CALIX, INC 10-Q

ITEM 1. Financial Statements CALIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) September 30, 2023 December 31, 2022 (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents $ 135,675 $ 79,073 Marketable securities 114,417 162,642 Accounts receivable, net 80,661 93,804 Inventory 150,033 149,160 Prepaid expenses and other current assets 106,839 62,691 Total current assets 587,625 547,370 Property and equipment, net 29,123 25,834 Right-of-use operating leases 9,964 9,283 Deferred tax assets 162,901 167,031 Goodwill 116,175 116,175 Other assets 20,872 19,142 $ 926,660 $ 884,835 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 22,134 $ 41,407 Accrued liabilities 82,078 90,474 Deferred revenue 34,944 33,541 Total current liabilities 139,156 165,422 Long-term portion of deferred revenue 25,413 25,072 Operating leases 8,446 8,442 Other long-term liabilities 2,700 6,332 Total liabilities 175,715 205,268 Commitments and contingencies (See Note 6) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 65,950 shares issued and outstanding as of September 30, 2023, and 65,735 shares issued and outstanding as of December 31, 2022 1,649 1,644 Additional paid-in capital 1,104,435 1,070,100 Accumulated other comprehensive loss ( 1,359 ) ( 2,473 ) Accumulated deficit ( 353,780 ) ( 389,704 ) Total stockholders’ equity 750,945 679,567 $ 926,660 $ 884,835 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Revenue $ 263,835 $ 236,334 $ 774,859 $ 623,324 Cost of revenue 123,286 117,762 369,789 312,780 Gross profit 140,549 118,572 405,070 310,544 Operating expenses: Sales and marketing 52,356 46,134 158,817 123,363 Research and development 46,963 33,196 135,477 93,443 General and administrative 25,301 19,237 73,100 54,179 Total operating expenses 124,620 98,567 367,394 270,985 Operating income 15,929 20,005 37,676 39,559 Interest income and other expense, net: Interest income, net 2,658 595 6,553 870 Other expense, net ( 444 ) ( 134 ) ( 448 ) ( 474 ) Total interest income and other expense, net 2,214 461 6,105 396 Income before income taxes 18,143 20,466 43,781 39,955 Income taxes 1,190 7,023 7,857 10,872 Net income $ 16,953 $ 13,443 $ 35,924 $ 29,083 Net income per common share: Basic $ 0.26 $ 0.21 $ 0.54 $ 0.45 Diluted $ 0.24 $ 0.19 $ 0.52 $ 0.42 Weighted-average number of shares used to compute net income per common share: Basic 66,288 65,355 66,201 64,892 Diluted 69,579 69,174 69,644 68,587 Net income $ 16,953 $ 13,443 $ 35,924 $ 29,083 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on available-for-sale marketable securities, net 263 ( 488 ) 1,185 ( 1,956 ) Foreign currency translation adjustments, net ( 33 ) ( 335 ) ( 71 ) ( 808 ) Total other comprehensive income (loss), net of tax 230 ( 823 ) 1,114 ( 2,764 ) Comprehensive income $ 17,183 $ 12,620 $ 37,038 $ 26,319 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, unaudited) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of July 1, 2023 66,320 $ 1,658 $ 1,112,434 $ ( 1,589 ) $ ( 370,733 ) $ 741,770 Stock-based compensation — — 16,026 — — 16,026 Issuance of common stock under equity incentive plans, net of forfeitures 359 9 8,366 — — 8,375 Repurchases of common stock ( 729 ) ( 18 ) ( 32,391 ) — — ( 32,409 ) Net income — — — — 16,953 16,953 Other comprehensive income — — — 230 — 230 Balance as of September 30, 2023 65,950 $ 1,649 $ 1,104,435 $ ( 1,359 ) $ ( 353,780 ) $ 750,945 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of July 2, 2022 65,241 $ 1,631 $ 1,032,833 $ ( 2,261 ) $ ( 415,074 ) $ 617,129 Stock-based compensation — — 11,027 — — 11,027 Issuance of common stock under equity incentive plans, net of forfeitures 201 5 6,966 — — 6,971 Net income — — — — 13,443 13,443 Other comprehensive loss — — — ( 823 ) — ( 823 ) Balance as of October 1, 2022 65,442 $ 1,636 $ 1,050,826 $ ( 3,084 ) $ ( 401,631 ) $ 647,747 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of December 31, 2022 65,735 $ 1,644 $ 1,070,100 $ ( 2,473 ) $ ( 389,704 ) $ 679,567 Stock-based compensation — — 50,090 — — 50,090 Issuance of common stock under equity incentive plans, net of forfeitures 1,169 29 26,630 — — 26,659 Repurchases of common stock ( 954 ) ( 24 ) ( 42,385 ) — — ( 42,409 ) Net income — — — — 35,924 35,924 Other comprehensive income — — — 1,114 1,114 Balance as of September 30, 2023 65,950 $ 1,649 $ 1,104,435 $ ( 1,359 ) $ ( 353,780 ) $ 750,945 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 64,274 $ 1,607 $ 997,855 $ ( 320 ) $ ( 430,714 ) $ 568,428 Stock-based compensation — — 31,502 — — 31,502 Issuance of common stock under equity incentive plans, net of forfeitures 1,168 29 21,469 — — 21,498 Net income — — — — 29,083 29,083 Other comprehensive loss — — — ( 2,764 ) — ( 2,764 ) Balance as of October 1, 2022 65,442 $ 1,636 $ 1,050,826 $ ( 3,084 ) $ ( 401,631 ) $ 647,747 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents CALIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) Nine Months Ended September 30, 2023 October 1, 2022 Operating activities: Net income $ 35,924 $ 29,083 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 50,090 31,502 Depreciation and amortization 12,181 10,837 Deferred income taxes 4,294 5,225 Net accretion of available-for-sale securities ( 3,119 ) ( 533 ) Changes in operating assets and liabilities: Accounts receivable, net 13,143 ( 15,308 ) Inventory ( 873 ) ( 52,236 ) Prepaid expenses and other assets ( 48,532 ) ( 32,854 ) Accounts payable ( 19,756 ) 36,170 Accrued liabilities ( 141 ) 9,825 Deferred revenue 1,745 9,112 Other long-term liabilities ( 3,629 ) ( 9,745 ) Net cash provided by operating activities 41,327 21,078 Investing activities Purchases of property and equipment ( 13,883 ) ( 9,260 ) Purchases of marketable securities ( 133,521 ) ( 142,280 ) Maturities of marketable securities 185,888 134,325 Net cash provided by (used in) investing activities 38,484 ( 17,215 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 26,659 21,498 Repurchases of common stock ( 42,409 ) — Payments related to financing arrangements ( 7,560 ) ( 995 ) Net cash provided by (used in) financing activities ( 23,310 ) 20,503 Effect of exchange rate changes on cash and cash equivalents 101 ( 527 ) Net increase in cash and cash equivalents 56,602 23,839 Cash and cash equivalents at beginning of period 79,073 51,333 Cash and cash equivalents at end of period $ 135,675 $ 75,172 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents CALIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Company and Basis of Presentation Company Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is the leading global provider of a platform (cloud, software and systems) and managed services that focus on the subscriber-facing network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. This platform and managed services enable broadband service providers (“BSPs”) of all sizes to innovate and transform their businesses. The Company’s BSP customers are empowered to utilize real-time data and insights from the Calix platform to simplify their businesses and deliver experiences that excite their subscribers. These insights enable BSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities. Basis of Presentation The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited financial statements at that date. The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company’s fiscal year begins on January 1 st and ends on December 31 st . Quarterly periods are based on a 4-4-5 calendar with the first quarter ending on the Saturday closest to March 31 st . As a result, the Company had one less day in the nine months ended September 30, 2023 than for the nine months ended October 1, 2022. The preparation of financial statements in conformity with GAAP for interim financial reporting requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 2. Significant Accounting Policies The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022. The Company’s significant accounting policies did not change during the nine months ended September 30, 2023. Newly Adopted Accounting Standard The Company did not adopt any new accounting standards during the nine months ended September 30, 2023 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2023 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, that are significant or expected to be significant to the Company. 8 Table of Contents 3. Cash, Cash Equivalents and Marketable Securities The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as commercial paper, corporate debt securities, municipal securities and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent commercial paper, U.S. government agency securities, corporate debt securities, municipal securities and U.S. government securities with maturities greater than 90 days at date of purchase. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values. Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations. The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive loss in stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as other expense, net. There were no realized gains and losses for the three and nine months ended September 30, 2023 and October 1, 2022, respectively. Cash, cash equivalents and marketable securities consisted of the following (in thousands): September 30, 2023 December 31, 2022 Cash and cash equivalents: Cash $ 30,264 $ 39,189 Commercial paper 38,093 33,199 Money market funds 35,720 555 U.S. government securities 31,598 5,990 Corporate debt securities — 140 Total cash and cash equivalents 135,675 79,073 Marketable securities: U.S. government securities 57,134 106,750 U.S. government agency securities 44,370 23,632 Commercial paper 8,358 28,992 Corporate debt securities 4,555 3,168 Municipal securities — 100 Total marketable securities 114,417 162,642 $ 250,092 $ 241,715 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. 9 Table of Contents The amortized cost and fair value of marketable securities were as follows (in thousands): As of September 30, 2023 Amortized Cost Unrealized Losses Fair Value U.S. government securities $ 88,922 $ ( 190 ) $ 88,732 Commercial paper 46,473 ( 22 ) 46,451 U.S. government agency securities 44,801 ( 431 ) 44,370 Corporate debt securities 4,590 ( 35 ) 4,555 $ 184,786 $ ( 678 ) $ 184,108 As of December 31, 2022 Amortized Cost Unrealized Losses Fair Value U.S. government securities $ 114,119 $ ( 1,379 ) $ 112,740 Commercial paper 62,262 ( 71 ) 62,191 U.S. government agency securities 23,876 ( 244 ) 23,632 Corporate debt securities 3,312 ( 4 ) 3,308 Municipal securities 101 ( 1 ) 100 $ 203,670 $ ( 1,699 ) $ 201,971 4. Fair Value Measurements The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier value hierarchy, which prioritizes the inputs used in measuring fair value: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The fair value hierarchy also requires the Company to maximize the use of observable inputs, when available, and to minimize the use of unobservable inputs when determining inputs and determining fair value. The following tables sets forth the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands): As of September 30, 2023 Level 1 Level 2 Total Money market funds $ 35,720 $ — $ 35,720 U.S. government securities 88,732 — 88,732 Commercial paper — 46,451 46,451 U.S. government agency securities — 44,370 44,370 Corporate debt securities — 4,555 4,555 $ 124,452 $ 95,376 $ 219,828 10 Table of Contents As of December 31, 2022 Level 1 Level 2 Total Money market funds $ 555 $ — $ 555 U.S. government securities 112,740 — 112,740 Commercial paper — 62,191 62,191 U.S. government agency securities — 23,632 23,632 Corporate debt securities — 3,308 3,308 Municipal securities — 100 100 $ 113,295 $ 89,231 $ 202,526 5. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): September 30, 2023 December 31, 2022 Accounts receivable $ 80,986 $ 94,201 Allowance for doubtful accounts ( 325 ) ( 397 ) $ 80,661 $ 93,804 Inventory consisted of the following (in thousands): September 30, 2023 December 31, 2022 Raw materials $ 11,696 $ 640 Finished goods 138,337 148,520 $ 150,033 $ 149,160 Prepaid expenses and other current assets consisted of the following (in thousands): September 30, 2023 December 31, 2022 Supplier deposits $ 65,891 $ 39,064 Prepaid expenses and other current assets 40,948 23,627 $ 106,839 $ 62,691 Notes Receivable The Company has notes receivable with one customer related to the sale of hardware. The notes receivable are secured by the underlying hardware and have original terms of three years at interest rates ranging from 5 % to 8 %. The Company assesses the credit worthiness of this customer on a periodic basis and did no t have an allowance for credit losses against these notes as of September 30, 2023. As of September 30, 2023, there was $ 13.0 million outstanding, of which $ 5.2 million is included in “Prepaid expenses and other current assets” and $ 7.8 million in “Other assets” in the accompanying Condensed Consolidated Balance Sheets. Property and equipment, net consisted of the following (in thousands): September 30, 2023 December 31, 2022 Test equipment $ 50,023 $ 44,106 Computer equipment 13,637 13,396 Software 12,505 10,389 Leasehold improvements 1,990 1,730 Furniture and fixtures 1,261 1,153 Total 79,416 70,774 Accumulated depreciation and amortization ( 50,293 ) ( 44,940 ) $ 29,123 $ 25,834 11 Table of Contents Accrued liabilities consisted of the following (in thousands): September 30, 2023 December 31, 2022 Compensation and related benefits $ 24,666 $ 27,813 Component inventory held by suppliers 13,428 10,280 Professional and consulting fees 6,977 7,307 Current portion of warranty and retrofit 5,795 6,377 Customer advances or rebates 5,449 5,653 Taxes payable 4,742 4,581 Revenue share payments 4,186 7,210 Operating leases 3,996 3,949 Product returns 2,723 2,961 Business events 1,967 3,167 Insurance 1,698 1,785 Freight 1,146 3,649 Other 5,305 5,742 $ 82,078 $ 90,474 Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Balance at beginning of period $ 8,306 $ 8,654 $ 8,386 $ 9,594 Accruals for product warranty and retrofit 1,081 219 2,899 396 Cost of warranty and retrofit claims ( 995 ) ( 566 ) ( 2,893 ) ( 1,683 ) Balance at end of period $ 8,392 $ 8,307 $ 8,392 $ 8,307 In March 2018, and as amended in December 2020, the Company entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which the Company is obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $ 15.8 million. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales through March 2024. If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due. As of September 30, 2023, the liability, including accrued interest, was $ 4.2 million, which is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2022, the liability, including accrued interest, was $ 11.4 million, of which $ 7.2 million was included in “Accrued liabilities” and $ 4.2 million in “Other long-term liabilities.” 12 Table of Contents 6. Commitments and Contingencies Lease Commitments The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of September 30, 2023 (in thousands): Period Future Minimum Lease Payments Remainder of 2023 $ 1,108 2024 4,664 2025 4,466 2026 1,485 2027 and thereafter 1,785 Total future minimum lease payments 13,508 Less imputed interest ( 1,066 ) $ 12,442 As of September 30, 2023, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 3,996 Operating leases 8,446 $ 12,442 The Company leases its headquarters office space in San Jose, California under a lease agreement that expires in December 2025. The future minimum lease payments under the lease are $ 5.5 million and are included in the table above. The weighted average discount rate for the Company’s operating leases as of September 30, 2023 was 5.4 %. The weighted average remaining lease term as of September 30, 2023 was 3.3 years. For the three and nine months ended September 30, 2023, total rent expense of the Company was $ 1.2 million and $ 3.6 million, respectively. For the three and nine months ended October 1, 2022, total rent expense of the Company was $ 1.2 million and $ 3.4 million, respectively. Cash paid within operating cash flows for operating leases was $ 3.4 million for the nine months ended September 30, 2023 and October 1, 2022 for each respective period. Purchase Commitments The Company’s suppliers, including contract manufacturers (“CMs”) and original design manufacturers (“ODMs”), place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of September 30, 2023 and December 31, 2022, the Company had approximately $ 227.2 million and $ 340.6 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within two years . The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $ 13.4 million and $ 10.3 million as of September 30, 2023 and December 31, 2022, respectively. The Company records the related charges in cost of revenue in its Condensed Consolidated Statements of Comprehensive Income. 13 Table of Contents Litigation From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceeding that, if determined adversely to the Company, in management’s opinion, is currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole. 7. Stockholders’ Equity 2019 Equity Incentive Award Plan Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company’s Board of Directors, are eligible to receive awards under the 2019 Equity Incentive Award Plan (“the 2019 Plan”). The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards and dividend equivalents to eligible individuals. At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 1.5 million shares. As of September 30, 2023, there were 5.4 million shares available for issuance under the 2019 Plan. During the three months ended September 30, 2023, stock option awards exercisable for up to an aggregate of 0.3 million shares of common stock were granted with a grant date weighted-average exercise price of $ 41.18 per share. During the nine months ended September 30, 2023, stock option awards exercisable for up to an aggregate of 0.9 million shares of common stock were granted with a grant date weighted-average exercise price of $ 46.25 per share. These stock option awards vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter over an additional three years . In February 2023, performance-based stock option awards exercisable for up to an aggregate of 1.2 million shares of common stock were granted to certain Company executives with a grant date exercise price of $ 51.57 per share. The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net operating income for 2023 (collectively, the “2023 Performance Targets”) during the one-year performance period. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2023 Performance Targets, as to 25 % of the shares of common stock earned on the one year anniversary of the date of grant, and as to the remaining 75 % of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. If the non-GAAP net operating income target and the bookings target are each achieved below 80 % of target, no shares would be awarded, and the performance-based stock option awards would be forfeited in full. If either target is achieved at the minimum threshold of 80 % of target, then the shares are awarded at 50 % of the granted shares, with an increasing percentage of shares awarded above the minimum thresholds up to 125 % of the granted shares for each target. Each target result is then weighted by 50 % and the combined total determines the percent of target shares. The maximum combined award is 100 %. The probability of meeting a portion of the performance conditions related to these performance-based stock option awards was assessed to be probable as of September 30, 2023 based on adjusted targets, and stock-based compensation expense of $ 2.8 million was recognized for the three months ended September 30, 2023. For the nine months ended September 30, 2023, stock-based compensation expense of $ 9.7 million was recognized. During the three months ended September 30, 2023, 61,000 shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 9.01 per share. During the nine months ended September 30, 2023, 0.3 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $ 11.93 per share. As of September 30, 2023, unrecognized stock-based compensation expense of $ 84.6 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.1 years. Employee Stock Purchase Plans The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15 % of their eligible compensation subject to certain Internal Revenue Code limitations. The offering periods under the ESPP are two six-month offering periods from August 15 th through February 14 th and February 15 th through August 14 th of each year. The price of common stock purchased under the ESPP is 85 % of the lower of the fair market value of the common stock on the commencement date and the end date of each six-month offering period. As of September 30, 2023, there were 4.5 million shares available for issuance under the ESPP. During the nine months ended September 30, 2023, 0.2 million shares were purchased under the ESPP. As of September 30, 2023, unrecognized stock-based 14 Table of Contents compensation expense of $ 1.2 million related to the ESPP is expected to be recognized over a remaining service period of 0.4 years. The NQ ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 25 % of their eligible recurring compensation. Eligible employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within the one year period immediately following the purchase date. The NQ ESPP provides quarterly offering periods from February 8 th through May 7 th , May 8 th through August 7 th , August 8 th through November 7 th and November 8 th through February 7 th of each year, with a maximum of 0.25 million shares allocated per purchase period. At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the NQ ESPP by 1.2 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 7.5 million shares. As of September 30, 2023, there were 3.6 million shares available for issuance under the NQ ESPP. During the nine months ended September 30, 2023, 0.6 million shares were purchased and issued. As of September 30, 2023, unrecognized stock-based compensation expense of $ 11.4 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.8 years. Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Cost of revenue $ 734 $ 698 $ 2,314 $ 1,964 Sales and marketing 4,333 3,082 13,818 8,412 Research and development 4,245 2,808 13,417 8,812 General and administrative 6,714 4,439 20,541 12,314 $ 16,026 $ 11,027 $ 50,090 $ 31,502 Income tax benefit recognized $ 2,578 $ 1,691 $ 9,685 $ 7,818 Stock Repurchase Program The Company has in place a stock repurchase program for up to $ 100 million of the Company’s common stock. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of the purchases depends on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy. The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. For the nine months ended September 30, 2023, the Company purchased 1.0 million shares of common stock for $ 42.4 million at an average price per share of $ 44.47 . As of September 30, 2023, the remaining balance under this authorization was $ 57.6 million. 8. Revenue from Contracts with Customers The Company develops, markets and sells a broadband platform and managed services, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a Company-wide basis, for purposes of allocating resources and evaluating financial performance. The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands): 15 Table of Contents Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 United States $ 235,128 $ 215,857 $ 695,491 $ 565,420 Europe 19,377 7,178 46,483 16,705 Americas ex U.S. 7,414 11,557 26,280 31,236 Middle East & Africa 1,740 1,223 5,888 8,940 Asia Pacific 176 519 717 1,023 $ 263,835 $ 236,334 $ 774,859 $ 623,324 Contract Asset Contract assets include amounts recognized as revenue prior to the Company’s contractual right to bill the customer. Amounts are billed in accordance with the agreed-upon contractual terms. The closing balance as of September 30, 2023 was $ 5.5 million of which the Company expects to bill 47 % of the balance during the remainder of 2023. The contract asset balance may fluctuate depending on the timing of fulfilling the related performance obligations with the Company's customers. Contract Liability Deferred revenue was $ 60.4 million, $ 67.2 million and $ 58.6 million as of September 30, 2023, July 1, 2023 and December 31, 2022, respectively. The decrease in the deferred revenue balance for the three months ended September 30, 2023 was the result of revenue recognized of $ 16.7 million that was included in the deferred revenue balance at the beginning the period offset by cash payments received or due in advance of satisfying the Company’s performance obligations. The increase in the deferred revenue balance for the nine months ended September 30, 2023 was driven by cash payments received or due in advance of satisfying the Company’s performance obligations and balances reclassified to contract assets during the period offset by $ 26.1 million of revenue recognized that was included in the deferred revenue balance at the beginning of the period. Revenue allocated to remaining performance obligations (“RPOs”) represents contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods but excludes variable consideration where the monthly invoicing is based on usage or where actual usage exceeds the minimum commitment. RPOs were $ 219.5 million as of September 30, 2023, and the Company expects to recognize as revenue 39 % of this amount over the next 12 months and the remainder thereafter. Contract Costs The Company capitalizes certain sales commissions related primarily to multi-year subscriptions and extended warranty support for which the expected amortization period is greater than one year. As of September 30, 2023 and December 31, 2022, the unamortized balance of deferred commissions was $ 10.9 million and $ 11.2 million, respectively. For the three and nine months ended September 30, 2023, the amount of amortization was $ 1.7 million and $ 4.6 million, respectively, compared to $ 1.0 million and $ 2.6 million for the three and nine months ended October 1, 2022, respectively. There was no impairment loss in relation to the costs capitalized for either period. Concentration of Customer Risk No customer accounted for more than 10% of the Company’s revenue for the three or nine months ended September 30, 2023 and October 1, 2022. Two customers represented 16 % and 13 %, respectively, of the Company’s accounts receivable as of September 30, 2023. One customer represented 11 % of the Company’s accounts receivable as of December 31, 2022. 9. Income Taxes The following table presents income taxes and the effective tax rates for the periods indicated (in thousands, except percentages): Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Income before income taxes $ 18,143 $ 20,466 $ 43,781 $ 39,955 Income taxes $ 1,190 $ 7,023 $ 7,857 $ 10,872 Effective tax rate 6.6 % 34.3 % 17.9 % 27.2 % The Company’s income taxes for the three and nine months ended September 30, 2023 and October 1, 2022 were determined using an estimated effective tax rate adjusted for discrete items that occurred during the respective periods. The Company’s 16 Table of Contents effective tax rate for the three and nine months ended September 30, 2023 and October 1, 2022 differed from the statutory federal corporate tax rate of 21% primarily due to state taxes, the effect of non-deductible stock-based compensation for executive officers offset by the favorable impact of U.S. federal research tax credits, excess tax benefits from stock-based compensation and the U.S. tax impact of foreign operations. For the three and nine months ended September 30, 2023, the Company recognized a tax benefit of $ 3.6 million related to the finalization of its 2022 tax returns. The Company has net deferred tax assets that have arisen primarily as a result of temporary differences, net operating loss carryforwards, capitalized research and development costs and tax credits. The Company’s ability to realize a deferred tax asset is based on its ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. Management believes that it is more likely than not that the Company will utilize a significant portion of its deferred tax assets. The Company maintained a valuation allowance for the three and nine months ended September 30, 2023 and October 1, 2022 of $ 29.9 million and $ 30.9 million, respectively, on certain U.S. federal and state deferred tax assets that the Company believes are not more likely than not to be realized in future periods. The Company considered scheduled reversals of deferred tax liabilities, historic profitability, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which its deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates, or if the Company decides to adjust these estimates in the future periods, further adjustments to its valuation allowance may be recorded, which could materially impact the Company’s financial position and net income in the period of the adjustment. 10. Net Income Per Common Share The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Numerator: Net income $ 16,953 $ 13,443 $ 35,924 $ 29,083 Denominator: Weighted-average common shares outstanding used to compute basic net income per share 66,288 65,355 66,201 64,892 Effect of dilutive common stock equivalents 3,291 3,819 3,443 3,695 Weighted-average common shares outstanding used to compute diluted net income per share 69,579 69,174 69,644 68,587 Net income per common share: Basic net income per common share $ 0.26 $ 0.21 $ 0.54 $ 0.45 Diluted net income per common share $ 0.24 $ 0.19 $ 0.52 $ 0.42 Potentially dilutive shares excluded, weighted average 4,958 1,724 4,022 1,803 Potentially dilutive shares have been excluded from the computation of diluted net income per common share when their effect is antidilutive. These antidilutive shares were from stock options. 17 Table of Contents