QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐
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: 001-34501
JUNIPER NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware
77-0422528
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1133 Innovation Way
Sunnyvale,
California
94089
(Address of principal executive offices)
(Zip code)
(408) 745-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.00001 per share
JNPR
New York Stock Exchange
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. Yesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
There were 324,555,523 shares of the Company's Common Stock, par value $0.00001, outstanding as of October 26, 2022.
Preferred stock, $0.00001 par value; 10.0 shares authorized; none issued and outstanding
—
—
Common stock, $0.00001 par value; 1,000.0 shares authorized; 324.5 shares and 321.6 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
—
—
Additional paid-in capital
6,894.9
6,972.6
Accumulated other comprehensive loss
(52.6)
(2.1)
Accumulated deficit
(2,504.2)
(2,653.6)
Total stockholders' equity
4,338.1
4,316.9
Total liabilities and stockholders' equity
$
8,976.2
$
8,887.0
See accompanying Notes to Condensed Consolidated Financial Statements
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements of Juniper Networks, Inc. (the “Company” or “Juniper”) were prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements. The Condensed Consolidated Balance Sheet as of December 31, 2021 has been derived from the audited Consolidated Financial Statements at that date. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any future period.
These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "Form 10-K"). We have evaluated all subsequent events through the date these condensed consolidated financial statements were issued.
The preparation of the financial statements and related disclosures in accordance with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates under different assumptions or conditions.
Summary of Significant Accounting Policies
Except for the change in certain policies upon adoption of the accounting standards and the policy for equity method investments described below, there have been no significant changes to the Company's significant accounting policies described in Note 1, Description of Business, Basis of Presentation and Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K for the fiscal year ended December 31, 2021.
The Company accounts for investments in companies over which it has the ability to exercise significant influence, but does not have control over the investee, under the equity method of accounting. The investment is initially measured at fair value and subsequently adjusted for any impairment, dividend received, plus or minus the Company's proportionate share of the equity method investee's income or loss. The Company records its interest in the net earnings or loss of its equity method investment along with adjustments for unrealized profits or losses on intra-entity transactions, within its Statements of Operations. Depending on the timing of such financial statements of the investee, there may be a lag between the timing of such financial statement and the Company's quarter-end date. For the Company's sole equity method investment, the Company's share of the investee's net earnings or loss is recorded two months in arrears. The Company records an impairment when factors indicate that the carrying amount of the investment might not be recoverable.
Recently Adopted Accounting Standards
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: On January 1, 2022, the Company early adopted ASU No. 2021-08 (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if the contracts were originated by the acquirer. Upon adoption, the standard did not have a material impact on the Condensed Consolidated Financial Statements.
Reference Rate Reform: In March 2020, the FASB issued ASU No. 2020-04 (Topic 848), Reference Rate Reform, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The standard became effective upon issuance and may
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
be applied to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR through December 31, 2022. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 2. Divestiture
On April 4, 2022, Synopsys, Inc ("Synopsys") purchased Juniper's silicon photonics business and formed a new entity called OpenLight Photonics, Inc. ("OpenLight"). The Company received cash consideration of $90.0 million and retained a 25% equity interest in the new entity. The agreements with Synopsys contain redemption options with respect to Juniper's equity interest in OpenLight, which are exercisable either by (i) Juniper on or after the third anniversary of the acquisition or sooner in certain circumstances, or (ii) Synopsys on or after the third anniversary of the acquisition. Juniper can exercise its put option at the greater of fair value at the time of redemption or $30.0 million, and the option was assigned a value of $10.8 million. The divestiture did not represent a strategic shift with a major effect on the Company’s operations and financial results, and therefore, does not qualify as a discontinued operation.
The Company recognized a gain on divestiture of $45.8 million and the portion of gain related to the remeasurement of retained investment was $19.5 million. The following table presents the carrying value of the major components of assets and liabilities derecognized as of April 4, 2022 (in millions):
As of
April 4, 2022
Assets:
Total current assets
$
1.0
Property and equipment, net
3.6
Deferred tax assets
3.9
Other long-term assets
1.1
Purchased intangible assets, net
49.0
Goodwill
28.9
Total assets held for sale
$
87.5
Liabilities:
Accounts payable
$
1.4
Other liabilities
1.1
Total liabilities held for sale
$
2.5
The Company's 25% equity interest in OpenLight is accounted for under the equity method of accounting. The investment was recognized at fair value in other long-term assets within the consolidated balance sheet at an aggregate amount of $40.8 million. The fair value was determined based on the price paid by Synopsys for its 75% equity interest in OpenLight along with the value of the redemption options.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 3. Cash Equivalents and Investments
Investments in Available-for-Sale Debt Securities
The following table summarizes the Company's unrealized gains and losses and fair value of investments designated as available-for-sale debt securities as of September 30, 2022 and December 31, 2021 (in millions):
As of September 30, 2022
As of December 31, 2021
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Fixed income securities:
Asset-backed and mortgage-backed securities
$
53.9
$
—
$
(1.5)
$
52.4
$
139.1
$
—
$
(0.5)
$
138.6
Certificates of deposit
5.1
—
—
5.1
5.0
—
—
5.0
Commercial paper
2.2
—
—
2.2
75.8
—
—
75.8
Corporate debt securities
322.2
—
(9.0)
313.2
443.3
0.7
(1.5)
442.5
Foreign government debt securities
8.8
—
(0.4)
8.4
12.8
—
(0.1)
12.7
Time deposits
80.9
—
—
80.9
35.2
—
—
35.2
U.S. government agency securities
18.7
—
(0.7)
18.0
26.8
—
(0.1)
26.7
U.S. government securities
17.0
—
(0.3)
16.7
73.5
0.1
—
73.6
Total fixed income securities
508.8
—
(11.9)
496.9
811.5
0.8
(2.2)
810.1
Privately-held debt and redeemable preferred stock securities
15.3
37.4
—
52.7
9.6
37.4
—
47.0
Total available-for-sale debt securities
$
524.1
$
37.4
$
(11.9)
$
549.6
$
821.1
$
38.2
$
(2.2)
$
857.1
Reported as:
Cash equivalents
$
80.9
$
—
$
—
$
80.9
$
47.2
$
—
$
—
$
47.2
Short-term investments
221.6
—
(3.4)
218.2
306.8
0.7
(0.1)
307.4
Long-term investments
206.3
—
(8.5)
197.8
457.5
0.1
(2.1)
455.5
Other long-term assets
15.3
37.4
—
52.7
9.6
37.4
—
47.0
Total
$
524.1
$
37.4
$
(11.9)
$
549.6
$
821.1
$
38.2
$
(2.2)
$
857.1
The following table presents the contractual maturities of the Company's total fixed income securities as of September 30, 2022 (in millions):
Amortized Cost
Estimated Fair Value
Due in less than one year
$
302.5
$
299.1
Due between one and five years
206.3
197.8
Total
$
508.8
$
496.9
As of September 30, 2022, the Company's unrealized loss of $11.9 million resulted from 370 investments, of which loss aggregating $7.0 million was from investments in an unrealized loss position for less than 12 months, and $4.9 million was from investments in an unrealized loss position for more than 12 months. The gross unrealized losses related to these
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
investments were primarily due to changes in market interest rates. The Company anticipates that it will recover the entire amortized cost basis of such available-for-sale debt securities and has determined that no allowance for credit losses was required to be recognized during the three and nine months ended September 30, 2022 and September 30, 2021.
During the three and nine months ended September 30, 2022 and September 30, 2021, there were no material gross realized gains or losses from available-for-sale debt securities.
Investments in Equity Securities
The following table presents the Company's investments in equity securities as of September 30, 2022 and December 31, 2021 (in millions):
As of
September 30, 2022
December 31, 2021
Equity investments with readily determinable fair value:
Money market funds
$
429.5
$
382.0
Mutual funds
27.1
33.4
Publicly-traded equity securities
8.1
8.1
Equity investments without readily determinable fair value
162.1
150.1
Equity investment under the equity method of accounting
38.2
—
Total equity securities
$
665.0
$
573.6
Reported as:
Cash equivalents
$
419.5
$
371.5
Short-term investments
8.1
8.1
Prepaid expenses and other current assets
12.5
15.1
Other long-term assets
224.9
178.9
Total
$
665.0
$
573.6
For the three and nine months ended September 30, 2022 and September 30, 2021, there wereno material unrealized gains or losses recognized for equity investments with readily determinable fair value and equity investments without readily determinable fair value. For the three and nine months ended September 30, 2022, the loss recognized from the equity method investment was $2.1 million and $2.6 million, respectively.
Restricted Cash and Investments
The Company has restricted cash and investments for: (i) amounts under the Company's non-qualified deferred compensation plan for senior-level employees; (ii) amounts held under the Company's short-term disability plan in California; and (iii) amounts held in escrow accounts, as required in connection with certain acquisitions completed primarily in 2020. Restricted investments consist of equity investments. As of September 30, 2022, the carrying value of restricted cash and investments was $55.9 million, of which $28.2 million was included in prepaid expenses and other current assets, and $27.7 million was included in other long-term assets on the Condensed Consolidated Balance Sheet.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash included in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (in millions):
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a summary of assets and liabilities measured at fair value on a recurring basis and as reported in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (in millions):
Fair Value Measurements at
September 30, 2022
Fair Value Measurements at
December 31, 2021
Quoted Prices in Active Markets For Identical Assets (Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs (Level 3)
Total
Quoted Prices in Active Markets For Identical Assets (Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs (Level 3)
Total
Assets:
Available-for-sale debt securities:
Asset-backed and mortgage-backed securities
$
—
$
52.4
$
—
$
52.4
$
—
$
138.6
$
—
$
138.6
Certificates of deposit
—
5.1
—
5.1
—
5.0
—
5.0
Commercial paper
—
2.2
—
2.2
—
75.8
—
75.8
Corporate debt securities
—
313.2
—
313.2
—
442.5
—
442.5
Foreign government debt securities
—
8.4
—
8.4
—
12.7
—
12.7
Time deposits
—
80.9
—
80.9
—
35.2
—
35.2
U.S. government agency securities
—
18.0
—
18.0
—
26.7
—
26.7
U.S. government securities
13.5
3.2
—
16.7
42.3
31.3
—
73.6
Privately-held debt and redeemable preferred stock securities
—
—
52.7
52.7
—
—
47.0
47.0
Total available-for-sale debt securities
13.5
483.4
52.7
549.6
42.3
767.8
47.0
857.1
Equity securities:
Money market funds
429.5
—
—
429.5
382.0
—
—
382.0
Mutual funds
27.1
—
—
27.1
33.4
—
—
33.4
Publicly-traded equity securities
8.1
—
—
8.1
8.1
—
—
8.1
Total equity securities
464.7
—
—
464.7
423.5
—
—
423.5
Derivative assets:
Foreign exchange contracts
—
1.3
—
1.3
—
9.2
—
9.2
Interest rate contracts
—
123.9
—
123.9
—
47.1
—
47.1
Total derivative assets
—
125.2
—
125.2
—
56.3
—
56.3
Total assets measured at fair value on a recurring basis
$
478.2
$
608.6
$
52.7
$
1,139.5
$
465.8
$
824.1
$
47.0
$
1,336.9
Liabilities:
Derivative liabilities:
Foreign exchange contracts
$
—
$
(87.0)
$
—
$
(87.0)
$
—
$
(24.0)
$
—
$
(24.0)
Interest rate contracts
—
(92.7)
—
(92.7)
—
(2.5)
—
(2.5)
Total derivative liabilities
—
(179.7)
—
(179.7)
—
(26.5)
—
(26.5)
Total liabilities measured at fair value on a recurring basis
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Fair Value Measurements at
September 30, 2022
Fair Value Measurements at December 31, 2021
Quoted Prices in Active Markets For Identical Assets (Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs (Level 3)
Total
Quoted Prices in Active Markets For Identical Assets (Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs (Level 3)
Total
Total assets, reported as:
Cash equivalents
$
419.5
$
80.9
$
—
$
500.4
$
371.6
$
47.2
$
—
$
418.8
Short-term investments
19.7
206.5
—
226.2
41.5
274.0
—
315.5
Long-term investments
1.9
195.9
—
197.8
8.8
446.7
—
455.5
Prepaid expenses and other current assets
12.6
0.1
—
12.7
15.1
8.8
—
23.9
Other long-term assets
24.5
125.2
52.7
202.4
28.8
47.4
47.0
123.2
Total assets measured at fair value
$
478.2
$
608.6
$
52.7
$
1,139.5
$
465.8
$
824.1
$
47.0
$
1,336.9
Total liabilities, reported as:
Other accrued liabilities
$
—
$
(58.9)
$
—
$
(58.9)
$
—
$
(14.9)
$
—
$
(14.9)
Other long-term liabilities
—
(120.8)
—
(120.8)
—
(11.6)
—
(11.6)
Total liabilities measured at fair value on a recurring basis
$
—
$
(179.7)
$
—
$
(179.7)
$
—
$
(26.5)
$
—
$
(26.5)
The Company's Level 2 available-for-sale debt securities are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, or alternative pricing sources with reasonable levels of price transparency, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets. The Company's derivative instruments are classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. During the three and nine months ended September 30, 2022, the Company had no transfers into or out of Level 3 of the fair value hierarchy of its assets or liabilities measured at fair value.
The Company's privately-held debt and redeemable preferred stock securities are classified as Level 3 assets due to the lack of observable inputs to determine fair value. The Company estimates the fair value of its privately-held debt and redeemable preferred stock securities on a recurring basis using an analysis of the financial condition and near-term prospects of the investee, including recent valuations at the time of financing activities and the investee's capital structure. During the three and nine months ended September 30, 2022, there werenosignificant activities related to privately-held debt and redeemable preferred stock securities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company's investments in equity securities without readily determinable fair value are classified as Level 3 assets due to the lack of observable inputs to determine fair value. The Company estimates the fair value of equity securities without readily determinable fair value, including those accounted for under the equity method of accounting, on a nonrecurring basis using an analysis of the financial condition and near-term prospects of the investee, including recent financing activities and the investee's capital structure. As of September 30, 2022, there have been no material upward or downward adjustments for price changes to the equity securities without readily determinable fair value.
Certain of the Company's assets, including intangible assets and goodwill, are measured at fair value on a nonrecurring basis. There werenosignificant impairment charges recognized during the three and nine months ended September 30, 2022.
As of September 30, 2022 and December 31, 2021, the Company had no liabilities required to be measured at fair value on a nonrecurring basis.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Assets and Liabilities Not Measured at Fair Value
The carrying amounts of the Company's accounts receivable, accounts payable, and other accrued liabilities approximate fair value due to their short maturities. As of September 30, 2022 and December 31, 2021, the estimated fair value of the Company's total outstanding debt in the Condensed Consolidated Balance Sheets was $1,435.1 million and $1,845.6 million, respectively, based on observable market inputs (Level 2).
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 5. Derivative Instruments
The Company uses derivative instruments to manage a variety of risks, including risks related to fluctuations in foreign currency exchange rates and interest rates on debt instruments. We do not use derivative financial instruments for speculative purposes.
The notional amount of the Company's derivative instruments is summarized as follows (in millions):
As of
September 30, 2022
December 31, 2021
Designated derivatives:
Cash flow hedges:
Foreign currency contracts
$
885.8
$
873.9
Interest rate lock contracts
650.0
650.0
Fair value hedges:
Interest rate swap contracts
600.0
600.0
Total designated derivatives
2,135.8
2,123.9
Non-designated derivatives
183.1
144.6
Total
$
2,318.9
$
2,268.5
The fair value of derivative instruments on the Condensed Consolidated Balance Sheets was as follows:
As of
Balance Sheet Classification
September 30, 2022
December 31, 2021
Derivative assets:
Derivatives designated as hedging instruments:
Foreign currency contracts
Other current assets
$
0.7
$
8.7
Foreign currency contracts
Other long-term assets
0.1
0.4
Interest rate lock contracts
Other long-term assets
123.9
45.0
Interest rate swap contracts
Other long-term assets
—
2.1
Total derivatives designated as hedging instruments
$
124.7
$
56.2
Derivatives not designated as hedging instruments
Other current assets
0.5
0.1
Total derivative assets
$
125.2
$
56.3
Derivative liabilities:
Derivatives designated as hedging instruments:
Foreign currency contracts
Other accrued liabilities
$
58.3
$
14.8
Foreign currency contracts
Other long-term liabilities
28.2
9.1
Interest rate swap contracts
Other long-term liabilities
92.7
2.5
Total derivatives designated as hedging instruments
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Offsetting of Derivative Instruments
The Company presents its derivative instruments at gross fair values in the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, the potential effects of set-off associated with the derivative contracts would be a reduction to both derivative assets and derivative liabilities by $81.9 million and $17.5 million, respectively.
Designated Derivatives
The Company uses foreign currency forward contracts or option contracts to hedge the Company's planned cost of revenues and operating expenses denominated in foreign currencies. These derivatives are designated as cash flow hedges and typically have maturities ofthirty-six months or less.
The Company enters into interest rate swaps, designated as fair value hedges, to convert the fixed interest rates of certain Senior Notes ("Notes") to floating interest rates. In April 2021, the Company entered into swaps for an aggregate notional amount of $300.0 million for its fixed-rate 2030 Notes in addition to the swaps entered in 2019 for an aggregate notional amount of $300.0 million for its fixed-rate 2041 Notes. The interest rate swaps will expire withineight years.
In 2020, the Company entered into interest rate locks with large financial institutions, which fix the benchmark interest rates of future debt issuances for an aggregate notional amount of $650.0 million. These contracts are designated as cash flow hedges and are expected to terminate within three years.
Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations
For cash flow hedges, the Company recognized an unrealized loss of $39.0 million and $3.7 million in accumulated other comprehensive loss for the effective portion of its derivative instruments for the three and nine months ended September 30, 2022, respectively. The Company recognized an unrealized loss of $3.0 million and an unrealized gain of $23.1 million in accumulated other comprehensive income for the effective portion of its derivative instruments for the three and nine months ended September 30, 2021, respectively.
For foreign currency contracts, the Company reclassified a loss of $8.8 million and $11.9 million out of accumulated other comprehensive loss to cost of revenues and operating expenses in the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2022, respectively, and a gain of $6.2 million and $24.3 million for the comparable periods ended September 30, 2021, respectively. As of September 30, 2022, an estimated$57.5 million of unrealized net loss within accumulated other comprehensive loss is expected to be reclassified into earnings within the next twelve months.
Non-Designated Derivatives
The Company also uses foreign currency forward contracts to mitigate variability in gains and losses generated from the remeasurement of certain monetary assets and liabilities denominated in foreign currencies. These foreign exchange forward contracts typically have maturities of approximatelyone to four months. The outstanding non-designated derivative instruments are carried at fair value. Changes in the fair value of these derivatives, which were recorded in Other expense, net within the Condensed Consolidated Statements of Operations, were not materialduring the three and nine months ended September 30, 2022 and September 30, 2021.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 6. Other Financial Information
Total Inventory
Total inventory consisted of the following (in millions):
As of
September 30, 2022
December 31, 2021
Production and service materials
$
431.4
$
208.6
Finished goods
109.0
75.6
Total inventory
$
540.4
$
284.2
Reported as:
Inventory
$
519.6
$
272.6
Other long-term assets
20.8
11.6
Total inventory
$
540.4
$
284.2
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in millions):
As of
September 30, 2022
December 31, 2021
Contract manufacturer deposit
$
390.9
$
223.8
Prepaid expenses
89.5
104.3
Other current assets
124.0
123.5
Total prepaid expenses and other current assets
$
604.4
$
451.6
Warranties
Changes during the nine months ended September 30, 2022 in the Company’s warranty reserve as reported within other accrued liabilities in the Condensed Consolidated Balance Sheets were as follows (in millions):
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Revenue
See Note 11, Segments, for disaggregated revenue by customer solution, customer vertical, and geographic region.
Product revenue of $11.6 million and $45.1 million included in deferred revenue at January 1, 2022 was recognized during the three and nine months ended September 30, 2022, respectively. Service revenue of $180.1 million and $694.2 million included in deferred revenue at January 1, 2022 was recognized during the three and nine months ended September 30, 2022, respectively.
Remaining Performance Obligations
Remaining Performance Obligations ("RPO") are comprised mainly of deferred product and service revenue, and to a lesser extent, unbilled service revenue from non-cancellable contracts for which the Company has not invoiced and has an obligation to perform, and for which revenue has not yet been recognized in the financial statements.
The following table summarizes the breakdown of RPO as of September 30, 2022 and when the Company expects to recognize the amounts as revenue (in millions):
Revenue Recognition Expected by Period
Total
Less than 1 year
1-3 years
More than 3 years
Product
$
110.2
$
91.9
$
15.0
$
3.3
Service
1,383.1
816.5
437.1
129.5
Total
$
1,493.3
$
908.4
$
452.1
$
132.8
Deferred Commissions
Deferred commissions were $28.8 million as of September 30, 2022. For the three and nine months ended September 30, 2022, amortization expense for previously deferred commissions was $50.6 million and $139.8 million, respectively, and there were no impairment charges recognized.
Other Expense, Net
Other expense, net, consisted of the following (in millions):
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 7. Restructuring Charges
During the first quarter of 2022 and 2021, the Company initiated restructuring plans designed to enable reinvestment in certain key priority areas to align with strategic changes, which resulted in severance costs from workforce reductions, contract termination and other exit costs. During the third quarter of 2022, the Company undertook further actions in connection with its 2022 Restructuring Plan, which resulted in additional severance costs and facility exit-related costs. As of September 30, 2022, activities under the Company's approved restructuring plans are expected to be substantially completed in the first half of 2023.
Restructuring liabilities are reported within other accrued liabilities in the Condensed Consolidated Balance Sheets. The following table provides a summary of changes in the restructuring liabilities (in millions):
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 8. Debt
Debt
The following table summarizes the Company's total debt (in millions, except percentages):
As of
Maturity Date
Effective Interest Rates
September 30, 2022
December 31, 2021
Senior Notes ("Notes"):
1.200% fixed-rate notes ("2025 Notes")
December 2025
1.37
%
$
400.0
$
400.0
3.750% fixed-rate notes ("2029 Notes")
August 2029
3.86
%
500.0
500.0
2.000% fixed-rate notes ("2030 Notes")
December 2030
2.12
%
400.0
400.0
5.950% fixed-rate notes ("2041 Notes")
March 2041
6.03
%
400.0
400.0
Total Notes
1,700.0
1,700.0
Unaccreted discount and debt issuance costs
(11.6)
(12.9)
Hedge accounting fair value adjustments(*)
(92.7)
(0.3)
Total
$
1,595.7
$
1,686.8
________________________________
(*) Represents the fair value adjustments for interest rate swaps with an aggregate notional amount of $600.0 million. These interest rate swaps convert the fixed interest rates of certain Notes to floating interest rates and are designated as fair value hedges. See Note 5, Derivative Instruments, for a discussion of the Company's interest rate swaps.
The Notes above are the Company’s senior unsecured and unsubordinated obligations, ranking equally in right of payment to all of the Company’s existing and future senior unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the Notes.
Interest on the Notes is payable in cash semiannually. The effective interest rates for the Notes include the interest on the Notes, accretion of the discount, and amortization of issuance costs. The indenture and the supplemental indentures (together, the "indentures") that govern the Notes also contain various covenants, including limitations on the Company's ability to incur liens or enter into sale-leaseback transactions over certain dollar thresholds.
As of September 30, 2022, the Company was in compliance with all covenants in the indentures governing the Notes.
Revolving Credit Facility
The Company has an unsecured revolving credit facility that will expire in April 2024, which enables borrowings of up to $500.0 million, with an option to increase the amount of the credit facility by up to an additional $200.0 million, subject to the lenders' approval. The credit facility will terminate in April 2024. As of September 30, 2022, the Company was in compliance with all covenants and no amounts were outstanding under its credit facility.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 9. Equity
The following table summarizes dividends paid and stock repurchases under the Company's stock repurchase program (in millions, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Dividends:
Per share
$
0.21
$
0.20
$
0.63
$
0.60
Amount
$
68.0
$
65.0
$
202.8
$
194.9
Repurchased under the 2018 Stock Repurchase Program:
Shares
—
1.7
6.3
11.0
Average price per share
$
—
$
28.43
$
33.38
$
25.80
Amount
$
—
$
50.0
$
212.2
$
285.0
Cash Dividends on Shares of Common Stock
During the three and nine months ended September 30, 2022, the Company declared and paid a quarterly cash dividend of $0.21 per common share, totaling $68.0 million and $202.8 million, respectively, on its outstanding common stock. Any future dividends, and the establishment of record and payment dates, are subject to approval by the Board of Directors (the “Board”) of Juniper or an authorized committee thereof. See Note 15, Subsequent Events, for discussion of the Company's dividend declaration subsequent to September 30, 2022.
Stock Repurchase Activities
During the nine months ended September 30, 2022, the Company repurchased 6.3 million shares of its common stock in the open market for an aggregate purchase price of $212.2 million at an average price of $33.38 per share under the 2018 Stock Repurchase Program.
As of September 30, 2022, there was approximately $0.7 billion of authorized funds remaining under the 2018 Stock Repurchase Program.
Future share repurchases under the 2018 Stock Repurchase Program will be subject to a review of the circumstances at that time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements.
In addition to repurchases under the 2018 Stock Repurchase Program, the Company also withholds shares of common stock from certain employees in connection with the vesting of stock awards issued to such employees to satisfy applicable tax withholding requirements. Such withheld shares are treated as common stock repurchases in the Company's financial statements as they reduce the number of shares that would have been issued upon vesting. Repurchases associated with tax withholdings were $14.5 million during the nine months ended September 30, 2022, and $9.0 million during the nine months ended September 30, 2021.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Accumulated Other Comprehensive Loss, Net of Tax
The components of accumulated other comprehensive loss, net of related taxes,for the nine months ended September 30, 2022 were as follows (in millions):
Unrealized Gains/Losses on Available-for- Sale Debt Securities
Unrealized Gains/Losses on Cash Flow Hedges
Foreign Currency Translation Adjustments
Total
Balance as of December 31, 2021
$
27.9
$
19.0
$
(49.0)
$
(2.1)
Other comprehensive loss before reclassifications
(8.2)
(20.4)
(35.3)
(63.9)
Amount reclassified from accumulated other comprehensive loss
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 10. Employee Benefit Plans
Equity Incentive Plans
The Company has stock-based compensation plans pursuant to which it has granted stock options, restricted stock units (“RSUs”), and performance share awards (“PSAs”). The Company also maintains its 2008 Employee Stock Purchase Plan (the “ESPP”) for all eligible employees. In May 2022, the Company's stockholders approved an additional 4.5 million shares of common stock for issuance under the Company's 2015 Equity Incentive Plan (the "2015 Plan"). As of September 30, 2022, 4.0 million and 6.2 million shares were available for future issuance under the 2015 Plan and the ESPP, respectively. In connection with past acquisitions, the Company has also assumed or substituted stock options, RSUs, restricted stock awards ("RSAs"), and PSAs.
RSU, RSA, and PSA Activities
The Company’s RSU, RSA, and PSA activities and related information as of and for the nine months ended September 30, 2022 were as follows (in millions, except per share amounts and years):
Outstanding RSUs, RSAs, and PSAs
Number of Shares
Weighted Average Grant Date Fair Value per Share
Weighted Average Remaining Contractual Term (In Years)
Aggregate Intrinsic Value
Balance as of December 31, 2021
22.2
$
24.55
Granted(*)
8.2
29.64
Vested
(6.5)
24.49
Canceled
(2.4)
25.52
Balance as of September 30, 2022
21.5
$
26.41
1.3
$
561.4
________________________________
(*) Includes 6.5 million service-based, 1.3 million performance-based, and 0.4 million market-based awards. The number of shares subject to performance-based and market-based conditions represents the aggregate maximum number of shares that may be issued pursuant to the award over its full term. The grant date fair value of RSUs and PSAs was reduced by the present value of dividends expected to be paid on the underlying shares of common stock during the requisite and derived service period as these awards are not entitled to receive dividends until vested.
Employee Stock Purchase Plan
The following table summarizes employee stock purchases through the ESPP (in millions, except per share amounts):
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Share-Based Compensation Expense
Share-based compensation expense associated with stock options, RSUs, RSAs, PSAs, and ESPP purchase rights was recorded in the following cost and expense categories in the Condensed Consolidated Statements of Operations (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Cost of revenues - Product
$
1.7
$
1.5
$
4.3
$
3.8
Cost of revenues - Service
4.8
4.7
13.0
13.1
Research and development
26.3
23.7
62.2
68.0
Sales and marketing
17.4
16.4
42.3
47.8
General and administrative
11.3
8.6
32.1
30.2
Total
$
61.5
$
54.9
$
153.9
$
162.9
The following table summarizes share-based compensation expense by award type (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Stock options
$
1.3
$
2.2
$
4.4
$
7.4
RSUs, RSAs, and PSAs
52.4
47.9
131.8
142.4
ESPP purchase rights
7.8
4.8
17.7
13.1
Total
$
61.5
$
54.9
$
153.9
$
162.9
As of September 30, 2022, the total unrecognized compensation cost related to unvested share-based awards was $394.8 million to be recognized over a weighted-average period of 1.76 years.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Segments
The Company operates in one reportable segment. The Company's Chief Executive Officer, who is the chief operating decision maker, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance, accompanied by disaggregated information about net revenues by customer solution, customer vertical, and geographic region as presented below.
The following table presents net revenues by customer solution (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Customer Solutions:
Automated WAN Solutions
$
532.7
$
384.5
$
1,386.3
$
1,167.0
Cloud-Ready Data Center
229.3
194.7
619.0
554.0
AI-Driven Enterprise
266.6
229.8
707.9
586.1
Hardware Maintenance and Professional Services
386.0
379.8
1,139.2
1,128.4
Total
$
1,414.6
$
1,188.8
$
3,852.4
$
3,435.5
The following table presents net revenues by customer vertical (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Cloud
$
375.3
$
303.3
$
1,013.3
$
894.6
Service Provider
523.1
445.8
1,421.9
1,327.7
Enterprise
516.2
439.7
1,417.2
1,213.2
Total
$
1,414.6
$
1,188.8
$
3,852.4
$
3,435.5
The Company attributes revenues to a geographic region based on the customer’s shipping address. The following table presents net revenues by geographic region (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Americas:
United States
$
839.0
$
609.2
$
2,133.6
$
1,729.7
Other
56.8
55.6
165.8
170.8
Total Americas
895.8
664.8
2,299.4
1,900.5
Europe, Middle East, and Africa
320.4
336.3
991.5
971.3
Asia Pacific
198.4
187.7
561.5
563.7
Total
$
1,414.6
$
1,188.8
$
3,852.4
$
3,435.5
For the three and nine months ended September 30, 2022 and September 30, 2021, no customer accounted for more than 10% of total net revenues.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 12. Income Taxes
The following table provides details of income taxes (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Income before income taxes
$
140.2
$
111.8
$
331.3
$
148.8
Income tax provision
$
16.6
$
22.9
$
38.1
$
29.0
Effective tax rate
11.9
%
20.5
%
11.5
%
19.5
%
The Company’s effective tax rate differs from the federal statutory rate of 21% primarily due to the tax impact of state taxes, geographic mix of earnings including foreign-derived intangible income deductions and global intangible low-taxed income, research and development and foreign tax credits, tax audit settlements, non-deductible compensation, cost sharing of stock-based compensation, and other transfer pricing adjustments.
The Company’s effective tax rate for the nine months ended September 30, 2022 includes the net effect of the gain recognized on divestiture of the Company's silicon photonics business, one-time benefits from tax legislative changes, and excess tax benefits associated with stock-based compensation.
The Company’s effective tax rate for the nine months ended September 30, 2021 reflected the loss on extinguishment of debt of $60.6 million and restructuring charges of $42.8 million in the period.
As of September 30, 2022, the total amount of gross unrecognized tax benefits was $122.0 million.
The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. There is a greater than remote likelihood that the balance of the gross unrecognized tax benefits will decrease by up to $5.9 million within the next twelve months due to the completion of tax review cycles in various tax jurisdictions and lapses of applicable statutes of limitation.
The Company is currently under examination by the Internal Revenue Service and the India tax authorities for the 2017 through 2018 tax years and the 2012 through 2019 tax years, respectively.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14. Commitments and Contingencies
Commitments
Except for the items below, there have been no material changes to the Company's commitments compared to the commitments described in Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K.
Purchase Commitments with Contract Manufacturers and Suppliers
In order to reduce manufacturing lead times and in the interest of having access to adequate component supply, the Company enters into agreements with contract manufacturers and certain suppliers to procure inventory based on the Company's requirements. A significant portion of the Company's purchase commitments arising from these agreements consists of firm and non-cancelable commitments. These purchase commitments totaled $2,415.0 million as of September 30, 2022.
Legal Proceedings
In the ordinary course of business, the Company is subject to various pending and potential investigations, disputes, litigations, and legal proceedings. The Company records an accrual for loss contingencies for legal proceedings when it believes that an unfavorable outcome is both (a) probable and (b) the amount or range of any possible loss is reasonably estimable. The Company intends to aggressively defend itself in any legal matters, and while the outcome of any pending matters is not currently determinable, the Company believes that none of its currently existing claims or proceedings are likely, individually or in the aggregate, to have a material adverse effect on its financial position. Notwithstanding the foregoing, there are many uncertainties associated with any litigation and these matters or any other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If any of these events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, if any, which could result in the need to adjust the liability and record additional expenses.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 15. Subsequent Events
Dividend Declaration
On October 25, 2022, the Company announced a cash dividend of $0.21 per share of common stock to be paid on December 22, 2022 to stockholders of record as of the close of business on December 1, 2022.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, which we refer to as the Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Juniper Networks, Inc., which we refer to as “Juniper Networks,” “Juniper,” “we,” “us,” or the “Company,” that are based on our current expectations, estimates, forecasts, and projections about our business, economic and market outlook, our results of operations, the industry in which we operate, and the beliefs and assumptions of our management. All statements other than statement of historical facts are statements that could be deemed to be forward-looking statements. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “would,” “will,” “could,” “may,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including the duration, extent, and continuing impact of the COVID-19 pandemic and global component shortages, including the semiconductor shortage, and our ability to successfully manage the demand, supply, and operational challenges associated with the COVID-19 pandemic and global component shortages, including the ongoing semiconductor shortage. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part II and elsewhere, and in other reports we file with the U.S. Securities and Exchange Commission, or the SEC. In addition, many of the foregoing risks and uncertainties are, and could be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by applicable law.
The following discussion is based upon our unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Report. We intend the discussion of our financial condition and results of operations to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting estimates affect our Condensed Consolidated Financial Statements. To aid in understanding our operating results for the periods covered by this Report, we have provided an executive overview, which includes a summary of our business and market environment along with a financial results and key performance metrics overview and a discussion of material events and uncertainties known to management, such as the COVID-19 pandemic and global component shortage. These sections should be read in conjunction with the more detailed discussion and analysis of our condensed consolidated financial condition and results of operations in this Item 2, our “Risk Factors” section included in Item 1A of Part II of this Report, and our unaudited Condensed Consolidated Financial Statements and Notes included in Item 1 of Part I of this Report, as well as our audited Consolidated Financial Statements and Notes included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or Form 10-K.
Business and Market Environment
Juniper Networks designs, develops, and sells products and services for high-performance networks to enable customers to build scalable, reliable, secure, and cost-effective networks for their businesses, while achieving agility and improved operating efficiency through automation. We sell our solutions in more than 150 countries in three geographic regions: Americas; Europe, Middle East, and Africa, which we refer to as EMEA; and Asia Pacific, which we refer to as APAC. We organize and manage our business by major functional departments on a consolidated basis as one operating segment.
Our true north is experience-first networking to help our customers achieve their business outcomes. We sell high-performance networking product offerings within the following customer solution categories: AI-Driven Enterprise, Automated WAN Solutions, and Cloud-Ready Data Center, and our connected security products are sold in each category.
•AI-Driven Enterprise encompasses client-to-cloud portfolio, cloud-delivered campus wired and wireless solutions of Mist and EX switches, and our SD-WAN portfolio, which includes 128 Technology and Branch SRX solutions. We believe our acquisition of WiteSand Systems Inc. in the fourth quarter of 2021 will expand upon our AI-Driven Enterprise portfolio to accelerate our ongoing efforts to deliver a next-generation NAC solution.
•Automated WAN Solutions includes MX and PTX product lines, and ACX product line targeting the Metro market. It also includes Paragon Active Assurance, formerly known as Netrounds, which is now part of Paragon Automation, our WAN Automation suite.
•Cloud-Ready Data Center includes QFX product line, Apstra and Contrail product lines, along with our high-end security portfolio of SRX, targeting data center security for service provider, cloud and enterprise.
In addition to our product offerings, we offer software-as-a-service ("SaaS"), software subscriptions, and other customer services, including maintenance and support, professional services, and education and training programs.
Our products and services address high-performance network requirements for our customers within our verticals: Cloud, Service Provider, and Enterprise who view the network as critical to their success. We believe our silicon, systems, and software represent innovations that transform the economics and experience of networking, helping our customers achieve superior performance, greater choice, and flexibility, while reducing overall total cost of ownership. We are executing against our innovation roadmap as each of our industry verticals transitions to cloud architectures. We focus on compelling and differentiated use cases targeting the AI-Driven Enterprise, Automated WAN Solutions, and Cloud-Ready Data Center solution categories. We believe our understanding of high-performance networking technology and cloud architecture positions us to effectively capitalize on the industry transition to more automated, cost-efficient, and scalable networks.
COVID-19 Pandemic Update
As the ongoing COVID-19 pandemic has evolved, we continue to monitor and evaluate the impact on our business operations on a regional, national and global basis. We reopened the majority of our facilities world-wide for office-based employees in a new office/hybrid collaboration model. We will continue our four-phased approach to office reopening at our facilities around the world based on considerations regarding the health and safety of our employees and the advice of regional and national governments.
As was the case in the third quarter of 2022, we do not expect the pandemic to have a substantial net impact on our consolidated operating results or our liquidity position for the remainder of 2022, although we continue to experience higher logistic costs due to cost increases and extended shipping times for ocean transit that have increased our dependence on higher-cost air freight. We continue to work with government authorities and implement safety measures to ensure that we are able to continue manufacturing and distributing our products during the pandemic. For more information on the impact of the COVID-19 pandemic and supply chain constraints on our business, see the “Risk Factors” section of Item 1A of Part II of this Report.
Global Component Shortage
We have a global supply chain, which is primarily composed of manufacturing partners and component suppliers. Global supply chain constraints in the wake of the COVID-19 pandemic continue to reduce our visibility into component availability, which have resulted in extended lead times of certain products and significant disruption to our production schedule.
During 2022, the supply constraints we experienced were due to both constrained manufacturing capacity as well as component parts shortages as our component vendors were also facing manufacturing challenges. These challenges resulted in extended lead-times to our customers, increased logistics costs, and impacted the volume of products we were able to deliver, which negatively impacted our ability to recognize revenue. Our supply chain team has been working to meet our customer needs by executing on a strong risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers.
Similar to others, we continue to experience increased component costs. This has had a negative impact on our gross margin. We continue to experience strong product orders across all verticals, customer solutions, and geographies. We anticipate backlog to remain at elevated levels but expect it to decline as supply improves. We believe some of the strength in product orders was attributable to industry supply chain challenges that were causing certain customers to place orders early in an effort to secure supply when needed. We continue to work to resolve our supply chain challenges and continue to increase our inventory levels and purchase commitments. We are working closely with our suppliers to further enhance our resiliency and mitigate the effects of recent disruptions. We believe the extended lead times and increased component and logistic costs will likely persist into 2023. We have taken pricing actions to mitigate some of the effects of rising component costs and general inflationary pressures, arising from supply chain constraints as well as overall macroeconomic conditions, and expect these actions to have a more substantial impact as we exit fiscal year 2022 and enter 2023. While the situation is dynamic, at this
point in time, we believe we will have access to sufficient supplies of semiconductors and other components and will be able to meet our full-year financial forecast. See the section entitled “Risk Factors” in Item 1A of Part II of this Report for further discussion of this risk.
Financial Results and Key Performance Metrics Overview
The following table provides an overview of our financial results and key financial metrics (in millions, except per share amounts, percentages, and days sales outstanding, or DSO):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Net revenues
$
1,414.6
$
1,188.8
$
225.8
19
%
$
3,852.4
$
3,435.5
$
416.9
12
%
Gross margin
$
787.8
$
692.2
$
95.6
14
%
$
2,131.3
$
1,989.7
$
141.6
7
%
Percentage of net revenues
55.7
%
58.2
%
55.3
%
57.9
%
Operating income
$
149.3
$
120.1
$
29.2
24
%
$
315.6
$
233.6
$
82.0
35
%
Percentage of net revenues
10.6
%
10.1
%
8.2
%
6.8
%
Net income
$
121.5
$
88.9
$
32.6
37
%
$
290.6
$
119.8
$
170.8
143
%
Percentage of net revenues
8.6
%
7.5
%
7.5
%
3.5
%
Net income per share:
Basic
$
0.38
$
0.27
$
0.11
41
%
$
0.90
$
0.37
$
0.53
143
%
Diluted
$
0.37
$
0.27
$
0.10
37
%
$
0.88
$
0.36
$
0.52
144
%
Operating cash flows
$
(22.0)
$
573.7
$
(595.7)
(104)
%
Stock repurchase plan activity
$
—
$
50.0
$
(50.0)
(100)
%
$
212.2
$
285.0
$
(72.8)
(26)
%
Cash dividends declared per common stock
$
0.21
$
0.20
$
0.01
5
%
$
0.63
$
0.60
$
0.03
5
%
DSO
65
59
6
10
%
As of
September 30, 2022
December 31, 2021
$ Change
% Change
Deferred revenue:
Deferred product revenue
$
105.9
$
129.1
$
(23.2)
(18)
%
Deferred service revenue
1,372.3
1,284.5
87.8
7
%
Total
$
1,478.2
$
1,413.6
$
64.6
5
%
Deferred revenue from customer solutions(*)
$
561.2
$
442.1
$
119.1
27
%
Deferred revenue from hardware maintenance and professional services
917.0
971.5
(54.5)
(6)
%
Total
$
1,478.2
$
1,413.6
$
64.6
5
%
(*) Includes deferred revenue from hardware solutions, software licenses, software support and maintenance and SaaS offerings sold in our Automated WAN Solutions, Cloud-Ready Data Center, and AI-Driven Enterprise customer solution categories.
•Net Revenues: Net revenues increased during the three and nine months ended September 30, 2022, compared to the same periods in 2021, across all verticals and customer solutions. Product net revenues increased during the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to higher sales volume, specifically from our MX, QFX and Mist product families. Service net revenues increased during the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to strong sales of hardware maintenance and software subscriptions.
Of our top ten customers for the third quarter of 2022, five were in Cloud, three were in Service Provider, and two were in Enterprise. Of these customers, none was located outside of the U.S.
•Gross Margin: Gross margin as a percentage of net revenues decreased primarily due to higher component costs due to supply chain constraints and unfavorable customer mix, partially offset by pricing actions and higher revenue.
•Operating Margin: Operating income as a percentage of net revenues increased primarily due to higher revenue, partially offset by the drivers described in the gross margin discussion above and higher personnel-related expenses driven by an increase in headcount.
•Operating Cash Flows: Net cash used in operations was $22.0 million during the nine months ended September 30, 2022, while net cash provided by operations was $573.7 million during the nine months ended September 30, 2021. The increase in operating cash outflows was primarily due to higher supplier payments and higher cash taxes, partially offset by higher customer collections.
•Capital Return: We continue to return capital to our stockholders. During the nine months ended September 30, 2022, we repurchased 6.3 million shares of our common stock in the open market at an average price of $33.38 per share for an aggregate purchase price of $212.2 million. During the three and nine months ended September 30, 2022, we paid a quarterly dividend of $0.21 per share, for an aggregate amount of $68.0 million and $202.8 million, respectively.
•DSO: DSO is calculated as the ratio of ending accounts receivable, net of allowances, divided by average daily net revenues for the preceding 90 days. DSO increased primarily due to a significant increase in product invoicing and lower collections of in-quarter invoicing, partially offset by higher revenue.
•Deferred Revenue: Total deferred revenue increased as of September 30, 2022, compared to December 31, 2021, primarily driven by an increase in deferrals of SaaS and software subscription services.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenues, and expenses that are not readily apparent from other sources.
During the nine months ended September 30, 2022, there were no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Form 10-K.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report, for a full description of the recently adopted accounting standards and recent accounting standards not yet adopted, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.
Nine Months Ended September 30, 2022compared with the Nine Months Ended September 30, 2021
Total net revenues increased across all customer solutions mainly driven by higher sales volume.
The Automated WAN Solutions revenue increased across all verticals.
The AI-Driven Enterprise revenue increase was primarily driven by Enterprise and Service Provider, partially offset by a decline in Cloud.
The Cloud-Ready Data Center revenue increase was primarily driven by Cloud and Service Provider, partially offset by a decline in Enterprise.
Also, software and security products and services represent key areas of our strategic focus that are critical components to our business success. Software and related service offerings include revenue from software license, software support and maintenance and SaaS contracts. Total security offerings include revenue from our complete portfolio of hardware and software security products, including SD-WAN solutions, as well as services related to our security solutions.
The following table presents net revenues from software and security products and services (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Software and Related Services
$
247.6
$
204.0
$
43.6
21
%
$
689.1
$
519.4
$
169.7
33
%
Percentage of net revenues
17.5
%
17.2
%
17.9
%
15.1
%
Total Security
$
139.7
$
160.4
$
(20.7)
(13)
%
$
459.3
$
495.2
$
(35.9)
(7)
%
Percentage of net revenues
9.9
%
13.5
%
11.9
%
14.4
%
Gross Margins
The following table presents gross margins (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Product gross margin
$
488.9
$
428.5
$
60.4
14
%
$
1,262.6
$
1,193.2
$
69.4
6
%
Percentage of product revenues
50.5
%
55.5
%
49.5
%
54.2
%
Service gross margin
298.9
263.7
35.2
13
%
868.7
796.5
72.2
9
%
Percentage of service revenues
66.9
%
63.3
%
66.8
%
64.7
%
Total gross margin
$
787.8
$
692.2
$
95.6
14
%
$
2,131.3
$
1,989.7
$
141.6
7
%
Percentage of net revenues
55.7
%
58.2
%
55.3
%
57.9
%
Our gross margins as a percentage of net revenues have been and will continue to be affected by a variety of factors, including general inflationary pressures, the mix and average selling prices of our products and services, new product introductions and enhancements, manufacturing, component and logistics costs, expenses for inventory obsolescence and warranty obligations, cost of support and service personnel, customer mix as we continue to expand our footprint with certain strategic customers, the mix of distribution channels through which our products and services are sold, and import tariffs. For example, our logistics and other supply chain-related costs have increased due to the COVID-19 pandemic and global semiconductor shortage. For more information on the impact of COVID-19 and supply chain constraints on our business, see the “Risk Factors” section of Item 1A of Part II of this Report.
Three Months Ended September 30, 2022 compared with the Three Months Ended September 30, 2021
Product gross margin
Product gross margin as a percentage of product revenues decreased primarily due to $17.8 million in incremental component costs due to supply chain constraints and unfavorable customer mix, partially offset by pricing actions and higher revenue. We continue to undertake specific efforts to address certain factors impacting our product gross margin. These efforts include performance and quality improvements through engineering to increase value across our products; optimizing our supply chain and service business; pricing management; and increasing software and solution sales.
Service gross margin
Service gross margin as a percentage of service net revenues increased primarily due to higher revenue from hardware maintenance and software subscriptions and lower delivery costs.
Nine Months Ended September 30, 2022compared with the Nine Months Ended September 30, 2021
Product gross margin
Product gross margin as a percentage of product revenues decreased primarily due to $58.5 million in incremental component costs and $10.4 million in incremental freight costs due to supply chain constraints and unfavorable customer mix, partially offset by pricing actions and higher revenue. We continue to undertake specific efforts to address certain factors impacting our product gross margin. These efforts include performance and quality improvements through engineering to increase value across our products; optimizing our supply chain and service business; pricing management; and increasing software and solution sales.
Service gross margin
Service gross margin as a percentage of service net revenues increased primarily due to higher revenue from hardware maintenance and software subscriptions and lower delivery costs.
Operating Expenses
The following table presents operating expenses (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Research and development
$
274.0
$
251.8
$
22.2
9
%
$
766.9
$
752.3
$
14.6
2
%
Percentage of net revenues
19.3
%
21.1
%
19.8
%
22.0
%
Sales and marketing
286.8
263.4
23.4
9
%
834.4
773.9
60.5
8
%
Percentage of net revenues
20.3
%
22.2
%
21.7
%
22.5
%
General and administrative
64.7
55.0
9.7
18
%
192.1
187.1
5.0
3
%
Percentage of net revenues
4.6
%
4.6
%
5.0
%
5.4
%
Restructuring charges
13.0
1.9
11.1
584
%
22.3
42.8
(20.5)
(48)
%
Percentage of net revenues
0.9
%
0.2
%
0.6
%
1.2
%
Total operating expenses
$
638.5
$
572.1
$
66.4
12
%
$
1,815.7
$
1,756.1
$
59.6
3
%
Percentage of net revenues
45.1
%
48.1
%
47.1
%
51.1
%
Three Months Ended September 30, 2022 compared with the Three Months Ended September 30, 2021
Total operating expenses increased primarily due to increases in personnel-related costs and higher restructuring costs.
Nine Months Ended September 30, 2022compared with the Nine Months Ended September 30, 2021
Total operating expenses increased primarily due to increases in personnel-related costs, partially offset by lower restructuring costs.
The following table presents the gain on divestiture (in millions, except percentages):
.
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Gain on divestiture
$
—
$
—
$
—
N/M
$
45.8
$
—
$
45.8
N/M
Percentage of net revenues
—
%
—
%
1.2
%
—
%
______________________
N/M - Not meaningful
During the nine months ended September 30, 2022, we recognized a gain of $45.8 million related to the divestiture of our silicon photonics business for cash consideration of $90.0 million and a 25% equity interest in the business. For further discussion of the divestiture, see Note 2, Divestiture, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
Loss on Extinguishment of Debt
The following table presents the loss on extinguishment of debt (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Loss on extinguishment of debt
$
—
$
—
$
—
N/M
$
—
$
(60.6)
$
60.6
N/M
Percentage of net revenues
—
%
—
%
—
%
(1.8)
%
______________________
N/M - Not meaningful
During the nine months ended September 30, 2021, we incurred a loss on extinguishment of debt of $60.6 million related to the redemption of our Senior Notes maturing in 2024 and June 2025. The loss primarily consisted of a premium on the early redemption and acceleration of unamortized debt discount and fees on the redeemed debt.
Other Expense, Net
The following table presents other expense, net (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Interest income
$
5.5
$
3.0
$
2.5
83
%
$
11.4
$
10.5
$
0.9
9
%
Interest expense
(15.2)
(12.2)
(3.0)
25
%
(41.1)
(38.5)
(2.6)
7
%
Gain (loss) on investments, net
(1.3)
0.7
(2.0)
N/M
(4.4)
3.3
(7.7)
N/M
Other
1.9
0.2
1.7
N/M
4.0
0.5
3.5
N/M
Total other expense, net
$
(9.1)
$
(8.3)
$
(0.8)
10
%
$
(30.1)
$
(24.2)
$
(5.9)
24
%
Percentage of net revenues
(0.6)
%
(0.7)
%
(0.8)
%
(0.7)
%
______________________
N/M - Not meaningful
Three Months Ended September 30, 2022 compared with the Three Months Ended September 30, 2021
Total other expense, net, increased primarily due to higher interest expense and net loss on investments, partially offset by higher interest income.
Nine Months Ended September 30, 2022 compared with the Nine Months Ended September 30, 2021
Total other expense, net, increased primarily due to losses on certain equity investments and higher interest expense, partially offset by foreign currency gains.
Income Tax Provision
The following table presents income tax provision (in millions, except percentages):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
$ Change
% Change
2022
2021
$ Change
% Change
Income tax provision
$
16.6
$
22.9
$
(6.3)
(28)
%
$
38.1
$
29.0
$
9.1
31
%
Effective tax rate
11.9
%
20.5
%
11.5
%
19.5
%
The effective tax rate decreased during the three months ended September 30, 2022, as compared to the same period in 2021, primarily due to an increase in the benefit of one-time items. The effective tax rate for the nine months ended September 30, 2022 decreased primarily due to an increase in the benefit of one-time items, partially offset by the effect of the gain recognized on the divestiture of our silicon photonics business and the impact of recently published U.S. tax regulations limiting the ability to utilize certain foreign tax credits. For further explanation of our income tax provision, see Note 12, Income Taxes, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
Beginning January 1, 2022, as a result of the Tax Cuts and Jobs Act of 2017 ("Tax Act"), all our U.S. and non-U.S. based R&D expenditures are being capitalized and amortized over five and fifteen years, respectively. Absent a change in legislation, we estimate a decrease in our cash flow from operations by up to $230 million in 2022. The actual impact on 2022 cash flow from operations will primarily depend on if and when this legislation is deferred, modified, or repealed by the U.S. Congress, including if retroactively, and the amount of R&D expenditures paid or incurred in 2022. We estimate the largest impact will be to 2022 cash flow from operations and that the impact in future years should gradually decrease over the five- and fifteen-year amortization periods. The Company’s effective tax rate may be impacted.
Liquidity and capital resources may be impacted by our operating activities as well as acquisitions, investments in strategic relationships, repurchases of shares of our common stock, and payment of cash dividends on our common stock. Since the enactment of the Tax Act, we have repatriated a significant amount of cash from outside of the U.S., and plan to continue to repatriate on an ongoing basis. We intend to use the repatriated cash to invest in the business, support value-enhancing mergers and acquisitions, and fund our return of capital to stockholders.
Based on past performance and current expectations, we believe that our existing cash and cash equivalents, short-term, and long-term investments, cash generated from operations together with the revolving credit facility and our ability to access to capital markets will be sufficient to fund our operations, planned stock repurchases and dividends, capital expenditures, purchase commitments and other liquidity requirements, and anticipated growth for at least the next twelve months and thereafter for the foreseeable future. However, our future liquidity and capital requirements may vary materially from those now planned depending on many factors, including, but not limited to, our growth rate, the timing and amount we spend to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services, the costs to acquire or invest in businesses and technologies, an increase in manufacturing or component costs, and the risks and uncertainties detailed in the “Risk Factors” section of Item 1A of Part II of this Report.
The Company's cash requirements have not changed materially since December 31, 2021, as discussed in the Form 10-K, except for purchase commitments with contracts manufacturers and suppliers and potential tax payments pursuant to the Tax Act.
Purchase Commitments with Contract Manufacturers and Suppliers
In order to reduce manufacturing lead times and in the interest of having access to adequate component supply, we enter into agreements with contract manufacturers and certain suppliers to procure inventory based on the Company's requirements. A significant portion of the Company's purchase commitments arising from these agreements consist of firm and non-cancelable commitments. As of September 30, 2022, we had purchase commitments of $2,415.0 million, with $2,295.3 million payable within 12 months.
Tax Payments
During the nine months ended September 30, 2022, we made tax payments of approximately $208 million of which approximately $110 million can be attributed to the capitalization and amortization requirements for R&D expenditures pursuant to the Tax Act. We may incur up to an additional $120 million in tax payments for the remainder of 2022.
Capital Return
We have a capital return program authorized by the Board of Directors (the "Board"). During the nine months ended September 30, 2022, we repurchased 6.3 million shares of our common stock in the open market at an average price of $33.38 per share for an aggregate purchase price of $212.2 million under the 2018 Stock Repurchase Program.
As of September 30, 2022, there was approximately $0.7 billion of authorized funds remaining under the 2018 Stock Repurchase Program.
Future share repurchases under the 2018 Stock Repurchase Program will be subject to a review of the circumstances at that time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. Our 2018 Stock Repurchase Program may be discontinued at any time. See Note 9, Equity, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report for further discussion of the 2018 Stock Repurchase Program.
In addition, any future dividends, and the establishment of record and payment dates, are subject to approval by the Board or an authorized committee thereof. See Note 15, Subsequent Events, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report for discussion of our dividend declaration subsequent to September 30, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the item below, our exposures to market risk have not changed materially since December 31, 2021. For quantitative and qualitative disclosures about market risk, see Item 7A Quantitative and Qualitative Disclosures about Market Risk, in our Form 10-K.
Foreign Currency Risk and Foreign Exchange Contracts
Our revenue and costs of product revenues are primarily denominated in U.S. Dollars. Our cost of service revenue and operating expenses are denominated in U.S. Dollars as well as other foreign currencies, including the British Pound, Chinese Yuan, Euro, and the Indian Rupee. Approximately 80% of these costs and operating expenses are denominated in U.S. Dollars. Periodically, we use foreign currency forward and/or option contracts to hedge certain forecasted foreign currency transactions to reduce variability in cost of service revenue and operating expenses caused by non-U.S. Dollar denominated operating expense and costs. In designing a specific hedging approach, we consider several factors, including offsetting exposures, significance of exposures, costs associated with entering into a particular hedge instrument, and potential effectiveness of the hedge. These derivatives are designated as cash flow hedges and have maturities of thirty-six months or less. The change in foreign currency exchange rates compared to prior periods resulted in a reduction to our operating expenses, including cost of service revenue, research and development, sales and marketing, and general and administrative expenses, by $43.0 million, or 1.4%, for the nine months ended September 30, 2022 and an increase by $28.2 million, or 0.6%, for the year ended December 31, 2021, as compared to the reduction in operating expenses of $10.7 million, or 0.2%, disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. See Note 5, Derivative Instruments, in Notes to Condensed Consolidated Financial Statements for further discussion of our derivative and hedging activity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this Report are certifications of our principal executive officer and principal financial officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and related evaluations referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this Report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any significant impact to our internal controls over financial reporting despite the fact that a portion of our employees continue to work remotely due to the COVID-19 pandemic and a portion have returned to the office under our new office/hybrid collaboration model. The design of our processes and controls allows for remote execution with accessibility to secure data. We are continually monitoring and assessing the COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.
The information set forth under the “Legal Proceedings” section in Note 14, Commitments and Contingencies, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report, is incorporated herein by reference.
Item 1A. Risk Factors
Factors That May Affect Future Results
We operate in rapidly changing economic and technological environments that present numerous risks, many of which are driven by factors that we cannot control or predict. Some of these risks are highlighted in the following discussion, and in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk. Investors should carefully consider all relevant risks before investing in our securities. The occurrence of any of these risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, operating results, and stock price.
RISKS RELATED TO OUR BUSINESS STRATEGY AND INDUSTRY
The COVID-19 pandemic has significantly affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and financial performance remains uncertain. The COVID-19 pandemic has, and may continue to, negatively affect our operations, including as a result of external factors beyond our control. The majority of our global workforce began working remotely in March 2020. We have reopened the majority of our facilities worldwide for office-based employees in a new office/hybrid collaboration model. We will continue our phased return to the office at our facilities around the world based on considerations regarding the health and safety of our employees and guidance of local and national governments. If the ongoing COVID-19 pandemic, corresponding governmental regulations or our return to the office process have a substantial impact on the health, attendance or productivity of our employees, partners, or customers, our results of operations and overall financial performance may be adversely impacted.
Further, the pandemic has and could continue to adversely affect our ability to provide or deliver products and on-site services to our customers. For example, the COVID-19 pandemic has caused us to experience supply constraints due to both constrained manufacturing capacity as well as shortages of component parts as our component vendors have experienced manufacturing challenges. This has resulted in extended lead-times to our customers and increased logistics and component costs, which has negatively impacted our ability to recognize revenue and decreased our gross margins for these periods, and may impact our ability to convert backlog into revenue. Our backlog may not be a reliable indicator of future operating results because a customer may place orders early in an effort to secure supply when needed and then cancel an order without significant penalty. Challenges to our supply chain due to the impact of the pandemic remain dynamic, including ongoing shortages of component parts, and we continue to experience increased logistics costs due to air travel and transport restrictions that limit the availability of flights on which we are able to ship products. Additionally, cost increases and extended shipping times for ocean transit have increased our dependence on higher-cost air freight.
The impact from the COVID-19 pandemic on our business depends on future developments that cannot be accurately forecasted at this time, such as the transmission rate and geographic spread of the disease and its variants, and the impact of these and other factors on our employees, customers, partners, and vendors. If we are not able to respond to and manage the impact of such events effectively and if the macroeconomic conditions of the general economy or the industries in which we operate worsen from present levels, our business, operating results, financial condition and cash flows could continue to be adversely affected.
Our quarterly results are unpredictable and subject to substantial fluctuations; as a result, we may fail to meet the expectations of securities analysts and investors. Our revenues and operating results may vary significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, the trading price of our securities could be negatively affected. Our operating results for prior periods may not be effective predictors of our future performance.
Factors associated with our industry, the operation of our business, and the markets for our products and services that may cause our quarterly results to fluctuate, include, but are not limited to:
•unpredictable ordering patterns and limited visibility into our customers’ spending plans and associated revenue;
•changes in our customer mix, the mix of products and services sold, and the geographies in which our products and services are sold;
•changes in the demand for our products and services, including seasonal fluctuations in customer spending;
•changing market and economic conditions, including rising interest rates and inflationary pressures, that could make our solutions more expensive or could increase our costs for materials, supplies, and services;
•ability to fulfill orders received in a timely manner due to disruptions and shortages in our global supply chain;
•increased advance ordering by customers of our products due to industry-wide supply chain concerns and our increased lead times;
•price and product competition;
•ineffective legal protection of our intellectual property rights in certain countries;
•how well we execute on our strategy and business model;
•financial stability of our customers, including the solvency of private sector customers;
•authority for customers to purchase goods and services;
•executive orders, tariffs, governmental sanctions, changes in laws or regulations and accounting rules, or interpretations thereof;
•regional economic and political conditions, which may be aggravated by unanticipated global events; and
•disruptions in our business operations or target markets caused by, among other things, terrorism or other intentional acts, armed conflicts (such as the recent conflict between Russia and Ukraine as well as governmental sanctions imposed in response), cyberwarfare, an escalation of political tensions, outbreaks of disease, such as pandemics, earthquakes, floods, fires, or other natural disasters, including catastrophic events, and other unanticipated extraordinary externalities, including extreme weather conditions due to climate change that increase both the frequency and severity of natural disasters and may cause derivative disruptions such as impacts to our physical infrastructure or those of our customers, manufacturers, and suppliers.
We believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. In some prior periods, our operating results have been below our guidance, our long-term financial model or the expectations of securities analysts or investors. This may happen again, and the price of our common stock may decline. In addition, our failure to pay quarterly dividends to our stockholders or the failure to meet our commitments to return capital to our stockholders could have a material adverse effect on our stock price.
We expect our gross margins and operating margins to vary over time. Our product and service gross margins are expected to vary, and may be adversely affected in the future by numerous factors, including, but not limited to, customer, vertical, product and geographic mix shifts, an increase or decrease in our software sales or services we provide, increased price competition in one or more of the markets in which we compete, modifications to our pricing strategy to gain footprint in markets or with customers, currency fluctuations that impact our costs or the cost of our products and services to our customers, inflation, increases in material, labor, logistics, warranty costs, or inventory carrying costs, excess product component or obsolescence charges from our contract manufacturers, issues with manufacturing or component availability, issues relating to the distribution of our products and provision of our services, quality or efficiencies, increased costs due to changes in component pricing or charges incurred due to inaccurately forecasting product demand, warranty related issues, the impact of tariffs, or our introduction of new products and enhancements, or entry into new markets with different pricing and cost structures. We have seen, and may continue to see, our gross margins negatively impacted by continued increases in component costs and inflationary pressures. Failure to sustain or improve our gross margins reduces our profitability and may have a material adverse effect on our business and stock price.
We derive a material portion of our revenues from a limited number of our customers, and our customers compete in industries that continue to experience consolidation. A material portion of our net revenues, across each customer vertical, depends on sales to a limited number of customers. The concentration of our customer base increases risks related to the financial condition of our customers, and the deterioration in financial condition of a single customer or the failure of a single customer to perform its obligations could have a material adverse effect on our results of operations and cash flow. If any such customers change their business requirements or focus, vendor selection, project prioritization, or purchasing behavior, or are parties to consolidation transactions, they may delay, suspend, reduce or cancel their purchases of our products or services and our business, financial condition, and results of operations may be adversely affected. In addition, major customers may also seek more favorable pricing, payment, intellectual property-related, or other commercial terms that are less favorable to us, which may have a negative impact on our business, cash flow, revenue, and gross margins.
If we are unable to compete effectively, our business and financial results could be harmed. The markets that we serve are rapidly evolving and highly competitive and include several well-established companies. We also compete with other public and private companies that are developing technologies that compete with our products. In addition, actual or speculated consolidation among competitors, or the acquisition by, or of, our partners and/or resellers by competitors can increase the competitive pressures faced by us as customers may delay spending decisions or not purchase our products at all. Our partners
and resellers generally sell competing products on a non-exclusive basis and consolidation could delay spending or require us to increase discounts to compete, which could also adversely affect our business. Several of our competitors have substantially greater resources and can offer a wider range of products and services for the overall network equipment market than we do. Other competitors have become more integrated, including through consolidation and vertical integration, and offer a broader range of products and services, which could make their solutions more attractive to our customers. Many of our competitors also sell networking products as bundled solutions with other IT products. If we are unable to compete effectively against existing or future competitors, we could experience a loss in market share and a reduction in revenues and/or be required to reduce prices, which could reduce our gross margins and materially and adversely affect our business, financial condition, and results of operations.
Fluctuating economic conditions make it difficult to predict revenues and gross margin for a particular period and a shortfall in revenues or increase in costs of production may harm our operating results. Our revenues and gross margin depend significantly on general economic conditions and the demand for products in the markets in which we compete. Economic weakness or uncertainty, customer financial difficulties, and constrained spending on network expansion and enterprise infrastructure have in the past resulted in, and may in the future result in, decreased revenues and earnings. Such factors could make it difficult to accurately forecast revenues and operating results and could negatively affect our ability to provide accurate forecasts to our contract manufacturers, manage our contract manufacturer relationships and other expenses and to make decisions about future investments. In addition, economic instability or uncertainty, inflationary pressures, continued turmoil in the geopolitical environment in many parts of the world and other events beyond our control, such as the COVID-19 pandemic and the recent conflict between Russia and Ukraine, have, and may continue to, put pressure on economic conditions, including global and regional financial markets, which has led and could lead, to reduced demand for our products, delays or reductions in network expansions or infrastructure projects, and/or higher costs of production. Future or continued economic weakness, failure of our customers and markets to recover from such weakness, customer financial difficulties, increases in costs of production, and reductions in spending on network maintenance and expansion could result in price concessions in certain markets or have a material adverse effect on demand for our products and consequently on our business, financial condition, and results of operations.
Our success depends upon our ability to effectively plan and manage our resources and restructure our business. Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale and adjust our business and business models. From time to time, we have increased investment in our business by increasing headcount, acquiring companies, and increasing our investment in research and development, sales and marketing, and other parts of our business. Conversely, in the last few years, we have initiated restructuring plans to realign our workforce as a result of organizational and leadership changes, which resulted in restructuring charges. Our ability to achieve the anticipated cost savings and other benefits from these initiatives is subject to many estimates and assumptions, which are subject to uncertainties. If our estimates and assumptions are incorrect, if we are unsuccessful at implementing changes, or if other unforeseen events occur, our business and results of operations could be adversely affected.
Our acquisitions or divestitures of businesses could disrupt our business and harm our financial condition and stock price, and equity issued as consideration for acquisitions may dilute the ownership of our stockholders. We have made, and may continue to make, acquisitions to enhance our business and invest significant resources to integrate the businesses we acquire. The success of each acquisition depends in part on our ability to realize the business opportunities and manage numerous risks, including, but not limited to: problems combining the purchased operations, technologies or products, unanticipated costs, higher operating expenses, liabilities, litigation, diversion of management's time and attention, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience, and where competitors in such markets have stronger market positions, initial dependence on unfamiliar supply chains, failure of our due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology, and the potential loss of key employees, customers, distributors, vendors, and other business partners of the companies we acquire.
Acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control. There can be no assurance that our previous or future acquisitions will be successful or that we will be able to successfully integrate any businesses, products, technologies, or personnel that we might acquire or that the transaction will advance our business strategy. Further, we may not realize anticipated revenues or other benefits associated with our acquisitions. In addition, we have divested, and may in the future divest, businesses, product lines, or assets. These initiatives may also require significant separation activities that could result in the diversion of management’s time and attention, loss of employees, substantial separation costs, and accounting charges for asset impairments. No assurance can be given that any acquisitions or divestitures will not materially adversely affect our business, operating results or financial condition.
In connection with certain acquisitions, we may agree to issue common stock, or assume equity awards, that dilute the ownership of our current stockholders; use a substantial portion of our cash resources; assume liabilities (both known and unknown); incur tax expenses; record goodwill and amortizable intangible assets as well as restructuring and other related
expenses. We may incur additional acquisition-related debt, which could increase our leverage and potentially negatively affect our credit ratings resulting in more restrictive borrowing terms or increased borrowing costs, thereby limiting our ability to borrow. Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of profitability or other financial benefits from our acquired or divested businesses, product lines or assets or to realize other anticipated benefits of divestitures or acquisitions.
Long sales and implementation cycles for our products and customer urgency related to ship dates to fill large orders may cause our revenues and operating results to vary significantly from quarter-to-quarter. We experience lengthy sales cycles because our customers' decisions to purchase certain of our products, particularly new products, involve a significant commitment of their resources and a lengthy evaluation and product qualification process. Customers design and implement large network deployments following lengthy procurement processes, which may impact expected future orders. Following a purchase, customers may also deploy our products slowly and deliberately. Customers with large networks often expand their networks in large increments on a periodic basis and place large orders on an irregular basis. These sales and implementation cycles, as well as our expectation that customers will place large orders with urgent ship dates, may cause our revenues and operating results to vary significantly from quarter-to-quarter.
Our ability to recognize revenue in a particular period is contingent on the timing of product orders and deliveries and/or our sales of certain software, subscriptions, and professional support and maintenance services. In some of our businesses, our quarterly sales have periodically reflected a pattern in which a disproportionate percentage of each quarter's total sales occurs towards the end of the quarter. Further, we build certain products only when orders are received. Since the volume of orders received late in any given fiscal quarter remains unpredictable, if orders for custom products are received late in any quarter, we may not be able to recognize revenue for these orders in the same period or meet our expected quarterly revenues. Similarly, if we were to take actions or events occur, which encourage customers to place orders or accept deliveries earlier than anticipated or our customers were to continue to accelerate ordering of our products in response to global supply constraints, extended lead times or other market pressures, our ability to meet our expected revenues in future quarters could be adversely affected. We also determine our operating expenses based on our anticipated revenues and technology roadmap and a high percentage of our expenses are fixed in the short and medium term. Any failure or delay in generating or recognizing revenue could cause significant variations in our operating results and operating margin from quarter-to-quarter.
In addition, services revenue accounts for a significant portion of our revenue, comprising 35%, 36%, and 35% of total revenue in 2021, 2020, and 2019, respectively. We expect our sales of new or renewal professional services, support, and maintenance contracts to fluctuate due to end-customers’ level of satisfaction with our products and services, the prices of our products and services or those offered by our competitors, and reductions in our end-customers’ spending levels. We recognize professional services when delivered, and we recognize support and maintenance and SaaS revenue periodically over the term of the relevant service period.
Further, we recognize certain software revenues periodically over the term of the relevant use or subscription periods and as a result, the related software and support and maintenance revenue we report each fiscal quarter is derived from the recognition of deferred revenue from contracts entered into during previous fiscal quarters. Any fluctuation in such new or renewed contracts in any one fiscal quarter may not be fully or immediately reflected in revenue and could negatively affect our revenue in future fiscal quarters.
RISKS RELATED TO OUR TECHNOLOGY AND BUSINESS OPERATIONS
If the demand for network and IP systems does not continue to grow, our business, financial condition, and results of operations could be adversely affected. A substantial portion of our business and revenues depends on the growth of secure IP infrastructure as well as customers that depend on the continued growth of IP services to deploy our products in their networks and IP infrastructures. As a result of changes in the economy, capital spending, or the building of network capacity in excess of demand (all of which have, in the past, particularly affected telecommunications service providers), spending on IP infrastructure can vary, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, a number of our existing customers are evaluating the build-out of their next generation networks. During the decision-making period when our customers are determining the design of those networks and the selection of the software and equipment they will use in those networks, such customers may greatly reduce or suspend their spending on secure IP infrastructure. Any reduction or suspension of spending on IP infrastructure is difficult to predict, and may be due to events beyond our control. This, in turn, can make it more difficult to accurately predict revenues from customers, can cause fluctuations in the level of spending by customers and, even where our products are ultimately selected, can have a material adverse effect on our business, financial condition, and results of operations.
If we do not anticipate technological shifts, market needs and opportunities, we may not be able to compete effectively and our ability to generate revenues will suffer. If we are unable to anticipate future technological shifts, market needs, requirements or opportunities, or fail to develop and introduce new products, product enhancements or business strategies to
meet those requirements or opportunities in a timely manner or at all, it could cause us to lose customers, substantially decrease or delay market acceptance and sales of our products and services, and significantly harm our business, financial condition, and results of operations. In addition, if we invest in developing products for a market that does not develop, it could significantly harm our business, financial condition, and results of operations. Even if we are able to anticipate, develop, and commercially introduce new products, enhancements or business strategies, there can be no assurance that such products, enhancements or business strategies will achieve market acceptance.
Our strategy to expand our software business could adversely affect our competitive position. The success of our strategy to expand our software business is subject to a number of risks and uncertainties, including, but not limited to:
•the additional development efforts and costs required to create new software products and to make our products compatible with multiple technologies;
•the possibility that our software products may not achieve widespread customer adoption;
•the possibility that our strategy could erode our revenue and gross margins;
•the impact on our financial results of longer periods of revenue recognition for certain types of software products and changes in tax treatment associated with software sales;
•the additional costs associated with both domestic and international regulatory compliance, data protection, privacy and security laws, industry data security standards, and changes we need to make to our distribution chain in connection with increased software sales;
•the ability of our disaggregated hardware and software products to operate independently and/or to integrate with current and future third-party products; and
•issues with third-party technologies used with our software products, which may be attributed to us.
If any of our software products or business strategies do not gain market acceptance or meet our expectations for growth, our ability to meet future financial targets may be adversely affected and our competitive position and our business and financial results could be harmed.
If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business. Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with many or all of the products within these networks as well as future products to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may need to modify our software or hardware to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware, which could be costly and could negatively affect our business, financial condition, and results of operations. In addition, if our products do not interoperate with those of our customers’ networks, demand for our products could be adversely affected or orders for our products could be canceled. This could hurt our operating results, damage our reputation, and seriously harm our business and prospects.
Our products incorporate and rely upon licensed third-party technology. We integrate licensed third-party technology into certain of our products. From time to time, we may be required to renegotiate our current third-party licenses or license additional technology from third parties to develop new products or product enhancements or to facilitate new business models. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms and some of our agreements with our licensors may be terminated for convenience by them. In addition, we cannot be certain that our licensors are not infringing on the intellectual property rights of third parties or that our licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our products. Third-party technology we incorporate into our products that is deemed to infringe on the intellectual property of others may result, and in some cases has resulted, in limitations on our ability to source technology from those third parties, restrictions on our ability to sell products that incorporate the infringing technology, increased exposure to liability that we will be held responsible for incorporating the infringing technology in our products, and increased costs involved in removing that technology from our products or developing substitute technology. Our inability to comply with, maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could require us to develop substitute technology or obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could delay or prevent product shipment and harm our business and results of operations.
We may face difficulties enforcing our proprietary rights, which could adversely affect our ability to compete. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual restrictions on disclosure of confidential and proprietary information, to protect our proprietary rights. There can be no assurance that any of our patent applications will result in issued patents with the scope of the claims we seek or that any of our patents or other proprietary rights will not be challenged, invalidated, infringed or circumvented or that our rights will, in fact, provide competitive advantages to us or
protect our technology. Further, we cannot be certain that we were the first to make the inventions claimed in our pending patent applications or that we were the first to file for patent protection, which could prevent our patent applications from issuing as patents or invalidate our patents following issuance, which in turn may prevent us from incorporating our inventions into our products. If we cannot protect our intellectual property rights, we could incur costly product redesign efforts, discontinue certain product offerings and experience other competitive harm.
Unauthorized parties may also attempt to copy aspects of our products or obtain and use our proprietary information. We generally enter into confidentiality or license agreements with our employees, consultants, vendors, and customers, and generally limit access to and distribution of our proprietary information. However, we cannot ensure that we have entered into such agreements with all parties who may have or have had access to our confidential information or that these agreements will not be breached. We cannot guarantee that any of the measures we have taken will prevent misappropriation of our technology. We are also vulnerable to third parties who illegally distribute or sell counterfeit, stolen or unfit versions of our products, which has happened in the past and could happen in the future, and could have a negative impact on our reputation and business.
In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the U.S. If we are unable to protect our proprietary rights, we may be at a competitive disadvantage to others who need not incur the substantial expense, time, and effort required to create innovative products that have enabled our success.
We depend on contract manufacturers and original design manufacturers as well as single-source and limited source suppliers, including for key components such as semiconductors. Our operations depend on our ability to anticipate our needs for components, products and services, as well as the ability of our manufacturers, original design manufacturers, and suppliers to deliver sufficient quantities of quality components, products and services at reasonable prices and in time for us to meet critical schedules for the delivery of our own products and services. Given the wide variety of solutions that we offer, the large and diverse distribution of our manufacturers and suppliers, and the long lead times required to manufacture, assemble and deliver certain products, problems could arise in production, planning and inventory management that could seriously harm our business. For example, there is currently a worldwide shortage of key components, such as semiconductor products, that has caused us to experience increased prices and extended lead times. The shortage of semiconductors has caused a significant disruption to our production schedule and may give rise to a substantial adverse effect on our financial condition or results of operations. Any delay in our ability to produce and deliver our products could cause our customers to purchase alternative products from our competitors. In addition, our ongoing efforts to optimize the efficiency of our supply chain could cause supply disruptions and be more expensive, time-consuming and resource-intensive than expected. Other manufacturing and supply problems that we could face are described below.
•Manufacturing Issues. We may experience supply shortfalls or delays in shipping products to our customers if our manufacturers experience delays, disruptions, or quality control problems in their manufacturing operations, or if we have to change or add manufacturers or contract manufacturing locations. Although we have contracts with our manufacturers that include terms to protect us in the event of an early termination, we may not have adequate time to transition all of our manufacturing needs to an alternative manufacturer under comparable commercial terms. We have experienced in the past and may experience in the future an increase in the expected time required to manufacture our products or ship products. Moreover, a significant portion of our manufacturing is performed in foreign countries and is therefore subject to risks associated with doing business outside of the U.S., including import restrictions, export restrictions, government sanctions, disruptions to our supply chain, cyberattacks, cyberwarfare, pandemics, regional climate-related events, or regional conflicts.
•Single-Source Suppliers. We rely on single or limited sources for many of our components due to technology, availability, price, quality, scale or customization needs. Any supplier of such components could discontinue components used in our products, which may cause us to either discontinue certain products or incur additional costs to redesign our products that incorporate discontinued components. In addition, there has been consolidation among certain suppliers of our components. Consolidation among suppliers can result in the reduction of the number of independent suppliers of components available to us, which could negatively impact our ability to access certain component parts or the prices we have to pay for such parts and may impact our gross margins.
•Supply Chain Disruption. Any disruptions to our supply chain, significant increase in component costs or logistics, or shortages of critical components, could decrease our sales, earnings, and liquidity or otherwise adversely affect our business and result in increased costs. Such a disruption could occur as a result of any number of events, including, but not limited to: an extended closure of or any slowdown at our suppliers' plants or shipping delays, market shortages due to the surge in demand from other purchasers for critical components, increases in prices, including fuel prices and increases in prices due to inflation, the imposition of regulations, quotas or embargoes or tariffs on components or our products themselves, labor stoppages, transportation delays, including due to labor strikes, or failures affecting the supply chain and shipment of materials and finished goods, third-party interference in the integrity of the products sourced through the
supply chain, cyberattacks, the unavailability of raw materials, severe weather conditions, adverse effects of climate change, natural disasters, geopolitical developments, war or terrorism and disruptions in utilities and other services. In addition, the development, licensing, or acquisition of new products in the future may increase the complexity of supply chain management. Failure to effectively manage the supply of components and products would adversely affect our business.
•Component Supply Forecast. We provide demand forecasts for our products to our manufacturers, who order components and plan capacity based on these forecasts. If we overestimate our requirements, our manufacturers may assess charges, or we may have liabilities for excess inventory or raw materials, each of which could negatively affect our gross margins. If we underestimate our requirements, our contract manufacturers may have inadequate time, materials, and/or components required to produce our products. This could increase costs or delay or interrupt manufacturing of our products, resulting in delays in shipments and deferral or loss of revenues and could negatively impact customer satisfaction. Any future spike in growth in our business, in the use of certain components we share in common with other companies, in IT spending, or in the economy in general, is likely to create greater short-term pressure on us and our suppliers to accurately forecast overall component demand and to establish optimal component inventories. If shortages or delays persist, we may not be able to secure enough components at reasonable prices or of acceptable quality to build and deliver products in a timely manner, and our revenues, gross margins and customer relationships could suffer.
•Alternative Sources of Supply.The development of alternate sources for components is time-consuming, difficult, and costly. In the event of a component shortage, supply interruption or significant price increase from these suppliers (such as with the current worldwide shortage of semiconductor products or due to the impact of the war between Ukraine and Russia), we may not be able to locate alternative sources in a timely manner. In addition, certain raw materials used in our industry’s extended supply chain come from Ukraine or Russia, such as neon, palladium, cobalt and others. Poor relations between the U.S. and Russia, sanctions by the U.S., EU, and other countries against Russia, the response by Russia and other countries to these sanctions, and any escalation of political tensions or economic instability in the area could have an adverse impact on us and our suppliers. Further, our suppliers may have staff, operations, materials or equipment located in Ukraine or Russia which could impact our supply chain or services being provided to us. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products and services to our customers, which would seriously affect present and future sales, and would, in turn, adversely affect our business, financial condition, and results of operations.
•COVID-19Impact. Delays in production or in product deliveries due to the COVID-19 pandemic have adversely affected and may continue to adversely affect our business, financial condition, and results of operations. For example, we have experienced supply constraints due to both constrained manufacturing capacity, as well as component parts shortages as our component vendors were also facing supply constraints, and increased logistics costs due to air travel and transport restrictions that limited the availability of flights on which we ship our products. Additionally, cost increases and extended shipping times for ocean transit have increased our dependence on higher-cost air freight. These challenges have resulted in extended lead-times to our customers and have had a negative impact on our ability to recognize associated revenue and has resulted in and may continue to result in an increase in accelerated ordering for certain of our products. We continue to work with government authorities and implement safety measures to ensure that we are able to continue manufacturing and distributing our products during the COVID-19 pandemic; however, we could still experience an unforeseen disruption to our supply chain that could impact our operations.
We face significant risks to our business and operations due to political and economic tensions between China and Taiwan. We have significant business operations in Taiwan, and many of our manufacturing partners and suppliers are located in Taiwan. As a result, our operations and our supply chain could be materially and negatively impacted by adverse changes in China-Taiwan relations, which have become increasingly frayed in recent years. Accordingly, further deterioration in military, political and economic relations between China and Taiwan, as well as the ongoing geopolitical and economic uncertainty between the U.S. and China, the unknown impact of current and future U.S. and Chinese trade regulations and other geopolitical risks with respect to China and Taiwan, may cause disruptions in the markets and industries we serve, including decreased demand from customers for products using our solutions, our supply chain, or other disruptions which may, directly or indirectly, materially harm our business, financial condition, results of operations and the market price of our stock.
System security risks, data protection breaches, and cyberattacks could compromise our and our customers’ proprietary information, disrupt our internal operations and harm public perception of our products. In the ordinary course of business, we store sensitive data, including intellectual property, personal data, our proprietary business information and that of our employees, contractors, customers, suppliers, vendors, and other business partners on our networks. In addition, we store sensitive data through cloud-based services that may be hosted by third parties and in data center infrastructure maintained by third parties. Secure maintenance of this information is critical to our operations and business strategy. We have been, and
expect to be, subject to cyberattacks, and may be subject to ransomware and distributed denial-of-service attacks, spearfishing attacks and other attempted intrusions on our networks and systems by a wide range of actors, including, but not limited to, nation states, criminal enterprises, terrorist organizations, and other organizations or individuals, as well as errors, wrongful conduct or malfeasance by employees and third-party service providers (collectively, “malicious parties”). We expect our third-party vendors to be subject to similar cyberattacks, ransomware and distributed denial-of-service attacks, spearfishing attacks and other attempted intrusions. The increasing occurrence of high-profile data breaches and ransomware attacks in addition to geopolitical unrest, provides evidence of an environment increasingly hostile to information security.
Despite our security measures, and those of our third-party vendors, our information systems, infrastructure, and data have experienced security incidents and breaches and may be subject to or vulnerable to breaches or attacks, including ransomware and distributed denial-of-service attacks. If any breach or attack compromises our networks or those of our vendors, creates system disruptions or slowdowns, or exploits security vulnerabilities or critical security defects of our products and services, the information stored on our networks or the networks of our customers, suppliers or business partners could be accessed and modified, publicly disclosed, lost, destroyed or stolen, and we may be subject to claims for contractual, tort or equitable liability and suffer reputational and financial harm. In addition, malicious parties may compromise our software, including the open-source software used in our products, or our manufacturing supply chain to embed malicious hardware, components, and software that are designed to defeat or circumvent encryption and other cybersecurity measures to interfere with the operation of our networks, expose us or our products to cyberattacks, or gain unauthorized access to our or our customers’ systems and information. If such actions are successful, they could diminish customer trust in our products, harm our business reputation, and adversely affect our business and financial condition.
Because techniques used by malicious parties to access or sabotage networks are sophisticated, change frequently, and generally are not recognized until after they are used, we may be unable to anticipate or immediately detect these techniques or the vulnerabilities they have caused or other potential vulnerabilities or security defects. Further, when vulnerabilities are discovered, we evaluate the risk, prioritize our responses, apply patches or take other remediation actions and notify customers, business partners, and suppliers, as appropriate. Exploitation of vulnerabilities and critical security defects, prioritization errors in remedying vulnerabilities or security defects, failure of third-party providers to remedy vulnerabilities or security defects, or customers not deploying security releases or deciding not to upgrade products, services or solutions, could, in each case, result in claims of liability against us, damage our reputation or otherwise harm our business.
All of this requires significant resources and attention from management and our employees, and the economic costs to us to eliminate or alleviate these issues could be significant and may be difficult to anticipate or measure. The market perception of the effectiveness of our products and our overall reputation could also be harmed as a result of any actual or perceived breach of security that occurs in our network or in the network of a customer of our products, regardless of whether the breach is attributable to our products, the systems of other vendors and/or to actions of malicious parties. This could impede our sales, manufacturing, distribution or other critical functions, which could have an adverse impact on our financial results.
Additionally, we could be subject to measures that regulate the security of the types of products we sell. Such regulations may result in increased costs and delays in product releases and changes in features to achieve compliance, which may impact customer demand for our products, and result in regulatory investigations, potential fines, and litigation in connection with a compliance concern, security breach or related issue, and potential liability to third parties arising from such breaches. Further, in response to actual or anticipated cybersecurity regulations or contractual security requirements negotiated with our customers, we may need to make changes to existing policies, processes and supplier relationships that could impact product offerings, release schedules and service response times, which could adversely affect the demand for and sales of our products and services. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. If our business liability insurance coverage is inadequate, or future coverage is unavailable on acceptable terms or at all, our financial condition and results of operations could be harmed.
Disruption in our distribution channels could seriously harm our future revenue and financial condition and increase our costs and expenses. The majority of our revenues are derived through value-added resellers and distributors, most of which also sell our competitors’ products, and some of which sell their own competing products. The loss of or reduction in sales to our resellers or distributors could materially reduce our revenues. Our competitors may in some cases be effective in leveraging their market share positions or in providing incentives to current or potential resellers and distributors to favor their products or to prevent or reduce sales of our products. If we are unable to develop and maintain relationships with our partners, develop new relationships with value-added resellers and distributors in new markets, expand the number of distributors and resellers in existing markets, manage, train or motivate existing value-added resellers and distributors effectively, or if these partners are not successful in their sales efforts, sales of our products may decrease, and our business, financial condition, and results of operations would suffer. We recognize a portion of our revenues at the time we sell products to our distributors. If these sales are made based on inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted. Further, our distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high, or
delay orders in anticipation of new products. They also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them, and in response to seasonal fluctuations in end-user demand.
To develop and expand our distribution channel, we continue to offer attractive channel programs to potential partners and have previously entered into OEM agreements with partners to rebrand and resell our products as part of their product portfolios. These relationships require processes and procedures that may be costly or challenging to implement, maintain, and manage. Our failure to successfully manage and develop our distribution channel could adversely affect our ability to generate revenues from the sale of our products. We also depend on our global channel partners to comply with applicable legal and regulatory requirements. Any failure by our partners to comply with these requirements, could have a material adverse effect on our business, operating results, and financial condition.
We rely on the performance of our business systems and third-party systems and processes. Some of our business processes depend upon our IT systems, the IT systems and processes of third parties, and the interfaces between the two, as well as hosted SaaS applications from third parties. For example, we receive a broad range of information technology services, such as applications, including support, development and maintenance; infrastructure management and support, including for server storage and network devices; and end user support. Some of these services are provided to us through cloud providers, third party providers, and off-site facilities that may be vulnerable to damage or interruption, including performance problems from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures, equipment failures, adverse events caused by operator error, cybersecurity attacks, pandemics, and similar events. In addition, because we lease, rather than own, off-site data center facilities, we cannot be assured that we will be able to expand our data center infrastructure to meet user demand in a timely manner, or on favorable financial terms. If we have issues receiving and processing data, this may delay our ability to provide products and services to our customers and business partners and damage our business. We also rely upon the performance of the systems and processes of our contract manufacturers to build and ship our products. If those systems and processes experience interruption or delay, the manufacture and shipment of our products in a timely manner may be impaired. Since IT is critical to our operations, in addition to the risks outlined above, problems with any of the third parties we rely on for our IT systems and services, could result in liabilities to our customers and business partners, lower revenue and unexecuted efficiencies, and impact our results of operations and our stock price. We could also face significant additional costs or business disruption if our arrangements with these third parties are terminated or impaired and we cannot find alternative services or support on commercially reasonable terms or on a timely basis or if we are unable to hire new employees in order to provide these services in-house.
Our ability to develop, market, and sell products could be harmed if we are unable to retain or hire key personnel or if our existing personnel are harmed by COVID-19. Our future success and ability to maintain a technology leadership position depends upon our ability to recruit and retain key management, engineering, technical, sales, marketing, and support personnel, as well as our ability to maintain the health of our personnel. The supply of highly qualified individuals with technological and creative skills, in particular engineers, in specialized areas with the expertise to develop new products and enhancements for our current products, and provide reliable product maintenance, as well as the number of salespeople with industry expertise, is limited. Competition for people with the specialized technical skills we require is significant and may cause us to incur increased compensation expenses to attract and retain employees with the skills to support our business needs. None of our officers or key employees is bound by an employment agreement for any specific term. If we fail to attract new personnel or retain and motivate our current personnel, the development and introduction of new products could be delayed, our ability to market, sell, or support our products could be impaired, and our business, results of operations and future growth prospects could suffer.
A number of our team members are foreign nationals who rely on visas and entry permits in order to legally work in the U.S. and other countries. In recent years, the U.S. has increased the level of scrutiny in granting H-1B, L-1 and other business visas. Compliance with new and unexpected U.S. immigration and labor laws could also require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain and attract skilled professionals. Additionally, circumstances related to or in response to pandemics, such as the COVID-19 pandemic, may interfere with our ability to hire or retain personnel. Any of these restrictions could have a material adverse effect on our business, results of operations and financial conditions.
Our business could be negatively impacted by ESG matters and/or our reporting of such matters. There is an increasing focus from U.S. and foreign government agencies, certain investors, customers, consumers, employees, and other stakeholders concerning environmental, social, and governance (“ESG”) matters. We may communicate certain initiatives and goals, regarding environmental matters, diversity, responsible sourcing and social investments and other corporate social responsibility and ESG matters, in our Corporate Social Responsibility Report, on our website, in our SEC filings,and elsewhere. These initiatives and goals could be difficult and expensive to implement, and we could be criticized for the accuracy, adequacy, or completeness of the disclosure of our ESG initiatives. We could fail, or be perceived to fail, in our achievement of these initiatives and goals as a result of rapidly evolving ESG definitions, rules, and regulations, including the SEC's proposed rules related to emissions disclosures and other ESG matters, such as internal planning issues and factors that
are beyond our control, including those involving third parties. In addition, we could be criticized for the scope or nature of such initiatives or goals, or for any revisions to these goals. Our reputation or other aspects of our business could be negatively impacted by all such matters, with potential material adverse effects.
LEGAL, REGULATORY, AND COMPLIANCE RISKS
We are a party to lawsuits, investigations, and other disputes. We have been named a party to litigation involving a broad range of matters, including commercial transactions, employment matters, patent infringement, copyrights, trademarks, and other rights to technologies and related standards that are relevant to our products, as well as governmental claims, and securities laws, and we may be named in additional litigation and/or governmental claims. For example, certain U.S. governmental agencies previously conducted investigations into possible violations by us of the U.S. Foreign Corrupt Practices Act, or the FCPA, which ultimately resulted in the Company entering into a settlement with the SEC that involved, among other things, the Company making a payment of $11.8 million in August 2019. Future claims or initiated litigation may include claims against us or our manufacturers, suppliers, partners, or customers. Future claims asserted and/or litigation may be initiated by third parties, including whistleblowers, and may relate to infringement of proprietary rights, issues arising under the False Claims Act, compliance with securities laws, or other matters. The expense of initiating and defending, and in some cases settling, such litigation and investigations may be costly, and may cause us to suffer reputational harm, divert management’s attention from day-to-day operations of our business, and may require us to implement certain remedial measures that could disrupt our business, operations, results of operations, financial condition or cash flows. In addition, if we fail to comply with the terms of any settlement agreement, we could face more substantial penalties. An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Further, increased patent litigation brought by non-practicing entities may result, and in some cases has resulted, in our customers requesting or requiring us to absorb a portion of the costs of such litigation or providing broader indemnification for litigation, each of which could increase our expenses and negatively affect our business, financial condition, and results of operations. Regardless of the merit of these claims, they may require us to develop alternative technologies, enter into license agreements, or cease engaging in certain activities or offering certain products or services. Furthermore, even arguably unmeritorious claims may be settled at significant costs to us because of the potential for high awards of damages or injunctive relief.
If any infringement or other intellectual property claim made against us or anyone we are required to indemnify is successful and we are required to pay significant monetary awards or damages to settle litigation, enter into royalty or licensing arrangements, or we fail to develop non-infringing technology and we incorporate infringing technology in our products, our business, financial condition, and results of operations could be materially and adversely affected.
Non-standard contract terms with telecommunications, cable and cloud service provider companies, and other large customers, including large enterprise customers, could have an adverse effect on our business or impact the amount of revenues to be recognized. Telecommunications, cable and cloud service provider companies, and other large companies, including large enterprise customers, generally have greater purchasing power than smaller entities and often request and receive more favorable terms from suppliers. As one such supplier, we may be required to agree to such terms and conditions, which may include terms that affect the amount or timing of or our ability to recognize revenue, increase our costs, and have an adverse effect on our business, financial condition, and results of operations. Consolidation among such large customers can further increase their buying power and ability to require onerous terms from us.
Regulations of our industry or of our customers could harm our operating results and future prospects. We are subject to laws, regulations, and policies affecting the sale of our products in a number of areas. For example, some governments have regulations prohibiting customers (both government and commercial) from purchasing products that do not meet country-specific safety, conformance or security certification criteria or in-country test requirements. Other regulations that may negatively impact our business include local content or local manufacturing requirements most commonly applicable for government, state-owned enterprise or regulated industry procurements. These types of regulations are in effect or under consideration in several jurisdictions where we do business.
The SEC requires us, as a public company that uses certain raw materials considered to be “conflict minerals” in our products, to report publicly on the extent to which “conflict minerals” are in our supply chain. As a provider of hardware end-products, we are several steps removed from the mining, smelting or refining of any conflict minerals. Accordingly, our ability to determine with certainty the origin and chain of custody of these raw materials is limited. Our relationships with customers, suppliers, and investors could suffer if we are unable to describe our products as “conflict-free.” We may also face increased costs in complying with conflict minerals disclosure requirements.
Environmental laws and regulations relevant to electronic equipment manufacturing or operations, including laws and regulations governing the hazardous material content of our products and the collection of and recycling of electrical and
electronic equipment, may adversely impact our business and financial condition. In particular, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and material composition of our products, their safe use, the energy consumption associated with those products, climate change laws, and regulations and product take-back legislation, which could require us to cease selling non-compliant products and to reengineer our products to use compliant components, which could result in additional costs to us, disrupt our operations, and result in an adverse impact on our operating results. If we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws, our customers may refuse to purchase our products and we could incur substantial costs or face other sanctions, which may include restrictions on our products entering certain jurisdictions. The amount and timing of costs to comply with environmental laws are difficult to predict.
In addition, as a contractor and subcontractor to the U.S. government, we are subject to federal regulations pertaining to our IT systems that require compliance with certain security and privacy controls. Failure to comply with these requirements could result in a loss of federal government business, subject us to claims or other remedies for non-compliance, or negatively impact our business, financial condition, and results of operations.
Further, some governments and government agencies have implemented and could continue to implement procurement policies that impact our profitability. Procurement policies favoring more non-commercial purchases, different pricing, or evaluation criteria or government contract negotiation offers based upon the customer’s view of what our pricing should be, could affect the margins on such contracts or make it more difficult to compete on certain types of programs. Moreover, the failure to comply with government contracting provisions could result in penalties or the ineligibility to compete for future contracts. Governments and government agencies are continually evaluating their contract pricing and financing practices, and we have no assurance regarding what changes will be proposed, if any, and their impact on our financial position, cash flows, or results of operations.
Moreover, our customers in the telecommunications industry may be subject to regulations and our business and financial condition could be adversely affected by changes in such regulations affecting our customers. Further, we could be affected by new laws or regulations on access to or commerce on IP networks in jurisdictions where we market our solutions. Regulations governing the range of services and business models that can be offered by service providers or cloud provider companies could adversely affect those customers' needs for products. Also, many jurisdictions have or are evaluating regulations relating to cybersecurity, supply chain integrity, privacy and data protection, any of which can affect the market and requirements for networking and security equipment. Additionally, certain countries where our customers operate may require that our products sold in that country be made locally or made in particular geographies, or satisfy local regulations for critical infrastructure projects, either of which could impact our ability to compete in those markets and may also negatively impact our margins due to the costs incurred to comply with these requirements.
The adoption and implementation of additional regulations could reduce demand for our products, increase the cost of building and selling our products, result in product inventory write-offs, impact our ability to ship products into affected areas and recognize revenue in a timely manner, require us to spend significant time and expense to comply with, and subject us to fines and civil or criminal sanctions or claims if we were to violate or become liable under such regulations. Any of these impacts could have a material adverse effect on our business, financial condition, and results of operations.
Governmental regulations, economic sanctions and other legal restrictions that affect international trade or affect movement and disposition of our products and component parts could negatively affect our revenues and operating results. The U.S. and other governments have imposed restrictions on the import and export of, among other things, certain telecommunications products and components, particularly those that contain or use encryption technology. Most of our products are telecommunications products that contain or use encryption technology and, consequently, are subject to restrictions. The scope, nature, and severity of such controls vary widely across different countries and may change frequently over time. In many cases, these government restrictions require a license prior to importing or exporting a good. Such licensing requirements can introduce delays into our operations as we or our channel partners must apply for the license and wait for government officials to process it or perform pre-shipment inspections; it is possible that lengthy delays will lead to the cancellation of orders by customers. Moreover, if we, our suppliers, or our channel partners fail to obtain necessary licenses prior to importing or exporting covered goods, we can be subject to government sanctions, including monetary penalties, conditions and restrictions. Such license requirements, and any fines or other sanctions imposed for their violation could negatively affect our revenues and operating results.
In addition, the U.S. and other governments have especially broad sanctions and embargoes prohibiting provision of goods or services to certain countries, territories, sanctioned governments, businesses, and individuals. We have implemented systems to detect and prevent sales into restricted countries or to prohibited entities or individuals, but there can be no assurance that our third party, downstream resellers and distributors will abide by these restrictions or have processes in place to ensure compliance.
Certain governments also impose special local content, certification, testing, source code review, escrow and governmental recovery of private encryption keys, or other cybersecurity feature requirements to protect network equipment and software procured by or for the government. Similar requirements also may be imposed in procurements by state owned entities or even private companies forming part of “critical network infrastructure” or supporting sensitive industries.
In recent years, U.S. government officials have had concerns with the security of products and services from certain telecommunications and video providers based in China, Russia, and other regions. As a result, the U.S. government has imposed bans on the use of certain Chinese-origin and Russian-origin components or systems either in items sold to the U.S. government or in the internal networks of government contractors and subcontractors (even if those networks are not used for government-related projects). U.S. regulations also permit the U.S. government to investigate and possibly mandate the unwinding of commercial transactions between U.S. companies and foreign suppliers. This introduces uncertainty into our supply chain, our imports of end products and our overall operational planning.
In May 2021, the U.S. President issued an executive order on cybersecurity that signals the U.S. government’s interest in developing standards and guidelines pertaining to Information and Communication Technology supply chains, government network capabilities and requirements, and cyber threat and vulnerability remediation. Any or all of these standards and guidelines could impact how we develop hardware and software, what features our products have, and our role in helping the U.S. government respond to cyber threats and vulnerabilities.
In response to Russia's invasion of Ukraine in February 2022, the U.S. and certain allies have imposed sanctions against the Russian government and other entities, which led to our suspension of operations in Russia. Accordingly, we are not able to sell our products in Russia, may not be able to provide ongoing support to our customers in Russia, and our assets located in Russia may be at risk. The response by Russia and other countries to these sanctions could lead to an escalation of political tensions, economic instability in the area, and cyberwarfare. These actions, as well as the effect of such actions on macroeconomic conditions, could have an adverse impact on our business and operations.
Our actual or perceived failure to adequately protect personal data could adversely affect our business, financial condition, and results of operations. A wide variety of provincial, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy and data protection-related laws and regulations are evolving, extensive, and complex. Compliance with these laws and regulations can be costly and can delay or impede the development and offering of new products and services. In addition, the interpretation and application of privacy and data protection-related laws in some cases is uncertain, and our legal and regulatory obligations are subject to frequent changes, including the potential for various regulator or other governmental bodies to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations, or to increase penalties. Moreover, there are a number of other legislative proposals worldwide, including in the U.S. at both the federal and state level, that could impose additional and potentially conflicting obligations in areas affecting our business. Examples of recent and anticipated developments that have impacted or could impact our business include the following:
•The EU General Data Protection Regulation imposes stringent data protection requirements and provides significant penalties for noncompliance. We have relied on the use of standard contractual clauses approved by the European Union (“EU”) Commission to legitimize the transfer of personal data outside of the EU to certain jurisdictions, including the U.S. In June 2021, the EU issued new standard contractual clauses that we will need to enter into with our customers, suppliers and channel partners, which is causing us to incur costs and allocate resources in order to manage the contract updating process. We may face reluctance or resistance by our current and prospective customers to use our products and services. We may also find it necessary to make further changes to our handling of personal data of residents of the European Economic Area (“EEA”). The regulatory environment applicable to the handling of EEA residents’ personal data, and our actions in addressing such environment, may cause us to assume additional liabilities or incur additional costs and could result in our business, operating results and financial condition being harmed. In addition, we and our customers may face a risk of enforcement actions by data protection authorities in the EEA relating to personal data transfers to us and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel, and negatively affect our business, operating results, and financial condition.
•Data protection legislation is also becoming increasingly common in the U.S. at both the federal and state level. State laws that are being enacted may require us to modify our data processing practices and policies, adapt our goods and services, and incur substantial costs and expenses to comply. Some state laws impose civil penalties on violators and authorize private rights of action, both of which might lead to an increase in the frequency and cost associated with data breach litigation.
•The Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data.
•We may be or become subject to data localization laws mandating that data collected in a foreign country be processed and stored within that country.
•Both U.S. federal and state, and non-U.S. governments are considering artificial intelligence (“AI”) and machine learning laws and regulations, which if finalized may impact our products and services and cause us to incur costs and expenses in order to comply.
Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use, or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business. Further, evolving and changing definitions of personal data and personal information, within the EU, the U.S., U.K., and elsewhere, including the classification of IP addresses, machine identification information, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting business relationships and partnerships that may involve the sharing or uses of data, and may require significant costs, resources, and efforts in order to comply.
FINANCIAL RISKS
Our financial condition and results of operations could suffer if there is an impairment of goodwill or purchased intangible assets. As of September 30, 2022, our goodwill was $3,734.3 million, and our purchased intangible assets were $177.7 million. We are required to test intangible assets with indefinite lives, including goodwill, annually or, in certain instances, more frequently, and may be required to record impairment charges, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred. Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets. However, any such impairment would have an adverse effect on our results of operations.
Changes in effective tax rates, the adoption of new U.S. or international tax legislation, or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results. Our future effective tax rates and the amount of our taxable income could be subject to volatility or adversely affected by the following: earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates; changes in the valuation of our deferred tax assets and liabilities; expiration of, or lapses in, the research and development (“R&D”) tax credit laws applicable to us; transfer pricing adjustments related to certain acquisitions, including the license of acquired intangibles under our intercompany R&D cost sharing arrangement; costs related to intercompany restructuring; tax effects of share-based compensation; challenges to our methodologies for valuing developed technology or intercompany arrangements; limitations on the deductibility of net interest expense; or changes in tax laws, regulations, accounting principles, or interpretations thereof. Our future effective tax rate may be impacted by judicial decisions, changes in interpretation of regulations, as well as additional legislation and guidance.
Proposals to reform U.S. and foreign tax laws could significantly impact how U.S. multinational corporations are taxed on foreign earnings and could increase the U.S. corporate tax rate. Although we cannot predict whether or in what form these proposals may become law, several of the proposals considered, if enacted into law, could have an adverse impact on our effective tax rate, income tax expense, and cash flows. Further, the Organisation for Economic Co-operation and Development (the “OECD”), an international association of 38 countries, including the U.S., has issued guidelines that change long-standing tax principles. The OECD guidelines may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. Some countries have enacted, and others have proposed, taxes based on gross receipts applicable to digital services, regardless of profitability. Recently, substantially all member countries of the OECD/G20 Inclusive Framework agreed to certain tax principles, including a global minimum tax of 15%. In September 2022, France, Germany, Italy, the Netherlands, and Spain issued a joint statement confirming their full commitment to the new principles, including the global minimum tax, irrespective of unanimous agreement by the EU. Additional changes to global tax laws are likely to occur, and such changes may adversely affect our tax liability.
In addition, we are generally subject to the continuous examination of our income tax returns by the Internal Revenue Service, and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, but the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.
We are subject to risks arising from our international operations, which may adversely affect our business, financial condition, and results of operations. We derive a substantial portion of our revenues from our international operations, and we plan to continue expanding our business in international markets. We conduct significant sales and customer support operations
directly and indirectly through our distributors and value-added resellers in countries throughout the world and depend on the operations of our contract manufacturers and suppliers that are located outside of the U.S. In addition, a portion of our R&D and our general and administrative operations are conducted outside the U.S. As a result of our international operations, we are affected by economic, business, regulatory, social, and political conditions in foreign countries, including the following:
•changes in general IT spending;
•the impact of the COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or where our customers are located;
•the imposition of government controls, inclusive of critical infrastructure protection;
•changes in trade controls, economic sanctions, or other international trade regulations, which may affect our ability to import or export our products to or from various countries;
•laws that restrict sales of products that are developed, manufactured, or incorporate components or assemblies sourced from certain countries or suppliers to specific customers and industry segments, or for particular uses;
•varying and potentially conflicting laws and regulations, changes in laws and interpretation of laws, misappropriation of intellectual property and reduced intellectual property protection;
•political uncertainty, including demonstrations, that could have an impact on product delivery;
•impact of geopolitical tensions, challenges, and uncertainties as a result of armed conflicts and resulting sanctions imposed by the U.S. and other countries against governmental or other entities, that may lead to disruption, instability, and volatility in global and regional financial markets, as well as higher inflation, increases in prices of commodities, and disruptions to supply chains;
•increased tensions among the U.S., the North Atlantic Treaty Organization, and Russia that could increase the threat of armed conflict, cyberwarfare and economic instability and could disrupt or delay operations or resources in Ukraine or Russia, disrupt or delay communication with such resources or the flow of funds to support operations, or otherwise render our resources unavailable;
•fluctuations in local economies, including inflationary conditions that could make our solutions more expensive or could increase our costs of doing business in certain countries;
•fluctuations in currency exchange rates (see Quantitative and Qualitative Disclosures about Market Risk for more information);
•tax policies, treaties or laws that could have an unfavorable business impact;
•the negotiation and implementation of free trade agreements between the U.S. and other nations;
•data privacy rules and other regulations that affect cross border data flow; and
•theft or unauthorized use or publication of our intellectual property and other confidential business information.
Any or all of these factors has or could have an adverse impact on our business, financial condition, and results of operations.
Moreover, local laws and customs in many countries differ significantly from or conflict with those in the U.S. or in other countries in which we operate. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations. Certain countries (such as Russia, China and EU member nations with regard to Iran trade) prohibit individuals and companies resident in or operating within their borders to comply with foreign sanctions imposed on such countries themselves or on third countries. There can be no assurance that our employees, contractors, channel partners, and agents will not take actions in violation of our policies and procedures, which are designed to ensure compliance with U.S. and foreign laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners, or agents could result in termination of our relationship, financial reporting problems, fines, and/or penalties for us, or prohibition on the importation or exportation of our products and could have a material adverse effect on our business, financial condition and results of operations.
There are risks associated with our outstanding and future indebtedness. As of September 30, 2022, we had $1,700.0 million in aggregate principal amount of outstanding senior notes, which we refer to collectively as the “Notes”. In April 2019, we entered into a credit agreement (the “Credit Agreement”) with certain institutional lenders that provides for a five-year $500.0 million unsecured revolving credit facility.
We may not be able to generate sufficient cash flow to enable us to satisfy our expenses, make anticipated capital expenditures or service our indebtedness, including the Notes. Our ability to pay our expenses, satisfy our debt obligations, refinance our debt obligations and fund planned capital expenditures is dependent upon our future performance and other factors discussed in this section. However, there can be no assurance that we will be able to manage any of these risks successfully.
The indenture that governs the Notes contains various covenants that limit our ability and the ability of our subsidiaries to, among other things: incur liens, incur sale and leaseback transactions, and consolidate or merge with or into, or sell
substantially all of our assets to another person. Further, the Credit Agreement contains two financial covenants along with customary affirmative and negative covenants that include the following:
•maintenance of a leverage ratio no greater than 3.0x (provided that if a material acquisition has been consummated, we are permitted to maintain a leverage ratio no greater than 3.5x for up to four quarters) and an interest coverage ratio no less than 3.0x; and
•covenants that limit or restrict the ability of the Company and its subsidiaries to, among other things, grant liens, merge or consolidate, dispose of all or substantially all of its assets, change their accounting or reporting policies, change their business and incur subsidiary indebtedness, in each case subject to customary exceptions for a credit facility of this size and type.
As a result of these covenants, we are limited in the manner in which we can conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business. In addition, under applicable U.S. tax laws and regulations, there are limitations on the deductibility of net business interest expenses. As a result, if our taxable income were to decline, we may not be able to fully deduct our net interest expense, which could have a material impact on our business.
Further, we receive debt ratings from the major credit rating agencies in the U.S. Factors that influence our credit ratings include financial strength as well as transparency with rating agencies and timeliness of financial reporting. There can be no assurance that we will be able to maintain our credit ratings and failure to do so could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
Our investments are subject to risks, which may cause losses and affect the liquidity of these investments. We have substantial investments in asset-backed and mortgage-backed securities, certificates of deposit, commercial paper, corporate debt securities, foreign government debt securities, money market funds, mutual funds, time deposits, U.S. government agency securities, and U.S. government securities. We also have investments in privately-held companies. Certain of our investments are subject to general credit, liquidity, market, sovereign debt, and interest rate risks. Our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value related to creditworthiness of our publicly traded debt investments is judged to be material. In addition, should financial market conditions worsen in the future, investments in some financial instruments may be subject to risks arising from market liquidity and credit concerns, which could have a material adverse effect on our liquidity, financial condition, and results of operations.
GENERAL RISK FACTORS
Failing to adequately evolve our financial and managerial control and reporting systems and processes, or any weaknesses in our internal controls may adversely affect investor perception, and our stock price. We will need to continue to improve our financial and managerial control and our reporting systems and procedures to manage and grow our business effectively in the future. We are required to assess the effectiveness of our internal control over financial reporting annually and to disclose in our filing if such controls were unable to provide assurance that a material error would be prevented or detected in a timely manner. If in the future, our internal controls over financial reporting are determined to not be effective, resulting in a material weakness, investor perceptions regarding the reliability of our financial statements may be adversely affected, which could cause a decline in the market price of our stock and otherwise negatively affect our liquidity and financial condition.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum. The exclusive forum provisions in our bylaws may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our current or former directors, officers, or other employees, which may discourage such lawsuits against us and our current or former directors, officers, and other employees. Alternatively, if a court were to find the exclusive forum provisions contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material and adverse impact on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended September 30, 2022, there were no share repurchases under our Board-approved 2018 Stock Repurchase Program, which authorizes us to purchase an aggregate of up to $3.0 billion of our common stock. Future share repurchases under our capital return plan will be subject to a review of the circumstances in place at that time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. This program may be discontinued at any time. As of September 30, 2022, there was approximately $0.7 billion of authorized funds remaining under the 2018 Stock Repurchase Program. See Note 9, Equity, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
The following materials from Juniper Network Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Changes in Stockholders' Equity, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text*
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included in Exhibit 101)*
*
Filed herewith
**
Furnished herewith
††
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Item 601(a)(6) and Item 601(b)(10)(iv) of Regulation S-K, which portions will be furnished to the SEC upon request.
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.
Juniper Networks, Inc.
October 28, 2022
By:
/s/ Thomas A. Austin
Thomas A. Austin
Group Vice President and Chief Accounting Officer
(Duly Authorized Officer and Principal Accounting Officer)
