Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - BigBand Networks, Inc. | f57277exv31w2.htm |
EX-31.1 - EX-31.1 - BigBand Networks, Inc. | f57277exv31w1.htm |
EX-32.1 - EX-32.1 - BigBand Networks, Inc. | f57277exv32w1.htm |
EX-10.19A - EX-10.19A - BigBand Networks, Inc. | f57277exv10w19a.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33355
BigBand Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
04-3444278 (I.R.S. Employer Identification Number) |
475 Broadway Street
Redwood City, California 94063
(Address of principal executive offices and zip code)
Redwood City, California 94063
(Address of principal executive offices and zip code)
(650) 995-5000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated filer o | Accelerated filer þ | Non-Accelerated filer o (Do not check if Smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 1, 2010, 69,108,695 shares of the registrants common stock, par value $0.001
per share, were outstanding.
BigBand Networks, Inc.
FORM 10-Q
FOR THE QUARTER ENDED
September 30, 2010
INDEX
FOR THE QUARTER ENDED
September 30, 2010
INDEX
2
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BigBand Networks, Inc.
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except per share data)
(Unaudited in thousands, except per share data)
As of | As of | |||||||
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 11,108 | $ | 24,894 | ||||
Marketable securities |
141,146 | 147,014 | ||||||
Accounts receivable, net of allowance for
doubtful accounts of $17 and $56 as of
September 30, 2010 and December 31, 2009,
respectively |
5,709 | 18,495 | ||||||
Inventories, net |
11,879 | 4,933 | ||||||
Prepaid expenses and other current assets |
3,845 | 6,177 | ||||||
Total current assets |
173,687 | 201,513 | ||||||
Property and equipment, net |
9,165 | 11,417 | ||||||
Goodwill |
1,656 | 1,656 | ||||||
Other non-current assets |
7,399 | 9,002 | ||||||
Total assets |
$ | 191,907 | $ | 223,588 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,668 | $ | 9,483 | ||||
Accrued compensation and related benefits |
5,234 | 5,023 | ||||||
Current portion of deferred revenues, net |
21,031 | 32,428 | ||||||
Current portion of other liabilities |
4,236 | 7,083 | ||||||
Total current liabilities |
39,169 | 54,017 | ||||||
Deferred revenues, net, less current portion |
9,251 | 12,438 | ||||||
Other liabilities, less current portion |
1,819 | 2,642 | ||||||
Accrued long-term Israeli severance pay |
4,691 | 4,215 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value, 250,000 shares
authorized as of September 30, 2010 and
December 31, 2009; 69,095 and 67,138 shares
issued and outstanding as of September 30,
2010 and December 31, 2009, respectively |
69 | 67 | ||||||
Additional paid-in-capital |
295,912 | 283,704 | ||||||
Accumulated other comprehensive income |
279 | 124 | ||||||
Accumulated deficit |
(159,283 | ) | (133,619 | ) | ||||
Total stockholders equity |
136,977 | 150,276 | ||||||
Total liabilities and stockholders equity |
$ | 191,907 | $ | 223,588 | ||||
See accompanying notes.
3
Table of Contents
BigBand Networks, Inc.
Condensed Consolidated Statements of Operations
(Unaudited in thousands, except per share amounts)
(Unaudited in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues: |
||||||||||||||||
Products |
$ | 16,261 | $ | 12,647 | $ | 57,747 | $ | 68,795 | ||||||||
Services |
10,490 | 9,555 | 27,632 | 36,321 | ||||||||||||
Total net revenues |
26,751 | 22,202 | 85,379 | 105,116 | ||||||||||||
Cost of net revenues: |
||||||||||||||||
Products |
10,208 | 8,211 | 33,534 | 34,193 | ||||||||||||
Services |
2,872 | 2,885 | 9,181 | 9,169 | ||||||||||||
Total cost of net revenues |
13,080 | 11,096 | 42,715 | 43,362 | ||||||||||||
Gross profit |
13,671 | 11,106 | 42,664 | 61,754 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
12,432 | 11,698 | 39,034 | 34,308 | ||||||||||||
Sales and marketing |
4,483 | 6,009 | 16,531 | 18,313 | ||||||||||||
General and administrative |
4,024 | 4,612 | 12,560 | 14,109 | ||||||||||||
Restructuring (credits) charges |
(139 | ) | | 900 | 1,356 | |||||||||||
Class action litigation charges |
| | | 477 | ||||||||||||
Total operating expenses |
20,800 | 22,319 | 69,025 | 68,563 | ||||||||||||
Operating loss |
(7,129 | ) | (11,213 | ) | (26,361 | ) | (6,809 | ) | ||||||||
Interest income |
225 | 544 | 1,077 | 2,137 | ||||||||||||
Other (expense) income, net |
(134 | ) | 31 | (317 | ) | (62 | ) | |||||||||
Loss before provision for income taxes |
(7,038 | ) | (10,638 | ) | (25,601 | ) | (4,734 | ) | ||||||||
Provision for income taxes |
216 | 220 | 63 | 767 | ||||||||||||
Net loss |
$ | (7,254 | ) | $ | (10,858 | ) | $ | (25,664 | ) | $ | (5,501 | ) | ||||
Basic net loss per common share |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.38 | ) | $ | (0.08 | ) | ||||
Diluted net loss per common share |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.38 | ) | $ | (0.08 | ) | ||||
Shares used in basic net loss per common share |
68,853 | 66,368 | 68,067 | 65,666 | ||||||||||||
Shares used in diluted net loss per common share |
68,853 | 66,368 | 68,067 | 65,666 | ||||||||||||
See accompanying notes.
4
Table of Contents
BigBand Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
Nine Months ended September 30, | ||||||||
2010 | 2009 | |||||||
Cash Flows from Operating activities |
||||||||
Net loss |
$ | (25,664 | ) | $ | (5,501 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation of property and equipment |
5,173 | 6,428 | ||||||
Amortization of software license |
625 | 208 | ||||||
Write-off of software license |
1,458 | | ||||||
Loss on disposal of property and equipment |
406 | 103 | ||||||
Stock-based compensation |
10,673 | 10,298 | ||||||
Tax benefit from exercise of stock options |
| (17 | ) | |||||
Net settled unrealized losses on cash flow hedges |
| 348 | ||||||
Change in operating assets and liabilities: |
||||||||
Decrease in accounts receivable |
12,786 | 2,419 | ||||||
(Increase) decrease in inventories, net |
(6,946 | ) | 1,255 | |||||
Decrease (increase) in prepaid expenses and
other current assets |
2,456 | (121 | ) | |||||
Increase in other non-current assets |
(480 | ) | (605 | ) | ||||
(Decrease) increase in accounts payable |
(815 | ) | 698 | |||||
Increase in long-term Israeli severance pay |
476 | 322 | ||||||
Decrease in accrued and other liabilities |
(3,323 | ) | (8,095 | ) | ||||
Decrease in deferred revenues |
(14,584 | ) | (18,713 | ) | ||||
Net cash used in operating activities |
(17,759 | ) | (10,973 | ) | ||||
Cash Flows from Investing activities |
||||||||
Purchase of marketable securities |
(149,356 | ) | (119,204 | ) | ||||
Proceeds from maturities of marketable securities |
132,849 | 100,106 | ||||||
Proceeds from sale of marketable securities |
22,270 | 8,500 | ||||||
Purchase of property and equipment |
(3,376 | ) | (2,983 | ) | ||||
Proceeds from sale of property and equipment |
49 | | ||||||
Decrease in restricted cash |
| 223 | ||||||
Purchase of software license |
| (2,500 | ) | |||||
Net cash provided by (used in) investing activities |
2,436 | (15,858 | ) | |||||
Cash Flows from Financing activities |
||||||||
Proceeds from issuance of common stock |
1,537 | 3,360 | ||||||
Tax benefit from exercise of stock options |
| 17 | ||||||
Net cash provided by financing activities |
1,537 | 3,377 | ||||||
Net decrease in cash and cash equivalents |
(13,786 | ) | (23,454 | ) | ||||
Cash and cash equivalents as of beginning of period |
24,894 | 50,981 | ||||||
Cash and cash equivalents as of end of period |
$ | 11,108 | $ | 27,527 | ||||
See accompanying notes.
5
Table of Contents
BigBand Networks, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Description of Business
BigBand Networks, Inc. (BigBand or the Company), headquartered in Redwood City, California,
was incorporated on December 3, 1998, under the laws of the state of Delaware and commenced
operations in January 1999. BigBand develops, markets and sells network-based platforms that enable
cable multiple system operators and telecommunications companies to offer video services across
coaxial, fiber and copper networks.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated balance sheet as of September 30, 2010, and the condensed
consolidated statements of operations for the three and nine months ended September 30, 2010 and
2009, and the condensed consolidated statements of cash flows for the nine months ended September
30, 2010 and 2009 are unaudited. The condensed consolidated balance sheet as of December 31, 2009
was derived from the audited consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009 filed with the U.S. Securities and
Exchange Commission (SEC) on March 5, 2010 (Form 10-K). The accompanying condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and related notes contained in the Companys Form 10-K.
The accompanying condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations
of the SEC as permitted by such rules. Not all of the financial information and footnotes required
for complete financial statements have been presented. Management believes the unaudited condensed
consolidated financial statements have been prepared on a basis consistent with the audited
consolidated financial statements and include all adjustments necessary of a normal and recurring
nature for a fair presentation of the Companys condensed consolidated balance sheet as of
September 30, 2010, the condensed consolidated statements of operations for the three and nine
months ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows
for the nine months ended September 30, 2010 and 2009. The results for the three and nine months
ended September 30, 2010 are not necessarily indicative of the results to be expected for the year
ending December 31, 2010 or for any other interim period or for any future period.
There have been no significant changes in the Companys accounting policies during the nine
months ended September 30, 2010 compared to the significant accounting policies described in the
Companys Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Management uses estimates and judgments in determining
recognition of revenues, valuation of inventories, valuation of stock-based awards, provision for
warranty claims, the allowance for doubtful accounts, restructuring costs, valuation of goodwill
and long-lived assets, and income tax amounts. Management bases its estimates and assumptions on
methodologies it believes to be reasonable. Actual results could differ from those estimates, and
such differences could affect the results of operations reported in future periods.
Revenue Recognition
The Companys software and hardware product applications are sold as solutions and its
software is a significant component of these solutions. The Company provides unspecified software
updates and enhancements related to products through support contracts. As a result, the Company
accounts for revenues in accordance with Accounting Standards Codification (ASC) 985 Software, for
each transaction, all of which involve the sale of products with a significant software component.
Revenue is recognized when all of the following have occurred: (1) the Company has entered into an
arrangement with a customer; (2) delivery has occurred; (3) customer payment is fixed or
determinable and free of contingencies and significant uncertainties; and (4) collection is
probable.
Product revenues consist of sales of the Companys software and hardware products. Software
product sales include a perpetual license to the Companys software. The Company recognizes product
revenues upon shipment to its customers, including channel partners, on non-cancellable contracts
and purchase orders when all revenue recognition criteria are met, or, if specified in an
agreement, upon receipt of final acceptance of the product, provided all other criteria are met.
End users and channel partners generally have no rights of return, stock rotation rights, or price
protection. Shipping charges billed to customers are included in product revenues and the related
shipping costs are included in cost of product revenues.
6
Table of Contents
Substantially all of the Companys product sales have been made in combination with support
services, which consist of software updates and customer support. The Companys customer service
agreements allow customers to select from plans offering
various levels of technical support, unspecified software upgrades and enhancements on an
if-and-when-available basis. Revenues for support services are recognized on a straight-line basis
over the service contract term, which is typically one year but can extend to five years for the
Companys telecommunications customers. Revenues from other services, such as installation, program
management and training, are recognized when the services are performed.
The Company uses the residual method to recognize revenues when a customer agreement includes
one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE)
of the fair value of all undelivered elements exists. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the contract fee is recognized as
product revenues. If evidence of the fair value of one or more undelivered elements does not exist,
all revenues are deferred and recognized when delivery of those elements occurs or when fair value
can be established. When the undelivered element is customer support and there is no evidence of
fair value for this support, revenue for the entire arrangement is bundled and revenue is
recognized ratably over the service period. VSOE of fair value for elements of an arrangement is
based on the normal pricing and discounting practices for those services when sold separately.
Fees are typically considered to be fixed or determinable at the inception of an arrangement
based on specific products and quantities to be delivered. In the event payment terms are greater
than 180 days, the fees are deemed not to be fixed or determinable and revenues are recognized when
the payments become due, provided the remaining criteria for revenue recognition have been met.
Deferred revenues consist primarily of deferred service fees (including customer support and
professional services such as installation, program management and training) and product revenues,
net of the associated costs. Deferred product revenues generally relate to acceptance provisions
that have not been met or partial shipment or when the Company does not have VSOE of fair value on
the undelivered items. When deferred revenues are recognized as revenues, the associated deferred
costs are also recognized as cost of net revenues.
The Company assesses the ability to collect from its customers based on a number of factors,
including the credit worthiness of the customer and the past transaction history of the customer.
If the customer is not deemed credit worthy, all revenues are deferred from the arrangement until
payment is received and all other revenue recognition criteria have been met.
Cash, Cash Equivalents and Marketable Securities
The Company holds its cash and cash equivalents in checking, money market and investment
accounts with high credit quality financial institutions. The Company considers all highly liquid
investments with original maturities of three months or less when purchased to be cash equivalents.
Marketable securities consist principally of corporate debt securities, commercial paper,
securities of U.S. agencies and certificates of deposit, with remaining time to maturity of two
years or less. If applicable, the Company considers marketable securities with remaining time to
maturity greater than one year and that have been in a consistent loss position for at least nine
months to be classified as long-term, as it expects to hold them to maturity. As of September 30,
2010, the Company did not have any such securities. The Company considers all other marketable
securities with remaining time to maturity of less than two years to be short-term marketable
securities. The short-term marketable securities are classified as current assets because they can
be readily converted into securities with a shorter remaining time to maturity or into cash. The
Company determines the appropriate classification of its marketable securities at the time of
purchase and re-evaluates such designations as of each balance sheet date. All marketable
securities and cash equivalents in the portfolio are classified as available-for-sale and are
stated at fair value, with all the associated unrealized gains and losses reported as a component
of accumulated other comprehensive income (loss). Fair value is based on quoted market rates or
direct and indirect observable markets for these investments. The amortized cost of debt securities
is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
and accretion are included in interest income. The cost of securities sold and any gains and losses
on sales are based on the specific identification method.
The Company reviews its investment portfolio periodically to assess for other-than-temporary
impairment in order to determine the classification of the impairment as temporary or
other-than-temporary, which involves considerable judgment regarding factors such as the length of
the time and the extent to which the market value has been less than amortized cost, the nature of
underlying assets, and the financial condition, credit rating, market liquidity conditions and
near-term prospects of the issuer. In April 2009, the Financial Accounting Standards Board (FASB)
issued new guidance which was incorporated into FASB Accounting Standards Codification 320
Investments Debt and Equity Securities, which established a new method of recognizing and
reporting other-than-temporary impairments of debt securities. If the fair value of a debt security
is less than its amortized cost basis at the balance sheet date, an assessment would have to be
made as to whether the impairment is other-than-temporary. If the Company considers it more likely
than not that it will sell the security before it will recover its amortized cost basis, an
other-than-temporary impairment will be considered to have occurred. An other-than temporary
impairment will also be considered to have occurred if the Company does not expect to recover the
entire amortized cost basis of the security, even if it does not intend to sell the security. The
Company has recognized no other-than-temporary impairments for its marketable securities.
7
Table of Contents
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable,
marketable securities, derivatives used in the Companys hedging program, accounts payable, other
accrued liabilities, other long-term liabilities and the Israeli severance pay fund assets
approximate their fair value.
Credit Risk and Concentrations of Significant Customers
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist primarily of cash equivalents, marketable securities, accounts receivable and
restricted cash. Cash equivalents, restricted cash and marketable securities are invested through
major banks and financial institutions in the U.S. and Israel. Such deposits in the U.S. may be in
excess of insured limits and are not insured in Israel. Management believes that the financial
institutions that hold the Companys investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
The Companys customers are impacted by several factors, including an industry downturn and
tightening of access to capital. The market that the Company serves is characterized by a limited
number of large customers creating a concentration of risk. To date, the Company has not incurred
any significant charges related to uncollectible accounts receivable related to large customers.
The Company had three customers which individually had an accounts receivable balance of greater
than 10% of the Companys total accounts receivable balance as of both September 30, 2010 and
December 31, 2009.
The Company recognized revenues from three customers that were 10% or greater of the Companys
total net revenues for the three months ended September 30, 2010 compared to four customers for the
three months ended September 30, 2009. The Company recognized revenues from three customers that
were 10% or greater of the Companys total net revenues for the nine months ended September 30,
2010 compared to two customers for the nine months ended September 30, 2009.
Inventories, Net
Inventories, net consist primarily of finished goods and are stated at the lower of standard
cost or market. Standard cost approximates actual cost on the first-in, first-out method. The
Company regularly monitors inventory quantities on-hand and records write-downs for excess and
obsolete inventories based on the Companys estimate of demand for its products, potential
obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate
that the carrying value of inventory exceeds its estimated selling price. These factors are
impacted by market and economic conditions, technology changes, and new product introductions and
require estimates that may include factors that are uncertain. If inventory is written down, a new
cost basis is established that cannot be increased in future periods.
Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred that require revision of the
remaining useful life of long-lived assets or would render them not recoverable. If such
circumstances arise, the Company compares the carrying amount of the long-lived assets to the
estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the
estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived
assets, an impairment charge, calculated as the amount by which the carrying amount of the assets
exceeds the fair value of the assets, is recorded. The Company wrote off approximately $1.5 million
related to a capitalized software license during the three months ended September 30, 2010, as
further described in note 5 under other non-current assets, as there were no material estimated
future revenues for this technology in the near term.
Warranty Liabilities
The Company provides a warranty for its software and hardware products. In most cases, the
Company warrants that its hardware will be free of defects in workmanship for one year, and that
its software media will be free of defects for 90 days. In master purchase agreements with large
customers, however, the Company often warrants that its products (hardware and software) will
function in material conformance to specifications for a period ranging from one to five years from
the date of shipment. In general, the Company accrues for warranty claims based on the Companys
historical claims experience. In addition, the Company accrues for warranty claims based on
specific events and other factors when the Company believes an exposure is probable and can be
reasonably estimated. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if
necessary, based on additional information as it becomes available.
Income Taxes
The Company follows ASC 740 Income Taxes, which requires the use of the liability method of
accounting for income taxes. The liability method computes income taxes based on a projected
effective tax rate for the full calendar year. For example, the effective tax rate for the nine
months ended September 30, 2010 will be based on the projected effective tax rate for the year
ending December 31, 2010. The liability method includes the effects of deferred tax assets or
liabilities. Deferred tax assets or liabilities are recognized for the expected tax consequences of
temporary differences between the financial statement and tax basis of assets and liabilities using
the enacted tax rates that will be in effect when these differences reverse. The Company provides a
valuation
8
Table of Contents
allowance to reduce deferred tax assets to the amount that is expected, based on whether
such assets are more likely than not to be realized.
Foreign Currency Derivatives
The Company has expenses, assets and liabilities denominated in currencies other than the U.S.
dollar that are subject to foreign currency risks, primarily related to expenses and liabilities
denominated in the Israeli New Shekel. A foreign currency risk management program was established
by the Company to help protect against the impact of foreign currency exchange rate movements on
the Companys operating results. The Company does not enter into derivatives for speculative or
trading purposes. All derivatives, whether designated in hedging relationships or not, are required
to be recorded on the consolidated balance sheet at fair
value. The accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation.
The Company selectively hedges future expenses denominated in Israeli New Shekels by
purchasing foreign currency forward contracts or combinations of purchased and sold foreign
currency option contracts. When the U.S. dollar strengthens against the Israeli New Shekel, the
decrease in the value of future foreign currency expenses is offset by losses in the fair value of
the contracts designated as hedges. Conversely, when the U.S. dollar weakens significantly against
the Israeli New Shekel, the increase in the value of future foreign currency expenses is offset by
gains in the fair value of the contracts designated as hedges. The exposures are hedged using
derivatives designated as cash flow hedges under ASC 815 Derivatives and Hedging. The effective
portion of the derivatives gain or loss is initially reported as a component of accumulated other
comprehensive income (loss) and, on occurrence of the forecasted transaction, is subsequently
reclassified to the consolidated statement of operations, primarily in research and development
expenses. The ineffective portion of the gain or loss is recognized immediately in other income
(expense), net. For the three and nine months ended September 30, 2010 and 2009, the ineffective
potion was not material. These derivative instruments generally have maturities of 180 days or
less, and hence all unrealized amounts as of September 30, 2010 will settle by March 31, 2011.
Prior to June 30, 2010, the Company entered into foreign currency forward contracts to reduce
the impact of foreign currency fluctuations on assets and liabilities denominated in currencies
other than its functional currency, which is the U.S. dollar. The Company did not have any such
transactions outstanding as of September 30, 2010. The Company recognized these derivative
instruments as either assets or liabilities on the consolidated balance sheet at fair value. These
forward exchange contracts were not accounted for as hedges; therefore, changes in the fair value
of these instruments were recorded as other income (expense), net in the consolidated statement of
operations. As of December 31, 2009, the notional amount of these derivative instruments was $1.3
million, with an unrealized fair value loss of $3,000 included in other current liabilities on the
Companys condensed consolidated balance sheet. These derivative instruments generally had
maturities of 90 days. Gains and losses on these contracts were intended to offset the impact of
foreign exchange rate changes on the underlying foreign currency denominated assets and
liabilities, primarily liabilities denominated in Israeli New Shekels, and therefore, did not
subject the Company to material balance sheet risk.
All of the derivative instruments are with high quality financial institutions and the Company
monitors the creditworthiness of these parties. Amounts relating to these derivative instruments
were as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Derivatives designated as hedging instruments: |
||||||||
Notional amount of currency option contracts: Israeli New Shekels |
ILS 27,000 | ILS 27,000 | ||||||
Notional amount of currency option contracts: U.S. dollars |
$ | 7,349 | $ | 7,454 | ||||
Unrealized gains (losses) included in accumulated other comprehensive income on condensed
consolidated balance sheets: |
||||||||
Unsettled primarily included as other current assets (liabilities) |
$ | 113 | $ | (147 | ) | |||
Settled underlying derivative was settled but forecasted transaction has not occurred |
(4 | ) | (4 | ) | ||||
Total unrealized gains (losses) included in accumulated other comprehensive income |
$ | 109 | $ | (151 | ) | |||
9
Table of Contents
The change in accumulated other comprehensive income from cash flow hedges included on the
Companys condensed consolidated balance sheets was as follows (in thousands):
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Accumulated other comprehensive loss related to cash flow hedges as of beginning of period |
$ | (151 | ) | $ | (621 | ) | ||
Changes in settled and unsettled portion of cash flow hedges |
31 | (288 | ) | |||||
(120 | ) | (909 | ) | |||||
Less: |
||||||||
Changes in cash flow hedges: Loss reflected in condensed consolidated statement of operations |
(229 | ) | (1,039 | ) | ||||
Accumulated other comprehensive income related to cash flow hedges as of end of period |
$ | 109 | $ | 130 | ||||
Stock-based Compensation
The Company applies the fair value recognition and measurement provisions of ASC 718
Compensation Stock Compensation (ASC 718). Stock-based compensation is recorded at fair value as
of the grant date and recognized as an expense over the employees requisite service period
(generally the vesting period), which the Company has elected to amortize on a straight-line basis.
The Company does not capitalize any stock-based compensation.
Recently Issued Accounting Standards
In October 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force
(ASU 2009-13) and ASU 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements a consensus of the FASB Emerging Issues Task Force (ASU 2009-14). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling prices of the
delivered goods and services based on a selling price hierarchy. The amendments eliminate the
residual method of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-14 removes tangible products from the scope of software revenue
guidance and provides guidance on determining whether software deliverables in an arrangement that
includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13
and ASU 2009-14 are effective on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The Company is currently evaluating the potential impact of the adoption of ASU 2009-13
and ASU 2009-14 on its consolidated financial position, results of operations or cash flows.
3. Basic and Diluted Net Loss per Common Share
The computation of basic and diluted net loss per common share was as follows (in thousands,
except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net loss |
$ | (7,254 | ) | $ | (10,858 | ) | $ | (25,664 | ) | $ | (5,501 | ) | ||||
Denominator: |
||||||||||||||||
Weighted average shares used in basic and diluted net loss per common share |
68,853 | 66,368 | 68,067 | 65,666 | ||||||||||||
Basic and diluted net loss per common share |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.38 | ) | $ | (0.08 | ) | ||||
10
Table of Contents
As of September 30, 2010 and 2009, the Company had securities outstanding that could
potentially dilute basic net income (loss) per common share in the future, but were excluded from
the computation of net loss per common share for the periods presented as their effect would have
been anti-dilutive as follows (shares in thousands):
As of September 30, | ||||||||
2010 | 2009 | |||||||
Stock options outstanding |
12,003 | 11,649 | ||||||
Restricted stock units |
3,443 | 2,855 | ||||||
Employee stock purchase plan shares |
274 | 269 | ||||||
Warrants to purchase common stock |
| 268 |
4. Fair Value
The fair value of the Companys cash equivalents and marketable securities is determined in
accordance with ASC 820 Fair Value Measurements and Disclosures (ASC 820). ASC 820 clarifies that
fair value is an exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis for considering such
assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in
measuring fair value as follows: observable inputs such as quoted prices in active markets (Level
1), inputs other than the quoted prices in active markets that are observable either directly or
indirectly (Level 2), and unobservable inputs in which there is little or no market data, which
requires the Company to develop its own assumptions (Level 3). This hierarchy requires the Company
to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value. For the Companys Level 2 investments, fair value was derived from
non-binding market consensus prices that were corroborated by observable market data, quoted market
prices for similar instruments, or pricing models, such as discounted cash flow techniques, with
all significant inputs derived from or corroborated by observable market data. The Companys
discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves.
The Companys fair value measurements of its financial assets as of September 30, 2010 were as
follows (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Marketable securities: |
||||||||||||||||
Corporate debt securities |
$ | | $ | 72,018 | $ | | $ | 72,018 | ||||||||
U.S. Agency debt securities |
| 52,943 | | 52,943 | ||||||||||||
Commercial paper |
| 15,985 | | 15,985 | ||||||||||||
Certificates of deposit |
200 | | | 200 | ||||||||||||
200 | 140,946 | | 141,146 | |||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
3,402 | | | 3,402 | ||||||||||||
Commercial paper |
| 2,000 | | 2,000 | ||||||||||||
3,402 | 2,000 | | 5,402 | |||||||||||||
Total cash equivalents and marketable securities |
$ | 3,602 | $ | 142,946 | $ | | 146,548 | |||||||||
Cash balances |
5,706 | |||||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 152,254 | ||||||||||||||
11
Table of Contents
The Companys fair value measurements of its financial assets as of December 31, 2009 were as
follows (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Marketable securities: |
||||||||||||||||
Corporate debt securities |
$ | | $ | 70,819 | $ | | $ | 70,819 | ||||||||
U.S. Agency debt securities |
1,265 | 63,014 | | 64,279 | ||||||||||||
Commercial paper |
| 7,393 | | 7,393 | ||||||||||||
Certificates of deposit |
4,523 | | | 4,523 | ||||||||||||
5,788 | 141,226 | | 147,014 | |||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
12,527 | | | 12,527 | ||||||||||||
Corporate debt securities |
| 181 | | 181 | ||||||||||||
Commercial paper |
| 1,000 | | 1,000 | ||||||||||||
12,527 | 1,181 | | 13,708 | |||||||||||||
Total fair value |
$ | 18,315 | $ | 142,407 | $ | | 160,722 | |||||||||
Cash balances |
11,186 | |||||||||||||||
Total cash, cash equivalents and marketable securities |
$ | 171,908 | ||||||||||||||
In addition to the amounts disclosed in the above table, the fair value of the Companys
Israeli severance pay assets, which were almost fully comprised of Level 2 assets, was $4.1 million
and $3.6 million as of September 30, 2010 and December 31, 2009, respectively.
5. Balance Sheet Data
Marketable Securities
Marketable securities included available-for-sale securities as follows (in thousands):
As of September 30, 2010 | ||||||||||||||||
Amortized Cost | Unrealized Gain | Unrealized Loss | Estimated Fair Value | |||||||||||||
Corporate debt securities |
$ | 71,858 | $ | 181 | $ | (21 | ) | $ | 72,018 | |||||||
U.S. Agency debt securities |
52,933 | 17 | (7 | ) | 52,943 | |||||||||||
Commercial paper |
15,985 | 1 | (1 | ) | 15,985 | |||||||||||
Certificates of deposit |
200 | | | 200 | ||||||||||||
Total marketable securities |
$ | 140,976 | $ | 199 | $ | (29 | ) | $ | 141,146 | |||||||
As of December 31, 2009 | ||||||||||||||||
Amortized Cost | Unrealized Gain | Unrealized Loss | Estimated Fair Value | |||||||||||||
Corporate debt securities |
$ | 70,569 | $ | 288 | $ | (38 | ) | $ | 70,819 | |||||||
U.S. Agency debt securities |
64,256 | 70 | (47 | ) | 64,279 | |||||||||||
Commercial paper |
7,394 | | (1 | ) | 7,393 | |||||||||||
Certificates of deposit |
4,520 | 4 | (1 | ) | 4,523 | |||||||||||
Total marketable securities |
$ | 146,739 | $ | 362 | $ | (87 | ) | $ | 147,014 | |||||||
The fair value of investments showing unrealized losses (none of which had been in a
continuous loss position for more than nine months) was $39.2 million and $54.0 million as of
September 30, 2010 and December 31, 2009, respectively. The contractual maturity date of the
available-for-sale securities was as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Due within one year |
$ | 106,310 | $ | 107,449 | ||||
Due within one to two years |
34,836 | 39,565 | ||||||
Total marketable securities |
$ | 141,146 | $ | 147,014 | ||||
12
Table of Contents
Inventories, Net
Inventories were $11.9 million and $4.9 million as of September 30, 2010 and December 31,
2009, respectively, and were comprised entirely of finished goods.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Taxes receivable |
$ | 1,040 | $ | 2,969 | ||||
Interest receivable |
1,038 | 1,070 | ||||||
Prepaid maintenance |
783 | 981 | ||||||
Other |
984 | 1,157 | ||||||
Total prepaid expenses and other current assets |
$ | 3,845 | $ | 6,177 | ||||
Property and Equipment, Net
Property and equipment, net is stated at cost, less accumulated depreciation. Depreciation is
calculated using the straight-line method and recorded over the assets estimated useful lives of
18 months to seven years. Property and equipment, net was comprised as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Engineering and other equipment |
$ | 27,089 | $ | 30,129 | ||||
Computers, software and related equipment |
17,317 | 19,942 | ||||||
Leasehold improvements |
5,373 | 5,897 | ||||||
Office furniture and fixtures |
1,115 | 1,132 | ||||||
50,894 | 57,100 | |||||||
Less: accumulated depreciation |
(41,729 | ) | (45,683 | ) | ||||
Total property and equipment, net |
$ | 9,165 | $ | 11,417 | ||||
Goodwill
Goodwill is carried at cost and is not amortized. The carrying value of goodwill was
approximately $1.7 million as of both September 30, 2010 and December 31, 2009. Goodwill is tested
for impairment on an annual basis and between annual tests in certain circumstances, and written
down when impaired. The Company considered several factors including its management structure and
the nature of its operations and concluded that it has only one reporting unit. Consistent with
this determination, it reviewed the carrying amount of this unit compared to its fair value based
on quoted market prices of the Companys common stock. Following this approach, through September
30, 2010, no impairment losses have been recognized.
Other Non-current Assets
Other non-current assets were comprised as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Israeli severance pay |
$ | 4,136 | $ | 3,648 | ||||
Security deposit |
2,021 | 1,962 | ||||||
Restricted cash |
583 | 583 | ||||||
Deferred tax assets |
460 | 449 | ||||||
Software license |
| 2,083 | ||||||
Other |
199 | 277 | ||||||
Total other non-current assets |
$ | 7,399 | $ | 9,002 | ||||
13
Table of Contents
Software license in the above table comprised a quadrature amplitude modulation (QAM) edge
resource management technology license purchased for $2.5 million by the Company on June 30, 2009,
which was being amortized on a straight line basis over an estimated useful life of three years.
During the three months ended September 30, 2010, the Company recorded an expense to cost of net
product revenues of $1.5 million, which was the net book value of the QAM purchased software as of
September 30, 2010, as there were no material estimated future revenues for this technology in the
near term.
Deferred Revenues, Net
Deferred revenues, net were as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Deferred service revenues, net |
$ | 24,748 | $ | 27,252 | ||||
Deferred product revenues, net |
5,534 | 17,614 | ||||||
Total deferred revenues, net |
30,282 | 44,866 | ||||||
Less current portion of deferred revenues, net |
(21,031 | ) | (32,428 | ) | ||||
Deferred revenues, net, less current portion |
$ | 9,251 | $ | 12,438 | ||||
Other Liabilities
Other liabilities were comprised as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Accrued warranty |
$ | 1,446 | $ | 2,068 | ||||
Foreign, franchise and other income tax liabilities |
1,329 | 2,198 | ||||||
Rent and restructuring liabilities |
1,240 | 1,581 | ||||||
Accrued professional fees |
660 | 462 | ||||||
Customer prepayments |
224 | 816 | ||||||
Sales and use tax payable |
200 | 1,310 | ||||||
Other |
956 | 1,290 | ||||||
Total other liabilities |
6,055 | 9,725 | ||||||
Less current portion of other liabilities |
(4,236 | ) | (7,083 | ) | ||||
Other liabilities, less current portion |
$ | 1,819 | $ | 2,642 | ||||
Accrued Warranty
Activity related to product warranty was as follows (in thousands):
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Balance as of beginning of period |
$ | 2,068 | $ | 3,381 | ||||
Warranty charges |
355 | 277 | ||||||
Utilization of warranty |
(691 | ) | (767 | ) | ||||
Other adjustments |
(286 | ) | (739 | ) | ||||
Balance as of end of period |
1,446 | 2,152 | ||||||
Less current portion of accrued warranty |
(731 | ) | (1,148 | ) | ||||
Accrued warranty, less current portion |
$ | 715 | $ | 1,004 | ||||
As part of the transition to all digital broadcasting from analog transmission, the Company
recorded a $0.5 million benefit from the reversal of warranty reserves related to the
decommissioned analog products in the nine months ended September 30, 2009. The reversal of this
warranty reserve was recorded as a reduction of the Companys cost of net product revenues, and is
included in the above table in other adjustments.
14
Table of Contents
6. Restructuring Charges
May 2010 Restructuring Plan
On May 4, 2010, the Audit Committee under designation of the Board of Directors authorized a
restructuring plan pursuant to which the Company terminated a portion of its workforce. In
connection with this restructuring plan, the Company recorded restructuring charges of $0.7 million
in the three months ended June 30, 2010.
February 2009 Restructuring Plan
On February 9, 2009, the Audit Committee under designation of the Board of Directors
authorized a restructuring plan pursuant to which employees were terminated. This plan was made in
response to market and economic conditions. In connection with this restructuring plan, the Company
recorded restructuring charges of $0.7 million in the three months ended March 31, 2009.
October 2007 Restructuring Plan
On October 29, 2007, the Audit Committee under designation of the Board of Directors
authorized a restructuring plan in connection with the retirement of the Companys cable modem
termination system product line pursuant to which employees were terminated and facilities were
vacated. During the three months ended June 30, 2010, the Company recorded a $0.3 million charge to
adjust this restructuring liability for changes in estimated sublease rentals. In three months
ended September 30, 2010, the Company finalized an agreement to sublease a portion of the vacated
facility and recorded a credit of $139,000 related to the estimated sublease rental income.
Inclusive of the 2010 adjustments, the Company has recorded $2.5 million, $2.0 million and $0.2
million of cumulative charges for severance, vacated facilities and other costs, respectively.
Summary of Restructuring Plans
All of the restructuring plans were essentially complete as of September 30, 2010.
Restructuring activity for the nine months ended September 30, 2010 was as follows (in thousands):
Balance as of | Balance as of | |||||||||||||||
December 31, | Cash | September 30, | ||||||||||||||
2009 | Charges | Payments | 2010 | |||||||||||||
Vacated facilities |
$ | 894 | $ | 208 | $ | (394 | ) | $ | 708 | |||||||
Severance |
| 692 | (645 | ) | 47 | |||||||||||
Total restructure liability |
$ | 894 | $ | 900 | $ | (1,039 | ) | $ | 755 | |||||||
Less restructuring liability, current portion |
(515 | ) | ||||||||||||||
Restructuring liability, less current portion |
$ | 240 | ||||||||||||||
The long term portion of the restructuring liability relates to the vacated facilities that
will be paid through March 2012.
7. Legal Proceedings
BigBand Networks, Inc. v. Imagine Communications, Inc., Case No. 07-351
On June 5, 2007, the Company filed suit against Imagine Communications, Inc. in the U.S.
District Court, District of Delaware, alleging infringement of certain U.S. Patents covering
advanced video processing and bandwidth management techniques. The lawsuit seeks injunctive relief,
along with monetary damages for willful infringement. The Company is subject to certain
counterclaims by which Imagine Communications, Inc. has challenged the validity and enforceability
of the Companys asserted patents. The Company intends to defend itself vigorously against such
counterclaims. No trial date has been set. At this stage of the proceeding, it is not possible for
the Company to quantify the extent of potential liabilities, if any, resulting from the alleged
counterclaims.
Securities Litigation
In connection with the settlement of the Companys federal securities litigation (In re
BigBand Networks, Inc. Securities Litigation, Case No. C07-5101-SBA) as ordered by the U.S.
District Court for the Northern District of California on September 22, 2009, the related
shareholder derivative lawsuit (Ifrah v. Bassan-Eskenazi, et. al., Case No. 468401) was dismissed
by the Superior Court for the County of San Mateo, California on September 23, 2009, and the state
securities litigation (Wiltjer v. Bassan-Eskenazi,
et. al., Case No. CGC-07-469661) was dismissed by the Superior Court for the City and County
of San Francisco on October 27, 2009. As of September 30, 2010 and December 31, 2009, the Company
had no further significant obligations under these lawsuits.
15
Table of Contents
8. Stockholders Equity
The Company allocated stock-based compensation expense as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of net revenues |
$ | 546 | $ | 562 | $ | 1,722 | $ | 1,521 | ||||||||
Research and
development |
1,257 | 1,346 | 3,944 | 3,566 | ||||||||||||
Sales and marketing |
424 | 687 | 1,735 | 1,751 | ||||||||||||
General and
administrative |
1,063 | 1,210 | 3,272 | 3,460 | ||||||||||||
Total stock-based
compensation |
$ | 3,290 | $ | 3,805 | $ | 10,673 | $ | 10,298 | ||||||||
Equity Incentive Plans
Since March 15, 2007, the Company has granted all options and restricted stock units (RSUs)
under its 2007 Equity Incentive Plan (2007 Plan). The 2007 Plan allows the Company to award
incentive and non-qualified stock options, restricted stock, RSUs and stock appreciation rights to
employees, officers, directors and consultants of the Company. Options under the 2007 Plan are
granted at an exercise price that equals the closing value of the Companys common stock on the
date of grant, generally are exercisable in installments vesting over a four-year period and
generally have a maximum term of ten years from the date of grant. The Company issues new shares
for all transactions with employees.
The Company has options outstanding under its 1999, 2001 and 2003 share option and incentive
plans. Cancelled or forfeited stock option grants under these plans are added to the total amount
of shares available for grant under the 2007 Plan.
The 2007 Plan contains an evergreen provision, pursuant to which the number of shares
available for issuance under the 2007 Plan shall be increased on the first day of the fiscal year,
in an amount equal to the least of (a) 6,000,000 shares, (b) 5% of the outstanding Shares on the
last day of the immediately preceding fiscal year or (c) such number of shares determined by the
Board of Directors. Shares available for future issuance under the 2007 Plan were as follows (in
thousands):
Shares | ||||
Available as of December 31, 2009 |
7,495 | |||
Authorized shares added |
3,357 | |||
Options and RSU cancelled |
2,911 | |||
Options and RSU granted |
(5,315 | ) | ||
Available as of September 30, 2010 |
8,448 | |||
Stock Options
Data pertaining to stock option activity was as follows (in thousands, except per share and
period data):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
of | Exercise | Contractual Life | Intrinsic | |||||||||||||
Options | Price | (Years) | Value | |||||||||||||
Outstanding as of December 31, 2009 |
12,115 | $ | 4.33 | 6.99 | $ | 7,621 | ||||||||||
Granted |
2,932 | 2.96 | ||||||||||||||
Exercised |
(814 | ) | 1.08 | $ | 1,639 | |||||||||||
Cancelled |
(2,230 | ) | 5.55 | |||||||||||||
Outstanding as of September 30, 2010 |
12,003 | $ | 3.98 | 6.83 | $ | 4,205 | ||||||||||
Vested and expected to vest, net of forfeitures |
11,676 | $ | 4.00 | 6.76 | $ | 4,204 | ||||||||||
The intrinsic value of an outstanding option is calculated based on the difference between its
exercise price and the closing price of the Companys common stock on the last trading date in the
period, or in the case of an exercised option, it is based on the difference between its exercise
price and the actual fair market value of the Companys common stock on the date of exercise. Stock
options with exercise prices greater than the closing price of the Companys common stock on the
last trading day of the period have an intrinsic value of zero. The aggregate intrinsic values for
options outstanding in the preceding table are based on the Companys closing stock prices of $2.84
per share and $3.44 per share as of September 30, 2010 and December 31, 2009, respectively. As of
September 30, 2010, total unrecognized stock compensation expense relating to unvested stock
options, adjusted for estimated forfeitures, was $12.9 million. This amount is expected to be
recognized over a weighted-average period of 2.8 years.
16
Table of Contents
Restricted Stock Units
RSU grants under the 2007 Plan generally vest in increments over two to four years from the
date of grant. The RSUs are classified as equity awards because the RSUs are paid only in shares
upon vesting. RSU awards are measured at the fair value at the date of grant, which corresponds to
the closing stock price of the Companys common stock on the date of grant. RSUs expected to vest
reflect an estimated forfeiture rate. The Companys RSU activity was as follows (in thousands,
except per share data):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Restricted | Grant-Date | Contractual Life | Intrinsic | |||||||||||||
Stock Units | Fair Value | (Years) | Value | |||||||||||||
Unvested as of December 31, 2009 |
2,497 | $ | 5.58 | 1.77 | $ | 8,590 | ||||||||||
Granted |
2,383 | 2.70 | ||||||||||||||
Vested |
(756 | ) | 4.88 | $ | 2,135 | |||||||||||
Cancelled |
(681 | ) | 4.61 | |||||||||||||
Unvested as of September 30, 2010 |
3,443 | $ | 4.04 | 1.26 | $ | 9,780 | ||||||||||
Expected to vest, net of forfeitures |
3,223 | $ | 4.04 | 1.22 | $ | 9,153 | ||||||||||
As of September 30, 2010, total unrecognized stock compensation expense relating to unvested
RSUs, adjusted for estimated forfeitures, was $10.8 million. This amount is expected to be
recognized over a weighted-average period of 2.1 years.
During the nine months ended September 30, 2010, the Company granted 447,000 RSUs to certain
employees, some or all of which may vest based on achievement of 2010 incentive compensation plan
targets, or be cancelled and returned to shares available for future issuance. The Company has not
accrued any expense for these RSUs as of September 30, 2010 as it does not expect vesting to occur.
The Company also granted 91,000 RSUs in June 2010 which vest in five years; however, vesting
will accelerate if certain stock performance criteria are attained. The stock compensation expense
for these RSUs is being recorded over their estimated vesting period and was immaterial for the
three and nine months ended September 30, 2010.
Employee Stock Purchase Plan
Under the Companys 2007 Employee Stock Purchase Plan (ESPP), employees may purchase shares of
common stock at a price per share that is 85% of the fair market value of the Companys common
stock as of the beginning or the end of each six month offering period, whichever is lower. The
ESPP contains an evergreen provision, pursuant to which an annual increase may be added on the
first day of each fiscal year, equal to the least of (i) 3,000,000 shares of the Companys common
stock, (ii) 2% of the outstanding shares of the Companys common stock on the first day of the
fiscal year or (iii) an amount determined by the Board of Directors. The ESPP is compensatory in
nature, and therefore results in compensation expense. The Company recorded stock-based
compensation expense associated with its ESPP of $102,000 and $0.3 million for the three and nine
months ended September 30, 2010, respectively. The Company recorded stock-based compensation
expense associated with its ESPP of $0.2 million and $0.6 million for the three and nine months
ended September 30, 2009, respectively. Shares available for future issuance under the ESPP were as
follows (in thousands):
Shares | ||||
Available as of December 31, 2009 |
2,477 | |||
Authorized shares added |
1,343 | |||
Common shares issued |
(265 | ) | ||
Available as of September 30, 2010 |
3,555 | |||
17
Table of Contents
Stock-Based Compensation Assumptions
The Company uses the Black-Scholes option-pricing model to determine the fair value of
stock-based awards, including ESPP awards, under ASC 718. This model incorporates various
subjective assumptions including expected volatility, expected term and interest rates. The fair
value of each new option awarded was estimated on the grant date using the assumptions noted as
follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock Options |
||||||||||||||||
Expected volatility |
67 | % | 74 | % | 67-73 | % | 73-75 | % | ||||||||
Expected term |
6 years | 6 years | 6 years | 6 years | ||||||||||||
Risk-free interest |
1.87 | % | 2.80 | % | 1.87-2.80 | % | 2.00-2.80 | % | ||||||||
Expected dividends |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
ESPP |
||||||||||||||||
Expected volatility |
| | 40-61 | % | 102-104 | % | ||||||||||
Expected term |
| | 0.5 years | 0.5 years | ||||||||||||
Risk-free interest |
| | 0.16-0.22 | % | 0.32-0.74 | % | ||||||||||
Expected dividends |
| | 0.0 | % | 0.0 | % |
The computation of expected volatility is derived primarily from the Companys weighted
historical volatility following its IPO in March 2007 and to a lesser extent the weighted
historical volatilities of several comparable companies within the cable and telecommunications
equipment industry. The risk-free interest factor is based on the U.S. Treasury yield curve in
effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal
to each grants expected term. For all periods presented, the Company has elected to use the
simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletin
(SAB) 107 as revised by SAB 110. The Company estimates its forfeiture rate based on an analysis of
its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on
actual forfeiture experience, analysis of employee turnover behavior, and other factors. Estimates,
including achievement of incentive compensation plan targets, are evaluated each reporting period
and adjusted, if necessary, by recognizing the cumulative effect of the change in estimate on
compensation costs recognized in prior year periods.
9. Segment Reporting
The Company has a single reporting segment. Enterprise-wide disclosures related to revenues
and long-lived assets are described below. Net revenues by geographical region were allocated based
on the shipping destination of customer orders, and were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
$ | 24,986 | $ | 20,294 | $ | 77,290 | $ | 90,962 | ||||||||
Asia |
1,152 | 1,164 | 5,713 | 8,802 | ||||||||||||
Europe |
342 | 524 | 1,485 | 3,777 | ||||||||||||
Americas excluding
United States |
271 | 220 | 891 | 1,575 | ||||||||||||
Total net revenues |
$ | 26,751 | $ | 22,202 | $ | 85,379 | $ | 105,116 | ||||||||
Long-lived assets, net of depreciation were as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
United States |
$ | 4,030 | $ | 6,286 | ||||
Israel |
4,395 | 4,728 | ||||||
Rest of World |
740 | 403 | ||||||
Total long-lived assets, net |
$ | 9,165 | $ | 11,417 | ||||
10. Income Taxes
As part of the process of preparing its unaudited condensed consolidated financial statements,
the Company is required to estimate its income taxes in each of the jurisdictions in which it
operates. This process involves estimating the current tax liability under the most recent tax laws
and assessing temporary differences resulting from the differing treatment of items for tax and
18
Table of Contents
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included on the unaudited condensed consolidated balance sheets.
Income tax expense was $63,000 and $0.8 million for the nine months ended September 30, 2010
and 2009, respectively. The effective tax rates for these periods differed from the U.S. federal
statutory rate primarily due to the differential in foreign tax rates on cost-plus foreign
jurisdictions, non deductible stock compensation expense, other currently non-deductible items,
movement in the Companys valuation allowance and various discrete items.
11. Comprehensive Loss
The components of comprehensive loss were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (7,254 | ) | $ | (10,858 | ) | $ | (25,664 | ) | $ | (5,501 | ) | ||||
Change in cash flow hedges |
345 | 177 | 260 | 751 | ||||||||||||
Change in unrealized
gains (losses) on
marketable securities |
136 | (34 | ) | (105 | ) | (141 | ) | |||||||||
Comprehensive loss |
$ | (6,773 | ) | $ | (10,715 | ) | $ | (25,509 | ) | $ | (4,891 | ) | ||||
Accumulated other comprehensive income was as follows (in thousands):
As of September 30, | As of December 31, | |||||||
2010 | 2009 | |||||||
Net unrealized gains (losses) on cash flow hedges |
$ | 109 | $ | (151 | ) | |||
Net unrealized gains on marketable securities |
170 | 275 | ||||||
Total accumulated other comprehensive income |
$ | 279 | $ | 124 | ||||
12. Subsequent Events
On October 18, 2010, the Companys stockholders approved a one-time voluntary stock option
exchange program (Exchange Program) that will permit eligible employees to exchange certain
outstanding stock options that are underwater for a lesser number of RSUs to be granted under the
Companys 2007 Plan and the Israeli Sub-plan thereunder. The Exchange Program will be open to all
of the Companys employees in the U.S., Israel, China, Hong Kong and Korea with outstanding stock
options granted with an exercise price greater than or equal to $3.50. The exchange ratios will be
as follows:
If the Exercise Price of an Eligible | The Exchange Ratio Would Be | |
Option is: | (Exchanged Options for One RSU): | |
$3.50 - $4.96 |
2.5-for-1 | |
$4.97 - $5.98 |
3-for-1 | |
$5.99 - $9.91 |
4-for-1 | |
$9.92 and higher |
5-for-1 |
The Exchange Program commenced on October 21, 2010 and is expected to end on November 18,
2010. The new RSUs will vest (1) for previously vested options, over 27 months in three equal
installments on the date that is 9 months, 18 months and 27 months following the RSU grant date, or
(2) for unvested options, over 36 months in 12 equal installments on a quarterly basis following
the RSU grant date. The Company does not believe the incremental stock compensation charge related
to the Exchange Program will be material.
19
Table of Contents
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include
statements as to industry trends and our future expectations and other matters that do not relate
strictly to historical facts. These statements are often identified by the use of words such as
may, will, expect, believe, anticipate, project, intend, could, estimate, or
continue, and similar expressions or variations. These statements are based on the beliefs and
assumptions of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other factors that could cause
actual results and the timing of certain events to differ materially from the future results
expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in the section titled Risk
Factors and those included elsewhere in this Form 10-Q. Furthermore, such forward-looking
statements speak only as of the date of this report. We undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We develop, market and sell network-based platforms that enable cable multiple system
operators (MSOs) and telecommunications companies (collectively, service providers) to offer video
services across coaxial, fiber and copper networks. We were incorporated in Delaware in December
1998. Since that time, we have developed significant expertise in rich media processing,
communications networking and bandwidth management. Our customers are using our platforms to expand
high-definition television (HDTV) services, and enable high-quality video advertising programming
to subscribers. Our Broadcast Video, TelcoTV, Switched Digital Video and IPTV (Personalized Video)
solutions are comprised of a combination of software and programmable hardware platforms. We have
sold our solutions to more than 200 customers globally. We sell our products and services to
customers in the U.S. and Canada through our direct sales force. Domestically, our customers
include Bright House, Cablevision, Charter, Comcast, Cox, Time Warner Cable and Verizon, which are
seven of the ten largest service providers in the U.S. We sell to customers internationally through
a combination of direct sales and resellers.
Net Revenues. We derive our net revenues principally from our video products, which are
comprised of a combination of software licenses and programmable hardware platforms, and our
service offerings. Our sales cycle typically ranges from six to eighteen months, but can be longer
if the sale relates to new product introductions. Our sales process generally involves several
stages before we can recognize revenues on the sale of our products. As a provider of advanced
technologies, we seek to actively participate with our existing and potential customers in the
evaluation of their technology needs and network architectures, including the development of
initial designs and prototypes. Following these activities, we typically respond to a service
providers request for proposal, configure our products to work within our customers network
architecture, and test our products first in laboratory testing and then in field environments to
ensure interoperability with existing products in the service providers network. Following
testing, our revenue recognition generally depends on satisfying the acceptance criteria specified
in our contract with the customer and our customers schedule for roll-out of the product.
Completion of several of these stages is substantially outside of our control, which causes our
revenue patterns from a given customer to vary widely from period to period. After initial
deployment of our products, subsequent purchases of our products typically have a more compressed
sales cycle.
Due to the concentrated nature of the cable and telecommunications industries, we sell our
products to a limited number of large customers. Within a given quarter, our revenues from our
large customers can vary significantly based upon their budgetary cycles and implementation
schedules. For the three months ended September 30, 2010 and 2009, we derived approximately 76% and
83%, respectively, of our net revenues from our top five customers. For the nine months ended
September 30, 2010 and 2009, we derived approximately 75% and 76%, respectively, of our net
revenues from our top five customers. We believe that for the foreseeable future our net revenues
will continue to be highly concentrated in a limited number of large customers. The loss of one or
more of our large customers, or the cancellation or deferral of purchases by one or more of these
customers, would have a material adverse impact on our revenues and operating results. We often
recognize a substantial portion of our revenues in the last month of a quarter, which limits our
visibility to estimate future revenues, product mix and gross margins.
Our service revenues include ongoing customer support and maintenance, product installation
and training. Our customer support and maintenance is available in a tiered offering at either a
standard or an enhanced level. The majority of our customers have purchased our enhanced level of
customer support and maintenance. Our accounting for revenues is complex, and we account for
revenues in accordance with applicable U.S. generally accepted accounting principles (GAAP).
Cost of Net Revenues. Our cost of product revenues consists primarily of payments for
components and product assembly, costs of product testing, provisions recorded for excess and
obsolete inventory, provisions recorded for warranty obligations, manufacturing overhead and
allocated facilities and information technology expense. Cost of service revenues is primarily
comprised of personnel costs in providing technical support, costs incurred to support deployment
and installation within our customers networks, training costs and allocated facilities and
information technology expense.
20
Table of Contents
Gross Margin. Our gross profit as a percentage of net revenues, or gross margin, has been and
will continue to be affected by a variety of factors, including the mix of software, hardware and
services sold, and the average selling prices of our products. We achieve a higher gross margin on
the software content of our products compared to the hardware content. In general, we expect the
average selling prices of our products to decline over time due to competitive pricing
pressures, but we seek to minimize the impact to our gross margins by introducing new products with
higher margins, selling software enhancements to existing products, achieving price reductions for
components and improving product design to reduce costs. Our gross margins for products are also
influenced by the specific terms of our contracts, which may vary significantly from customer to
customer based on the type of products sold, the overall size of the customers order, and the
architecture of the customers network, which can influence the amount and complexity of design,
integration and installation services. Our overhead costs for our services are relatively fixed,
and fluctuations of our service revenues impact our service gross margin, which historically has
been higher than our product gross margin.
Operating Expenses. Our operating expenses consist of research and development, sales and
marketing, general and administrative, restructuring and other charges. Personnel-related costs are
the most significant component of our operating expenses. We expect our operating expenses to
increase modestly in absolute dollars for the three months ending December 31, 2010 compared to the
three months ended September 30, 2010, primarily due to modest
growth in sales and marketing expense.
Research and development expense is the largest functional component of our operating expenses
and consists primarily of personnel costs, independent contractor costs, prototype expenses, and
other allocated facilities and information technology expense. All research and development costs
are expensed as incurred. Our development teams are located in Tel Aviv, Israel; Shenzhen, China;
Westborough, Massachusetts and Redwood City, California. We expect our research and development
expense to remain relatively flat in absolute dollars for the three months ending December 31, 2010
compared to the three months ended September 30, 2010, as we remain cautious about our spending in
the near term.
Sales and marketing expense relates primarily to compensation and associated costs for
marketing and sales personnel, sales commissions, promotional and other marketing expenses, travel,
trade-show expenses and allocated facilities and information technology expense. Marketing programs
are intended to generate revenues from new and existing customers and are expensed as incurred. We
expect sales and marketing expense to increase modestly in absolute dollars for the three months
ending December 31, 2010 compared to the three months ended September 30, 2010 related to growth in
headcount and consultants.
General and administrative expense consists primarily of compensation and associated costs for
general and administrative personnel, professional services and allocated facilities and
information technology expenses. Professional services consist of outside legal, accounting and
other consulting costs. We expect general and administrative expense
to remain relatively flat in the three months ending December 31,
2010, compared to the three months ended
September 30, 2010, primarily due to increased legal fees related to a lawsuit we filed against
Imagine Communications, Inc. alleging patent infringement.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with U.S.
GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
The preparation of our condensed consolidated financial statements requires our management to make
estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the applicable periods. Management bases its
estimates, assumptions, and judgments on historical experience and on various other factors that
are believed to be reasonable under the circumstances. Different assumptions and judgments would
change the estimates used in the preparation of our condensed consolidated financial statements,
which, in turn, could change the results from those reported. Our management evaluates its
estimates, assumptions and judgments on an ongoing basis.
Critical accounting policies that affect our more significant judgments and estimates used in
the preparation of our condensed consolidated financial statements include accounting for revenue
recognition, the valuation of inventories, warranty liabilities, stock- based compensation, the
allowance for doubtful accounts, the impairment of long-lived assets, and income taxes, the
policies of which are discussed under the caption Critical Accounting Policies and Estimates in
our 2009 Form 10-K filed with the SEC on March 5, 2010. For additional information on the recent
accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated
Financial Statements.
21
Table of Contents
Results of Operations
The percentage relationships of the listed items from our condensed consolidated statements of
operations as a percentage of total net revenues were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Total cost of net revenues |
48.9 | 50.0 | 50.0 | 41.3 | ||||||||||||
Total gross profit |
51.1 | 50.0 | 50.0 | 58.7 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
46.5 | 52.7 | 45.7 | 32.6 | ||||||||||||
Sales and marketing |
16.8 | 27.1 | 19.4 | 17.4 | ||||||||||||
General and administrative |
15.0 | 20.7 | 14.6 | 13.4 | ||||||||||||
Restructuring (credits) charges |
(0.5 | ) | | 1.1 | 1.3 | |||||||||||
Class action litigation charges |
| | | 0.5 | ||||||||||||
Total operating expenses |
77.8 | 100.5 | 80.8 | 65.2 | ||||||||||||
Operating loss |
(26.7 | ) | (50.5 | ) | (30.8 | ) | (6.5 | ) | ||||||||
Interest income |
0.8 | 2.5 | 1.3 | 2.0 | ||||||||||||
Other (expense) income, net |
(0.4 | ) | 0.1 | (0.5 | ) | | ||||||||||
Loss before provision for income taxes |
(26.3 | ) | (47.9 | ) | (30.0 | ) | (4.5 | ) | ||||||||
Provision for income taxes |
0.8 | 1.0 | 0.1 | 0.7 | ||||||||||||
Net loss |
(27.1) | % | (48.9) | % | (30.1) | % | (5.2 | )% | ||||||||
Net Revenues
Total net revenues increased 20.5% to $26.8 million for the three months ended September 30,
2010 from $22.2 million for the three months ended September 30, 2009. The increase was due to a
$3.6 million increase in product revenues and a $0.9 million increase in service revenues.
Total net revenues decreased 18.8% to $85.4 million for the nine months ended September 30,
2010 from $105.1 million for the nine months ended September 30, 2009. The $19.7 million decrease
was due to a $11.0 million decrease in product revenues and a $8.7 million decrease in service
revenues.
Revenues from our top five customers comprised approximately 76% and 83% of net revenues for
the three months ended September 30, 2010 and 2009, respectively. Revenues from our top five
customers comprised approximately 75% and 76% of net revenues for the nine months ended September
30, 2010 and 2009, respectively. Cox Communications, Time Warner Cable and Verizon each represented
10% or more of our net revenues for the three and nine months ended September 30, 2010.
Brighthouse, Comcast, Time Warner Cable and Verizon each represented 10% or more of our net
revenues for the three months ended September 30, 2009. Time Warner Cable and Verizon each
represented 10% or more of our net revenues for the nine months ended September 30, 2009.
Time Warner Cable represented slightly more than 30% of our net revenues for the three months
ended September 30, 2010 compared to slightly less than 40% of our net revenues for the three
months ended September 30, 2009. While net revenues from Time Warner Cable decreased as a
percentage of total net revenues, they remained relatively flat in absolute dollars. For the nine
months ended September 30, 2010, Time Warner Cable represented slightly less than 40% of our net
revenues compared to slightly more than 30% for the nine months ended September 30, 2009. While net
revenues from Time Warner Cable increased as a percentage of total net revenues for the nine months
ended September 30, 2010, they remained relatively flat in absolute dollars.
Cox Communications represented slightly more than 20% of our net revenues for the three months
ended September 30, 2010, due to numerous Switched Digital Video deployments, compared to less than
10% of our net revenues for the three months ended September 30, 2009. For the nine months ended
September 30, 2010, Cox Communications represented slightly more than 10% of our net revenues
compared to less than 10% of our net revenues for the nine months ended September 30, 2009.
22
Table of Contents
Net revenues by geographical region based on the shipping destination of customer orders as a
percentage of total net revenues were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
United States |
93.4 | % | 91.4 | % | 90.6 | % | 86.5 | % | ||||||||
Asia |
4.3 | 5.2 | 6.7 | 8.4 | ||||||||||||
Europe |
1.3 | 2.4 | 1.7 | 3.6 | ||||||||||||
Americas excluding United States |
1.0 | 1.0 | 1.0 | 1.5 | ||||||||||||
Total net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Product Revenues. Product revenues increased to $16.3 million for the three months ended
September 30, 2010 from $12.6 million for the three months ended September 30, 2009. The increase
was primarily due to a $4.9 million increase in Switched Digital Video revenues, which was
primarily attributable to deployment and expansion projects from our existing customers, partially
offset by a decrease of $0.9 million in TelcoTV revenues, primarily due to a slowdown in the
rollout of the FiOS system by Verizon, which we expect will continue for the three months ending
December 31, 2010.
Product revenues decreased to $57.7 million for the nine months ended September 30, 2010 from
$68.8 million for the nine months ended September 30, 2009. The decrease was primarily due to a
$7.7 million decrease in Switched Digital Video revenues and a $2.2 million decrease in TelcoTV
revenues. This was partially offset by $0.6 million increase from new IPTV product offerings. Data
revenues were zero for the nine months ended September 30, 2010 compared to $1.6 million for the
nine months ended September 30, 2009, which was due to the retirement of our cable modem
termination system platform products in October 2007.
Service Revenues. Service revenues increased to $10.5 million for the three months ended
September 30, 2010 from $9.6 million for the three months ended September 30, 2009. This increase
was primarily due to a $0.6 million increase in Video customer support and maintenance revenues and
a $0.6 million increase in video installation and training revenues.
Service revenues decreased to $27.6 million for the nine months ended September 30, 2010 from
$36.3 million for the nine months ended September 30, 2009. The $8.7 million decrease was primarily
due to a one-time recognition of $5.6 million of previously deferred service revenues from a large
TelcoTV customer related to analog technology that was transitioned to digital technology during
the nine months ended September 30, 2009, which did not occur in the comparable 2010 period. Video
customer support and maintenance revenues decreased $1.6 million primarily due to downward pricing
pressure from existing customers and distributors and to a lesser extent non-renewals from certain
customers on some of our older products. Lastly, video installation and training revenues decreased
$0.8 million due to a decline in overall order volume.
Gross Profit and Gross Margin
Gross Profit. Gross profit increased 23.1% to $13.7 million for the three months ended
September 30, 2010 from $11.1 million for the three months ended September 30, 2009. Gross margin
increased to 51.1% for the three months ended September 30, 2010 compared to 50.0% for the three
months ended September 30, 2009.
Gross profit decreased 30.9% to $42.7 million for the nine months ended September 30, 2010
from $61.8 million for the nine months ended September 30, 2009. Gross margin decreased to 50.0%
for the nine months ended September 30, 2010 compared to 58.7% for the nine months ended September
30, 2009.
Product Gross Margin. Product gross margin for the three months ended September 30, 2010 was
37.2% compared to 35.1% for the three months ended September 30, 2009. This increase was primarily
due to increased product revenues that resulted in a higher absorption of fixed manufacturing
costs. In absolute dollars, manufacturing overhead expenses were flat at $2.9 million for both the
three months ended September 30, 2010 and 2009. We purchased a quadrature amplitude modulation
(QAM) edge resource management technology license for $2.5 million on June 30, 2009. During the
three months ended September 30, 2010, we recorded an expense to cost of net product revenues of
$1.5 million, which was the net book value of the QAM purchased software as of September 30, 2010,
as there were no material estimated future revenues for this technology in the near term. Product
gross margin for both the three months ended September 30, 2010 and 2009 included stock-based
compensation expense of $0.3 million.
Product gross margin for the nine months ended September 30, 2010 was 41.9% compared to
50.3% for the nine months ended September 30, 2009. This decrease was primarily due to lower
absorption of fixed manufacturing costs, a higher concentration of revenues being generated from
lower margin hardware products, continued downward pricing pressure and higher warranty expense.
Warranty expense increased $0.5 million, primarily related to a one-time $0.5 million benefit from
the reversal of warranty reserves related to analog products during the nine months ended September
30, 2009, which did not occur in the comparable 2010 period. Additionally, we purchased a
quadrature amplitude modulation (QAM) edge resource management technology license for $2.5 million
on June 30, 2009. During the nine months ended September 30, 2010, we recorded an expense to cost
of net product revenues of $1.5 million, which was the net book value of the QAM purchased software
as of September 30, 2010, as there were no material estimated future revenues for this technology
in the near term. These factors were partially offset by a $0.5 million decrease in manufacturing
23
Table of Contents
overhead expenses due to cost containment efforts. Product gross margin for the nine
months ended September 30, 2010 and 2009 included stock-based compensation expense of $1.0 million
and $0.9 million, respectively.
Services Gross Margin. Services gross margin for the three months ended September 30, 2010 was
72.6% compared to 69.8% for the three months ended September 30, 2009. This increase was primarily
due to an equal increase in both Video customer support and maintenance revenues and Video
installation and training revenues. Services gross margin for both the three months ended September
30, 2010 and 2009 included stock-based compensation expense of $0.2 million.
Services gross margin for the nine months ended September 30, 2010 was 66.8% compared to 74.8%
for the three months ended September 30, 2009. This decrease was primarily due to a $8.7 million
decrease in service revenues, primarily attributable to a one-time $5.6 million recognition of
deferred service revenues from analog technology that was transitioned to digital technology with
no related cost of service during the nine months ended September 30, 2009, which did not occur in
the comparable 2010 period. Services gross margin for the nine months ended September 30, 2010 and
2009 included stock-based compensation expense of $0.7 million and $0.6 million, respectively.
Operating Expenses
Research and Development. Research and development expense was $12.4 million for the three
months ended September 30, 2010, or 46.5% of net revenues, compared to $11.7 million for the three
months ended September 30, 2009, or 52.7% of net revenues. The increase in absolute dollars was
primarily due to a $0.5 million increase in prototype expense related to the development of new
product offerings. Research and development expense for both the three months ended September 30,
2010 and 2009 included stock-based compensation expense of $1.3 million.
Research and development expense was $39.0 million for the nine months ended September 30,
2010, or 45.7% of net revenues, compared to $34.3 million for the nine months ended September 30,
2009, or 32.6% of net revenues. The increase in absolute dollars was primarily due to a $1.9
million increase in wages and benefits related to increased headcount, $1.7 million increase in
independent contractor costs, a $0.7 million increase in prototype expense related to the
development of new product offerings and an increase in stock-based compensation expense. Research
and development expense for the nine months ended September 30, 2010 and 2009 included stock-based
compensation expense of $3.9 million and $3.6 million, respectively.
Sales and Marketing. Sales and marketing expense was $4.5 million for the three months ended
September 30, 2010, or 16.8% of net revenues, compared to $6.0 million for the three months ended
September 30, 2009, or 27.1% of net revenues. The decrease in absolute dollars was primarily due to
a $0.5 million decrease in commission expense related to a decline in customer orders, and a $0.4
million decrease in payroll costs. In addition, sales and marketing expense for the three months
ended September 30, 2010 and 2009 included stock-based compensation expense of $0.4 million and
$0.7 million, respectively.
Sales and marketing expense was $16.5 million for the nine months ended September 30, 2010, or
19.4% of net revenues, compared to $18.3 million for the nine months ended September 30, 2009, or
17.4% of net revenues. The decrease in absolute dollars was primarily due to a $0.8 million
decrease in wages and benefits, which was attributable to a reduction in headcount. Additionally,
marketing programs decreased $0.5 million due to cost containment efforts. Sales and marketing
expense for the nine months ended September 30, 2010 and 2009 included stock-based compensation
expense of $1.7 million and $1.8 million, respectively.
General and Administrative. General and administrative expense was $4.0 million for the three
months ended September 30, 2010, or 15.0% of net revenues, compared to $4.6 million for the three
months ended September 30, 2009, or 20.7% of net revenues. The decrease in absolute dollars was
primarily due to a $0.4 million decrease in litigation-related activities. General and
administrative expense for the three months ended September 30, 2010 and 2009 included stock-based
compensation expense of $1.1 million and $1.2 million, respectively.
General and administrative expense was $12.6 million for the nine months ended September 30,
2010, or 14.6% of net revenues, compared to $14.1 million for the nine months ended September 30,
2009, or 13.4% of net revenues. The decrease in absolute dollars was primarily due to a $0.9
million decrease in litigation-related activities and a $0.6 million decrease in bonus expense a
result of a decline in our financial performance. General and administrative expense for the nine
months ended September 30, 2010 and 2009 included stock-based compensation expense of $3.3 million
and $3.5 million, respectively.
Restructuring (Credits) Charges. Restructuring (credits) charges were ($139,000) and $0.9
million for the three and nine months ended September 30, 2010 and zero and $1.4 million for the
three and nine months ended September 30, 2009, respectively. The 2010 charges included $0.7
million related to a restructuring plan pursuant to which employees and subcontractors were
terminated, and amounts related to changes in projected sublease income for a facility vacated in
October 2007. The 2009 restructuring charges included $0.7 million related to a restructuring plan
pursuant to which employees were terminated and $0.7 million related to lower projected sublease
income for a Massachusetts facility vacated in October 2007.
Interest Income
Interest income for the three months ended September 30, 2010 and 2009 was $0.2 million and
$0.5 million, respectively. Interest income for the nine months ended September 30, 2010 and 2009
was $1.1 million and $2.1 million, respectively. The decreases in interest income were primarily
attributable to lower interest rates.
24
Table of Contents
Other (expense) income, net
Other (expense) income, net, which consists primarily of foreign exchange (losses) gains, was
an expense of $134,000 for the three months ended September 30, 2010 compared to income of $31,000
for the three months ended September 30, 2009. Other (expense) income, net, was an expense of $0.3
million for the nine months ended September 30, 2010 compared to an expense of $62,000 for the nine
months ended September 30, 2009.
Provision for income taxes
Provision for income taxes for the three months ended September 30, 2010 was $0.2 million, or
negative 3.1%, on a pre-tax loss of $7.0 million, compared to tax expense of $0.2 million, or
negative 2.1%, on a pre-tax loss of $10.6 million for the three months ended September 30, 2009.
The difference between our effective tax rates and the federal statutory rate of 35% is primarily
attributable to the differential in foreign tax rates, non deductible stock compensation expense,
other currently non-deductible items, movement in our valuation allowance and various discrete
items.
We maintained a valuation allowance as of September 30, 2010 against certain of our deferred
tax assets because, based on the available evidence, we believe it is more likely than not that we
would not be able to utilize these deferred tax assets in the future. We intend to maintain this
valuation allowance until sufficient evidence exists to support its reduction. We make estimates
and judgments about our future taxable income that are based on assumptions that are consistent
with our plans and estimates. Should the actual amounts differ from our estimates, the amount of
our valuation allowance could be materially impacted.
We had gross unrecognized tax benefits of approximately $2.8 million and $3.4 million as of
September 30, 2010 and December 31, 2009, respectively. We expect the unrecognized tax benefits to
remain unchanged for the next 12 months.
Our policy to include interest and penalties related to unrecognized tax benefits within our
provision for income taxes did not change since December 31, 2009. Our major tax jurisdictions are
the U.S. and Israel. The tax years 2000 through 2009 remain open and subject to examination by the
appropriate governmental agencies in the U.S. and the tax years 2007 through 2009 remain open and
subject to examination by the appropriate governmental agencies in Israel.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private and public sales of
equity securities and from cash provided by operations. As of September 30, 2010, we had no
long-term debt outstanding.
Cash Flow
Cash, cash equivalents and marketable securities. As of September 30, 2010, our cash, cash
equivalents and marketable securities of $152.3 million were invested primarily in corporate debt
securities, commercial paper, securities of U.S. agencies and certificates of deposit. We do not
enter into investments for trading or speculative purposes. Although cash, cash equivalents and
marketable securities decreased by $19.7 million during the nine months ended September 30, 2010,
we believe that our existing sources of liquidity combined with cash generated from operations will
be sufficient to meet our currently anticipated cash requirements for at least the next 12 months.
However, the networking industry is capital intensive. In order to remain competitive, we must
constantly evaluate the need to make significant investments in products and in research and
development. We may seek additional equity or debt financing from time to time to maintain or
expand our product lines or research and development efforts, or for other strategic purposes such
as acquisitions. The timing and amount of any such financing requirements will depend on a number
of factors, including demand for our products, changes in industry conditions, product mix,
competitive factors and the timing of any strategic acquisitions. There can be no assurance that
such financing will be available on acceptable terms, and any additional equity financing would
result in incremental ownership dilution to our existing stockholders. There are no significant
limits or restrictions that affect our ability to access our cash, cash equivalents and marketable
securities.
25
Table of Contents
Operating activities
The key line items affecting cash from operating activities were as follows (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (25,664 | ) | $ | (5,501 | ) | ||
Add back non-cash charges: |
||||||||
Stock-based compensation |
10,673 | 10,298 | ||||||
Depreciation of property and equipment |
5,173 | 6,428 | ||||||
Write-off of software license |
1,458 | | ||||||
Other non-cash charges |
1,031 | 642 | ||||||
Net (loss) income before non-cash charges |
(7,329 | ) | 11,867 | |||||
Decrease in accounts receivable |
12,786 | 2,419 | ||||||
(Increase) decrease in inventories, net |
(6,946 | ) | 1,255 | |||||
Decrease in deferred revenues |
(14,584 | ) | (18,713 | ) | ||||
Decrease in accounts payable and accrued and other liabilities |
(4,138 | ) | (7,397 | ) | ||||
Other, net |
2,452 | (404 | ) | |||||
Net cash used in operating activities |
$ | (17,759 | ) | $ | (10,973 | ) | ||
Changes in net cash used in operating activities were influenced by the following factors:
Accounts receivable decreased by $12.8 million during the nine months ended September 30, 2010
due to lower sales and shipments to our customers primarily due to the timing of orders.
Our inventory requires lead time to manufacture therefore we are required to order certain
inventory in advance of our anticipated sales. Inventory increased $6.9 million during the nine
months ended September 30, 2010 due to lower sales and shipments than we anticipated when we placed
the orders, and also due to purchases of inventory to prepare for anticipated future sales.
Deferred revenues, net decreased during the nine months ended September 30, 2010 and 2009.
This was primarily due to our recognition of revenues related to installation of products
purchased in prior years, which was not replaced by the same level of shipments.
Investing Activities
Our investing activities provided cash of $2.4 million for the nine months ended September 30,
2010, primarily from maturities and sales, net of purchases, of marketable securities of $5.8
million to fund our operations, partially offset by the purchase of property and equipment,
primarily computer and engineering equipment of $3.4 million. Our investing activities used cash of
$15.9 million for the nine months ended September 30, 2009, primarily from purchases, net of
maturities and sales, of marketable securities, of $10.6 million, the purchase of property and
equipment, primarily computer and engineering equipment of $3.0 million, and the purchase of a
software license of $2.5 million.
Financing Activities
Our financing activities provided cash of $1.5 million and $3.4 million for the nine months
ended September 30, 2010 and 2009, respectively, primarily through the exercise of stock options
under our equity incentive plans and sale of stock under our employee stock purchase plan.
Contractual Obligations
Our contractual obligations as of September 30, 2010 were as follows (in thousands):
Payments due by December 31: | ||||||||||||||||||||
Total | 2010 | 2012 | 2014 | Thereafter | ||||||||||||||||
Purchase obligations (1) |
$ | 11,588 | $ | 910 | $ | 10,678 | $ | | $ | | ||||||||||
Operating lease obligations (2) |
6,404 | 860 | 5,239 | 305 | | |||||||||||||||
Total obligations |
$ | 17,992 | $ | 1,770 | $ | 15,917 | $ | 305 | $ | | ||||||||||
(1) | Purchase obligations comprise firm non-cancellable agreements to purchase inventory. | |
(2) | Operating lease obligations are net of $1.2 million sublease rentals from a portion of our Tel Aviv and Massachusetts facilities. |
26
Table of Contents
Off-Balance Sheet Arrangements
As of September 30, 2010, we had no off-balance sheet arrangements as defined in Item
303(a)(4) of Regulation S-K.
Effects of Inflation
Our monetary assets, consisting primarily of cash, marketable securities and receivables, are
not materially affected by inflation because they are short-term in duration. Our non-monetary
assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and
other assets, are not affected significantly by inflation. We believe that the impact of inflation
on the replacement costs of our equipment, furniture and leasehold improvements will not materially
affect our operations. However, the rate of inflation affects our cost of goods sold and operating
expenses, such as those for employee compensation, which may not be readily recoverable in the
price of the products and services offered by us.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The primary objectives of our investment activities are to preserve principal, provide
liquidity and maximize income without exposing us to significant risk of loss. The securities we
invest in are subject to market risk. This means that a change in prevailing interest rates may
cause the principal amount of our investment to fluctuate. We maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including commercial paper and
corporate debt securities, government and non-government debt securities, money market funds and
certificates of deposit. The risk associated with fluctuating interest rates is not limited to our
investment portfolio. As of September 30, 2010, our investments were primarily in commercial paper,
corporate notes and bonds, money market funds and U.S. government and agency securities. If overall
interest rates fell 10% for the three months ended September 30, 2010, our interest income would
have decreased by an immaterial amount, assuming consistent investment levels.
Foreign Currency Risk
Our sales contracts are primarily denominated in U.S. dollars, and therefore the majority of
our revenues are not subject to foreign currency risk. However, if we extend credit to
international customers and the U.S. dollar appreciates against our customers local currency,
there is an increased collection risk as it will require more local currency to settle our U.S.
dollar invoice.
Our operating expenses and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates, particularly changes in the Israeli New Shekel, and to a lesser extent the
Chinese Yuan and Euro. To help protect against significant fluctuations in value and the volatility
of future cash flows caused by changes in currency exchange rates, we have foreign currency risk
management programs to hedge both balance sheet items and future forecasted expenses denominated in
Israeli New Shekels. An adverse change in exchange rates of 10% for the Israeli New Shekel, Chinese
Yuan and Euro, without any hedging of the Israeli New Shekel, would have resulted in an increase in
our loss before taxes of approximately $0.8 million for the three months ended September 30, 2010.
We continue to hedge our projected exposure to exchange rate fluctuations between the U.S.
dollar and the Israeli New Shekel, and accordingly, we do not anticipate that these fluctuations
will have a material impact on our financial results for the three months ending December 31, 2010.
Currency forward contracts and currency options are generally utilized in these hedging programs.
Our hedging programs are intended to reduce, but not eliminate, the impact of currency exchange
rate movements. As our hedging
program is relatively short-term in nature, a long-term material change in the value of the
U.S. dollar versus the Israeli New Shekel could adversely impact our operating expenses in the
future.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, as required by
paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended,
we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer,
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose in reports that we
file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and (ii) is accumulated and communicated to our management, including our Chief Executive Officer
and our Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance
that such information is accumulated and communicated to our management. Our disclosure controls
and procedures include components of our internal control over financial reporting. Managements
assessment of the effectiveness of our internal control over financial reporting is expressed at
the level of reasonable assurance because a control system, no matter how well designed and
operated, can provide only reasonable, but not absolute, assurance that the control systems
objectives will be met.
27
Table of Contents
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2010, there was no change in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of
Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
28
Table of Contents
PART II. OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
A discussion of our current litigation is disclosed in the notes to our condensed consolidated
financial statements. See Notes to Condensed Consolidated Financial Statements, Note 7 Legal
Proceedings in Part I, Item 1 of this quarterly report on Form 10-Q.
Item 1A. | RISK FACTORS |
An investment in our equity securities involves significant risks. Any of these risks, as well
as other risks not currently known to us or that we currently consider immaterial, could have a
material adverse effect on our business, prospects, financial condition or operating results. The
trading price of our common stock could decline due to any of these risks, and you may lose all or
part of your investment. In assessing the risks described below, you should also refer to the other
information contained in this Form 10-Q, including our consolidated financial statements and the
related notes, before deciding to purchase any shares of our common stock.
We depend on cable multiple system operators (MSOs) and telecommunications companies adopting
advanced technologies for substantially all of our net revenues, and any decrease or delay in
capital spending for these advanced technologies would harm our operating results, financial
condition and cash flows.
Almost all of our sales depend on cable MSOs and telecommunications companies adopting
advanced video technologies, and we expect these sales to continue to constitute a significant
majority of our revenues for the foreseeable future. Demand for our products will depend on the
magnitude and timing of capital spending by service providers on advanced technologies for
constructing and upgrading their network infrastructure, and a reduction or delay in this spending
could have a material adverse effect on our business.
The capital spending patterns of our existing and potential customers are dependent on a
variety of factors, including:
| annual budget cycles; | |
| overall consumer demand for video services and the acceptance of newly introduced services; | |
| competitive pressures, including pricing pressures; | |
| changes in general economic conditions due to fluctuations in the equity and credit markets or otherwise; | |
| the impact of industry consolidation; | |
| the strategic focus of our customers and potential customers; | |
| technology adoption cycles and network architectures of service providers, and evolving industry standards that may impact them; | |
| the status of federal, local and foreign government regulation of telecommunications and television broadcasting, and regulatory approvals that our customers need to obtain; | |
| discretionary customer spending patterns; | |
| bankruptcies and financial restructurings within the industry; and | |
| work stoppages or other labor- or labor market-related issues that may impact the timing of orders and revenues from our customers. |
Since 2009, we have seen reduced capital spending by our customers for our key products. Any
continued slowdown or delay in the capital spending by service providers for our products as a
result of any of the above factors would likely have a significant adverse impact on our quarterly
revenue and net losses.
Our operating results are likely to fluctuate significantly and may fail to meet or exceed the
expectations of securities analysts or investors or our guidance, causing our stock price to
decline.
Our operating results have fluctuated in the past and are likely to continue to fluctuate, on
an annual and a quarterly basis, as a result of a number of factors, many of which are outside our
control. These factors include:
| market acceptance of new or existing products offered by us or our customers; | |
| the level and timing of capital spending by our customers; | |
| the timing, mix and amount of orders, especially from significant customers; | |
| the level of our deferred revenue balances; | |
| changes in market demand for our products; | |
| our mix of products sold; |
29
Table of Contents
| the mix of software and hardware products sold; | |
| our unpredictable and lengthy sales cycles, which typically range from six to eighteen months; | |
| the timing of revenue recognition on sales arrangements, which may include multiple deliverables and result in delays in recognizing revenue; | |
| our ability to design, install and receive customer acceptance of our products; | |
| materially different acceptance criteria in key customers agreements, which can result in large amounts of revenue being recognized, or deferred, as the different acceptance criteria are applied to large orders; | |
| new product introductions by our competitors; | |
| competitive market conditions, including pricing actions by our competitors; | |
| our ability to complete complex development of our software and hardware on a timely basis; | |
| unexpected changes in our operating expenses; | |
| the impact of new accounting, income tax and disclosure rules; | |
| the cost and availability of components used in our products; | |
| the potential loss of key manufacturer and supplier relationships; and | |
| changes in domestic and international regulatory environments. |
We establish our expenditure levels for product development and other operating expenses based
on projected sales levels, and our expenses are relatively fixed in the short term. Accordingly,
variations in the timing of our sales can cause significant fluctuations in our operating results.
In addition, as a result of the factors described above, our operating results in one or more
future periods may fail to meet or exceed the expectations of securities analysts or investors or
our guidance, which would likely cause the trading price of our common stock to decline
substantially.
Our customer base is highly concentrated, and there are a limited number of potential customers for
our products. The loss of any of our key customers would likely reduce our revenues significantly.
Historically, a large portion of our sales have been to a limited number of large customers.
Our five largest customers accounted for approximately 75% of our net revenues for the nine months
ended September 30, 2010, compared to 76% of our net revenues for the nine months ended September
30, 2009. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net
revenues for the nine months ended September 30, 2010. Time Warner Cable and Verizon each
represented 10% or more of our net revenues for the nine months ended September 30, 2009. We
believe that for the foreseeable future our net revenues will be concentrated in a limited number
of large customers.
We anticipate that a large portion of our revenues will continue to depend on sales to a
limited number of customers, and we do not have contracts or other agreements that guarantee
continued sales to these or any other customers. Consequently, reduced capital expenditures by any
one of our larger customers (whether caused by adverse financial conditions, more cautious spending
patterns due to economic uncertainty or other factors) is likely to have a material negative impact
on our operating results. For example, Verizon slowed the rollout of its FiOS system in 2009, which
has and will continue to negatively impact our revenues. In addition, as the consolidation of
ownership of cable MSOs and telecommunications companies continues, we may lose existing customers
and have access to a shrinking pool of potential customers. We expect to see continuing industry
consolidation due to the significant capital costs of constructing video, voice and data networks
and for other reasons. Further business combinations may occur in our customer base, which will
likely result in our customers gaining increased purchasing leverage over us. This may reduce the
selling prices of our products and services and as a result may harm our business and financial
results. Many of our customers desire to have two sources for the products we sell to them. As a
result, our future revenue opportunities could be limited, and our profitability could be adversely
impacted. The loss of, or reduction in orders from, any of our key customers would significantly
reduce our revenues and have a material adverse impact on our business, operating results and
financial condition.
If revenues forecasted for a particular period are not realized in such period due to the lengthy,
complex and unpredictable sales cycles of our products, our operating results for that or
subsequent periods will be harmed.
The sales cycles of our products are typically lengthy, complex and unpredictable and usually
involve:
| a significant technical evaluation period; | |
| a significant commitment of capital and other resources by service providers; | |
| substantial time required to engineer the deployment of new technologies for new video services; | |
| substantial testing and acceptance of new technologies that affect key operations; and | |
| substantial test marketing of new services with subscribers. |
30
Table of Contents
For these and other reasons, our sales cycles are generally between six and eighteen months,
but can last longer. If orders forecasted for a specific customer for a particular quarter do not
occur in that quarter, our operating results for that quarter or subsequent quarters could be
substantially lower than anticipated. Our quarterly and annual results may fluctuate significantly
due to revenue recognition rules and the timing of the receipt of customer orders.
Additionally, we derive a large portion of our net revenues from sales that include the
network design, installation and integration of equipment, including equipment acquired from third
parties to be integrated with our products to the specifications of our customers. We base our
revenue forecasts on the estimated timing to complete the network design, installation and
integration of our customer projects and customer acceptance of those products. The systems of our
customers are both diverse and complex, and our ability to configure, test and integrate our
systems with other elements of our customers networks depends on technologies provided to our
customers by third parties. As a result, the timing of our revenue related to the implementation of
our solutions in these complex networks is difficult to predict and could result in lower than
expected revenue in any particular quarter. Similarly, our ability to deploy our equipment in a
timely fashion can be subject to a number of other risks, including the availability of skilled
engineering and technical personnel, the availability of equipment produced by third parties and
our customers need to obtain regulatory approvals.
Lower deferred revenue balances will make future period results less predictable.
Historically, we have had relatively high deferred revenue balances at quarter end, which has
provided us with some measure of predictability for future periods. However, our deferred revenue
balance as of September 30, 2010 was approximately $14.6 million lower than it was as of December
31, 2009. This lower deferred revenue balance makes our quarterly revenue more dependent on orders
both received and shipped within the same quarter, and therefore less predictable. This lack of
deferred revenues could cause additional revenue volatility, which could in turn harm our stock
price.
If we do not accurately anticipate the correct mix of our products that will be sold, we may be
required to record charges related to excess inventories.
Due to the unpredictable nature of the demand for our products, we are required to place
non-cancelable orders with our suppliers for components, finished products and services in advance
of actual customer commitments to purchase these products. Significant unanticipated fluctuations
in demand could result in costly excess production or inventories. Our inventory balance was
approximately $6.9 million higher as of September 30, 2010 compared to December 31, 2009. In order
to minimize the negative financial impact of excess production, we may be required to significantly
reduce the sales prices of our products in an attempt to increase demand, which in turn could
result in a reduction in the value of the original inventory. If we were to determine that we could
not utilize or sell this inventory, we may be required to write down its value. Writing down
inventory or reducing product prices could adversely impact our gross margins and financial
condition.
The markets in which we operate are intensely competitive, many of our competitors are larger, more
established and better capitalized than we are, and some of our competitors have integrated
products performing functions similar to our products into their existing network infrastructure
offerings, and consequently our existing and potential customers may decide against using our
products in their networks, which would harm our business.
The markets for selling network-based hardware and software products to service providers are
extremely competitive and have been characterized by rapid technological change. We compete broadly
with system suppliers including ARRIS Group, Cisco Systems, Harmonic, Motorola, SeaChange
International and a number of smaller companies. Many of our competitors are substantially larger
and have greater financial, technical, marketing and other resources than we have. Given their
capital resources, long-standing relationships with service providers worldwide, and broader
product lines, many of these large organizations are in a better position to withstand any
significant reduction in capital spending by customers in these markets. If we are unable to
overcome these resource advantages, our competitive position would suffer.
In addition, other providers of network-based hardware and software products offer
functionality aimed at solving similar problems addressed by our products. For example, several
vendors have announced products designed to compete with our Switched Digital Video solution. The
inclusion of functionality perceived to be similar to our product offerings in our competitors
products that already have been accepted as necessary components of network architecture may have
an adverse effect on our ability to market and sell our products. In addition, our customers other
vendors that can provide a broader product offering may be able to offer pricing or other
concessions that we are not able to match because we currently offer a more modest suite of
products and have fewer resources. If our existing or potential customers are reluctant to add
network infrastructure from new vendors or otherwise decide to work with their other existing
vendors, our business, operating results and financial condition will be adversely affected.
In recent years, we have seen consolidation among our competitors, such as Ciscos acquisition
of Scientific Atlanta, Motorolas acquisition of Terayon, and purchases of Video on Demand
solutions by each of ARRIS Group, Cisco, Harmonic and Motorola. In addition, some of our
competitors have entered into strategic relationships with one another to offer a more
comprehensive solution than would be available individually. We expect this trend to continue as
companies attempt to strengthen or maintain their market positions in the evolving industry for
video by increasing the amount of commercial and technical integration of their video products. Due
to our comparatively small size and comparatively narrow product offerings, our ability to compete
will depend on our ability to
31
Table of Contents
partner with companies to offer a more complete overall solution. If we fail to do so, our
competitive position will be harmed and our sales will likely suffer. These combined companies may
offer more compelling product offerings and may be able to offer greater pricing flexibility,
making it more difficult for us to compete while sustaining acceptable gross margins. Finally,
continued industry consolidation may impact customers perceptions of the viability of smaller
companies, which may affect their willingness to purchase products from us. These competitive
pressures could harm our business, operating results and financial condition.
We have been unable to achieve sustained profitability, which could harm the price of our stock.
Historically, we have experienced significant operating losses and we were not profitable in
the nine months ended September 30, 2010. If we fail to achieve or sustain profitability in the
future, it will harm our long-term business and we may not meet the expectations of the investment
community, which would have a material adverse impact on our stock price.
We may not accurately anticipate the timing of the market needs for our products and develop such
products at the appropriate times at significant research and development expense, or we may not
gain market acceptance of our several emerging video services and/or adoption of new network
architectures and technologies, any of which could harm our operating results and financial
condition.
Accurately forecasting and meeting our customers requirements is critical to the success of
our business. Forecasting to meet customers needs is particularly difficult for newer products and
products under development. Our ability to meet customer demand depends on our ability to configure
our solutions to the complex architectures that our customers have developed, the availability of
components and other materials and the ability of our contract manufacturers to scale their
production of our products. Our ability to meet customer requirements depends on our ability to
obtain sufficient volumes of required components and materials in a timely fashion. If we fail to
meet customers supply expectations, our net revenues will be adversely affected, and we will
likely lose business. In addition, our priorities for future product development are based on how
we expect the market for video services to develop in the U.S. and in international markets.
Future demand for our products will depend significantly on the growing market acceptance of
several emerging video services including HDTV, addressable advertising, video delivered over
telecommunications company networks and video delivered over Internet Protocol by cable MSOs. The
effective delivery of these services will depend on service providers developing and building new
network architectures to deliver them. If the introduction or adoption of these services or the
deployment of these networks is not as widespread or as rapid as we or our customers expect, our
revenue opportunities will be limited.
Our product development efforts require substantial research and development expense, as we
develop new technology, including next generation MSP and technology primarily related to the
delivery of video over IP networks. In addition, as many of our products are new solutions, there
is a risk of delays in delivery of these solutions. Our research and development expense was $39.0
million for the nine months ended September 30, 2010, and there can be no assurance that we will
achieve an acceptable return on our research and development efforts, and no assurance that we will
be able to deliver our solutions in time to achieve market acceptance.
Additionally, our customers are adopting new technologies, standards and formats. In
particular, service providers are transitioning from delivering video via radio frequency, which
products have historically represented a large majority of our revenues, to delivering video over
IP. While we are in the process of developing products based on this and other new formats in order
to remain competitive, we do not have such products at this time and cannot be certain when, if at
all, we will have products in support of such new formats.
Our ability to grow will depend significantly on our delivery of products that help enable
telecommunications companies to provide video services. If the demand for video services from
telecommunications companies does not materialize or if these service providers find alternative
methods of delivering video services, future sales of our video products will suffer.
We have generated significant revenues from a single telecommunications company. Our ability
to grow will depend on our selling video products to additional telecommunications companies.
Although a number of our existing products are being deployed in telecom networks, we will need to
devote considerable resources to obtain orders, qualify our products and hire knowledgeable
personnel to address telecommunications company customers, each of which will require significant
time and financial commitment. These efforts may not be successful in the near future, or at all.
If technological advancements allow telecommunications companies to provide video services without
upgrading their current system infrastructure or provide them a more cost-effective method of
delivering video services than our products, projected sales of our video products will suffer.
Even if these providers choose our video solutions, they may not be successful in marketing video
services to their customers, in which case additional sales of our products would likely be
limited.
Selling successfully to additional telecommunication companies will be a significant challenge
for us. Several of our largest competitors have mature customer relationships with many of the
largest telecommunications companies, while we have limited experience with sales and marketing
efforts designed to reach these potential customers. In addition, telecommunications companies face
specific network architecture and legacy technology issues that we have only limited expertise in
addressing. If we fail to penetrate the telecommunications market successfully, our growth in
revenues and our operating results would likely be adversely impacted.
32
Table of Contents
We anticipate that our gross margins will fluctuate with changes in our product mix and we expect
decreases in the average selling prices of our hardware and software products, which will adversely
impact our operating results.
Our product gross margins decreased for the nine months ended September 30, 2010, compared to
the nine months ended September 30, 2009. Our industry has historically experienced a decrease in
average selling prices. We anticipate that the average selling prices of our products will continue
to decrease in the future in response to competitive pricing pressures, increased sales discounts
and new product introductions by our competitors. We may experience substantial decreases in future
operating results due to a decrease of our average selling prices. Additionally, our failure to
develop and introduce new products on a timely basis would likely contribute to a decline in our
gross margins, which could have a material adverse effect on our operating results and cause the
price of our common stock to decline. We also anticipate that our gross margins will fluctuate from
period to period as a result of the mix of products we sell in any given period. If our sales of
lower margin products significantly expand in future quarterly periods, our overall gross margin
levels and operating results would be adversely impacted.
Continued uncertain general economic conditions may adversely affect our financial condition and
results of operations and make our future business more difficult to forecast and manage.
Our business is sensitive to changes in general economic conditions, both in the U.S. and
globally. Due to the continued tight credit markets and concerns regarding the availability of
credit, our current or potential customers may delay or reduce purchases of our products, which
would adversely affect our revenues and therefore harm our business and results of operations.
More generally, we are unable to predict how long the current economic uncertainty will last.
There can be no assurances that government responses to the recession will restore confidence in
the U.S. and global economies. We expect our business to be adversely impacted by any significant
or prolonged uncertainty in the U.S. or global economies as our customers capital spending is
expected to be reduced during an economic downturn. The uncertainty regarding the U.S. and global
economies also has made it more difficult for us to forecast and manage our business.
We must manage our business effectively even if our infrastructure, management and resources might
be strained due to our expense reduction efforts and recent officer departures.
In the past several years, including this year, we have undertaken a number of reductions in
force, experienced a number of changes in our executive management (including the departures in the
first half of 2010 of our chief operating officer, chief financial officer and the senior vice
president of worldwide sales) and implemented other cost reduction measures. Effectively managing
our business with reduced headcount and expenses in some areas will likely place increased strain
on our existing resources. In particular, the departures of our chief operating officer and our
senior vice president of worldwide sales in March 2010 (neither of whom we replaced) has placed
place additional strain on our existing team and there can be no assurance that the departures of
these officers will not disrupt our business operations, customer relationships or other matters.
In addition, we may need to expand and otherwise improve our internal systems, including our
management information systems, customer relationship and support systems, and operating,
administrative and financial systems and controls. These efforts may require us to make significant
capital expenditures or incur significant expenses, and divert the attention of management, sales,
support and finance personnel from our core business operations, which may adversely affect our
financial performance in future periods. Moreover, to the extent we grow in the future, such growth
will result in increased responsibilities for our management personnel. Managing any future growth
will require substantial resources that we may not have or otherwise be able to obtain.
Our efforts to develop additional channels to market and sell our products internationally may not
succeed.
Our video solutions traditionally have been sold directly to large cable MSOs with recent
sales directly to telecommunications companies. To date, we have not focused on smaller service
providers and have had only limited access to service providers in certain international markets,
including Asia and Europe. Although we intend to establish strategic relationships with leading
distributors worldwide in an attempt to reach new customers, we may not succeed in establishing
these relationships. Even if we do establish these relationships, the distributors may not succeed
in marketing our products to their customers. Some of our competitors have established
long-standing relationships with cable MSOs and telecommunications companies that may limit our and
our distributors ability to sell our products to those customers. Even if we were to sell our
products to those customers, it would likely not be based on long-term commitments, and those
customers would be able to terminate their relationships with us at any time without significant
penalties.
International sales represented 9.4% of our net revenues for the nine months ended September
30, 2010 compared to 13.5% for nine months ended September 30, 2009. Our international sales depend
on our development of indirect sales channels in Europe and Asia through distributor and reseller
arrangements with third parties. However, we may not be able to successfully enter into additional
reseller and/or distribution agreements and/or may not be able to successfully manage our product
sales channels. In addition, many of our resellers also sell products from other vendors that
compete with our products and may choose to focus on products of those vendors. Additionally, our
ability to utilize an indirect sales model in these international markets will depend on our
ability to qualify and train those resellers to perform product installations and to provide
customer support. If we fail to develop and cultivate relationships with significant resellers, or
if these resellers do not succeed in their sales efforts (whether because they are unable to
provide support or otherwise), we may be unable to grow or sustain our revenue in international
markets.
33
Table of Contents
We are exposed to fluctuations in currency exchange rates, which could negatively affect our
financial results and cash flows.
Because a substantial portion of our employee base is located in Israel, we are exposed to
fluctuations in currency exchange rates between the U.S. dollar and the Israeli New Shekel. These
fluctuations could have a material adverse impact on our financial results and cash flows. A
decrease in the value of the U.S. dollar relative to foreign currencies could increase our
operating expenses and the cost of raw materials to the extent that we must purchase components or
pay employees in foreign currencies.
Currently, we hedge a portion of our anticipated future expenses and certain assets and
liabilities denominated in the Israeli New Shekel. The hedging activities we undertake are intended
to partially offset the impact of currency fluctuations. As our hedging program is relatively
short-term in nature, a material long-term change in the value of the U.S. dollar versus the
Israeli New Shekel could increase our operating expenses in the future.
Our products must interoperate with many software applications and hardware found in our customers
networks. If we are unable to ensure that our products interoperate properly, our business would be
harmed.
Our products must interoperate with our customers existing networks, which often have varied
and complex specifications, utilize multiple protocol standards, software applications and products
from multiple vendors, and contain multiple generations of products that have been added over time.
As a result, we must continually ensure that our products interoperate properly with these existing
networks. To meet these requirements, we must undertake development efforts that require
substantial capital investment and employee resources. We may not accomplish these development
efforts quickly or cost-effectively, if at all. For example, our products currently interoperate
with set-top boxes marketed by vendors such as Cisco Systems and Motorola and with VOD servers
marketed by ARRIS Group and SeaChange. If we fail to maintain compatibility with these set-top
boxes, VOD servers or other software or equipment found in our customers existing networks, we may
face substantially reduced demand for our products, which would adversely affect our business,
operating results and financial condition.
We have entered into interoperability arrangements with a number of equipment and software
vendors for the use or integration of their technology with our products. In these cases, the
arrangements give us access to and enable interoperability with various products in the digital
video market that we do not otherwise offer. If these relationships fail, we will have to devote
substantially more resources to the development of alternative products and the support of our
products, and our efforts may not be as effective as the combined solutions with our current
partners. In many cases, these parties are either companies with which we compete directly in other
areas, such as Motorola, or companies that have extensive relationships with our existing and
potential customers and may have influence over the purchasing decisions of these customers. A
number of our competitors have stronger relationships with some of our existing and potential
partners and, as a result, our ability to successfully partner with these companies may be harmed.
Our failure to establish or maintain key relationships with third party equipment and software
vendors may harm our ability to successfully sell and market our products. We are currently
investing significant resources to develop these relationships. Our operating results could be
adversely affected if these efforts do not generate the revenues necessary to offset this
investment.
In addition, if we find errors in the existing software or defects in the hardware used in our
customers networks or problematic network configurations or settings, as we have in the past, we
may have to modify our software or hardware so that our products will interoperate with our
customers networks. This could cause longer installation times for our products and could cause
order cancellations, either of which would adversely affect our business, operating results and
financial condition.
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 would have a material adverse
effect on our sales and results of operations.
Once our products are deployed within our customers networks, our customers depend on our
support organization to resolve any issues relating to our products. If we or our channel partners
do not effectively assist our customers in deploying our products, or succeed in helping our
customers quickly resolve post-deployment issues and provide effective ongoing support, our ability
to sell our products to existing customers would be adversely affected and our reputation with
potential customers could be harmed. In addition, as we expand our operations internationally, our
support organization will face additional challenges including those associated with delivering
support, training and documentation in languages other than English. Our failure to maintain
high-quality support and services would have a material adverse effect on our business, operating
results and financial condition.
If we fail to comply with new laws and regulations, or changing interpretations of existing laws or
regulations, our future revenues could be adversely affected.
Our products are subject to various legal and regulatory requirements and changes. For
example, effective June 12, 2009, federal law required that television broadcast stations stop
broadcasting in analog format and broadcast only in digital format. We believe that this change
accelerated the timing of sales of our digital products, and consequently the revenue associated
with our broadcast solutions decreased after June 30, 2009. These and other similar implementations
of laws and interpretations of existing regulations could cause our customers to forgo or change
the timing of spending on new technology rollouts, such as switched digital video, which could make
our results more difficult to predict, or harm our revenues.
Additionally, governments in the U.S. and other countries have adopted laws and regulations
regarding privacy and advertising that could impact important aspects of our business. In
particular, governments are considering new limits or requirements with
34
Table of Contents
respect to our customers collection, use, storage and disclosure of personal information for
marketing purposes. Any legislation enacted or regulation issued could dampen the growth and
acceptance of addressable advertising which is enabled by our products. If the use of our products
to increase advertising revenue is limited or becomes unlawful, our business, results of operations
and financial condition would be harmed.
Our expansion of international operations may not succeed.
As of September 30, 2010, approximately 82% of our research and development headcount was
located outside the U.S., primarily in Israel and increasingly in China. Managing research and
development operations in numerous locations requires substantial management oversight. If we are
unable to expand our international operations successfully and in a timely manner, our business,
operating results and financial condition may be harmed. Such expansion may be more difficult or
could take longer than we anticipate, and we may not be able to successfully market, sell, deliver
and support our products internationally.
Our international operations, and the international operations of our contract manufacturers
and our outsourced development contractors, are subject to a number of risks, including:
| continued uncertainty in the global economy; | |
| fluctuations in the value of local currencies in the markets we are attempting to penetrate may adversely affect the price competitiveness of our products; | |
| fluctuations in currency exchange rates, primarily fluctuations in the Israeli New Shekel, may have an adverse effect on our operating costs; | |
| political and economic instability; | |
| unpredictable changes in foreign government regulations and telecommunications standards; | |
| legal, cultural and language differences in the conduct of business; | |
| import and export license requirements, tariffs, taxes and other trade barriers; | |
| potentially adverse tax consequences; | |
| the burden of complying with a wide variety of foreign laws, treaties and technical standards; | |
| acts of war or terrorism and insurrections; | |
| difficulty in staffing and managing foreign operations; and | |
| changes in economic policies by foreign governments. |
The effects of any of the risks described above could reduce our future revenues or increase
our costs from our international operations.
Our business is subject to the risks of warranty returns, product liability and product defects.
Products like ours are very complex and can frequently contain undetected errors or failures,
especially when first introduced or when new versions are released. Despite testing, errors may
occur. Product errors could affect the performance of our products, delay the development or
release of new products or new versions of products, adversely affect our reputation and our
customers willingness to buy products from us and adversely affect market acceptance or perception
of our products. Any such errors or delays in releasing new products or new versions of products or
allegations of unsatisfactory performance could cause us to lose revenue or market share, increase
our service costs, cause us to incur substantial costs in redesigning the products, subject us to
liability for damages and divert our resources from other tasks, any one of which could materially
adversely affect our business, results of operations and financial condition. Our products must
successfully interoperate with products from other vendors. As a result, when problems occur in a
network, it may be difficult to identify the sources of these problems. The occurrence of hardware
and software errors, whether or not caused by our products, could result in the delay or loss of
market acceptance of our products, and therefore delay our ability to recognize revenue from sales,
and any necessary revisions may cause us to incur significant expenses. The occurrence of any such
problems could harm our business, operating results and financial condition.
Although we have limitation of liability provisions in our standard terms and conditions of
sale, they may not fully or effectively protect us from claims as a result of federal, state or
local laws or ordinances or unfavorable judicial decisions in the U.S. or other countries. The sale
and support of our products also entails the risk of product liability claims. We maintain
insurance to protect against certain claims associated with the use of our products, but our
insurance coverage may not adequately cover any claim asserted against us. In addition, even claims
that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert
managements time and other resources.
35
Table of Contents
Regional instability in Israel may adversely affect business conditions, including the operations
of our contract manufacturers, and may disrupt our operations and negatively affect our operating
results.
A substantial portion of our research and development operations and our contract
manufacturing occurs in Israel. As of September 30, 2010, we had 167 full-time employees located in
Israel. We also have customer service, marketing and general and administrative employees at this
facility. Accordingly, we are directly influenced by the political, economic and military
conditions affecting Israel, and any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its trading partners could significantly harm our business.
In addition, in the past, Israel and companies doing business with Israel have been the subject of
an economic boycott. Israel has also been and is subject to civil unrest and terrorist activity,
with varying levels of severity, for the last decade. Security and political conditions may have an
adverse impact on our business in the future. Hostilities involving Israel or the interruption or
curtailment of trade between Israel and its trading partners could adversely affect our operations
and make it more difficult for us to retain or recruit qualified personnel in Israel.
In addition, most of our employees in Israel are obligated to perform annual reserve duty in
the Israeli Defense Forces and several have been called for active military duty in connection with
intermittent hostilities over the years. Should hostilities in the region escalate again, some of
our employees would likely be called to active military duty, possibly resulting in interruptions
in our sales and development efforts and other impacts on our business and operations, which we
cannot currently assess.
We depend on a limited number of third parties to provide key components of, and to provide
manufacturing and assembly services with respect to, our products.
We and our contract manufacturers obtain many components necessary for the manufacture or
integration of our products from a sole supplier or a limited group of suppliers. We or our
contract manufacturers do not always have long-term agreements in place with such suppliers. As an
example, we do not have a long-term purchase agreement in place with PowerOne, the sole supplier of
power supplies for our products. Our direct and indirect reliance on sole or limited suppliers
involves several risks, including the inability to obtain an adequate supply of required
components, and reduced control over pricing, quality and timely delivery of components. Our
ability to deliver our products on a timely basis to our customers would be materially adversely
impacted if we or our contract manufacturers needed to find alternative replacements for (as
examples) the chassis, chipsets, central processing units or power supplies that we use in our
products. Significant time and effort would be required to locate new vendors for these alternative
components, if alternatives are even available. Moreover, the lead times required by the suppliers
of some components are lengthy and preclude rapid changes in quantity requirements and delivery
schedules. Even as we increase our use of standardized components, we may experience supply chain
issues, particularly as a result of market volatility. Such volatility could lead suppliers to
decrease inventory, which in turn would lead to increased manufacturing lead times for us. In
addition, increased demand by third parties for the components we use in our products (for example,
Field Programmable Gate Arrays or other semiconductor technology) may lead to decreased
availability and higher prices for those components from our suppliers, since we generally carry
little inventory of our product components. As a result, we may not be able to secure enough
components at reasonable prices or of acceptable quality to build products in a timely manner,
which would impact our ability to deliver products to our customers, and our business, operating
results and financial condition would be adversely affected.
For manufacturing and assembly, we currently rely exclusively on a number of suppliers
including Flextronics or Benchmark, depending on the product, to assemble our products, manage our
supply chain and negotiate component costs for our solutions. Our reliance on these contract
manufacturers reduces our control over the assembly process, exposing us to risks, including
reduced control over quality assurance, production costs and product supply. If we fail to manage
our relationships with these contract manufacturers effectively, or if these contract manufacturers
experience delays (including delays in their ability to purchase components, as noted above),
disruptions, capacity constraints or quality control problems in their operations, our ability to
ship products to our customers could be impaired and our competitive position and reputation could
be harmed. If these contract manufacturers are unable to negotiate with their suppliers for reduced
component costs, our operating results would be harmed. Qualifying a new contract manufacturer and
commencing volume production is expensive and time-consuming. If we are required to change contract
manufacturers, we may lose net revenues, incur increased costs and damage our customer
relationships.
Our failure to adequately protect our intellectual property and proprietary rights, or to secure
such rights on reasonable terms, may adversely affect us.
We hold numerous issued U.S. patents and have a number of patent applications pending in the
U.S. and foreign jurisdictions. Although we attempt to protect our intellectual property rights
through patents, copyrights, trademarks, licensing arrangements, maintaining certain technology as
trade secrets and other measures, we cannot be sure that any patent, trademark, copyright or other
intellectual property rights owned by us will not be invalidated, circumvented or challenged, that
such intellectual property rights will provide competitive advantages to us or that any of our
pending or future patent applications will be issued with the scope of the claims sought by us, if
at all. Despite our efforts, other competitors may be able to develop technologies that are similar
or superior to our technology, duplicate our technology to the extent it is not protected, or
design around the patents that we own. In addition, effective patent, copyright, trademark and
trade secret protection may be unavailable or limited in certain foreign countries in which we do
business or may do business in the future.
36
Table of Contents
The steps that we have taken may not prevent misappropriation of our technology. In addition,
to prevent misappropriation we may need to take legal action to enforce our patents and other
intellectual property rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or invalidity. For
example, on June 5, 2007, we filed a lawsuit in federal court against Imagine Communications, Inc.,
alleging patent infringement. This and other potential intellectual property litigation could
result in substantial costs and diversion of resources and could negatively affect our business,
operating results and financial condition.
In order to successfully develop and market certain of our planned products, we may be
required to enter into technology development or licensing agreements with third parties whether to
avoid infringement or because we believe a specific functionality is necessary for a successful
product launch. These third parties may be willing to enter into technology development or
licensing agreements only on a costly royalty basis or on terms unacceptable to us, or not at all.
Our failure to enter into technology development or licensing agreements on reasonable terms, when
necessary, could limit our ability to develop and market new products and could cause our business
to suffer. For example, we could face delays in product releases until alternative technology can
be identified, licensed or developed, and integrated into our current products. These delays, if
they occur, could adversely affect our business, operating results and financial condition.
We may face intellectual property infringement claims from third parties.
Our industry is characterized by the existence of an extensive number of patents and frequent
claims and related litigation regarding patent and other intellectual property rights. From time to
time, third parties have asserted and may assert patent, copyright, trademark and other
intellectual property rights against us or our customers. Our suppliers and customers may have
similar claims asserted against them. We have agreed to indemnify some of our suppliers and
customers for alleged patent infringement. The scope of this indemnity varies, but, in some
instances, includes indemnification for damages and expenses including reasonable attorneys fees.
Any future litigation, regardless of its outcome, could result in substantial expense and
significant diversion of the efforts of our management and technical personnel. An adverse
determination in any such proceeding could subject us to significant liabilities, temporary or
permanent injunctions or require us to seek licenses from third parties or pay royalties that may
be substantial. Furthermore, necessary licenses may not be available on satisfactory terms, or at
all.
Our use of open source and third-party software could impose limitations on our ability to
commercialize our products.
We incorporate open source software into our products, including certain open source code
which is governed by the GNU General Public License, Lesser GNU General Public License and Common
Development and Distribution License. The terms of many open source licenses have not been
interpreted by U.S. courts, and there is a risk that these licenses could be construed in a manner
that could impose unanticipated conditions or restrictions on our ability to commercialize our
products. In such event, we could be required to seek licenses from third parties in order to
continue offering our products, make generally available, in source code form, proprietary code
that links to certain open source modules, re-engineer our products, discontinue the sale of our
products if re-engineering could not be accomplished on a cost-effective and timely basis, or
become subject to other consequences, any of which could adversely affect our business, operating
results and financial condition.
We may engage in future acquisitions that dilute the ownership interests of our stockholders, cause
us to use a significant portion of our cash, incur debt or assume contingent liabilities.
As part of our business strategy, from time to time, we review potential acquisitions of other
businesses, and we may acquire businesses, products, or technologies in the future. In the event of
any future acquisitions, we could:
| issue equity securities which would dilute our current stockholders percentage ownership; | |
| incur substantial debt; | |
| assume contingent liabilities; or | |
| spend significant cash. |
These actions could harm our business, operating results and financial condition, or the price
of our common stock. Moreover, even if we do obtain benefits from acquisitions in the form of
increased sales and earnings, there may be a delay between the time when the expenses associated
with an acquisition are incurred and the time when we recognize such benefits. This is particularly
relevant in cases where it is necessary to integrate new types of technology into our existing
portfolio and where new types of products may be targeted for potential customers with which we do
not have pre-existing relationships. Acquisitions and investment activities also entail numerous
risks, including:
| difficulties in the assimilation of acquired operations, technologies and/or products; | |
| unanticipated acquisition transaction costs; | |
| the diversion of managements attention from other business; | |
| adverse effects on existing business relationships with suppliers and customers; | |
| risks associated with entering markets in which we have no or limited prior experience; |
37
Table of Contents
| the potential loss of key employees of acquired businesses; | |
| difficulties in the assimilation of different corporate cultures and practices; and | |
| substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items. |
We may not be able to successfully integrate any businesses, products, technologies or
personnel that we might acquire in the future, and our failure to do so could have a material
adverse effect on our business, operating results and financial condition.
Negative conditions in the global credit markets may impair the value or reduce the liquidity of a
portion of our investment portfolio.
As of September 30, 2010, we had $11.1 million in cash and cash equivalents and $141.1 million
in investments in marketable debt securities. Historically, we have invested these amounts
primarily in government agency debt securities, corporate debt securities, commercial paper,
auction rate securities, money market funds and taxable municipal debt securities meeting certain
criteria. We currently hold no mortgaged-backed or auction rate securities. However, our
investments are subject to general credit, liquidity, market and interest rate risks, which may be
exacerbated by any uncertainty in the U.S. and global credit markets such as the conditions in late
2008 and 2009 that have affected various sectors of the financial markets and caused global credit
and liquidity issues. In the future, these market risks associated with our investment portfolio
may harm the results of our operations, liquidity and financial condition.
Although we believe we have chosen a lower risk portfolio designed to preserve our existing
cash position, it may not adequately protect the value of our investments. Furthermore, this lower
risk portfolio is unlikely to provide us with any significant interest income in the near term.
If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our operating results and financial condition may be harmed.
Our ability to successfully implement our business plan and comply with regulations applicable
to being a public reporting company requires an effective planning and management process. We
expect that we will need to continue to implement and improve operational and financial systems,
procedures and controls to manage our business effectively in the future. Any delay in the
implementation of, or disruption in the transition to, new or enhanced systems, procedures or
controls, could harm our ability to accurately forecast sales demand, manage our supply chain and
record and report financial and management information on a timely and accurate basis. In addition,
the successful enhancement of our operational and financial systems, procedures and controls will
result in higher general and administrative costs in future periods, and may adversely impact our
operating results and financial condition.
While we believe that we currently have proper and effective internal control over financial
reporting, we must continue to comply with laws requiring us to evaluate those internal controls.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions
of the act require, among other things, that we evaluate the effectiveness of our internal control
over financial reporting and disclosure controls and procedures. Ensuring that we have adequate
internal financial and accounting controls and procedures in place to help produce accurate
financial statements on a timely basis is a costly and time-consuming effort. For example, our
accounting for income taxes requires considerable, specific knowledge of various tax acts, both
foreign and domestic, and also involves several subjective judgments that could lead to
fluctuations in our results of operations should some or all events not occur as anticipated. We
incur significant costs and demands upon management as a result of complying with these laws and
regulations affecting us as a public company. If we fail to maintain proper and effective internal
controls in future periods, it could adversely affect our ability to run our business effectively
and could cause investors to lose confidence in our financial reporting.
We are subject to import/export controls that could subject us to liability or impair our ability
to compete in international markets.
Our products are subject to U.S. export controls and may be exported outside the U.S. only
with the required level of export license or through an export license exception, in most cases
because we incorporate encryption technology into our products. In addition, various countries
regulate the import of certain encryption technology 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. Changes in our products or changes in export and import regulations may create
delays in the introduction of our products in international markets, prevent our customers with
international operations from deploying our products throughout their global systems or, in some
cases, prevent the export or import of our products to certain countries altogether. Any change in
export or import regulations or related legislation, shift in approach to the enforcement or scope
of existing regulations, or change in the countries, 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 internationally.
In addition, we may be subject to customs duties and export quotas, which could have a
significant impact on our revenue and profitability. While we have not yet encountered significant
regulatory difficulties in connection with the sales of our products in
38
Table of Contents
international markets, the future imposition of significant customs duties or export quotas
could have a material adverse effect on our business.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic
events, and to interruption by manmade problems such as computer viruses or terrorism.
Our corporate headquarters is located in the San Francisco Bay area, a region known for
seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could
have a material adverse impact on our business, operating results and financial condition. In
addition, our computer servers are vulnerable to computer viruses, break-ins and similar
disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism
or war or public health outbreaks could cause disruptions in our or our customers business or the
economy as a whole. To the extent that such disruptions result in delays or cancellations of
customer orders, or the deployment of our products, our business, operating results and financial
condition would be adversely affected.
39
Table of Contents
Item 6. EXHIBITS
3.1B
|
Form of Amended and Restated Certificate of Incorporation of the Registrant(1) | |
3.2B
|
Form of Amended and Restated Bylaws of the Registrant(1) | |
10.19A
|
Sublease Agreement (8 Technology Drive, Westborough, Massachusetts) | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | |
32.1*
|
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
(1) | Incorporated by reference to exhibit of same number filed with the registrants Registration Statement on Form S-1 (No. 333-139652) on December 22, 2006, as amended. | |
* | This exhibit shall not be deemed filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference. |
40
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2010
BigBand Networks, Inc. |
||||
By: | /s/ Ravi Narula | |||
Ravi Narula, Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) | ||||
EXHIBIT INDEX
3.1B
|
Form of Amended and Restated Certificate of Incorporation of the Registrant(1) | |
3.2B
|
Form of Amended and Restated Bylaws of the Registrant(1) | |
10.19A
|
Sublease Agreement (8 Technology Drive, Westborough, Massachusetts) | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | |
32.1*
|
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
(1) | Incorporated by reference to exhibit of same number filed with the registrants Registration Statement on Form S-1 (No. 333-139652) on December 22, 2006, as amended. | |
* | This exhibit shall not be deemed filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference. |
41