424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-221658

 

PROSPECTUS

6,000,000 Shares

 

 

LOGO

Common Stock

 

 

Casa Systems, Inc. is offering 6,000,000 shares of our common stock. This is our initial public offering, and no public market currently exists for our shares of common stock. 

 

 

Summit Partners, our largest stockholder and a venture capital firm that one of our directors, Bruce Evans, is a Managing Director of, has indicated an interest in purchasing up to 250,000 shares in the offering, but in no event an amount that would have the effect of Summit Partners being the beneficial owner of 50% or more of our outstanding shares following the offering. In addition, our President and Chief Executive Officer, Jerry Guo, has indicated an interest in purchasing up to 100,000 shares in the offering.

 

 

Our common stock has been approved for listing on the Nasdaq Global Select Market under the symbol “CASA.”

 

 

We are an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

 

 

PRICE $13.00 A SHARE

 

 

 

      

Price to

Public

      

Underwriting
Discounts

and
Commissions(1)

      

Proceeds to
Casa Systems

 

Per Share

       $13.00          $0.91          $12.09  

Total

       $78,000,000          $5,460,000          $72,540,000  

 

(1) See “Underwriters” beginning on page 137 for additional information regarding underwriting compensation.

We have granted the underwriters the right to purchase up to an additional 900,000 shares of common stock.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on December 19, 2017.

 

 

 

MORGAN STANLEY       BARCLAYS
RAYMOND JAMES     STIFEL
Macquarie Capital   Northland Capital Markets   William Blair

December 14, 2017


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     12  

Cautionary Note Regarding Forward-Looking Statements

     40  

Industry and Other Data

     42  

Use of Proceeds

     43  

Dividend Policy

     44  

Capitalization

     45  

Dilution

     47  

Selected Consolidated Financial Data

     49  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53  

Business

     87  
     Page  

Management

     103  

Executive Compensation

     109  

Related Person Transactions

     121  

Principal Stockholders

     124  

Description of Capital Stock

     126  

Shares Eligible for Future Sale

     130  

Material U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders of Common Stock

     133  

Underwriters

     137  

Legal Matters

     143  

Experts

     143  

Where You Can Find More Information

     143  

Index to Consolidated Financial Statements

     F-1  
 

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we file with the Securities and Exchange Commission, or SEC. We and the underwriters have not authorized anyone to provide you with additional information or information different from that contained in this prospectus or any free writing prospectus. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other earlier date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Through and including January 8, 2018 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.


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Terms Used in this Prospectus

 

Concept

  

Abbreviation

  

Definition

Cable Modem Termination System

   CMTS   

A CMTS is a critical element of a cable service provider’s network. A CMTS is typically located either on the cable service provider’s premises or at a remote hub in the field and is used to provide high-speed data services such as Internet Protocol, or IP, or Voice over Internet Protocol, or VoIP, to cable subscribers. A CMTS enables IP data and IP voice communication between a cable service provider’s networks and subscribers’ modems through coaxial cable. A CMTS performs several network services, including subscriber and access management, data security and service provisioning for cable subscribers. A CMTS communicates with subscribers’ cable modems using DOCSIS protocol. DOCSIS is a cable industry standard defined by CableLabs, a consortium of cable service providers.

Converged Cable Access Platform

   CCAP   

A CCAP is a part of a cable service provider’s network that enables the delivery of IP voice, digital video and data over a single port. A CCAP combines CMTS functions that enable data and IP voice communication with edge-quadrature amplitude modulation, or Edge-QAM, functionality to enable video delivery over cable networks in one integrated chassis.

Field Programmable Gate Array

   FPGA   

An FPGA is an integrated circuit designed to be configured by a customer after manufacturing. FPGAs can be reprogrammed in the field to desired application or functionality requirements through the use of custom software. This feature distinguishes FPGAs from Application Specific Integrated Circuits (ASICs), which are custom manufactured for specific tasks and are not able to be modified after manufacturing.

Remote-PHY

   R-PHY   

R-PHY refers to remotely deployable hardware that is typically located at the edge of a cable service provider’s network, near where the customers are located. R-PHY is capable of radio frequency signal generation that provides connectivity from where the customers are located to the data center via an optical network. R-PHY is typically connected to a CMTS or a CCAP system at a data center. By placing R-PHY equipment closer to subscribers, cable service providers are able to move fiber closer to the network edge. This allows for cable service providers to serve more subscribers at higher speed, resulting in overall increased network throughput.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 12, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Casa Systems,” “Casa,” “our company,” “we,” “us” and “our” in this prospectus to refer to Casa Systems, Inc. and its subsidiaries.

CASA SYSTEMS, INC.

Our Vision

Our products help our customers provide and manage broadband connectivity. We believe consumers and enterprises should be able to enjoy ultra-fast speeds and enhanced digital content experiences through their phones, tablets, computers, TVs and other connected devices at home or on the go. We believe that connectivity should be ubiquitous and seamless; it should not matter whether the user is accessing the Internet through wireless or fixed connections, and it should not matter whether that service is being provided by a cable operator, fixed telecom carrier or wireless services provider. Our innovative, software-centric products are designed to help achieve this vision.

Overview

We provide a suite of software-centric infrastructure solutions that allow cable service providers to deliver voice, video and data services over a single platform at multi-gigabit speeds. In addition, we offer solutions for next-generation distributed and virtualized architectures in cable operator, fixed telecom and wireless networks. Our innovative solutions enable customers to cost-effectively and dynamically increase network speed, add bandwidth capacity and new services for consumers and enterprises, reduce network complexity and reduce operating and capital expenditures.

We focus our development efforts on innovation and being the first to market with new products at each generational shift in cable network technology. We pioneered the use of a software-centric approach to leverage the programmability of FPGAs and general purpose processors for use in the cable industry. In addition, we believe we were the first to provide each of the following to our customers: a solution enabling cable service providers to deliver IP voice, digital video and data over a single port; a solution enabling cable service providers to deliver multi-gigabit speeds to their subscribers; and a remote node solution to enable distributed broadband cable access at gigabit speeds.

We have created a software-centric, multi-service portfolio that enables a broad range of core and access network functions for fixed and wireless networks. These networks share a common set of core and access network functions that enable network services, such as subscriber management, session management, transport security and radio frequency, or RF, management. Our Axyom software architecture allows each of these network functions to be provided and controlled by a distinct segment of software, which can be integrated or combined together in a building block-style fashion with the segments of software responsible for each other network function. This allows us to offer network architectures that can be efficiently tailored to meet each customer’s specific requirements, both as they exist at the time of initial implementation and as they evolve over time. While we initially focused on providing solutions for cable service providers due to our founders’ experience in the cable industry, the commonalities between fixed and wireless network architectures have allowed us to expand our solutions into the wireless market as cable service providers have increasingly sought to add wireless capabilities to their service offerings.

 



 

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We offer a scalable solution that can meet the evolving bandwidth needs of our customers and their subscribers. Our first installation in a cable service provider’s network frequently involves deploying our broadband products in only a portion of the provider’s network and with only a fraction of the capacity of our products enabled at the time of initial installation. Over time, our customers have generally expanded the use of our solutions to other areas of their networks to increase network capacity. Capacity expansions are accomplished either by deploying additional systems or line cards, or by our remote enablement of additional channels through the use of software. Sales of additional line cards and software-based capacity expansions generate higher gross margins than our initial hardware-based deployments.

Our solutions are commercially deployed in over 70 countries by more than 400 customers, including regional service providers as well as some of the largest Tier 1 broadband service providers, serving millions of subscribers. Our principal customers include Charter/Time Warner Cable, Rogers and Mediacom in North America; Televisa/IZZI Mexico, Megacable Mexico and Claro Telmex Colombia in Latin America; Liberty Global, Vodafone and DNA Oyj in Europe; and Jupiter Communications and Beijing Gehua CATV Networks in Asia-Pacific.

One of our largest customers, Time Warner Cable, launched its flagship “TWC Maxx” initiative in the New York City metropolitan area in 2014 using our solution. By deploying our C100G CCAP solution, Time Warner Cable was able to triple the maximum speed offered to its customers and reduce power consumption by nearly 30%, or approximately 11GWh per year, which we estimate is enough power for over 1,800 residential homes. Our solution also enabled Time Warner Cable to reduce facility space and remove over 140 miles of coaxial copper cable.

We have achieved significant growth and profitability. For the year ended December 31, 2015, we generated revenue of $272.5 million, net income of $67.9 million and adjusted EBITDA1 of $115.5 million, representing increases of 29.0%, 13.8% and 22.1%, respectively, from the corresponding amounts for the year ended December 31, 2014. For the year ended December 31, 2016, we generated revenue of $316.1 million, net income of $88.7 million and adjusted EBITDA of $129.1 million, representing increases of 16.0%, 30.5% and 11.7%, respectively, from the corresponding amounts for the year ended December 31, 2015. For the nine months ended September 30, 2017, we generated revenue of $233.6 million, net income of $59.6 million and adjusted EBITDA of $93.3 million, representing increases of 7.7%, 22.2% and 25.2%, respectively, from the corresponding amounts for the nine months ended September 30, 2016.

Industry Background

We believe broadband service providers are facing several key challenges, including:

 

    Rapidly increasing bandwidth demand. Bandwidth demand has grown substantially and is expected to continue to increase, caused by more users with more connected devices and applications, increased use of bandwidth-intensive streaming media services, and the increasing prevalence of Internet of Things, or IoT, solutions, among other factors.

 

    Competition fueled by increasing breadth of service offerings. With increased consumer and enterprise choice for access to broadband, broadband service providers are increasingly coming into competition with each other, and must develop differentiated service offerings with higher levels of performance at lower cost.

 

1  Adjusted EBITDA is a non-GAAP financial measure. Please see “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for information regarding the limitations of using adjusted EBITDA and for a reconciliation of adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 



 

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    Increasing network complexity. As the diversity of service offerings has grown, network complexity has increased.

 

    Need to control operating and capital expenditures. The operation of network infrastructure is space, power and personnel intensive. In addition, broadband service providers are frequently required to incur significant capital expenditures to upgrade existing equipment.

Opportunity to Transform Broadband Networks

Given the challenges they face, broadband service providers are undertaking three key technology initiatives to help build next-generation networks:

 

    Densification. Broadband service providers are shifting from centralized to more distributed architectures, a process referred to as densification. Densification requires extending network connectivity and distributing access aggregation solutions closer to end users.

 

    Network convergence. As fixed and wireless providers continue to consolidate and integrate their service offerings, which is referred to as convergence, these service providers are seeking to integrate their separate delivery modes with all-IP architectures, shared transport and a common suite of software-centric core and access network functions.

 

    Virtualization. Software-enabled architectures that are decoupled from underlying hardware allow for increased efficiencies, upgradability, configuration flexibility, service agility and scalability not feasible with hardware-centric approaches.

Our Solutions

We offer solutions for fixed and wireless networks. Our software-centric, multi-service broadband platform, Axyom, enables ultra-broadband delivery and convergence. We engineered our platform from the ground-up to be high performance, flexible and adaptable, and to allow our customers to seamlessly address the growing demand for bandwidth and connectivity and competitive need for service agility.

Our platform provides the following key benefits to broadband service providers:

 

    Addition of critical bandwidth capacity. Our solutions enable broadband service providers to offer multi-gigabit speeds and to expand capacity seamlessly to meet the growing demand for bandwidth.

 

    Flexibility to add new and expand existing services. Our platform provides us with the flexibility to adapt to changing industry standards and customer needs.

 

    Ability to upgrade networks remotely. Our programmable architecture allows us to deploy technology updates to our customers remotely without the expense, disruption or network downtime caused by hardware replacements or field visits by personnel.

 

    Reduced network complexity, operating costs and capital expenditures. Our converged software platform allows broadband service providers to significantly reduce the complexity and costs of their networks by reducing parallel and otherwise redundant network architectures.

 

    Ability to densify networks. Our products help broadband service providers deploy more capacity at the network edge, closer to where end users and devices are accessing the network, increasing available bandwidth and reducing latency to improve quality of service.

 

    Common platform capabilities to address the needs of both fixed and wireless networks. Our software-centric, multi-service platform enables a broad range of network services for fixed and wireless networks allowing for the delivery of diverse consumer and enterprise applications.

 



 

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Our primary product line is our portfolio of converged cable access platform, or CCAP, solutions, which enable the provision of voice, video and data over a single port.

Our Competitive Strengths

The following competitive strengths have helped us become a market leader:

 

    Highly flexible, software-centric architecture. We have designed our product portfolio from the ground up to be software-centric and modular in nature. Our proprietary software is at the heart of our products. Our software allows us to leverage the programmability of FPGAs and general purpose processors in our solutions. Our software-centric architecture enables us to virtualize core network and access functions allowing these functions to be decoupled from underlying hardware, which is not feasible with hardware-centric approaches and allows for increased efficiencies, upgradability, configuration flexibility, service agility and scalability.

 

    Proven engineering and product development track record. We have a proven history of anticipating network evolutions and developing solutions that enable next-generation networks. Our forward-looking design and investment approach, coupled with our proven product development track record, has enabled us to deliver fully featured next-generation solutions in advance of competitors. For example, we believe we were first to market with (1) a software-centric cable solution leveraging the programmability of FPGAs and general purpose processors, (2) a commercially deployed, fully qualified DOCSIS 3.0 CMTS, (3) a commercially deployed CCAP delivering IP voice, digital video and data over a single port, (4) commercially deployed DOCSIS 3.1-compliant solutions supporting speeds of up to 10 gigabits per second and (5) a commercially deployable remote-PHY solution.

 

    Strong management and engineering team with a culture of innovation. We pride ourselves on our culture of innovation, which is driven by our management team of experienced executives and engineers with deep industry expertise. As of October 31, 2017, approximately 85% of our employees were engineers or had other technical backgrounds.

 

    Customer focus. We have a passion to serve our customers and the agility and flexibility to offer solutions to meet their evolving requirements.

 

    Diversified and established customer base. Our solutions are commercially deployed in over 70 countries by more than 400 customers, including some of the world’s largest Tier 1 broadband service providers.

Market Opportunity

We believe that the shift to software-centric ultra-broadband networks and fixed and wireless network convergence presents us with a compelling market opportunity. We believe the global CCAP market, which currently accounts for the majority of our revenue, is $2.0 billion in 2017. In addition, we believe that new wireless communications and network infrastructure segments that we have entered offer substantial additional market opportunities.

Our Growth Strategy

The key elements of our growth strategy are:

 

    Continue to innovate and extend technology leadership through R&D investment.

 

    Further penetrate existing customers.

 

    Expand our customer base.

 

 



 

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    Expand the breadth of solutions sold to customers, with particular focus on the development of new software-based and virtualized products.

 

    Leverage our core technology for the cable industry into adjacent wireless markets.

 

    Invest in our platform through selective acquisitions.

Risks Associated with Our Business

You should consider carefully the risks described under the “Risk Factors” section beginning on page 12 and elsewhere in this prospectus. These risks, which include the following, could materially and adversely affect our business, financial condition, operating results, cash flow and prospects, which could cause the trading price of our common stock to decline and could result in a partial or total loss of your investment:

 

    If we do not successfully anticipate technological shifts, market needs and opportunities, and develop new products and product enhancements that meet those technological shifts, needs and opportunities, we may not be able to compete effectively.

 

    Our success depends in large part on broadband service providers’ continued deployment of, and investment in, ultra-broadband network capabilities that make use of our solutions.

 

    We expect certain of our customers will continue to account for a substantial portion of our revenue.

 

    Timing of large orders and seasonality in our revenue may cause our quarterly revenue and results of operations to fluctuate and possibly decline materially from quarter to quarter.

 

    Our sales to the broadband service provider market are volatile and our sales cycles can be long and unpredictable. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our revenue and results of operations to fluctuate and possibly decline significantly.

 

    We may not generate positive returns on our research and development investments.

 

    Our CCAP solutions currently represent a significant majority of our product sales; this concentration may limit our ability to increase our revenue.

 

    We have invested heavily in developing wireless solutions, and we face risks in seeking to expand our platform into the wireless market.

 

    We believe the broadband service provider industry is in the early stages of a major architectural shift toward the virtualization of networks and the use of networks with distributed architectures. If the architectural shift does not occur, if it does not occur at the pace we predict, or if the products and services we have developed are not attractive to our customers after such shift takes place, our revenues could decline.

 

    We face intense competition, including from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

    If we are unable to sell additional products to our existing customers, our revenue growth will be adversely affected and our revenue could decline.

 

    We may have difficulty attracting new large customers or acquiring new customers due to the high costs of switching broadband equipment.

 

    Our results of operations are likely to vary significantly from period to period and be unpredictable. If we fail to meet the expectations of analysts or investors, the market price of our common stock could decline substantially.

 



 

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Our Corporate Information

We were incorporated in the State of Delaware on February 28, 2003. Our principal executive offices are located at 100 Old River Road, Andover, Massachusetts 01810, and our telephone number at that address is (978) 688-6706. Our website address is www.casa-systems.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.

“Casa Systems,” “Casa,” our logo and other trademarks or tradenames of Casa Systems, Inc. appearing in this prospectus are our property. This prospectus also contains trademarks and trade names of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

 



 

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THE OFFERING

 

Common stock offered

  

6,000,000 shares

Common stock to be outstanding after this offering

  

80,097,475 shares

Option to purchase additional shares

   We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 900,000 shares from us.

Use of proceeds

  

The principal purposes of this offering are to create a public market for our common stock, facilitate access to the public equity markets, increase our visibility in the marketplace and obtain additional capital.

 

We estimate that we will receive net proceeds from this offering of $68.9 million, based on the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and general corporate purposes. In addition, we believe that opportunities may exist from time to time to expand our current business through acquisitions of or investments in complementary products, technologies or businesses. While we have no agreements, commitments or understandings for any specific acquisitions at this time, we may use a portion of our net proceeds for these purposes. See “Use of Proceeds” for more information.

 

Dividend policy

   Although we have declared and paid a special dividend on four separate occasions since our inception and have declared an additional special dividend of $43.0 million that is contingent upon, and payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, and approved further cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments in connection with this dividend in the event that it is paid, we do not anticipate declaring cash dividends following this offering. See “Dividend Policy” for more information.

Indications of interest

   Summit Partners, our largest stockholder and a venture capital firm that one of our directors, Bruce Evans, is a Managing Director of, has indicated an interest in purchasing up to 250,000 shares in the offering, but in no event an amount that would have the effect of Summit Partners being the beneficial owner of 50% or more of our outstanding shares

 



 

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   following the offering. In addition, our President and Chief Executive Officer, Jerry Guo, has indicated an interest in purchasing up to 100,000 shares in the offering.

Risk factors

   See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Nasdaq Global Select Market symbol

   “CASA”

The number of shares of our common stock to be outstanding after this offering is based on 33,715,505 shares of common stock outstanding as of October 31, 2017 and 40,381,970 additional shares of our common stock issuable upon the automatic conversion of all outstanding shares of our convertible preferred stock upon the closing of this offering and excludes:

 

    145,830 shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Incentive Plan as of October 31, 2017, with a weighted-average exercise price of $0.25 per share;

 

    14,899,160 shares of common stock issuable upon the exercise of stock options outstanding under our 2011 Stock Incentive Plan as of October 31, 2017, with a weighted-average exercise price of $4.23 per share;

 

    861,740 shares of common stock issuable upon the vesting of restricted stock units outstanding under our 2011 Stock Incentive Plan as of October 31, 2017;

 

    2,839,315 shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan as of October 31, 2017, which plan terminated as to new awards immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, at which point the shares of common stock that remained reserved for issuance under our 2011 Stock Incentive Plan became available for issuance under our 2017 Stock Incentive Plan; and

 

    7,160,685 additional shares of common stock available for future issuance under our 2017 Stock Incentive Plan, of which we expect to grant options to purchase an aggregate of 625,000 shares, with an exercise price per share equal to the initial public offering price in this offering, to certain of our employees and restricted stock units for an aggregate of 34,615 shares to one of our non-employee directors, in each case upon the commencement of trading of our common stock on the Nasdaq Global Select Market.

Except as otherwise noted, all information in this prospectus assumes:

 

    the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 40,381,970 shares of our common stock upon the closing of this offering;

 

    no exercise by the underwriters of their option to purchase up to an additional 900,000 shares; and

 

    a five-for-one forward stock split of our common stock effected on December 1, 2017.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present summary consolidated financial and other financial data for our business. The summary consolidated statement of operations data presented below for the years ended December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the nine months ended September 30, 2016 and 2017 and the summary consolidated balance sheet data as of September 30, 2017 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, the unaudited data reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results to be expected in the future, and the results for any interim period are not necessarily indicative of results to be expected in any full year. You should read this summary consolidated financial data in conjunction with the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
           2014                 2015                 2016           2016      2017  
     (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

           

Revenue:

           

Product

   $ 194,358     $ 247,588     $ 279,223     $ 191,763      $ 205,155  

Service

     16,920       24,862       36,905       25,139        28,458  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenue

     211,278       272,450       316,128       216,902        233,613  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cost of revenue(1):

           

Product

     59,088       74,349       89,340       68,793        62,865  

Service

     5,917       5,265       8,477       5,983        3,637  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total cost of revenue

     65,005       79,614       97,817       74,776        66,502  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     146,273       192,836       218,311       142,126        167,111  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

           

Research and development(1)

     25,481       37,155       49,210       37,213        43,912  

Sales and marketing(1)

     21,409       36,157       36,114       27,289        26,983  

General and administrative(1)

     10,346       16,453       18,215       13,532        14,387  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     57,236       89,765       103,539       78,034        85,282  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

     89,037       103,071       114,772       64,092        81,829  

Other income (expense), net

     (2,942     (1,408     921       953        (9,858
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     86,095       101,663       115,693       65,045        71,971  

Provision for income taxes

     26,387       33,742       27,025       16,228        12,334  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 59,708     $ 67,921     $ 88,668     $ 48,817      $ 59,637  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash dividends declared per common share or common share equivalent

   $ 0.3835     $     $ 2.9197     $ 0.5891      $ 1.1774  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to common stockholders(2):

           

Basic

   $ 23,287     $ 27,302     $ (35,119   $ 19,928      $ 7,689  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 23,843     $ 30,402     $ (35,119   $ 20,006      $ 7,689  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 



 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
           2014                  2015                  2016           2016      2017  
     (in thousands, except per share amounts)  

Net income (loss) per share attributable to common stockholders(2):

             

Basic

   $ 0.78      $ 0.86      $ (1.07   $ 0.61      $ 0.23  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.73      $ 0.78      $ (1.07   $ 0.47      $ 0.18  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(2):

             

Basic

     29,983        31,740        32,864       32,822        33,657  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     32,683        38,809        32,864       42,137        43,198  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

         $ 1.12        $ 0.75  
        

 

 

      

 

 

 

Diluted

         $ 1.00        $ 0.67  
        

 

 

      

 

 

 

Weighted-average shares used to compute pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

           79,246          80,039  
        

 

 

      

 

 

 

Diluted

           88,933          89,579  
        

 

 

      

 

 

 

Other Financial Data:

             

Non-GAAP net income(3)

   $ 62,145      $ 72,812      $ 95,032     $ 53,301      $ 64,520  

Adjusted EBITDA(3)

   $ 94,632      $ 115,541      $ 129,084     $ 74,517      $ 93,298  

 

(1) Includes stock-based compensation expense related to stock options, stock appreciation rights and restricted stock units granted to employees and non-employee consultants as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2014      2015      2016      2016      2017  
     (in thousands)  

Cost of revenue

   $ 161      $ 143      $  237      $ 178      $ 202  

Research and development expense

     852        1,843        2,306        1,637        1,535  

Sales and marketing expense

     598        775        1,147        846        801  

General and administrative expense

     380        4,560        4,614        3,313        3,355  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,991      $ 7,321      $ 8,304      $ 5,974      $ 5,893  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 14 to our audited consolidated financial statements and Note 12 to our unaudited condensed consolidated financial statements, both included elsewhere in this prospectus, for an explanation of the calculations of basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income per share attributable to common stockholders.
(3) These financial measures are not calculated in accordance with GAAP. See “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for information regarding our use of these non-GAAP financial measures and a reconciliation of such measures to their nearest comparable financial measures calculated and presented in accordance with GAAP.

 



 

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     As of September 30, 2017  
     Actual     Pro Forma(2)     Pro Forma
As  Adjusted(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 183,519     $ 183,519     $ 254,426  

Working capital(1)

     247,182       197,179       268,171  

Total assets

     392,235       392,235       461,030  

Long-term debt, including current portion, net of unamortized debt issuance costs

     298,147       298,147       298,147  

Total liabilities

     402,962       452,965       452,880  

Convertible preferred stock

     97,479              

Total stockholders’ equity (deficit)

     (108,206     (60,730     8,150  

 

(1) We define working capital as current assets less current liabilities.
(2) The pro forma balance sheet data gives effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 40,381,970 shares of common stock upon the closing of this offering and (ii) the accrual of an additional special dividend of $43.0 million, which was declared by our board of directors on November 30, 2017, contingent upon, and to be payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, and cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments approved by our board of directors for payment in connection with the additional special dividend in the event that it is paid.
(3) The pro forma as adjusted balance sheet data gives further effect to our sale of 6,000,000 shares of common stock in this offering at the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 



 

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RISK FACTORS

Risks Related to Our Business and Our Industry

If we do not successfully anticipate technological shifts, market needs and opportunities, and develop new products and product enhancements that meet those technological shifts, needs and opportunities, we may not be able to compete effectively.

The broadband service provider market, including fixed and wireless, is characterized by rapid technological shifts and increasingly complex customer requirements to achieve scalable networks that accommodate rapidly increasing consumer demand for bandwidth. To compete effectively, we must continue to develop new technologies and products that address emerging technological trends and changing customer needs. The process of developing new technology is complex and uncertain, and the development of new offerings requires significant upfront investment that may not result in material improvements to existing products or result in marketable new products or costs savings or revenue for an extended period of time, if at all.

We believe that our culture of innovation is a significant factor in our ability to develop new products. If we are not able to attract and retain employees that are able to contribute to our culture of innovation, our ability to identify emerging technological trends and changing customer needs and successfully develop new products to address them could be adversely impacted.

The success of new products and enhancements also depends on many other factors, including timely completion and introduction, differentiation from products offered by competitors and previous versions of our own products and, ultimately, market acceptance of these new products and enhancements. In addition, new technologies or standards could render our existing products obsolete or less attractive to customers. If we are unable to successfully introduce new products and enhancements, we would not be able to compete effectively and our business, financial condition, results of operations and prospects could be materially adversely affected.

Our success depends in large part on broadband service providers’ continued deployment of, and investment in, ultra-broadband network capabilities that make use of our solutions.

A significant portion of our product and solution suite is dedicated to enabling cable service providers to deliver voice, video and data services over newer and faster ultra-broadband networks. As a result, our success depends significantly on these cable service providers’ continued deployment of, and investment in, their networks, which depends on a number of factors outside of our control. These factors include capital constraints, the presence of available capacity on legacy networks, perceived subscriber demand for ultra-broadband networks, competitive conditions within the broadband service provider industry and regulatory issues. If broadband service providers do not continue deploying and investing in their ultra-broadband networks in ways that involve our solutions, for these or other reasons, our business, financial condition, results of operations and prospects could be materially adversely affected.

We expect certain of our customers will continue to represent a substantial portion of our revenue.

Historically, certain of our customers have accounted for a significant portion of our revenue. For example, sales to Time Warner Cable accounted for 41%, 14%, 23% and 36% of our revenue for the years ended December 31, 2014, 2015 and 2016 and the nine months ended September 30, 2017, respectively; sales to Liberty Global accounted for 17%, 10% and 11% of our revenue for the years ended December 31, 2015 and 2016 and the nine months ended September 30, 2017, respectively; sales to Rogers accounted for 19% of our revenue for the year ended December 31, 2016; and sales to SCSK Corporation accounted for 13% of our revenue for the year ended December 31, 2014. Based on their historical purchasing patterns, we expect that our large customers will continue to account for a substantial portion of our revenue in future periods. However, our customers generally make purchases from us on a purchase-order basis rather than pursuant to long-term contracts, and those that do enter long-term contracts typically have the right to terminate their contracts for

 

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convenience, and as a result, we generally have no assurances that these large customers will continue to purchase our solutions. We may also see consolidation of our customer base, which could result in loss of customers. In addition, some of our large customers have used, and may in the future use, the sizes and relative importance of their orders to our business to require that we enter into agreements with more favorable terms than we would otherwise agree to and obtain price concessions. The loss of a significant customer, a significant delay or reduction in purchases by large customers or significant price concessions to one or more large customers, could have a material adverse effect on our business, financial condition, results of operations and prospects.

Timing of large orders and seasonality in our revenue may cause our quarterly revenue and results of operations to fluctuate and possibly decline materially from quarter to quarter.

Our customers tend to make large purchases from us when initiating or upgrading services based on our solutions, followed by smaller purchases for maintenance and ongoing support. In addition, purchases by existing customers of capacity expansions can also involve large individual orders that may represent a significant portion of our revenue for a fiscal quarter, which may also have a significant impact on our quarterly gross margin due to these capacity expansions generating higher gross margins than our initial hardware-based deployments. As a result of all of these factors, our quarterly revenue and results of operations, including our gross margin, may be significantly impacted by one or a small number of large individual orders. For example, any cancellation of orders or any acceleration or delay in anticipated product purchases or the acceptance of shipped products by a large customer could materially affect our revenue and results of operations in any quarterly period. We may be unable to sustain or increase our revenue from other new or existing customers to offset the discontinuation of purchases by one of our larger customers. As a result, our quarterly revenue and results of operations are difficult to estimate and may fluctuate or decline materially from quarter to quarter.

In addition, we believe that there are significant seasonal factors which may cause revenue to be greater for the first and fourth quarters of our fiscal year as compared to the second and third quarters. We believe that this seasonality results from a number of factors, including the procurement, budgeting and deployment cycles of many of our customers. These seasonal variations may cause our quarterly revenue and results of operations to fluctuate or decline materially from quarter to quarter.

Our sales to the broadband service provider market are volatile and our sales cycles can be long and unpredictable. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our revenue and results of operations to fluctuate and possibly decline significantly.

Our sales to the broadband service provider market have been characterized by large and sporadic purchases and long sales cycles. Sales activity often depends upon the stage of completion of expanding network infrastructures, the availability of funding and the extent to which broadband service providers are affected by regulatory, economic and business conditions in the countries in which they operate.

In addition, the timing of our sales and revenue recognition is difficult to forecast because of the unpredictability of our products’ sales cycles. A sales cycle is the period between initial contact with a prospective customer and the sale of our products to that customer. Customer orders often involve the purchase of multiple products. These orders are complex and difficult to obtain because prospective customers generally consider a number of factors over an extended period of time before committing to purchase the products and solutions we sell. Customers, especially in the case of our large customers, often view the purchase of our products as a significant and strategic decision and require considerable time to evaluate, test and qualify our products prior to making a purchase decision and placing an order. The length of time that customers devote to their evaluation, contract negotiation and budgeting processes varies significantly, but can often exceed 24 months. During the sales cycle, we expend significant time and money on sales and marketing activities and make investments in evaluation equipment, all of which are included in our sales and marketing expenses and lower our operating margins, particularly if no sale occurs.

 

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Even if a customer decides to purchase our products, there are many factors affecting the timing of our recognition of revenue, which makes our revenue difficult to forecast. For example, the sale of our products may be subject to acceptance testing or there may be unexpected delays in a customer’s internal procurement processes, particularly for some of our larger customers, for whom our products represent a very small percentage of their total procurement activity. These factors may result in our inability to recognize revenue for months or years following a sale. In addition, other factors that are specific to particular customers can affect the timing of their purchases and the variability of our revenue recognition, including the strategic importance of a particular project to a customer, budgetary constraints and changes in their personnel. For all of these reasons, it is difficult to predict whether a sale will be completed, the particular period in which a sale will be completed and the period in which revenue from a sale will be recognized. If our sales cycles lengthen, our revenue could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not generate positive returns on our research and development investments.

Developing our products is expensive, and the investment in product development may involve a long payback cycle or may result in investments in technologies or standards that do not get adopted in the timeframe we anticipate, or at all. For the years ended December 31, 2014, 2015 and 2016 and the nine months ended September 30, 2017, our research and development expenses were $25.5 million, or approximately 12.1% of our revenue, $37.2 million, or approximately 13.6% of our revenue, $49.2 million, or approximately 15.6% of our revenue, and $43.9 million, or approximately 18.8% of our revenue, respectively. We expect to continue to invest heavily in software development in order to expand the capabilities of our broadband and wireless infrastructure solutions, introduce new products and features and build upon our technology leadership, and we expect that our research and development expenses will continue to increase in absolute dollars and as a percentage of revenue from 2016 to 2017. Our investments in research and development may not generate positive returns in a timely fashion or at all.

Our converged cable access platform, or CCAP, solutions currently represent a significant majority of our product sales; this concentration may limit our ability to increase our revenue, and our business would be adversely affected in the event we are unable to sell one or more of our products.

We are heavily dependent upon the sales of our CCAP solutions. In the event we are unable to market and sell these products or any future product that represents a substantial amount of our revenue, our business, financial condition, results of operations and prospects could be materially adversely affected.

We have invested heavily in developing wireless solutions, and we face risks in seeking to expand our platform into the wireless market.

We have invested heavily in developing wireless solutions that have yet to generate revenue. We cannot guarantee that these investments, or any of our other investments in research and development will ever generate revenue or become profitable for us, and the failure of these investments to generate positive returns may adversely impact our business, financial condition, results of operations and prospects. The wireless market makes up a substantial portion of our total potential addressable market. In addition, expanding our offerings into the wireless market presents other significant risks and uncertainties, including potential distraction of management from other business operations that generate more substantial revenue, the dedication of significant research and development, sales and marketing, and other resources to this new business line at the expense of our other business operations and other risks that we may not have adequately anticipated.

We believe the broadband service provider industry is in the early stages of a major architectural shift toward the virtualization of networks and the use of networks with distributed architectures. If the architectural shift does not occur, if it does not occur at the pace we predict, or if the products and services we have developed are not attractive to our customers after such shift takes place, our revenues could decline.

We believe the broadband service provider industry is in the early stages of transitioning to the virtualization of networks and the use of networks with distributed architectures. We are developing products and

 

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services that we believe will be attractive to our customers and potential customers who make that shift. Our strategy depends in part on our belief that the industry shift to a software-centric cloud-based architecture and increasing densification will continue. In our experience, fundamental changes like this often take time to accelerate and the adoption rates of our customers may vary. As our customers determine their future network architectures and how to implement them, we may encounter delayed timing of orders, deferred purchasing decisions and reduced expenditures. These longer decision cycles and reduced expenditures may negatively impact our revenues, or make it difficult for us to accurately predict our revenues, either of which could materially adversely affect our business, financial condition, results of operations and prospects. Moreover, it is possible that our customers may reverse or fail to expand upon current trends toward virtualization and distributed architectures, which could result in significantly reduced demand for the products that we have developed and currently plan to develop.

We face intense competition, including from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The market for broadband infrastructure solutions is intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and our failure to increase, or the loss of, market share, any of which could materially adversely affect our business, financial condition, results of operations and prospects.

In the broadband service provider market, we primarily compete with larger and more established companies, such as Arris and Cisco. As we seek to enter the wireless market, we expect to encounter additional competition from large, established providers of wireless communication networks, including Ericsson and Nokia.

Many of our existing and potential competitors enjoy substantial competitive advantages, such as:

 

    greater name recognition and longer operating histories;

 

    larger sales and marketing budgets and resources;

 

    broader distribution and established relationships with customers;

 

    greater access to larger customer bases;

 

    greater customer support resources;

 

    greater manufacturing resources;

 

    the ability to leverage their sales efforts across a broader portfolio of products;

 

    the ability to leverage purchasing power with vendor subcomponents;

 

    the ability to incorporate additional functionality into their existing products;

 

    the ability to bundle offerings with other products and services;

 

    the ability to set more aggressive pricing policies;

 

    the ability to offer greater amounts of equity and more valuable equity as incentives for purchases of their products and services;

 

    lower labor and development costs;

 

    greater resources to fund research and development or otherwise acquire new product offerings;

 

    larger intellectual property portfolios; and

 

    substantially greater financial, technical, research and development or other resources.

 

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Our ability to compete will depend upon our ability to provide a better solution than our competitors at a price that offers superior value. We may be required to make substantial additional investments in research, development, sales and marketing in order to respond to competition.

We also expect increased competition if our market continues to expand. Conditions in our market could change rapidly and significantly as a result of technological advancements or other factors. Current or potential competitors may be acquired by third parties that have greater resources available than we do. Our current or potential competitors might take advantage of the greater resources of the larger organization resulting from these acquisitions to compete more vigorously or broadly with us. In addition, continued industry consolidation might adversely affect customers’ perceptions of the viability of smaller and even medium-sized companies, such as us, consequently, customers’ willingness to purchase from us. Further, certain large customers may develop broadband infrastructure solutions for internal use and/or to broaden their portfolios of internally developed resources, which could allow these customers to become new competitors in the market.

If we are unable to sell additional products to our existing customers, our revenue growth will be adversely affected and our revenue could decline.

To increase our revenue, we must sell additional products to our existing customers and add new customers and we expect that a substantial portion of our future sales will be follow-on sales to existing customers. For example, one of our sales strategies is to target sales of capacity expansions and implementation of wireless solutions at our current cable customers because they are familiar with the operational and economic benefits of our solutions. However, our existing customers may choose to use other providers for their infrastructure needs. If we fail to sell additional products to our existing customers, our business, financial condition, results of operations and prospects could be materially adversely affected.

We may have difficulty attracting new large customers or acquiring new customers due to the high costs of switching broadband equipment.

Broadband service providers typically need to make substantial investments when deploying network infrastructure, which can delay a purchasing decision. Once a broadband service provider has deployed infrastructure for a particular portion of its network, it is often difficult and costly to switch to another vendor’s infrastructure. Unless we are able to demonstrate that our products offer significant performance, functionality or cost advantages that outweigh a customer’s expense of switching from a competitor’s product, it will be difficult for us to generate sales once that competitor’s equipment has been deployed. Accordingly, if a customer has already deployed a competitor’s product for its broadband infrastructure, it may be difficult for us to sell our products to that customer. If we fail to attract new large customers or acquire new customers, our business, financial condition, results of operations and prospects could be materially adversely affected.

We are exposed to the credit risk of some of our customers and to credit exposures in the event of turmoil in the credit markets, which could result in material losses.

Due to our reliance on significant customers, we are dependent on the continued financial strength of these customers. If one or more of our significant customers experience financial difficulties, it could result in uncollectable accounts receivable and our loss of such customers and anticipated revenue.

The majority of our sales are on an open credit basis, with typical payment terms of one year or less. We monitor individual customer payment capability in granting such open credit arrangements, seeking to limit such open credit to amounts we believe our customers can pay and maintain reserves we believe are adequate to cover exposure for doubtful accounts. However, there can be no assurance that our open credit customers will pay the amounts they owe to us or that the reserves we maintain will be adequate to cover such credit exposure. Our customers’ failure to pay and/or our failure to maintain sufficient reserves could have a material adverse effect on our consolidated financial statements. In addition, in the event that turmoil in the credit markets makes it more

 

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difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business and operations.

A portion of our sales is also derived through our resellers, which tend to have more limited financial resources than other customers and to present increased credit risk. Our resellers also typically have the ability to terminate their agreements with us for any reason upon advance written notice.

We are exposed to fluctuations in currency exchange rates, which could adversely affect our business, financial condition, results of operations and prospects.

Our sales agreements are primarily denominated in U.S. dollars. Therefore, a strengthening U.S. dollar could increase the real cost of our products to our customers outside of the U.S., and alternatively a decrease in the value of the U.S. dollar relative to foreign currencies could increase our product and operating costs in foreign locations. If we are not able to successfully hedge against the risks associated with the currency fluctuations, our business, financial condition, results of operations and prospects could be materially adversely affected.

We generate a significant amount of revenue from sales to customers outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.

We have extensive international operations and generate a significant amount of revenue from sales to customers in Asia-Pacific, Europe and the Latin America. Our ability to grow our business and our future success will depend to a significant extent on our ability to continue to expand our operations and customer base worldwide.

As a result of our international reach, we must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing and retaining an international staff, and specifically staff related to sales management and sales personnel, we may experience difficulties in sales productivity in foreign markets. We also enter into strategic relationships with resellers and sales agents in certain international markets where we do not have a local presence. If we are not able to maintain these relationships internationally or to recruit additional companies to enter into reseller and sales agent relationships, our future success in these international markets could be limited. Business practices in the international markets that we serve may differ from those in the U.S. and may require us in the future to include terms other than our standard terms in customer contracts. To the extent that we may enter into customer contracts in the future that include non-standard terms related to payment, warranties or performance obligations, our business, financial condition, results of operations and prospects could be materially adversely affected.

Our international sales and operations are subject to a number of risks, including the following:

 

    greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;

 

    increased expenses incurred in establishing and maintaining our international operations;

 

    fluctuations in exchange rates between the U.S. dollar and foreign currencies where we do business;

 

    greater difficulty and costs in recruiting local experienced personnel;

 

    wage inflation in certain growing economies;

 

    general economic and political conditions in these foreign markets;

 

    economic uncertainty around the world as a result of sovereign debt issues;

 

    communication and integration problems resulting from cultural and geographic dispersion;

 

    limitations on our ability to access cash resources in our international operations;

 

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    ability to establish necessary business relationships and to comply with local business requirements;

 

    risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our products required in foreign countries;

 

    greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties;

 

    the uncertainty of protection for intellectual property rights in some countries;

 

    delays resulting from our need to comply with foreign cybersecurity laws;

 

    greater risk of a failure of our operations and employees to comply with both U.S. and foreign laws and regulations, including antitrust regulations, the FCPA, privacy and data protection laws and regulations and any trade regulations ensuring fair trade practices; and

 

    heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements.

These and other factors could harm our ability to gain future international revenue and, consequently, materially adversely affect our business, financial condition, results of operations and prospects. Expanding our existing international operations and entering into additional international markets will require significant management attention and financial commitments. Our failure to successfully manage our international operations and the associated risks effectively could limit our future growth or materially adversely affect our business, financial condition, results of operations and prospects.

We are subject to anti-corruption laws such as the U.S. Foreign Corrupt Practices Act of 1977, as amended.

We are subject to anti-corruption laws such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, which generally prohibits U.S. companies and their employees and intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage or directing business to another, and requires companies to maintain accurate books and records. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. We rely on non-employee third-party representatives and other intermediaries to develop international sales opportunities, and generally have less direct control over such third parties’ actions taken on our behalf. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the United States and elsewhere could seek to impose civil and/or criminal fines and penalties, which could have a material adverse effect on our business, reputation, results of operations and financial condition. We intend to increase our international sales and business and, as such, the cost of complying with such laws, and the potential harm from our noncompliance, are likely to increase.

Failure to comply with anti-corruption laws, such as the FCPA and the United Kingdom Bribery Act 2010, or the Bribery Act, and similar laws associated with our activities outside the U.S., could subject us to penalties and other adverse consequences. Any violation of the FCPA, Bribery Act or similar laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions suspension or debarment from U.S. government contracts, all of which could have a material adverse effect on our reputation, business, results of operations and prospects. In addition, responding to any enforcement action or related investigation may result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate these controls.

Our products may be subject to various export controls and because we incorporate encryption technology into certain of our products, certain of our products may be exported from various countries only with the required export license or through an export license exception. Furthermore, certain export control and economic

 

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sanctions laws prohibit the shipment of certain products, technology, software and services to embargoed countries and sanctioned governments, entities, and persons. If we fail to comply with the applicable export control laws, customs regulations, economic sanctions or other applicable laws, we could be subject to monetary damages or the imposition of restrictions which could materially adversely affect our business, financial condition, results of operations and prospects and could also harm our reputation. Further, there could be criminal penalties for knowing or willful violations, including incarceration for culpable employees and managers. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. We recently discovered that we may have inadvertently violated certain technical provisions of the U.S. export control laws and regulations by failing to inform customers of their export control obligations and failing to make certain submissions to the Commerce Department’s Bureau of Industry and Security, or BIS, in a timely and complete manner. However, we believe that the exports of our products were all to destinations and end users that would not have required licensing under the U.S. export control and sanctions laws. We have voluntarily disclosed the potential technical violations to BIS, and, although BIS may impose a penalty, we do not expect any such penalty to be material to our business, financial condition, results of operations and prospects.

In addition, various countries regulate the import of certain encryption technology and products, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations or create delays in the introduction of our products into international markets. Any decreased use of our products or limitation on our ability to export or sell our products could materially adversely affect our business, financial condition, results of operations and prospects.

Our revenue growth rate in recent periods may not be indicative of our future performance.

Our revenue growth rate in recent periods may not be indicative of our future performance. Our revenue grew 29.0% from the year ended December 31, 2014 to the year ended December 31, 2015, grew 16.0% from the year ended December 31, 2015 to the year ended December 31, 2016 and grew 7.7% from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. We may not achieve similar revenue growth rates in future periods. You should not rely on our revenue for any prior quarterly or annual period as any indication of our future revenue or revenue growth. If we are unable to maintain consistent revenue or revenue growth, our business, financial condition, results of operations and prospects could be materially adversely affected.

The majority of the growth in our revenue and income from operations has occurred since 2013, making it difficult to evaluate our future prospects.

We were founded in 2003 and booked our first revenue in 2006. The majority of the growth in our revenue and income from operations has occurred since 2013, making it difficult to evaluate our future prospects, including our ability to plan for and manage future growth. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this prospectus. If we do not address these risks successfully, our business, financial condition, results of operations and prospects could be materially adversely affected, and the market price of our common stock could decline.

 

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Our products are necessary for the operation of our customers’ broadband service operations. Product quality problems, warranty claims, services disruptions, or other defects, errors or vulnerabilities in our products or services could harm our reputation and materially adversely affect our business, financial condition, results of operations and prospects.

We assist our customers in the operation of their broadband service operations. Failures of our products could result in significant interruptions in our customers’ capabilities to maintain their networks and operations. Further, unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in analyzing, correcting or redesigning our products, cause us to lose significant customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially adversely affect our business, financial condition, results of operations and prospects.

Additionally, errors, failures or bugs in our products could result in warranty claims or claims by customers for losses that they sustain or, in some cases, could allow customers to claim damages. In addition, in the past, we have had to replace certain components of products that we had shipped or provide remediation in response to the discovery of defects or bugs from failures in software protocols.

Limitation of liability provisions in our standard terms and conditions of sale, and those of our resellers and sales agents, may not be enforceable under some circumstances or may not fully or effectively protect us from end-customer claims and related liabilities and costs. In some cases, including with respect to indemnification obligations under many of our agreements with customers and resellers, our contractual liability may be uncapped. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain types of claims associated with the use of our products, but our insurance coverage may not adequately cover any such claims. In addition, even claims that ultimately are unsuccessful could result in expenditures of funds in connection with litigation and divert management’s time and other resources.

Our products must interoperate with operating systems, software applications and hardware, and comply with industry standards, that are developed by others, and if we are unable to devote the necessary resources for our products to interoperate with such software and hardware and comply with such standards, we may lose or fail to increase market share and experience a weakening demand for our products.

Generally, our products comprise only a part of and must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which may be manufactured by a wide variety of vendors and original equipment manufacturers. Our products must also comply with industry standards, such as Data Over Cable Service Interface Specification, or DOCSIS, 3.0 and 3.1, which are established by third parties, in order to interoperate with such servers, storage, software and other networking equipment such that all systems function efficiently together. We may depend on other vendors to support prevailing industry standards. Also, some industry standards may not be widely adopted or implemented uniformly, and competing standards and other approaches may emerge that may be preferred by our customers.

In addition, when new or updated versions of these industry standards, software systems or applications are introduced, we must sometimes develop updated versions of our software so that our products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these systems and applications, our customers may not be able to adequately utilize our products, and we may lose or fail to increase market share and experience a weakening in demand for our products, among other consequences, which could materially adversely affect our business, financial condition, results of operations and prospects.

 

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Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material adverse effect on our business, financial condition, results of operations and prospects.

Once our products are deployed within our customers’ networks, our customers depend on our support organization to resolve any issues relating to our products. Our provision of high-quality support is critical for the successful marketing and sale of our products. If we do not assist our customers in deploying our products effectively, do not succeed in helping our customers resolve post-deployment issues quickly or do not provide adequate ongoing support, it could adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, our standard sales contracts require us to provide minimum service requirements to our customers on an ongoing basis and our failure to satisfy these requirements could expose us to claims under these contracts. Our failure to maintain high-quality support and services, including compliance with our contractual minimum service obligations, could have a material adverse effect on our business, financial condition, results of operations and prospects.

We base our inventory requirements on our forecasts of future sales. If these forecasts are materially inaccurate, we may procure inventory that we may be unable to use in a timely manner or at all.

We and our contract manufacturers procure components and build our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analyses from our sales and marketing organizations, adjusted for overall market conditions. To the extent our forecasts are materially inaccurate or if we otherwise do not need such inventory, we may under- or over-procure inventory, and such inaccuracies in our forecasts could subject us to contractual damages and otherwise materially adversely affect our business, financial condition, results of operations and prospects.

Because we depend on third-party manufacturers to build our hardware, we are susceptible to manufacturing delays and pricing fluctuations that could prevent us from delivering customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales and customers.

We depend on third-party contract manufacturers to manufacture our product hardware. A significant portion of our cost of revenue consists of payments to these third-party contract manufacturers. Our reliance on these third-party contract manufacturers reduces our control over the manufacturing process, quality assurance, product costs and product supply and timing, which exposes us to risk. To the extent that our products are manufactured at facilities in foreign countries, we may be subject to additional risks associated with complying with local rules and regulations in those jurisdictions. If we are unable to manage our relationships with our third-party contract manufacturers effectively, or if these third-party manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead times, capacity constraints or quality control problems in their manufacturing operations or fail to meet our future requirements for timely delivery, our ability to ship products to our customers would be severely impaired, and our business, financial condition, results of operations and prospects could be materially adversely affected.

Our contract manufacturers typically fulfill our supply requirements on the basis of individual orders. We do not have long-term contracts with our third-party manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, they are not obligated to continue to fulfill our supply requirements, which could result in supply shortages, the prices we are charged for manufacturing services could be increased on short notice and we may not be able to develop alternate or second contract manufacturers in a timely manner. If we add or change contract manufacturers, or change any manufacturing plant locations within a contract manufacturer network, we would add additional complexity and risk to our supply chain management.

In addition, we may be subject to significant challenges in ensuring that quality, processes and costs, among other issues, are consistent with our expectations and those of our customers. A new contract manufacturer or

 

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manufacturing location may not be able to scale its production of our products at the volumes or quality we require. This could also adversely affect our ability to meet our scheduled product deliveries to our customers, which could damage our customer relationships and cause the loss of sales to existing or potential customers, late delivery penalties, delayed revenue or an increase in our costs which could adversely affect our gross margins. This could also result in increased levels of inventory subjecting us to increased excess and obsolete charges that could have a negative impact on our results of operations.

Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which could disrupt or delay our scheduled product deliveries to our customers and may result in the loss of sales and customers.

Our products rely on key components that our contract manufacturers purchase on our behalf from a limited number of suppliers, including Altera, Analog Devices, Bell Power, Broadcom, Maxim, Mini-Circuits, Qorvo, TTM Technologies and Xilinx. We do not have guaranteed supply contracts with any of our component suppliers, and our suppliers could delay shipments or cease manufacturing such products or selling them to us at any time. The development of alternate sources for those components is time-consuming, difficult and costly. If we are unable to obtain a sufficient quantity of these components on commercially reasonable terms or in a timely manner, sales of our products could be delayed or halted entirely or we may be required to redesign our products. Any of these events could result in lost sales and damage to our customer relationships, which would adversely impact our business, financial condition, results of operations and prospects. In the event of a shortage or supply interruption from our component suppliers, we may not be able to develop alternate or second sources in a timely manner, on commercially reasonable terms or at all. In addition, certain of our customer contracts require us to notify our customers of any discontinuation of the products that we supply to them and to provide support for discontinued products, and lack of supply from our suppliers could leave us unable to fulfill our customer support obligations. Adverse changes to our relationships with our sole suppliers could result in lost sales and damage to our customer relationships, which would adversely impact our business, financial condition, results of operations and prospects.

We rely on resellers and sales agents to sell our products into certain international markets, and the loss of such resellers and sales agents could delay or harm our ability to deliver our products to our customers.

We rely upon resellers and sales agents to coordinate sales and distribution of our products in certain international markets. We provide our resellers and sales agents with specific training and programs to assist them in selling our products, but these steps may not be effective. In addition, our resellers and sales agents may be unsuccessful in marketing, selling and supporting our products and services. If we are unable to develop and maintain effective sales incentive programs for our resellers and sales agents, we may not be able to incentivize these resellers and sales agents to sell our products to customers. Any of our resellers and sales agents could elect to consolidate or enter into a strategic partnership with one of our competitors, which could reduce or eliminate our future opportunities with that reseller or sales agent. Our agreements with our resellers and sales agents may generally be terminated for any reason by either party with advance notice. We may be unable to retain these resellers and sales agents or secure additional or replacement resellers and sales agents. The replacement of one or more of our significant resellers or sales agents requires extensive training, and any new or expanded relationship with a reseller or sales agent may take several months or more to achieve productivity. Any of these events could materially adversely affect our business, financial condition, results of operations and prospects.

Our business and operations have experienced rapid growth in recent years, and if we do not appropriately manage any future growth or are unable to improve our systems and processes, our business, financial condition, results of operations and prospects will be adversely affected.

We have experienced rapid growth and increased demand for our products in recent years, which have placed a strain on our management, administrative, operational and financial infrastructure. For example, our revenue increased from $211.3 million for the year ended December 31, 2014 to $272.5 million for the year

 

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ended December 31, 2015 to $316.1 million for the year ended December 31, 2016 and from $216.9 million for the nine months ended September 30, 2016 to $233.6 million for the nine months ended September 30, 2017. To handle this growth and increase in demand, we have significantly expanded our headcount, from 352 as of December 31, 2014 to 604 as of December 31, 2016 and to 664 as of October 31, 2017, and expect to continue to increase our headcount. As we have grown, we have had to manage an increasingly larger and more complex array of internal systems and processes to scale with all aspects of our business, including our software development, contract manufacturing and purchasing, logistics and fulfillment and sales, maintenance and support. Our success will depend in part upon our ability to manage our growth effectively. To do so, we must continue to increase the productivity of our existing employees and continue to hire, train and manage new employees as needed. To manage domestic and international growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting processes and procedures and implement more extensive and integrated financial and business information systems. We may not be able to successfully implement these or other improvements to our systems and processes in an efficient or timely manner, and we may discover deficiencies in their capabilities or effectiveness. Our failure to improve our systems and processes, or their failure to operate effectively and in the intended manner, may result in disruption of our current operations and customer relationships, our inability to manage the growth of our business and our inability to accurately forecast our revenue, expenses and earnings.

If we are unable to hire, retain, train and motivate qualified personnel and senior management, including in particular our founders, our business, financial condition, results of operations and prospects could be adversely affected.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel, particularly software engineering and sales personnel. Competition for highly skilled personnel is often intense, particularly in the greater Boston region where we are headquartered, and we may not be able to attract and retain the highly skilled employees that we need to support our business. Many of the companies with which we compete for experienced personnel have greater resources than we have to provide more attractive compensation packages and other amenities. Research and development personnel are aggressively recruited by startup and growth companies, which are especially active in many of the technical areas and geographic regions in which we conduct product development. In addition, in making employment decisions, particularly in the high-technology industry, job candidates often consider the value of the stock-based compensation they are to receive in connection with their employment. Declines in the market price of our stock could adversely affect our ability to attract, motivate or retain key employees. If we are unable to attract or retain qualified personnel, or if there are delays in hiring required personnel, our business, financial condition, results of operations and prospects could be materially adversely affected.

Also, to the extent we hire personnel from competitors, or from certain customers or other third parties whose employees we have agreed not to solicit, we may be subject to allegations that such personnel have been improperly solicited, that such personnel have divulged proprietary or other confidential information or that former employers own certain inventions or other work product. Such claims could result in litigation.

Our future performance also depends on the continued services and continuing contributions of our founders and senior management to execute our business plan and to identify and pursue new opportunities and product innovations. Our employment arrangements with our employees do not require that they continue to work for us for any specified period, and therefore, they could terminate their employment with us at any time. In particular, the loss of Jerry Guo, our President and Chief Executive Officer, and Weidong Chen, our Chief Technology Officer, could have a material adverse impact on our business. Further, the loss of other members of our senior management team, sales and marketing team or engineering team, or any difficulty attracting or retaining other highly qualified personnel in the future, could significantly delay or prevent the achievement of our development and strategic objectives, which could materially adversely affect our business, financial condition, results of operations and prospects. Except with respect to Mr. Guo, we do not maintain “key person” life insurance on our officers, directors or key employees.

 

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If we do not effectively expand and train our direct sales force, we may be unable to increase sales to our existing customers or add new customers, and our business will be adversely affected.

We depend on our direct sales force to increase sales with existing customers and to obtain new customers. As such, we have invested and will continue to invest substantially in our sales organization. In recent periods, we have been adding personnel to our sales function as we focus on growing our business, entering new markets and increasing our market share, and we expect to incur significant additional expenses in expanding our sales personnel in order to achieve revenue growth. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, retaining and integrating sufficient numbers of sales personnel to support our growth, particularly in international markets. In addition, we have significantly increased the number of personnel in our sales and marketing departments in recent periods, with headcount growing from 67 as of December 31, 2014 to 116 as of October 31, 2017. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire, retain or integrate into our corporate culture sufficient numbers of qualified individuals in the markets where we do business or plan to do business. If we are unable to hire, integrate and train a sufficient number of effective sales personnel, or the sales personnel we hire are not successful in obtaining new customers or increasing sales to our existing customer base, our business, financial condition, results of operations and prospects could be materially adversely affected.

Adverse economic conditions or reduced broadband infrastructure spending may adversely affect our business, financial condition, results of operations and prospects.

Our business depends on the overall demand for broadband connectivity. Weak domestic or global economic conditions, fear or anticipation of such conditions or a reduction in broadband infrastructure spending even if economic conditions improve, could materially adversely affect our business, financial condition, results of operations and prospects in a number of ways, including longer sales cycles, lower prices for our products and services, reduced sales and lower or no growth. Continued turmoil in the geopolitical environment in many parts of the world may also affect the overall demand for our products and services. Deterioration in global economic or political conditions could materially adversely affect our business, financial condition, results of operations and prospects in the future. A prolonged period of economic uncertainty or a downturn may also significantly affect the availability of capital and the terms and conditions of financing arrangements, including the overall cost of financing as well as the financial health or creditworthiness of our customers. Circumstances may arise in which we need, or desire, to raise additional capital, and such capital may not be available on commercially reasonable terms, or at all.

Breaches of our cybersecurity systems and measures could degrade our ability to conduct our business operations and deliver products and services to our customers, delay our ability to recognize revenue, compromise the integrity of our products, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Certain persons and entities may attempt to penetrate our network, or of the systems hosting our website, or our other networks and systems, and may otherwise seek to misappropriate our proprietary or confidential information or cause interruptions of our service. Because the techniques used by such persons and entities to access or sabotage networks and systems change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our networks, system, or products. We have also outsourced a

 

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number of our business functions to third-parties, including our manufacturers and logistics providers, and our business operations also depend, in part, on the success of these third parties’ own cybersecurity measures. Additionally, we depend upon our employees and independent contractors to appropriately handle confidential data and deploy our IT resources in a safe and secure fashion that does not expose our network systems to security breaches and the loss of data. Accordingly, if any of our cybersecurity systems, processes or policies, or those of any of our manufacturers, logistics providers, customers or independent contractors fail to protect against unauthorized access, sophisticated hacking or terrorism and the mishandling, misuse, or misappropriation of data by employees, contractors or other persons or entities, our ability to conduct our business effectively could be damaged in a number of ways, including:

 

    sensitive data regarding our business, including intellectual property, personal information and other confidential and proprietary data, could be stolen;

 

    our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously damaged until such systems can be restored;

 

    our ability to process customer orders and electronically deliver products and services could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition, damage to our relationships with customers and prospective customers and damage to our reputation;

 

    defects and security vulnerabilities could be introduced into our software, products, network and systems, thereby damaging our reputation and perceived reliability and security of our products and potentially making the systems of our customers vulnerable to data loss and cyber incidents; and

 

    personally identifiable data relating to various parties, including end users, employees and business partners could be compromised.

Should any of the above events occur, we could be subject to significant claims for liability from our customers, employees or others and regulatory investigations or actions from governmental agencies. In addition, our ability to protect our intellectual property rights could be compromised and our reputation and competitive position could be significantly harmed. Any regulatory, contractual or other actions, litigations, investigations, fines, penalties and liabilities relating to any actual or alleged misuse or misappropriation of personal data or other confidential or proprietary information could be significant in terms of monetary exposure and reputational impact and necessitate changes to our business operations that may be disruptive to us. Additionally, we could incur significant costs in order to upgrade our cybersecurity systems, processes, policies and procedures and remediate damages. Consequently, our financial performance and results of operations could be materially adversely affected.

If we are unable to obtain, maintain or protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

Our success depends, in part, on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties to protect and enforce our rights to our proprietary technology, all of which offer only limited protection.

In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisers and customers. These arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, if others independently discover trade secrets and proprietary information, we would not be able to assert trade secret rights against such parties. Effective trade secret protection may not be available in every country in which our services are available or where we have employees or independent contractors. The loss or unavailability of trade secret protection could make it easier for third parties to compete with our products

 

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by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and employment laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We also rely on patents to protect certain aspects of our proprietary technology in the United States. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Further, we cannot guarantee that any of our pending patent applications will result in the issuance of patents or that any patents that do issue from such applications will have adequate scope to provide us with a competitive advantage. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found. To the extent that additional patents are issued from our patent applications, which is not certain, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. If third parties have prepared and filed patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the United States Patent and Trademark Office to determine priority of invention for patent applications filed before March 16, 2013, or in derivation proceedings to determine inventorship for patent applications filed after such date. In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its effective filing date. Even if patents covering our products are obtained by us or by our licensors, once such patents expire, we may be vulnerable to competition from similar products. Moreover, the rights granted under any issued patents may not provide us with adequate protection or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future.

Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the United States. Competitors may use our technologies in jurisdictions where we have not obtained or are unable to adequately enforce intellectual property protection to develop their own products. We are also restricted from asserting our intellectual property rights against certain customers under our contracts with them.

Detecting and protecting against the unauthorized use of our products, technology and proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could materially adversely affect our business, financial condition, results of operations and prospects, and there is no guarantee that we would be successful. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to protecting their technology or intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property, which could result in a substantial loss of our market share. Even if we did succeed in enforcing our intellectual property through litigation, this may be costly and divert management resources.

Finally, certain of our license agreements with our third-party licensors provide for joint ownership of developments or inventions that we create that are related to the subject matter of the license. Other agreements to which we are subject, including member agreements with standards bodies and research and development consortia, may require us to disclose and/or grant licenses to technology that is related to the subject matter of the standards body or the consortium and included in our contributions to specifications established by these bodies. These agreements could result in third parties having ownership or license rights to important intellectual property that we otherwise may have elected to maintain exclusive ownership of.

 

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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

We have not applied for trademark registration for our name and logo in all geographic markets. In those markets where we have applied for trademark registration, failure to secure those registrations could adversely affect our ability to enforce and defend our trademark rights and result in indemnification claims. Our registered or unregistered trademarks or trade names, as well as the registered or unregistered trademarks or trade names used by our resellers or distributors associated with our products, may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Any claim of infringement by a third party, even those claims without merit, could cause us to incur substantial costs defending against such claim, could divert management attention from our business and could require us to cease use of such intellectual property in certain geographic markets. Over the long term, if we, or our resellers or distributors, are unable to establish name recognition based on our trademarks and trade names, then our business may be adversely affected.

Assertions by third parties of infringement or other violations by us of their intellectual property rights, or other lawsuits asserted against us, could result in significant costs and materially adversely affect our business, financial condition, results of operations and prospects.

Patent and other intellectual property disputes are common in the broadband infrastructure industry and have resulted in protracted and expensive litigation for many companies. Many companies in the broadband infrastructure industry, including our competitors and other third parties, as well as non-practicing entities, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims of patent infringement, misappropriation or other violations of intellectual property rights against us. From time to time, they have or may in the future also assert such claims against us, our customers whom we typically indemnify against claims that our products infringe, misappropriate or otherwise violate the intellectual property rights of third parties.

As the number of products and competitors in our market increases and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violations of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, distract our management from our business and require us to cease use of such intellectual property, which may impact important elements of our business. In addition, some claims for patent infringement may relate to subcomponents that we purchase from third parties. If these third parties are unable or unwilling to indemnify us for these claims, we could be substantially harmed.

The patent portfolios of most of our competitors are larger than ours. This disparity may increase the risk that our competitors may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot guarantee that we are not infringing or otherwise violating any third-party intellectual property rights.

The third-party asserters of intellectual property claims may be unreasonable in their demands, or may simply refuse to settle, which could lead to expensive settlement payments, prolonged periods of litigation and related expenses, additional burdens on employees or other resources, distraction from our business, supply stoppages and lost sales. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls”, have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. In the past, we have received threatening letters or notices and have been the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others. Responding to such claims, regardless of their merit,

 

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can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses.

An adverse outcome of a dispute may require us to pay substantial damages including treble damages if we are found to have willfully infringed a third party’s patents; cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and indemnify our partners and other third parties. Any damages or royalty obligations we may become subject to as a result of an adverse outcome, and any third-party indemnity we may need to provide, could materially adversely affect our business, financial condition, results of operations and prospects. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Further, there is little or no information publicly available concerning market or fair values for license fees, which can lead to overpayment of license or settlement fees. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Suppliers subject to third-party intellectual property claims also may choose or be forced to discontinue or alter their arrangements with us, with little or no advance notice to us. Any of these events could materially adversely affect our business, financial condition, results of operations and prospects.

Unavailability, termination or breach of licenses to third-party software and other intellectual property could materially harm our business.

Many of our products and services include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property licensed from third parties in our business. We exercise no control over our third-party licensors, and the failure or unsuitability of their software or other intellectual property exposes us to risks that we will have little ability to control. For example, a licensor may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licenses to us; our licensors may also have the ability to terminate our licenses if the licensed technology becomes the subject of a claim of intellectual property infringement. Also, it will be necessary in the future to renew licenses, expand the scope of existing licenses or seek new licenses, relating to various aspects of these products and services or otherwise relating to our business, which may result in increased license fees. Any new licenses may not be available on acceptable terms, if at all. In addition, a third party may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such third party the right to terminate a license or seek damages from us, or both. The inability to obtain or maintain certain licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases of products and services and could otherwise disrupt our business, until equivalent technology can be identified, licensed or developed, if at all, and integrated into our products and services or otherwise in the conduct of our business. Moreover, the inclusion in our products and services of software or other intellectual property licensed from third parties on a nonexclusive basis may limit our ability to differentiate our products from those of our competitors. Any of these events could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

Our products contain software modules licensed to us by third-party authors under “open source” licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software that we use. If we combine our software with open source software in a certain manner, we could, under

 

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certain open source licenses, be required to release portions of the source code of our software to the public. This would allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us.

Although we monitor our use of open source software to avoid subjecting our products to undesirable conditions, we do not have a formal open source policy in place that gives our developers written guidance on what open source licenses we deem “safe.” Further, even where we believe an open source license may have acceptable conditions, the terms of many open source licenses have not been interpreted by U.S. courts, and these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that our informal processes for controlling our use of open source software in our products will be effective or that our compliance with open source licenses, including notice and attribution requirements, are adequate. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis or to make generally available, in source code form, our proprietary code. We also could face infringement claims. Any of the foregoing could materially adversely affect our business, financial condition, results of operations and prospects.

Our failure to adequately protect personal data and to comply with related laws and regulations could result in material liability.

A wide variety of provincial, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer (including across national boundaries), and other processing of personal data. These data protection and privacy-related laws and regulations are evolving and being tested in courts and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.

Any failure by us to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers and other affected persons and entities, damage to our reputation and loss of goodwill, and other forms of injunctive or operations-limiting relief, any of which could have a material adverse effect on our operations, financial performance, and business.

Definitions of personal data and personal information, and requirements relating to the same under applicable laws and regulations within the European Union, the United States, and elsewhere, change frequently and are subject to new and different interpretations by courts and regulators. Because the interpretation and application of laws and other obligations relating to privacy and data protection are uncertain, it is possible that existing or future laws, regulations, and other obligations may be interpreted and applied in a manner that is inconsistent with our data management practices. We may be required to expend significant resources to modify our products and otherwise adapt to these changes, which we may be unable to do on commercially reasonable terms or at all, and our ability to develop new products and features could be limited. These developments could harm our business, financial condition and results of operations. Even if not subject to legal challenge, the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by current and prospective customers.

Failure to comply with governmental laws and regulations could materially adversely affect our business, financial condition, results of operations and prospects.

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more

 

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stringent than those in the United States. From time to time, we may receive inquiries from such governmental agencies or we may make voluntary disclosures regarding our compliance with applicable governmental regulations or requirements. Noncompliance with applicable government regulations or requirements could subject us to sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition, results of operations and prospects could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could materially adversely affect our business, financial condition, results of operations and prospects.

We may invest in or acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our business, financial condition, results of operations and prospects.

As part of our growth strategy, we may make investments in or acquire complementary companies, products or technologies. We do not have experience in making investments in other companies nor have we made any acquisitions to date, and as a result, our ability as an organization to evaluate and/or complete investments or acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable investment or acquisition candidates, and we may not be able to complete such investments or acquisitions on favorable terms, if at all. If we do complete investments or acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any investments or acquisitions we complete could be viewed negatively by our customers, investors and securities analysts.

In addition, investments and acquisitions may result in unforeseen operating difficulties and expenditures. For example, if we are unsuccessful at integrating any acquisitions or retaining key talent from those acquisitions, or the technologies associated with such acquisitions, into our company, the business, financial condition, results of operations and prospects of the combined company could be materially adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel or accurately forecast the financial effects of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such investment or acquisition, each of which could adversely affect our financial condition or the market price of our common stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations. Moreover, if the investment or acquisition becomes impaired, we may be required to take an impairment charge, which could adversely affect our financial condition or the market price of our common stock.

Our international operations may give rise to potentially adverse tax consequences.

We are expanding our international operations and staff to better support our growth into the international markets. We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our corporate structure and associated transfer pricing policies contemplate the business flows and future growth into the international markets, and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions, which are required to be computed on an arm’s-length basis pursuant to the intercompany arrangements or disagree with our determinations as to the income and expenses attributable to

 

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specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

Current U.S. tax laws could impact the tax treatment of our foreign earnings by creating limits on the ability of taxpayers to claim and utilize foreign tax credits and deferring certain tax deductions until earnings outside of the United States are repatriated to the United States. Due to our existing, and anticipated expansion of, our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial condition and operating results.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.

We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales, and we have been advised that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts, and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our operating results.

If we needed to raise additional capital to expand our operations and invest in new products, our failure to do so on favorable terms could reduce our ability to compete and could materially adversely affect our business, financial condition, results of operations and prospects.

We expect that our existing cash and cash equivalents, together with our net proceeds from this offering, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, if we need to raise additional funds to expand our operations and invest in new products, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the market price of our common stock could decline.

Our business is subject to the risks of fire, power outages, floods and other catastrophic events and to interruption by manmade problems such as terrorism.

Our corporate headquarters and the operations of our key manufacturing vendors, as well as many of our customers, are located in areas exposed to risks of natural disasters such as fires and floods. A significant natural disaster, such as a fire, flood or other catastrophic events such as a disease outbreak, could have a material adverse effect on our or their business, which could in turn materially adversely affect our business, financial condition, results of operations and prospects. For example, in the event our manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, which could result in missed financial targets, such as revenue and shipment targets, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which could materially adversely affect our business, financial condition, results of operations and prospects. In addition, acts of terrorism could cause disruptions in our business or the business of our manufacturers, logistics providers, partners or customers or the economy as a whole. All of the aforementioned risks may be compounded if our disaster recovery plans and those of our manufacturers, logistics providers or partners prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or delays in the manufacture, deployment or shipment of our products, our business, financial condition, results of operations and prospects would be adversely affected.

 

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Regulations affecting broadband infrastructure could reduce demand for our products.

Laws and regulations governing the Internet and electronic commerce are emerging but remain largely unsettled, even in the areas where there has been some legislative action. Regulations may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and quality of products, either of which could restrict our business or increase our cost of doing business. Government regulatory policies are likely to continue to have a major impact on the pricing of existing and new network services and, therefore, are expected to affect demand for those services and the communications products, including our products, supporting those services.

Any changes to existing laws or the adoption of new regulations by federal or state regulatory authorities or any legal challenges to existing laws or regulations affecting IP networks could materially adversely affect the market for our products. Moreover, customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products or address any regulatory changes could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We have outstanding debt that could limit our ability to make expenditures and investments in the conduct of our business and adversely impact our ability to obtain future financing.

We have outstanding debt. Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on or other amounts due in respect of our indebtedness. We may be required to dedicate significant cash flows from operations to make such payments, which could limit our ability to make other expenditures and investments in the conduct of our business. Our indebtedness may also reduce our flexibility in planning for or reacting to changes in our business and market conditions. Our indebtedness also exposes us to interest rate risk, since our debt obligations generally bear interest at variable rates. In addition, we may incur additional indebtedness in the future to meet future financing needs. If we add new debt, the risks described above could increase.

Our credit facility contains restrictive and financial covenants that may limit our operating flexibility.

Our credit facility contains certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, change business locations, make certain investments, make any payments on any subordinated debt, transfer or dispose of assets, amend certain material agreements, and enter into various specified transactions. We, therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lender or prepay the outstanding amount under the credit facility. The credit facility also contains certain financial covenants and financial reporting requirements. Our obligations under the credit facility are secured by substantially all of our assets, excluding intellectual property and investments in foreign subsidiaries. We may not be able to generate or sustain sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under the credit facility. Furthermore, our future working capital, borrowings or equity financing could be unavailable to repay or refinance the amounts outstanding under the credit facility. In the event of a liquidation, our lender would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our lender, were first repaid in full.

Risks Related to Our Common Stock and this Offering

Our results of operations are likely to vary significantly from period to period and be unpredictable. If we fail to meet the expectations of analysts or investors, the market price of our common stock could decline substantially.

Our results of operations have historically varied from period to period, and we expect that this trend will continue. As a result, you should not rely upon our past financial results for any period as indicators of future

 

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performance. Our results of operations in any given period can be influenced by a number of factors, many of which are outside of our control and may be difficult to predict, including the factors described above as well as:

 

    changes in our pricing policies, whether initiated by us or as a result of competition;

 

    the amount and timing of operating costs and capital expenditures related to the operation and expansion of our business;

 

    changes in the growth rate of the broadband services market;

 

    the actual or rumored timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or customers;

 

    our ability to successfully expand our business geographically;

 

    insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our products and services, or confronting our key suppliers, including our sole source suppliers, which could disrupt our supply chain;

 

    our inability to fulfill our customers’ orders due to supply chain delays, access to key commodities or technologies or events that impact our manufacturers or their suppliers;

 

    the cost and possible outcomes of any potential litigation matters;

 

    our overall effective tax rate, including impacts caused by any changes in the valuation of our deferred tax assets and any new legislation or regulatory developments;

 

    increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates; and

 

    general economic conditions, both domestically and in foreign markets.

Any one of the factors above or the cumulative effect of several of the factors described above may result in significant fluctuations in our financial and other results of operations. This variability and unpredictability could result in our failure to meet expectations of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action suits.

An active trading market for our common stock may not develop, and you may not be able to resell your shares of our common stock at or above the initial offering price.

Before this offering, there was no public trading market for our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price, at the time that you would like to sell them, or at all. The initial public offering price of our common stock was determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after the offering. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.

The market price of our common stock could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

    price and volume fluctuations in the overall stock market from time to time;

 

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    volatility in the market price and trading volume of comparable companies;

 

    actual or anticipated changes in our earnings or fluctuations in our results of operations or in the expectations of securities analysts;

 

    announcements of technological innovations, new products, strategic alliances, or significant agreements by us or by competitive vendors;

 

    announcements by our customers regarding significant increases or decreases in capital expenditures;

 

    departure of key personnel;

 

    litigation involving us or that may be perceived as having an impact on our business;

 

    changes in general economic, industry and market conditions and trends;

 

    investors’ general perception of us;

 

    sales of large blocks of our stock; and

 

    announcements regarding further industry consolidation.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

We will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We intend to use the net proceeds from this offering for working capital and general corporate purposes. Because we will have broad discretion in the application of the net proceeds from this offering, our management may fail to apply these funds effectively, which could adversely affect our ability to operate and grow our business. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they publish negative evaluations of our stock or the stock of other companies in our industry, the price of our stock and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by industry or financial analysts. If no analysts or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock or the stock of other companies in our industry, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

Purchasers in this offering will incur immediate and substantial dilution in the book value of their investment as a result of this offering.

If you purchase common stock in this offering, you will incur immediate and substantial dilution of $12.90 per share, representing the difference between the initial public offering price of $13.00 per share and our pro

 

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forma as adjusted net tangible book value per share after giving effect to this offering and the other adjustments described in detail under “Dilution”. Moreover, to the extent outstanding options are exercised, you will incur further dilution. See “Dilution”.

Because we do not expect to declare any dividends on our common stock for the foreseeable future following this offering, investors in this offering may never receive a return on their investment.

Although we have paid special dividends in the past, you should not rely on an investment in our common stock to provide dividend income. Following this offering, we do not anticipate that we will declare any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

After this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 74.5% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering. As a result, these stockholders could have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets, and over the management and affairs of our company. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors or may want us to pursue strategies that deviate from the interests of other stockholders.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the “Underwriters” section of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering and after giving effect to the conversion of all outstanding shares of our convertible preferred stock into 40,381,970 shares of our common stock upon the closing of this offering, we will have 80,097,475 shares of common stock outstanding based on the number of shares outstanding as of October 31, 2017. This includes the 6,000,000 shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 74,097,475 shares, or 92.5% of our outstanding shares after this offering, are currently, and will be following the closing of this offering, restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under federal securities laws with respect to affiliate sales, in the near future as described in the “Shares Eligible for Future Sale” and “Underwriters” sections of this prospectus.

In addition, as of October 31, 2017, there were 15,044,990 shares subject to outstanding options, 861,740 shares subject to outstanding restricted stock unit awards, or RSUs, and an additional 2,839,315 shares reserved for future issuance under our equity incentive plans that will become eligible for sale in the public market to the

 

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extent permitted by any applicable vesting requirements, lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately 33,715,505 shares of our common stock as of October 31, 2017, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.

Anti-takeover provisions in our restated certificate of incorporation and our amended and restated bylaws, as well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our restated certificate of incorporation and amended and restated bylaws and Delaware law contain provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or delay attempts by our stockholders to replace or remove our management. Our corporate governance documents include provisions:

 

    establishing a classified board of directors with staggered three-year terms so that not all members of our board are elected at one time;

 

    providing that directors may be removed by stockholders only for cause and only with a vote of the holders of at least 75% of the issued and outstanding shares of common stock;

 

    limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

    requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

    authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; and

 

    limiting the liability of, and providing indemnification to, our directors and officers.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations with us. Any provision of our restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders. Our restated certificate of incorporation further provides that the federal district courts of the United States of America are the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions could limit our stockholders’ ability to obtain a more favorable judicial forum for disputes with us or our directors, officers or employees.

Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of

 

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fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition, results of operations and prospects.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of this offering, subject to specified conditions. For so long as we remain an emerging growth company, we are permitted, and intend, to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include being permitted to provide reduced disclosure regarding executive compensation and exemptions from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 related to our internal control over financial reporting, and not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditor’s report providing additional information about the audit and the financial statements. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, companies that have not filed a pending registration statement under the Securities Act, had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard, provided that we continue to be an emerging growth company. This may make comparison of our financial statements with the financial statements of another public company that is not an emerging growth company, or an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

We will remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1 billion of non-convertible debt securities over a three-year period.

 

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We have elected to rely on certain phase-in provisions of the Nasdaq Stock Market rules, and, as a result, we will not immediately be subject to certain corporate governance requirements otherwise required of Nasdaq-listed companies.

We are currently relying on the phase-in provisions of the Nasdaq rules for certain corporate governance requirements, including the requirements that we have:

 

    a majority of independent directors on our board of directors;

 

    an audit committee that is composed entirely of independent directors; and

 

    a compensation committee that is composed entirely of independent directors.

Under the phase-in provisions of the Nasdaq rules, a majority of the members of our board of directors must be independent within one year of the date of this offering, and we must comply with the following independence requirements with respect to our audit committee and our compensation committee: (1) one independent member of each committee at the time of this offering, (2) a majority of independent members of each committee within 90 days of the date of this offering and (3) all independent members of each committee within one year of the date of this offering. As of the date of this offering, only two members of our board of directors have been determined to be independent, only one member of our audit committee has been determined to be independent and only one member of our compensation committee has been determined to be independent. During the phase-in periods, our stockholders will not have the same protections afforded to stockholders of companies that comply with Nasdaq’s independence requirements without reliance on the phase-in periods. We will be required to recruit new directors in order to comply with Nasdaq’s independence requirements, and the resultant changes in our board and committee membership may influence our future corporate strategy and operating philosophies and may result in deviations from our current strategy. Additionally, if, during the phase-in periods, we are unable to recruit a sufficient number of new directors who qualify as independent or otherwise comply with Nasdaq rules, we may be subject to delisting by Nasdaq.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our management team and could divert their attention away from the day-to-day management of our business, which could materially adversely affect our business, financial condition, results of operations and prospects.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an emerging growth company. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.

 

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We are currently evaluating our internal controls, including to identify and remediate any deficiencies in those internal controls. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls, which will be required after we are no longer an emerging growth company, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are increasing legal and financial compliance costs and making some activities more time-consuming. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors and qualified executive officers.

Within the initial twelve months of becoming a publicly traded company, we estimate that we will incur approximately $2.0 to $3.0 million of incremental annual costs associated with being a publicly traded company, which we expect will be included in general and administrative expenses. However, it is possible that our actual incremental costs of being a publicly traded company will be higher than we currently estimate. In estimating these costs, we took into account expenses related to insurance, legal, accounting and compliance activities.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

    our ability to anticipate technological shifts;

 

    our ability to generate positive returns on our research and development;

 

    changes in the rate of broadband service providers’ deployment of, and investment in, ultra-broadband network capabilities;

 

    the lack of predictability of revenue due to lengthy sales cycles and the volatility in capital expenditure budgets of broadband service providers;

 

    our ability to maintain and expand gross profit and net income;

 

    the sufficiency of our cash resources and needs for additional financing;

 

    our ability to further penetrate our existing customer base and obtain new customers;

 

    changes in our pricing policies, whether initiated by us or as a result of competition;

 

    the amount and timing of operating costs and capital expenditures related to the operation and expansion of our business;

 

    the actual or rumored timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or customers;

 

    our ability to successfully expand our business domestically and internationally;

 

    insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our products and services, or confronting our key suppliers, which could disrupt our supply chain;

 

    our inability to fulfill our customers’ orders due to supply chain delays, access to key commodities or technologies or events that impact our manufacturers or their suppliers;

 

    future accounting pronouncements or changes in our accounting policies;

 

    stock-based compensation expense;

 

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    the cost and possible outcomes of any potential litigation matters;

 

    our overall effective tax rate, including impacts caused by the relative proportion of foreign to U.S. income, the amount and timing of certain employee stock-based compensation transactions, changes in the valuation of our deferred tax assets and any new legislation or regulatory developments;

 

    increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates;

 

    general economic conditions, both domestically and in foreign markets;

 

    our ability to obtain and maintain intellectual property protection for our products; and

 

    our use of proceeds from this offering.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

 

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INDUSTRY AND OTHER DATA

Information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, is based on information from independent industry analysts and third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions, which we believe to be reasonable, made by us based on such data, as well as our knowledge of our industry and solutions. This information involves a number of assumptions and limitations, and we caution you not to give undue weight to such estimates. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or us and contained in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of our common stock in this offering will be approximately $68.9 million, based on the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters fully exercise their option to purchase additional shares in this offering, we estimate that our net proceeds will be approximately $79.8 million.

The principal purposes of this offering are to create a public market for our common stock, facilitate access to the public equity markets, increase our visibility in the marketplace and obtain additional capital.

We intend to use the net proceeds from this offering for working capital and general corporate purposes. In addition, we believe that opportunities may exist from time to time to expand our current business through acquisitions of or investments in complementary products, technologies or businesses. While we have no agreements, commitments or understandings for any specific acquisitions at this time, we may use a portion of the net proceeds from this offering for these purposes. We do not intend to use any of the net proceeds from this offering to pay the special dividend of $43.0 million declared by our board of directors that is contingent upon, and payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, or the further cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments approved by our board of directors for payment in connection with this dividend in the event that it is paid.

Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations, the anticipated growth of our business, and the availability and terms of alternative financing sources to fund our growth. Pending use of the net proceeds as described above, we intend to invest the proceeds in short-term, interest-bearing obligations, investment-grade securities, certificates of deposit or direct or guaranteed obligations of the U.S. government. The goal with respect to the investment of these net proceeds will be capital preservation and liquidity so that these funds are readily available to fund our operations.

 

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DIVIDEND POLICY

We declared special dividends in November 2014, June 2016, December 2016 and May 2017. The November 2014 special dividend totaled $27.6 million in cash payments to our stockholders. In connection with the November 2014 special dividend, our board of directors also approved cash payments totaling $2.4 million to be made to holders of our stock options and stock appreciation rights as equitable adjustments to the holders of such instruments in accordance with the provisions of our equity incentive plans. The June 2016 special dividend totaled $43.1 million in cash payments to our stockholders. In connection with the June 2016 special dividend, our board of directors also approved cash payments totaling $6.9 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments to the holders of such instruments in accordance with the provisions of our equity incentive plans. The December 2016 special dividend totaled $171.4 million in cash payments to our stockholders. In connection with the December 2016 special dividend, our board of directors also approved cash payments totaling $28.6 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments to the holders of such instruments in accordance with the provisions of our equity incentive plans. The May 2017 special dividend totaled $87.1 million in cash payments to our stockholders. In connection with the May 2017 special dividend, our board of directors also approved cash payments totaling $12.9 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments to the holders of such instruments in accordance with the provisions of our equity incentive plans.

Although we have declared and paid the special dividends described above and have declared an additional special dividend of $43.0 million that is contingent upon, and payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, and approved further cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments in connection with this dividend in the event that it is paid, we do not anticipate declaring cash dividends following this offering. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant. Our credit facility contains covenants that limit our ability to pay dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2017:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to:

 

    the automatic conversion of all outstanding shares of our convertible preferred stock into 40,381,970 shares of common stock upon the closing of this offering;

 

    the accrual of an additional special dividend of $43.0 million, which was declared by our board of directors on November 30, 2017, contingent upon, and to be payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, and cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments approved by our board of directors for payment in connection with the additional special dividend in the event that it is paid; and

 

    the filing and effectiveness of our restated certificate of incorporation; and

 

    on a pro forma as adjusted basis, giving further effect to our sale of 6,000,000 shares of common stock in this offering at the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

This information should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of and other financial information contained in this prospectus.

 

    As of September 30, 2017  
    Actual     Pro Forma     Pro Forma
As Adjusted
 
   

(in thousands, except share and per

share amounts)

 

Cash and cash equivalents

  $ 183,519     $ 183,519     $ 254,426  
 

 

 

   

 

 

   

 

 

 

Long-term debt, including current portion, net of unamortized debt issuance costs

  $ 298,147     $ 298,147     $ 298,147  
 

 

 

   

 

 

   

 

 

 

Convertible preferred stock (Series A, B and C), $0.001 par value; 6,000,000 shares authorized, 4,038,197 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    97,479              
 

 

 

   

 

 

   

 

 

 

Stockholders’ equity (deficit):

     

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

                 

Common stock, $0.001 par value; 100,000,000 shares authorized, 33,701,135 shares issued and outstanding, actual; 500,000,000 shares authorized, 74,083,105 shares issued and outstanding, pro forma; 500,000,000 shares authorized, 80,083,105 shares issued and outstanding, pro forma as adjusted

    34       74       80  

Additional paid-in capital

          47,436       116,310  

Accumulated other comprehensive loss

    (460     (460     (460

Accumulated deficit

    (107,780     (107,780     (107,780
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (108,206     (60,730     8,150  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 287,420     $ 237,417     $ 306,297  
 

 

 

   

 

 

   

 

 

 

 

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The table above does not include:

 

    145,830 shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Incentive Plan as of September 30, 2017, with a weighted-average exercise price of $0.25 per share;

 

    14,970,580 shares of common stock issuable upon the exercise of stock options outstanding under our 2011 Stock Incentive Plan as of September 30, 2017, with a weighted-average exercise price of $4.25 per share;

 

    861,740 shares of common stock issuable upon the vesting of restricted stock units outstanding under our 2011 Stock Incentive Plan as of September 30, 2017;

 

    2,782,265 shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan as of September 30, 2017, which plan terminated as to new awards immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, at which point the shares of common stock that remained reserved for issuance under our 2011 Stock Incentive Plan became available for issuance under our 2017 Stock Incentive Plan; and

 

    7,160,685 additional shares of common stock available for future issuance under our 2017 Stock Incentive Plan, of which we expect to grant options to purchase an aggregate of 625,000 shares, with an exercise price per share equal to the initial public offering price in this offering, to certain of our employees and restricted stock units for an aggregate of 34,615 shares to one of our non-employee directors, in each case upon the commencement of trading of our common stock on the Nasdaq Global Select Market.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Our historical net tangible book value (deficit) as of September 30, 2017 was $(110.3) million, or $(3.27) per share of our common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and convertible preferred stock, which is not included within our stockholders’ deficit. Historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the 33,701,135 shares of our common stock outstanding as of September 30, 2017.

Our pro forma net tangible book value (deficit) as of September 30, 2017 was $(62.8) million, or $(0.85) per share of our common stock. Pro forma net tangible book value (deficit) represents the amount of our total tangible assets less our total liabilities, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 40,381,970 shares of our common stock upon the closing of this offering and (ii) the accrual of an additional special dividend of $43.0 million, which was declared by our board of directors on November 30, 2017, contingent upon, and to be payable following, the closing of this offering to the holders of record of our stock as of November 30, 2017, and cash payments of $7.0 million to be made to holders of our stock options, stock appreciation rights and restricted stock units as equitable adjustments approved by our board of directors for payment in connection with the additional special dividend in the event that it is paid. Pro forma net tangible book value (deficit) per share represents our pro forma net tangible book value divided by the total number of shares outstanding as of September 30, 2017, after giving effect to the automatic conversion of all outstanding shares of convertible preferred stock upon the closing of this offering.

After giving further effect to our sale of 6,000,000 shares of common stock in this offering at the initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2017 would have been $8.2 million, or $0.10 per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $0.95 to existing stockholders and immediate dilution per share of $12.90 to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

     $ 13.00  

Historical net tangible book value (deficit) per share as of September 30, 2017

   $ (3.27  

Increase per share attributable to the pro forma adjustments described above

     2.42    
  

 

 

   

Pro forma net tangible book value (deficit) per share as of September 30, 2017

     (0.85  

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing common stock in this offering

     0.95    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       0.10  
    

 

 

 

Dilution per share to new investors purchasing common stock in this offering

     $ 12.90  
    

 

 

 

If the underwriters fully exercise their option to purchase additional shares of common stock in this offering, our pro forma as adjusted net tangible book value per share after this offering would be $0.23 per share, and the dilution per share to new investors purchasing common stock in this offering would be $12.77 per share, in each case based on the initial public offering price of $13.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on the pro forma as adjusted basis described above, the total number of shares of common stock purchased from us after giving effect to the conversion of our convertible preferred

 

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stock into common stock, the total consideration paid or to be paid, and the average price per share paid or to be paid by existing stockholders and by new investors in this offering at the initial public offering price of $13.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     74,083,105        92.5   $ 105,850,268        57.6   $ 1.43  

New investors

     6,000,000        7.5       78,000,000        42.4     $ 13.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     80,083,105        100.0   $ 183,850,268        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

The table above assumes no exercise of the underwriters’ option to purchase additional shares in this offering. If the underwriters fully exercise their option to purchase additional shares in this offering, the number of shares of our common stock held by new investors purchasing common stock in this offering would be increased to 8.5% of the total number of shares of common stock outstanding after this offering, and the number of shares held by existing stockholders would be reduced to 91.5% of the total number of shares of common stock outstanding after this offering.

The table above does not include:

 

    145,830 shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Incentive Plan as of September 30, 2017, with a weighted-average exercise price of $0.25 per share;

 

    14,970,580 shares of common stock issuable upon the exercise of stock options outstanding under our 2011 Stock Incentive Plan as of September 30, 2017, with a weighted-average exercise price of $4.25 per share;

 

    861,740 shares of common stock issuable upon the vesting of restricted stock units outstanding under our 2011 Stock Incentive Plan as of September 30, 2017;

 

    2,782,265 shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan as of September 30, 2017, which plan terminated as to new awards immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, at which point the shares of common stock that remained reserved for issuance under our 2011 Stock Incentive Plan became available for issuance under our 2017 Stock Incentive Plan; and

 

    7,160,685 additional shares of common stock available for future issuance under our 2017 Stock Incentive Plan, of which we expect to grant options to purchase an aggregate of 625,000 shares, with an exercise price per share equal to the initial public offering price in this offering, to certain of our employees and restricted stock units for an aggregate of 34,615 shares to one of our non-employee directors, in each case upon the commencement of trading of our common stock on the Nasdaq Global Select Market.

To the extent any of the outstanding options are exercised, you will experience further dilution, which may be significant. To the extent all of such outstanding options had been exercised as of September 30, 2017, the pro forma as adjusted net tangible book value per share after this offering would be $0.75, and the total dilution per share to new investors purchasing common stock in this offering would be $12.25.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or securities convertible into equity, the issuance of these securities may result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present selected consolidated financial and other financial data for our business. The selected consolidated statement of operations data presented below for the years ended December 31, 2014, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2014 have been derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2016 and 2017 and the selected consolidated balance sheet data as of September 30, 2017 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, the unaudited data reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results are not necessarily indicative of the results to be expected in any future period, and the results for any interim period are not necessarily indicative of results to be expected in any full year. You should read the following selected consolidated financial data in conjunction with the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
          2014                 2015                 2016           2016     2017  
    (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

         

Revenue:

         

Product

  $ 194,358     $ 247,588     $ 279,223     $ 191,763     $ 205,155  

Service

    16,920       24,862       36,905       25,139       28,458  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    211,278       272,450       316,128       216,902       233,613  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue(1):

         

Product

    59,088       74,349       89,340       68,793       62,865  

Service

    5,917       5,265       8,477       5,983       3,637  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    65,005       79,614       97,817       74,776       66,502  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    146,273       192,836       218,311       142,126       167,111  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

    25,481       37,155       49,210       37,213       43,912  

Sales and marketing(1)

    21,409       36,157       36,114       27,289       26,983  

General and administrative(1)

    10,346       16,453       18,215       13,532       14,387  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    57,236       89,765       103,539       78,034       85,282  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    89,037       103,071       114,772       64,092       81,829  

Other income (expense), net

    (2,942     (1,408     921       953       (9,858
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

    86,095       101,663       115,693       65,045       71,971  

Provision for income taxes

    26,387       33,742       27,025       16,228       12,334  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 59,708     $ 67,921     $ 88,668     $ 48,817     $ 59,637  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share or common share equivalent

  $ 0.3835     $     $ 2.9197     $ 0.5891     $ 1.1774  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(2):

         

Basic

  $ 23,287     $ 27,302     $ (35,119   $ 19,928     $ 7,689  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 23,843     $ 30,402     $ (35,119   $ 20,006     $ 7,689  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
           2014                  2015                  2016           2016      2017  
     (in thousands, except per share amounts)  

Net income (loss) per share attributable to common stockholders(2):

             

Basic

   $ 0.78      $ 0.86      $ (1.07   $ 0.61      $ 0.23  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.73      $ 0.78      $ (1.07   $ 0.47      $ 0.18  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(2):

             

Basic

     29,983        31,740        32,864       32,822        33,657  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     32,683        38,809        32,864       42,137        43,198  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

         $ 1.12        $ 0.75  
        

 

 

      

 

 

 

Diluted

         $ 1.00        $ 0.67  
        

 

 

      

 

 

 

Weighted-average shares used to compute pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

           79,246          80,039  
        

 

 

      

 

 

 

Diluted

           88,933          89,579  
        

 

 

      

 

 

 

Other Financial Data:

             

Non-GAAP net income(3)

   $ 62,145      $ 72,812      $ 95,032     $ 53,301      $ 64,520  

Adjusted EBITDA(3)

   $ 94,632      $ 115,541      $ 129,084     $ 74,517      $ 93,298  

 

(1) Includes stock-based compensation expense related to stock options, stock appreciation rights and restricted stock units granted to employees and non-employee consultants as follows:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2014      2015      2016        2016          2017    
     (in thousands)  

Cost of revenue

   $ 161      $ 143      $ 237      $ 178      $ 202  

Research and development expense

     852        1,843        2,306        1,637        1,535  

Sales and marketing expense

     598        775        1,147        846        801  

General and administrative expense

     380        4,560        4,614        3,313        3,355  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,991      $ 7,321      $ 8,304      $ 5,974      $ 5,893  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 14 to our audited consolidated financial statements and Note 12 to our unaudited condensed consolidated financial statements, both included elsewhere in this prospectus, for an explanation of the calculations of basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income per share attributable to common stockholders.
(3) See “—Non-GAAP Financial Measures” for information regarding our use of these non-GAAP financial measures and a reconciliation of such measures to comparable financial measures calculated and presented in accordance with GAAP.

 

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     As of December 31,     As of
September 30,
2017
 
     2014      2015      2016    
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash, cash equivalents and marketable securities

   $ 77,155      $ 92,496      $ 343,946     $ 183,519  

Working capital(1)

     99,237        162,981        286,652       247,182  

Total assets

     230,815        283,097        583,035       392,235  

Long-term debt, including current portion, net of unamortized debt issuance costs

            7,795        299,751       298,147  

Total liabilities

     124,636        103,160        557,259       402,962  

Convertible preferred stock

     97,479        97,479        97,479       97,479  

Total stockholders’ equity (deficit)

     8,700        82,458        (71,703     (108,206

 

(1) We define working capital as current assets less current liabilities.

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, we monitor and consider non-GAAP net income and adjusted EBITDA. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

Non-GAAP net income. We define non-GAAP net income as net income as reported in our consolidated statements of operations, excluding the impact of stock-based compensation expense and changes in the fair value of the warrant liability, both of which are non-cash charges, and the tax effect on those excluded items applied using our effective income tax rate for the period. We have presented non-GAAP net income because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. The presentation of non-GAAP net income also allows our management and board of directors to make additional comparisons of our results of operations to other companies in our industry.

Adjusted EBITDA. We define adjusted EBITDA as our net income, excluding the impact of stock-based compensation expense; other income (expense), net, which includes changes in the fair value of the warrant liability; depreciation and amortization expense; and our provision for income taxes. We have presented adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance.

We use these non-GAAP financial measures to evaluate our operating performance and trends and make planning decisions. We believe that each of these non-GAAP financial measures helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of each non-GAAP financial measure. Accordingly, we believe that these financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.

Our non-GAAP financial measures are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures rather than net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Some of these limitations are:

 

    we exclude stock-based compensation expense from each of our non-GAAP financial measures as it has recently been, and will continue to be for the foreseeable future, a significant recurring non-cash expense for our business and an important part of our compensation strategy;

 

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    we exclude the changes in the fair value of a warrant liability from our non-GAAP net income and adjusted EBITDA measures as it had been a recurring non-cash charge in our statement of operations until the warrant was exercised in March 2014;

 

    adjusted EBITDA excludes depreciation and amortization expense and, although this is a non-cash expense, the assets being depreciated and amortized may have to be replaced in the future;

 

    adjusted EBITDA does not reflect the cash requirements necessary to service interest on our debt or the cash received from our interest-bearing financial assets, both of which impact the cash available to us, and does not reflect foreign currency transaction gains and losses, all of which are reflected in other income (expense), net;

 

    adjusted EBITDA does not reflect income tax payments that reduce cash available to us; and

 

    the expenses and other items that we exclude in our calculations of non-GAAP net income and adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from non-GAAP net income and adjusted EBITDA when they report their operating results.

In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

The following tables reconcile non-GAAP net income and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2014     2015     2016     2016     2017  
     (in thousands)  

Reconciliation of Net Income to Non-GAAP Net Income:

          

Net income

   $ 59,708     $ 67,921     $ 88,668     $ 48,817     $ 59,637  

Stock-based compensation

     1,991       7,321       8,304       5,974       5,893  

Change in fair value of warrant liability

     1,523                          

Tax effect of excluded items

     (1,077     (2,430     (1,940     (1,490     (1,010
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 62,145     $ 72,812     $ 95,032     $ 53,301     $ 64,520  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2014      2015      2016     2016     2017  
     (in thousands)  

Reconciliation of Net Income to Adjusted EBITDA:

            

Net income

   $ 59,708      $ 67,921      $ 88,668     $ 48,817     $ 59,637  

Stock-based compensation

     1,991        7,321        8,304       5,974       5,893  

Depreciation and amortization

     3,604        5,149        6,008       4,451       5,576  

Other income (expense), net

     2,942        1,408        (921     (953     9,858  

Provision for income taxes

     26,387        33,742        27,025       16,228       12,334  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 94,632      $ 115,541      $ 129,084     $ 74,517     $ 93,298  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section titled “Risk Factors.” In this discussion, we use financial measures that are considered non-GAAP financial measures under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is included elsewhere in this prospectus. Investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.

Overview

We provide a suite of software-centric infrastructure solutions that allow cable service providers to deliver voice, video and data services over a single platform at multi-gigabit speeds. In addition, we offer solutions for next-generation distributed and virtualized architectures in cable operator, fixed telecom and wireless networks. Our innovative solutions enable customers to cost-effectively and dynamically increase network speed, add bandwidth capacity and new services for consumers and enterprises, reduce network complexity and reduce operating and capital expenditures.

We were founded in 2003 with the vision of enabling consumers and enterprises to enjoy ultra-fast speeds and enhanced digital content experiences through their phones, tablets, TVs and other connected devices at home or on the go with ubiquitous and seamless access, regardless of how the user is accessing the Internet. Our forward-looking design and investment approach, coupled with our proven product development track record, has enabled us to deliver fully featured next-generation solutions in advance of competitors. For example, we believe we were:

 

    the first to market (2005) with a software-centric cable solution leveraging the programmability of field programmable gate arrays, or FPGAs, and general purpose processors;

 

    the first to market (2008) with a commercially deployed, fully qualified Data Over Cable Service Interface Specification, or DOCSIS, 3.0 cable modem termination system;

 

    the first to market (2012) with a commercially deployed converged cable access platform, or CCAP, delivering IP voice, digital video and data over a single port;

 

    the first to market (2015) with commercially deployed DOCSIS 3.1-compliant solutions supporting speeds of up to 10 gigabits per second; and

 

    the first to market (2016) with a commercially deployable remote-PHY, or R-PHY, solution.

Our introduction of our CCAP products created substantial growth. For example, our revenue and income from operations were only $67.0 million and $10.0 million, respectively, for the year ended December 31, 2013 as compared to $316.1 million and $114.8 million, respectively, for the year ended December 31, 2016. Our solutions are commercially deployed in more than 70 countries by more than 400 customers, including regional service providers as well as some of the world’s largest Tier 1 broadband service providers, serving millions of subscribers.

We believe that the shift to software-centric ultra-broadband networks and fixed and wireless network convergence presents us with a compelling market opportunity. We intend to maintain our technological leadership through the enhancement of existing products and the development of new products in both our current and adjacent markets. By investing in research and development, we believe we will be well positioned to continue our rapid growth and take advantage of the large market opportunity across fixed and wireless networks. We also intend to continue to expand our sales and marketing initiatives in key geographies.

 

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We have achieved significant growth and profitability. For the year ended December 31, 2015, we generated revenue of $272.5 million, net income of $67.9 million and adjusted EBITDA of $115.5 million, representing increases of 29.0%, 13.8% and 22.1%, respectively, from the corresponding amounts for the year ended December 31, 2014. For the year ended December 31, 2016, we generated revenue of $316.1 million, net income of $88.7 million and adjusted EBITDA of $129.1 million, representing increases of 16.0%, 30.5% and 11.7%, respectively, from the corresponding amounts for the year ended December 31, 2015. For the nine months ended September 30, 2017, we generated revenue of $233.6 million, net income of $59.6 million and adjusted EBITDA of $93.3 million, representing increases of 7.7%, 22.2% and 25.2%, respectively, from the corresponding amounts for the nine months ended September 30, 2016.

Our Business Model

We derive revenue from sales of our products and services. We generate product revenue primarily from sales of our broadband products. The majority of our product revenue is derived from sales of our CCAP solutions, particularly our C100G CCAP. We generate service revenue primarily from sales of maintenance and support services, which end customers typically purchase in conjunction with our products, and, to a lesser extent, from sales of professional services and extended warranty services.

Since shipping our first products in 2005, our cumulative end-customer base has grown significantly. Our revenue and installed base of equipment has increased significantly with the introduction of our CCAP solution in 2012 and our DOCSIS 3.1 capabilities in 2015, both of which run on our Axyom software platform.

We offer a scalable broadband solution that can meet the evolving bandwidth needs of our customers and their subscribers.

Our sales model focuses on the following key areas:

 

    Adding New Customers. With several thousand broadband service providers existing globally, we believe that we have opportunities for growth by acquiring new customers in all of the geographic regions in which we compete. Potential new customers include broadband service providers that provide fixed or wireless services or both. We intend to add new customers over time by continuing to invest in our technology and our sales team to capitalize on these new opportunities. Our sales team works closely with prospective customers to educate them on and demonstrate to them the technical and business merits of our products, including the ability to capture new revenue opportunities and realize cost savings through the use of our broadband solutions. For example, our CCAP solutions converge delivery of voice, video and data services over a single port, resulting in increased capacity and scalability, reduced space and energy consumption and simplified operations and engineering, and the DOCSIS 3.1 capabilities of our CCAP solutions further improve network capacity and throughput by utilizing RF modulation techniques that leverage existing broadband spectrum more efficiently, freeing up spectrum on our customers’ networks for other potential revenue-generating services. We build relationships with prospective customers at multiple levels and within numerous departments in a customer’s organization and, through the sales process, we strive to be a strategic business partner for our customers. We believe that the technological strengths and capabilities of our broadband solutions and the introduction and implementation of next-generation standards, such as DOCSIS 3.1, have been, and will continue to be, an important factor in our ability to add new customers.

 

    Expanding Sales to Our Existing Customer Base. Our first installation in a cable service provider’s network frequently involves deploying our broadband products in only a portion of the provider’s network and with only a fraction of the capacity of our products enabled at the time of initial installation. Over time, our customers have generally expanded the use of our solutions to other areas of their networks to increase network capacity. Capacity expansions are accomplished either by deploying additional systems or line cards, or by our remote enablement of additional channels through the use of software. Sales of additional line cards and software-based capacity expansions generate higher gross margins than our initial hardware-based deployments.

 

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We work with our existing customers to identify expansion and cross selling opportunities. Existing customers are familiar with and have benefited from the operational and economic benefits of our broadband products, and therefore, sales cycles for existing customers are generally shorter. We believe expansion and cross selling opportunities with existing customers are significant given their existing and expected infrastructure spend as service providers leverage their investment in our platform to deliver new services to their customers. Our top 20 customers over the period from 2013 to September 30, 2017 made subsequent purchases of our products and services in a majority of the fiscal quarters following the quarter in which they made their initial purchases. The first quarter of purchases is typically the beginning of the deployment of our broadband products. Approximately 54% of all customers that have made initial purchases from us since January 1, 2013 have made additional purchases from us after the initial quarter of purchase. These customers purchased on average 3.6 times, 6.2 times, 9.9 times and 14.2 times the value of their initial quarter purchases during the four, eight, 12 and 16 quarters, respectively, following the quarter of initial purchase. Among all customers that have made initial purchases from us since January 1, 2013, the 20 largest, as measured by their total purchases from us, purchased on average 4.0 times, 7.3 times, 11.7 times and 23.5 times the value of their initial quarter purchases during the four, eight, 12 and 16 quarters, respectively, following the quarter of initial purchase. These 20 customers accounted for the substantial majority of purchases by all customers that made initial purchases from us over that period, and all of these 20 customers have made subsequent purchases from us. These analyses are based on billings, which represent amounts invoiced to customers for products shipped, or for services performed or to be performed, which will be recorded as either revenue or deferred revenue depending on the nature of the arrangement.

Our solutions are commercially deployed in over 70 countries by more than 400 customers. We expect that a substantial portion of our future sales will be follow-on sales to existing customers. During the years ended December 31, 2014, 2015 and 2016 and the nine months ended September 30, 2017, sales to existing customers represented 78%, 63%, 74% and 98% of our revenue, respectively. Our business and results of operations will depend on our ability to sell additional products to our existing customer base.

 

    Selling New Products. Our results of operations have been, and we believe will continue to be, affected by our ability to quickly and effectively design and sell products with improved performance and increased functionality. As networks and standards for broadband solutions evolve, we aim to deliver new products prior to our competition. For example, the introduction of our DOCSIS 3.0 broadband solution, our CCAP solution and our DOCSIS 3.1 capabilities allowed us to obtain new customers, increase our sales to existing customers, increase our revenue and capture market share. We aim to increase our revenue by enabling customers to transition from previously deployed data and video solutions to our integrated CCAP solutions, which can incorporate DOCSIS 3.1 standards as well as our remote-PHY distributed access solution. Over the last several years, we have made substantial investments to extend our Axyom software platform to serve the wireless market, and we expect to generate increased revenue in the future from sales of wireless solutions to new and existing customers. We have also developed solutions for telecommunications service providers. Our ability to sustain our revenue growth will depend, in part, upon our sales of new products.

We market and sell our products and services through our direct global sales force, supported by sales agents, and through resellers. A majority of our revenue is derived from direct sales, which generate higher gross margins than sales made through resellers. Our sales organization includes systems engineers with deep technical expertise that provide pre-sales technical support. These systems engineers also assist with post-sales support. Our resellers receive an order from an end customer prior to placing an order with us, and we confirm the identification of or are aware of the end customer prior to accepting such orders. We use sales agents to assist our direct global sales force in the sales process with certain customers primarily located in the Latin America and Asia-Pacific regions. If a sales agent is engaged in the sales process, we receive the order directly from and sell the products and services directly to the end customer, and we pay a commission to the sales agent, calculated as a percentage of the related customer payment.

 

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Each of our sales teams is responsible for a geographic territory and/or has responsibility for a number of major direct end-customer accounts. We have a diverse, global customer base and our revenue by geographic region fluctuates from period to period based on the timing of customer projects. The percentages of our revenue derived from customers in each geographic region were as follows:

 

     Year Ended December 31,     Nine Months Ended September 30,  
         2014             2015             2016             2016             2017      

Revenue by geographic region:

    

North America

     50.8     20.0     58.2     59.2     53.7

Latin America

     14.2     32.1     15.0     15.2     13.5

Europe, Middle East and Africa

     15.3     27.8     14.3     12.6     19.2

Asia-Pacific

     19.7     20.1     12.5     13.0     13.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Financial Measures

In addition to the measures presented in our consolidated financial statements, we use the following non-GAAP financial measures to evaluate our operating performance, to identify trends affecting our business, and to establish budgets and develop operational goals for managing our business.

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2014      2015      2016          2016              2017      
     (in thousands)  

Non-GAAP net income

   $ 62,145      $ 72,812      $ 95,032      $ 53,301      $ 64,520  

Adjusted EBITDA

   $ 94,632      $ 115,541      $ 129,084      $ 74,517      $ 93,298  

These financial measures are non-GAAP financial measures. Please see “Selected Consolidated Financial Data—Non-GAAP Financial Measures” for information regarding the limitations of using these financial measures and for reconciliations of non-GAAP net income and adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Key Components of Our Results of Operations

Revenue

We generate product revenue from sales of our software-centric broadband products, including our CCAP solution and our DOCSIS 3.1 capabilities. The majority of our revenue is derived from sales of our CCAP solutions, particularly our C100G CCAP. We also generate product revenue from sales of additional line cards and software-based capacity expansions.

Our product revenue consisted of the following:

 

    Year Ended December 31,  
    2014     2015     2016  
    Sales of
Broadband
Products
    Capacity
Expansions
    Total
Product
Revenue
    Sales of
Broadband
Products
    Capacity
Expansions
    Total
Product
Revenue
    Sales of
Broadband
Products
    Capacity
Expansions
    Total
Product
Revenue
 
    (dollars in thousands)  

Product revenue

  $ 187,218     $ 7,140     $ 194,358     $ 226,703     $ 20,885     $ 247,588     $ 209,751     $ 69,472     $ 279,223  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of product revenue

    96.3     3.7     100.0     91.6     8.4     100.0     75.1     24.9     100.0

 

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     Nine Months Ended September 30,  
     2016     2017  
     Sales of
Broadband
Products
    Capacity
Expansions
    Total
Product
Revenue
    Sales of
Broadband
Products
    Capacity
Expansions
    Total
Product
Revenue
 
     (dollars in thousands)  

Product revenue

   $ 160,711     $ 31,052     $ 191,763     $ 141,799     $ 63,356     $ 205,155  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of product revenue

     83.8     16.2     100.0     69.1     30.9     100.0

We generate service revenue from sales of initial maintenance and support services contracts, which are typically purchased by end customers in conjunction with our products, and from our customers’ subsequent annual renewals of those contracts. We offer maintenance and support services under renewable, fee-based contracts, which include telephone support and unspecified software upgrades and updates provided on a when-and-if-available basis. To a lesser extent, we generate service revenue from sales of professional services, such as installation and configuration, and extended warranty services.

The sale of our software-centric broadband products generally includes a 90-day warranty on the software and a one-year warranty on the hardware component of the products, which includes repair or replacement of the applicable hardware. We record a warranty accrual for the initial software and hardware warranty included with our product sales and do not defer revenue. In addition, in conjunction with customers’ renewals of maintenance and support services contracts, we offer an extended warranty for periods typically of one to three years for agreed-upon fees, which we record as service revenue.

Cost of Revenue

Our cost of product revenue consists primarily of the costs of procuring goods, such as chassis and line cards embedded with FPGAs, from our contract manufacturers and other suppliers. In addition, cost of product revenue includes salary and benefit expenses, including stock-based compensation, for manufacturing and supply-chain management personnel, allocated facilities-related costs, estimated warranty costs, third-party logistics costs, and estimated costs associated with excess and obsolete inventory.

Our cost of service revenue includes salary and benefit expenses, including stock-based compensation, for our maintenance and support services and professional services personnel, fees incurred for subcontracted professional services provided to our customers, and allocated facilities-related costs.

Gross Profit

Our product gross profit and gross margin have been, and may in the future be, influenced by several factors, including changes in the volume of our software-centric broadband products sold, product configuration, sales of capacity expansions, geographic location of our customers, pricing due to competitive pressure, estimated warranty costs, inventory obsolescence, and favorable and unfavorable changes in inventory production volume and component costs. As some products mature, the average selling prices of those products may decline. Our service gross profit and gross margin have been, and may in the future be, influenced by the amount and timing of renewals of maintenance and support services contracts by customers and, to a lesser extent, the amount of professional services ordered by customers and performed by us. We expect that our gross margin will remain relatively stable in the near term, subject to quarter-to-quarter fluctuation.

Operating Expenses

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

 

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Research and Development Expenses

Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for our employees engaged in research, design and development activities. Research and development expenses also include project-specific engineering services purchased from external vendors, prototype costs, depreciation expense, amortization of purchased intellectual property, allocated facilities-related costs and travel expenses.

We expect that our research and development costs will continue to increase in absolute dollars while remaining relatively stable as a percentage of revenue in the near term as we continue to make significant investments to enhance our software-centric broadband products and develop new software-centric broadband products and technologies, including our new wireless solutions.

Sales and Marketing Expenses

Sales and marketing expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in sales and marketing activities. Sales and marketing expenses also include commissions, calculated as a percentage of the related customer payment, to sales agents that assist us in the sales process with certain customers primarily located in the Latin America and Asia-Pacific regions. These sales agent commissions fluctuate from period to period based on the amount and timing of sales to the customers subject to sales agent commissions. Sales and marketing expenses also include marketing activities, such as trade shows, marketing programs and promotional materials, as well as allocated facilities-related costs. We are also establishing a new sales force to sell and undertake new marketing programs to promote our new wireless solutions.

We expect that our sales and marketing expenses will increase in absolute dollars while remaining relatively stable as a percentage of revenue in the near term as we continue to make investments in our sales and marketing organizations and expand our marketing programs and efforts to increase the market awareness and sales of our products and services.

General and Administrative Expenses

General and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees engaged in general and administrative activities, as well as professional service fees, allocated facilities-related costs, insurance, travel and bad debt expenses related to accounts receivable.

We expect that our general and administrative expenses will increase in absolute dollars while remaining relatively stable as a percentage of revenue in the near term primarily due to our continued growth and the increased cost of compliance associated with being a public company.

Other Income (Expense), Net

Other income (expense), net consists of interest income from our investments in short-term financial instruments, such as certificates of deposit, money market mutual funds and commercial paper, and interest expense associated with our term loan facility, the mortgage on our corporate office and debt maintenance costs related to our revolving credit facility. Other income (expense), net also includes realized and unrealized gains and losses from foreign currency transactions. We hedge certain significant transactions denominated in currencies other than the U.S. dollar, and we expect to continue to do so to minimize our exposure to foreign currency fluctuations.

We classified warrants for the purchase of shares of our common stock as a liability on our consolidated balance sheets due to the anti-dilution provisions in those warrants. The warrants were initially recorded at fair value on date of issuance and were subsequently remeasured to fair value at each balance sheet date. Changes in

 

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fair value of these warrants were recognized as a component of other income (expense), net in our consolidated statements of operations and comprehensive income, and we continued to adjust the liability for changes in fair value until the warrants were exercised on March 31, 2014.

We expect that our other income (expense), net for 2017 will include approximately $16.2 million of additional interest expense as compared to 2016 attributable to borrowings under our term loan facility entered into in December 2016. As a result of this expected increase, we expect that interest expense for 2017 will be higher than for 2016 both in absolute dollars and as a percentage of revenue.

Provision for Income Taxes

We are subject to income taxes in the United States and the foreign jurisdictions in which we do business. These foreign jurisdictions have statutory tax rates different from those in the United States. Our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the utilization of foreign tax credits and research and development tax credits, changes in corporate structure, the amount and timing of certain employee stock-based compensation transactions, changes in the valuation of our deferred tax assets and changes in tax laws and interpretations. We plan to regularly assess the likelihood of outcomes that could result from the examination of our tax returns by the U.S. Internal Revenue Service, or IRS, and other tax authorities to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our then-current expectations, charges or credits to our provision for income taxes may become necessary. Any such adjustments could have a significant effect on our results of operations.

In the third quarter of 2016, we began the process of restructuring our international operations, which over time is expected to reduce our effective tax rate; however, due to the timing of this restructuring program, the impact on our effective tax rate in 2016 was not fully realized. In addition, our 2016 effective tax rate and provision for income taxes reflected a non-recurring tax benefit for equitable adjustment payments to holders of our stock-based awards in connection with dividends declared by our board of directors. Our 2017 effective tax rate reflects the benefit of our international restructuring as well as a non-recurring tax benefit for equitable adjustment payments to holders of our stock based awards in connection with dividends declared by our board of directors. We expect that the favorable impact of the restructuring of our international operations on our effective tax rates will continue in future periods, subject to period to period variability related to the geographic distribution of earnings in foreign jurisdictions with statutory tax rates different from those in the United States.

 

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Results of Operations

The following tables set forth our consolidated results of operations in dollar amounts and as percentage of total revenue for the periods shown:

 

     Year Ended December 31,      Nine Months Ended
September 30,
 
     2014     2015     2016            2016                  2017        
     (in thousands)  

Revenue:

            

Product

   $ 194,358     $ 247,588     $ 279,223      $ 191,763      $ 205,155  

Service

     16,920       24,862       36,905        25,139        28,458  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     211,278       272,450       316,128        216,902        233,613  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Cost of revenue(1):

            

Product

     59,088       74,349       89,340        68,793        62,865  

Service

     5,917       5,265       8,477        5,983        3,637  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total cost of revenue

     65,005       79,614       97,817        74,776        66,502  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     146,273       192,836       218,311        142,126        167,111  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

            

Research and development(1)

     25,481       37,155       49,210        37,213        43,912  

Sales and marketing(1)

     21,409       36,157       36,114        27,289        26,983  

General and administrative(1)

     10,346       16,453       18,215        13,532        14,387  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     57,236       89,765       103,539        78,034        85,282  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income from operations

     89,037       103,071       114,772        64,092        81,829  

Other income (expense), net

     (2,942     (1,408     921        953        (9,858
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     86,095       101,663       115,693        65,045        71,971  

Provision for income taxes

     26,387       33,742       27,025        16,228        12,334  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 59,708     $ 67,921     $ 88,668      $ 48,817      $ 59,637  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes stock-based compensation expense related to stock options, stock appreciation rights and restricted stock units granted to employees and non-employee consultants as follows:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2014     2015     2016         2016             2017      
    (in thousands)  

Cost of revenue

  $ 161     $ 143     $ 237     $ 178     $ 202  

Research and development expense

    852       1,843       2,306       1,637       1,535  

Sales and marketing expense

    598       775       1,147       846       801  

General and administrative expense

    380       4,560       4,614       3,313       3,355  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 1,991     $ 7,321     $ 8,304     $ 5,974     $ 5,893  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
         2014             2015             2016         2016     2017  
     (as a percentage of total revenue)  

Revenue:

          

Product

     92     91     88     88     88

Service

     8       9       12       12       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100       100       100       100       100  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Product

     28       27       28       32       27  

Service

     3       2       3       3       2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     31       29       31       34       28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     69       71       69       66       72  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     12       14       16       17       19  

Sales and marketing

     10       13       11       13       12  

General and administrative

     5       6       6       6       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     27       33       33       36       37  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     42       38       36       30       35  

Other income (expense), net

     (1     (1                 (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     41       37       37       30       31  

Provision for income taxes

     12       12       9       7       5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     28     25     28     23     26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentages in the table above are based on actual values. As a result, some totals may not sum due to rounding.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2017

 

     Nine Months Ended September 30,               
     2016     2017     Change  
     Amount      % of
Total
    Amount      % of
Total
    Amount      %  
     (dollars in thousands)  

Revenue:

               

Product

   $ 191,763        88.4   $ 205,155        87.8   $ 13,392        7.0

Service

     25,139        11.6     28,458        12.2     3,319        13.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 216,902        100.0   $ 233,613        100.0   $ 16,711        7.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Revenue by geographic region:

               

North America

   $ 128,298        59.2   $ 125,396        53.7   $ (2,902      (2.3 )% 

Latin America

     33,043        15.2     31,423        13.5     (1,620      (4.9 )% 

Europe, Middle East and Africa

     27,377        12.6     44,906        19.2     17,529        64.0

Asia-Pacific

     28,184        13.0     31,888        13.6     3,704        13.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenue

   $ 216,902        100.0   $ 233,613        100.0   $ 16,711        7.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The increase in product revenue was due to an increase in sales of our software-centric broadband products in Europe, Middle East and Africa primarily due to an increase of $14.3 million in sales of our CCAP solutions to existing customers to increase the proportion of their networks using our products to provide their subscribers with greater bandwidth capacity, and an increase of $2.0 million in sales to new customers, which predominantly deployed our CCAP solution that includes DOCSIS 3.1 capabilities. These increases were partially offset by an

 

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aggregate decrease of $2.9 million in product sales in all other regions resulting primarily from decreases in purchases by existing customers in those regions, which we believe was primarily due to the timing of customer expenditures on network upgrades.

The increase in service revenue was primarily due to a $4.4 million increase in maintenance and support services revenue due to an increase in our installed base of customers through the addition of new customers and from customers renewing their maintenance and support service contracts, partially offset by a $1.1 million decrease in professional services revenue due to a decrease in customer projects requiring our assistance.

Cost of Revenue and Gross Profit

 

     Nine Months Ended
September 30,
     Change  
     2016      2017      Amount     %  
     (dollars in thousands)  

Cost of revenue:

          

Product

   $ 68,793      $ 62,865      $ (5,928     (8.6 )% 

Service

     5,983        3,637        (2,346     (39.2 )% 
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 74,776      $ 66,502      $ (8,274     (11.1 )% 
  

 

 

    

 

 

    

 

 

   

The decrease in cost of product revenue was primarily due to a decrease in the proportion of our revenue derived from our hardware-based broadband products.

The decrease in cost of service revenue was primarily due to a $1.5 million decrease in personnel-related costs as a result of the transfer of certain personnel from our service and support department to our research and development department and a $1.0 million decrease in subcontracted professional services.

 

     Nine Months Ended September 30,               
     2016     2017     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount      Gross
Margin
(bps)
 
     (dollars in thousands)  

Gross profit:

               

Product

   $ 122,970        64.1   $ 142,290        69.4   $ 19,320        530  

Service

     19,156        76.2     24,821        87.2     5,665        1,100  
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 142,126        65.5   $ 167,111        71.5   $ 24,985        600  
  

 

 

      

 

 

      

 

 

    

The increase in product gross margin was primarily due to lower cost of goods sold as a result of an increase in sales of software-based capacity expansions and a decrease in sales of our hardware-based broadband products.

The increase in service gross margin was due to an increase in maintenance and support services revenue and a decrease in lower-margin professional services revenue.

Research and Development

 

     Nine Months Ended
September 30,
    Change  
     2016     2017     Amount      %  
    

(dollars in thousands)

 

Research and development

   $ 37,213     $ 43,912     $ 6,699        18.0

Percentage of revenue

     17.2     18.8     

 

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The increase in research and development expense was due to a $5.1 million increase in personnel-related costs (including the effect of a $0.1 million decrease in stock-based compensation expense) as a result of the increase in the headcount of our research and development personnel from 321 to 381 to support the development of our new wireless and software-centric broadband products and to enhance our existing software-centric broadband products, a $1.0 million increase in depreciation expense for research and development related assets, a $0.5 million increase in facilities and infrastructure expenses and a $0.1 million increase in prototype development costs for new broadband products.

Sales and Marketing

 

     Nine Months Ended
September 30,
    Change  
         2016             2017             Amount             %      
    

(dollars in thousands)

 

Sales and marketing

   $ 27,289     $ 26,983     $ (306     (1.1 )% 

Percentage of revenue

     12.6     11.6    

The slight decrease in sales and marketing expense was due to a $0.9 million decrease in marketing costs related to trade shows and events to promote our solutions, a $0.5 million decrease in personnel-related costs and a $0.1 million decrease in facilities and infrastructure expenses, all partially offset by a $1.2 million increase in sales agent commissions.

General and Administrative

 

     Nine Months Ended
September 30,
    Change  
         2016             2017             Amount              %      
    

(dollars in thousands)

 

General and administrative

   $ 13,532     $ 14,387     $ 855        6.3

Percentage of revenue

     6.2     6.2     

The increase in general and administrative expense was primarily due to a $0.6 million increase in personnel-related costs to support the continued growth in our business, a $0.2 million increase in professional service fees and a $0.1 million increase in facilities and infrastructure expenses.

Other Income (Expense), Net

 

     Nine Months Ended
September 30,
    Change  
         2016             2017             Amount             %      
    

(dollars in thousands)

 

Other income (expense), net

   $ 953     $ (9,858   $ (10,811     (1,134.4 )% 

Percentage of revenue

     0.4     (4.2 )%     

The change from a net other income of $1.0 million to a net other expense of $9.9 million was primarily due to a $12.7 million increase in interest expense attributable to our term loan facility entered into in December 2016, partially offset by a $0.9 million increase in interest income due to an increase in interest rates and an increase in our portfolio of cash equivalents and a $0.8 million increase in foreign currency gains due to appreciation of the Euro and the impact thereof on our foreign-denominated cash and receivables.

 

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Provision for Income Taxes

 

     Nine Months Ended
September 30,
    Change  
         2016             2017             Amount             %      
     (dollars in thousands)  

Provision for income taxes

   $ 16,228     $ 12,334     $ (3,894     (24.0 )% 

Effective tax rate

     24.9     17.1    

The 7.8% decrease in our effective tax rate resulted from the tax benefits of equitable adjustment payments to holders of our stock-based awards and the favorable benefit of the foreign rate differential due to the restructuring of our international operations.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2016

Revenue

 

     Year Ended December 31,              
     2015     2016     Change  
     Amount      % of Total     Amount      % of Total     Amount     %  
     (dollars in thousands)  

Revenue:

              

Product

   $ 247,588        90.9   $ 279,223        88.3   $ 31,635       12.8

Service

     24,862        9.1     36,905        11.7     12,043       48.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 272,450        100.0   $ 316,128        100.0   $ 43,678       16.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Revenue by geographic region:

              

North America

   $ 54,518        20.0   $ 183,941        58.2   $ 129,423       237.4

Latin America

     87,382        32.1     47,314        15.0     (40,068     (45.9 )% 

Europe, Middle East and Africa

     75,767        27.8     45,205        14.3     (30,562     (40.3 )% 

Asia-Pacific

     54,783        20.1     39,668        12.5     (15,115     (27.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 272,450        100.0   $ 316,128        100.0   $ 43,678       16.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The increase in product revenue was due to an increase in sales of our software-centric broadband products in North America primarily due to an increase of $74.2 million in sales to new customers, which predominantly deployed our CCAP solution that includes DOCSIS 3.1 capabilities, and an increase of $45.7 million in sales of our CCAP solutions to existing customers to increase the proportion of their networks using our products to provide their subscribers with greater bandwidth capacity through capacity expansions. These increases were partially offset by an aggregate decrease of $88.3 million in product sales in all other regions resulting primarily from decreases in purchases by customers in those regions of capacity expansions from us, which we believe was primarily due to the timing of customer expenditures on network upgrades.

The increase in service revenue was primarily due to a $9.3 million increase in maintenance and support services revenue due to an increase in our installed base of customers through the addition of new customers and from customers renewing their maintenance and support service contracts as well as a $2.8 million increase in professional services revenue related to customer installations in North America to deploy our DOCSIS 3.1 capabilities.

 

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Cost of Revenue and Gross Profit

 

     Year Ended
December 31,
     Change  
     2015      2016      Amount      %  
     (dollars in thousands)  

Cost of revenue:

           

Product

   $ 74,349      $ 89,340      $ 14,991        20.2

Service

     5,265        8,477        3,212        61.0
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

   $ 79,614      $ 97,817      $ 18,203        22.9
  

 

 

    

 

 

    

 

 

    

The increase in cost of product revenue was primarily due to an increase in the quantity of our software-centric broadband products sold and an increase in personnel-related costs resulting from hiring additional employees.

The increase in cost of service revenue was primarily due to a $2.5 million increase in subcontracted professional services related to customer deployments of our DOCSIS 3.1 capabilities and a $0.7 million increase in personnel-related costs resulting from hiring additional employees.

 

     Year Ended December 31,               
     2015     2016     Change  
     Amount      Gross
Margin
    Amount      Gross
Margin
    Amount      Gross
Margin (bps)
 
     (dollars in thousands)  

Gross profit:

               

Product

   $ 173,239        70.0   $ 189,883        68.0   $ 16,644        (200

Service

     19,597        78.8     28,428        77.0     8,831        (180
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 192,836        70.8   $ 218,311        69.1   $ 25,475        (170
  

 

 

      

 

 

      

 

 

    

The decrease in product gross margin was primarily due to higher cost of goods related to initial sales of our software-centric broadband products as a result of the significant amount of hardware in these sales.

Service gross margin declined due to an increase in professional services revenue as a percentage of total service revenue during the year ended December 31, 2016.

Research and Development

 

     Year Ended
December 31,
    Change  
     2015     2016     Amount      %  
     (dollars in thousands)  

Research and development

   $ 37,155     $ 49,210     $ 12,055        32.4

Percentage of revenue

     13.6     15.6     

The increase in research and development expense was due to a $9.6 million increase in personnel-related costs (including a $0.5 million increase in stock-based compensation expense) as a result of the increase in the headcount of our research and development personnel from 256 to 328 to support the development of our new wireless and software-centric broadband products and to enhance our existing software-centric broadband products, a $1.2 million increase in facilities and infrastructure expenses and a $1.2 million increase in prototype development costs for new broadband products.

 

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Sales and Marketing

 

     Year Ended
December 31,
    Change  
     2015     2016     Amount     %  
     (dollars in thousands)  

Sales and marketing

   $ 36,157     $ 36,114     $ (43     (0.1 )% 

Percentage of revenue

     13.3     11.4    

The slight decrease in sales and marketing expense was due to a $7.8 million decrease in sales agent commissions related to a decrease in sales in Latin America, which was partially offset by a $6.8 million increase in personnel-related costs (including a $0.4 million increase in stock-based compensation expense) as a result of the increase in the headcount of our sales and marketing personnel from 94 to 114 in order to increase the sales force associated with our software-centric broadband products and to develop a new sales force assigned to our new wireless solutions and a $0.9 million increase in marketing costs related to trade shows and events to promote our solutions.

General and Administrative

 

     Year Ended
December 31,
    Change  
     2015     2016     Amount      %  
     (dollars in thousands)  

General and administrative

   $ 16,453     $ 18,215     $ 1,762        10.7

Percentage of revenue

     6.0     5.8     

The increase in general and administrative expense was primarily due to a $1.5 million increase in personnel-related costs (including a $0.1 million increase in stock-based compensation expense) to support the continued growth in our business and a $0.3 million increase in facilities and infrastructure expenses.

Other Income (Expense), Net

 

     Year Ended
December 31,
    Change  
         2015             2016         Amount     %  
     (dollars in thousands)  

Other income (expense), net

   $ (1,408   $ 921     $ 2,329       165.4

Percentage of revenue

     0.5     0.3    

The change from a net other expense of $1.4 million to a net other income of $0.9 million was primarily due to a $2.7 million decrease in foreign currency losses resulting from a lower carrying value of foreign-denominated cash and receivables during the year ended December 31, 2016 as compared to the year ended December 31, 2015 and a $0.3 million increase in interest income due to an increase in our portfolio of cash equivalents and marketable securities, both partially offset by a $0.7 million increase in interest expense primarily attributable to $300.0 million of borrowings under the term loan facility we entered into in December 2016.

Provision for Income Taxes

 

     Year Ended
December 31,
    Change  
     2015     2016     Amount     %  
     (dollars in thousands)  

Provision for income taxes

   $ 33,742     $ 27,025     $ (6,717     (19.9 )% 

Effective tax rate

     33.2     23.4    

 

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The 9.8% decrease in our effective tax rate primarily resulted from the tax benefits from certain employee stock-based compensation transactions, including equitable adjustment payments to holders of our stock-based awards, during the year ended December 31, 2016 related to our adoption, effective as of January 1, 2016, of a new share-based payment accounting standard. In particular, the tax benefit of equitable adjustment payments in 2016 contributed to a 7.0% non-recurring reduction in our effective tax rate. The decrease in our effective tax rate was also due in part to an increase in the benefit of the foreign tax rate differential, reflecting the partial effect of a process we began in the third quarter of 2016 to restructure our international operations.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2015

Revenue

 

     Year Ended December 31,              
     2014     2015     Change  
     Amount      % of Total     Amount      % of Total     Amount     %  
     (dollars in thousands)  

Revenue:

              

Product

   $ 194,358        92.0   $ 247,588        90.9   $ 53,230       27.4

Service

     16,920        8.0     24,862        9.1     7,942       46.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 211,278        100.0   $ 272,450        100.0   $ 61,172       29.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Revenue by geographic region:

              

North America

   $ 107,376        50.8   $ 54,518        20.0   $ (52,858     (49.2 )% 

Latin America

     29,915        14.2     87,382        32.1     57,467       192.1

Europe, Middle East and Africa

     32,407        15.3     75,767        27.8     43,360       133.8

Asia-Pacific

     41,580        19.7     54,783        20.1     13,203       31.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

   $ 211,278        100.0   $ 272,450        100.0   $ 61,172       29.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

The increase in product revenue was primarily due to product sales to new customers that deployed our CCAP solution of $42.4 million in Latin America, $16.8 million in Europe, Middle East and Africa, and $13.8 million in Asia-Pacific; an increase in product sales of $8.9 million to existing customers in such regions; and recognition of previously deferred revenue of $23.1 million upon the product acceptance by a new customer in Europe that deployed our CCAP solution. These increases were partially offset by a decrease in product sales in North America of $51.9 million resulting primarily from decreases in purchases by customers in North America of capacity expansions from us, which we believe was primarily due to the timing of customer expenditures on network upgrades.

The increase in service revenue was primarily due to a $12.7 million increase in maintenance and support services revenue as a result of an increase in our installed base of customers through the addition of new customers and from customers renewing their maintenance and support service contracts, which was partially offset by a $4.7 million decrease in professional services revenue, which was primarily due to revenue recognized in 2014 in connection with one major professional services engagement.

Cost of Revenue and Gross Profit

 

     Year Ended
December 31,
     Change  
     2014      2015      Amount     %  
     (dollars in thousands)  

Cost of revenue:

          

Product

   $ 59,088      $ 74,349      $ 15,261       25.8

Service

     5,917        5,265        (652     (11.0 )%