foreign currency translation, foreign income inclusions in the U.S., foreign tax credit expiration, and losses in foreign jurisdictions that require a valuation allowance. The increase in 2024 income tax provision compared to 2023 is due to foreign currency unrealized gains(losses) and increase in withholding taxes and in 2023 there was a benefit received from material foreign discrete that was not present in 2024.
We have not been subject to material federal or state income taxes given existing operating losses and tax credit carryforwards other than in the state of Illinois given limitations on the use of net operating losses. If these losses and other tax attributes become fully utilized, our taxes will increase significantly to a more normalized rate on U.S. earnings. The release of reserves in the future may have a beneficial impact to our tax expense, but the timing of the impact depends on factors such as expiration of the statute of limitations or settlements with taxing authorities. No significant releases are expected within the near future based on available information at this time.
Liquidity and Capital Resources
Years Ended
December 28, 2024
December 30, 2023
December 31,
(In thousands)
Net cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
Years Ended
December 28, 2024
December 30, 2023
(In thousands)
Cash and cash equivalents
Restricted cash
Our restricted cash balance amounts are primarily pledged as collateral for certain standby letters of credit related to customer performance guarantees, value added tax licenses and property leases.
Operating Activities
Net cash provided by operating activities was $80.7 million for 2024, as compared to net cash provided by operating activities of $49.5 million for 2023 and net cash used in operating activities of $37.6 million for 2022.
Net loss for 2024 was $150.3 million, which included non-cash charges of $126.2 million such as depreciation, stock-based compensation, amortization of intangibles assets, operating lease expense, restructuring charges and related costs, and amortization of debt issuance costs, compared to a net loss of $25.2 million in 2023, which included non-cash charges of $152.6 million. Net cash provided by working capital was $104.9 million in 2024. Accounts receivable decreased by $40.2 million due to timing of billings and collections. Inventory levels decreased by $121.8 million primarily due to our efforts to reduce inventory. Prepaid and other assets increased by $49.2 million primarily due to increase in non-trade receivables, customer contract assets and long term contract manufacturing deposits. Accounts payable decreased by $28.3 million primarily due to timing of payments to suppliers. Accrued liabilities and other expenses increased by $11.6 million primarily due to increase in customer advances. Deferred revenue increased by $8.7 million primarily from billing exceeding amortization of maintenance renewals during the period.
Net loss for 2023 was $25.2 million, which included non-cash charges of $152.6 million such as depreciation, stock-based compensation, amortization of intangibles assets, operating lease expense, restructuring charges and related costs, and amortization of debt issuance costs, compared to a net loss of $76.0 million in 2022, which included non-cash charges of $152.1 million. Net cash used in working capital was $77.9 million in 2023. Accounts receivable decreased by $38.5 million due to timing of billings and collections. Inventory levels increased by $57.9 million due to changes in customer order patterns that reduced the amount of inventory drawdown following our efforts to build inventory to manage previous lead time challenges. Prepaid and other assets decreased by $9.7 million primarily due to decrease in customer contract assets. Accounts payable decreased by $2.9 million primarily due to timing of payments to suppliers. Accrued liabilities and other expenses decreased by $40.1 million primarily due to lower contract manufacturing accruals and decreases in accrued taxes, partially offset by increases in restructuring and other compensation related expenses. Deferred revenue decreased by $25.3 million due to amortization of maintenance renewals during the period.
Investing Activities
Net cash used in investing activities was for the purchase of property and equipment and amounted to $75.0 million and $62.3 million for 2024 and 2023, respectively. The increase was primarily due to capital expenditures related to laboratory and manufacturing equipment and leasehold improvements under construction.
Net cash used in investing activities was for the purchase of property and equipment and amounted to $62.3 million and $46.1 million for 2023 and 2022, respectively. The increase was primarily due to capital expenditures related to laboratory and manufacturing equipment.
Financing Activities
Net cash used in financing activities was $32.2 million for 2024. Financing activities in 2024 primarily included principal repayment of our 2.125% Convertible Senior Notes due in 2024 (the "2024 Notes") of $18.7 million, payment of $10.3 million for term license purchases, payment of $0.6 million on finance lease obligations, and tax withholdings in the amount of $2.1 million paid on behalf of certain employees for net share settlements of restricted stock units (“RSUs”).
Net cash provided by financing activities was $13.7 million for 2023. Financing activities in 2023 primarily included net proceeds of $15.3 million from issuance of the 2028 Notes and partial repurchase of the 2024 Notes, and $14.9 million from the issuance of shares of our common stock under the ESPP. These proceeds were offset by $10.4 million term license purchases, $2.1 million payment of debt issuance costs incurred in connection with the issuance of the 2028 Notes and entering into the asset-based revolving credit facility under the Loan Agreement, $1.0 million payments on finance lease obligations, and tax withholdings in the amount of $2.5 million paid on behalf of certain employees for net share settlements of RSUs.
Liquidity
We believe that our current cash, along with the Credit Facility (as defined below) will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, mortgage payments and interest payments on our convertible senior notes (as defined below) for at least 12 months. If the impact to our business and financial position from weakness in the global economy, banking sector and financial markets is more extensive or prolonged than expected and our existing sources of cash are insufficient to satisfy our liquidity requirements, we may require additional capital from equity or debt financings to fund our operations, to respond to competitive pressures or strategic opportunities, or otherwise. In addition, we are continuously evaluating alternatives and potential transactions for efficiently funding our capital expenditures, ongoing operations and servicing our existing debt. We may, subject to market conditions and other considerations, from time to time engage in a variety of financing transactions for such purposes, including the issuance of securities or the incurrence of additional debt and the refinancing of existing debt. We may not be able to secure timely additional financing, or refinance existing debt, on favorable terms or at all. The terms of any additional financings or refinancing may place limits on our financial and operating flexibility, and we may not be able to obtain terms as favorable as the terms of any debt being refinanced. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
On August 8, 2022, and on June 16, 2023, we issued the Existing 2028 Notes, and the Additional 2028 Notes, respectively which will mature on August 1, 2028, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on February 1 and August 1 of each year, which commenced on February 1, 2023. In the event that all of the 2028 Notes are converted, we would be required to repay the principal amount in cash and the conversion premium in any combination of cash and shares of its common stock at our election.
The net proceeds from the issuance of the Additional 2028 Notes, after deducting the repurchase price for the 2024 Notes and offering expenses and fees, was approximately $12.5 million. We used the net proceeds from this offering for general corporate purposes, including working capital and to fund growth and potential strategic projects.
On March 9, 2020, we issued the 2027 Notes, which will mature on March 1, 2027, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on September 1, 2020. For the conversion obligation, we intend to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.
On September 11, 2018, we issued the 2024 Notes, which matured on September 1, 2024. Upon maturity of the 2024 Notes, the Company repaid the then remaining principal balance of $18.7 million along with accrued interest of $0.2 million.
For more information regarding the convertible senior notes, see Note 11, “Debt” to the notes to consolidated financial statements. Refer to the contractual obligations section below for future payment obligations.
On June 24, 2022, we entered into a Loan, Guaranty and Security Agreement (the "Loan Agreement") with the lenders party thereto, and Bank of America, N.A., as agent. The Loan Agreement provides for a senior secured asset-based revolving credit facility of up to $200 million (the "Credit Facility"), which we may draw upon from time to time. We may increase the total commitments under the revolving credit facility by up to an additional $100 million, subject to certain conditions. In addition, the Loan Agreement provides for a $50 million letter of credit subfacility and a $20 million swingline loan facility.
As of December 28, 2024, we had no drawings on the Credit Facility and we had availability of $118.9 million under the Credit Facility. For more information regarding the Credit Facility, see Note 11, “Debt” to the notes to consolidated financial statements.
As of December 28, 2024, we had $146.2 million of cash, cash equivalents and restricted cash including $38.4 million of cash held by our foreign subsidiaries. Our policy with respect to undistributed foreign subsidiaries' earnings is to consider those earnings to be indefinitely reinvested. As a result of the enactment in the United States of the Tax Cuts and Jobs Act of 2017 (the "Jobs Act"), if and when funds are actually distributed in the form of dividends or otherwise, we expect minimal tax consequences, including foreign withholding taxes, which would be applicable in some jurisdictions.
We had standby letters of credit and bank guarantees as of the years ended December 28, 2024 and December 30, 2023. See Note 13, “Guarantees” to the notes to consolidated financial statements for further information.
Contractual Obligations
The following is a summary of our contractual obligations as of December 28, 2024 and December 30, 2023 (in thousands):
December 28, 2024
December 30, 2023
Change
% Change
Operating leases (1)
Finance lease obligations
Purchase obligations (2)
2028 Notes, including interest (3)
2027 Notes, including interest (3)
2024 Notes, including interest (3)
Mortgage payable, including interest (3)
Total contractual obligations (4)
(1) We lease facilities under non-cancelable operating lease agreements. These leases have varying terms that range from one to 24 years, and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to ten years. We also have contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. See Note 12, "Commitments and Contingencies" to the notes to consolidated financial statements for more information.
(2) We have service agreements with certain production suppliers under which we are committed to purchase certain parts. The decrease in purchase obligations compared with the end of fiscal 2023 was primarily due to our efforts to reduce inventory and overall spend.
(3) See Note 11, “Debt” to the notes to consolidated financial statements for more information.
(4) Certain commitments and contingencies are not included in the table because we cannot reliably estimate the timing and amount of future payments, if any. For example, tax liabilities of $10.5 million related to uncertain tax positions and expected future payments to our pension and post-employment plans are excluded from the contractual obligation table because they do not represent contractual cash outflows as they are dependent on various factors. See Note 17, "Employee Benefit and Pension Plans" to the notes to consolidated financial statements for more information relating to our pension and post-retirement benefit plans.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. See Note 2, “Significant Accounting Policies” to the notes to consolidated financial statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Financial Statements and Supplementary Data, which describes our significant accounting policies and methods used in preparation of our consolidated financial statements. Management believes that the estimates, assumptions and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.
We believe our critical accounting policies and estimates are those related to revenue recognition, accounting for income taxes, and inventory valuation. Management considers these policies critical because they are both important to the portrayal of our financial condition and results of operations, and they require management to make judgments and estimates about inherently uncertain matters.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition by applying the following five-step approach:
• identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when, or as, we satisfy a performance obligation.
Many of our product sales are sold in combination with installation and deployment services along with initial hardware and software support. Our product sales are also sold at times with spares management, on-site hardware replacement services, network operations management, software subscription services, extended hardware warranty and training. Initial software and hardware support services are generally delivered over a one-year period in connection with the initial purchase. Software warranty provides customers with maintenance releases during the warranty support period and hardware warranty provides replacement or repair of equipment that fails to perform in line with specifications. Software subscription services include software warranty and additionally provides customers with rights to receive unspecified software product upgrades released during the support period.
Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements. Network operations management includes the day-to-day operation of a customer's network. These services are generally delivered on an annual basis. We evaluate each promised good and service in a contract to determine whether it represents a distinct performance obligation or should be accounted for as a combined performance obligation.
Services revenue includes software subscription services, installation and deployment services, spares management, on-site hardware replacement services, network operations management, extended hardware warranty and training. Revenue from software subscription services, spares management, on-site hardware replacement services, network operations management and extended hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally one year, as services are provided over the course of the entire period. Revenue related to training and installation and deployment services is recognized upon completion of the services.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. We typically satisfy our performance obligations upon shipment or delivery of product depending on the contractual terms. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. We assess our ability to collect from our customers based primarily on the creditworthiness and past payment history of the customer.
Customer product returns are generally approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are recorded as a reduction to revenue.
For sales to resellers, the same revenue recognition criteria apply. It is our practice to identify an end-customer prior to shipment to a reseller. We do not offer refund rights, return rights or price protection to our resellers.
We report revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Customer Purchase Commitments
We sell software licenses that provide customers the ability to purchase incremental bandwidth capacity on an already-deployed hardware. Instant Bandwidth-enabled systems generally include a specific initial capacity and incremental capacity can be added by the purchase of Instant Bandwidth licenses. Instant Bandwidth licenses are considered distinct performance obligations because customers can provision additional transmission capacity on demand without the deployment of any incremental equipment.
Some contracts commit the customer to purchase incremental Instant Bandwidth licenses within a specified time frame from the initial shipment of the Instant Bandwidth-enabled hardware. The time frame varies by customer and generally ranges between 12 to 24 months. If the customer does not purchase the additional capacity within the time frame as stated in the contract, we have the right to deliver and invoice such Instant Bandwidth licenses to the customer. Future committed licenses are considered to be additional performance obligations when a minimum purchase obligation is present, as evidenced by enforceable rights and obligations. As such, we are required to estimate the variable consideration for future Instant Bandwidth licenses as part of determining the contract transaction price.
Contract Termination Rights
The contract term is determined on the basis of the period over which the parties to the contract have present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause that allows the customer to terminate services without penalty, upon advance notification. For such contracts, the service duration is limited to the non-cancelable portion of the contract.
Variable Consideration
The consideration associated with customer contracts is generally fixed. Variable consideration includes discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration that can vary is not a substantial portion of total consideration.
Variable consideration estimates are re-assessed at each reporting period until a final outcome is determined. The changes to the original transaction price due to a change in estimated variable consideration will be applied on a retrospective basis, due to system constraints, with the adjustment recorded in the period in the current period.
Stand-alone Selling Price
The transaction price for a contract is allocated among the performance obligations on a relative SSP basis. The SSP is the price at which an entity would sell a promised product or service separately to a customer.
While certain services we sell have readily observable SSPs, the majority of our products and services are generally not sold on a stand-alone basis and therefore SSPs for such products and services are not directly observable. If there is no observable SSP, it is estimated using judgment and considering all reasonably available information, including but not limited to, gross margin objectives, pricing practices in customer contracts with multiple goods and services, internal costs, historical profitability data, competitor pricing strategies, as well as other observable inputs. The determination of SSPs for performance obligation is reassessed on a quarterly basis and updated accordingly.
Transaction Price Allocated to the Remaining Performance Obligation
Our remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially satisfied, as of period end, consisting of deferred revenue and non-cancellable backlog. Our backlog represents purchase orders received from customers for future product shipments and services that are unsatisfied or partially satisfied as of period end. Our backlog is subject to future events that could cause the amount or timing of the related revenue to change. Orders in backlog may be fulfilled several quarters following receipt or may relate to multi-year support service obligations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. This involves calculating current tax expense and recognizing differences in timing for deductible transactions, leading to deferred tax assets and liabilities on our balance sheet. Deferred tax assets are future tax benefits we expect to receive when certain expenses become deductible or when tax attributes are used. The realization of these assets depends on future taxable income in the relevant areas where these deductions, losses, and credits can be applied.
We must assess the likelihood that some portion or all of our deferred tax assets will be recovered from future taxable income within the respective jurisdictions. To the extent we believe that recovery does not meet the “more-likely-than-not” standard, it must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining its provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In evaluating the need for a full or partial valuation allowance, all positive and negative evidence must be considered, including considering all sources of income, its current financial performance, market conditions, and other factors. Based on the available objective evidence, at December 28, 2024, management believes it is more likely than not that the net deferred tax assets in the U.S., state, and certain foreign jurisdictions will not be realizable in the foreseeable future. Accordingly, we have recorded a valuation allowance against these deferred tax assets. We will continue to assess our realizability of deferred tax assets on a quarterly basis. To the extent that we determine that deferred tax assets are realizable on a more likely than not basis in the future, and an adjustment is needed, that adjustment will be recorded in the period that the determination is made.
Inventory Valuation
Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of actual cost or net realizable value. Costs are recognized utilizing the first-in, first-out method. Net realizable value is based upon an estimated selling price reduced by the estimated cost of disposal. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing and technological obsolescence of our products.
Inventory that is obsolete or in excess of our forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand. In valuing our inventory costs and deferred inventory costs, we considered whether the net realizable value of inventory delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. We concluded that, in the instances where the net realizable value of inventory delivered or expected to be delivered was less than cost, it was appropriate to value the inventory costs and deferred inventory costs at cost or net realizable value, whichever is lower, thereby recognizing the cost of the reduction in net realizable value of inventory in the period in which the reduction occurred or can be reasonably estimated. We have, therefore, recognized inventory write-downs as necessary in each period in order to reflect inventory at the lower of actual cost or net realizable value.
We consider whether we should accrue losses on firm purchase commitments related to inventory items. Given that the net realizable value of common equipment is below contractual purchase price, we have also recorded losses on these firm purchase commitments in the period in which the commitment is made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the purchase commitment.
Recent Accounting Pronouncements
See Note 2, “Significant Accounting Policies” to the notes to consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoptions and effects on us.
