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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-02-27 · 78 added, 94 removed, 226 unchanged (43% of the section changed)

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This section of the Form 10-K generally discusses fiscal 2023 and 2022 items and year-to-year comparisons between fiscal 2023 and 2022.

Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 8, 2022.

We are a leading provider of networking solutions that enable next-generation networks focused on reliability, availability, scalability and cybersecurity.

Our portfolio supports customers operating in the cloud, on-premise or in hybrid environments providing rapid return on their investment as well as investment protection with best-in-class technical performance.

As cyber-attacks increase in volume and complexity, we integrate security as a key attribute in our solutions that further enable our customers to continue to adapt to market trends in cloud, internet of things and the ever increasing need for more data, building upon our strong global footprint and leadership in application and network infrastructure.

Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and 2021 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 27, 2023.

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures.

Our product portfolio seeks to address many of the cyber protection challenges and solution requirements.

The portfolio consists of six secure application solutions;

Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”) and intelligent management, and automation tools;

Harmony Controller and aGalaxy TPS.

Our products are offered in a variety of form factors and payment models, including physical appliances and perpetual and subscription-based software licenses, as well as pay-as-you-go licensing models and FlexPool, a flexible consumption-based software model.

Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software.

Our customers include leading service providers (cloud, telecommunications, multiple system operators, cable), government organizations, and enterprises.

We derive revenue from two sources:

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and (ii) services revenue, which includes post contract support (“PCS”), professional services, and training.

Revenue for term-based license agreements is recognized at a point in time when the Company delivers the software license to the customer and the subscription term has commenced.

Revenue for term-based license agreements is recognized at a point in time when the Company delivers the software license to the customer and over time once the subscription term has commenced.

For our software-as-a-service offerings, our customers do not take possession of the Company’s software but rather we provide access to the service via a hosting arrangement.

Revenue in these arrangements is recognized ratably as the services are provided.

Revenue in these arrangements is recognized over time as the services are provided.

A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors.

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We report two customer verticals:

service providers and enterprises and we report customer revenues in three broad geographic regions:

service providers, which accounted for 58% and 66% of our total revenue during 2023 and 2022, respectively, and enterprise, which accounted for 42% and 34% of our total revenue during 2023 and 2022, respectively.

During 2023, we experienced an increase in demand from our enterprise customers and a decrease in demand from our service provider customers related to lower service provider capital spending and longer sales cycles.

While we expect total demand to remain strong as the need for cybersecurity solutions continues to increase, we expect the demand shift trend from service provider to enterprise to continue in the near term.

We report customer revenues in three broad geographic regions:

the Americas, APJ and EMEA regions.

In the three months ended March 31, 2022, we changed the way we present revenue by geographic region.

The Americas region comprises the United States and all other countries in America (excluding the United States).

The Americas region comprises the United States and all other countries in the Americas (excluding the United States).

The APJ region comprises Japan and all other countries in APAC (excluding Japan).

We believe this vertical and revised geographic view aligns with how we manage the business and maps our product portfolio to customer verticals.

This change in the way we report revenue had no impact to our key metrics including operations, comprehensive income and accumulated deficit.

The EMEA region comprises Europe, Middle East and Africa.

We believe this vertical and geographic view aligns with how we manage the business and maps our product portfolio to customer verticals.

Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, gaming, education and government.

Since inception, our customer base has grown rapidly.

As of December 31, 2022, we had sold products to over 8,000 customers worldwide since our inception.

We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value-added resellers and system integrators, and fulfill nearly all orders globally through such partners.

We sell substantially all of our solutions through our high-touch sales organization as well as distribution channels, including distributors, value-added resellers and system integrators, and fulfill nearly all orders globally through such resellers.

We believe this sales approach allows us to obtain the benefits of channel distribution, such as expanding our market coverage, while still maintaining face-to-face relationships with our end-customers.

We outsource the manufacturing of our hardware products to original design manufacturers.

We outsource the manufacturing of our hardware

products to original design manufacturers.

We perform quality assurance and testing at our San Jose, Taiwan and Japan distribution centers, as well as at our manufacturers’ locations.

During 2022, (i) 53% of our total revenue was generated from the Americas region, of which 46% was generated from the United States, (ii) 32% was generated from the APJ region, of which 20% was generated from Japan, and (iii) 15% was generated from the EMEA region.

During 2021, (i) 48% of our total revenue was generated from the Americas region, of which 40% was generated from the United States, (ii) 37% was generated from the APJ region, of which 25% was generated from Japan, and (iii) 15% was generated from the EMEA region.

During 2020, (i) 43% of our total revenue was generated from the Americas region, of which 37% was generated from the United States, (ii) 43% was generated from the APJ region, of which 30% was generated from Japan, and (iii) 14% was generated from the EMEA region.

Our enterprise customers accounted for 34%, 37% and 39% of our total revenue during 2022, 2021 and 2020, respectively.

Our service provider customers accounted for 66%, 63% and 61% of our total revenue during 2022, 2021 and 2020, respectively.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers and service providers, in any period.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers and service providers.

Purchases from our ten largest end-customers accounted for 33%, 41% and 39% of our total revenue for 2023, 2022 and 2021, respectively.

Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles.

The timing of these purchases and the delivery of the purchased products are difficult to predict.

The timing of these purchases and the delivery of the purchased products are difficult to predict and rely upon customer growth and network enhancements.

Consequently, any acceleration or delay in anticipated product purchases by or deliveries to our largest customers could materially impact our revenue and operating results in any quarterly period.

This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.

As of December 31, 2022, we had $68.0 million of cash and cash equivalents and $83.0 million of marketable securities.

Cash provided by operating activities was $66.1 million in the year ended December 31, 2022 compared to $50.1 million of cash provided by operating activities in the year ended December 31, 2021.

This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict, as was the case in 2023.

We intend to continue to invest for long-term growth.

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Income before income taxes 43,795 17.4 52,716 18.7 (8,921) (16.9) %

Provision for (benefit from) income taxes 5,808 2.1 (63,245) (25.3) 69,053 (109.2) %

Provision for income taxes 3,825 1.5 5,808 2.1 (1,983) (34.1) %

Net income $ 39,970 15.9 % $ 46,908 16.7 % $ (6,938) (14.8) %

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Purchase of a hardware appliance includes a perpetual license to the included software.

Additionally, currently a small portion of our products revenue comes from subscription revenue for our Cloud service offerings.

Additionally, a small portion of our products revenue comes from subscription revenue.

We offer several products by subscription, primarily through either term-based license agreements or as a service through our cloud-based platform.

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For our software-as-a-service offerings, our customers do not take possession of our software but rather we provide access to the service via a hosting arrangement.

Revenue in these arrangements is recognized ratably as the services are

As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

Revenue in these arrangements is recognized ratably as the services are provided.

As a percentage of revenue, our

products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

We generate services revenue from sales of post contract support (“PCS”), which is bundled with sales of products and technical services.

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Total revenue $ 251,700 100 % $ 280,338 100 % $ (28,638) (10) %

Total revenue increased by $30.3 million, or 12%, in 2022 compared to 2021.

This increase was due to a $24.8 million increase in products revenue and a $5.5 million increase in services revenue.

Products revenue increased $24.8 million, or 17%, in 2022 compared to 2021 primarily driven by higher demand from our service provider customers in the Americas, APAC and EMEA regions, partially offset by lower demand from service provider customers in Japan.

Total revenue decreased by $28.6 million, or 10%, in 2023 compared to 2022.

This decrease was due to a $32.1 million decrease in products revenue, partially offset by an increase of $3.5 million in services revenue.

Products revenue decreased $32.1 million, or 19%, in 2023 compared to 2022 primarily driven by lower demand from our service provider customers in the Americas, APAC and EMEA regions, partially offset by higher demand from enterprise customers in Japan.

Services revenue increased $3.5 million, or 3%, in 2023 compared to 2022.

The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base in the Americas and EMEA regions.

During 2022, $148.7 million, or 53% of total revenue, was generated from the Americas, which represents a 23% increase compared to 2021.

The increase was primarily due to higher products revenue driven by an increase in demand from our service provider customers.

The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base in the Japan, Americas and EMEA regions.

During 2023, $132.7 million, or 53% of total revenue, was generated from the Americas region, which represents an 11% decrease compared to 2022.

The decrease was primarily due to lower products revenue driven by a decrease in demand from our service provider customers.

During 2023, $77.6 million, or 31% of total revenue, was generated from APJ, which represents a 13% decrease compared to 2022.

The decrease was mainly due to decreased revenue from our service provider customers.

During 2022, $42.0 million, or 15% of total revenue, was generated from EMEA, which represented an 9% increase compared to 2021.

The increase was primarily due to higher products revenue driven by an increase in demand from our service provider customers.

The decrease was mainly due to decreased revenue from both our enterprise and service provider customers.

During 2023, $41.3 million, or 16% of total revenue, was generated from EMEA, which represented a 1% decrease compared to 2022.

The decrease was primarily due to lower products revenue driven by a decrease in demand from our service provider customers driven by decreased demand.

Cost of Revenue, Gross Profit and Gross Margin

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Cost of products revenue is primarily comprised of cost of third-party manufacturing services and cost of inventory for the hardware component of our products.

Our component suppliers change their selling prices frequently in response to market trends, including industry-wide increases in demand.

Cost of products revenue also includes warehouse personnel costs, shipping costs, inventory write-downs, certain allocated facilities and information technology infrastructure costs, and expenses associated with logistics and quality control.

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Gross margin may vary and be unpredictable from period to period due to a variety of factors.

These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, inventory write-downs and foreign currency exchange rates.

These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, cost of inventory for the hardware component of our products, inventory write-downs and foreign currency exchange rates.

Our sales are generally denominated in U.S.

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Total gross profit $ 203,738 80.9 % $ 223,506 79.7 % $ (19,768) 1.2 %

Products gross margin decreased by 1.2% in 2022 compared to 2021 primarily driven by changes in product and geographic mix.

Services gross margin increased by 4.9% in 2022 compared to 2021 primarily due to a decrease in personnel related support costs.

Products gross margin percentage decreased by 0.9% in 2023 compared to 2022 primarily driven by changes in product and geographic mix.

Services gross margin percentage increased by 0.7% in 2023 compared to 2022 primarily due to a decrease in personnel-related support costs.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, general and administrative, and restructuring expenses.

The largest component of our operating expenses is personnel costs which consist of wages, benefits,

bonuses, and, with respect to sales and marketing expenses, sales commissions.

The largest component of our operating expenses is personnel costs which consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses, sales commissions.

Personnel costs also include stock-based compensation.

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Sales and marketing expenses also include the cost of marketing programs, trade shows, consulting services, promotional materials, demonstration equipment, depreciation and certain allocated facilities and information technology infrastructure costs.

The $2.9 million increase in sales and marketing expenses in 2022 compared to 2021 was primarily due to increases of $1.6 million in travel and related expenses, $1.0 million in marketing activities and events and $0.3 million in consulting expense.

In 2023, we expect sales and marketing expenses to increase from 2022 levels in line with overall revenue growth as we apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

The $2.5 million decrease in sales and marketing expenses in 2023 compared to 2022 was primarily due to decreases of $3.5 million in personnel costs as a result of a decrease in headcount and $0.4 million in marketing expenses, partially offset by increases of $0.9 million in credit loss expense and $0.5 million in travel-related expense.

In 2024, we expect sales and marketing expenses to increase from 2023 levels as we continue to apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

Research and Development

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We expense research and development costs as incurred.

The $4.3 million increase in research and development expenses in 2022 compared to 2021 was primarily due to a $5.0 million increase in consulting expense as the Company transitions to using non-employee consultants for certain research and developments activities and a $0.8 million increase in software expenses.

This increase was partially offset by a $1.4 million decrease in salary and benefit expenses as a result of a decrease in headcount.

The $3.2 million decrease in research and development expenses in 2023 compared to 2022 was primarily due to a decrease of $8.5 million increase in personnel costs as a result of a decrease in headcount.

This decrease was partially offset by increases of $3.4 million in depreciation expense and $1.9 million in consulting expense as the Company transitions to using non-employee consultants for certain research and development activities.

In 2024, we expect research and development expenses to increase from 2023 levels reflecting strategic investments in our growth priorities, including cybersecurity technology.

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Professional services primarily consist of fees for outside accounting, tax, legal, recruiting and other administrative services.

The $0.1 million increase in general and administrative expenses in 2022 compared to 2021 was primarily due to a $2.8 million increase in consulting expense as the Company transitions to using non-employee consultants for certain general and administrative activities.

Additionally, business expenses increased $1.7 million primarily related to an increase in property tax expense.

These increases were partially offset by a decrease of $4.4 million in salary and benefit expenses as a result of a decrease in headcount.

In 2023, we expect general and administrative expenses to remain stable as we apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

The $0.4 million increase in general and administrative expenses in 2023 compared to 2022 was primarily due to an increase of $1.3 million in professional services expense as a result of increases in accounting and tax fees.

Additionally, facility expense increased $0.7 million primarily related to rent expense, equipment expense increased $0.4 million and depreciation expense increased $0.3 million.

Partially offsetting these increases was a decrease of $1.6 million in office expenses as the Company paid catch-up tax fee in 2022 related to a property tax audit.

Additionally, consulting expense decreased $0.7 million.

In 2024, we expect general and administrative expenses to increase from 2023 levels as we continue to apply a disciplined approach to focus our investments in areas that offer the greatest opportunities.

Non-Operating Income (Expense) - Interest Income

Interest income consists primarily of interest income earned on our cash and cash equivalents and marketable securities.

Interest income consists primarily of interest income earned on our invested cash, cash equivalents and marketable securities.

Interest income was $5.1 million and $1.3 million in the years ended December 31, 2023 and 2022, respectively.

Non-Operating Income (Expense) - Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of foreign currency exchange gains and losses.

Interest and other income (expense), net, had a favorable change of $0.5 million, or 23%, in 2022 compared to 2021 primarily driven by a $1.5 million favorable change in foreign currency exchange gains and losses, partially offset by a $1.0 million impairment of an equity investment held by the Company.

In the years ended December 31, 2023 and 2022, interest and other income (expense), net consisted primarily of foreign currency exchange gains and losses, which had a favorable change of $0.6 million in the year ended December 31, 2023 compared to 2022.

Additionally, we recorded impairment expense of $1.0 million in the year ended December 31, 2022 related to an equity investment in a private company held by the Company.

Provision for (Benefit from) Income Taxes

We recorded an income tax provision of $5.8 million for the year ended December 31, 2022 and recorded an income tax benefit of $(63.2) million for the year ended December 31, 2021.

The main component of our income tax benefit in the year ended December 31, 2021 is related to the valuation allowance release in the three months ended September 30, 2021.

Prior to 2021 and since inception, the Company had maintained a full valuation.

Since 2021, federal deferred tax assets are no longer subject to a valuation allowance.

Certain state deferred tax assets continue to be subject to a valuation allowance.

Our deferred tax assets primarily consist of U.S.

net operating loss (“NOL”) and tax credit carryforwards.

The Company’s income tax provision for the year ended December 31, 2022 primarily consisted of federal income taxes.

Our income tax provision for the years ended December 31, 2021 primarily consisted of foreign income taxes.

We recorded income tax provisions of $3.8 million for the year ended December 31, 2023 and $5.8 million for the year ended December 31, 2022.

Our deferred tax assets primarily consist of research and development credits, capitalized research and development expenses and accruals and reserves.

The Company’s income tax provision for the years ended December 31, 2023 and 2022 primarily consisted of state and foreign income taxes.

See Note 9 Income Taxes, of the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further details regarding the Company’s taxes.

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The common shares repurchased are held in treasury and accounted for under the cost method.

On September 17, 2020, the Company’s Board of Directors authorized a stock repurchase program of up to $50 million of its common stock over a period of twelve months.

This repurchase program was active for twelve months and expired in the second half of 2021.

On October 28, 2021, the Company announced its Board of Directors authorized a new stock repurchase program of up to $100 million of its common stock over a period of twelve months.

This repurchase program was also active for twelve months and expired in the second half of 2022.

On November 1, 2022, the Company announced its Board of Directors authorized a new stock repurchase program of up to $50 million of its common stock over a period of twelve months (the “2022 Program”).

As of December 31, 2022, the Company had $50.0 million available to repurchase shares under the 2022 Program.

Under all programs, repurchased shares are held in treasury at cost.

On November 1, 2022, the Company announced its Board of Directors authorized a stock repurchase program of up to $50 million of its common stock over a period of twelve months, at which point it expired.

On November 7, 2023, the Company announced its Board of Directors had authorized a stock repurchase program of up to $50 million of its common stock over a period of twelve months.

As of December 31, 2023, the Company had $49.7 million available to repurchase shares.

Under these repurchase programs, repurchased shares are held in treasury at cost.

The Company’s stock repurchase programs do not obligate us to acquire any specific number of shares.

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In October 2021, our Board approved the initiation of a regular quarterly cash dividend on our common stock.

The first dividend, in the amount of $0.05 per share of common stock outstanding, was paid in December 2021 and was treated as a return of capital.

In October 2022, our Board approved an increase in the amount of the quarterly cash dividend to $0.06 per share.

The first dividend, in the amount of $0.05 per share of common stock outstanding, was paid in December 2021 and was treated as a return of capital, and on November 1, 2022, the Board of Directors increased the dividend amount to $0.06 per share.

We currently anticipate that we will continue to pay comparable quarterly cash dividends in the future.

However, the payment, amount and timing of future dividends remain within the discretion of our Board and will depend upon our results of operations, financial condition, cash requirements, and other factors.

However, the payment, amount and timing of future dividends remain within the discretion of our Board and will depend on our results of operations, financial condition, cash requirements, and other factors.

In addition, as described in Note 6 Commitments and Contingencies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, we may be currently, or may be from time to time, involved in ongoing litigation.

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Financing activities (28,849) (88,141)

Net decrease in cash and cash equivalents $ (10,954) $ (4,356)

Net increase (decrease) in cash and cash equivalents $ 29,273 $ (10,954)

Cash Flows from Operating Activities

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Our cash flows from operating activities will continue to be affected principally by the extent to which we increase spending on our business and our working capital requirements.

During the year ended December 31, 2023, cash provided by operating activities was $44.5 million, consisting of net income of $40.0 million and non-cash benefits totaling $22.8 million, partially offset by an unfavorable net change in operating assets and liabilities of $18.3 million.

Our non-cash benefits primarily consisted of non-cash charges of $14.1 million for stock-based compensation and $9.3 million of depreciation and amortization expense.

The net change in our operating assets and liabilities primarily reflects cash outflows from changes in accrued and other liabilities of $20.8 million, inventory of $6.3 million, accounts payable of $3.0 million and prepaid expenses and other assets of $1.9 million, partially offset by cash inflows from changes in deferred revenue of $14.3 million.

The unfavorable change in accounts receivable was due to the timing of collections from our customers.

The favorable change in deferred revenues was attributable to the timing of service contract bookings.

During the year ended December 31, 2022, cash provided by operating activities was $66.1 million, consisting of net income of $46.9 million, partially offset by a non-cash benefit of $21.5 million and an unfavorable net change in operating assets and liabilities of $2.3 million.

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The favorable change in deferred revenues was attributable to the timing of service contract bookings.

During the year ended December 31, 2021, cash provided by operating activities was $50.1 million, consisting of net income of $94.9 million, partially offset by a non-cash benefit of $39.8 million and an unfavorable net change in operating assets and liabilities of $5.0 million.

Our non-cash benefit consisted primarily of a benefit of $64.2 million related to the release our of deferred tax asset valuation allowance plus other adjustments, and non-cash charges of $14.4 million for stock-based compensation and $8.9 million of depreciation and amortization expense.

The net change in our operating assets and liabilities primarily reflects cash outflows from changes in accounts receivable of $10.4 million, accrued and other liabilities of $5.6 million, prepaid expenses and other assets of $2.1 million and inventory of $1.8 million, partially offset by cash inflows from changes in deferred revenue of $12.9 million and changes in accounts payable of $2.0 million.

The unfavorable change in accounts receivable was due to the timing of collections from our customers.

The favorable change in deferred revenues was primarily driven by increased bookings.

Cash Flows from Investing Activities

During the year ended December 31, 2022, cash used in investing activities was $11.1 million, consisting of purchases of marketable securities of $55.4 million and property and equipment of $10.8 million, partially offset by proceeds from maturities of marketable securities of $71.0 million and sales of marketable securities of $6.3 million.

During the year ended December 31, 2021, cash used in investing activities was $38.1 million, consisting of purchases of marketable securities of $128.6 million and property and equipment of $5.2 million, partially offset by proceeds from sales and maturities of marketable securities of $95.7 million.

During the year ended December 31, 2023, cash provided in investing activities was $13.6 million, consisting of proceeds from maturities of marketable securities of $64.5 million and proceeds from the sales of marketable securities of $45.4 million, partially offset by purchases of marketable securities of $85.4 million and capital expenditures of $10.9 million.

During the year ended December 31, 2022, cash used in investing activities was $11.1 million, consisting of purchases of marketable securities of $55.4 million and capital expenditures of $10.8 million, partially offset by proceeds from maturities of marketable securities of $71.0 million and sales of marketable securities of $6.3 million.

Cash Flows from Financing Activities

During the year ended December 31, 2022, cash used in financing activities was $88.1 million consisting primarily of $79.3 million of cash used to repurchase our common stock and $15.9 million used for the payments of cash dividends, partially offset by $7.0 million of cash proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2021, cash used in financing activities was $16.4 million consisting primarily of $18.3 million of cash used to repurchase our common stock and $3.9 million used for the payments of cash dividends, partially offset by $5.8 million of cash proceeds from common stock issuances under our equity incentive plans.

Critical Accounting Policies and Estimates

During the year ended December 31, 2023, cash used in financing activities was $28.8 million consisting primarily of $17.8 million of cash used for the payments of cash dividends and $16.0 million of cash used to repurchase our common stock in the open market, partially offset by $4.9 million of cash proceeds from common stock issuances under our equity incentive plans.

During the year ended December 31, 2022, cash used in financing activities was $88.1 million consisting primarily of $79.3 million of cash used to repurchase our common stock in the open market and from Summit, and $15.9 million used for the payments of cash dividends, partially offset by $7.0 million of cash proceeds from common stock issuances under our equity incentive plans.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.

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Our actual results could differ from these estimates.

Note 1, Description of Business and Summary of Significant Accounting Policies , in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Inventory consists primarily of finished goods and related component parts and is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or estimated net realizable value.

We evaluate inventory for excess and obsolete products, based on management’s assessment of future demand and market conditions.

Inventory is stated at the lower of cost or net realizable value.

Inventory cost is determined using a first-in, first-out method.

We regularly evaluate inventory for excess and obsolete products.

Most of our inventory provisions relate to excess quantities of certain products, based on our inventory levels and future product purchase commitments compared to assumptions based on management’s assessment of future demand and market conditions.

Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.

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Revenue in these arrangements is recognized ratably as the services are provided.

A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors.

A substantial portion of our revenue is from sales of our products and services through distribution channels, such as resellers and distributors.

Our customers predominantly purchase PCS services in conjunction with purchases of our products.

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We generally use a range of amounts to estimate SSP for individual products and services based on multiple factors including, but not limited to the sales channel (reseller, distributor or end-customer), the geographies in which our products and services are sold, and the size of the end-customer.

We account for multiple contracts with a single partner as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract.

We account for multiple contracts with a single reseller as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract.

We may occasionally accept returns to address customer satisfaction issues even though there is generally no contractual provision for such returns.

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Specific customer returns and allowances are considered when determining our sales return reserve estimate.

Our policy applies to the accounting for individual contracts.

However, we have elected a practical expedient to apply the guidance to a portfolio of contracts or performance obligations with similar characteristics so long as such application would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio.

Consequently, we have chosen to apply the portfolio approach when possible, which we do not believe will happen frequently.

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We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Recent Accounting Pronouncements

Refer to Note 1 Description of Business and Summary of Significant Accounting Policies, in the notes to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis