CALIX, INC 10-K

ITEM 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm 36 Consolidated Balance Sheets, As of December 31, 202 3 and 20 2 2 38 Consolidated Statements of Comprehensive Income, Years Ended December 31, 202 3 , 202 2 and 202 1 39 Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 202 3 , 202 2 and 202 1 40 Consolidated Statements of Cash Flows, Years Ended December 31, 202 3 , 202 2 and 202 1 41 Notes to Consolidated Financial Statements 42 35 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Calix, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Calix, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 36 Table of Contents Evaluation of net realizable value of raw material and finished goods inventory and excess and obsolete component liabilities As discussed in Notes 1, 4 and 5 to the consolidated financial statements, the Company has raw material and finished goods inventories with a carrying value of $133.0 million and excess and obsolete component liabilities of $32.2 million as of December 31, 2023. The Company adjusts the inventory carrying value for excess or obsolete inventory based on assumptions about future demand for products, potential obsolescence of technology, product life cycle, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds the estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product introductions and require significant estimates that may include elements that are uncertain. The Company also records a liability and a charge to cost of revenue for estimated losses on components the Company is obligated to purchase from its manufacturers when the components have been rendered excess and obsolete 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 component levels that greatly exceed projected demand. During the fourth quarter of 2023, the Company took charges of $28.7 million to write down excess and obsolete inventory and accrue a liability for components at suppliers primarily associated with the Company’s legacy product family. We identified the evaluation of net realizable value of inventory and excess and obsolete component liabilities as a critical audit matter. Evaluation of the Company’s forecasted demand, including the Company’s determination of the effect of market and economic conditions, technology and design changes, new product introductions, and discontinuation of products both by the Company and its suppliers required significant auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory process. This included controls over the reviews of the estimates of the net realizable value of excess or obsolete raw material and finished goods inventory and liabilities for losses on components the Company is obligated to purchase from its manufacturers. For a selection of inventory items owned by the Company, we (1) reperformed the analysis provided by the Company to assess the accuracy of the net realizable value of inventory by comparing historical sales activity, customer order backlog, or demand forecasts to the inventory on hand quantities, and (2) performed inquiries of Company’s personnel and inspected documents regarding product end of life announcements, technology and design changes, and new product introductions. For a selection of components subject to the Company’s purchase commitments, we (1) evaluated the reasonableness of management’s assumptions used to estimate the excess and obsolete component liabilities by considering historical sales activity, customer order backlog, or demand forecasts of the related finished products and (2) performed inquiries of Company’s personnel and inspected documents regarding product end of life announcements, technology and design changes, new product introductions, and historical reimbursements to suppliers for excess and obsolete components. /s/ KPMG LLP We have served as the Company’s auditor since 2016. Santa Clara, California February 22, 2024 37 Table of Contents CALIX, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 63,409 $ 79,073 Marketable securities 156,937 162,642 Accounts receivable, net 126,027 93,804 Inventory 132,985 149,160 Prepaid expenses and other current assets 118,598 62,691 Total current assets 597,956 547,370 Property and equipment, net 29,461 25,834 Right-of-use operating leases 9,262 9,283 Deferred tax assets 167,691 167,031 Goodwill 116,175 116,175 Other assets 21,320 19,142 $ 941,865 $ 884,835 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 34,746 $ 41,407 Accrued liabilities 116,227 90,474 Deferred revenue 36,669 33,541 Total current liabilities 187,642 165,422 Long-term portion of deferred revenue 24,864 25,072 Operating leases 7,421 8,442 Other long-term liabilities 2,956 6,332 Total liabilities 222,883 205,268 Commitments and contingencies (See Note 5) Stockholders’ equity: Preferred stock, $ 0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of December 31, 2023 and 2022 — — Common stock, $ 0.025 par value; 100,000 shares authorized; 65,052 shares issued and outstanding as of December 31, 2023, and 65,735 shares issued and outstanding as of December 31, 2022 1,627 1,644 Additional paid-in capital 1,078,393 1,070,100 Accumulated other comprehensive loss ( 659 ) ( 2,473 ) Accumulated deficit ( 360,379 ) ( 389,704 ) Total stockholders’ equity 718,982 679,567 $ 941,865 $ 884,835 See accompanying notes to consolidated financial statements. 38 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share data) Years Ended December 31, 2023 2022 2021 Revenue $ 1,039,593 $ 867,827 $ 679,394 Cost of revenue 521,277 432,399 322,807 Gross profit 518,316 435,428 356,587 Operating expenses: Sales and marketing 214,564 174,549 125,909 Research and development 177,772 131,994 101,747 General and administrative 100,395 76,275 55,779 Restructuring benefit — — ( 786 ) Total operating expenses 492,731 382,818 282,649 Operating income 25,585 52,610 73,938 Interest and other income (expense), net: Interest income (expense), net 9,704 2,009 ( 402 ) Other expense, net ( 532 ) ( 577 ) ( 882 ) Total interest and other income (expense), net 9,172 1,432 ( 1,284 ) Income before income taxes 34,757 54,042 72,654 Income taxes 5,432 13,032 ( 165,724 ) Net income $ 29,325 $ 41,010 $ 238,378 Net income per common share: Basic $ 0.44 $ 0.63 $ 3.77 Diluted $ 0.42 $ 0.60 $ 3.51 Weighted-average number of shares used to compute net income per common share: Basic 65,980 65,058 63,277 Diluted 69,320 68,911 67,856 Net income $ 29,325 $ 41,010 $ 238,378 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on available-for-sale marketable securities, net 1,701 ( 1,521 ) ( 179 ) Foreign currency translation adjustments, net 113 ( 632 ) 50 Total other comprehensive income (loss), net of tax 1,814 ( 2,153 ) ( 129 ) Comprehensive income $ 31,139 $ 38,857 $ 238,249 See accompanying notes to consolidated financial statements. 39 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders’ Shares Amount Capital Loss Deficit Equity Balance as of December 31, 2020 62,122 $ 1,553 $ 948,055 $ ( 191 ) $ ( 669,092 ) $ 280,325 Stock-based compensation — — 24,230 — — 24,230 Issuance of common stock under equity incentive plans, net of forfeitures 2,152 54 25,570 — — 25,624 Net income — — — — 238,378 238,378 Other comprehensive loss — — — ( 129 ) — ( 129 ) Balance as of December 31, 2021 64,274 1,607 997,855 ( 320 ) ( 430,714 ) 568,428 Stock-based compensation — — 44,826 — — 44,826 Issuance of common stock under equity incentive plans, net of forfeitures 1,461 37 27,419 — — 27,456 Net income — — — — 41,010 41,010 Other comprehensive loss — — — ( 2,153 ) — ( 2,153 ) Balance as of December 31, 2022 65,735 1,644 1,070,100 ( 2,473 ) ( 389,704 ) 679,567 Stock-based compensation — — 62,771 — — 62,771 Issuance of common stock under equity incentive plans, net of forfeitures 1,527 38 32,111 — — 32,149 Repurchase of common stock including excise tax ( 2,210 ) ( 55 ) ( 86,589 ) — — ( 86,644 ) Net income — — — — 29,325 29,325 Other comprehensive income — — — 1,814 — 1,814 Balance as of December 31, 2023 65,052 1,627 1,078,393 ( 659 ) ( 360,379 ) 718,982 See accompanying notes to consolidated financial statements. 40 Table of Contents CALIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2023 2022 2021 Operating activities: Net income $ 29,325 $ 41,010 $ 238,378 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 62,771 44,826 24,230 Depreciation and amortization 16,631 14,315 15,012 Deferred income taxes ( 660 ) 1,932 ( 168,426 ) Net accretion of available-for-sale securities ( 4,199 ) ( 1,146 ) — Changes in operating assets and liabilities: Accounts receivable, net ( 32,222 ) ( 8,585 ) ( 15,800 ) Inventory 16,175 ( 60,280 ) ( 36,612 ) Prepaid expenses and other assets ( 60,795 ) ( 38,359 ) ( 27,074 ) Accounts payable ( 6,369 ) 12,111 16,025 Accrued liabilities 37,070 20,919 3,273 Deferred revenue 2,921 9,118 10,400 Other long-term liabilities ( 4,397 ) ( 8,678 ) ( 2,613 ) Net cash provided by operating activities 56,251 27,183 56,793 Investing activities: Purchases of property and equipment ( 17,855 ) ( 14,067 ) ( 10,463 ) Purchases of marketable securities ( 216,193 ) ( 191,403 ) ( 298,092 ) Maturities of marketable securities 227,803 181,388 197,894 Net cash used in investing activities ( 6,245 ) ( 24,082 ) ( 110,661 ) Financing activities: Proceeds from common stock issuances related to employee benefit plans 32,149 27,456 25,624 Repurchases of common stock ( 86,397 ) — — Payments related to financing arrangements ( 11,678 ) ( 2,393 ) ( 1,241 ) Net cash provided by (used in) financing activities ( 65,926 ) 25,063 24,383 Effect of exchange rate changes on cash and cash equivalents 256 ( 424 ) 11 Net increase (decrease) in cash and cash equivalents ( 15,664 ) 27,740 ( 29,474 ) Cash and cash equivalents at beginning of year 79,073 51,333 80,807 Cash and cash equivalents at end of year $ 63,409 $ 79,073 $ 51,333 Supplemental disclosures of cash flow information: Interest paid $ 253 $ 577 $ 631 Income taxes paid $ 11,873 9,607 5,197 Non-cash investing activities: Changes in accounts payable and accrued liabilities related to purchases of property and equipment $ ( 180 ) $ 586 $ 194 See accompanying notes to consolidated financial statements. 41 Table of Contents CALIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Significant Accounting Policies 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 and Accounting Guidance The accompanying consolidated financial statements have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) and U.S. generally accepted accounting principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Use of Estimates The preparation of financial statements is in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For the Company, these estimates include, but are not limited to: allowances for doubtful accounts and sales returns, excess and obsolete inventory, allowances for obligations to its contract manufacturers, valuation of stock-based compensation, useful lives assigned to long-lived assets, standard and extended warranty costs, realizability of deferred tax assets and uncertain tax positions and contingencies. Actual results could differ from those estimates, and such differences could be material to the Company’s financial position and results of operations. Revenue Recognition Revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Revenue from sales of access and premises systems is recognized when control is transferred to the customer, which is generally when the products are shipped. Revenue from software platform licenses, which provides the customer with a right to use the software as it exists, is generally recognized upfront when made available to the customer. Revenue from cloud-based software subscriptions, customer support, maintenance, extended warranty subscriptions and managed services is generally recognized ratably over the contract term. Revenue from professional services and training is recognized as the services are delivered. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s hardware products contain both software and non-software components that function together to deliver the products’ essential functionality and therefore constitutes a single performance obligation as the promise to transfer the individual software and non-software components is not separately identifiable and, therefore, not distinct. Cloud-based software subscriptions can include multi-year agreements with a fixed annual fee for a minimum committed usage level. To the extent that minimum committed usage level each year varies, the Company has concluded that each year represents a distinct stand-ready performance obligation and the transaction price allocated to each performance obligation is recognized as revenue ratably over each annual period. The Company’s contracts may include multiple performance obligations. For such arrangements, the Company allocates the contract’s transaction price to each performance obligation using the relative stand-alone selling price of each distinct good or service in the contract. The Company generally determines stand-alone selling prices based on the prices charged to customers or its best estimate of stand-alone selling price. The Company’s estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy. 42 Table of Contents Cost of Revenue Cost of revenue consists primarily of finished goods inventory purchased from the Company’s contract manufacturers, payroll and related expenses associated with managing the relationships with contract manufacturers, depreciation of manufacturing test equipment, warranty and retrofit costs, excess and obsolete inventory costs, allowances for obligations to its contract manufacturers, shipping charges and amortization of certain intangible assets. It also includes contractor and other costs of services incurred directly related to the delivery of services to customers. Warranty and Retrofit The Company offers limited warranties for its hardware products for a period of one , three or five years , depending on the product type. The Company recognizes estimated costs related to warranty activities as a component of cost of revenue upon product shipment or upon identification of a specific product failure. Under certain circumstances, the Company also provides fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs related to retrofit activities as a component of cost of revenue upon identification of such product failures. The Company recognizes estimated warranty and retrofit costs when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical costs incurred in correcting product failures and information available related to any specifically identified product failures. Judgment is required in estimating costs associated with warranty and retrofit activities, and the Company's estimates are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, the Company may initially have limited information and limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future periods. The recorded amount is adjusted from time to time for specifically identified warranty and retrofit exposure. Actual warranty and retrofit expenses are charged against the Company’s estimated warranty and retrofit liability when incurred. Factors that affect the Company’s warranty and retrofit liability include the number of active installed units and historical and anticipated rates of warranty and retrofit claims and cost per claim. Stock-Based Compensation Stock-based compensation expense associated with stock options and purchase rights under the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”) is measured at the grant date based on the fair value of the award and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting period) on a straight-line basis. The fair value of stock option and employee stock purchase right under the ESPP is estimated at the grant date using the Black-Scholes option valuation model. The fair value of the employee stock purchase right under the NQ ESPP is based on closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense associated with performance stock options (“PSOs”) with graded vesting features and which contain both a performance and a service condition is measured based on fair value of stock options estimated at the grant date using the Black-Scholes option valuation model, and is recognized, net of forfeitures, as expense over the requisite service period using the graded vesting attribution method. Compensation expense is only recognized if the Company has determined that it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and adjusts compensation expense based on its probability assessment. Loss Contingencies From time to time, the Company is involved in legal proceedings arising from the normal course of business activities. The Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. Assessing legal contingencies involves significant judgment and estimates, and the outcome of litigation is inherently uncertain and subject to numerous factors outside the Company’s control. Significant judgment is required when the Company assesses the likelihood of any adverse judgments or outcomes, including the potential range of possible losses, and whether losses are probable and reasonably estimable. Because of uncertainties related to these matters, the Company bases its estimates of whether a loss contingency is probable or reasonably possible, as well as the reasonable range of possible losses associated with each loss contingency, only on the information available at the time. As additional information becomes available, and at least quarterly, the Company reassesses the potential liability on each significant matter and may revise its estimates. These revisions could have a material impact on the Company’s business, operating results or financial condition. The actual outcome of these legal proceedings may materially differ from the Company’s estimates of potential liability, which could have a material adverse effect on the Company’s business, operating results or financial condition. 43 Table of Contents Credit Risk and Inventory Supplier Concentrations Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. Cash equivalents consist of money market funds and marketable securities with a maturity at the date of purchase of ninety days or less, which are invested through financial institutions in the United States. Deposits in and investments held by these financial institutions may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company also has approximately $ 7.7 million of cash held by its foreign subsidiaries in India, China and the United Kingdom. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to these cash and cash equivalents. The Company depends primarily on a small number of outside contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) for the bulk of its finished goods inventory. The Company generally purchases its products through purchase orders with its suppliers. While the Company seeks to maintain a sufficient supply of its products, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such products, the receipt of defective parts, an increase in price of such products or the Company’s inability to obtain lower prices from its CMs, ODMs and other suppliers in response to competitive pressures. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade receivables, accounts payable and other accrued liabilities approximate their fair value due to their relatively short-term nature. Marketable securities are valued using quoted market prices in active markets to determine fair value. Cash, Cash Equivalents and Marketable Securities Cash equivalents and marketable securities are stated at amounts that approximate fair value based on quoted market prices. The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as U.S. treasury securities, corporate debt instruments, commercial paper 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 highly liquid U.S. treasury securities, corporate debt instruments, commercial paper and U.S. government securities with maturities greater than 90 days at date of purchase. 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 comprehensive loss in the 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.” Realized gains and losses were not significant for the years ended December 31, 2023 and 2022, respectively. For the Company’s available-for-sale debt securities in an unrealized loss position, the Company determines whether a credit loss exists. In this assessment, among other factors, the Company considers the extent to which the fair value is less than the amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If factors indicate a credit loss exists, an allowance for credit loss will be recorded to “Other expense, net,” limited by the amount that the fair value is less than the amortized cost basis. The amount of fair value change relating to all other factors will be recognized in other comprehensive loss. See Note 2 “ Cash, Cash Equivalents and Marketable Securities.” Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for expected credit losses at contract inception resulting from the inability of its customers to make required payments. The Company records a specific allowance and revises the expected loss based on an analysis of individual past-due balances. Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional allowance based on a percentage of outstanding receivables. The Company performs credit evaluations of its customers’ financial condition. These evaluations require judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s financial position and results of operations. Inventory Valuation and Supplier Purchase Commitments Inventory, which primarily consists of finished goods purchased from CMs or ODMs, is stated at the lower of cost (determined by the first-in, first-out method) or market value. Shipments from suppliers before the Company receives them are recorded as 44 Table of Contents in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company. Inbound shipping costs and U.S. tariffs are included in cost of inventory. In addition, from time to time, the Company procures component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. The Company also evaluates its supplier purchase commitments, which remain elevated due to the extended lead-times during the global pandemic-induced supply chain challenges, and records a liability for excess and obsolete components based on its estimated demand of our products, potential obsolescence of technology and product life cycles. These factors are impacted by market and economic conditions, competitive dynamics, technology changes and new product introductions and require significant estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot be increased in future periods. For example, during the fourth quarter of 2023, the Company took charges of $ 28.7 million to write down excess and obsolete inventory and accrue a liability for components at suppliers primarily associated with the Company’s legacy product family that existed before its shift to an all-platform model. During 2023, customers moved to the Company’s platform model at a faster rate than originally anticipated, leaving the Company with excess finished goods and related components at suppliers. Contract Costs The Company capitalizes certain sales commissions related primarily to multi-year cloud-based software subscriptions and extended warranty support contracts. Capitalized commissions are amortized as sales and marketing expenses over the period that the related revenue is recognized, which can be up to five years for extended warranty. The Company classifies the unamortized portion of deferred commissions as current or noncurrent based on the timing of when the Company expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in “Prepaid expenses and other current assets” and “Other assets,” respectively, in the Company’s Consolidated Balance Sheets. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful life of each asset. Generally, computer equipment is depreciated over two years ; purchased software is depreciated over three to five years ; test equipment is depreciated over three years ; furniture and fixtures are depreciated over seven years ; and leasehold improvements are depreciated over the shorter of the respective lease term or the estimated useful life of the asset. Maintenance and repairs are charged to expense as incurred. Goodwill Goodwill was recorded as a result of the Company’s acquisitions of Occam Networks, Inc. in February 2011 and Optical Solutions, Inc. in February 2006. The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized but instead is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it may be impaired. The Company evaluates goodwill on an annual basis as of the end of the second quarter of each fiscal year. Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level. At the end of the second quarter of 2023, the Company completed its annual goodwill impairment test. Based on its assessment of certain qualitative factors such as market capitalization, management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of July 2, 2023. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at the time. There have been no significant events or changes in circumstances subsequent to the 2023 annual impairment test that would more likely than not indicate that the carrying value of goodwill may have been impaired as of December 31, 2023. There were no impairment losses for goodwill for the years ended December 31, 2023, 2022 or 2021. Deferred Revenue Deferred revenue results from transactions where the Company billed the customer for products or services and when cash payments are received or due prior to transferring control of the promised goods or services to the customer. Payment terms to customers typically range from net 30 to net 90 days and vary by the size and location of customer and the products or services offered. The period between the transfer of control of the promised good or service to a customer and when payment is due is not significant. 45 Table of Contents Income Taxes The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities on the Company’s Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. The Company must assess the likelihood that deferred tax assets will be recovered from future taxable Income, and if the Company determines that recovery is not more likely than not, the Company must establish a valuation allowance. Management judgment is required in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. Newly Adopted Accounting Standards The Company did not adopt any new accounting standards in 2023 that were significant to the Company. Recent Accounting Pronouncements Not Yet Adopted There have been no accounting pronouncements or changes in accounting pronouncements that are significant or potentially significant to the Company. 2. Cash, Cash Equivalents and Marketable Securities Cash, cash equivalents and marketable securities consisted of the following (in thousands): December 31, 2023 2022 Cash and cash equivalents: Cash $ 18,040 $ 39,189 Commercial paper 32,837 33,199 U.S. government securities 9,969 5,990 Money market funds 2,563 555 Corporate debt securities — 140 Total cash and cash equivalents 63,409 79,073 Marketable securities: U.S. government securities 92,277 106,750 U.S. government agency securities 43,521 23,632 Commercial paper 14,139 28,992 Corporate debt securities 7,000 3,168 Municipal securities — 100 Total marketable securities 156,937 162,642 $ 220,346 $ 241,715 The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities. As of December 31, 2023, all marketable securities were due in three years or less. 46 Table of Contents The amortized cost and fair value of marketable securities as of December 31, 2023 were as follows (in thousands): Amortized Cost Gross Unrealized Gains (Losses) Fair Value U.S. government securities $ 102,167 $ 80 $ 102,247 Commercial paper 47,003 ( 28 ) 46,975 U.S. government agency securities 43,573 ( 52 ) 43,521 Corporate debt securities 6,999 1 7,000 $ 199,742 $ 1 $ 199,743 The amortized cost and fair value of marketable securities as of December 31, 2022 were as follows (in thousands): Amortized Cost Gross Unrealized Losses Fair Value U.S. government securities $ 114,120 $ ( 1,380 ) $ 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 $ 203,671 $ ( 1,700 ) $ 201,971 3. 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 December 31, 2023 Level 1 Level 2 Total Money market funds $ 2,563 $ — $ 2,563 U.S. government securities 102,246 — 102,246 Commercial paper — 46,976 46,976 U.S. government agency securities — 43,521 43,521 Corporate debt securities — 7,000 7,000 $ 104,809 $ 97,497 $ 202,306 47 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 4. Balance Sheet Details Accounts receivable, net consisted of the following (in thousands): December 31, 2023 2022 Accounts receivable $ 126,331 $ 94,201 Allowance for doubtful accounts ( 304 ) ( 397 ) $ 126,027 $ 93,804 The table below summarizes the changes in allowance for doubtful accounts and product return liability for the periods indicated (in thousands): Balance at Beginning of Year Additions Charged to Expenses or Revenue Net of Recoveries Write Offs and Returns Balance at End of Year Year Ended December 31, 2023: Allowance for doubtful accounts $ 397 $ 43 $ ( 136 ) $ 304 Product return liability 2,961 4,761 ( 4,825 ) 2,897 Year Ended December 31, 2022: Allowance for doubtful accounts $ 725 $ ( 276 ) $ ( 52 ) $ 397 Product return liability 1,836 5,622 ( 4,497 ) 2,961 Year Ended December 31, 2021: Allowance for doubtful accounts $ 1,405 $ ( 201 ) $ ( 479 ) $ 725 Product return liability 1,888 3,681 ( 3,733 ) 1,836 Inventory consisted of the following (in thousands): December 31, 2023 2022 Raw materials $ 22,119 $ 640 Finished goods 110,866 148,520 $ 132,985 $ 149,160 Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2023 2022 Supplier deposits $ 78,131 $ 39,064 Prepaid expenses and other current assets 40,467 23,627 $ 118,598 $ 62,691 48 Table of Contents Property and equipment, net consisted of the following (in thousands): December 31, 2023 2022 Test equipment $ 50,853 $ 44,106 Computer equipment 13,615 13,396 Software 12,972 10,389 Leasehold improvements 2,122 1,730 Furniture and fixtures 1,283 1,153 80,845 70,774 Accumulated depreciation and amortization ( 51,384 ) ( 44,940 ) $ 29,461 $ 25,834 Depreciation and amortization expenses were $ 16.6 million, $ 14.3 million and $ 15.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. Accrued liabilities consisted of the following (in thousands): December 31, 2023 2022 Compensation and related benefits $ 36,741 $ 27,813 Component inventory held by suppliers 32,182 10,280 Professional and consulting fees 7,717 7,307 Customer advances or rebates 5,967 5,653 Current portion of warranty and retrofit 5,655 6,377 Taxes payable 4,317 4,581 Operating leases 4,142 3,949 Litigation settlement 3,250 — Business events 2,938 3,167 Product returns 2,897 2,961 Freight 1,510 3,649 Current portion of revenue-share payments — 7,210 Other 8,911 7,527 $ 116,227 $ 90,474 Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands): Years Ended December 31, 2023 2022 2021 Balance at beginning of year $ 8,386 $ 9,594 $ 9,208 Provision for warranty and retrofit charged to cost of revenue 3,282 1,315 3,370 Utilization of reserve ( 3,639 ) ( 2,523 ) ( 2,984 ) Balance at end of year $ 8,029 $ 8,386 $ 9,594 49 Table of Contents 5. 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 December 31, 2023 (in thousands): Year Ending December 31, Future Minimum Lease Payments 2024 $ 4,676 2025 4,479 2026 1,499 2027 1,061 2028 and thereafter 739 Total future minimum lease payments 12,454 Less imputed interest ( 891 ) $ 11,563 As of December 31, 2023, the operating lease liability consisted of the following (in thousands): Accrued liabilities - current portion of operating leases $ 4,142 Operating leases 7,421 $ 11,563 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 $ 5.0 million as of December 31, 2023 and are included in the tables above. The above tables also include future minimum lease payments for the Company's office facilities in Petaluma, California; Plymouth, Minnesota; Richardson, Texas; Bangalore, India; Nanjing, China; and West Jordan, Utah, which expire at various dates through 2029. In November 2021, the Company entered into a sublease for a portion of the San Jose headquarters office space that was previously abandoned. The sublease commenced in August 2022 for a term of 39 months. The Company received $ 0.8 million and $ 0.3 million in sublease income in 2023 and 2022, respectively. Future minimum payments consisted of the following as of December 31, 2023 (in thousands): Year Ending December 31, Future Minimum Sublease Payments 2024 773 2025 661 Total future minimum sublease payments $ 1,434 The weighted average discount rate for the Company’s operating leases as of December 31, 2023 was 5.3 %. The weighted average remaining lease term as of December 31, 2023 was 3.1 years. For the years ended December 31, 2023, 2022 and 2021, total rent expense of the Company was $ 4.8 million, $ 4.6 million and $ 4.1 million, respectively. Cash paid within operating cash flows for operating leases was $ 4.5 million, $ 4.5 million and $ 3.9 million for years ended December 31, 2023, 2022 and 2021, respectively. Purchase Commitments The Company’s CMs and ODMs place orders for component inventory based upon the Company’s build forecasts and pursuant to stated component lead times to 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. 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 50 Table of Contents 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. 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. The estimated excess and obsolete component liabilities related to manufacturing and engineering change orders, termination of manufacturing partners and other factors are included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets, because the corresponding component parts have not been received by the Company. The amounts were $ 32.2 million and $ 10.3 million as of December 31, 2023 and 2022, respectively. The Company records the related charges in “Cost of revenue” in its Consolidated Statements of Comprehensive Income. As of December 31, 2023 and 2022, the Company had approximately $ 176.3 million and $ 340.6 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs. 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. Indemnifications The Company from time to time enters into contracts that require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, (ii) agreements with the Company’s officers, directors and certain employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts under which the Company may be required to indemnify customers against third-party claims that a Company product infringes a patent, copyright or other intellectual property right and (iv) agreements under which the Company may be required to indemnify the counterparty for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the transactions contemplated by such agreements. Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying Consolidated Balance Sheets. 6. Stockholders’ Equity Preferred Stock The Board of Directors has the authority, without a further vote of the stockholders, to designate and issue up to 5.0 million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. Since the Company’s initial public offering, the Board of Directors has not designated any rights, preference or powers of any preferred stock, and no shares of preferred stock have been issued. Common Stock Holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds. No dividends have been declared or paid as of December 31, 2023. Stock Repurchase Program The Company maintains a common stock repurchase program. 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 51 Table of Contents Company’s discretion. During the year ended December 31, 2023, the Company purchased 2.2 million shares of common stock for $ 86.4 million at an average price per share of $ 39.09 . As of December 31, 2023, the remaining authorized balance under this program was $ 113.6 million. Equity Incentive Plans 2019 Equity Incentive Award Plan The 2019 Equity Incentive Award Plan (the “2019 Plan”) supersedes and replaces the 2010 Equity Incentive Award Plan (the “2010 Plan”) and preceding plans. The terms and conditions of the 2010 Plan will continue to govern any outstanding awards granted under the 2010 Plan. Employees and consultants of the Company, its subsidiaries and affiliates and the Company’s Board of Directors members are eligible to receive awards under the 2019 Plan. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units or other stock or cash-based awards and dividend equivalents to eligible individuals. Stock options granted under the 2019 Plan are granted at a price not less than 100 % of the fair market value of the common stock on the date of grant. Stock options issued under the 2019 Plan generally vest 25 % on the first anniversary of the vesting commencement date and on a quarterly basis thereafter for a period of an additional three years . The options have a maximum term of ten years . 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 December 31, 2023, there were 5.0 million shares available for issuance under the 2019 Plan. In February 2022, PSOs covering an aggregate of 0.7 million shares of common stock were awarded to certain executives with a grant date exercise price of $ 55.96 per share. The actual number of shares underlying the PSOs that could become eligible to vest and become exercisable, or earned, was contingent upon achievement of annual corporate financial targets for bookings and non-GAAP operating income for 2022 (together, the “2022 Performance Targets”) during the one-year performance period. In February 2023, the Compensation Committee of the Board of Directors certified achievement of the 2022 Performance Targets and determined that 100 % of the shares underlying the PSOs were earned, subject to the four-year service condition. As such, 25 % of the awarded shares underlying the PSOs were vested and became exercisable on the first anniversary of the grant date, and the remaining 75 % of the shares of common stock will vest and become exercisable in substantially equal quarterly installments over the subsequent three years, subject to the executive’s continued service with the Company through the respective vesting dates. Stock-based compensation expense of $ 6.2 million and $ 10.1 million was recognized for the years ended December 31, 2023 and 2022, respectively, related to these awards. In February 2023, PSOs covering an aggregate of 1.2 million shares of common stock were awarded to certain executives with a grant date average exercise price of $ 51.57 per share. The actual number of shares underlying the PSOs that could become earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP operating income for 2023 (together, the “2023 Performance Targets”) during the one-year performance period, with equal weighting for each measure. If either of the 2023 Performance Targets are achieved below 80 % of target, no shares will be deemed earned for that measure and the corresponding PSOs will be forfeited. If both 2023 Performance Targets are achieved at or above the minimum threshold of 80 %, then 50 % of the shares allocable to each 2023 Performance Target will be deemed earned, with an increasing percentage of shares being earned for achievement above the minimum threshold, up to 125 % of the shares allocable to the target. Each 2023 Performance Target result is then weighted by 50 %, and the combined total determines the number of shares underlying the PSOs that are deemed earned, up to a maximum of 100 % of the shares underlying the PSOs. During June 2023, the Compensation Committee approved an adjustment to the 2023 Performance Targets, resulting in incremental compensation cost of $ 4.9 million that is recognized over the vesting period of the awards. Upon certification of achievement, any shares underlying the PSOs that are not deemed earned are immediately forfeited, and 25 % of the shares underlying the PSOs that are deemed earned immediately vest and become exercisable upon the first anniversary of the grant date, with the remaining 75 % of the earned shares vesting and becoming exercisable in substantially equal quarterly installments over the subsequent three years, in each case, subject to the executive’s continued service with the Company through the respective vesting dates. In February 2024, the Compensation Committee certified the achievement related to the adjusted 2023 Performance Targets and determined that 54.5 % of shares underlying the PSOs were earned, subject to the on-going service condition. As such, 45.5 % of the shares underlying the PSOs were immediately forfeited, 25 % of the earned shares underlying the PSOs became vested and exercisable on the first anniversary of the grant date, and the remaining 75 % of the earned shares underlying the PSOs will vest in substantially equal quarterly installments over the subsequent three years, subject to the executive’s continued service with the Company through the respective vesting dates. Stock-based compensation expense of $ 9.2 million was recognized for the year ended December 31, 2023 related to the PSOs. 52 Table of Contents The following table summarizes the stock option activity under the Company’s equity incentive plans (in thousands, except per share data): Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Price Life Intrinsic Stock Options Shares Per Share (in years) Value (1) Outstanding as of December 31, 2022 8,287 $ 29.31 Granted 2,542 46.88 Exercised ( 466 ) 11.12 Canceled ( 40 ) 51.51 Outstanding as of December 31, 2023 10,323 $ 34.37 7.3 $ 149,074 Vested and expected to vest as of December 31, 2023 10,003 $ 33.97 7.3 $ 148,050 Options exercisable as of December 31, 2023 5,532 $ 22.25 6.2 $ 133,001 (1) Amounts represent the difference between the exercise price and the fair market value of common stock at December 31, 2023 of $ 43.69 per share for all “in-the-money” options outstanding. During the years ended December 31, 2023, 2022 and 2021, total intrinsic value of stock options exercised was $ 16.7 million, $ 31.0 million and $ 59.6 million, respectively. Cash received from employee stock option exercises in 2023, 2022 and 2021 was $ 5.2 million, $ 6.7 million and $ 11.2 million, respectively. Employee Stock Purchase Plans 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. In addition, participants may purchase up to 2,000 shares of common stock in each offering period. 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. The total shares authorized for issuance under the ESPP is 12.4 million shares. As of December 31, 2023, there were 4.5 million shares available for issuance under the ESPP. During the year ended December 31, 2023, 0.2 million shares were purchased under the ESPP. As of December 31, 2023, unrecognized stock-based compensation expense of $ 0.4 million related to the ESPP is expected to be recognized over a remaining service period of 0.1 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 December 31, 2023, there were 3.4 million shares available for issuance under the NQ ESPP. During the year ended December 31, 2023, 0.9 million shares were purchased and issued. As of December 31, 2023, unrecognized stock-based compensation expense of $ 10.8 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.8 years. 53 Table of Contents Stock-Based Compensation The following table summarizes stock-based compensation expense (in thousands): Years Ended December 31, 2023 2022 2021 Cost of revenue $ 2,913 $ 2,700 $ 1,458 Sales and marketing 16,893 12,001 6,728 Research and development 17,000 12,165 6,769 General and administrative 25,965 17,960 9,275 $ 62,771 $ 44,826 $ 24,230 Income tax benefits recognized $ 10,993 $ 11,501 $ 16,929 The following table summarizes the weighted-average grant date fair values of the Company’s stock-based awards granted in the periods indicated: Years Ended December 31, 2023 2022 2021 Stock options $ 23.02 $ 31.86 $ 26.55 ESPP $ 17.96 $ 18.51 $ 12.93 NQ ESPP $ 42.51 $ 52.91 $ 55.50 The Company values employee stock purchase rights under the NQ ESPP at the closing market price of the Company’s common stock on the date of grant. The Company estimates the fair value of stock options and employee stock purchase right under the ESPP at the grant date using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption based on a blended volatility ( 50 % historical volatility and 50 % implied volatility from traded options on the Company’s common stock). The selection of a blended volatility assumption was based upon the Company’s assessment that a blended volatility is more representative of the Company’s future stock price trend as it weighs the historical volatility with the future implied volatility. (ii) Expected life of the option award – Represents the weighted-average period that the stock options are expected to remain outstanding. The Company’s computation of expected life utilizes the simplified method in accordance with Staff Accounting Bulletin No. 110 due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The mid-point between the vesting date and the expiration date is used as the expected term under this method. (iii) Expected dividend yield – The assumption is zero based on the Company’s history of not paying dividends and no future expectations of dividend payouts. (iv) Risk-free interest rate – Based on the U.S. Treasury yield curve in effect at the time of grant with maturities approximating the grant’s expected life. The following table summarizes the weighted-average assumptions used in estimating the grant-date fair value of stock options and of each employee’s purchase right under the ESPP in the periods indicated: Years Ended December 31, Stock Options 2023 2022 2021 Expected volatility 52 % 58 % 56 % Expected life (years) 6.1 6.1 6.0 Risk-free interest rate 4.02 % 3.15 % 1.11 % Years Ended December 31, ESPP 2023 2022 2021 Expected volatility 47 % 62 % 63 % Expected life (years) 0.5 0.5 0.5 Risk-free interest rate 5.31 % 2.16 % 0.05 % In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense only for those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on the Company’s 54 Table of Contents historical experience. Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-based compensation is adjusted accordingly. As of December 31, 2023, unrecognized stock-based compensation expense by award type, net of estimated forfeitures, and their expected weighted-average recognition periods are summarized in the following table (in thousands). Stock Option ESPPs Unrecognized stock-based compensation expense $ 76,859 $ 11,235 Weighted-average amortization period (in years) 2.1 0.8 The Company expects to recognize stock-based compensation expense of $ 44.6 million in 2024, $ 25.1 million in 2025, $ 15.0 million in 2026 and $ 3.4 million in 2027. Shares Reserved for Future Issuance As of December 31, 2023, the Company had common shares reserved for future issuance as follows (in thousands): Stock options outstanding 10,323 Shares available for future grant under 2019 Plan 4,984 Shares available for future issuance under ESPP 4,508 Shares available for future issuance under NQ ESPP 3,385 23,200 7. Employee Benefit Plan The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax basis, a percentage of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company, at the discretion of the Board of Directors, may make additional matching contributions on behalf of the participants. The Company made matching contributions totaling $ 5.2 million, $ 4.1 million and $ 3.2 million in 2023, 2022 and 2021, respectively. 8. Accumulated Other Comprehensive Loss The table below summarizes the changes in accumulated other comprehensive loss by component: Unrealized Gains and Losses on Available-for-Sale Marketable Securities Foreign Currency Translation Adjustments Total Balance as of December 31, 2021 $ ( 179 ) $ ( 141 ) $ ( 320 ) Other comprehensive loss ( 1,521 ) ( 632 ) ( 2,153 ) Balance as of December 31, 2022 ( 1,700 ) ( 773 ) ( 2,473 ) Other comprehensive income 1,701 113 1,814 Balance as of December 31, 2023 $ 1 $ ( 660 ) $ ( 659 ) Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average exchanges rates. These translations result in differences called foreign currency translation adjustments. Realized foreign currency transaction gains or losses were not significant during the years ended December 31, 2023, 2022 and 2021 and are recorded in “Other expense, net” in the Company's Consolidated Statements of Comprehensive Income. Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other comprehensive loss to “Other expense, net” in our Consolidated Statements of Comprehensive Income. 55 Table of Contents 9. Income Taxes The domestic and foreign components of income before incomes taxes were as follows (in thousands): Years Ended December 31, 2023 2022 2021 Domestic $ 30,983 $ 51,442 $ 70,776 Foreign 3,774 2,600 1,878 $ 34,757 $ 54,042 $ 72,654 Income taxes consisted of the following (in thousands): Years Ended December 31, 2023 2022 2021 Current: Federal $ ( 2,407 ) $ 3,671 $ — State 6,493 6,555 2,818 Foreign 2,006 874 438 Current income tax 6,092 11,100 3,256 Deferred: Federal 2,050 6,336 ( 157,355 ) State ( 2,525 ) ( 4,372 ) ( 11,631 ) Foreign ( 185 ) ( 32 ) 6 Deferred income tax ( 660 ) 1,932 ( 168,980 ) $ 5,432 $ 13,032 $ ( 165,724 ) The differences between the statutory and effective tax rates, expressed as a percentage of net income before income taxes, were as follows: Years Ended December 31, 2023 2022 2021 Federal statutory rate 21.0 % 21.0 % 21.0 % Impact of state taxes 2.6 ( 4.9 ) ( 16.4 ) Foreign operations 0.8 — ( 0.2 ) R&D tax credits ( 13.5 ) ( 9.1 ) ( 1.9 ) U.S. tax impact of foreign operations ( 2.4 ) 7.8 — Stock-based compensation 8.8 — ( 12.8 ) Other permanent items 2.5 1.2 0.7 Provision to return adjustments ( 9.7 ) ( 0.4 ) ( 0.3 ) Valuation allowance — 1.3 ( 208.3 ) Attribute expiration 0.8 5.5 ( 13.1 ) Uncertain tax positions 4.7 1.7 3.2 15.6 % 24.1 % ( 228.1 ) % 56 Table of Contents The significant components of the Company’s deferred tax assets were as follows (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 1,020 $ 44,188 Tax credit carryforwards 58,349 56,717 Inventory 16,592 5,986 Accruals and reserves 6,684 4,949 Deferred revenue 13,460 13,156 Stock-based compensation 12,087 7,417 Lease liability 2,277 2,346 Capitalized R&D 93,340 67,925 Other 144 9 Gross deferred tax assets 203,953 202,693 Valuation allowance ( 29,908 ) ( 29,914 ) Total deferred tax assets 174,045 172,779 Deferred tax liabilities: Fixed assets ( 1,484 ) ( 2,648 ) Right of use assets ( 1,710 ) ( 1,602 ) Intangible assets ( 3,160 ) ( 1,498 ) Total deferred tax liabilities ( 6,354 ) ( 5,748 ) $ 167,691 $ 167,031 All deferred taxes, along with any related valuation allowance, are classified in the Consolidated Balance Sheet as long-term. A valuation allowance is required when, based upon an assessment of various factors, including recent operating loss history, anticipated future earnings, and prudent and reasonable tax planning strategies, it is more likely than not that some portion of the deferred tax assets will not be realized. At each reporting period, the Company assesses the estimated future realizability of the gross carrying value of its deferred tax assets. The Company’s periodic assessments take into consideration both positive evidence (future profitability projections for example and recent financial performance) and negative evidence (historical financial performance for example) as it relates to evaluating the future recoverability of its deferred tax assets. During 2021, the Company released its valuation allowance for federal and state (with the exception of California) deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S. profitability in the current and future periods. In performing its analysis, the Company used the most updated plans and estimates that it currently uses to manage the underlying business and calculated the ability to utilize its deferred tax assets. The valuation allowance decreased by less than $ 0.1 million from 2022 to 2023. The Company continues to maintain a valuation allowance of $ 29.9 million 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. As of December 31, 2023, the Company had U.S. state net operating losses of approximately $ 16.5 million which will expire at various dates through 2039 if not utilized. Additionally, the Company has U.S. federal, California and other U.S. states research and development credits of approximately $ 44.9 million, $ 49.7 million and $ 2.7 million as of December 31, 2023, respectively. The U.S. federal research and development credits will expire at various dates through 2043 if not utilized. The California research and development credits have no expiration date. The credits related to other various U.S. states have begun to expire and will continue to expire at various dates through 2038. Uncertain Tax Positions ASC 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The standard requires the Company to recognize the financial statement effects of an uncertain tax position when it is more likely than not that such position will be sustained upon audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in its Consolidated Statements of Comprehensive Income. 57 Table of Contents T he Company’s unrecognized tax benefits were as follows (in thousands): Years Ended December 31, 2023 2022 Balance at beginning of year $ 29,215 $ 25,992 Reduction for tax positions related to prior year ( 19 ) ( 905 ) Additions for tax positions related to prior year 580 1,232 Additions for tax positions related to current year 2,673 2,896 Balance at end of year $ 32,449 $ 29,215 As of December 31, 2023 and 2022, the Company had unrecognized tax benefits of $ 32.4 million and $ 29.2 million, respectively, $ 17.6 million of which would affect the Company’s effective tax rate if recognized. There were no accrued interest or penalties for uncertain income tax as of December 31, 2023. The Company files tax returns in the United States and various state jurisdictions, China, India and the United Kingdom. The tax years 2000 through 2023 remain open and subject to examination by the appropriate governmental agencies due to tax attribute carryforwards. 10. Net Income Per Common Share The computation of basic and diluted net income per common share for the periods indicated was as follows (in thousands, except per share data): Years Ended December 31, 2023 2022 2021 Numerator: Net income $ 29,325 $ 41,010 $ 238,378 Denominator: Weighted-average common shares — basic 65,980 65,058 63,277 Effect of dilutive potential common shares 3,340 3,853 4,579 Weighted-average common shares — diluted 69,320 68,911 67,856 Basic net income per common share $ 0.44 $ 0.63 $ 3.77 Diluted net income per common share $ 0.42 $ 0.60 $ 3.51 Potentially dilutive shares excluded, weighted-average 4,688 1,758 1,006 Unvested restricted stock awards are included in the calculation of basic weighted-average shares because such shares are participating securities; however, the impact was immaterial. 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 primarily from stock options. 11. 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 considered to be in 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. 58 Table of Contents Geographic Information: A summary of revenue disaggregated by geographic region based upon the location of the customers was as follows (in thousands): Years Ended December 31, 2023 2022 2021 United States $ 944,201 $ 786,802 $ 565,964 Europe 54,265 26,916 45,879 Americas excluding U.S. 32,696 41,892 45,719 Middle East & Africa 7,457 10,885 19,018 Asia Pacific 974 1,332 2,814 $ 1,039,593 $ 867,827 $ 679,394 The Company’s property and equipment, net of accumulated depreciation, were located in the following geographical areas (in thousands): December 31, 2023 2022 United States $ 25,231 $ 21,785 China 3,385 3,220 India 845 829 $ 29,461 $ 25,834 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 balance as of December 31, 2023 was $ 4.7 million of which the Company expects to bill 67 % of the balance during 2024. Contract Liability Deferred revenue was $ 61.5 million and $ 58.6 million as of December 31, 2023 and 2022, respectively. The increase in deferred revenue of $ 2.9 million is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations and balances reclassified to contract assets during the year being greater than the $ 29.2 million of revenue recognized that was included in the deferred revenue balance at the beginning of the year. 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 $ 242.5 million as of December 31, 2023, and the Company expects to recognize as revenue 39 % of this amount over the next 12 months and a majority of the remainder over the two years 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 December 31, 2023 and 2022, the unamortized balance of deferred commissions was $ 12.0 million and $ 11.2 million, respectively. For the years ended December 31, 2023, 2022 and 2021, the amount of amortization was $ 6.5 million, $ 4.0 million and $ 1.4 million, respectively. There was no impairment loss in relation to the costs capitalized for these respective periods. Concentration of Customer Risk No customer accounted for more than 10% of the Company’s revenue for the years ended December 31, 2023, 2022 and 2021. One customer represented 19 % and 11 % of the Company’s accounts receivable as of December 31, 2023 and 2022, respectively. Another customer represented 14 % of the Company’s accounts receivable as of December 31, 2023. 59 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in nor any disagreements with accountants on accounting principles or practices, financial statement disclosure, auditing scope or procedures, or other reportable events requiring disclosure pursuant to Item 304(b) of Regulation S-K.