We also train our channel partners in the delivery of support, professional, and educational services to ensure these services can be locally delivered.
Our Junos Platform enables our customers to expand network software into the application space, deploy software clients to control delivery, and accelerate the pace of innovation with an ecosystem of developers. At the heart of the Junos Platform is Junos OS.OS Evolved. We believe Junos OS Evolved is fundamentally differentiated from other network operating systems not only in its design, but also in its development capabilities. The advantages of Junos OS Evolved include:
We have assembled a team of skilled engineers with extensive experience in the fields of high-end computing, network system design, ASIC design, security, routing protocols, software applications and platforms, and embedded operating systems. As of December 31, 2017,2020, we employed 3,7234,044 people in our worldwide research and development, or R&D, organization.
We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications, integrating that technology, and maintaining the competitiveness and innovation of our product and service offerings. In our products, we are leveraging our software, ASIC and systems technology, developing additional network interfaces targeted to our customers' applications, and continuing to develop technology to support the build-out of high performancesecure high-performance networks and cloud environments. We continue to expand the functionality of our products to improve performance, reliability and scalability, and to provide an enhanced user interface.
Our R&D process is driven by our corporate strategy and the availability of new technology, market demand, and customer feedback. We have invested significant time and resources in creating a structured process for all product development projects. Following an assessment of market demand, our R&D team develops a full set of comprehensive functional product specifications based on inputs from the product management and sales organizations. This process is designed to provide a framework for defining and addressing the steps, tasks, and activities required to bring product concepts and development projects to market. Expenditures for R&D were $980.7 million, $1,013.7 million, and $994.5 million in 2017, 2016, and 2015, respectively.
Our sales organization, with its structure of sales professionals, business development teams, systems engineers, marketing teams, channel teams, and an operational infrastructure team, are generally distributed betweenis based on both vertical markets. Within each team, sales team members serve the following threemarkets and geographic regions: (i) Americas (including United States, Canada, Mexico, Caribbean and Central and South America), (ii) EMEA, and (iii) APAC. Within each region, there are regional and country teams, as well as vertical market focused teams, to ensure we operate close to our customers.regions.
Our sales teams operate in their respective regions and generally either engage customers directly or manage customer opportunities through our distribution and reseller relationships as described below.
A critical part of our sales and marketing efforts are our channel partners through which we conduct the majority of our sales.
We utilize various channel partners, including, but not limited to the following:
Our manufacturing is primarily conducted through contract manufacturers and original design manufacturers in the United States, or U.S., China, Malaysia, Mexico, and Taiwan. As of December 31, 2017,2020, we utilized Celestica Incorporated, Flextronics International Ltd., Accton Technology Corporation, and Alpha Networks Inc. for the majority of our manufacturing activity. Our contract manufacturers and original design manufacturers in all locations are responsible for all phases of manufacturing from prototypes to full production and assist withincluding activities such as material procurement, surface mount assembly, final assembly, test, control, shipment to our customers, and repairs. Together with our contract manufacturers and original design manufacturers, we design, specify, and monitor the tests that are required forto ensure that our products to meet internal and external quality standards. We believe that these arrangements provide us with the following benefits:
Our contract manufacturers and original design manufacturers build our products based on our rolling product demand forecasts. Each contract manufacturer procures the components necessary to assemble the products in our forecast and tests the products according to agreed-upon specifications. Products are then shipped to our distributors, VARs,resellers, or end-users.end-customers. Generally, we do not own the components. Title to the finished goods is generally transferred from the contract manufacturers to us when the products leave the contract manufacturer's or original design manufacturer's location. Customers take title to the
products upon delivery at a specified destination. If the product or components remain unused or the products remain unsold for a specified period, we may incur carrying charges or charges for excess or obsolete materials charges.materials.
We also purchase and hold inventory for strategic reasons and to mitigate the risk of shortages of certain critical component supplies. Thecomponents; the majority of this inventory is production components. As a result, we may incur additional holding costs and obsolescence charges, particularly resulting from uncertainties in future product demand.
Some of our custom components, such as ASICs, are manufactured primarily by sole or limited sources, each of which is responsible for all aspects of production using our proprietary designs. To ensure the security and integrity of Juniper products during manufacture, assembly and distribution, we have implemented a supply chain risk management framework as part of our overall Brand Integrity Management System. This framework encompasses all aspects of the supply chain as well as enhanced elements specific to security issues applicable to Juniper products and our customers.
We, as do many companies in our industry, experience seasonal fluctuations in customer spending patterns. Historically, we have experienced stronger customer demand in the fourth quarter and weaker demand in the first quarter.quarter of the fiscal year. This historical pattern should not be considered a reliable indicator of our future net revenues or financial performance.
We compete in the network infrastructure markets. These markets are characterized by rapid change, converging technologies, and a migration to networking solutions that offer agility advantages.combine high performance networking with cloud technologies. In the network infrastructure business, Cisco Systems, Inc., or Cisco, has historically been the dominant player. However, our principal competitors also include Arista Networks, Inc., or Arista;; Dell Inc., or Dell;Technologies; Hewlett Packard Enterprise Co., or HPE; Huawei Technologies Co., Ltd., or Huawei; and Nokia Corporation, or Nokia.
Many of our current and potential competitors, such as Cisco, Nokia, HPE, and Huawei, among others, have broader portfolios which enable them to bundle their networking products with other networking and information technology products in a manner that may discourage customers from purchasing our products. Many of our current and potential competitors have greater name recognition, marketing budgets, and more extensive customer bases that they may leverage to compete more effectively. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share, negatively affecting our operating results.
In addition, there are a number of other competitors in the security network infrastructure space, including Palo Alto Networks, Inc., or Palo Alto Networks;; Check Point Software Technologies, Ltd., or Check Point;; F5 Networks, Inc., or F5 Networks;; and Fortinet, Inc., or Fortinet;; among others, who tend to be focused specifically on security solutions and, therefore, may be considered specialized compared to our broader product line.
We expect that over time, large companies with significant resources, technical expertise, market experience, customer relationships, and broad product lines, such as Cisco, Nokia, and Huawei, will introduce new products designed to compete more effectively in the market. There are also several other companies that aim to build products with greater capabilities to compete with our products. Further, there has been significant consolidation in the networking industry, with smaller companies being acquired by larger, established suppliers of network infrastructure products. We believe this trend is likely to continue which may increase the competitive pressure faced by us due to their increased size and breadth of their product portfolios.
In addition to established competitors, a number of public and private companies have announced plans for new products to address the same needs that our products address. We believe that our ability to compete depends upon our ability to demonstrate that our products are superior and cost effective in meeting the needs of our current and potential customers.
As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have and also from emerging companies that are developing new technologies. Although we believe that our technology and the purpose-built features of our products make them unique and will enable us to compete effectively with these companies, there can be no assurance that new products, enhancements or business strategies will achieve widespread market acceptance.
Our success and ability to compete are substantially dependent upon our internally developed technology and expertise, as well as our ability to obtain and protect necessary intellectual property rights. While we rely on patent, copyright, trade secret, and trademark law, as well as confidentiality agreements, to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology.
In addition, we integrate licensed third-party technology into certain of our products and, from time to time, we need to renegotiate these licenses or license additional technology from third parties to develop new products or product enhancements or to facilitate new business models. There can be no assurance that third-party licenses will be available or continue to be available to us on commercially reasonable terms or at all. Our inability to 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 obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could harm our business, financial condition, and results of operations.
The following sets forth certain information regarding our executive officers as of the filing of this Report:
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Name | | Age | | Position |
Rami Rahim | | 4750 | | Chief Executive Officer and Director |
Anand Athreya | | 5457 | | Executive Vice President, Chief Development Officer |
Bikash KoleyManoj Leelanivas | | 4451 | | Executive Vice President, Chief TechnologyProduct Officer |
Brian Martin | | 5659 | | Senior Vice President, General Counsel and Secretary |
Kenneth B. Miller | | 4749 | | Executive Vice President, Chief Financial Officer |
Vince MolinaroThomas A. Austin | | 5453 | | Executive Vice President, Chief Customer Officer |
Terrance F. Spidell | | 49 | | Vice President, Corporate Controller and Chief Accounting Officer |
RAMI RAHIMjoined Juniper in January 1997 and became Chief Executive Officer of Juniper, and a member of the Board of Directors, in November 2014. From March 2014 until he became Chief Executive Officer, Mr. Rahim served as Executive Vice President and General Manager of Juniper Development and Innovation, or JDI.Innovation. His responsibilities included driving strategy, development and business growth for routing, switching, security, silicon technology, and the Junos operating system. Previously, Mr. Rahim served Juniper in a number of roles, including Executive Vice President, Platform Systems Division, Senior Vice President and General Manager, Edge and Aggregation Business Unit, or EABU, and Vice President, Product Management for EABU. Prior to that, Mr. Rahim spent the majority of his time at Juniper in the development organization where he helped with the architecture, design and implementation of many Juniper core, edge, and carrier Ethernet products. Mr. Rahim holds a Bachelorbachelor of Sciencescience degree in Electrical Engineering from the University of Toronto and a Mastermaster of Sciencescience degree in Electrical Engineering from Stanford University.
ANAND ATHREYAjoined Juniper in August 2004 and became our Executive Vice President and Chief Development Officer in August 2017. In this role, he is responsible for Juniper's Engineering organization. Since joining Juniper, in 2004, Mr. Athreya has held various leadership positions within Engineering, including most recently serving as Senior Vice President of Engineering from May 2014 through August 2017, and Corporate Vice President of Engineering from February 2011 through May 2014. Mr. Athreya joined Juniper from Procket Networks, a maker of routers and routing technology, where he served as Director of Software Engineering. Prior to that, he was Vice President of Engineering at Malibu Networks, a supplier of fixed wireless networking based broadband solutions, Assistant Vice President of Product Management and Strategy at Tiara Networks, a provider of broadband access systems, and held engineering roles at Novell.Novell, a software and services company. Mr. Athreya received his Bachelorbachelor of science degree in Electrical Engineering from Bangalore University, a master'smaster of science degree in
Computer Science and Engineering from Osmania University, and an MBA from National University. He is also a graduate of the Advanced Management Program at Harvard Business School.
BIKASH KOLEY has servedMANOJ LEELANIVAS joined Juniper in March 2018 as our Executive Vice President, Chief TechnologyProduct Officer. In this role, Mr. Leelanivas leads all aspects of product strategy and direction for Juniper and helps to align products with our go-to-market strategies and execution, including marketing operations. From June 2013 to September 2017, Mr. Leelanivas was President and Chief Executive Officer since he joinedof Cyphort, an innovator in scale-out security analytics technology, that was acquired by Juniper in September 2017. PriorFrom March 1999 to joiningMay 2013, he held several key product management positions at Juniper, including Executive Vice President of Advanced Technologies Sales for data center. Mr. Koley worked at Google from January 2008 until August 2017, where he served most recently asLeelanivas holds a Distinguished Engineer and the Headbachelor of Network Architecture, Engineering and Planning from November 2015 through August 2017, where he helped to design, build and operate Google’s production network infrastructure. In addition, Mr. Koley also served as a Principal Architect and Director, Network Architecture and Engineering at Google from May 2012 through October 2015. Prior to Google, Mr. Koley was the CTO of Qstreams Networks, a company he co-founded. He also spent several years at Ciena Corporationtechnology in various technical roles. Mr. Koley received his Bachelor of Technology degree in Electronics and Communications Engineering from the Indian Institute of Technology, Kharagpur, India and M.S. and Ph.D. degrees in Electrical and Computer Engineering from the National Institute of Technology Karnataka, a master of science degree in Computer Science from the University of Maryland at College Park.Kentucky, and is a graduate of the Stanford University Executive Business Program.
BRIAN MARTIN joined Juniper in October 2015 as Senior Vice President, General Counsel and Secretary. InFrom January 2018 to October 2018, Mr. Martin also assumed the role of interim Chief Human Resources Officer or CHRO,("CHRO") while the Company continuescontinued its search for a full-time CHRO. From April 2007 to September 2015, Mr. Martin served as Executive Vice President, General Counsel and Corporate Secretary of KLA-Tencor Corporation ("KLA-Tencor"), a provider of process control and yield management solutions. Prior to joining KLA-Tencor, Mr. Martin spent ten years in senior legal positions at Sun Microsystems, Inc. (“Sun”("Sun"), a manufacturer of computer workstations, servers, software, and services for networks, most recently as Vice President, Corporate Law Group, responsible for legal requirements associated with Sun’s corporate securities, mergers, acquisitions and alliances, corporate governance and Sarbanes-Oxley compliance, and litigation management. Prior to joining Sun, Mr. Martin was in private practice where he had extensive experience in antitrust and intellectual property litigation. From August 2020 to the present, he has served as an adjunct professor at the Southern University Law Center. Mr. Martin holds a bachelor’sbachelor of science degree in economicsEconomics from the University of Rochester and a J.D. from the State University of New York at Buffalo Law School.
KENNETH B. MILLER joined Juniper in June 1999 and has served as our Executive Vice President, Chief Financial Officer since February 2016. Mr. Miller served as our interim Chief Accounting Officer while the Company continued to search for a full-time Chief Accounting Officer from February 2019 to September 2019. From April 2014 to February 2016, Mr. Miller served as our Senior Vice President, Finance, where he was responsible for the finance organization across the Company, as well as our treasury, tax and global business services functions. Previously, Mr. Miller served as our Vice President, Go-To-Market Finance;Finance, Vice President, Platform Systems Division;Division, Vice President, SLT Business Group Controller and in other positions in our Finance and Accounting organizations. Mr. Miller holds a Bachelorbachelor of Sciencescience degree in Accounting from Santa Clara University.
VINCE MOLINAROTHOMAS A. AUSTIN joined Juniper in 2009September 2019 as Senior Vice President of Sales, and served as Executive Vice President, Sales, Services and Support from July 2013 to February 2014. Since February 2014, Mr. Molinaro has served as our Executive Vice President, Chief Customer Officer. In February 2018, Juniper announced that Mr. Molinaro will step down from his current role, but that he will continue to serve as our interim Chief Customer Officer until his replacement has been named and is in place. Prior to joining Juniper, Mr. Molinaro held senior leadership positions at a number of technology companies, including Bell Laboratories, Inc., Lucent Technologies, Inc. (prior to its acquisition by Alcatel Inc.), Alcatel-Lucent USA Inc. and Internap Network Services Corporation. He has extensive domestic and international experience having lived and managed large organizations throughout Europe and the U.S. Mr. Molinaro holds a Bachelor of Science degree in Biomedical Engineering from Boston University and a Master of Science degree in Electrical Engineering from the University of Bridgeport.
TERRANCE F. SPIDELL joined Juniper in August 2011 as Vice President, Assistant Corporate Controller, and has served as Vice President, Corporate Controller since November 2012. In 2013, Mr. Spidell assumed the position of ourand Chief Accounting Officer. Before joining Juniper,From September 2016 until July 2019, Mr. Spidell wasAustin served as the Vice President of Corporate Finance at VeriSign,Dell Technologies, Inc., a provider of Internet infrastructure services,multinational information technology company. From September 2008 until its acquisition by Dell Technologies in September 2016, Mr. Austin served as the Vice President of Corporate Controller, from June 2009Finance at EMC Corporation, a multinational information technology company. From January 2001 through July 20112008, Mr. Austin served as the Chief Financial Officer and as Vice President, Accounting Operations, from March 2008 through June 2009.Treasurer at Arbor Networks, Inc., a network security company. Prior to VeriSign,joining Arbor Networks, Mr. Spidell held various positions, most recently Senior Manager,Austin served as a controller for several companies. He began his career in public accounting at PricewaterhouseCoopers, a registered public accounting firm. Mr. Spidell is a Certified Public Accountant andAustin holds a Bachelorbachelor of Business Administration degreesscience degree in Public Accountancy from Providence College and an MBA from Babson College. Mr. Austin is also an adjunct professor of Finance and Accounting, from Boise State University.at Providence College School of Business.
Available Information
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, with the U.S. Securities and Exchange Commission, or the SEC electronically. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Juniper Networks that file electronically with the SEC. The address of that website is https://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports on our website at http://www.juniper.net by contacting our Investor Relations Department at our corporate offices by calling 1-408-745-2000, or by sending an e-mail message to Juniper Networks Investor Relations at investorrelations@juniper.net. Such reports and other information are available on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our Corporate Governance Standards, the charters of our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as
well as our Worldwide Code of Business Conduct are also available on our website. Information on our website is not, and will not be deemed, a part of this Reportreport or incorporated into any other filings the Company makes with the SEC.
Investors and others should note that we announce material financial and operational information to our investors using our Investor Relations website (http://investor.juniper.net), press releases, SEC filings and public conference calls and webcasts. We also use the Twitter accounts @JuniperNetworks and the Company’s blogs as a means of disclosing information about the Company and for complying with our disclosure obligations under Regulation FD. The social media channels that we use as a means of disclosing information described above may be updated from time to time as listed on our Investor Relations website.
Item 1A. Risk Factors
Factors That May Affect Future Results
InvestmentsWe operate in our securities involve significant risks. Even small changes in investor expectations for our future growthrapidly changing economic and earnings, whether as a resulttechnological environments that present numerous risks, many of actualwhich are driven by factors that we cannot control or rumored financial or operating results, changespredict. Some of these risks are highlighted in the mixfollowing discussion, and in Management’s Discussion and Analysis of the productsFinancial Condition and services sold, acquisitions, industry changes, or other factors, could trigger,Results of Operations and have triggered in the past, significant fluctuations in the market price of our common stock.Quantitative and Qualitative Disclosures About Market Risk. Investors in our securities should carefully consider all of the relevant factorsrisks disclosed by us including, butbefore investing in our securities. The occurrence of any of these risks or additional risks and uncertainties not limitedpresently known to the following factors,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 overall 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 such as restrictions on the physical movement of our employees, contract manufacturers, partners, and customers to limit the spread of COVID-19 and the availability and acceptance of a COVID-19 vaccine. Since March 2020, the majority of our global workforce has been working remotely resulting from shelter-in-place requirements and travel restrictions. We continue to follow the guidance of local and national governments, including monitoring the health of employees who have returned to our offices and limiting the gathering size of employee groups in indoor spaces. If the COVID-19 pandemic has a substantial impact on our employees, partners or customers health, attendance or productivity, our results of operations and overall financial performance may be adversely impacted.
Moreover, the conditions caused by the pandemic may affect the overall demand environment for our products and services and could adversely affect our customers’ ability or willingness to purchase our products or services or to make payments on existing contracts with us, delay prospective customers’ purchasing decisions, delay the provisioning of our offerings, lengthen payment terms, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. 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, during fiscal 2020, the COVID-19 pandemic caused us to experience supply constraints due to both constrained manufacturing capacity as well as shortages of component parts as our component vendors also faced manufacturing challenges. These challenges resulted in extended lead-times to our customers and increased logistics costs, which negatively impacted our ability to recognize revenue and decreased our gross margins for these periods. While our manufacturing capacity continues to improve, we expect several of our component suppliers will remain challenged in the near term. Further, the spread of COVID-19 has and is likely to continue to affect the shipment of goods globally.
The duration and extent of 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, the extent and effectiveness of containment actions, the world-wide distribution and acceptance of vaccines, 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 do not improve, or 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, which could adversely affect the trading price of our common stock.
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 controlcontrol. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and anyinvestors, the trading price of whichour securities could be negatively affected. Our operating results for prior periods may causenot be effective predictors of our stock price to fluctuate.future performance.
The factorsFactors associated with our industry, the operation of our business, and the markets for our products and services that may cause our quarterly results to vary quarter by quarter and be unpredictablefluctuate, include but are not limited to:
•unpredictable ordering patterns and limited visibility into customerour customers’ spending plans;plans and associated revenue;
•changes in our customer mix;
changes inmix, the mix of products and services sold;
changes insold, and the mix of 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;
current and potential customer, partner and supplier consolidation and concentration;
•price and product competition;
long sales, qualification and implementation cycles;•ineffective legal protection of our intellectual property rights in certain countries;
unpredictable ordering patterns and reduced visibility into our customers’ spending plans and associated revenue;
•how well we execute on our strategy and operating plansbusiness model;
•financial stability of our customers, including the solvency of private sector customers, which may be impacted by the COVID-19 pandemic;
•statutory authority for government customers to purchase goods and the impact ofservices;
•executive orders, tariffs, changes in our business model that could result in significant restructuring charges;
our ability to achieve targeted cost reductions;
changes in tax laws or regulations and accounting rules, or interpretations thereof;
changes in the amount and frequency of share repurchases or dividends;
•regional economic and political conditions; andconditions which may be aggravated by unanticipated global events;
seasonality.
For example, we, and many companies•disruptions in our industry, experience adverse seasonal fluctuations in customer spending, particularly inbusiness operations or target markets caused by, among other things, terrorism or other intentional acts, outbreaks of disease, such as the first quarter. In addition, while we may have backlog orders for products that have not shipped, we believe that our backlog may not be a reliable indicator of future operating results for a number of reasons, including project delays, changes in project scope and the fact that our customers may cancel purchase ordersCOVID-19 pandemic, or change delivery schedules without significant penalty. Furthermore, market trends, competitive pressures, commoditization of products, rebates and discounting, increased componentearthquakes, floods, or logistics costs, issues with product quality, regulatory impactsother natural disasters; and other factors may result in reductions in revenue or pressure on gross margins in a given period, which may necessitate adjustments to our operations. Such adjustments may be difficult or impossible to execute in the short or medium term.unanticipated extraordinary externalities.
As a result of these factors, as well as other variables affecting our operating results, weWe believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. In the past,some prior periods, our operating results have been below our guidance, our long-term financial model or the expectations of securities analysts or investors, and thisinvestors. This may happen in the future, in which caseagain, and the price of our common stock may decline and has declined indecline. In addition, our failure to pay quarterly dividends to our stockholders or the past. Suchfailure to meet our commitments to return capital to our stockholders could have a decline could also occur, and has occurred in the past, even when we have metmaterial adverse effect on our publicly stated revenues and/or earnings guidance.stock price.
We expect our gross margins and operating margins to vary over time, and the level of gross margins and operating margins we have achieved in recent years may not be sustainable.
We expect ourtime. Our product and service gross margins are expected to vary, both in the near-term and in the long-term, and the gross margins we have achieved in recent years may not be sustainable and may be adversely affected in the future by numerous factors, some of which have occurred and may occur in the future, 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, changes in the actions of our competitors or their pricing strategies, which may be difficult to predict and respond to, modifications to our pricing strategy in order to gain footprint in certain markets or with certain customers, currency fluctuations that impact our costs or the cost of our products and services to our customers, 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. For example, in fiscal year 2017, our margins decreased as compared to fiscal year 2016, primarily due to lower product net revenues and product mix, resulting from the year-over-year decline in routing revenues, our customers' architectural shifts, and higher costs of certain memory components. In fiscal year 2016, our margins decreased compared to fiscal year 2015, primarily due to elevated pricing pressure and product mix. In fiscal year 2015, our margins increased compared to fiscal year 2014, as a result of higher restructuring and other charges recorded in 2014 but not in 2015, in connection with the restructuring plan we initiated in the first quarter of 2014. Failure to sustain or improve our gross margins reduces our profitability and may have a material adverse effect on our business and stock price.
Further, we will continue to remain diligent in our long-term financial objective to increase revenue and operating margins and manage our operating expenses as a percentage of revenue. We expect that our margins will vary with our ability to achieve these goals. We can provide no assurance that we will be able to achieve all or any of the goals of these plans or meet our announced expectations, in whole or in part, or that our plans will have the intended effect of improving our margins on the expected timeline, or at all.
A limited number of our customers comprisederive a material portion of our revenues and any changes in the way they purchase products and services from us could affect our business. In addition, there is an ongoing trend toward consolidation in the industry in whicha limited number of our customers, and partners operate. Any decrease in revenues from our customers or partners could have an adverse effect on our net revenues and operating results.
compete in industries that continue to experience consolidation. A material portion of our net revenues, dependacross each customer vertical, depends on sales to a limited number of customers. If such customers and distribution partners, particularly in our Telecom/Cable and Cloud verticals. Changes in thechange their business requirements or focus, vendor selection, project prioritization, financial prospects, capital resources, and expenditures, or purchasing behavior, (including product mix purchased or delays in deployment) of our key customers could significantly decrease our salesare parties to such customersconsolidation transactions, they may delay, suspend, reduce or could lead to delays or cancellations of plannedcancel their purchases of our products or services and our business, financial condition, and results of operations may be adversely affected.
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 a number of well-established companies. We also compete with other public and private companies that are developing competing technologies to 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 or resell competing products on a non-exclusive basis and consolidation could delay spending or require us to increase discounts to compete, which increasescould 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 riskoverall network equipment market than we do. Other competitors have become more integrated, including through consolidation and vertical integration, and offer a broader range of quarterly fluctuationsproducts 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 revenuesgross margins and operating results. Any of these factors couldmaterially and adversely affect our business, financial condition, and results of operations.
In addition, in recent years, there has been movement towards consolidation in the telecommunications industry (for example, CenturyLink, Inc.'s acquisition of Level 3 Communications, Inc., and Vodafone India’s proposed acquisition of Idea Cellular Ltd.) and that consolidation trend has continued. Certain telecommunications companies have also announced their intent towards vertical consolidation through acquisitions of media and content companies, such as Verizon’s acquisition of Yahoo and AT&T’s proposed acquisition of Time Warner. If our customers or partners are parties to consolidation transactions they may delay, suspend or indefinitely reduce or cancel their purchases of our products or other direct or indirect unforeseen consequences could harm our business, financial condition, and results of operations.
We sell our products to customers that use those products to build networks and IP infrastructure, and 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 and on the deployment of our products by customers that depend on the continued growth of IP services. 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. For example, in the second half of 2017, our switching and routing results were adversely affected by spending delays from our largest cloud customers, who we believe are in the process of implementing a networking architectural shift. The duration of the delay is difficult to predict, in part because each cloud customer will migrate their network architecture based on their own constraints. Such delays in purchases can make it more difficult to 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.
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, and manage our contract manufacturer relationships and other expenses.expenses and to make decisions about future investments. In addition, economic instability or uncertainty, as well as continued turmoil in the
geopolitical environment in many parts of the world and other events beyond our control, such as the COVID-19 pandemic, have, and may continue to, put pressure on economic conditions, which has led and could lead, to reduced demand for our products, to delays or reductions in network expansions or infrastructure projects, and/or higher costs of production. More generally-speaking, economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of investments. Furthermore, instability in the global markets may adversely impact the ability of our customers to adequately fund their expected expenditures, which could lead to delays or cancellations of planned purchases of our products or services. Our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses is, and will continue to be, fixed in the short and medium term. Therefore, fluctuations in revenue and gross margins could cause significant variations in our operating results and operating margins from quarter to quarter. Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments. 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 through rapidly fluctuating economic and market conditions, and such actions may have an adverse effect on our financial and operating results.
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 in response to fluctuating market opportunities and conditions.
From time to time, we have increased investment in our business by for example, increasing headcount, acquiring companies, and increasing our investment in R&D,research and development, sales and marketing, and other parts of our business. Conversely, in February 2017the last few years and in 2020, we have initiated the 2017 Restructuring Planrestructuring plans to realign our workforce as a result of organizational and increase operational efficiencies. This included workforce reductions and contract terminations. As we assessed the performance of our operating results against our long-term operating goals and evaluated potential opportunities for improvement, the 2017 Restructuring Plan was expanded and additionalleadership changes which resulted in restructuring charges were incurred in the fourth quarter of 2017 to further align our workforce. Some of our expenses are fixed costs that cannot be rapidly or easily adjusted in response to fluctuations in our business or numbers of employees. Rapid changes in the size, alignment or organization of our workforce, including sales account coverage, could adversely affect our ability to develop and deliver products and services as planned or impair our ability to realize our current or future business and financial objectives.charges. Our ability to achieve the anticipated cost savings and other benefits from our restructuringthese initiatives within the
expected time frame is subject to many estimates and assumptions. Theseassumptions, which are subject to uncertainties. If our estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect or if we are unsuccessful at implementing changes, or if other unforeseen events occur, our business and results of operations could be adversely affected.
We face intense competition thatIntegration of acquisitions or divestitures of businesses could reduce our revenues and adversely affectdisrupt our business and harm our financial results.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 in order 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.
Competition is intenseThere can be no assurance 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, and we may not realize anticipated revenues or other benefits associated with our acquisitions. In addition, we have divested, and may in the marketsfuture, 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.
In connection with certain acquisitions, we serve. The routingmay 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 switching markets have historically been dominated by Cisco, with competition coming from other companies such as Nokia Corporation (following its acquisition of Alcatel-Lucent)unknown), Arista, HPE,record goodwill and Huawei. In the security market, we face intense competition from Cisco and Palo Alto Networks,amortizable intangible assets as well as companies such as Check Point, F5 Networks,restructuring and Fortinet. Further, a number of other small public and private companies have products or have announced plans for new products to address the same challenges and markets that our products address.
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 customersrelated expenses. We may delay spending decisions or not purchase our products at all. For example, in recent years, Nokia Corporation merged with Alcatel-Lucent, HPE acquired Aruba Networks, Cisco acquired AppDynamics, Symantec Corporation acquired Blue Coat Systems, and Dell acquired EMC, which further consolidated our market. A number 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. In addition, some of our competitors have become more integrated, including through consolidation, and offer a broader range of products and services,incur additional acquisition-related debt, which could make their solutions more attractive toincrease our customers. Many of our competitors sell networking products as bundled solutions with other IT products, such as computerleverage and storage systems. If we are unable to compete successfully against existing and future competitors on the basis of product offerings or price, we could experience a loss in market share and revenues and/or be required to reduce prices, which could reduce our gross margins, and which could materially and adverselypotentially negatively affect our business,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 condition, and resultsbenefits from our acquired or divested businesses, product lines or assets or to realize other anticipated benefits of operations. Our partners and resellers generally selldivestitures or resell 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.acquisitions.
The longLong sales and implementation cycles for our products as well as our expectation that some customers will sporadically placeand customer urgency related to ship dates to fill large orders with short lead times, may cause our revenues and operating results to vary significantly from quarter-to-quarter.
A customer's decisionWe experience lengthy sales cycles because our customers' decisions to purchase certain of our products, particularly new products, involvesinvolve a significant commitment of itstheir resources and a lengthy evaluation and product qualification process. As a result, the sales cycle may be lengthy. In particular, customers making critical decisions regarding theCustomers design and implementation ofimplement large network deployments may engage in veryfollowing lengthy procurement processes, thatwhich may delay or impact expected future orders. Throughout the sales cycle, we may spend considerable time educating and providing information to prospective customers regarding the use and benefits of our products. Even after making the decision toFollowing a purchase, customers may also deploy our products slowly and deliberately. Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer's network environment, and the degree of hardware and operating system configuration necessary to deploy the products. Customers with large networks usuallyoften expand their networks in large increments on a periodic basis. Accordingly, we may receive purchasebasis and place large orders for significant dollar amounts on an irregular basis. These longsales and implementation cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, both of whichurgent ship dates, may be exacerbated by the impact of global economic weakness, may cause our revenues and operating results to vary significantly and unexpectedly from quarter-to-quarter.
TheOur ability to recognize revenue in a particular period is contingent on the timing of product orders and deliveries and/or our reliance on revenue from sales of certain software, or subscriptions, and professional support and maintenance services may cause us to recognize revenue inservices. In some of our businesses, our quarterly sales have periodically reflected a different period than the onepattern in which a transaction takes place. This may make it difficult for investors to observe quarterly trends and may cause significant variations in our operating results and operating margin on a quarterly basis.
Generally, our network equipmentdisproportionate percentage of each quarter's total sales occurs towards the end of the quarter. Further, we build certain products are stocked only in limited quantities by our distributors and resellers due to the cost, complexity and custom nature of configurations required by our customers; we generally build such products aswhen orders are received. TheSince the volume of orders received late in any given fiscal quarter remains unpredictable. Ifunpredictable, if orders for certaincustom products are received late in any quarter, we may not be able to recognize revenue for these orders in the same period which could adversely affector meet our expected quarterly revenues.
Similarly, if we were to take actions to encourage customers to place orders or accept deliveries earlier than anticipated, our ability to meet our expected revenues for such quarter.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 31%36%, 29%35%, and 27%33% of total revenue in fiscal year 2017, 2016,years 2020, 2019, and 2015,2018, respectively. SalesWe expect our sales of new or renewal professional services, support, and maintenance contracts may decline and/orto fluctuate as a result of a number of factors, includingdue 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.
The introduction of new software products and services is part of our intended strategy to expand our software business, andFurther, we recognize certain software revenues may be recognized periodically over the term of the relevant use period or subscription period. Asperiods and as a result, certainthe related software subscription 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. Consequently, a declineAny fluctuation in such new or renewed contracts in any one fiscal quarter willmay not be fully or immediately reflected in revenue in that fiscal quarter but willand could negatively affect our revenue in future fiscal quarters. Accordingly,
RISKS RELATED TO OUR TECHNOLOGY AND BUSINESS OPERATIONS
If the effectdemand for network and IP systems does not continue to grow, our business, financial condition, and results of significant downturns in new or renewed salesoperations could be adversely affected. A substantial portion of our software, subscriptions or supportbusiness and maintenance is not reflected in full in our operating results until future periods. Also, it is difficult for us to rapidly increase such software or services revenue through additional sales in any period, as revenue from those software, subscription and support and maintenance contracts must be recognized over the applicable period.
Additionally, we determine our operating expenses largelyrevenues depends on the basisgrowth of anticipated revenuessecure IP infrastructure as well as customers that depend on the continued growth of IP services to deploy our products in their networks and technology roadmap and a high percentage of our expenses are fixed in the short and medium term.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 failurematerial 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 delaysuspend 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, such as the COVID-19 pandemic. This, in generating or recognizing revenue couldturn, can make it more difficult to accurately predict revenues from customers, can cause significant variationsfluctuations in the level of spending by customers and, even where our operatingproducts are ultimately selected, can have a material adverse effect on our business, financial condition, and results and operating margin from quarter-to-quarter.of operations.
If we do not successfully anticipate technological shifts, market needs and opportunities, and develop products, product enhancements and business strategies that meet those technological shifts, needs and opportunities, or if those products are not made available or strategies are not executed in a timely manner or do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer.
The markets for our productsIf we are characterized by rapid technological change, frequent new product introductions, changes in customer requirements, continuous pricing pressures and a constantly evolving industry. We may not be ableunable to anticipate future technological shifts, market needs, and opportunities or be able to develop new products, product enhancements or business strategies to meet such technological shifts, needs or opportunities in a timely manner or at all. For example, the move from traditional wide area network, or WAN, infrastructures towards software-defined WAN, or SD-WAN, has been receiving considerable attention. In our view, it will take several years to see the full impact of SD-WAN, and we believe the successful products and solutions in this market will combine hardware and software elements. If we fail to anticipate market 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, and such failure could substantially decrease or delay market acceptance and sales of our present and future products and services, which wouldand significantly harm our business, financial condition, and results of operations. In addition, if we invest time, energy and resources in developing products for a market that doesn'tdoes not develop, it could likewise 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 any new products, enhancements or business strategies will achieve widespread market acceptance.
In the recent years, we have announced a number of new products and enhancements toFurther, our hardware and software products across routing, switching and security. The success of our new products depends on several factors, including, but not limited to, component costs, timely completion and introduction of these products, prompt resolution of any defects or bugs in these products, our ability to support these products, differentiation of new products from those of our competitors and market acceptance of these products.
The introduction of new software productsstrategy is part of our intended strategy to expand our software business. We have also begun to disaggregate certain software from certain hardware products, such that customers would be able to purchase or license our hardware and software products independently, which we expect could in time enable our hardware to be deployed with third party networking applications and services and our software to be used with third party hardware. The success of our strategy to expand our software business, including our strategy to disaggregate software from certain hardware products, is subject to a number of risks and uncertainties, including:
•the additional development efforts and costs required to create new software products and/orand to make our disaggregated products compatible with multiple technologies;
•the possibility that our new software products or disaggregated products may not achieve widespread customer adoption;
•the potentialpossibility 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 regulatory compliance 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 partythird-party products; and
•issues with third partythird-party technologies used with our disaggregated products, which may be attributed to us.
If any of our new 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 cancelled. 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, financial condition, 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. Although we have been issued numerous patents and other patent applications are currently pending, 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. 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 assure you 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 dependentalso 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. Such sales 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. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under 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 with whomand original design manufacturers as well as single-source and limited source suppliers. 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 do not have long-term supply contracts,offer, the large and changesdiverse distribution of our manufactures, and suppliers, and the long lead times required to or disruptionsmanufacture, assemble and deliver certain products, problems could arise in those relationships or manufacturing processes, expected or unexpected, may result in delaysproduction, planning and inventory management that could cause usseriously harm our business. Any delay in our ability to lose revenuesproduce and damage our customer relationships.
We depend on independent contract manufacturers (each of which is a third-party manufacturer for numerous companies) to manufacture our products. Although we have contracts with our contract manufacturers, these contracts do not require them to manufacturedeliver our products on a long-term basis in any specific quantity or at any specific price.could cause our customers to purchase alternative products from our competitors. In addition, it isour ongoing efforts to optimize the efficiency of our supply chain could cause supply disruptions and be more expensive, time-consuming and costlyresource-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 qualify and implement additional contract manufacturer relationships. Therefore,our customers if we fail to effectively manage our contract manufacturer relationships, which includes failing to provide accurate forecasts of our requirements, or if one or more of them experiencesmanufacturers experience delays, disruptions, or quality control problems in ourtheir manufacturing operations, or if we hadhave to change or add additional contract manufacturers or contract manufacturing sites,locations. Although we have contracts with our abilitymanufacturers that include terms to ship productsprotect us in the event of an early termination, we may not have adequate time to transition all of our customers could be delayed.manufacturing needs to an alternative manufacturer under comparable commercial terms in the event of an early termination. 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. Suchproducts, including delays could result in supply shortfalls that damage our abilitydue to meet customer demand for those productsthe manufacturing restrictions, travel restrictions and could cause our customersshelter-in-place orders to purchase alternative products from our competitors. Also,control the additionspread of manufacturing locations or contract manufacturers or the introduction of new products by us would increase the complexity of our supply chain management.COVID-19. Moreover, an increasinga significant portion of our manufacturing is performed in China, Malaysia and other foreign countries and is therefore subject to risks associated with doing business outside of the United States,U.S., including the possibility of import tariffs, or regional conflicts. Each of these factors could adversely affect our business, financial condition and results of operations.
If we failexport restrictions, disruptions to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays, which would harm our business.
We provide demand forecasts for our products to our contract manufacturers and original design manufacturers, who order components and plan capacity based on these forecasts. If we overestimate our requirements, our original design or contract manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. For example, in certain prior quarters, our gross margins were reduced as a result of an inventory charge resulting from inventory we held in excess of forecasted demand. In addition, some optical modules we use are experiencing faster product transitions than our other products, which increases the risk that we could have excess inventory of those modules. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms, and the demand for each component at a given time, and because our contract manufacturers are third-party manufacturers for numerous other companies, if we underestimate our requirements, as we have in certain prior quarters with respect to certain products, our contract manufacturers may have inadequate time, materials, and/or components required to produce our products, which could increase costs or delay or interrupt manufacturing of our products resulting in delays in shipments and deferral or loss of revenues and negatively impacting customer satisfaction.
System security risks, data protection breaches, and cyber-attacks could compromise our and our customers’ proprietary information, disrupt our internal operations and harm public perception of our products, which could cause our business and reputation to suffer and adversely affect our stock price.
In the ordinary course of business, we store sensitive data, including intellectual property, personal data, our proprietary business information and that of our customers, suppliers and 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. The secure maintenance of this information is critical to our operations and business strategy. The growing cyber risk environment means that individuals, companies, and organizations of all sizes, including Juniper have been and are increasingly subject to the threat of intrusions on their networks and systems by a wide range of actors on an ongoing and regular basis. Despite our security measures, and those of our third-party vendors, our information technology and infrastructure has experienced breaches and may
be vulnerable in the future to breach or attacks by computer programmers, hackers or sophisticated nation-state and nation-state supported actors or breached due to employee error or wrongful conduct, malfeasance, or other disruptions. If any breach or attack compromises our networks, creates system disruptions or slowdowns or exploits security vulnerabilities of our products, the information stored on our networks or those of our customers could be accessed and modified, publicly disclosed, lost or stolen, and we may be subject to liability to our customers, suppliers, business partners and others, and suffer reputational and financial harm. In addition, hardware, components and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs", vulnerabilities and other problems that could unexpectedly interfere with the operation of our networks or expose us or our products to cyber attacks. This can be true even for “legacy” products that have been determined to have reached an end of life engineering status but will continue to operate for a limited amount of time.
When vulnerabilities are discovered, we evaluate the risk, apply patches or take other remediation actions as required and notify customers and suppliers when appropriate. All of this requires significant time and attention from management and our employees.
As a result of any actual or perceived breach of network 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 market perception of the effectiveness of our products and our overall reputation could be harmed. As a large, well known provider of networking products, cyber attackers may specifically target our products or attempt to imitate us or our products in order to compromise a network. Because the techniques used by attackers, many of whom are highly sophisticated and well-funded, to access or sabotage networks 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. This could impede our sales, manufacturing, distribution or other critical functions, which could have an adverse impact on our financial results. The economic costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure, because the damage may differ based on the identity and motive of the attacker, which are often difficult to pinpoint. Additionally, we could be subject to regulatory investigations, potential fines and litigation in connection with a security breach or related issue and be liable to third parties for these types of breaches.
We are dependent on sole source and limited source suppliers for several key components, which makes us susceptible to shortages, quality issues or price fluctuations in our supply chain, and we may face increased challenges in supply chain management in the future.pandemics, regional climate-related events, or regional conflicts.
•Single-Source Suppliers. We rely on single or limited sources of certain of our components. During periods of high demand for electronic products, component shortages are possible, and the predictability of the availability of such components may be limited. For example, some optical transceivers and memory components used in our networking solutions might experience extended lead times and higher pricing, given the demand in the market. Any future spike in growth in our business, or more likely in IT spending and the economy in general is likely to create greater short-term pressures on us and our suppliers to accurately forecast overall component demand and to establish optimal component inventories. If shortages or delays persist, the price of these components may increase, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner, and our revenues and gross margins could suffer until other sources can be developed. In addition, we have experienced, and from time-to-time may experience, component shortages or quality issues that resulted, or could result, in delays of product shipments and/or warranty or other claims. For example, in late 2016, we became aware of a defect in a clock-signal component from a third-party supplier that affected certain of our products and which resulted in remediation costs. As a result of this issue, we recorded a product cost of revenue charge that impacted our product gross margins for our fiscal year ended December 31, 2016 and three months ended March 31, 2017, and we may incur additional costs. We also currently purchase numerous key components, including ASICs and other semiconductor chips, from single or limited sources and many of our component suppliers are concentrated in China and Korea.components due to technology, availability, price, quality, scale or customization needs. In addition, there has been consolidation among certain suppliers of our components. For example, GLOBALFOUNDRIES acquired IBM’s semiconductor manufacturing business, Avago Technologies Limited acquired Broadcom Corporation, Intel Corporation acquired Altera Corporation and Broadcom Limited is proposing to acquire Qualcomm Incorporated. 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. In addition,parts and may impact our gross margins. Additionally, if certain components that we receive from our suppliers have defects or other quality issues, we may determine nothave to continue a business relationship with us for other reasonsreplace or repair such components, and we could be subject to claims based on warranty, product liability, epidemic or delivery failures that may be beyond our control. could lead to significant expenses.
•Supply-chain Disruption. Any disruptions to our supply chain or significant increase in component costs 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 supplier's plants or shipping delays due to efforts to limit the spread of COVID-19, increases in wages that drive up prices, the imposition of regulations, quotas or embargoes on key components, labor stoppages, transportation delays 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, the unavailability of raw materials, severe weather conditions, adverse effects of climate change, natural disasters, civil unrest, military conflicts, geopolitical developments, war or terrorism and disruptions in utilityutilities 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, 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 key components is time-consuming, difficult, and costly. In addition, the lead times associated with certain components are lengthylengthy. For example, we have experienced extended lead times of up to 50 weeks on some semiconductor products, and preclude rapid changes in quantitieswe expect these extended lead times to continue for the foreseeable future, which may impact our production and delivery schedules. Also, long-term supply and maintenance obligations to customers increase the duration for which specific components are required, which may further increase the risk of component shortages or the cost of carrying inventory. In the event of a component shortage, or supply interruption or significant price increase from these suppliers, we may not be able to develop alternate or second sources in a timely manner. 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, whichand would, in turn, adversely affect our business, financial condition, and results of operations.
In addition,•COVID-19 Impact. Delays in production or in product deliveries due to the development, licensing, or acquisition of new products in the futureCOVID-19 pandemic have adversely affected and may increase the complexity of supply chain management. Failurecontinue to effectively manage the supply of key components and products would adversely affect our business.
We rely on value-addedbusiness, financial condition, and other resellers,results of operations. For example, during fiscal 2020, the COVID-19 pandemic caused us to experience supply constraints due to both constrained manufacturing capacity, particularly in China and Malaysia, as well as component parts shortages as our component vendors were also facing manufacturing challenges, and increased logistics costs due to air travel and transport restrictions that limited the availability of flights on which we ship our products. These challenges resulted in extended lead-times to our customers and had a negative impact on our ability to recognize associated revenue in each quarter. 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, uncertainty resulting from the pandemic as well as the world-wide distribution of the vaccines for COVID-19 could result in an unforeseen disruption to our supply chain (for example, a closure of a key manufacturing or distribution facility or the inability of a key supplier or transportation supplier to source and transport materials) that could impact our operations.
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 sellour operations and business strategy. On an ongoing and regular basis, we have been, and expect to be, subject to cyberattacks and 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”). The continued occurrence of high-profile data breaches provides evidence of an environment increasingly hostile to information security.
Despite our security measures, and those of our third-party vendors, our information technology and infrastructure have experienced breaches and may be subject to or vulnerable to breaches or attacks in the future. If any breach or attack compromises our networks or those of our vendors, creates system disruptions or slowdowns or exploits security vulnerabilities of our products, 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 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 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. Further, when vulnerabilities are discovered, we evaluate the risk, apply patches or take other remediation actions and notify customers, business partners, and suppliers as appropriate.
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 disruptionsour 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 failuresales, manufacturing, distribution or other critical functions, which could have an adverse impact on our financial results. These risks to effectively developour systems may be increased during the COVID-19 pandemic as the health of our internal security team members who monitor and manage,address cyber threats and attacks against us and our distribution channelemployees around the world is also at risk.
Additionally, we could be subject to measures that regulate the security of the types of products we sell, such as the California Internet of Things (IoT) security law (SB-327), which became enforceable in 2020. Such regulations may result in increased costs and thedelays 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 proceduressupplier relationships that support itcould impact product offerings, release schedules and service response times, which could adversely affect our ability to generate revenues from the saledemand for and sales of our products.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.
OurDisruption in our distribution channels could seriously harm our future success is highly dependent upon establishingrevenue and maintaining successful relationships with a variety of value-addedfinancial condition and other resellerincrease our costs and distribution partners, including our worldwide strategic partners such as Ericsson, IBM, Dimension Data and NEC Corporation. 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. Our revenues depend in part on the performance of these partners. The loss of or reduction in sales to our resellers or distributors could materially reduce our revenues. For example, in 2016, Nokia Corporation merged with Alcatel-Lucent, a competitor of ours, and in 2015 Cisco announced a partnership with Ericsson, which is one of our existing partners. 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 failare unable to develop and maintain relationships with our partners, fail to develop new relationships with value-added resellers and distributors in new markets, fail to expand the number of distributors and resellers in existing markets, fail to manage, train or motivate existing value-added resellers and distributors effectively, determine that we cannot continue to do business with these partners for any reason 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.
In addition, we We recognize a portion of our revenues based on a sell-through model using information provided byat the time we sell products to our distributors. If those distributors provide us withthese sales are made based on inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted.
We are 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 vulnerablemay adjust their orders in response to third parties who illegally distribute or sell counterfeit, stolen or unfit versionsthe supply of our products which has happenedand the products of our competitors that are available to them, and in the past and could happenresponse to seasonal fluctuations in the future. Such sales could have a negative impact on our reputation and business.end-user demand.
Further, in order toTo develop and expand our distribution channel, we must continue to offer attractive channel programs to potential partners and scale and improve our processes and procedures that support the channel. As a result, our programs, processes and procedures may become increasingly complex and inherently difficult to manage. We have previously entered into OEM agreements with partners pursuant to which they rebrand and resell our products as part of their product portfolios. These types of relationships are complex and require additional processes and procedures that may be costly or challenging and costly to implement, maintain, and manage. Our failure to successfully manage and develop our distribution channel and the programs, processes and procedures that support it 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. To the extent that they failAny failure by our partners to do so, thatcomply with these requirements, could have a material adverse effect on our business, operating results, and financial condition.
Our ability to process orders and ship products in a timely manner is dependent in partWe rely on the performance of our business systems and performance of thethird-party systems and processes of third parties such as our contract manufacturers, suppliers, data center providers or other partners, as well as the interfaces between our systems and the systems of such third parties. If our systems, the systems and processes of those third parties, or the interfaces between them experience delays or fail, our business processes and our ability to build and ship products could be impacted, and our financial results could be harmed.
processes. Some of our business processes depend upon our information technology, or IT systems, the systems and processes of and IT services provided by third parties, and the interfaces of our systems withbetween the systems of third parties.two. For example, we are in the processIBM provides us with a broad range of further consolidating our on-site data centers to theinformation 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 including service desk. These cloud and to off-site facilities that are hosted and controlled by third-parties. These cloudproviders, third party providers, and off-site facilities are vulnerable to damage, interruption, orincluding performance problems from earthquakes, hurricanes, floods, fires, power loss, telecommunications failures, equipment failure, adverse events caused by operator error, cybersecurity attacks, pandemics, and similar events. In addition,
because we lease our cloud storage space and 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 economic 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, our ability to build and ship our products in a timely manner may be harmed. For example, we have experienced instances where our contract manufacturers were not able to ship products in the time periods expected by us, which prevented us from meeting our commitmentsSince IT is critical to our customers.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 were 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 and marketing, and support personnel as well as to maintain the health of our personnel during a pandemic, including the COVID-19 pandemic. 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. None of our officers or key employees is bound by an employment agreement for any specific term. If we are not ablefail to shipattract new personnel or retain and motivate our current personnel, the development and introduction of new products or if product shipments arecould be delayed, our ability to recognize revenue in a timely manner for thosemarket, sell, or support our products wouldcould be affectedimpaired, and our financialbusiness, results of operations and future growth prospects could be harmed.
Integration of acquisitions could disrupt our business and harm our financial condition and stock price and may dilute the ownership of our stockholders.
We have made, and may continue to make, acquisitions in order to enhance our business. For example, in 2017 we acquired Cyphort Inc. and in 2016, we acquired AppFormix Inc., Aurrion, Inc. and BTI Systems Inc. Acquisitions involve numerous risks, including, but not limited to, problems combining the purchased operations, technologies or products, unanticipated costs and liabilities, diversion of management's attention from our core businesses, 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 potential loss of key employees.suffer. There can be no assurance that weothers will be ablenot develop technologies that are similar or superior to integrate successfully any businesses, products, technologies, or personnel that we might acquire. The integration of businesses that we may acquire is likely to be a complex, time-consuming, and expensive process and we may not realize the anticipated revenues or other benefits associated with our acquisitions if we fail to successfully manage and operate the acquired business. If we fail in any acquisition integration efforts and are unable to efficiently operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls, and human resources practices, our business, financial condition, and results of operations may be adversely affected.technology.
In connection with certain acquisitions, we may agree to issue common stock or assume equity awards that dilute the ownershipA number of our current stockholders, use a substantial portion of our cash resources, assume liabilities, record goodwillteam members are foreign nationals who rely on visas and amortizable intangible assets that will be subjectentry permits in order to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuringlegally work in the U.S. and other related expenses, allcountries. In recent years, the U.S. has increased the level of which could harm our financial condition and results of operations.
Telecommunications, cable and cloud service provider companies and our other large customers generally require onerous terms and conditionsscrutiny in our contracts with them. As we seek to sell more products to such customers, we may be required to agree to terms and conditions that could have an adverse effect on our business or ability to recognize revenues.
Telecommunications, cable and cloud service provider companies, which comprise a significant portion of our customer base,granting H-1B, L-1 and other large companies, generally have greater purchasing power than smaller entitiesbusiness visas. Compliance with new and accordingly, often requestunexpected U.S. immigration and receive more favorable terms from suppliers. For example, our customers France Telecom-Orangelabor laws could also require us to incur additional unexpected labor costs and Deutsche Telekom AG have formed a company for the purpose of purchasing products from, and negotiating more favorable contractual terms with, suppliers. As we seek to sell more products to this class of customer, we may be required to agree to such terms and conditions, which may include terms that affect the timing ofexpenses or could restrain our ability to recognize revenue, increaseretain and attract skilled professionals. Additionally, pandemics, such as the COVID-19 pandemic, may interfere with 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.
In addition, service providers have purchased products from other vendors who promised but failed to deliver certain functionality and/hire or had products that caused problems or outages in the networksretain personnel. Any of these customers. As a result, these customers may request additional features from us and require substantial penalties for failure to deliver such features or may require substantial penalties for any network outages that may be caused by our products. These additional requests and penalties, if we are required to agree to them, may require us to defer revenue recognition from such sales, which may negatively affect our business, financial condition and results of operations. In addition, increased patent litigation brought against customers by non-practicing entities in recent years, may result, and in some cases has resulted, in customers requesting or requiring vendors 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.
We are a party to lawsuits, investigations, proceedings, and other disputes, which are costly to defend and, if determined adversely to us, could require us to pay fines or damages, undertake remedial measures or prevent us from taking certain actions, any or all of which could harm our business, results of operations, financial condition or cash flows.
We, and certain of our current and former officers and current and former members of our Board of Directors, have been or are subject to various lawsuits. We have been served with lawsuits related to employment matters, commercial transactions and patent infringement, as well as securities laws. As noted in Note 16, Commitments and Contingencies, in Notes to Consolidated Financial Statements of this Report, under the heading of “Legal Proceedings”, the U.S. Securities and Exchange Commission, or the SEC, is conducting, and the U.S. Department of Justice, or the DOJ, was previously conducting, investigations into possible violations by the Company of the U.S. Foreign Corrupt Practices Act, or the FCPA, in a number of countries. The investigations relate to certain of the Company’s marketing practices and whether the Company or any third party on behalf of the Company gave anything of value to any government official in violation of the FCPA. The Company’s Audit Committee, with the assistance of independent advisors, has been investigating and conducting a thorough review of possible violations of the FCPA, and has made recommendations for remedial measures, including employee disciplinary actions in foreign jurisdictions, which the Company has implemented and continues to implement. Litigation and investigations are inherently uncertain. We therefore cannot predict the duration, scope, outcome or consequences of litigation and government investigations. In connection with any government investigations, including those in which we are currently involved as described above, if the government takes action against us or we agree to settle the matter, we may be required to pay substantial fines and incur other sanctions, which may be material, and suffer reputational harm. The lawsuits and investigations are expensive and time-consuming to defend, settle, and/or resolve, and may require us to implement certain remedial measures that could prove costly or disruptive to our business and operations. The unfavorable resolution of one or more of these mattersrestrictions could have a material adverse effect on our business, results of operations and financial condition or cash flows.conditions.
LEGAL, REGULATORY, AND COMPLIANCE RISKS
We are a party to litigation and claims regarding intellectual property rights, resolution of which may be time-consuming and expensive, as well as require a significant amount of resources to prosecute, defend, or make our products non-infringing.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patentlawsuits, investigations, and other intellectual property rights. disputes. We expect thathave been named a party to litigation involving employment matters, commercial transactions, patent infringement, claims may increase as the number of products and competitors in our market increases and overlaps occur. Third parties have asserted and may in the future assert claims or initiate litigation related to patent, copyright, trademark,copyrights, trademarks, and other intellectual property rights to technologies and related standards that are relevant to our products.products, as well as governmental claims, and securities laws, and we may be named in additional litigation. 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 making a payment of $11.8 million in August 2019. The asserted claims and/or initiated litigation may include claims against us or our manufacturers, suppliers, partners, or customers, alleging that our products or services infringe proprietary rights. 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 and operations. 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 in recent years 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 have been and can be time-consuming, result in costly litigation, and may require us to develop non-infringing 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 that are not necessarily predictable, even arguably unmeritorious claims may be settled for significant amounts of money. relief.
If any infringement or other intellectual property claim made against us or anyone we are required to indemnify by any third-party is successful ifand we are required to pay significant monetary awards or damages to settle litigation, for significant amountsenter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of money, ifour customers, or we fail to develop non-infringing technology ifand we incorporate infringing technology in our products, or if we license required proprietary rights at material expense, our business, financial condition, and results of operations could be materially and adversely affected.
In addition, increased patent litigation brought against customers in recent years, may result, and in some cases has resulted, in customers requesting or requiring vendors 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.
Non-standard contract terms with telecommunications, cable and cloud service provider companies and other large 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, generally have greater purchasing power than smaller entities and often request and receive more favorable terms from suppliers. We may be required to agree to such terms and conditions, which may include terms that affect the 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.
In addition, other vendors may have promised but failed to deliver certain functionality to these types of customers and/or had products that caused problems or outages in their networks. As a result, these customers may request additional features from us and require substantial penalties for failure to deliver such features or for any network outages that may or may not have been caused by our products. If we are required to agree to these requests or incur penalties, the amount of revenue recognized from such sales may be negatively impacted and as a result, may negatively affect our business, financial condition and results of operations.
Regulation of our industry in general and the telecommunications industry in particularor those of our customers could harm our operating results and future prospects.
We are subject to laws and regulations affecting the sale of our products in a number of areas. For example, some governments have regulations prohibiting government entities from purchasing security products that do not meet specified indigenouscountry-specific safety, conformance or security certification criteria even though those criteria may be in conflict with accepted international standards.or in-country test requirements. Other regulations that may negatively impact our business include country of origin regulations.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 Dodd-Frank Wall Street Reform and Consumer Protection Act includes disclosure requirements applicableSEC requires us, as a public company who uses certain raw materials that are considered to public companies regarding the use ofbe “conflict minerals” minedin 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 Democratic Republicmining, smelting or refining of Congoany conflict minerals. Accordingly, our ability to determine with certainty the origin and adjoining countries, whichchain of custody of these raw materials is limited. Our relationships with customers and suppliers could suffer if we referare unable to collectivelydescribe our products as the DRC, and procedures regarding a manufacturer's efforts to prevent the sourcing of such “conflict minerals.“conflict-free.” These minerals are presentWe may also face increased costs in our products. In addition, the European Union reached agreement in late 2016 on a EU-widecomplying with conflict minerals rule under which most EU importers of tin, tungsten, tantalum, gold and their ores will have to conduct due diligence todisclosure requirements.
ensure the minerals do not originate from conflict zones and do not fund armed conflicts. Large manufacturers also will have to disclose how they plan to monitor their sources to comply with the rules. The regulation was adopted in 2017 with compliance required by 2021.
In addition, environmentalEnvironmental laws and regulations relevant to electronic equipment manufacturing or operations, including laws and regulations governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment, may adversely impact our business and financial condition. TheseIn 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 include, among others, the European Union, or EU, Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive, or RoHS. The EU RoHS and the similar laws of other jurisdictions limit the content of certain hazardous materials, such as lead, mercury, and cadmium, in electronic equipment, including our products. Currently, our products comply with the EU RoHS requirements. However, certain exemptions are scheduled to lapse, or have lapsed. The lapse of any exemption, further changes to this or other laws, or passage of similar laws in the EU or other jurisdictions, wouldproduct take-back legislation, which could require us to cease selling non-compliant products in the EU and to reengineer our products to use compliant components compatible with these regulations. This reengineering and component substitutionwhich could result in additional costs to us, disrupt our operations, or logistics, and result in an adverse impact on our operating results. In addition, in validating the compliance ofIf we were to violate or become liable under environmental laws or if our products become non-compliant with applicable hazardous materials restrictions, we rely substantially on affirmations by our component suppliers as to the compliance of their products with respect to those same restrictions. Failure by our component suppliers to furnish accurate and timely information could subject us to penalties or liability for violation of such hazardous materials restrictions, interrupt our supply of products to the EU, and result inenvironmental laws, our customers refusing or being unablemay refuse to purchase our products. Additionally, the EUproducts and a numberwe could incur substantial costs or face other sanctions, which may include restrictions on our products entering certain jurisdictions. The amount and timing of other countries have adopted regulations requiring producers of electrical and electronic equipmentcosts to assume certain responsibilities for collecting, treating, recycling and disposing of products when they have reached the end of their useful life. Finally, the EU REACH regulations regulate the handling of certain chemical substances that may be used in our products.comply with environmental laws are difficult to predict.
In addition, as a contractor and subcontractor to the U.S. government, departments and agencies, we are subject to Federalfederal regulations pertaining to our IT systems. For instance, as a subcontractor to the U.S. Department of Defense, or DOD, the Defense Federal Acquisition Regulation Supplement (DFARS) requiredsystems that our IT systems complyrequires compliance with thecertain security and privacy controls described in National Institute of Standards and Technology Special Publication 800-171, or NIST SP 800-171 no later than December 31, 2017. The DFARS also requires that we flow the security control requirement down to certain of our own subcontractors.controls. Failure to comply with these requirements could result in a loss of Federalfederal government business, subject us to claims or other remedies for non-compliance, andor negatively impact our business, financial condition, and results of operations.
TheMoreover, our customers in the telecommunications industry is highly regulated,may be subject to regulations and our business and financial condition could be adversely affected by changes in such regulations relating to the Internet telecommunications industry. Currently, there are fewaffecting our customers. Further, we could be affected by new laws or regulations that apply directly toon access to or commerce on IP networks but future regulations could include sales taxes on products sold via the Internet and Internet service provider access charges. We could be adversely affected by regulation of IP networks and commerce in any countryjurisdictions where we market equipment and services to service providers or cloud provider companies.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. For instance, in December 2017, the U.S. Federal Communications Commission repealed its 2015 regulations governing aspects of fixed broadband networks and wireless networks. This change in regulatory treatment of networks might impact service provider and cloud provider business models and, as such, providers' needs for Internet telecommunications equipment and services. Also, many jurisdictions are evaluating or implementing regulations relating to cyber security,cybersecurity, supply chain integrity, privacy and data protection, any of which can affect the market and requirements for networking and security equipment.
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 and economic sanctions affecting the import or export of products generally or affecting products containing encryption capabilities could negatively affect our revenues and operating results.
The United StatesU.S. and various foreignother governments have imposed controls and restrictions on the import orand 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 and contain or use encryption technology and, consequently, are subject to such controls, requirements and restrictions. Certain governments also control importation and in-country use of encryption items and technology. The scope, nature, and severity of such controls vary widely across different countries and may change frequently over time. For example, China has promulgated cybersecurity regulations
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 must apply for the license and published a new draftwait for government officials to process it; it is possible that lengthy delays will lead to the cancellation of orders by customers. Moreover, if we fail to obtain necessary licenses prior to importing or exporting covered goods, we can be subject to government sanctions, including monetary penalties. Government restrictions on the import or export law affecting networking products that may impairof technology can restrict our ability to profitably marketmanufacture and sell our products, which can affect negatively 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. Some of these restrictions have been imposed not just to protect national security but also to protect domestic industries and to achieve political aims. 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 China. Certain countries’ encryption control regimes may significantly limit our abilityplace to sell major lines of our products in those countries.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 onto protect network equipment and software procured by or for purposes of government procurements.the government. Similar requirements also may also be imposed in procurements by state owned entities (“SOE’s”). Our abilityor 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, Congress has enacted bans on the use of certain Chinese-origin components or systems either in items sold to sell into substantial government and SOE markets (whether or not the products we sell include encryption) is vulnerable to changes in applicable government procurement regulations, any associated local content requirements and changes in the government’s interpretation of such regulations. In addition, 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). The U.S. government also has broader sanctionsbeen considering policies that would limit the ability of businesses to acquire certain goods and embargoes that generally forbidservices from entities with geographic connections to China, Russia, and other untrusted nation-states, including subjecting such acquisitions to government review. Such proposals, if implemented, could introduce significant uncertainty into our supply of most items to or involvingchain and overall operational planning as we would not be certain countries, territories,which potential acquisitions and transactions the government would permit and which it would reject.
In addition, governments legal entities and individuals, including restrictions imposed bysometimes impose additional taxes on certain imported products. For example, the U.S. and EUChinese governments each have imposed tariffs on exportscertain products, including information and communication technology products originating from the other country, which resulted in a large portion of our products manufactured in China becoming subject to Russiatariffs on importation into the U.S. Depending upon their duration and Ukraine. We have implemented systemsimplementation, as well as our ability to detectmitigate their impact, these tariffs could materially affect our business, including in the form of increased cost of goods sold, increased pricing for customers, and prevent sales into these countries or to prohibited entities or individuals, but there can be no assurance that they will always be effective.reduced sales.
Governmental regulation of encryption orour IP networking, encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, or related economic sanctions could harm our international and domestic sales and adversely affect our revenues and operating results. In addition, failure to comply with such regulations could result in harm to our reputation and ability to compete in international markets, penalties, costs, seizure of assets (including source code) and restrictions on import or export privileges or adversely affect sales to government agencies or government-funded projects.
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-privacy and data protection-related laws and regulations are evolving, with new or modified lawsextensive, and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations.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. Examples of recent and anticipated developments that have or could impact our business include the following:
For example, we previously•The General Data Protection Regulation, which became effective in May 2018, imposes stringent data protection requirements and provides significant penalties for noncompliance. We have relied upon adherence toon the U.S. Departmentuse of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU Safe Harbor Framework, which we refer to as the Safe Harbor, agreed tomodel contractual clauses approved by the U.S. Department of Commerce and the EU. The Safe Harbor, which established means for legitimizingE.U. Commission to legitimize the transfer of personal data outside of the E.U. to certain jurisdictions, including the United States. The model contractual clauses have been subject to legal challenge. In relation to the recent “Schrems II” decision by U.S. companies fromthe Court of Justice of the European Union and its impact on our data transfer mechanism, we may experience additional costs associated with increased compliance burdens and new
contract negotiations with third parties that aid in processing of data on our behalf. We may face reluctance or resistance by our current and prospective customers to use our products and services. Further, we may find it necessary to make further changes to our handling of personal data of residents of the European Economic Area or EEA,(“EEA”). The regulatory environment applicable to the U.S., was invalidatedhandling of EEA residents’ personal data, and our actions in 2015 by a decision of the European Court of Justice,addressing such environment, may cause us to assume additional liabilities or the ECJ. Now that the EUincur additional costs and U.S. have implemented a successor privacy framework called the Privacy Shield, we are reviewingcould result in our business, operating results and documenting our practices required to obtain certification under the Privacy Shield, in addition to entering into EU Model Contracts with our vendors where appropriate and feasible in anticipation of the possibility that either the Privacy Shield or EU Model Contracts may be legally challenged or voided like Safe Harbor in an uncertain political environment.financial condition being harmed. In addition, both we and our customers may face a risk of enforcement actions by data protection authorities in the EU General Data Protection Regulation, which goes into full effect in May 2018, is expectedEEA relating to personal data transfers to us and by us from the EEA. Any such enforcement actions could result in substantial changes tocosts and diversion of resources, distract management and technical personnel, and negatively affect our compliance obligations, including contractual requirements for data transfers outside the EEA,business, operating results, and a significant increase in potential administrative fines for non-compliance. Similarly, the June 2016 approval by voters infinancial condition.
•On January 31, 2020, the United Kingdom or ("U.K.") withdrew from the European Union ("EU"), commonly referred to as "Brexit". There is significant uncertainty related to how data flows in and out of a referendumthe U.K. will be affected if the U.K. does not receive an adequacy decision in the next six months. We may experience additional costs associated with increased compliance burdens and new contract negotiations with third parties depending on the outcome of the adequacy discussions.
•Data protection legislation is also becoming increasingly common in the U.S. at both the federal and state level. The California Consumer Privacy Act (“CCPA”), which became effective and enforceable in 2020 requires, among other things, covered companies to leaveprovide new disclosures to California consumers regarding the EU coulduse of personal information, gives California residents expanded rights to access their personal information and allows such consumers new abilities to opt-out of certain sales of personal information. The effects of the CCPA and other similar laws may require us to makemodify our data processing practices and policies, adapt our goods and services, and incur substantial costs and expenses to comply. The CCPA also provides for civil penalties for violations and a private right of action for data breaches that may increase the frequency and cost associated with data breach litigation. Further, the new California Privacy Rights Act (“CPRA”) which was passed in November 2020, significantly modifies the CCPA. These modifications may result in additional changesuncertainty and require us to incur additional costs and expenses in our effort to comply.
•The Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the wayonline collection, use, dissemination, and security of data. In addition, we conductmay 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. and non-U.S. governments are considering regulating artificial intelligence and machine learning, which may impact our businessproducts and transmit data between the U.S., U.K., EUservices and the rest of the world.cause us to incur costs and expenses in order to comply.
Our actual or allegedperceived 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 significant penalties or other legal actionand regulatory investigations against us, orclaims for damages by customers and other affected individuals, fines, damage to our customers or suppliers, which could result in negative publicity, increase our operating costs, subject us to claims or other remediesreputation, and have a material adverse effect on our business, financial condition, and results of operations.
Our ability to develop, market, and sell products could be harmed if we are unable to retain or hire key personnel.
Our future success depends upon our ability to recruit and retain the services of executive, engineering, sales and marketing, and support personnel. The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people with specialized industry expertise, is limited and competition for such individuals is intense. None of our officers or key employees is bound by an employment agreement for any specific term. The loss of the services ofgoodwill, any of our key employees, the inability to attract or retain personnel in the future or delays in hiring required personnel, engineers and sales people, and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell, or support our products.
A number of our team members are foreign nationals who rely on visas and entry permits in order to legally work in the United States and other countries. In recent years, the United States has increased the level of scrutiny in granting H-1(B), L-1 and other business visas. In addition, the current U.S. administration has indicated that immigration reform is a priority. Compliance with United States immigration and labor laws could require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain skilled professionals. Any of these restrictionswhich 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, resultsincluding limiting business relationships and partnerships that may involve the sharing or uses of operationsdata, and financial conditions.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 otherpurchased intangible assets. As of December 31, 2020, our goodwill was $3,669.6 million, and our purchased intangible assets with indefinite lives.
were $266.7 million. We are required to test intangible assets with indefinite lives, including goodwill, annually or, in certain instances, more frequently, if certain circumstances change that would more likely than not reduce the fair value of a reporting unit and intangible assets below their carrying values. As of December 31, 2017, our goodwill was $3,096.2 million and intangible assets with indefinite lives was $49.0 million. When the carrying value of a reporting unit’s goodwill exceeds its implied fair value of goodwill, or if the carrying amount of an intangible asset with an indefinite life exceeds its fair value, a chargemay be required to operations is recorded. Either event would result in incremental expenses for that quarter,record impairment charges, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred.
In the past, we recorded a goodwill impairment charge of $850.0 million due to the underperformance of our Security reporting unit and product rationalizations.
From time to time, economic weakness has contributed to extreme price and volume fluctuations in global stock markets that have reduced the market price of many technology company stocks, including ours. Declines in our level of revenues or declines in our operating margins, or sustained declines in our stock price, increase the risk that goodwill and intangible assets with indefinite lives may become impaired in future periods.
During the three months ended June 30, 2017, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis on our Security reporting unit. Based on our analysis, we determined that our Security reporting unit’s goodwill was not impaired. However, our Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis, such as expected future cash flows, the degree of volatility in equity and debt markets, and our stock price.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 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 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. TheIn addition, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017, makesmade significant changes to the taxation of U.S. business entities, that will have a meaningful impact to our provision for income taxes. These changes includewhich included a reduction to the federal corporate income tax rate, the current taxation of certain foreign earnings, the imposition of base-erosion prevention measures which may limit the deduction of certain transfer pricing payments, and possible limitations on the deductibility of net interest expense or corporate debt obligations. Accounting for the incomeOur future effective tax effectsrate may be impacted by changes in interpretation of the Tax Act requires significant
judgements and estimates that are based on current interpretations of the Tax Act and could be affected by changing interpretations of the Act,regulations, as well as additional legislation and guidance aroundregarding the Tax Act. Any refinements to these provisional estimates are difficult to predict and could impact our results.
Furthermore, onin October 5, 2015, the Organisation for Economic Co-operation and Development, or OECD, an international association of 3537 countries including the U.S., published final proposals under its Base Erosion and Profit Shifting, or BEPS, Action Plan. The BEPS Action Plan includes fifteen Actions to address BEPS in a comprehensive manner and represents a significant change to the international corporate tax landscape. These proposals, as adopted by countries, may increase tax uncertainty and adversely affect our provision for income taxes.
In addition, we are generally subject to the continuous examination of our income tax returns by the Internal Revenue Service, or IRS, and other tax authorities. It is possible that tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a negative effect on our financial position and operating results. 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. There can be no assurance that the outcomes from continuous examinations will not have an adverse effect on our business, financial condition, and results of operations.
We may face difficulties enforcing our proprietary rights, which could adversely affect our ability to compete.
We generally rely on a combination of patents, copyrights, trademarks, and trade secret laws and contractual restrictions on disclosure of confidential and proprietary information, to establish and maintain proprietary rights in our technology and products. Although we have been issued numerous patents and other patent applications are currently pending, there can be no assurance that any of our patent applications will result in issued patents 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, any of which could result in costly product redesign efforts, discontinuance of certain product offerings and other competitive harm.
In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. 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 assure you that we have entered into such agreements with all parties who may have or have had access to our confidential information or that the agreements we have entered into will not be breached. We cannot guarantee that any of the measures we have taken will prevent misappropriation of our technology.
Furthermore, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. The outcome of any actions taken in these foreign countries may be different than if such actions were determined under the laws of the United States. Although we are not dependent on any individual patents or group of patents for particular segments of the business for which we compete, if we are unable to protect our proprietary rights in a market, we may find ourselves 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 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 VARsvalue-added resellers in countries throughout the world and depend on the operations of our contract manufacturers and suppliers that are located outside of the United States.U.S. In addition, a portion of our R&D and our general and administrative operations are conducted outside the United States. In some countries, we may experience reduced intellectual property protection.
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,spending;
•the impact of the recent 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 or limitations in trade protection lawscontrols, economic sanctions, or other regulatory requirements,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 manufactured outside of the country;incorporate components or assemblies from certain countries to specific customers (e.g., U.S. federal government departments and agencies) and industry segments, or for particular uses or more generally;
•varying and potentially conflicting laws and regulations;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;
•fluctuations in local economies;
wage inflation or a tightening of the labor market;•fluctuations in currency exchange rates (see Quantitative and Qualitative Disclosures about Market Risk for more information);
•tax policies, treaties or laws that could have aan unfavorable business impact;
potential import tariffs imposed by
•the United Statesnegotiation and implementation of free trade agreements between the possibility of reciprocal tariffs by foreign countries;U.S. and other nations;
•data privacy rules and other regulations that affect cross border data flow; and
the impact•theft or unauthorized use or publication of the following on customer spending patterns: political considerations, unfavorable changes in tax treaties or laws, natural disasters, epidemic disease, labor unrest, earnings expatriation restrictions, misappropriation ofour intellectual property military actions, acts of terrorism, political and social unrest and difficulties in staffing and managing international operations.other confidential business information.
Any or all of these factors has or could have a materialan adverse impact on our business, financial condition, and results of operations.
In addition, the June 2016 approval by voters inmedium and long term consequences of Brexit for the economies of the U.K. and EU member states as a result of a referendum to leavethe U.K.'s withdrawal from the EU remain unknown and unpredictable. We conduct business in the EU and the U.K.’s formal initiation As a consequence, any one or more medium and longer term effects of the exit process in March 2017, commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets. The U.K.’s exit from the EU, if implemented,will take some period of time to complete and could result in regulatory changes that impact our business. For example, changes to the way service providers conduct business and transmit data between the U.K. and the EU could require us to make changes to the way we handle customer data. We will also review the impact of any resulting changes to EU or U.K. law that could affect our operations, such asincluding those affecting labor policies, financial planning, product manufacturing, product distribution, and product distribution. Political and regulatory responses to the vote are still developing and we are in the process of assessing the impact the vote may have on our business as more information becomes available. Nevertheless, because we conduct business in the EU, including the U.K., any of thethose effects of Brexit, including those we cannot anticipate, could have a material adverse effect on our business, business opportunities, operating results, financial condition, and cash flows.flows if we are unable to anticipate and adequately address these risks.
Moreover, local laws and customs in many countries differ significantly from or conflict with those in the United StatesU.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 applicable to us. 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.
Our productsThere are highly technical and if they contain undetected defects, errors or malware or do not meet customer quality expectations, our business could be adversely affected, and we may be subject to additional costs or lawsuits or be required to pay damages in connection with any alleged or actual failure of our products and services.
Our products are highly technical and complex, are critical to the operation of many networks, and, in the case of our security products, provide and monitor network security and may protect valuable information. Our products have contained and may contain one or more undetected errors, defects, malware, or security vulnerabilities. These errors may arise from hardware or software we produce or procure from third parties. Some errors in our products may only be discovered after a product has been installed and used by end-customers. For example, in December 2015, we disclosed that we identified unauthorized code in ScreenOS that could allow a knowledgeable attacker to gain administrative access to NetScreen devices and to decrypt VPN connections.
Any errors, defects, malware or security vulnerabilities discovered in our products after commercial release could result in monetary penalties, negative publicity, loss of revenues or delay in revenue recognition, loss of customers, loss of future business and
reputation, penalties, and increased service and warranty cost, any of which could adversely affect our business, financial condition, and results of operations. In addition, in the event an error, defect, malware, or vulnerability is attributable to a component supplied by a third-party vendor, we may not be able to recover from the vendor all of the costs of remediation that we may incur. In addition, we could face claims for product liability, tort, or breach of warranty or indemnification. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. 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. Moreover, if our products fail to satisfy our customers' quality expectations for whatever reason, the perception of and the demand for our products could be adversely affected.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.
Because a substantial portion of our business is conducted outside the United States, we face exposure to adverse movements in non-U.S. currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial condition and results of operations.
The majority of our revenues and expenses are transacted in U.S. Dollars. We also have some transactions that are denominated in foreign currencies, primarily the British Pound, Chinese Yuan, Euro, and Indian Rupee related to our sales and service operations outside of the United States. An increase in the value of the U.S. Dollar could increase the real cost to our customers of our products in those markets outside the United States in which we sell in U.S. Dollars. This could negatively affect our ability to meet our customers' pricing expectations in those markets and may result in erosion of gross margin and market share. A weakened U.S. Dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we must purchase components in foreign currencies.
Currently, we hedge currency exposuresrisks associated with certain assetsour outstanding and liabilities denominated in nonfunctional currencies and periodically hedge anticipated foreign currency cash flows, with the aim of offsetting the impact of currency fluctuations on these exposures. However, hedge activities can be costly, and hedging cannot fully offset all risks, including long-term declines or appreciation in the value of the U.S. Dollar. If our attempts to hedge against these risks are not successful, or if long-term declines or appreciation in the value of the U.S. Dollar persist, our financial condition and results of operations could be adversely impacted.
A portion of the transaction consideration we received from the divestiture of our Junos Pulse product portfolio is in the form of a non-contingent seller promissory note and we may not receive the amount owed to us (including accrued interest), including in the time frame contemplated, by the buyer under the note.
In the fourth quarter of fiscal 2014, we completed the sale of our Junos Pulse product portfolio to an affiliate of Siris Capital, a private equity firm, for total consideration of $230.7 million, of which $125.0 million was in the form of an 18-month non-contingent interest-bearing promissory note issued to the Company. On October 2, 2015, we and the issuer of the promissory note agreed to modify the original terms of the note to extend the maturity date from April 1, 2016 to December 31, 2018. On May 1, 2017, we received a principal payment in the amount of $75.0 million and outstanding interest on the note and we and the issuer agreed to further amend the terms of the note with respect to the remaining approximately $58.0 million to, among other things, extend the maturity date from December 31, 2018 to September 30, 2022, provide that interest due can be paid in kind by increasing the outstanding principal amount of the note and subordinate the note to other debt issued by senior lenders. Since a portion of the transaction consideration is in the form of a non-contingent seller promissory note and the note is subordinated to debt issued by senior lenders, there is the risk that we may not receive the amount owed to us (including accrued interest), including in the time frame contemplated, under the note. In the event that the promissory note is not repaid on the terms we contemplate, any collection or restructuring efforts we undertake may be costly and require significant time and attention from our management and there is no guarantee that we will be able to recover the amounts owed to us in full.
If we fail to adequately evolve our financial and managerial control and reporting systems and processes, our ability to manage and grow our business will be negatively affected.
Our ability to successfully offer our products and implement our business plan in a rapidly evolving market depends upon an effective planning and management process. We will need to continue to improve our financial and managerial control and our reporting systems and procedures in order to manage our business effectively in the future. If we fail to effectively improve our systems and processes or we fail to monitor and ensure that these systems and processes are being used correctly, our ability to manage our business, financial condition, and results of operations may be negatively affected.
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 in order 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 cancelled. 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, and if licenses of third-party technology do not continue to be available to us or are not available on terms acceptable to us, our revenues and ability to develop and introduce new products could be adversely affected.
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. The failure to comply with the terms of any license, including free open source software, may result in our inability to continue to use such license. 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 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 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, if possible, 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, financial condition, and results of operations.
We are required to evaluate the effectiveness of our internal control over financial reporting and publicly disclose material weaknesses in our controls. Any adverse results from such evaluation may adversely affect investor perception, and our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting 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. We have an ongoing program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes to our controls design and test the system and process controls necessary to comply with these requirements. If in the future, our internal controls over financial reporting are determined to be not effective resulting in a material weakness or significant deficiency, 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.
Failure to maintain our credit ratings could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
The major credit rating agencies routinely evaluate our indebtedness. This evaluation is based on a number of factors, which 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.
We may be unable to generate the cash flow to satisfy our expenses, make anticipated capital expenditures or service our debt obligations, including the Notes and the Revolving Credit Facility.
As of December 31, 2017,2020, we have issued $2,150.0had $2,123.8 million in aggregate principal amount of senior notes, which we refer to collectively as the Notes, and had $2,136.3 million in outstanding long-term debt (see discussion in Note 10, Debt and Financing, in the Notes to Consolidated Financial Statements of this Report)(the "Notes"). In June 2014,April 2019, we entered into a Credit Agreementcredit agreement (the “Credit Agreement”) with certain institutional lenders that provides for a five yearfive-year $500.0 million unsecured revolving credit facility which we refer to as the Revolving(the “Revolving Credit Facility, with an option to increase the Revolving Credit Facility by up to an additional $200.0 million. The Credit Agreement will terminate in June 2019, at which point all amounts borrowed must be repaid. As of December 31, 2017, no amounts were outstanding under the Credit Agreement.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 and the Revolving Credit Facility (if drawn upon).Notes. Our ability to pay our expenses, satisfy our debt obligations, refinance our debt obligations and fund planned capital expenditures will depend onis dependent upon our future performance which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control. Based upon current levels of operations, we believe cash flow from operations and available cash willdiscussed in this section. However, there can be adequate for at least the next twelve months to meet our anticipated requirements for working capital, capital expenditures and scheduled payments of principal and interest on our indebtedness, including the Notes and the Revolving Credit Facility (if drawn upon). However, if we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt (including the Notes) or obtain additional financing. There is no assurance that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, or at all.manage any of these risks successfully.
The indenturesindenture that governgoverns the Notes containcontains various covenants that limit our ability and the ability of our subsidiaries to, among other things:
incur liens;
liens, incur sale and leaseback transactions;transactions, and
consolidate or merge with or into, or sell substantially all of our assets to another person.
The 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 3.0x3.0x; 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. A failure to comply with these restrictions could lead to an event of default, which could result in an acceleration of the indebtedness. Our future operating results may not be sufficient to enable compliance with these covenants to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments, including those under the Notes,applicable U.S. tax laws and the Revolving Credit Facility (if drawn upon).
In addition, certain changes under the Tax Act may result inregulations, there are limitations on the deductibility of our net business interest expenses. Beginning in 2018, the Tax Act generally limits the annual deduction for net business interest expense to an amount equal to 30% of adjusted taxable income. As a result, if our taxable income were to decline, we may not be able to fully deduct our net interest expense. These changes, among others under the Tax Act, could result in increases to our future U.S. tax expenses,expense, which could have a material impact on our business.
OurFurther, 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 pay quarterly dividends todo so could adversely affect 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.
Our ability to pay quarterly dividends or achieve our intended capital return policy will be subject to, among other things, our financialcost of funds and related margins, liquidity, competitive position and resultsaccess to capital markets.
We announced that, beginning in 2017, we intend to target a capital return policy, inclusive of share repurchases and dividends, of approximately 50% of annual free cash flow. Free cash flow is calculated as net cash provided by operating activities less capital expenditures. In January 2018, we announced that our Board of Directors approved a new $2 billion buyback authorization, which replaced our prior authorization. In February 2018, as a part of our new buyback authorization, we entered into a $750 million accelerated share repurchase program. In addition, our Board of Directors declared an increase to our quarterly cash dividend to $0.18 per share, which reflects an increase of 80% compared to previous quarterly dividends. Any failure to meet our commitments to return capital to our stockholders could have a material adverse effect on our stock price.
The investment of our cash balance and ourOur investments in government and corporate debt securities are subject to risks, which may cause losses and affect the liquidity of these investments.
At December 31, 2017, we had $2,006.5 million in cash and cash equivalents and $2,014.5 million in short- and long-term investments. We have invested these amounts primarilysubstantial investments in asset-backed securities, certificates of deposit, commercial paper, corporate debt securities, foreign government debt securities, money market funds, mutual funds, publicly-traded equity securities, time deposits, U.S. government agency securities, and U.S. government securities. We also have investments in privately-held companies. Certain of theseour 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 or equity investments is judged to be other-than-temporary. Thesematerial. In addition, should financial market conditions worsen in the future, investments in some financial instruments may be subject to risks associated with our investment portfolio mayarising from market liquidity and credit concerns, which could have a material adverse effect on our liquidity, financial condition, and results of operations.
Changes in the method of determining the London Interbank Offered Rate, or LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect our current or future indebtedness. Certain of our financial obligations and instruments, including our Revolving Credit Facility, accounts receivable finance programs, and floating rate notes that we have invested in, as well as interest rate derivatives that we use as fair value and cash flow hedges, are or may be made at variable interest rates that use LIBOR (or metrics derived from or related to LIBOR) as a benchmark for establishing the interest rate. In 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. If LIBOR ceases to exist, we may need to renegotiate our debt arrangements that extend beyond 2021 that utilize LIBOR as a factor in determining the interest rate, which may negatively impact the terms of such indebtedness. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows. In addition, the overall financial markets may be disrupted as a result of the phase out or replacement of LIBOR. Disruption in the financial markets could have an adverse effect on our financial position, results of operations, cash flows, and liquidity.
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 for disputes with us or our directors, officers, or employees.
forum. Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, the U.S. District Court for the District of Delaware) is the sole and exclusive forum for (i) any derivative action or proceeding brought oncertain actions and proceedings as specified in our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any of our current or former directors, officers, or other employees to us or to our stockholders; (iii) any action asserting a claim arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation, or our bylaws; (iv) any action or proceeding asserting a claim as to which Delaware General Corporation Law confers jurisdiction on the Court of Chancery or (v) any action asserting a claim governed by the internal affairs doctrine.bylaws. 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.
Uninsured losses could harm our operating results.
We self-insure against many business risks and expenses, such as intellectual property litigation and our medical benefit programs, where we believe we can adequately self-insure against the anticipated exposure and risk or where insurance is either not deemed cost-effective or is not available. We also maintain a program of insurance coverage for various types of property, casualty, and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost, and our decisions with respect to risk retention. The policies are subject to deductibles, policy limits, and exclusions that result in our retention of a level of risk on a self-insurance basis. In addition, our insurance coverage may not be adequate to compensate us for all losses or failures that may occur. Losses not covered by insurance could be substantial and unpredictable and could adversely affect our financial condition and results of operations.
Our stock price may be volatile.
Historically, our common stock has experienced substantial price volatility, particularly as a result of variations between our actual financial results and the published expectations of analysts and as a result of announcements by our competitors and us. Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations, business, security of our products, or significant transactions can cause changes in our stock price. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in particular and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions and the announcement of proposed and completed acquisitions or other significant transactions, or any difficulties associated with such transactions, by us or our current or potential competitors, may materially adversely affect the market price of our common stock in the future.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
Our corporate headquarters areis located on 80 acres of owned land in Sunnyvale, California and includes approximately 0.7 million square feet of owned buildings. In addition to our owned facilities, we lease approximately 0.2 million square feet in buildings in Sunnyvale, California as part of our corporate headquarters as of December 31, 2017.
In addition, to our leased buildings in Sunnyvale, we also lease space (including offices and other facilities) in various locations throughout the United States, Canada, South America, EMEA, and APAC regions, including offices in Australia, China, Hong Kong, India, Ireland, Israel, Japan, the Netherlands, Russia, United Arab Emirates, and the United Kingdom. As of December 31, 2017,2020, we leased approximately 1.81.7 million square feet worldwide, with approximately 38%36% in North America. The respective operating leases expire at various times through March 2028. In addition, in July 2015 we entered into a lease arrangement through March 2026 for approximately 63,000 square feet of space in the State of Washington.May 2031. Each leased facility is subject to an individual lease or sublease, which could provide various options
to renew/terminate the agreement or to expand/contract the leased space. We believe that our current offices and other facilities are in good condition and appropriately support our current business needs. We may improve, replace or reduce facilities as considered appropriate to meet the needs of our operations.
For additional information regarding obligations under our leases, see Note 16, 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report. For additional information regarding properties by geographic region, see Note 13, 12, Segments, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report.
ITEM 3. Legal Proceedings
The information set forth under the heading “Legal Proceedings” in Note 16, 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report, is incorporated herein by reference.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market PricesInformation
The principal market in which our common stock is traded is the New York Stock Exchange, or NYSE, under the symbol JNPR. The following table sets forth the high and low sales prices for our common stock for each full quarterly period within the two most recent fiscal years as reported on the NYSE.
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| High | | Low | | High | | Low |
First quarter | $ | 29.10 |
| | $ | 24.90 |
| | $ | 27.73 |
| | $ | 21.49 |
|
Second quarter | $ | 30.96 |
| | $ | 27.42 |
| | $ | 25.69 |
| | $ | 21.18 |
|
Third quarter | $ | 30.29 |
| | $ | 26.50 |
| | $ | 24.45 |
| | $ | 21.18 |
|
Fourth quarter | $ | 29.95 |
| | $ | 23.87 |
| | $ | 29.21 |
| | $ | 22.41 |
|
Stockholders
As of February 16, 2018,10, 2021, there were 832599 stockholders of record of our common stock and we believe a substantially greater number of beneficial owners who hold shares through brokers, banks or other nominees.
Dividends
We paid cash dividends of $0.10$0.20 per share each quarter, totaling $150.4 million and $152.5$264.1 million during the yearsyear ended December 31, 2017 and 2016, respectively.2020. In January 2018,2021, we declared an increase of oura quarterly cash dividend to $0.18of $0.20 per share of common stock to be paid on March 22, 20182021 to stockholders of record as of the close of business on March 1, 2018. This reflects an increase of 80% compared to previous quarterly dividends.2021. The declaration and amount of any future cash dividends are at the discretion of the Board of Directors and will depend on our financial performance, economic outlook, and any other relevant considerations.
Unregistered Securities Issued
On December 6, 2017,November 30, 2020, we issued 109,271823,310 shares of our common stock as consideration to an individualeight individuals in connection with the 2016 AppFormix acquisition.128 Technology acquisition in the fourth quarter of 2020.
The issuance of the above securities werewas exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated under the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides stock repurchase activity during the three months ended December 31, 20172020 (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(*) | | Maximum Dollar Value of Shares that May Still Be Purchased Under the Plans or Programs(*) |
October 1 - October 31, 2020 | — | | | $ | — | | | — | | | $ | 1,400.0 | |
November 1 - November 30, 2020 | — | | | $ | — | | | — | | | $ | 1,400.0 | |
December 1 - December 31, 2020 | 3.4 | | | $ | 21.83 | | | 3.4 | | | $ | 1,325.0 | |
Total | 3.4 | | | | | 3.4 | | | |
________________________________
(*) Shares were repurchased during the periods set forth in the table above under our stock repurchase program, which had been approved by the Board and authorized 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. For the majority of restricted stock units granted to executive officers of the Company, the number of shares issued on the date the restricted stock units vest is net of shares withheld to meet applicable tax withholding requirements. Although these withheld shares are not issued or considered common stock repurchases under our stock repurchase program and therefore are not included in the preceding table, they are treated as common stock repurchases in our financial statements as they reduce the number of shares that would have been issued upon vesting, see Note 10, Equity, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report.
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| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(*) | | Maximum Dollar Value of Shares that May Still Be Purchased Under the Plans or Programs(*) |
October 1 - October 31, 2017 | 0.6 |
| | $ | 25.14 |
| | 0.6 |
| | $ | 314.7 |
|
November 1 - November 30, 2017 | 8.5 |
| | $ | 25.51 |
| | 8.5 |
| | $ | 97.0 |
|
December 1 - December 31, 2017 | 3.4 |
| | $ | 28.40 |
| | 3.4 |
| | $ | — |
|
Total | 12.5 |
| | $ | 26.28 |
| | 12.5 |
| | |
| |
(*)
| Shares were repurchased during the periods set forth in the table above under our stock repurchase program, which had been approved by the Board and authorized us to purchase an aggregate of up to $4.4 billion of our common stock. In January 2018, the Board approved a new $2.0 billion share repurchase authorization, which replaces the existing authorization, and authorized Juniper to enter into an accelerated share repurchase program for up to $750 million. 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. See Note 18, Subsequent Events, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for further discussion.
|
Company Stock Performance
The information contained in this Company Stock Performance section shall not be deemed to be incorporated by reference into other U.S. Securities and Exchange Commission, or SEC, filings; nor deemed to be soliciting material or filed with the Commission or subject to Regulation 14A or 14C or subject to Section 18 of the Exchange Act. The comparisons in the performance graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.
The performance graph below shows the cumulative total stockholder return over a five-year period assuming the investment of $100 on December 31, 2012,2015, in each of Juniper Networks' common stock, the Standard & Poor's 500 Stock Index (“S&P 500”), and the NASDAQ Telecommunications Index (“IXTC”).Index. Total stockholder return assumes reinvestment of all dividends.
Stock Performance Graph
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
JNPR | $ | 100.00 | | | $ | 104.09 | | | $ | 106.46 | | | $ | 103.21 | | | $ | 97.40 | | | $ | 92.16 | |
S&P 500 | $ | 100.00 | | | $ | 111.95 | | | $ | 136.38 | | | $ | 130.39 | | | $ | 171.44 | | | $ | 202.96 | |
NASDAQ Telecommunications Index | $ | 100.00 | | | $ | 117.59 | | | $ | 141.37 | | | $ | 148.82 | | | $ | 169.12 | | | $ | 210.04 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
JNPR | $ | 100.00 |
| | $ | 114.74 |
| | $ | 114.48 |
| | $ | 143.68 |
| | $ | 149.55 |
| | $ | 152.97 |
|
S&P 500 | $ | 100.00 |
| | $ | 132.37 |
| | $ | 150.48 |
| | $ | 152.55 |
| | $ | 170.78 |
| | $ | 208.05 |
|
NASDAQ Telecommunications Index | $ | 100.00 |
| | $ | 127.29 |
| | $ | 141.93 |
| | $ | 134.42 |
| | $ | 158.06 |
| | $ | 190.02 |
|
ITEM 6. Selected Financial Data
The following selected consolidated financial data is derived from our audited Consolidated Financial Statements. As our operating results are not necessarily indicativeTable of future operating results, this data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the notes thereto in Item 8, Financial Statements and Supplementary Data, of this Report, which are incorporated herein by reference.
The information presented below reflects the impact of certain significant transactions and the adoption of certain accounting pronouncements, which makes a direct comparison difficult between each of the last five fiscal years. For a complete description of matters affecting the results in the tables below during the three years ended December 31, 2017, see Notes to Consolidated Financial Statements in Item 8 of Part II of this Report.
Consolidated Statements of Operations Data
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2017(1) | | 2016 | | 2015 | | 2014(2) | | 2013 |
| (In millions, except per share amounts) |
Net revenues | $ | 5,027.2 |
| | $ | 4,990.1 |
| | $ | 4,857.8 |
| | $ | 4,627.1 |
| | $ | 4,669.1 |
|
Gross margin | 3,072.1 |
| | 3,104.5 |
| | 3,078.6 |
| | 2,858.2 |
| | 2,941.4 |
|
Operating income (loss) | 848.1 |
| | 889.7 |
| | 912.0 |
| | (419.7 | ) | | 565.9 |
|
Net income (loss) | $ | 306.2 |
| | $ | 592.7 |
| | $ | 633.7 |
| | $ | (334.3 | ) | | $ | 439.8 |
|
Net income (loss) per share: | |
| | | | |
| | |
| | |
|
Basic | $ | 0.81 |
| | $ | 1.55 |
| | $ | 1.62 |
| | $ | (0.73 | ) | | $ | 0.88 |
|
Diluted | $ | 0.80 |
| | $ | 1.53 |
| | $ | 1.59 |
| | $ | (0.73 | ) | | $ | 0.86 |
|
Shares used in computing net income (loss) per share: | |
| | | | |
| | |
| | |
|
Basic | 377.7 |
| | 381.7 |
| | 390.6 |
| | 457.4 |
| | 501.8 |
|
Diluted | 384.2 |
| | 387.8 |
| | 399.4 |
| | 457.4 |
| | 510.3 |
|
Cash dividends declared per share of common stock | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.20 |
| | $ | — |
|
| |
(1)
| Fiscal year 2017 includes an estimated $289.5 million of tax expense related to the U.S. Tax Cuts and Jobs Act, and pre-tax restructuring charges of $65.6 million.
|
| |
(2)
| Fiscal year 2014 includes the following significant pre-tax items: impairment of goodwill of $850.0 million; restructuring and other charges of $208.5 million; gain on the sale of equity investments of $163.0 million; gain, net of legal fees in connection with the litigation settlement with Palo Alto Networks of $196.1 million; and gain on the sale of Junos Pulse of $19.6 million.
|
Consolidated Balance Sheet Data
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (In millions) |
Cash, cash equivalents, and investments | $ | 4,021.0 |
| | $ | 3,657.3 |
| | $ | 3,192.2 |
| | $ | 3,104.9 |
| | $ | 4,097.8 |
|
Working capital | 2,446.3 |
| | 2,236.0 |
| | 1,110.5 |
| | 1,297.2 |
| | 2,182.7 |
|
Goodwill | 3,096.2 |
| | 3,081.7 |
| | 2,981.3 |
| | 2,981.5 |
| | 4,057.7 |
|
Total assets(1) | 9,833.8 |
| | 9,656.5 |
| | 8,607.9 |
| | 8,273.6 |
| | 10,267.1 |
|
Short-term and long-term debt(1) | 2,136.3 |
| | 2,133.7 |
| | 1,937.4 |
| | 1,341.2 |
| | 993.7 |
|
Total long-term liabilities (excluding long-term debt)(2) | 1,278.4 |
| | 824.4 |
| | 594.1 |
| | 499.9 |
| | 529.8 |
|
Total stockholders' equity(3) | $ | 4,680.9 |
| | $ | 4,962.5 |
| | $ | 4,574.4 |
| | $ | 4,919.1 |
| | $ | 7,302.2 |
|
| |
(1)
| Fiscal year 2016 includes the adoption of Accounting Standards Update ("ASU") No. 2015-03 (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Other long-term assets and long-term debt in the prior years were retrospectively adjusted to conform to the required presentation.
|
| |
(2)
| Fiscal 2017 includes an estimated $394.0 million recorded in long-term income taxes payable related to the one-time transition tax as a result of the Tax Cuts and Jobs Act. |
| |
(3)
| Fiscal year 2017 includes the adoption of ASU No. 2016-09 (Topic 718) Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for forfeitures, among other things. The Company elected to account for forfeitures as they occur using a modified retrospective transition method, rather than estimating forfeitures, resulting in a cumulative-effect adjustment of $9.0 million, which increased the January 1, 2017 opening accumulated deficit balance on the Consolidated Balance Sheets.
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read with the Business in Item 1 of Part I and the Consolidated Financial Statements and the related notes in Item 8 of Part II of this Report.
The following discussion is based upon our Consolidated Financial Statements included elsewhere in this Report, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and spare parts, among other matters. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. Each of these decisions has some impact on the financial results for any given period. For further information about our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” section included in this “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
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. These sections should be read in conjunction with the more detailed discussion and analysis of our consolidated financial condition and results of operations in this Item 7, our “Risk Factors” section included in Item 1A of Part I, and our Consolidated Financial Statements and notes thereto included in Item 8 of Part II of this Report.
Executive Overview
Business and Market Environment
Juniper 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, efficiency and value through automation.
Our products are sold in three geographic regions: Americas; Europe, Middle East, and Africa, or EMEA; and Asia Pacific, or APAC. We sell our high-performance network products and service offerings across routing, switching, and security technologies. In addition to our products, we offer our customers services, including maintenance and support, professional services, and education and training programs. 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.
Further, our intent is to lead in the area of software solutions that simplify the operation of networks, and to allow our customers across our key verticals to deliver further value over their networks. We anticipate that our increased focus on software business models will result in an increase in software revenue as a percentage of total revenue over time.
In 2017, we began reporting revenue on the following verticals: Cloud, Telecom/Cable, and Strategic Enterprise, which we believe better aligns with our business model compared to our previous reporting of revenue by Service Provider and Enterprise. A summary of the types of customers included in our verticals is as follows:
Cloud: companies that are heavily reliant on the cloud for their business model’s success. As an example, customers in the cloud vertical can include cloud service providers as well as enterprises that provide software-as-a-service, infrastructure-as-a-service, or platform-as-a-service.
Telecom/Cable: includes wireline and wireless carriers and cable operators.
Strategic Enterprise: includes enterprises not included in the Cloud vertical. In particular, they are industries with high performance, high agility requirements, including financial services; national, federal, state, and local governments; as well as research and educational institutions.
We are focused on and continue to see significant opportunities from the implementation of cloud architectures, such as large public and private data centers, as well as distributed cloud infrastructure which resides in multiple, distributed data centers in order to place applications or services closer to end users, such as enabling security and networking as a service.
We believe the network needs for our customers in our Telecom/Cable and Cloud verticals are converging, as are those of Strategic Enterprises, as all of these customers recognize the need for high performance networks and leveraging the cloud for improved agility and greater levels of operating efficiency.
As these customers continue to grow, we believe their network architectures will continue to evolve. We believe our understanding of high performance networking technology, and our strategy, position us to capitalize on the industry transition to more automated, cost-efficient, scalable networks.
In routing, we believe that certain large cloud customers are starting to transition their wide area networks from scale-up to a scale-out architecture as they continue to add capacity, which has resulted and we expect may continue to result in a transition of these customers from purchasing our MX product family to our PTX product family. These architectural shifts have led to a near-term slowdown in our net revenues as in some cases there is a pause before the new architecture ramps as well as lower average selling prices for PTX product family compared to MX product family. We are unable to predict the exact timing or duration of the transition, as it will vary from customer to customer.
In switching, we see that certain large cloud customers who can rapidly scale based on increased demand are in the process of adopting 100-Gigabit connections, or 100G, resulting in certain large deployment delays at our largest cloud customers as they prepare for this adoption.
Despite these ongoing deployment delays and architectural shifts, we remain confident in our competitive position and strong relationships with these strategic customers. Our overall strategy with our cloud customers has not changed and we continue to execute against our innovation roadmap, which includes our plan to continue to grow our relevance and our business in the cloud vertical.
In 2017, we continued to execute on our product strategy, specifically around the cloud. We announced Cloud-Grade Networking, which we expect will accelerate agility and innovation with cloud customers. Cloud-Grade Networking builds on carrier-grade reach and reliability with enterprise-grade control and usability, bringing cloud-level agility and operational scale to networks everywhere. This announcement included two new foundational products:
Junos Node Slicing: converges multiple concurrent network functions on the same physical routing infrastructure, letting customers optimize their infrastructure while offering differentiated services with enhanced operational and administrative isolation within a single chassis.
Universal Chassis: a breakthrough system allowing customers to standardize on a hardware platform across their data center, core, and network edge. We believe the system will create significant value for our customers by enhancing their return on investment through reduced costs.
Aligning with our Cloud-Grade Networking initiative, we also announced a Programmable Photonic Layer solution, comprised of two main products: TCX1000 Series Programmable ROADM and proNX Optical Director. This solution is a disaggregated optical line system that is designed to offer greater levels of flexibility, cost control, and multi-layer visibility to packet-optical transport.
We also announced enhancements to our Software-Defined Secure Networks, or SDSN, platform and expanded our public cloud offering with the introduction of vSRX for Microsoft Azure. Our SDSN enhancements deliver pervasive security across multi-vendor environments, public clouds, and private clouds. Further, we announced enhancements to our Contrail Cloud platform that includes AppFormix integrations, pre-validated virtual network functions, and a managed solution of professional services offering to simplify our customers' transition to telco clouds.
In addition, we announced further cloud-based enhancements to our security portfolio. We introduced our Contrail Security product, a new solution specifically designed to allow enterprises and Software-as-a-Service, or SaaS, cloud providers to protect applications running in multiple cloud environments. We also completed the acquisition of Cyphort Inc., a software company that provides security analytics for advanced threat defense. This acquisition is expected to strengthen the capabilities of our cloud-based threat prevention service, Sky Advanced Threat Prevention, or Sky ATP, by increasing efficiency and performance and providing additional threat detection functionalities and analytics. We will continue to look at targeted and strategic acquisitions that we believe can complement our product portfolio, operations, R&D strategy or overall business.
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):
| | | As of and for the Years Ended December 31, | | As of and for the Years Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 | | 2020 | | 2019 | | $ Change | | % Change |
| | | | | | | $ Change | | % Change | | $ Change | | % Change | | | | | | | | |
Net revenues | $ | 5,027.2 |
| | $ | 4,990.1 |
| | $ | 4,857.8 |
| | $ | 37.1 |
| | 1 | % | | $ | 132.3 |
| | 3 | % | Net revenues | $ | 4,445.1 | | | $ | 4,445.4 | | | $ | (0.3) | | | — | % |
Gross margin | $ | 3,072.1 |
| | $ | 3,104.5 |
| | $ | 3,078.6 |
| | $ | (32.4 | ) | | (1 | )% | | $ | 25.9 |
| | 1 | % | Gross margin | $ | 2,573.7 | | | $ | 2,616.8 | | | $ | (43.1) | | | (2) | % |
Percentage of net revenues | 61.1 | % | | 62.2 | % | | 63.4 | % | | | | | | | | | Percentage of net revenues | 57.9 | % | | 58.9 | % | |
Operating income | $ | 848.1 |
| | $ | 889.7 |
| | $ | 912.0 |
| | $ | (41.6 | ) | | (5 | )% | | $ | (22.3 | ) | | (2 | )% | Operating income | $ | 353.1 | | | $ | 442.2 | | | $ | (89.1) | | | (20) | % |
Percentage of net revenues | 16.9 | % | | 17.8 | % | | 18.8 | % | | | | | | | | | Percentage of net revenues | 7.9 | % | | 9.9 | % | |
Net income | $ | 306.2 |
| | $ | 592.7 |
| | $ | 633.7 |
| | $ | (286.5 | ) | | (48 | )% | | $ | (41.0 | ) | | (6 | )% | Net income | $ | 257.8 | | | $ | 345.0 | | | $ | (87.2) | | | (25) | % |
Percentage of net revenues | 6.1 | % | | 11.9 | % | | 13.0 | % | | | | | | | | | Percentage of net revenues | 5.8 | % | | 7.8 | % | |
Net income per share | | | | | | | | | | | | | | Net income per share | |
Basic | $ | 0.81 |
| | $ | 1.55 |
| | $ | 1.62 |
| | $ | (0.74 | ) | | (48 | )% | | $ | (0.07 | ) | | (4 | )% | Basic | $ | 0.78 | | | $ | 1.01 | | | $ | (0.23) | | | (23) | % |
Diluted | $ | 0.80 |
| | $ | 1.53 |
| | $ | 1.59 |
| | $ | (0.73 | ) | | (48 | )% | | $ | (0.06 | ) | | (4 | )% | Diluted | $ | 0.77 | | | $ | 0.99 | | | $ | (0.22) | | | (22) | % |
Cash dividends declared per common stock | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | — |
| | — | % | | $ | — |
| | — | % | |
| | | | | | | | | | | | | | |
Operating cash flows | $ | 1,260.1 |
| | $ | 1,107.2 |
| | $ | 899.5 |
| | $ | 152.9 |
| | 14 | % | | $ | 207.7 |
| | 23 | % | Operating cash flows | $ | 612.0 | | | $ | 528.9 | | | $ | 83.1 | | | 16 | % |
Stock repurchase plan activity | 719.7 |
| | 312.9 |
| | 1,142.5 |
| | 406.8 |
| | 130 | % | | (829.6 | ) | | (73 | )% | Stock repurchase plan activity | $ | 375.0 | | | $ | 550.0 | | | $ | (175.0) | | | (32) | % |
Cash dividends declared per common stock | | Cash dividends declared per common stock | $ | 0.80 | | | $ | 0.76 | | | $ | 0.04 | | | 5 | % |
DSO(*) | 62 |
| | 68 |
| | 53 |
| | (6 | ) | | (9 | )% | | 15 |
| | 28 | % | DSO(*) | 71 | | | 66 | | | 5 | | | 8 | % |
| | | | | | | | | | | | | | |
Deferred revenue | $ | 1,539.3 |
| | $ | 1,481.1 |
| | $ | 1,168.1 |
| | $ | 58.2 |
| | 4 | % | | $ | 313 |
| | 27 | % | Deferred revenue | $ | 1,285.8 | | | $ | 1,223.4 | | | $ | 62.4 | | | 5 | % |
Product deferred revenue | $ | 334.2 |
| | $ | 322.9 |
| | $ | 240.3 |
| | $ | 11.3 |
| | 3 | % | | $ | 82.6 |
| | 34 | % | Product deferred revenue | $ | 104.7 | | | $ | 132.6 | | | $ | (27.9) | | | (21) | % |
Service deferred revenue | | Service deferred revenue | $ | 1,181.1 | | | $ | 1,090.8 | | | $ | 90.3 | | | 8 | % |