Harmonic Annual Report 2017

Plain-text annual report

Table of Content 2017 Annual ReportTable of ContentUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_______________________________________________________Form 10-K_______________________________________________________(Mark One)ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2017¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File No. 000-25826_______________________________________________________HARMONIC INC.(Exact name of Registrant as specified in its charter)Delaware77-0201147(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)4300 North First StreetSan Jose, CA 95134(408) 542-2500(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)Securities registered pursuant to section 12(b) of the Act:Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, par value $.001 per shareThe NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None_______________________________________________________Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ýIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No ýIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No ¨Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrantwas required to submit and post such files). Yes ý No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ýIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the ExchangeAct. (Check one):Large accelerated filer¨Accelerated filerýNon-accelerated filer¨ (Do not check if a smaller reporting company)Smaller reporting company¨Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ýBased on the closing sale price of the Common Stock on The NASDAQ Global Select Market on June 30, 2017, the aggregate market value of the votingCommon Stock held by non-affiliates of the Registrant was approximately $157,264,000. Shares of Common Stock held by each executive officer anddirector and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to beaffiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, was 84,097,572 on February 28, 2018._______________________________________________________DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the Registrant’s 2017 Annual Meeting of Stockholders (which will be filed with the Securities and ExchangeCommission within 120 days of the end of the fiscal year ended December 31, 2017) are incorporated by reference in Part III of this Annual Report onForm 10-K.Table of ContentHARMONIC INC.FORM 10-KTABLE OF CONTENTS PagePART IITEM 1BUSINESS4ITEM 1ARISK FACTORS13ITEM 1BUNRESOLVED STAFF COMMENTS31ITEM 2PROPERTIES32ITEM 3LEGAL PROCEEDINGS32ITEM 4MINE SAFETY DISCLOSURE33PART IIITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES33ITEM 6SELECTED FINANCIAL DATA35ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS36ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK50ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA52ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE100ITEM 9ACONTROLS AND PROCEDURES100ITEM 9BOTHER INFORMATION100PART IIIITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE101ITEM 11EXECUTIVE COMPENSATION101ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS101ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE101ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES101PART IVITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES101ITEM 16FORM 10-K SUMMARY104SIGNATURES105 2Table of ContentForward Looking StatementsSome of the statements contained in this Annual Report on Form 10-K are forward-looking statements that involve risk and uncertainties. Thestatements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identifyforward-looking statements by terminology such as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,”“potential,” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to,statements regarding:•developing trends and demands in the markets we address, particularly emerging markets;•economic conditions, particularly in certain geographies, and in financial markets;•new and future products and services;•capital spending of our customers;•our strategic direction, future business plans and growth strategy;•industry and customer consolidation;•expected demand for and benefits of our products and services;•seasonality of revenue and concentration of revenue sources;•expectations regarding the impact of our acquisition of Thomson Video Networks (“TVN”);•expectations regarding our CableOS software-based CCAP solutions;•expectations regarding the impact of the Warrant issued to Comcast on our business;•potential future acquisitions and dispositions;•anticipated results of potential or actual litigation;•our competitive environment;•the impact of our restructuring plans;•the impact of governmental regulation;•anticipated revenue and expenses, including the sources of such revenue and expenses;•expected impacts of changes in accounting rules;•expectations regarding the usability of our inventory and the risk that inventory will exceed forecasted demand;•expectations and estimates related to goodwill and intangible assets and their associated carrying value;•use of cash, cash needs and ability to raise capital; andThese statements are subject to known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially fromthose implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in “RiskFactors” beginning on page 13 in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K are basedon information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements. The terms “Harmonic,”“Company,” “we,” “us,” “its,” and “our”, as used in this Annual Report on Form 10-K, refer to Harmonic Inc. and its subsidiaries and its predecessors as acombined entity, except where the context requires otherwise.3Table of ContentPART IItem 1.BUSINESSWe develop and sell (i) versatile and high performance video delivery software, products, system solutions and services that enable our customers toefficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and “over-the-top” (OTT) video services to consumer devices,including televisions, personal computers, laptops, tablets and smart phones and (ii) cable access solutions that enable cable operators to more efficiently andeffectively deploy high-speed internet, voice and video services to consumers’ homes.We operate in two segments, Video and Cable Edge. Our Video business sells video processing and production and playout solutions and servicesworldwide to cable operators and satellite and telecommunications (telco) pay-TV service providers, which we refer to collectively as “service providers,”and to broadcast and media companies, including streaming new media companies. Our Video business infrastructure solutions are delivered either throughshipment of our products, software licenses or as software-as-a-service (“SaaS”) subscriptions. Our Cable Edge business sells cable access solutions andrelated services, including our CableOS software-based Converged Cable Access Platform (CCAP) solutions, primarily to cable operators globally.Across our two business segments, we derived approximately 48% of our revenue from the Americas in 2017. The Europe, Middle East and Africa(EMEA) and Asia Pacific (APAC) regions accounted for the remaining 33% and 19% of our 2017 revenue, respectively.Harmonic was initially incorporated in California in June 1988, and was reincorporated in Delaware in May 1995. Our principal executive offices arelocated at 4300 North First Street, San Jose, California 95134. Our telephone number is (408) 542-2500. Our Internet website is http://www.harmonicinc.com.Other than the information expressly set forth in this Annual Report on Form 10-K, the information contained or referred to on our website is not part of thisreport.Industry Overview and Market TrendsVideo BusinessWe believe our customers must continue to employ innovative technologies and services to address key trends in the dynamic video industry.▪Demand for Video Services Anytime, Anywhere, on any Device. In our ubiquitous multiscreen video environment, video programming andcontent needs to be transformed into multiple formats, bit rates and resolutions for display on a broad range of devices.▪Demand for High Quality Video. Consumer demand for high quality video anytime, anywhere and on any device requires ever-increasingbandwidth capacity in service providers’ networks, as well as technology that maximizes network bandwidth efficiency. With the advent ofUltra High Definition (Ultra HD) televisions and OTT services increasingly being rendered in “4K” high resolution and consumingapproximately four times the bandwidth of traditional HD channels, we believe next generation compression technologies, such as HighEfficiency VideoCompression (HEVC) or advances in H.264/AVC codecs, as well as increasing requirements for HDR encoding, will continueto remain a high priority for distributors of video.▪Streaming Video Service. Consumer demand for video download and streaming services from new media companies such as Netflix, Hulu,Google (YouTube), Amazon (Prime Video) and Apple (iTunes) continue to experience significant global growth. These and other similarservices aggregate third-party and original content and stream video “over-the-top” (OTT) to any Internet-connected device utilizing Internetservice providers’ networks at no incremental infrastructure cost to the consumer.▪Time-Shifted Viewing. “Time-shifting” technologies include digital video recorders (DVRs), cloud and network DVRs (cDVR and nDVR) thatallow a subscriber to store programming on the service provider’s servers or in the cloud, and video-on-demand (VOD) services.In response to these trends and the success of new media OTT streaming companies, as well as the growing trend of “cord-cutting” (i.e., consumerscanceling traditional pay-TV subscriptions in favor of streaming services) and the increasing number of “cord-nevers” (i.e., consumers who have never had apay-TV subscription):4Table of Content•service providers and broadcast and media companies continue to provide more of their own OTT streaming video services, including OTTstreaming of live (or “linear”) television programming;•service providers are competing to offer higher quality video signals in HD, including evolving initiatives to deliver video in 4K Ultra HDresolution;•service providers are developing and expanding their content delivery and Internet Protocol (IP) networks, and increasing the capacity andefficiency of their networks with investments in various delivery infrastructure technologies to, among other things, maximize video qualityand minimize bandwidth utilization;•service providers continue to consolidate to achieve greater economies of scale and subscriber concentration, and acquire media companies toexpand their content libraries and capabilities to develop original content;•service providers continue to enhance and differentiate their content offerings, either through in-house development of new content or throughacquisitions of existing content brands; and•service providers have an ongoing need, despite the migration of traffic to OTT, to provide services over their existing broadcast distributioninfrastructures.We believe that the delivery of video over IP will continue to change traditional video viewing habits and distribution methods and may alter thetraditional advertising and subscription business models of major service providers.Our Video MarketsService Providers•Cable Operators. Cable operators continue to focus on various initiatives to improve and differentiate their service offerings from competingservice providers, including: bundled digital video, voice and high speed data services; expansion of VOD libraries and on-demand andstreaming service offerings; upgraded consumer-facing applications; video delivery over IP to broadband enabled consumer devices; andcapacity enhancement of high-speed data services.•Satellite Operators. Satellite operators around the world have established digital television services that serve tens of millions of subscribers,with the ability to provide tens of thousands of linear channels. We believe these linear services will continue to grow, particularly in emergingmarkets, while, in parallel, satellite operators launch new streaming services, such as Sling TV and DirecTV Now, to address younger generationviewers and new consumption habits.•Telcos. Telcos have established video offerings to successfully compete in the video marketplace, including high-quality HD content, largerVOD libraries, time-shifting television services, bundled voice, data and video packages and, more recently, streaming services. In many cases,telcos are making significant infrastructure investments to expand their video offerings into IP services and gain market share, while certaintelcos are also acquiring satellite and/or cable companies to achieve market reach and scale.Broadcast and Media Companies•Network broadcasters, programmers and content owners require video contribution and distribution solutions to transmit live programming ofnews and sports to their studios for subsequent broadcast, and deliver the same programming and content to service providers for distribution totheir subscribers. Broadcasters generally produce their own news and sports highlight content, along with hundreds of channels of networkprogramming that is played-to-air under strict reliability requirements using playout servers and software.•With broadcast and media companies continuing to expand their offerings to support a wide range of live and linear content and makingcontent available in higher quality video formats and on-demand, we believe these trends are accelerating demand for functionally collapsedplayout systems with integrated media orchestration software, as well as increasing demand for media servers and video-optimized storagesolutions equipped to support higher resolution formats. In addition, in order to achieve faster time-to-market and reduce operational costs, webelieve content providers are adopting cloud-based technologies and transitioning portions of their operations into public cloud environments,thereby enabling expanded services at a more rapid pace, the distribution of video directly to consumers or to distributors over IP and publicnetworks, and more efficient and scalable global operations.•In the terrestrial broadcasting market, while broadcasters in various countries that have not yet completed converting from analog to digitaltransmission continue with change-over efforts, operators in numerous other5Table of Contentcountries around the world are adopting the next generation of digital transmission technologies, such as the DVB-T2 standard and ATSC 3.0standards. The ongoing conversion from analog to digital transmission and the adoption of next-generation transmission standards provides theopportunity to deliver new channels, HD and Ultra HD services, premium content, and interactive services.Over-the-Top (OTT)•According to a recent Cisco study, IP video traffic accounts for a significant majority of Internet traffic globally, and video traffic will onlycontinue to increase for the foreseeable future. We believe service providers and broadcast and media companies with OTT services andofferings will continue to require high-quality video processing solutions and new technologies in order to process and distribute large amountsof live and VOD content from a wide variety of sources to a broad array of consumer devices, and to optimize adaptive bitrate video streamingquality and bandwidth utilization.•With the continued proliferation of OTT streaming content and program channels similar to channels currently available from service providers,monetizing this content through the use of national, regionalized and personalized advertising delivered to the varied devices of individualviewers has become a key area of focus for companies with OTT offerings. We believe OTT ad insertion and other related content customizationsolutions will continue to attract increased investments from OTT companies.Emerging Markets•With a growing middle class across emerging markets, we believe the Pay-TV business is poised for growth over the coming decade in the AsiaPacific region, South Asia, the Middle East, Africa and Central and South America. We currently derive a meaningful portion of our revenuefrom countries in emerging markets.•Many consumers who are entering the middle class are now able to afford a monthly video service to gain access to their favorite programs andmovies. We believe some of the leading video service providers serving emerging markets will experience high subscriber growth rates and maybecome worldwide industry leaders.•We believe subscribers in these markets will demand increasingly sophisticated video services over time as consumer consumption trends inthese markets track to those in more developed markets. As a result, we believe that the infrastructure and technology investments of theseservice providers and new market entrants are likely to grow significantly for the foreseeable future.•Media companies addressing emerging markets are aggressively investing in the creation of new content, particularly content that is localizedand responsive to consumer demands, with the goal of creating strong brands and a growing, loyal customer base. We believe that this growth incontent creation will require these media companies to significantly increase their investments in video storage, processing and relatedtechnologies.Video Infrastructure Technology Trends•Network Function Virtualization. We believe there is industry momentum towards network function virtualization, whereby core video chainfunctions are being re-engineered and collapsed to run on the latest Intel processors in order to leverage high-performance and scalableappliance-based hardware, and as software-only virtual instances designed to run on private or public cloud environments.•Unified Video Playout & Processing Systems. In light of more complicated workflows inherent in managing the delivery of greater quantities ofcontent across multiple formats to a growing population of set-top-boxes and consumer electronic devices, we believe the industry is movingtowards unified video processing systems. These systems integrate what had been historically discrete hardware video processing functions intosoftware, enabling significant cost efficiencies, greater flexibility and improved business agility across the entire video workplace. A unifiedvideo processing system also requires software-based channel origination and playout capabilities, with integrated functionality such asgraphics and branding insertion and media orchestration, and an integrated control system that streamlines playout processes, improves videoquality, enables time-shift and cDVR functionality, while reducing server overhead. Also, when playout functionality is deployed to the cloud,the compression and OTT packaging and origin functionality (in addition to the capability to distribute over traditional broadcast distributionnetworks) associated with the playout will necessarily also need to be deployed in the cloud.•By combining historically discrete video chain functions into a unified playout and distribution system where content can be ingested,formatted, stored, played-to-air and compressed, packaged and delivered, we believe functionally collapsed video playout infrastructures withintegrated control systems will enable content providers6Table of Contentto produce more channels in higher resolution formats faster and more cost-effectively, and provide content in the widest possible range offormats.Cable Edge BusinessIndustry ChallengesCable operators continue to face challenges from the rapid growth of demand for broadband bandwidth in their networks, driven primarily by:•more users with more connected devices and applications;•bundled digital video, voice and high speed data services; and•bandwidth-intensive VOD and OTT streaming video services, and cloud applications.In addition, the operation of network infrastructure is space, power and personnel intensive. Hardware-centric networks can also be expensive to updateor replace. To remain competitive, especially in the face of heightened competition from non-cable service providers such as telcos to deliver gigabit datarates, cable operators need to incur significant capital expenditures to upgrade existing equipment and network technologies.Technology Trends•CCAP. In order to deliver gigabit data rates, cable operators are aggressively driving broadband access technologies such as the ConvergedCable Access Platform (CCAP) architecture. The CCAP architecture combines edge “quadrature amplitude modulation” (QAM) and “cablemodem termination system” (CMTS) functions in a single solution in order to combine resources for video and data services.•DOCSIS 3.1. We believe the cable industry will move rapidly to DOCSIS 3.1, which enables increased bandwidth data transfer over existingbroadband infrastructure.•Virtualization. We believe cable operators are moving toward more software-driven architectures. Virtualized software solutions that aredecoupled from underlying hardware and run on commercial off-the-shelf (COTS) servers allow for significantly increased efficiencies,upgradability, configuration flexibility, service agility and scalability not feasible with hardware-centric approaches. We believe a software-based, centralized CCAP-based system can significantly reduce cable headend costs, especially costs related to physical space and powerconsumption, and increase operational efficiency, and that the deployment of these systems will be an important step in cable operators’transition to all-IP networks.•Distributed Architecture. In addition to centralized CCAP systems, we believe there is growing interest in distributed Remote PHY solutions,particularly in competitive gigabit service markets where cable operators are competing with fiber-to-the-home (FTTH) services and areextending fiber networks deeper into their access networks. A Remote PHY architecture, which involves COTS servers running virtualizedCCAP core software at a headend and the distribution of Remote PHY nodes closer to end users, alleviates the power and space requirements ofcentralized systems at headend sites due to the fact that the RF processing is distributed into the field outside of the headend. We believe thisdistributed architecture will enable service providers to efficiently scale to support data and IP video growth.Our Products and SolutionsVideo Processing and Delivery SolutionsWe offer a range of products and solutions that address the demand and market trends shaping our industry, including next-generation software-basedmedia processing platforms. Our video processing solutions, which include network management software and application software and hardware products,provide our customers with the ability to acquire a variety of signals from different sources and in different protocols in order to deliver a variety of real-timeand stored content to their subscribers for viewing on a broad range of devices.Cloud media processing. An increasing number of service providers and media professionals are looking to cloud-based architectures for their mediaprocessing workflows, which is a fundamental shift from traditional, hardware-based approaches. We have addressed, and continue to address, this changinglandscape with our VOS Software Cluster (formerly VOS Cloud) software application, which transforms traditional video preparation and deliveryarchitectures into a fully integrated set of cloud-native functions, accelerating the time to market for new broadcast and OTT services. Our VOS 360 offeringprovides these same capabilities through our software-as-a-service solution. We are also seeing customer demand for cloud-like7Table of Contentfunctionality but for deployment in traditional data centers, without the complexity and cost associated with a formal private cloud infrastructure. We addresscustomers with these needs with our VOS Software Cluster software application which is compatible with traditional data center architectures.Broadcast and distribution encoders. Our high-performance encoders compress video, audio and data channels to low bit rates while maintaining highvideo quality. Our latest software-based Electra encoders can deliver video in multiple formats, including standard, HD and Ultra HD, and in any videocompression standard, including MPEG-2, MPEG-4 AVC and HEVC. This capability allows the encoders to converge workflows targeted for all forms ofvideo delivery, whether broadcast, cable, satellite, IPTV or OTT. Today’s Electra and VOS solutions all leverage the Harmonic PURE Compression Engine, asoftware-based technology that incorporates many of the encoding algorithm and processing techniques developed by Harmonic over the past two decades.The benefits of the PURE Compression Engine include a faster rate of video quality innovation, the ability to dynamically balance workflow efficiency andresource utilization, and improved investment protection. Our EyeQ real-time content-aware encoding solution is an optional enhancement for systemsfeaturing PURE Compression. The EyeQ compression solution leverages the mechanics of the human eye to assess video quality and optimize encodingparameters in real time. Our VOS Software Cluster software application supports a subset of broadcast and distribution encoding functionality.Contribution encoders. Our ViBE contribution encoders provide broadcasters with video compression solutions for real-time news gathering, livesports coverage and other remote events, and enable our customers to deliver these feeds to their studios for further processing. Our latest models can encodeHD and Ultra HD video signals in HEVC or AVC 4:2:2 10-bit resolution, enabling the transmission of very high-quality video with low latency. Broadcastersand other operators also use our contribution encoders for delivery of their programming to their customers, which are typically cable, telco and satelliteoperators.Multiscreen transcoders and stream processing. We offer high-density, real-time transcoding of video for broadcast and OTT delivery with our ElectraXT Xtream transcoder. This scalable platform is designed to accelerate time to market for operators faced with fast channel lineup growth and a rise inmultiscreen applications. Our latest ProStream X and ProStream XVM real-time stream processing systems are software-based and provide high-performance,high-throughput processing for mission-critical IP video delivery applications, including multiplexing, scrambling, splicing and blackout switching. OurVOS Software Cluster software application supports multiscreen transcoding and stream processing.Multiscreen delivery. Our VOS Software Cluster software application enables the packaging and delivery of high-quality OTT services, including livestreaming, VOD, catch-up TV, start-over TV, nDVR and cDVR services through hypertext transfer protocol (HTTP) streaming to any device. Capabilitiesinclude real-time and file-based transcoding, stream packaging, and multiscreen workflow management, as well as support for digital rights management(DRM) processes with a number of DRM partners. Our VOS Software Cluster application ingests transcoded, segmented and encrypted output from Electrasystems to provide high-volume live adaptive bitrate streaming and the delivery of time-shifted services.Decoders and descramblers. Our family of ProView integrated receivers-decoder (IRD) products allows service providers to acquire content deliveredvia satellite, IP or terrestrial networks for distribution to their subscribers. These products, including the ProView 7100 and ProView 8100, are used bybroadcasters to decode signals backhauled from live news and sporting events in contribution applications, as well as by content owners looking to distributetheir content in a controlled manner to a large base of video service providers. Our VOS Software Cluster software applications support a subset of thesedecoding and descrambling capabilities.Video servers. Our video playout solutions, including media orchestration software, are based on scalable video servers used by broadcast and mediacompanies to create and playout television channels. Our Spectrum family of video server systems are used by broadcast and media companies to create play-to-air television channels. Our customers typically use these video server products to record incoming content from either live feeds or from tapes, encodingthat content in real-time into standard media files that are then stored in the server’s file system until the content is needed for playback as part of a scheduledplaylist. Clips stored in the server are decoded in real-time and played-to-air according to a playout schedule in a frame-accurate, back-to-back manner tocreate a seamless television channel. Our Spectrum servers support SD, HD and Ultra HD programming, as well as many different media formats. Our Polarismedia orchestration software solutions work with our Spectrum products and provide our customers with playout management and control tools for channel-in-a-box and integrated channel playout applications. Our VOS Software Cluster software application supports a subset of these video server functionalities.Video-optimized StorageMediaGrid. Our MediaGrid shared storage system is a scale-out, network-attached storage system with a built-in media file system optimized for mediaproduction workflows. Architected as a clustered storage system with a distributed file system,8Table of ContentMediaGrid provides highly scalable storage capacity and access bandwidth to support demanding media production applications, such as video editing,content transformation and media library management. In addition, MediaGrid systems are increasingly being employed for VOD, time-shifted televisionservices and OTT adaptive bitrate streaming. Our VOS Software Cluster software application relies on external infrastructure for storage, and is compatiblewith MediaGrid video-optimized storage when deployed into a customer’s traditional data center environment.Unified Video Playout and Processing SaaSCloud-native SaaS solutions. Our VOS360 service provides the functionality of our VOS Software Cluster in public cloud environments and isdesigned to be deployable in any public cloud infrastructure. With the VOS360 service, the maintenance operations of the VOS Software Cluster are theresponsibility of Harmonic.Cable Edge Products and SolutionsSoftware-Based CCAP Solution. As demand continues to rapidly grow for high-speed broadband services such as OTT streaming, VOD, time-shift TVand cloud DVR, we believe we can help cable operators take advantage of this opportunity with our CableOS software-based CCAP, an end-to-end cableaccess solution that we believe delivers unprecedented scalability, agility and cost savings. CableOS enables the migration to multi-gigabit broadbandcapacity and the fast deployment of DOCSIS 3.1 data, video and voice services. We believe the solution resolves space and power constraints in the headendand hub, eliminates dependence on hardware upgrade cycles, and reduces total cost of ownership. Our CableOS solution can be deployed based on acentralized, distributed Remote PHY or hybrid architecture.Edge QAM products. Our Narrowcast Services Gateway (NSG) products are fully integrated edge gateway products that integrate routing, multiplexing,scrambling and modulation into a single package for the delivery of narrowcast services to subscribers over cable networks. NSG systems allow cableoperators to deliver IP signals from the headend to the edge of the network for subsequent modulation onto a HFC network. Originally developed for VODapplications, the NSG has evolved to support multiple applications, including switched digital video and modular CMTS applications, as well as large-scaleVOD deployments.CCAP systems are expected to, over time, replace and make obsolete current cable edge QAM products, as well as current CMTS products, since fullycompliant CCAP-based solutions will combine the functionality of these products into one solution. Since we historically have not addressed the CMTSmarket, we believe that our CableOS solution, which includes a software-based CMTS, will have an opportunity to be sold into a significantly larger andgrowing market created by the CCAP standard as well as the distributed Remote PHY architecture, with Remote PHY nodes replacing traditional opticalnodes.Technical Support and Professional ServicesWe provide maintenance and support services to most of our customers under service level agreements that are generally renewed on an annual basis.We also provide consulting, implementation and integration services to our customers worldwide. We draw upon our expertise in broadcast television,communications networking and compression technology to design, integrate and install complete solutions for our customers, including integration withthird-party products and services. We offer a broad range of services, including program management, technical design and planning, building and sitepreparation, integration and equipment installation, end-to-end system testing and comprehensive training.CustomersWe sell our products to a variety of cable, satellite and telco, and broadcast and media companies. Set forth below is a representative list of oursignificant end user and integrator/reseller customers, based, in part, on revenue during 2017.9Table of ContentUnited StatesInternationalAT&TAccenture BVCharter CommunicationsBell Expressvu Inc.ComcastCom HemCox CommunicationGroupe Canal +SADigitalGlueHuawei Technnologies Co. Ltd.Dish NetworkM7 Group SAHeartland Video SystemsNagravision SA Kudelski GroupIon Media NetworksNetorium GMBHTurner BroadcastingSCSK Corp.UnivisionSky Servicos De Banda Larga LTDASales to our 10 largest customers in 2017, 2016 and 2015 accounted for approximately 24%, 28% and 32% of our net revenue, respectively. Althoughwe continue to seek to broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industryconsolidation and customer concentration.During 2017 and 2016, no single customer accounted for more than 10% of our net revenue. During 2015, revenue from Comcast accounted forapproximately 12% of our net revenue, respectively. The loss of any significant customer, or any material reduction in orders from any significant customer,or our failure to qualify our new products with any significant customer could materially and adversely affect our operating results, financial condition andcash flows. In addition, we are involved in most quarters in one or more relatively large individual transactions. A decrease in the number of relatively largerindividual transactions in which we are involved in any quarter could adversely affect our operating results for that quarter.Sales and MarketingIn the U.S. and internationally, we sell our products through our own direct sales force, as well as through independent resellers and systems integrators.Our direct sales team is organized geographically and by major customers and markets to support customer requirements. Our principal sales offices outsideof the U.S. are located in Europe and Asia, and we have a support center in Switzerland to support our international customers and operations. Ourinternational resellers are generally responsible for importing our products and providing certain installation, technical support and other services tocustomers in their territory after receiving training from us.Our direct sales force and resellers are supported by a highly trained technical staff, which includes application engineers who work closely with ourcustomers to develop technical proposals and design systems to optimize system performance and economic benefits for our customers. Our technical supportteams provide a customized set of services, as required, for ongoing maintenance, support-on-demand and training for our customers and resellers, both in ourfacilities and on-site.Our product management organization develops strategies for product lines and markets and, in conjunction with our sales force, identifies theevolving technical and application needs of customers so that our product development resources can be most effectively and efficiently deployed to meetanticipated product requirements. Our product management organization is also responsible for setting price levels, demand forecasting and general supportof the sales force, particularly at major accounts.Our corporate marketing organization is responsible for building awareness of the Harmonic brand in our markets and driving engagement with ourstrategies, solutions and products. The group develops all of our corporate messaging and manages all customer and industry communication channels,including public relations, Web and social media, events and trade shows, as well as demand generation marketing campaigns in conjunction with our salesforce.Manufacturing and SuppliersWe rely on third-party contract manufacturers to assemble our products and the subassemblies and modules for our products. In 2003, we entered intoan agreement with Plexus Services Corp. to act as our primary contract manufacturer. Plexus currently provides us with a majority, of the products wepurchase from our contract manufacturers. This agreement has automatic annual renewals, unless prior notice for nonrenewal is given, and has beenautomatically renewed for a term expiring in October 2018. We do not generally maintain long-term agreements with any of our contract manufacturers.Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained10Table of Contentfrom a sole supplier or a limited group of suppliers. While we expend considerable efforts to qualify additional component sources, consolidation of suppliersin the industry and the small number of viable alternatives have limited the results of these efforts. We do not generally maintain long-term agreements withany of our suppliers.Intellectual PropertyAs of December 31, 2017, we held 74 issued U.S. patents and 46 issued foreign patents and had 94 patent applications pending. Although we attempt toprotect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets andother measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated,circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patentapplications will be issued with the claims, or the scope of the claims, sought by us, if at all. We cannot assure you that others will not develop technologiesthat are similar or superior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright andtrade secret protection may be unavailable or limited in which we do business or may do business in the future.We enter into confidentiality or license agreements with our employees, consultants, vendors and customers as needed, and generally limit access to,and distribution of, our proprietary information. However, no assurances can be given that these actions will prevent misappropriation of our technology. Inaddition, if necessary, we are prepared to take legal action, in the future, to enforce our patents and other intellectual property rights, to protect our tradesecrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any such litigationcould result in substantial costs and diversion of resources, including management time, and could negatively affect our business, operating results, financialposition and cash flows.In order to successfully develop and market our products, we may be required to enter into technology development or licensing agreements with thirdparties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that suchagreements can be negotiated on reasonable terms or at all. The failure to enter into technology development or licensing agreements, when necessary, couldlimit our ability to develop and market new products and could harm our business.BacklogWe schedule production of our products and solutions based upon our backlog, open contracts, informal commitments from customers and salesprojections. Our backlog consists of firm purchase orders by customers. Approximately 76% of our backlog is projected to be converted to revenue within arolling one-year period. Our backlog, including deferred revenue at December 31, 2017 was $224.4 million. Delivery schedules on such orders may bedeferred or canceled for a number of reasons, including reductions in capital spending by our customers or changes in specific customer requirements. Inaddition, due to annual capital spending budget cycles at many of our customers, the amount of our backlog at any given time is not necessarily indicative ofactual revenues for any succeeding period.CompetitionThe markets for video infrastructure systems are extremely competitive and have been characterized by rapid technological change and decliningaverage selling prices. The principal competitive factors in these markets include product performance, functionality and features, reliability, pricing, breadthof product offerings, brand recognition and awareness, sales and distribution capabilities, technical support and services, and relationships with endcustomers. We believe that we compete favorably in each of these categories.Our competitors in our Video business segment include vertically integrated system suppliers, such as Arris Group, Cisco Systems and Ericsson (whichrecently announced the sale of majority stake in its video technology business to a private equity firm), and, in certain product lines, other companiesincluding ATEME and Elemental Technologies (an Amazon Web Services company). With respect to production and playout products, competitors includeEvertz Microsystems, EVS, Grass Valley (a Belden brand) and Imagine Communications. Our competitors in our Cable Edge business include Arris, CasaSystems and Cisco Systems. In the OTT market, our competitors include internally developed technologies and solutions by companies such as Netflix,Facebook, Google and Microsoft, as well as end-to-end online video platforms such as Brightcove, who provide comprehensive OTT infrastructure solutions,some of which overlap with our products and services.Consolidation in the industry has led to the acquisition of a number of our historic competitors over the last several years.11Table of ContentFor example, Motorola Home, BigBand Networks and C-Cor were acquired by Arris; NDS and Scientific Atlanta were acquired by Cisco Systems; Envivioand Tandberg Television were acquired by Ericsson; Elemental Technologies was acquired by Amazon; and Miranda Technologies and Grass Valley wereacquired by Belden Inc. Consequently, some of our principal competitors are substantially larger and have greater financial, technical, marketing and otherresources than we have.Research and DevelopmentWe have historically devoted a significant amount of our resources to research and development. Research and development expenses in 2017, 2016and 2015 were approximately $96.0 million, $98.4 million and $87.5 million, respectively. Research and development expenses as a percent of revenue in2017, 2016 and 2015 were approximately 26.8%, 24.2% and 23.2%, respectively. Our internal research and development activities are conducted primarilyin the United States (California, Oregon and New Jersey), France, Israel and Hong Kong. In addition, a portion of our research and development is conductedthrough third-party partners with engineering resources in Ukraine and in India.Our research and development program is primarily focused on developing new products and systems, and adding new features and other improvementsto existing products and systems. Our development strategy is to identify features, products and systems, in both software and hardware solutions, that are, orare expected to be, needed by our customers. For our Video business segment, our current research and development efforts are focused on next-generationvideo processing and delivery across different deployment environments, particularly cloud-native and SaaS delivery models, and enhanced videocompression, video quality, and multiscreen solutions. We also devote significant resources to production and playout and distribution solutions. Withrespect to our Cable Edge business segment, our major research and development efforts are focused on cable edge solutions for both video and data,particularly the ongoing development of our centralized and distributed CableOS software-based CCAP solutions.Our success in designing, developing, manufacturing and selling new or enhanced products will depend on a variety of factors, including theidentification of market demand for new products, product selection, timely product design and development, product performance, effective manufacturingand assembly processes and sales and marketing. Because of the complexity inherent in such research and development efforts, we cannot assure you that wewill successfully develop new products, or that new products developed by us will achieve market acceptance. Our failure to successfully develop andintroduce new products would materially and adversely affect our business, operating results, financial condition and cash flows.EmployeesAs of December 31, 2017, we employed a total of 1,244 full time employees, including 473 in research and development, 216 in sales, 301 in serviceand support, 66 in operations, 61 in marketing (corporate and product) and 127 in a general and administrative capacity. Of those employees, 435 werelocated in the U.S. and 809 employees were located in foreign countries in South America, the Middle East, Europe, Asia and Canada. From time to time, wealso employ a number of temporary employees and consultants on a contract basis. Our employees in France are represented by labor unions and an employeeworks council. None of our other employees are represented by a labor union with respect to his or her employment with us. We have not experienced anywork stoppages, and we consider our relations with our employees to be good.12Table of ContentItem 1A.RISK FACTORSWe depend on cable, satellite and telco, and broadcast and media industry capital spending for our revenue and any material decrease or delay in capitalspending in any of these industries would negatively impact our operating results, financial condition and cash flows.Our revenue has been derived from worldwide sales to service providers and broadcast and media companies, as well as, more recently, emergingstreaming media companies. We expect that these markets will provide our revenue for the foreseeable future. Demand for our products will depend on themagnitude and timing of capital spending by customers in each of these markets for the purpose of creating, expanding or upgrading their systems. Thesecapital spending patterns are dependent on a variety of factors, including:• the impact of general economic conditions, actual and projected;• access to financing;• annual capital spending budget cycles of each of the industries we serve;• the impact of industry consolidation;• customers suspending or reducing capital spending in anticipation of: (i) new standards, such as HEVC and DOCSIS 3.1; (ii) industry trends andtechnology shifts, such as virtualization, and (iii) new products, such as products based on our VOS software platform or the CCAP architecture, suchas CableOS;• federal, state, local and foreign government regulation of telecommunications, television broadcasting and streaming media;• overall demand for communication services and consumer acceptance of new video and data technologies and services;• competitive pressures, including pricing pressures;• the impact of fluctuations in currency exchange rates; and• discretionary end-user customer spending patterns.In the past, specific factors contributing to reduced capital spending have included:• weak or uncertain economic and financial conditions in the U.S. or one or more international markets;• uncertainty related to development of digital video industry standards;• delays in evaluations of new services, new standards and systems architectures by many operators;• emphasis by operators on generating revenue from existing customers, rather than from new customers, through construction, expansion orupgrades;• a reduction in the amount of capital available to finance projects of our customers and potential customers;• proposed and completed business combinations and divestitures by our customers and the length of regulatory review of each;• completion of a new system or significant expansion or upgrade to a system; and• bankruptcies and financial restructuring of major customers.In the past, adverse economic conditions in one or more of the geographies in which we offer our products have adversely affected our customers’capital spending in those geographies and, as a result, our business. During challenging economic13Table of Contenttimes, and in tight credit markets, many customers may delay or reduce capital expenditures. This could result in reductions in revenue from our products,longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies and increased price competition. If globaleconomic and market conditions, or economic conditions in the U.S., Europe or other key markets, deteriorate, we could experience a material and adverseeffect on our business, results of operations, financial condition and cash flows. Additionally, since most of our international revenue is denominated in U.S.dollars, global economic and market conditions may impact currency exchange rates and cause our products to become relatively more expensive tocustomers in a particular country or region, which could lead to delayed or reduced capital spending in those countries or regions, thereby negativelyimpacting our business and financial condition.In addition, industry consolidation has in the past constrained, and may in the future constrain or delay, capital spending by our customers. Further, ifour product portfolio and product development plans do not position us well to capture an increased portion of the capital spending of customers in themarkets on which we focus, our revenue may decline.As a result of these potential capital spending issues, we may not be able to maintain or increase our revenue in the future, and our operating results,financial condition and cash flows could be materially and adversely affected.The markets in which we operate are intensely competitive.The markets for our products are extremely competitive and have been characterized by rapid technological change and declining average sales pricesin the past. Our competitors in our Video business segment include vertically integrated system suppliers, such as Arris Group, Cisco Systems and Ericsson(which recently announced the sale of majority stake in its video technology business to a private equity firm), and, in certain product lines, other companiesincluding ATEME and Elemental Technologies (an Amazon Web Services company). With respect to production and playout products, competitors includeEvertz Microsystems, EVS, Grass Valley (a Belden brand) and Imagine Communications. Our competitors in our Cable Edge business include Arris, CasaSystems and Cisco Systems. In the OTT market, our competitors include internally developed technologies and solutions by companies such as Netflix,Facebook, Google and Microsoft, as well as end-to-end online video platforms such as Brightcove, who provide comprehensive OTT infrastructure solutions,some of which overlap with our products and services.Many of our competitors are substantially larger, or as a result of consolidation activity have become larger, and have greater financial, technical,marketing and other resources than we have, and have been in operation longer than we have. Consolidation in the industry has led to the acquisition of anumber of our historic competitors over the last several years. For example, Motorola Home, BigBand Networks and C-Cor were acquired by Arris; NDS andScientific Atlanta were acquired by Cisco Systems; Envivio and Tandberg Television were acquired by Ericsson; Elemental Technologies was acquired byAmazon; and Miranda Technologies and Grass Valley were acquired by Belden Inc.In addition, some of our larger competitors have more long-standing and established relationships with domestic and foreign customers. Many of theselarge enterprises are in a better position to withstand any significant reduction in capital spending by customers in our markets. They often have broaderproduct lines and market focus, and may not be as susceptible to downturns in a particular market. These competitors may also be able to bundle theirproducts together to meet the needs of a particular customer, and may be capable of delivering more complete solutions than we are able to provide. To theextent large enterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise, competition would likelyintensify.Further, some of our competitors that have greater financial resources have offered, and in the future may offer, their products at lower prices than weoffer for our competing products or on more attractive financing or payment terms, which has in the past caused, and may in the future cause, us to lose salesopportunities and the resulting revenue or to reduce our prices in response to that competition. Also, some competitors that are smaller than we are haveengaged in, and may continue to engage in, aggressive price competition in order to gain customer traction and market share. Reductions in prices for any ofour products could materially and adversely affect our operating margins and revenue.Additionally, certain customers and potential customers have developed, and may continue to develop, their own solutions that may cause suchcustomers or potential customers to not consider our product offerings or to displace our installed products with their own solutions. The growing availabilityof open source codecs and related software, as well as new server chipsets that incorporate encoding technology, has, in certain respects, lowered the barriersto entry for the video processing industry. The development of solutions by potential and existing customers and the reduction of the barriers to entry toenter the video processing industry could result in increased competition and adversely affect our results of operations and business.14Table of ContentIf any of our competitors’ products or technologies were to become the industry standard, our business could be seriously harmed. If our competitors aresuccessful in bringing their products to market earlier than us, or if these products are more technologically capable than ours, our revenue could bematerially and adversely affected.We need to develop and introduce new and enhanced products in a timely manner to meet the needs of our customers and to remain competitive.All of the markets we address are characterized by continuing technological advancement, changes in customer requirements and evolving industrystandards. To compete successfully, we must continually design, develop, manufacture and sell new or enhanced products that provide increasingly higherlevels of performance and reliability and meet our customers changing needs. However, we may not be successful in those efforts if, among other things, ourproducts:• are not cost effective;• are not brought to market in a timely manner;• are not in accordance with evolving industry standards;• fail to meet market acceptance or customer requirements; or• are ahead of the needs of their markets.We are currently developing and marketing products based on the latest video compression standards, such as HEVC, which provides significantlygreater compression efficiency, thereby making more bandwidth available to operators. At the same time, we continue to devote development resources toenhance the existing AVC/H.264 compression of our products, which many of our customers continue to require. There can be no assurance that these effortswill be successful in the near future, or at all, or that our competitors will not take significant market share in encoding or transcoding.We continue to focus our development efforts on key product solutions in our Video and Cable Edge businesses. Our VOS solution is a software-based,cloud-enabled platform that unifies the entire media processing chain, from ingest to delivery. We have launched a number of VOS-based product solutionsand services, including Electra XVM, VOS Software Cluster (formerly VOS Cloud) and VOS360, and continue to develop and expand the capabilities of ourVOS software platform. In our Cable Edge business, we have launched and continue to develop our CableOS software-based CCAP systems.Many of these products and initiatives are intended to integrate existing and new features and functions in response to shifts in customer demands inthe relevant market, as well as to general technology trends (such as virtualized and cloud-based computing, and integrated QAM and CMTS functionality insoftware-based CCAP solutions) that we believe will significantly impact our industry. The success of these significant and costly development efforts will bepredicated, for certain products and initiatives, on the timing of market adoption of the new standards on which the resulting products are based, and for otherproducts, the timing of customer adoption of our products and solutions, as well as our ability to timely develop the features and capabilities of our productsand solutions. If new standards or some of our new products are adopted later than we predict or not adopted at all, or if adoption occurs earlier than we areable to deliver the applicable products or functionality, we risk spending significant research and development time and dollars on products or features thatmay never achieve market acceptance or that miss the customer demand window and thus do not produce the revenue that a timely introduction would havelikely produced.If we fail to develop and market new and enhanced products on a timely basis, our operating results, financial condition and cash flows could bematerially and adversely affected.Our CCAP-based product initiatives expose us to certain technology transition risks that may adversely impact our operating results, financial conditionand cash flows.In the last few years, the cable industry has begun to develop and promulgate the CCAP architecture for next-generation cable edge solutions, whichcombines edge QAM and CMTS functions in a single system in order to combine resources for video and data delivery. We believe our CableOS software-based CCAP solution, supporting centralized, distributed Remote PHY or hybrid configurations, will significantly reduce cable headend costs and increaseoperational efficiency, and are an important step in cable operators’ transition to all-IP networks. If we are unsuccessful in developing these capabilities in atimely manner, or are otherwise delayed in making such capabilities available to our customers, our business may be adversely impacted, particularly if ourcompetitors develop and market fully compliant products before we do.15Table of ContentWe believe CCAP-based solutions will, over time, replace and make obsolete current cable edge-QAM solutions, including our cable edge QAMproducts, as well as current CMTS solutions, which is a market our products have previously not addressed. If demand for our CCAP solutions is weaker thanexpected, or sales of our CCAP-based solutions do not adequately offset the continuing decline in demand we have experienced for our non-CCAP cableaccess products, our near and long-term operating results, financial condition and cash flows could be adversely impacted. Further, in September 2016 wegranted Comcast a warrant (the “Warrant”) to purchase shares of our common stock to further incentivize them to purchase our products and adopt ourtechnologies, particularly our CableOS software-based CCAP solution. If Comcast does not adopt our CableOS solution, or does so more slowly than weanticipate, we may be unable to realize the anticipated benefits of our relationship with Comcast and our business and operating results, financial conditionand cash flows could be materially and adversely affected. Moreover, if a new or competitive architecture for next-generation cable edge solutions ispromulgated that renders our CCAP-based systems obsolete, our business may be adversely impacted.The sales cycle for our CableOS solutions tends to be long. For cable operators, upgrading or expanding network infrastructure is complex andexpensive, and investing in a CableOS solution is a significant strategic decision that may require considerable time to evaluate, test and qualify. Potentialcustomers need to ensure our CableOS solution will interoperate with the various components of its existing network infrastructure, including third-partyequipment, servers and software. In addition, since we are a relatively new entrant into the CMTS market, we need to demonstrate significant performance,functionality and/or cost advantages with our CableOS solutions that outweigh customer switching costs. If sales cycles are significantly longer thananticipated or we are otherwise unsuccessful in growing our CableOS sales, our operating results, financial condition and cash flows could be materially andadversely affected.Our future growth depends on market acceptance of several broadband services, on the adoption of new broadband technologies, and on several otherbroadband industry trends.Future demand for many of our products will depend significantly on the growing market acceptance of emerging broadband services, including digitalvideo, VOD, Ultra HD, IP video services (particularly streaming to tablet computers, connected TVs and mobile devices) and very high-speed data services.The market demand for such emerging services is rapidly growing, with many custom or proprietary systems in use, which increases the challenge ofdelivering interoperable products intended to address the requirements of such services.The effective delivery of these services will depend, in part, on a variety of new network architectures, standards and devices, such as:• the adoption of cloud-native media processing architectures;• the adoption of advanced video compression standards, such as next generation H.264 compression and HEVC;• the CCAP architecture;• fiber to the premises, or FTTP, networks designed to facilitate the delivery of video services by telcos;• the greater use of protocols such as IP;• the further adoption of bandwidth-optimization techniques, such as DOCSIS 3.0 and DOCSIS 3.1; and• the introduction of new consumer devices, such as advanced set-top boxes, DVRs and network DVRs, connected TVs, tablet computers, and avariety of smart phone mobile devices.If adoption of these emerging services and/or technologies is not as widespread or as rapid as we expect, or if we are unable to develop new productsbased on these technologies on a timely basis, our operating results, financial condition and cash flows could be materially and adversely affected.Furthermore, other technological, industry and regulatory trends and requirements may affect the growth of our business.These trends and requirements include the following:• convergence, whereby network operators bundle video, voice and data services to consumers, including mobile delivery options;• the increasing availability of traditional broadcast video content and video-on-demand on the Internet;16Table of Content• adoption of high-bandwidth technology, such as DOCSIS 3.x, next generation LTE and FTTP;• the use of digital video by businesses, governments and educational institutions;• efforts by regulators and governments in the U.S. and internationally to encourage the adoption of broadband and digital technologies, as well asto regulate broadband access and delivery;• consumer interest in higher resolution video such as Ultra HD or retina-display technologies on mobile devices;• the need to develop partnerships with other companies involved in video infrastructure workflow and broadband services;• the continued adoption of the television viewing behaviors of consumers in developed economies by the growing middle class across emergingeconomies;• the extent and nature of regulatory attitudes towards issues such as network neutrality, competition between operators, access by third parties tonetworks of other operators, local franchising requirements for telcos to offer video, and other new services, such as mobile video; and• the outcome of disputes and negotiations between content owners and service providers regarding rights of service providers to store and distributerecorded broadcast content, which outcomes may drive adoption of one technology over another in some cases.If we fail to recognize and respond to these trends, by timely developing products, features and services required by these trends, we are likely to loserevenue opportunities and our operating results, financial condition and cash flows could be materially and adversely affected.We depend significantly on our international revenue and are subject to the risks associated with international operations, including those of our resellers,contract manufacturers and outsourcing partners, which may negatively affect our operating results.Revenue derived from customers outside of the U.S. in the fiscal years ended December 31, 2017, 2016 and 2015 represented approximately 63%, 58%and 53% of our revenue, respectively. Although no assurance can be given with respect to international sales growth in any one or more regions, we expectthat international revenue will likely continue to represent, from year to year, a majority, and potentially increasing, percentage of our annual revenue for theforeseeable future. A significant percentage of our revenue is generated from sales to resellers, value-added resellers (“VARs”) and systems integrators,particularly in emerging market countries. Furthermore, the majority of our employees are based in our international offices and locations, and most of ourcontract manufacturing occurs outside of the U.S. In addition, we outsource a portion of our research and development activities to certain third-partypartners with development centers located in different countries, particularly Ukraine and India.Our international operations, the international operations of our resellers, contract manufacturers and outsourcing partners, and our efforts to maintainand increase revenue in international markets are subject to a number of risks, which are generally greater with respect to emerging market countries,including the following:• growth and stability of the economy in one or more international regions;• fluctuations in currency exchange rates;• changes in foreign government regulations and telecommunications standards;• import and export license requirements, tariffs, taxes, economic sanctions, contractual limitations and other trade barriers;• our significant reliance on resellers and others to purchase and resell our products and solutions, particularly in emerging market countries;• availability of credit, particularly in emerging market countries;17Table of Content• longer collection periods and greater difficulty in enforcing contracts and collecting accounts receivable, especially from smaller customers andresellers, particularly in emerging market countries;• compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act and/or similar anti-corruption and anti-bribery laws,particularly in emerging market countries;• the burden of complying with a wide variety of foreign laws, treaties and technical standards;• fulfilling “country of origin” requirements for our products for certain customers;• difficulty in staffing and managing foreign operations;• business and operational disruptions or delays caused by political, social and economic instability and unrest, including risks related to terroristactivity, particularly in emerging market countries (e.g., recent significant civil, political and economic disturbances in Ukraine);• changes in economic policies by foreign governments, including the imposition and potential continued expansion of economic sanctions by theU.S. and the European Union on the Russian Federation;• any negative economic impacts resulting from the political environment in the U.S. or the U.K.’s referendum to exit the European Union; and• business and economic disruptions and delays caused by outbreaks of disease, epidemics and potential pandemics.We have certain international customers who are billed in their local currency, primarily the Euro, British pound and Japanese yen, which subjects us toforeign currency risk. In addition, a portion of our operating expenses relating to the cost of certain international employees, are denominated in foreigncurrencies, primarily the Israeli shekel, British pound, Euro, Singapore dollar, Chinese yuan and Indian rupee, although we do hedge against the Israelishekel. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising frominternational operations may contribute to fluctuations in our operating results. Furthermore, payment cycles for international customers are typically longerthan those for customers in the U.S. Unpredictable payment cycles could cause us to fail to meet or exceed the expectations of security analysts and investorsfor any given period.Most of our international revenue is denominated in U.S. dollars, and fluctuations in currency exchange rates could cause our products to becomerelatively more expensive to customers in a particular country or region, leading to a reduction in revenue or profitability from sales in that country or region.The potential negative impact of a strong U.S. dollar on our business may be exacerbated by the significant devaluation of a number of foreign currencies.Also, if the U.S. dollar were to weaken against many foreign currencies, there can be no assurance that a weaker dollar would lead to growth in capitalspending in foreign markets.Our operations outside the U.S. also require us to comply with a number of U.S. and international regulations that prohibit improper payments or offersof payments to foreign governments and their officials and political parties for corrupt purposes. For example, our operations in countries outside the U.S. aresubject to the FCPA and similar laws, including the U.K. Bribery Act. Our activities in certain emerging countries create the risk of unauthorized payments oroffers of payments by one of our employees, consultants, sales agents or channel partners that could be in violation of various anti-corruption laws, eventhough these parties may not be under our control. Under the FCPA and U.K. Bribery Act, companies may be held liable for the corrupt actions taken by theirdirectors, officers, employees, channel partners, sales agents, consultants, or other strategic or local partners or representatives. We have internal controlpolicies and procedures with respect to FCPA compliance, have implemented FCPA training and compliance programs for our employees, and include in ouragreements with resellers a requirement that those parties comply with the FCPA. However, we cannot provide assurances that our policies, procedures andprograms will prevent violations of the FCPA or similar laws by our employees or agents, particularly in emerging market countries, and as we expand ourinternational operations. Any such violation, even if prohibited by our policies, could result in criminal or civil sanctions against us.The effect of one or more of these international risks could have a material and adverse effect on our business, financial condition, operating results andcash flows.18Table of ContentWe purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limited sources, andwe rely on contract manufacturers and other subcontractors.Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or alimited group of suppliers. For example, we depend on two suppliers for certain video encoding chips which are incorporated into several products. Ourreliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on contractors for manufacturing and installation of our products,involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules; reduced control overcosts, quality and timely delivery of components, subassemblies or modules; supplier discontinuation of components, subassemblies or modules we require;and timely installation of products. In addition, in the U.S. the Trump administration has suggested imposing, and has begun to impose tariffs or otherrestrictions on foreign imports. If any such tariffs are imposed on products or components that we import, including those obtained from a sole supplier or alimited group of suppliers, we could experience reduced revenues or may have to raise our prices, either of which could have an adverse effect on ourbusiness, financial condition and operating results.These risks could be heightened during a substantial economic slowdown, because our suppliers and subcontractors are more likely to experienceadverse changes in their financial condition and operations during such a period. Further, these risks could materially and adversely affect our business if oneof our sole sources, or a sole source of one of our suppliers or contract manufacturers, is adversely affected by a natural disaster. While we expend resources toqualify additional component sources, consolidation of suppliers and the small number of viable alternatives have limited the results of these efforts.Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during time periodsin which demand for our products is increasing, especially if demand increases more quickly than we expect.Plexus Services Corp., which manufactures our products at its facilities in Malaysia, currently serves as our primary contract manufacturer, and currentlyprovides us with a majority, by dollar amount, of the products that we purchase from our contract manufacturers. Most of the products manufactured by ourFrench and Israeli operations are outsourced to another third-party manufacturer in France and Israel, respectively. From time to time we assess ourrelationship with our contract manufacturers, and we do not generally maintain long-term agreements with any of our suppliers or contract manufacturers. Ouragreement with Plexus has automatic annual renewals, unless prior notice is given by either party, and has been automatically renewed for a term expiring inOctober 2018.Difficulties in managing relationships with any of our current contract manufacturers, particularly Plexus, that manufacture our products off-shore, orany of our suppliers of key components, subassemblies and modules used in our products, could impede our ability to meet our customers’ requirements andadversely affect our operating results. An inability to obtain adequate and timely deliveries of our products or any materials used in our products, or theinability of any of our contract manufacturers to scale their production to meet demand, or any other circumstance that would require us to seek alternativesources of supply, could negatively affect our ability to ship our products on a timely basis, which could damage relationships with current and prospectivecustomers and harm our business and materially and adversely affect our revenue and other operating results. Furthermore, if we fail to meet customers’supply expectations, our revenue would be adversely affected and we may lose sales opportunities, both short and long term, which could materially andadversely affect our business and our operating results, financial condition and cash flows. Increases, from time to time, in demand on our suppliers andsubcontractors from our customers or from other parties have, on occasion, caused delays in the availability of certain components and products. In response,we may increase our inventories of certain components and products and expedite shipments of our products when necessary. These actions could increaseour costs and could also increase our risk of holding obsolete or excess inventory, which, despite our use of a demand order fulfillment model, couldmaterially and adversely affect our business, operating results, financial condition and cash flows.The loss of one or more of our key customers, a failure to continue diversifying our customer base, or a decrease in the number of larger transactions couldharm our business and our operating results.Historically, a significant portion of our revenue has been derived from relatively few customers, due in part to the consolidation of our service providerand media customers. Sales to our top 10 customers in the fiscal years ended December 31, 2017, 2016 and 2015 accounted for approximately 24%, 28% and32% of revenue, respectively. Although we have broadened our customer base by further penetrating new markets and expanding internationally, we expectto see continuing industry consolidation and customer concentration.In the fiscal years ended December 31, 2017 and 2016, no single customer accounted for more than 10% of our net revenue. In the fiscal year endedDecember 31, 2015, revenue from Comcast accounted for approximately 12% of our net revenue. Further consolidation of our service provider and mediacustomers could lead to additional revenue concentration for19Table of Contentus and the loss of any significant customer, or any material reduction in orders from any other significant customer, or our failure to qualify our new productswith any significant customer could materially and adversely affect, either long term or in a particular quarter, our operating results, financial condition andcash flows. Further, if Comcast does not increase its adoption of our technologies or purchases of our products in connection with the Warrant we issued tothem in September 2016, or does so more slowly than we anticipate, we may be unable to realize the anticipated benefits of the Warrant and our operatingresults, financial condition and cash flows could be materially and adversely effected.In addition, we are involved in most quarters in one or more relatively large individual transactions. A decrease in the number of the relatively largerindividual transactions in which we are involved in any quarter could materially and adversely affect our operating results for that quarter.As a result of these and other factors, we may be unable to increase our revenues from some or all of the markets we address, or to do so profitably, andany failure to increase revenues and profits from these customers could materially and adversely affect our operating results, financial condition and cashflows.We rely on resellers, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failure to develop andmanage our relationships with these customers or the processes and procedures that support them could adversely affect our business.We generate a significant percentage of our revenue through sales to resellers, VARs and systems integrators that assist us with fulfillment orinstallation obligations. We expect that these sales will continue to generate a significant percentage of our revenue in the future. Accordingly, our futuresuccess is highly dependent upon establishing and maintaining successful relationships with a variety of channel partners.We generally have no long-term contracts or minimum purchase commitments with any of our reseller, VAR or system integrator customers, and ourcontracts with these parties do not prohibit them from purchasing or offering products or services that compete with ours. Our competitors may provideincentives to any of our reseller, VAR or systems integrator customers to favor their products or, in effect, to prevent or reduce sales of our products. Any ofour reseller, VAR or systems integrator customers may independently choose not to purchase or offer our products. Many of our resellers, and some of ourVARs and system integrators are small, are based in a variety of international locations, and may have relatively unsophisticated processes and limitedfinancial resources to conduct their business. Any significant disruption of our sales to these customers, including as a result of the inability or unwillingnessof these customers to continue purchasing our products, or their failure to properly manage their business with respect to the purchase of, and payment for,our products, or their ability to comply with our policies and procedures as well as applicable laws, could materially and adversely affect our business,operating results, financial condition and cash flows. In addition, our failure to continue to establish or maintain successful relationships with reseller, VARand systems integrator customers could likewise materially and adversely affect our business, operating results, financial condition and cash flows.We have made, and may continue to make, acquisitions, and any acquisition could disrupt our operations, cause dilution to our stockholders andmaterially and adversely affect our business, operating results, cash flows and financial condition.As part of our business strategy, from time to time we have acquired, and we may continue to acquire, businesses, technologies, assets and product linesthat we believe complement or expand our existing business. For example, on February 29, 2016, we announced the closing of our acquisition of TVN, whichis headquartered in Rennes, France. Acquisitions involve numerous risks, including the following:• unanticipated costs or delays associated with an acquisition;• difficulties in the assimilation and integration of acquired operations, technologies and/or products;• potential disruption of our business and the diversion of management’s attention from the regular operations of the business during the acquisitionprocess;• the challenges of managing a larger and more geographically widespread operation and product portfolio after the closing of the acquisition;• potential adverse effects on new and existing business relationships with suppliers, contract manufacturers, resellers, partners and customers;20Table of Content• compliance with regulatory requirements, such as local employment regulations and organized labor in France;• risks associated with entering markets in which we may have no or limited prior experience;• the potential loss of key employees of acquired businesses and our own business as a result of integration;• difficulties in bringing acquired products and businesses into compliance with applicable legal requirements in jurisdictions in which we operateand sell products;• impact of known potential liabilities or unknown liabilities, including litigation and infringement claims, associated with companies we acquire;• substantial charges for acquisition costs or for the amortization of certain purchased intangible assets, deferred stock compensation or similaritems;• substantial impairments to goodwill or intangible assets in the event that an acquisition proves to be less valuable than the price we paid for it;• difficulties in establishing and maintaining uniform financial and other standards, controls, procedures and policies;• delays in realizing, or failure to realize, the anticipated benefits of an acquisition; and• the possibility that any acquisition may be viewed negatively by our customers or investors or the financial markets.Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and is likely to continue to be, intense.As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commerciallyreasonable terms or because the target chooses to be acquired by another company. Furthermore, in the event that we are able to identify and consummate anyfuture acquisitions, we may, in each of those acquisitions:• issue equity securities which would dilute current stockholders’ percentage ownership;• incur substantial debt to finance the acquisition or assume substantial debt in the acquisition;• incur significant acquisition-related expenses;• assume substantial liabilities, contingent or otherwise; or• expend significant cash.These financing activities or expenditures could materially and adversely affect our operating results, cash flows and financial condition or the price ofour common stock. Alternatively, due to difficulties in the capital or credit markets at the time, we may be unable to secure capital necessary to complete anacquisition on reasonable terms, or at all. Moreover, even if we were to obtain benefits from acquisitions in the form of increased revenue and earnings pershare, there may be a delay between the time the expenses associated with an acquisition are incurred and the time we recognize such benefits.In addition to the risks outlined above, if we are unable to successfully receive payment of any significant portion of TVN’s existing French R&D taxcredit receivables from the French tax authority as expected, or are unable to successfully apply for or otherwise obtain the financial benefit of new FrenchR&D tax credits in future years, our ability to achieve the anticipated benefits of the acquisition as well as our business, operating results and financialcondition could be adversely affected.As of December 31, 2017, we had approximately $243 million of goodwill recorded on our balance sheet associated with prior acquisitions. In the eventwe determine that our goodwill is impaired, we would be required to write down all or a portion of such goodwill, which could result in a material non-cashcharge to our results of operations in the period in which such write-down occurs.If we are unable to successfully address one or more of these risks, our business, operating results, financial condition and cash flows could be materiallyand adversely affected.21Table of ContentWe may not be able to effectively manage our operations.In recent years, we have expanded our international operations significantly. For example, upon the closing of our acquisition of TVN on February 29,2016, we added 438 employees, most of whom are based in France.As of December 31, 2017, we had 809 employees in our international operations, representing approximately 65% of our worldwide workforce. Ourability to manage our business effectively in the future, including with respect to any future growth, our operation as both a hardware and increasinglysoftware-centric business, the integration of any acquisition efforts such as our recent acquisition of TVN, and the breadth of our international operations, willrequire us to train, motivate and manage our employees successfully, to attract and integrate new employees into our overall operations, to retain keyemployees and to continue to improve and evolve our operational, financial and management systems. There can be no assurance that we will be successfulin any of these efforts, and our failure to effectively manage our operations could have a material and adverse effect on our business, operating results, cashflows and financial condition.We face risks associated with having outsourced engineering resources located in Ukraine.We outsource a portion of our research and development activities for both our Video and Cable Edge business segments to a third-party partner withengineering resources located in Ukraine. Political, social and economic instability and unrest or violence in Ukraine, including the ongoing conflict withRussian-backed separatists or conflict with the Russian Federation directly, could cause disruptions to the business and operations of our outsourcing partner,which could slow or delay the development work our partner is undertaking for us. Instability, unrest or conflict could limit or prevent our employees fromtraveling to, from, or within Ukraine to direct and coordinate our outsourced engineering teams, or cause us to shift all or portions of the development workoccurring in Ukraine to other locations or countries. The resulting delays could negatively impact our product development efforts, operating results and ourbusiness.In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualified personnel.Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. Wemust successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management. Wecannot provide assurances that changes of management personnel in the future would not cause disruption to operations or customer relationships or adecline in our operating results.We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualifiedpersonnel. Competition for qualified management, technical and other personnel is often intense, particularly in Silicon Valley, Israel and Hong Kong wherewe have significant research and development activities, and we may not be successful in attracting and retaining such personnel. Competitors and othershave in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standard agreementsconcerning confidentiality, non-solicitation and ownership of inventions, we generally do not have non-competition agreements with our personnel. The lossof the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel,particularly senior management and engineers and other technical personnel, could negatively affect our business and operating results. Furthermore, acertain portion of our personnel in the U.S. is comprised of foreign nationals whose ability to work for us depends on obtaining the necessary visas. Ourability to hire and retain foreign nationals in the U.S., and their ability to remain and work in the U.S., is affected by various laws and regulations, includinglimitations on the availability of visas. Changes in U.S. laws or regulations affecting the availability of visas may adversely affect our ability to hire or retainkey personnel and as a result may impair our operations.We face risks associated with having facilities and employees located in Israel.As of December 31, 2017, we maintained facilities in Israel with a total of 164 employees, or approximately 13% of our worldwide workforce. Ouremployees in Israel engage in a number of activities, for both our Video and Cable Edge business segments, including research and development, productdevelopment, and supply chain management for certain product lines and sales activities.As such, we are directly affected by the political, economic and military conditions affecting Israel. Any significant conflict involving Israel could havea direct effect on our business or that of our Israeli contract manufacturers, in the form of physical damage or injury, restrictions from traveling or reluctanceto travel to from or within Israel by our Israeli and other employees or those of our subcontractors, or the loss of Israeli employees to active military duty.Most of our employees in22Table of ContentIsrael are currently obligated to perform annual reserve duty in the Israel Defense Forces, and approximately 9% of those employees were called for activemilitary duty in 2017. In the event that more of our employees are called to active duty, certain of our research and development activities may besignificantly delayed and adversely affected. Further, the interruption or curtailment of trade between Israel and its trading partners, as a result of terroristattacks or hostilities, conflicts between Israel and any other Middle Eastern country or organization, or any other cause, could significantly harm ourbusiness. Additionally, current or future tensions or conflicts in the Middle East could materially and adversely affect our business, operating results,financial condition and cash flows.Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts or investors,causing our stock price to decline.Our operating results have fluctuated in the past and are likely to continue to fluctuate in the future, on an annual and a quarterly basis, as a result ofseveral factors, many of which are outside of our control. Some of the factors that may cause these fluctuations include:• the level and timing of capital spending of our customers in the U.S., Europe and in other markets;• economic and financial conditions specific to each of the cable, satellite and telco, and broadcast and media industries, as well as generaleconomic and financial market conditions, including any stemming from an unstable political environment in the United States or abroad as well asthose resulting from regulatory, trade or tax policy changes from the Tax Cuts and Jobs Act that was enacted in December 2017 (the “TCJA”);• changes in market acceptance of and demand for our products or our customers’ services or products;• the timing and amount of orders, especially from large individual transactions and transactions with our significant customers;• the mix of our products sold and the effect it has on gross margins;• the timing of revenue recognition, including revenue recognition on sales arrangements and from transactions with significant service and supportcomponents, which may span several quarters;• our transition to a software-as-a-service subscription model for our Video business, which may cause near-term declines in revenue;• the timing of completion of our customers’ projects;• the length of each customer product upgrade cycle and the volume of purchases during the cycle;• competitive market conditions, including pricing actions by our competitors;• the level and mix of our domestic and international revenue;• new product introductions by our competitors or by us;• uncertainty in both the U.K. and the European Union due to the U.K.’s referendum to exit the European Union, which could adversely affect ourresults, financial condition and prospects;• changes in domestic and international regulatory environments affecting our business;• the evaluation of new services, new standards and system architectures by our customers;• the cost and timely availability to us of components, subassemblies and modules;• the mix of our customer base, by industry and size, and sales channels;• changes in our operating and extraordinary expenses;• the timing of acquisitions and dispositions by us and the financial impact of such transactions;23Table of Content• impairment of our goodwill and intangibles;• the impact of litigation, such as related litigation expenses and settlement costs;• write-downs of inventory and investments;• changes in our effective federal tax rate, including as a result of changes in our valuation allowance against our deferred tax assets, and changes inour effective state tax rates, including as a result of apportionment;• changes to tax rules related to the deferral of foreign earnings and compliance with foreign tax rules;• the impact of applicable accounting guidance on accounting for uncertainty in income taxes that requires us to establish reserves for uncertain taxpositions and accrue potential tax penalties and interest; and• the impact of applicable accounting guidance on business combinations that requires us to record charges for certain acquisition related costs andexpenses and generally to expense restructuring costs associated with a business combination subsequent to the acquisition date.The timing of deployment of our products by our customers can be subject to a number of other risks, including the availability of skilled engineeringand technical personnel, the availability of third-party equipment and services, our customers’ ability to negotiate and enter into rights agreements withvideo content owners that provide our customers with the right to deliver certain video content, and our customers’ need for local franchise and licensingapprovals.We often recognize a substantial portion of our quarterly revenue in the last month of the quarter. We establish our expenditure levels for productdevelopment and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term.Accordingly, even small variations in the timing of revenue, particularly from relatively large individual transactions, can cause significant fluctuations inoperating results in a particular quarter.As a result of these factors and other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securitiesanalysts or investors. In that event, the trading price of our common stock would likely decline.Fluctuations in our future effective tax rates could affect our future operating results, financial condition and cash flows.We are required to periodically review our deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary.The realization of our deferred tax assets, which are predominantly in the U.S., is dependent upon the generation of sufficient U.S. and foreign taxable incomein the future to offset these assets. Based on our evaluation, a history of operating losses in recent years has led to uncertainty with respect to our ability torealize certain of our net deferred tax assets, and as a result we recorded a net increase in valuation allowance of $9.0 million and $18.3 million in 2017 and2016, respectively, against our U.S. net deferred tax assets. The increase in valuation allowance in 2017 and 2016 were offset partially by the release of $5.8million and $8.4 million, respectively. The release of valuation allowance were associated with our foreign subsidiaries and a one-time benefit in 2017 of$2.6 million relating to the refund of alternative minimum tax credit carryforwards related to the TCJA.The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potentialliabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxeswill be due. In the event we determine that it is appropriate to create a reserve or increase an existing reserve for any such potential liabilities, the amount ofthe additional reserve is charged as an expense in the period in which it is determined. If payment of these amounts ultimately proves to be unnecessary, thereversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimateof tax liabilities proves to be less than the ultimate tax assessment for the applicable period, a further charge to expense in the period such short fall isdetermined would result. Either such charge to expense could have a material and adverse effect on our operating results for the applicable period.We anticipate that, due to our current international tax structure, our consolidated pre-tax income will continue to be subject to foreign tax at relativelylower tax rates when compared to the U.S. federal statutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the U.S.federal statutory rate.24Table of ContentOur future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of U.S.and international income changes for any reason. Accordingly, there can be no assurance that our income tax rate will be less than the U.S. federal statutoryrate in future periods.On December 22, 2017, the U.S. Congress passed and the President signed into law the TCJA, which contains many significant changes to the U.S. taxlaws. The consequences of these changes, including whether and how state, local and foreign jurisdictions will react to such changes, have not yet beendetermined. Changes in corporate tax rates, the realizability of the net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, andthe deductibility of expenses contained in the TJCA or other tax reform legislation could have a material impact on the value of our deferred tax assets, couldresult in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. Furthermore, changes to thetaxation of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings. The foregoing items could have anadverse effect on our operating results, cash flow, or financial condition.We or our customers may face intellectual property infringement claims from third parties.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. In particular, leading companies in the telecommunications industry have extensive patent portfolios. Also, patent infringementclaims and litigation by entities that purchase or control patents, but do not produce goods or services covered by the claims of such patents (so-called “non-practicing entities” or “NPEs”), have increased rapidly over the last decade or so. From time to time, third parties, including NPEs, have asserted, and mayassert in the future, patent, copyright, trademark and other intellectual property rights against us or our customers. Our suppliers and their customers,including us, may have similar claims asserted against them. A number of third parties, including companies with greater financial and other resources thanus, have asserted patent rights to technologies that are important to us.Any intellectual property litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of ourmanagement and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities and temporary orpermanent injunctions and require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not beavailable on terms satisfactory to us, or at all. An unfavorable outcome on any such litigation matter could require that we pay substantial damages, couldrequire that we pay ongoing royalty payments, or could prohibit us from selling certain of our products. Any such outcome could have a material and adverseeffect on our business, operating results, financial condition and cash flows.Our suppliers and customers may have intellectual property claims relating to our products asserted against them. We have agreed to indemnify some ofour suppliers and most of our customers for patent infringement relating to our products. The scope of this indemnity varies, but, in some instances, includesindemnification for damages and expenses (including reasonable attorney’s fees) incurred by the supplier or customer in connection with such claims. If asupplier or a customer seeks to enforce a claim for indemnification against us, we could incur significant costs defending such claim, the underlying claim orboth. An adverse determination in either such proceeding could subject us to significant liabilities and have a material and adverse effect on our operatingresults, cash flows and financial condition.We may be the subject of litigation which, if adversely determined, could harm our business and operating results.We may be subject to claims arising in the normal course of business. The costs of defending any litigation, whether in cash expenses or in managementtime, could harm our business and materially and adversely affect our operating results and cash flows. An unfavorable outcome on any litigation mattercould require that we pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we pay ongoingroyalty payments or prohibit us from selling certain of our products. In addition, we may decide to settle any litigation, which could cause us to incursignificant settlement costs. A settlement or an unfavorable outcome on any litigation matter could have a material and adverse effect on our business,operating results, financial condition and cash flows.We may sell one or more of our product lines, from time to time, as a result of our evaluation of our products and markets, and any such divestiture couldadversely affect our continuing business and our expenses, revenues, results of operation, cash flows and financial position.We periodically evaluate our various product lines and may, as a result, consider the divestiture of one or more of those product lines. We have soldproduct lines in the past, and any prior or future divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cashflows and financial position.25Table of ContentDivestitures of product lines have inherent risks, including the expense of selling the product line, the possibility that any anticipated sale will notoccur, delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the divested business, unexpected costs associated with theseparation of the business to be sold from the seller’s information technology and other operating systems, and potential post-closing claims forindemnification or breach of transition services obligations of the seller. Expected cost savings, which are offset by revenue losses from divested businesses,may also be difficult to achieve or maximize due to the seller’s fixed cost structure, and a seller may experience varying success in reducing fixed costs ortransferring liabilities previously associated with the divested business.We could be negatively affected as a result of a future proxy contest and the actions of activist stockholders.If a proxy contest with respect to election of our directors is initiated in the future, or if other activist stockholder activities occur, our business could beadversely affected because:• responding to a proxy contest and other actions by activist stockholders can be costly and time-consuming, disrupting our operations anddiverting the attention of management and our employees;• perceived uncertainties as to our future direction caused by activist activities may result in the loss of potential business opportunities, and maymake it more difficult to attract and retain qualified personnel and business partners; and• if individuals are elected to our Board of Directors (the “Board”) with a specific agenda, it may adversely affect our ability to effectively and timelyimplement our strategic plans.Our failure to adequately protect our proprietary rights and data may adversely affect us.At December 31, 2017, we held 74 issued U.S. patents and 46 issued foreign patents, and had 94 patent applications pending. Although we attempt toprotect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets andother measures, we can give no assurances that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated,circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patentapplications will be issued with the scope of the claims sought by us, if at all. We can give no assurances that others will not develop technologies that aresimilar or superior to our technologies, duplicate our technologies or design around the patents that we own. In addition, effective patent, copyright and tradesecret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.We enter into confidentiality or license agreements with our employees, consultants, and vendors and our customers, as needed, and generally limitaccess to, and distribution of, our proprietary information. Nevertheless, we cannot provide assurances that the steps taken by us will preventmisappropriation of our technology. In addition, we have taken in the past, and may take in the future, legal action to enforce our patents and otherintellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims ofinfringement or invalidity. Such litigation could result in substantial costs and diversion of management time and other resources, and could materially andadversely affect our business, operating results, financial condition and cash flows.Recently reported hacking attacks on government and commercial computer systems, particularly attacks sponsored by foreign governments orenterprises, raise the risks that such an attack may compromise, in a material respect, one or more of our computer systems and permit hackers access to ourproprietary information and data. While we have invested in and continue to update our network security and cybersecurity infrastructure and systems, ifsuch an attack does, in fact, allow access to or theft of our proprietary information or data, our business, operating results, financial condition and cash flowscould be materially and adversely affected.Our products include third-party technology and intellectual property, and our inability to acquire new technologies or use third-party technology in thefuture could harm our business.In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensingagreements with third parties. Although companies with technology useful to us are often willing to enter into technology development or licensingagreements with respect to such technology, we cannot provide assurances that such agreements may be negotiated on commercially reasonable terms, or atall. The failure to enter, or a delay in entering, into such technology development or licensing agreements, when necessary or desirable, could limit ourability to develop and market new products and could materially and adversely affect our business.26Table of ContentWe incorporate certain third-party technologies, including software programs, into our products, and, as noted, intend to utilize additional third-partytechnologies in the future. In addition, the technologies that we license may not operate properly or as specified, and we may not be able to securealternatives in a timely manner, either of which could harm our business. We could face delays in product releases until alternative technology can beidentified, licensed or developed, and integrated into our products, if we are able to do so at all. These delays, or a failure to secure or develop adequatetechnology, could materially and adversely affect our business, operating results, financial condition and cash flows.Our use of open source software in some of our products may expose us to certain risks.Some of our products contain software modules licensed for use from third-party authors under open source licenses. Use and distribution of opensource software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or othercontractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make availablesource code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software withopen source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietarysoftware to the public. This could allow our competitors to create similar products with lower development effort and in less time and ultimately could resultin a loss of product sales for us.Although we monitor our use of open source closely, it is possible our past, present or future use of open source has triggered or may trigger theforegoing requirements. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licensescould be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, wecould be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of ourproducts in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our operating results,financial condition and cash flows.We are subject to import and export control and trade and economic sanction laws and regulations that could subject us to liability or impair our abilityto compete in international markets.Our products are subject to U.S. export control laws, and may be exported outside the U.S. only with the required export license or through an exportlicense exception, in most cases because we incorporate encryption technology into certain of our products. We are also subject to U.S. trade and economicsanction regulations which include prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries,governments, persons and entities. In addition, various countries regulate the import of certain technology and have enacted laws that could limit our abilityto distribute our products, or could limit our customers’ ability to implement our products, in those countries. Although we take precautions and haveprocesses in place to prevent our products and services from being provided in violation of such laws, our products may have been in the past, and could inthe future be, provided inadvertently in violation of such laws, despite the precautions we take. If we fail to comply with these laws, we and certain of ouremployees could be subject to civil or criminal penalties, including the possible loss of export privileges, monetary penalties, and, in extreme cases,imprisonment of responsible employees for knowing and willful violations of these laws. Additionally, our business and operating results be adverselyaffected through penalties, reputational harm, loss of access to certain markets, or otherwise.In addition, we may be subject to customs duties that could have a significant adverse impact on our operating results or, if we are able to pass on therelated costs in any particular situation, would increase the cost of the related product to our customers. As a result, the future imposition of significantincreases in the level of customs duties or the creation of import quotas on our products in Europe or in other jurisdictions, or any of the limitations oninternational sales described above, could have a material adverse effect on our business, operating results, financial condition and cash flows. Further, someof our customers in Europe have been, or are being, audited by local governmental authorities regarding the tariff classifications used for importation of ourproducts. Import duties and tariffs vary by country and a different tariff classification for any of our products may result in higher duties or tariffs, which couldhave an adverse impact on our operating results and potentially increase the cost of the related products to our customers.We may need additional capital in the future and may not be able to secure adequate funds at all or on terms acceptable to us.We engage in the design, development, and manufacture and sale of a variety of video and cable access products and system solutions, which hasrequired, and will continue to require, significant research and development expenditures.27Table of ContentWe believe that our existing cash of approximately $57 million at December 31, 2017 will satisfy our cash requirements for at least the next 12 months.However, we may need to raise additional funds to take advantage of presently unanticipated strategic opportunities, satisfy our other cash requirements fromtime to time, or strengthen our financial position. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond ourcontrol, such as weakness in the economic conditions in markets in which we sell our products and continued uncertainty in financial, capital and creditmarkets. There can be no assurance that equity or debt financing will be available to us on reasonable terms, if at all, when and if it is needed.We may raise additional financing through public or private equity offerings, debt financings, or corporate partnership or licensing arrangements. Tothe extent we raise additional capital by issuing equity securities or convertible debt, our stockholders may experience dilution. To the extent that we raiseadditional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or products, or grantlicenses on terms that are not favorable to us. To the extent we raise capital through debt financing arrangements, we may be required to pledge assets or enterinto covenants that could restrict our operations or our ability to incur further indebtedness and the interest on such debt may adversely affect our operatingresults.If adequate capital is not available, or is not available on reasonable terms, when needed, we may not be able to take advantage of acquisition or othermarket opportunities, to timely develop new products, or to otherwise respond to competitive pressures.Our operating results could be adversely affected by natural disasters affecting us or impacting our third-party manufacturers, suppliers, resellers orcustomers.Our corporate headquarters is located in California, which is prone to earthquakes. We have employees, consultants and contractors located in regionsand countries around the world. In the event that any of our business, sales or research and development centers or offices in the U.S. or internationally areadversely affected by an earthquake or by any other natural disaster, we may sustain damage to our operations and properties, which could cause a sustainedinterruption or loss of affected operations, and cause us to suffer significant financial losses.We rely on third-party contract manufacturers for the production of our products. Any significant disruption in the business or operations of suchmanufacturers or of their or our suppliers could adversely impact our business. Our principal contract manufacturers and several of their and our suppliers andour resellers have operations in locations that are subject to natural disasters, such as severe weather, tsunamis, floods and earthquakes, which could disrupttheir operations and, in turn, our operations.In addition, if there is a natural disaster in any of the locations in which our significant customers are located, we face the risk that our customers mayincur losses or sustained business interruption, or both, which may materially impair their ability to continue their purchase of products from us. Accordingly,natural disaster in one of the geographies in which we, or our third-party manufacturers, their or our suppliers or our customers, operate could have a materialand adverse effect on our business, operating results, cash flows and financial condition.Our business and industry are subject to various laws and regulations that could adversely affect our business, operating results, cash flows and financialcondition.Our business and industry are regulated under various federal, state, local and international laws. For example, we are subject to environmentalregulations such as the European Union’s Waste Electrical and Electronic Equipment (WEEE) and Restriction on the Use of Certain Hazardous Substances inElectrical and Electronic Equipment (RoHS) directives and similar legislation enacted in other jurisdictions worldwide. Our failure to comply with these lawscould result in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct businessin such regions and countries. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis.Although we cannot predict the ultimate impact of any such new laws and regulations, they would likely result in additional costs, and could require that weredesign or change how we manufacture our products, any of which could have a material and adverse effect on our operating results, financial condition andcash flows.We are subject to the Sarbanes-Oxley Act of 2002 which, among other things, requires an annual review and evaluation of our internal control overfinancial reporting. If we conclude in future periods that our internal control over financial reporting is not effective or if our independent registered publicaccounting firm is unable to provide an unqualified attestation as of future year-ends, we may incur substantial additional costs in an effort to correct suchproblems, and investors may lose confidence in28Table of Contentour financial statements, and our stock price may decrease in the short term, until we correct such problems, and perhaps in the long term, as well.We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that require us to conduct research,disclose, and report whether or not our products contain certain conflict minerals sourced from the Democratic Republic of Congo or its surroundingcountries. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of the materials used in the manufacture ofcomponents used in our products. In addition, we may incur certain additional costs to comply with the disclosure requirements, including costs related toconducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, ifapplicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may facereputational harm if we determine that certain of our products contain minerals not determined to be conflict-free and/or we are unable to alter our products,processes or sources of supply to avoid such materials.Changes in telecommunications legislation and regulations in the U.S. and other countries could affect our sales and the revenue we are able to derivefrom our products. In particular, on December 14, 2017, the U.S. Federal Communications Commission (FCC) voted to repeal the “net neutrality” rules andreturn to a “light-touch” regulatory framework. However, the repeal has not yet taken effect and a number of parties have already stated their intent to appealthis order; thus, the future impact of such repeal and any challenge thereto remains uncertain. The rules were designed to ensure that all online content istreated the same by internet service providers and other companies that provide broadband services. Should the repeal of net neutrality rules take effect orregulations dealing with access by competitors to the networks of incumbent operators could slow or stop infrastructure and services investments orexpansion by service providers. Increased regulation of our customers’ pricing or service offerings could limit their investments and, consequently, revenuefrom our products. The impact of new or revised legislation or regulations could have a material adverse effect on our business, operating results, financialcondition and cash flows.Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeoverattempt.We have provisions in our certificate of incorporation and bylaws that could have the effect of rendering more difficult or discouraging an acquisitiondeemed undesirable by our Board. These include provisions:• authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;• limiting the liability of, and providing indemnification to, our directors and officers;• limiting the ability of our stockholders to call, and bring business before, special meetings;• requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidatesfor election to our Board;• controlling the procedures for conducting and scheduling of Board and stockholder meetings; and• providing the Board with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled specialmeetings.These provisions could delay hostile takeovers, changes in control of the Company or changes in our management. As a Delaware corporation, we arealso subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding morethan 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of ouroutstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a changein control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price thatsome investors are willing to pay for our common stock.The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatoryenvironment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financialstatements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations andharm our operating results.29Table of ContentThe accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board(the “FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments fromthe FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are beingsubject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that couldmaterially impact our financial statements. For example, in May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue fromContracts with Customers (“Topic 606”), as amended, which will supersede nearly all existing revenue recognition guidance. The effective date of the newrevenue standard is our first quarter of 2018. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented inthe period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date ofinitial application and providing certain additional disclosures. We plan to adopt using the modified retrospective approach and we currently believe therewill be significant impacts to the timing of recognition of software licenses with undelivered features and professional services revenue related to servicecontracts with acceptance terms, which could have a significant impact to our financial results.The conditional conversion feature of our convertible senior notes, if triggered, may adversely affect our financial condition and operating results.In December 2015, we issued $128.25 million aggregate principal amount of 4.00% convertible senior notes due 2020 (the “Notes”) through a privateplacement with a financial institution. The Notes bear interest at 4.00% per annum, which is payable semiannually in arrears on June 1 and December 1 ofeach year, commencing June 1, 2016. In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convertthe Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversionobligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settlea portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not electto convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as acurrent rather than long-term liability, which would result in a material reduction of our net working capital.The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financialresults.Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20) an entity must separately account for theliability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in amanner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required tobe included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component wouldbe treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current and future periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amountover the term of the Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the currentperiod’s amortization of the debt discount and the instrument’s non-convertible interest rate, which could adversely affect our reported or future financialresults, the trading price of our common stock and the trading price of the Notes.In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currentlyaccounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in thecalculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stockmethod, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settlesuch excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit theuse of the treasury stock method or circumstances would not change such that we would no longer be permitted to use the treasury stock method. If we areunable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would beadversely affected.Our common stock price, and therefore the price of our Notes, may be extremely volatile, and the value of an investment in our stock may decline.Our common stock price has been highly volatile. We expect that this volatility will continue in the future due to factors such as:30Table of Content• general market and economic conditions;• actual or anticipated variations in operating results;• increases or decreases in the general stock market or to the stock prices of technology companies;• announcements of technological innovations, new products or new services by us or by our competitors or customers;• changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;• announcements by us or our competitors of significant acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;• announcements by our customers regarding end user market conditions and the status of existing and future infrastructure network deployments;• additions or departures of key personnel; and• future equity or debt offerings or our announcements of these offerings.In addition, in recent years, the stock market in general, and The NASDAQ Stock Market and the securities of technology companies in particular, haveexperienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance ofindividual companies. These broad market fluctuations have in the past, and may in the future, materially and adversely affect our stock price, regardless ofour operating results. In these circumstances, investors may be unable to sell their shares of our common stock at or above their purchase price over the shortterm, or at all.Our stock price may decline if additional shares are sold in the market or if analysts drop coverage of or downgrade our stock.Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these salescould occur, may cause the market price of our common stock to decline. In addition, we issue additional shares upon exercise of stock options, includingunder our Employee Stock Purchase Plan (“ESPP”), and in connection with grants of restricted stock units (“RSUs”) on an ongoing basis. To the extent we donot elect to pay solely cash upon conversion of our Notes, we will also be required to issue additional shares of common stock upon conversion. Increasedsales of our common stock in the market after exercise of outstanding stock options or grants of restricted stock units could exert downward pressure on ourstock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.The trading market for our common stock relies in part on the availability of research and reports that third-party industry or securities analysts publishabout us. If one or more of the analysts who do cover us downgrade our stock, our stock price may decline. If one or more of these analysts cease coverage ofus, we could lose visibility in the market, which in turn could cause the liquidity of our stock and our stock price to decline.Available InformationHarmonic makes available free of charge, on the Harmonic web site, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K (via link to the SEC website), and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act as soon as reasonably practicable after Harmonic files such material with, or furnishes such material to, the Securities and ExchangeCommission. The address of the Harmonic web site is http://www.harmonicinc.com. Except as expressly set forth in this Form 10-K, the contents of our website are not incorporated into, or otherwise to be regarded as part of, this report.Item 1B.UNRESOLVED STAFF COMMENTS31Table of ContentNone.Item 2.PROPERTIESAll of our facilities are leased, including our principal operations and corporate headquarters in San Jose, California. We have research anddevelopment centers in the United States, France, Israel and Hong Kong. We have sales and service offices primarily in the U.S. and various locations inEurope and Asia. Our leases, which expire at various dates through June 2028, are for an aggregate of approximately 405,000 square feet of space, of whichthe San Jose lease, expiring August 2020, is for approximately 160,000 square feet of space. This excludes 33,000 square feet of space that is vacant andavailable for sublease. We have two business segments: Video and Cable Edge. Because of the interrelation of these segments, a majority of these segmentsuse substantially all of the properties, at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of the segments. Webelieve that the facilities that we currently occupy are adequate for our current needs and that suitable additional space will be available, as needed, toaccommodate the presently foreseeable expansion of our operations.Item 3.LEGAL PROCEEDINGSIn October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that ourMediaGrid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014, the juryreturned a unanimous verdict in favor of us, rejecting Avid’s infringement allegations in their entirety. In January 2015, Avid filed an appeal with respect tothe jury’s verdict with the Federal Circuit. In January 2016, the Federal Circuit issued an order vacating the verdict of noninfringement and remanding thecase to the trial court for a new trial on infringement. In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that our Spectrum productinfringes one patent held by Avid. The complaint sought injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial and AppealBoard (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. In July 2014, the PTABissued a decision finding claims 1-10 invalid and claims 11-16 not invalid. We filed an appeal with respect to the PTAB’s decision on claims 11-16 inSeptember 2014, and the Federal Circuit affirmed the PTAB’s decision in April 2016. In July 2017, the court issued a scheduling order consolidating both cases and setting the trial date for November 6, 2017. On October 19, 2017, the parties agreed to settle the consolidated cases by entering into a settlement and patent portfolio cross-license agreement, andthe cases were dismissed with prejudice. In connection with the agreement, we recorded a $6.0 million litigation settlement expense in “Selling, general andadministrative expenses” in our 2017 Consolidated Statement of Operations. Of the associated $6.0 million settlement liability, $2.5 million was paid inOctober 2017 and the remaining $1.5 million and $2.0 million will be paid in the second quarter of 2019 and the third quarter of 2020, respectively.From time to time, we are involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in theordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment,and other matters. While certain matters to which we are a party may specify the damages claimed, such claims may not represent reasonably possible losses.Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss orrange of loss, if any, be reasonably estimated.An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual propertyinfringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, oran unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on our business, operatingresults, financial position and cash flows.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and otherintellectual property rights against us or our customers. Such assertions32Table of Contentarise in the normal course of our operations. The resolution of any such assertions and claims cannot be predicted with certainty.Item 4.MINE SAFETY DISCLOSURENot applicable.PART IIItem 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Information of our Common StockOur common stock is traded on The NASDAQ Global Select Market under the symbol HLIT, and has been listed on NASDAQ since our initial publicoffering on May 22, 1995. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported onThe NASDAQ Global Select Market: 2017 2016 Sales Price Sales PriceQuarter endedHigh Low High LowFirst quarter$6.10 $4.90 $4.04 $2.85Second quarter6.00 4.90 3.64 2.51Third quarter5.35 2.80 5.99 2.72Fourth quarter4.55 2.85 6.13 3.80HoldersAs of February 28, 2018, there were approximately 380 holders of record of our common stock.Dividend PolicyWe have never declared or paid any dividends on our capital stock. At this time, we expect to retain future earnings, if any, for use in the operation andexpansion of our business and do not anticipate paying any cash dividends in the foreseeable future.Repurchases of Equity Securities by the IssuerThere were no stock repurchases during the year ended December 31, 2017. Our stock repurchase program expired on December 31, 2016. Further stockrepurchases would require authorization from the Board.Sales of Unregistered SecuritiesThere were no sales of unregistered securities during the year ended December 31, 2017.Stock Performance Graph33Table of ContentSet forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of our common stock with thecumulative return of The NASDAQ Telecommunications Index and of the Standard & Poor’s (S&P) 500 Index for the period commencing December 31, 2012and ending on December 31, 2017. The graph assumes that $100 was invested in each of the Company’s common stock, the S&P 500 and The NASDAQTelecommunications Index on December 31, 2012, and assumes the reinvestment of dividends, if any. The comparisons shown in the graph below are basedupon historical data. Harmonic cautions that the stock price performance shown in the graph below is not indicative of, nor intended to forecast, the potentialfuture performance of the Company’s common stock. 12/12 12/13 12/14 12/15 12/16 12/17Harmonic Inc. 100.00 145.56 138.26 80.28 98.62 82.84S&P 500 100.00 132.39 150.51 152.59 170.84 208.14NASDAQ Telecom 100.00 141.28 145.43 140.97 150.94 184.81The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material”, “filed” or incorporated byreference in previous or future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Harmonicspecifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.34Table of ContentItem 6.SELECTED FINANCIAL DATAThe selected financial data set forth below as of December 31, 2017 and 2016, and for the fiscal years ended December 31, 2017, 2016 and 2015, arederived from our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The selected financial data as of December 31,2015, 2014 and 2013, and for the fiscal years ended December 31, 2014 and 2013 are derived from audited financial statements not included in this AnnualReport on Form 10-K. This financial data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, and the Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. These historicalresults are not necessarily indicative of the results to be expected in the future.On February 29, 2016, we completed our acquisition of TVN and applied the acquisition method of accounting for the business combination. Theselected consolidated balance sheet data as of December 31, 2016 represents the consolidated statement of financial position of the combined company. Theselected consolidated statement of operations data for the year ended December 31, 2016 of the combined entity includes 10 months of operating results ofTVN, beginning March 1, 2016.On March 5, 2013, we completed the sale of our cable access HFC business to Aurora Networks. As such, the results of operations associated with cableaccess HFC business are presented as discontinued operations in our Consolidated Statement of Operations for fiscal year ended December 31, 2013. Year ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share amounts)Consolidated Statements of Operations Data Net revenue$358,246 $405,911 $377,027 $433,557 $461,940Cost of revenue 188,426 205,161 174,315 221,209 241,495 Gross profit169,820 200,750 202,712 212,348 220,445Operating expenses: Research and development95,978 98,401 87,545 93,061 99,938 Selling, general and administrative136,270 144,381 120,960 131,322 134,014 Amortization of intangibles3,142 10,402 5,783 6,775 8,096 Restructuring and related charges5,307 14,602 1,372 2,761 1,421 Total operating expenses240,697 267,786 215,660 233,919 243,469Loss from operations(70,877) (67,036) (12,948) (21,571) (23,024)Interest income (expense), net(11,078) (10,628) (333) 132 219Other expense, net(2,222) (31) (282) (356) (347)Loss on impairment of long-term investment(530) (2,735) (2,505) — —Loss from continuing operations before income taxes(84,707) (80,430) (16,068) (21,795) (23,152)Provision for (benefit from) income taxes (1,752) (8,116) (407) 24,453 (44,741)Income (loss) from continuing operations $(82,955) $(72,314) $(15,661) (46,248) $21,589Net income (loss) per share from continuing operations: Basic$(1.02) $(0.93) $(0.18) $(0.50) $0.20 Diluted$(1.02) $(0.93) $(0.18) $(0.50) $0.20Shares used in per share calculation: Basic80,974 77,705 87,514 92,508 106,529 Diluted80,974 77,705 87,514 92,508 107,808 As of December 31, 2017 2016 2015 2014 2013 (In thousands)Consolidated Balance Sheet Data Cash, cash equivalents and short-term investments$57,024 $62,558 $152,794 $104,879 $170,581Working capital$29,686 $71,938 $201,250 $142,754 $243,650Total assets$508,059 $554,069 $524,957 $480,518 $606,084Convertible debt, long-term$108,748 $103,259 $98,295 $— $—Stockholders’ equity$218,343 $270,641 $328,168 $371,813 $494,16635Table of ContentItem 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with the consolidated financial statements and the related notes. The following discussioncontains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in theforward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and thoselisted under Item 1A, Risks Factors.Business OverviewWe develop and sell (i) versatile and high performance video delivery software, products, system solutions and services that enable our customers toefficiently create, prepare, store, playout and deliver a full range of high-quality broadcast and OTT video services to consumer devices, includingtelevisions, personal computers, laptops, tablets and smart phones and (ii) cable access solutions that enable cable operators to more efficiently andeffectively deploy high-speed internet, voice and video services to consumers’ homes.We do business in three geographic regions: the Americas, EMEA and APAC and operate in two segments, Video and Cable Edge. Our Video businesssells video processing, production and playout solutions, and services worldwide to cable operators and satellite and telco Pay-TV service providers, whichwe refer to collectively as “service providers,” as well as to broadcast and media companies, including streaming new media companies. Our Video businessinfrastructure solutions are delivered either through shipment of our products, software licenses or as SaaS subscriptions. Our Cable Edge business sells cableaccess solutions and related services, including our CableOS software-based CCAP solutions, primarily to cable operators globally.On February 29, 2016, we completed the acquisition of TVN. TVN is assigned to our Video segment and its results of operations are included in ourConsolidated Statements of Operations beginning March 1, 2016. The TVN acquisition was primarily funded with cash proceeds from the issuance of theNotes in December 2015. The acquisition of TVN strengthened our competitive position in the video infrastructure market as well as enhanced the depth andscale of our research and development and service and support capabilities in the video arena.Historically, our revenue has been dependent upon capital spending in the cable, satellite, telco, broadcast and media industries, including streamingmedia. Our customers’ capital spending patterns are dependent on a variety of factors, including but not limited to: economic conditions in the U.S. andinternational markets; access to financing; annual budget cycles of each of the industries we serve; impact of industry consolidations; and customerssuspending or reducing capital spending in anticipation of new products or new standards, new industry trends and/or technology shifts. If our productportfolio and product development plans do not position us well to capture an increased portion of the capital spending in the markets in which we compete,our revenue may decline. As we attempt to further diversify our customer base in these markets, we may need to continue to build alliances with otherequipment manufacturers, content providers, resellers and system integrators, managed services providers and software developers; adapt our products fornew applications; take orders at prices resulting in lower margins; and build internal expertise to handle the particular operational, payment, financing and/orcontractual demands of our customers, which could result in higher operating costs for us.A majority of our revenue has been derived from relatively few customers, due in part to the consolidation of our service provider customers. Sales toour 10 largest customers in 2017, 2016 and 2015 accounted for approximately 24%, 28% and 32% of our revenue, respectively. Although we are attemptingto broaden our customer base by penetrating new markets and further expanding internationally, we expect to see continuing industry consolidation andcustomer concentration. During 2017 and 2016, no single customers accounted for more than 10% of our net revenue. During 2015, revenue from Comcastaccounted for 12%, of our net revenue. No other single customer accounted for more than 10% of our net revenue in 2015. The loss of any significantcustomer, or any material reduction in orders from any significant customer, or our failure to qualify our new products with any significant customer couldmaterially and adversely affect our operating results, financial condition and cash flows.Our net revenue decreased $47.7 million, or 12% in 2017, compared to 2016, due to a $32.0 million and $15.7 million decrease in our Video segmentand Cable Edge segment revenue, respectively. The decrease in our Video segment revenue in 2017 was primarily due to the shift in customer investmentpriorities from our traditional Pay-TV broadcast products to OTT SaaS subscriptions, and an associated softer demand environment for traditional videobroadcast products. The decrease in our Cable Edge segment revenue in 2017 was primarily due to continued weak demand for our legacy Cable Edgeproducts due to technology transition in the industry from legacy EdgeQAM consumption used to deliver broadcast Pay-TV services to a new architecturethat is capable of delivering converged video and IP data services.36Table of ContentOur Video segment customers continue to be cautious with investments in new technologies, such as next-generation IP architecture and Ultra HD. Webelieve a material and growing portion of the opportunities for our video business are linked to a migration by our customers to IP workflows and thedistribution of linear and on-demand, OTT, and new mobile video services. We continue to steadily transition our video business away from legacy andcustomized computing hardware to more software-centric solutions and services, including OTT SaaS subscription offerings, enabling video compression andprocessing through our VOS software platform running on standard off-the-shelf servers, data centers and in the cloud.Our Cable Edge strategy is to become a major player in the converged cable access platform (“CCAP”) market by delivering disruptive new virtualizedDOCSIS 3.1 CMTS technology and related CCAP architectures, which we collectively refer to as CableOS. In the meantime, our Cable Edge segment isexperiencing declining demand as our customers have decreased spending on our legacy Cable Edge products to prepare for the adoption of new virtualizedDOCSIS 3.1 CMTS solutions and distributed access architectures. While these trends present near-term challenges for us, we continue to make progress in thedevelopment of CableOS solutions and growth of our CableOS business with expanded commercial deployments, field trials, and customer engagementssince our first CableOS shipments in the fourth quarter of 2016.To support our Cable Edge strategy and foster the further development and growth of this segment, in September 2016, we issued Comcast a Warrant tofurther incentivize them to purchase our products and adopt our technologies, particularly our CableOS CCAP systems. Pursuant to the Warrant, Comcastmay, subject to certain vesting provisions, purchase up to 7,816,162 shares of our common stock, for a per share exercise price of $4.76. Because the Warrantis considered an incentive for Comcast to purchase certain of the Company’s products, the value of the Warrant is recorded as a reduction in the Company’snet revenues to the extent such value does not exceed net revenues from pertinent sales to Comcast. (See Note 16, “Warrants,” of the Notes to ourConsolidated Financial Statements for additional information).As a result of the continued uncertainty regarding the timing of our customers’ investment decisions, we implemented restructuring plans, including our2016, 2017 and 2018 restructuring plans, to better align the Company's resources and strategic goals, while simultaneously implementing an extensiveCompany-wide expense control program. (See Note 10, “Restructuring and Related Charges” and Note 20, “Subsequent Event”, of the Notes to ourConsolidated Financial Statements for additional information).Our aggregate balance of cash and cash equivalents as of December 31, 2017 was $57.0 million and during the fiscal year 2017, we generated $3.1million of cash from operations. We also entered into a $15 million line of credit with Silicon Valley Bank in September 2017. We expect that our currentsources of liquidity will provide us adequate liquidity based on our current plan for the next twelve months.Critical Accounting Policies, Judgments and EstimatesThe preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect thereported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements andaccompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates weremade. See Note 2 of the notes to our Consolidated Financial Statements for details of our accounting policies. Critical accounting policies, judgments andestimates that we believe have the most significant impact on Harmonic’s financial statements are set forth below:•Revenue recognition;•Valuation of inventories;•Business combination;•Impairment of goodwill or long-lived assets;•Assessment of the probability of the outcome of current litigation;•Accounting for income taxes; and•Stock-based compensation.Revenue RecognitionHarmonic’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and the sale of end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. We also derive subscription revenues, which are comprised ofsubscription fees from customers utilizing the Company’s cloud-37Table of Contentbased media processing solutions. Harmonic recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services havebeen provided, the sale price is fixed or determinable, and collectability is reasonably assured. Subscription revenue is recognized based on usage.We generally use contracts and customer purchase orders to determine the existence of an arrangement. Shipping documents and customer acceptance,when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with thetransaction and whether the price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer, asdetermined by credit checks and analysis, as well as the customer’s payment history.Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accountingperiod. Because of the concentrated nature of our customer base, different judgments or estimates made for any one large contract or customer could result inmaterial differences in the amount and timing of revenue recognized in any particular period.We have multiple-element revenue arrangements that include hardware and software essential to the hardware product’s functionality, non-essentialsoftware, services and support. We allocate revenue to all deliverables based on their relative selling prices. We determine the relative selling prices by firstconsidering vendor-specific objective evidence of fair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. Whenwe are unable to establish selling price using VSOE or TPE, we use our best estimate of selling price (“BESP”) in our allocation of arrangement consideration.The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. BESP is generallyused for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company’s process for determining BESPinvolves management’s judgment, and considers multiple factors that may vary over time, depending upon the unique facts and circumstances related to eachdeliverable. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consideradditional factors, the Company’s BESP may also change. Once revenue is allocated to all deliverables based on their relative selling prices, revenue relatedto hardware elements (hardware, essential software and related services) are recognized using a relative selling price allocation and non-essential software andrelated services are recognized under the residual method.Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the software revenuerecognition guidance. In accordance with the software revenue recognition guidance, the Company applies the residual method to recognize revenue for thedelivered elements in stand-alone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the totalarrangement consideration, less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value exists for allundelivered elements. We establish fair value by reference to the price the customer is required to pay when an item is sold separately, using contractuallystated, substantive renewal rates, when applicable, or the price of recently completed stand alone sales transactions. Accordingly, the determination as towhether appropriate objective and reliable evidence of fair value exists can impact the timing of revenue recognition for an arrangement.Solution sales for the design, manufacture, test, integration and installation of products are accounted for in accordance with applicable guidance onaccounting for performance of construction/production contracts, using the percentage-of-completion method of accounting when various requirements forthe use of this accounting guidance exist. Under the percentage-of-completion method, our revenue recognized reflects the portion of the anticipated contractrevenue that has been earned, equal to the ratio of actual labor hours expended to total estimated labor hours to complete the project. Costs are recognizedproportionally to the labor hours incurred. Management believes that, for each such project, labor hours expended in proportion to total estimated hours atcompletion represents the most reliable and meaningful measure for determining a project’s progress toward completion. This requires us to estimate, at theoutset of each project, a detailed project plan and associated labor hour estimates for that project. For contracts that include customized services for whichlabor costs are not reasonably estimable, the Company uses the completed contract method of accounting. Under the completed contract method, 100% ofthe contract’s revenue and cost is recognized upon the completion of all services under the contract. If the estimated costs to complete a project exceed thetotal contract amount, indicating a loss, the entire anticipated loss is recognized. Our application of the percentage-of-completion method of accounting issubject to our estimates of labor hours to complete each project. In the event that actual results differ from these estimates or we adjust these estimates infuture periods, our operating results, financial position or cash flows for a particular period could be adversely affected.Revenue on shipments to resellers and systems integrators is generally recognized on delivery. Resellers and systems integrators purchase our productsfor specific capital equipment projects of the end-user and do not hold inventory as a standard operating practice. They perform functions that includeimportation, delivery to the end-customer, installation or integration, and post-sales service and support. Our agreements with these resellers and systemsintegrators have terms which are generally consistent with the standard terms and conditions for the sale of our equipment to end users and do not provide forproduct rotation or pricing allowances, as are typically found in agreements with stocking resellers. We have long-term relationships38Table of Contentwith most of these resellers and systems integrators and substantial experience with similar sales of similar products. We do have instances of acceptingproduct returns from resellers and system integrators. However, such returns typically occur in instances where the system integrator has designed a productinto a project for the end user, but the integrator requests permission to return the component as it does not meet the specific project’s functionalrequirements. Such returns are made solely at our discretion, as our agreements with resellers and system integrators do not provide for return rights. We havesufficient experience monitoring product returns from our resellers, and, accordingly, we have concluded that we should use a sell-in model for our resellersales.Valuation of InventoriesWe state inventories at the lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in,first-out basis. We write down the cost of excess or obsolete inventory to net realizable value based on future demand forecasts and historical consumption. Ifthere were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because ofrapidly changing technology and customer requirements, we could be required to record additional charges for excess and obsolete inventory and our grossmargin could be adversely affected. Inventory management is of critical importance in order to balance the need to maintain strategic inventory levels toensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.Business CombinationWe applied the acquisition method of accounting for business combinations to our acquisition of TVN, which closed on February 29, 2016. (See Note6, “Business Acquisition,” for additional information on TVN acquisition). Under this method of accounting, all assets acquired and liabilities assumed arerecorded at their respective fair values at the date of the completion of the transaction. Determining the fair value of assets acquired and liabilities assumedrequires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cashinflows and outflows, discount rates, intangibles and other asset lives, among other items. Fair value is defined as the price that would be received in a sale ofan asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants areassumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an assetassume the highest and best use of that asset by market participants. As a result, we may have been required to value the acquired assets at fair valuemeasurements that do not reflect its intended use of those assets. Use of different estimates and judgments could yield different results. Any excess of thepurchase price over the fair value of the net assets acquired is recognized as goodwill.During the fourth quarter of 2016, we completed the accounting for this business combination.Impairment of Goodwill or Long-lived AssetsGoodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed.We test for goodwill impairment at the reporting unit level, which is the same as our operating segment, on an annual basis in the fourth quarter of each of ourfiscal years, and at any other time at which events occur or circumstances indicate that the carrying amount of goodwill may exceed its fair value.The provisions of the accounting standard for goodwill and other intangibles allows us to first assess qualitative factors to determine whether it isnecessary to perform the two-step quantitative goodwill impairment test. Various factors are considered in the qualitative assessment, includingmacroeconomic conditions, financial performance, or a sustained decrease in share price. If as a result of the qualitative assessment, it is deemed more likelythan not that the fair value of a reporting unit is less than its carrying amount, management will perform the quantitative test.We use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to itsnet book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step ofthe process, which is performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s netassets other than goodwill and the fair value of the reporting unit. If this difference is less than the net book value of goodwill, an impairment exists and isrecorded.In the first step, the fair value of each of our reporting units is determined using both the income and market valuation approaches. Under the incomeapproach, the fair value of the reporting unit is based on the present value of estimated future cash flows that the reporting unit is expected to generate overits remaining life. Under the market approach, the value of the reporting unit is based on an analysis that compares the value of the reporting unit to values ofpublicly-traded companies in similar lines of business. In the application of the income and market valuation approaches, we are required to make estimates39Table of Contentof future operating trends and judgments on discount rates and other variables. Determining the fair value of a reporting unit is highly judgmental in natureand involves the use of significant estimates and assumptions. We base our fair value estimates on assumptions we believe to be reasonable but that areunpredictable and inherently uncertain. Actual future results related to assumed variables could differ from these estimates. In addition, we make certainjudgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flowprojections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions.The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and theuncertainty related to the business's ability to execute on the projected cash flows. Under the market approach, we estimate the fair value based on marketmultiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reportingunits, and then apply a control premium which is determined by considering control premiums offered as part of the acquisitions that have occurred in marketsegments that are comparable with our reporting units.During the fourth quarter of 2017, we performed the first step of goodwill impairment testing for our two reporting units as part of our annual goodwillimpairment test and concluded that goodwill was not impaired. We have not recorded any impairment charges related to goodwill for any prior periods.We evaluate the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicatorsare present, we evaluate the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows expected to result from theuse of each asset group and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset, animpairment loss is recognized in order to write down the carrying value of the asset to its estimated fair market value.Assessment of the Probability of the Outcome of Current LitigationFrom time to time, we are involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in theordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employmentand other matters. We assess potential liabilities in connection with each lawsuit and threatened lawsuits and accrue an estimated loss for these losscontingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates that it is probable thata liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certain matters to which we area party specify the damages claimed, such claims may not represent reasonably probable losses. Given the inherent uncertainties of litigation, the ultimateoutcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual propertyinfringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, oran unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on our business, operatingresults, financial position and cash flows.See Note 19, “Legal Proceedings,” of the notes to our Consolidated Financial Statements for additional information on the Avid litigation).Accounting for Income TaxesIn preparing our financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating ouractual current tax exposures and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax andaccounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheet.We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverseoutcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We apply the provisions of the applicableaccounting guidance regarding accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognitionand de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefitmeasured at the largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requiresthat a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period in which suchdetermination is made.40Table of ContentWe file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position isaudited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, webelieve that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest and penalties, in light ofchanging facts and circumstances. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Ifpayment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period whenwe determine the liabilities are no longer necessary. Any changes in estimate, or settlement of any particular position, could have a material impact on ouroperating results, financial condition and cash flows.Stock-based CompensationWe measure and recognize compensation expense for all stock-based compensation awards made to employees and non-employee directors, includingstock options, restricted stock units and awards related to our Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair value of those awards.The grant date fair value of restricted stock units is based on the fair value of our common stock on the date of grant. The grant date fair value of our stockoptions and ESPP is estimated using the Black-Scholes option pricing model.The determination of fair value of stock options and ESPP on the date of grant, using an option-pricing model, is affected by our stock price, as well asassumptions regarding a number of highly complex and subjective variables. These variables include our expected stock price volatility over the term of theawards, actual and projected employee stock option exercise behaviors, risk-free interest rates, and expected dividends. We estimated the expected life of theawards based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractuallife of the options and purchase rights. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of theawards. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expecteddividend yield is zero.Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures and, accordingly, was recorded for only thosestock-based awards that we expected to vest. Upon the adoption of Accounting Standard Update No. 2016-09, Compensation - Stock Compensation (Topic718), issued by the Financial Accounting Standards Board, our accounting policy was changed to account for forfeitures as they occur. The change wasapplied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased theaccumulated deficit). The implementation of this accounting standard update has no impact to our statement of cash flows because we do not have any excesstax benefits from share-based compensation because our tax provision is primarily under full valuation allowance. No prior periods were recast as a result ofthis change in accounting policy.We recognize the stock-based compensation expense for performance-based RSUs (“PRSUs”) based on the probability of achieving certainperformance criteria, as defined in the PRSU agreements. We estimate the number of PRSUs ultimately expected to vest and recognize expense using thegraded vesting attribution method over the requisite service period. Changes in our estimates related to probability of achieving certain performance criteriaand number of PRSUs expected to vest could significantly affect the stock-based compensation expense from one period to the next.If factors change and we employ different assumptions to determine the fair value of our stock-based compensation awards granted in future periods, thecompensation expense that we record under it may differ significantly from what we have recorded in the current period.See Note 12, “Employee Benefit Plans and Stock-based Compensation,” of the notes to our Consolidated Financial Statements for additionalinformation.Results of OperationsNet RevenueThe following table presents the breakdown of net revenue by geographical region (in thousands, except percentages):41Table of Content Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Americas$171,736 $207,249 $212,568 $(35,513)(17)% $(5,319)(3)%EMEA117,129 126,752 92,422 (9,623)(8)% 34,33037 %APAC69,381 71,910 72,037 (2,529)(4)% (127)— % Total net revenue$358,246 $405,911 $377,027 $(47,665)(12)% $28,8848 % Regional revenue as a % of total net revenue: Americas48% 51% 56% EMEA33% 31% 25% APAC19% 18% 19% Fiscal 2017 compared to Fiscal 2016Net revenue in the Americas decreased $35.5 million, or 17% in 2017, compared to 2016, largely due to decreased demand for our video products ascustomers transition investment from traditional linear broadcast video products to our new OTT and SaaS solutions, which are being used to stream premiumvideo content to mobile devices, computers and smart TVs, including large screen Ultra HD TVs.EMEA net revenue decreased $9.6 million, or 8% in 2017, compared to 2016, primarily due to the aforementioned shift from traditional broadcast Pay-TV products to OTT technologies and SaaS subscriptions, partially offset by an increase in Cable Edge segment revenue as a result of increased customerdemand for our new CableOS system, compared to 2016.APAC net revenue decreased $2.5 million, or 4% in 2017 compared 2016, primarily due to timing of customer investments in video infrastructure aswell as the negative impact from the technology shift in both segments.Fiscal 2016 compared to Fiscal 2015Net revenue in the Americas decreased $5.3 million, or 3%, in 2016 compared to 2015, primarily due to the transition to new DOCSIS 3.1 technologies,which has impacted our Cable Edge business in the near-term, offset in part by improved service provider spending for our Video products and services.EMEA net revenue increased $34.3 million, or 37%, in 2016 compared to 2015, primarily due to improved Video product and service revenue, whichwas partially offset by the decline in service provider demand for our Cable Edge products as they transition to new DOCSIS 3.1 technologies.APAC net revenue decreased $0.1 million in 2016 compared to 2015, primarily attributable to softer demand for our Cable Edge products due to thetransition to DOCISIS 3.1 technologies, partially offset by increased Video service revenue from our service provider customers.Gross ProfitThe following presents the gross profit and gross profit as a percentage of net revenue (“gross margin”) (in thousands, except percentages): Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Gross profit$169,820 $200,750 $202,712 $(30,930)(15)% $(1,962)(1)%As a percentage of net revenue(“gross margin”)47.4% 49.5% 53.8% (2.1)% (4.3)% Gross margin decreased 2.1% in 2017, as compared to 2016, primarily due to an unfavorable product sales mix, including transition from our traditionallinear broadcast products to our new SaaS solutions, as well as lower service margins due to increased CableOS field trial activities and new productionintroduction costs, higher under-absorbed factory overhead costs,42Table of Contentprimarily driven by lower revenue and purchase levels year over year. In 2017, we recorded an inventory obsolescence charge of approximately $3.7 millionfor our legacy Cable Edge product lines, compared to $4.0 million in 2016.Gross margin decreased 4.3% in 2016, as compared to 2015. The decrease in gross margin was primarily due to the inclusion of TVN’s operating resultswhich resulted in higher material, labor and overhead costs attributable to the additional headcount and facilities acquired in connection with the TVNacquisition. In addition, the restructuring costs incurred in 2016 related to the termination of employees of the TVN French Subsidiary under the TVN VDP,and the increase of $3.7 million in amortization expense related to intangibles acquired from TVN. Gross margin was unfavorably impacted by an inventoryobsolescence charge of approximately $4.0 million for legacy Cable Edge product lines. These unfavorable margin impacts were offset in part by increasedservice and support revenue in 2016 compared to 2015.Research and DevelopmentOur research and development expense consists primarily of employee salaries and related expenses, contractors and outside consultants, supplies andmaterials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existingproducts. The following table presents the research and development expenses and the expense as a percentage of net revenue (in thousands, exceptpercentages): Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Research and development$95,978 $98,401 $87,545 $(2,423)(2)% $10,85612%As a percentage of net revenue26.8% 24.2% 23.2% The $2.4 million, or 2%, decrease in research and development expense in 2017 compared to 2016 was primarily due to lower project material andoutside consulting spending due to the completion of certain research and development projects in early 2017, lower employee compensation costs due toheadcount reduction, and lower outside engineering services due to cost reduction efforts. The research and development expense in each of 2017 and 2016were net of $6.0 million in reimbursements of engineering spending in each of the year by one of our large customers, as well as $5.9 million and $6.1 millionof French R&D tax credits, respectively.The $10.9 million, or 12%, increase in research and development expense in 2016 compared to 2015 was primarily due to the inclusion of TVN’s post-acquisition research and development expenses and higher expenses for CableOS product development. Such increase was offset in part by $6.0 million inreimbursements of engineering spending by one of our large customers, as well as $6.1 million of French R&D tax credits in 2016.Our TVN French Subsidiary participates in the French CIR program which allows companies to monetize eligible research expenses. We recognize R&Dtax credits receivable from the French government for spending on innovative research and development as an offset to research and development expenses.Selling, General and AdministrativeThe following table presents the selling, general and administrative expenses and the expense as a percentage of net revenue (in thousands, exceptpercentages): Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Selling, general and administrative$136,270 $144,381 $120,960 $(8,111)(6)% $23,42119%As a percentage of net revenue38.0% 35.6% 32.1% The $8.1 million, or 6%, decrease in selling, general and administrative expenses in 2017 compared to 2016 was primarily due to lower TVNacquisition- and integration- related costs in 2017 as majority of the integration projects were completed in early 2017. In addition, lower headcountexpenses and lower depreciation expenses from reduction in capital expenditure also contributed to the decrease year over year. These reductions were offsetin part by a $6.0 million charge related to the Avid litigation settlement in 2017. (See Note 18, “Commitments and Contingencies-Legal Proceedings,” foradditional information on the Avid litigation),43Table of ContentThe $23.4 million, or 19%, increase in selling, general and administrative expenses in 2016 compared to 2015 was primarily due to the inclusion ofTVN’s post acquisition selling, general and administrative expenses, as well as TVN acquisition- and integration- related costs. Such increases were offset inpart by lower headcount expenses and efforts to reduce sales and marketing related expenses.Segment Financial ResultsThe following table provides summary financial information by reportable segment (in thousands, except percentages): Year ended December 31, 2017 (1) 2016 2015 2017 vs. 2016 2016 vs. 2015Video Revenue$319,473 $351,489 $291,779 $(32,016)(9)% $59,71020 %Gross profit173,414 194,044 167,573 (20,630)(11)% 26,47116 %Operating income (loss)(2,024) 11,963 13,529 (13,987)(117)% (1,566)(12)% Segment revenue as % of totalrevenue89.2 % 86.6 % 77.4 % 2.6 % 9.2 % Gross margin %54.3 % 55.2 % 57.4 % (0.9)% (2.2)% Operating margin %(0.6)% 3.4 % 4.6 % (4.0)% (1.2)% Cable Edge Revenue$38,773 $54,422 $85,248 $(15,649)(29)% $(30,826)(36)%Gross profit8,892 21,174 37,832 (12,282)(58)% (16,658)(44)%Operating loss(23,154) (12,131) (1,599) (11,023)91 % (10,532)659 % Segment revenue as % of totalrevenue10.8 % 13.4 % 22.6 % (2.6)% (9.2)% Gross margin %22.9 % 38.9 % 44.4 % (16.0)% (5.5)% Operating margin %(59.7)% (22.3)% (1.9)% (37.4)% (20.4)% Total Revenue$358,246 $405,911 $377,027 $(47,665)(12)% $28,8848 %Gross profit182,306 215,218 205,405 (32,912)(15)% 9,8135 %Operating income (loss)(25,178) (168) 11,930 (25,010)14,887 % (12,098)(101)%(1) We have historically employed an aggregate allocation methodology based on total revenues to attribute professional services revenue and salesexpenses between our Video and Cable Edge segments. Beginning in the fourth quarter of 2017, we have prospectively changed to a more precise attributionmethodology as the activities of selling and supporting our CableOS solution have become increasingly distinct from those of our Video solutions. Theimpact of making this change in the fourth quarter of 2017 compared to our historical approach was a reduction in operating income of $2.4 million from ourVideo segment and a corresponding increase to the operating income of our Cable Edge segment. We believe that the updated allocation methodology willprovide greater clarity regarding the operating metrics of our Video and Cable Edge business segments.A reconciliation of our consolidated segment operating income (loss) to consolidated loss before income taxes is as follows (in thousands):44Table of Content Year ended December 31, 2017 2016 2015Total segment operating income (loss)$(25,178) $(168) $11,930Unallocated corporate expenses (1)(20,767) (38,972) (2,794)Stock-based compensation(16,610) (13,060) (15,582)Amortization of intangibles(8,322) (14,836) (6,502)Consolidated loss from operations(70,877) (67,036) (12,948)Non-operating expense, net(13,830) (13,394) (3,120)Loss before income taxes$(84,707) $(80,430) $(16,068)(1) We do not allocate amortization of intangibles, stock-based compensation, restructuring and related charges, TVN acquisition- and integration-related costs, and certain other non-recurring charges to the operating income for each segment because management does not include this information in themeasurement of the performance of the operating segments.VideoOur Video segment net revenue decreased $32.0 million, or 9% in 2017, compared to 2016, due to a $39.9 million decrease in video product revenue,offset in part by a $7.9 million increase in video service revenue. The decrease in our Video segment net revenue in 2017 reflects our customers’ transitionfrom our traditional linear broadcast products to our new OTT technologies and SaaS solutions, partially offset by higher revenue due to the inclusion of twoadditional months of TVN post-acquisition revenue, compared to 2016. Video segment operating margin decreased 4.0% in 2017, compared to 2016,primarily due to decrease in video product revenue which led to higher unabsorbed factory overhead and higher inventory obsolescence charges for ourlegacy broadcast video inventory, offset partially by a decrease in discretionary operating expenses.Our Video segment net revenue increased $59.7 million, or 20%, in 2016 compared to 2015. This increase was primarily attributable to a $40.6 millionincrease in video product revenue and a $19.1 million increase in video service revenue, and such increases were primarily due to the acquisition of TVNwhich contributed approximately $60.0 million of revenue in 2016. Video segment operating margin decreased 1.2% in 2016, compared to 2015, primarilydue to unfavorable product mix and the inclusion of TVN’s lower gross margins and higher headcount and facilities costs related to the TVN acquisition.Cable EdgeOur Cable Edge segment net revenue decreased $15.6 million, or 29% in 2017, compared to 2016, primarily due to continuing lower demand for ourlegacy EdgeQAM technologies as some of our customers defer purchases as they plan for a migration to next generation DOCSIS 3.1 technologies and CCAParchitectures. Cable Edge segment operating margin decreased 37.4% in 2017, compared to 2016, due to the reduced demand for our legacy EdgeQAMproducts as well as higher service costs related to increased CableOS trial activity and new product introduction costs, as well as higher research anddevelopment expenses for CableOS development in 2017.Our Cable Edge segment net revenue decreased $30.8 million, or 36%, in 2016 compared to 2015. The decrease was primarily due to reduce in demandas some of our customers are deferring purchases as they plan their migration to next generation DOCSIS 3.1 technologies and CCAP architectures. CableEdge segment operating margin decreased 20.4% in 2016, compared to 2015, primarily due to the decrease in Cable Edge segment revenue and higherresearch and development expenses for CableOS development.Amortization of Intangibles Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Amortization of intangibles$3,142 $10,402 $5,783 $(7,260)(70)% $4,61980%As a percentage of net revenue0.9% 2.6% 1.5% The decrease in amortization of intangibles expense in 2017, compared to 2016, was primarily because certain acquired intangible assets were fullyamortized. The increase in the amortization of intangibles expense in 2016 compared to 2015 was primarily due to the amortization of intangibles related tothe acquisition of TVN.45Table of ContentRestructuring and Related ChargesWe implemented several restructuring plans in the past few years with the goal of bringing operational expenses to appropriate levels relative to our netrevenues. We account for our restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and related charges areincluded in “Product cost of revenue” and “Operating expenses-restructuring and related charges” in the Consolidated Statements of Operations. Thefollowing table summarizes the restructuring and related charges (in thousands): Year ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015Product cost of revenue$1,279 $3,400 $113 $(2,121) (62)% $3,287 2,909%Operating expenses-Restructuring andrelated charges5,307 14,602 1,372 (9,295) (64)% 13,230 964%Total$6,586 $18,002 $1,485 $(11,416) (63)% $16,517 1,112%The $11.4 million decrease in restructuring and related charges in 2017, compared to 2016, was primarily due to lower TVN VDP costs in 2017,compared to 2016. Most of the TVN VDP costs were recorded in 2016 based on the departing employees’ service period.The $16.5 million increase in restructuring and related charges in 2016, compared to 2015, was primarily due to the VDP implemented in the fourthquarter of 2016 to allow the employees in the TVN French Subsidiary to voluntarily terminate their employment with certain benefits. Based on theapplicable accounting guidance, we recorded $13.1 million restructuring and related charges under the TVN VDP in 2016. In 2016, we also recorded a $2.2million restructuring and related charge related to our excess facility at the U.S. headquarters in San Jose, California.See Note 10, “Restructuring and Related Charges,” of the notes to our Consolidated Financial Statements for details on each of our restructuring plans.Interest Expense, NetInterest expense, net was $11.1 million, $10.6 million and $0.3 million during 2017, 2016 and 2015, respectively. The increase in interest expense, netfrom 2015 to 2016 is primarily due to increased amortization of discount and issuance costs for the Notes issued in December 2015. (See Note 11,“Convertible Notes, Other Debts and Capital Leases,” of the notes to our Consolidated Financial Statements for additional information on the Notes).Other Expense, NetOther expense, net was $2.2 million, $31,000 and $0.3 million during 2017, 2016 and 2015, respectively. Other expense, net is primarily comprised offoreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated in currencies other than the functional currency ofthe reporting entity. Our foreign currency exposure is primarily driven by the fluctuations in the foreign currency exchanges rates of the Euro, British pound,Japanese yen and Israeli shekels. The increase in other expense, net in 2017 compared to 2016 was primarily due to the effect of the strengthening of the Euroand British pound on our intercompany balances. See “Foreign Currency Exchange Risk” under Item 7A of this Annual Report on Form 10-K for additionalinformation.Loss on Impairment of Long-term InvestmentSince mid-2016, the stock price of Vislink, our equity investment which trades on the AIM exchange, has traded below its cost basis. Based on ourassessment of the positive and negative factors of Vislink’s financial and business conditions, we believe that more-likely-than-not, Vislink’s stock price maynot recover to its cost basis and, as a result, we recorded a total of $2.7 million impairment charges in 2016. In February 2017, Vislink completed the disposalof its hardware division and changed its name to Pebble Beach Systems (from thereon, referred to as Pebble Beach Systems). In February 2017, Pebble BeachSystems also announced its financial results for fiscal 2016 which showed a significant increase in operating losses and at the same time Pebble BeachSystems announced that it was considering a sale of the company. Since February 2017, Pebble Beach Systems’ stock price has declined to below ourreduced cost basis. In view of Pebble Beach Systems’ potential sale opportunity, we determined that the decline in the fair value of Pebble Beach Systems’investment in the first nine months of 2017 was not considered permanent yet. However, in the fourth quarter of 2017, Pebble Beach Systems announced thatit had46Table of Contentterminated its sale process due to lack of viable offers and that it would work on refinancing its debts and revising its bank covenants to improve its liquidity.Based on this fourth quarter announcement, without the sale opportunity and its highly leveraged financial conditions, we believe that it is more-likely-than-not that Pebble Beach Systems’ investment is recoverable. As a result, during the fourth quarter of 2017, we wrote off the remaining carrying value andreleased all the balances in the accumulated other comprehensive loss to earnings, resulting in an impairment charge of $0.5 million in the fourth quarter of2017.In 2015, based on our assessment of VJU’s expected cash flows, we determined that the investment in VJU was not expected to be recoverable, as aresult, we recorded an impairment charge of $2.5 million in 2015. The VJU investment was sold for $6,000 in the fourth quarter of 2017.Income TaxesWe reported the following operating results for each of the three years ended December 31, 2017, 2016 and 2015 (in thousands, except percentages): Year ended December 31, 2017 2016 2015Loss before income taxes(84,707) (80,430) (16,068)Benefit from income taxes(1,752) (8,116) (407)Effective income tax rate2% 10% 3%Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from ouroperations in lower tax jurisdictions throughout the world and our valuation allowance in the U.S. In addition, our effective tax rates vary in each periodprimarily due to specific one-time, discrete items that affected the tax rate in the respective period.In 2017, our effective income tax rate of 2% differed from the U.S. federal statutory rate of 35% primarily due to our geographical income mix,favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate changes in foreign jurisdictions, tax benefits associatedwith the release of tax reserves for uncertain tax positions resulting from the expiration of the applicable statute of limitations, a one-time benefit from thereduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA, partially offsetby the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-basedcompensation, and the net of various other discrete tax adjustments.On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income taxrate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred andcreates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed the accounting for the tax effects of enactment of theTCJA; however, the effects on existing deferred tax balances has been determined and recorded. The impact of remeasuring deferred tax assets at a lower taxrate is a $14.5 million reduction of the value of net deferred tax assets (which represent future tax benefits), which is offset by a corresponding reduction inthe related valuation allowance. As a result, there is net zero impact to our tax expense for 2017. Under the TCJA, the corporate AMT was repealed. Therefore,corporations which have been unable to utilize AMT credit carryforwards now have the opportunity to realize them through cash refunds. We have an AMTcredit carryforward of $2.6 million that previously was not considered realizable and as such had a valuation allowance recorded. As a result of the TCJA, thevaluation allowance was released and is reflected as a benefit in our 2017 income tax provision. We have reclassified the $2.6 million credit carryforward toother receivables in the consolidated balance sheet to reflect the expected cash refund.The TCJA also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously notrepatriated for U.S. income tax purposes. Although we currently do not expect to be impacted by the mandatory deemed repatriation provision of the TCJA,because we believe our cumulative unremitted earnings and profits are negative, due to the complexity of our international tax and legal entity structure, wewill continue to analyze the earnings and profits and tax pools of our foreign subsidiaries to reasonably estimate the effects of the mandatory deemedrepatriation provision of the TCJA over the one-year measurement period.In 2016, our effective income tax rate of 10% differed from the then-applicable U.S. federal statutory rate of 35% primarily due to our geographicalincome mix and our tax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorableresolutions of uncertain tax positions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offsetby the increase in the47Table of Contentvaluation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.In 2015, our effective income tax rate of 3% differed from the then-applicable U.S. federal statutory rate of 35%, primarily due to a difference in foreigntax rates and our losses generated in the United States for the year received no tax benefit as a result of a full valuation allowance against all of our U.S.deferred tax assets, as well as adjustments relating to our 2014 U.S. federal tax return filed in September 2015 and a reversal of uncertain tax positionsresulting from the expiration of statutes of limitations. In addition, the impairment of the VJU investment (see Note 3, “Investments in Other EquitySecurities”) received no tax benefit.For a reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 14,“Income Taxes,” of the notes to our Consolidated Financial Statements.Liquidity and Capital ResourcesAs of December 31, 2017, our principal sources of liquidity consisted of cash and cash equivalents of $57.0 million, net accounts receivable of $69.8million, our $15 million line of credit with Silicon Valley Bank, described in more detail below, and financing from French government agencies. As ofDecember 31, 2017, we had $128.25 million in convertible senior notes outstanding (“Notes”), which are due on December 1, 2020. The Notes bear interestat a fixed rate of 4.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. We also had debts with French government agenciesand to a lesser extent, with other financial institutions, primarily in France, in the aggregate of $22.9 million at December 31, 2017.Our cash and cash equivalents of $57.0 million as of December 31, 2017 consisted of bank deposits held throughout the world, of which $33.5 millionof the cash and cash equivalents balance was held outside of U.S. At present, such foreign funds are considered to be indefinitely reinvested in foreigncountries to the extent of indefinitely reinvested foreign earnings. In the event funds from foreign operations are needed to fund cash needs in the UnitedStates and if U.S. taxes have not already been previously accrued, we may be required to accrue and pay additional U.S. and foreign withholding taxes inorder to repatriate these funds.Our principal uses of cash will include repayments of debt and related interest, purchases of inventory, payroll, restructuring expenses, and otheroperating expenses related to the development and marketing of our products, purchases of property and equipment and other contractual obligations for theforeseeable future. We believe that our cash and cash equivalents of $57.0 million at December 31, 2017 will be sufficient to fund our principal uses of cashfor at least the next 12 months. However, if our expectations are incorrect, we may need to raise additional funds to fund our operations, to take advantage ofunanticipated strategic opportunities or to strengthen our financial position. In the future, we may enter into other arrangements for potential investments in,or acquisitions of, complementary businesses, services or technologies, which could require us to seek additional equity or debt financing. Additional fundsmay not be available on terms favorable to us or at all.On September 27, 2017, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”). The LoanAgreement provides for a secured revolving credit facility in an aggregate principal amount of up to $15.0 million. Under the terms of the Loan Agreement,the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time cannot exceed up to 85% of our eligible receivables.Under the terms of the Loan Agreement, we may also request letters of credit from the Bank. Loans under the Loan Agreement will bear interest at our option,and subject to certain conditions, at an annual rate of either a prime rate or a LIBOR rate plus an applicable margin of 2.25%. There will be no applicablemargin for prime rate advances when we are in compliance with the liquidity requirement of at least $20.0 million in the aggregate of consolidated cash plusavailability under the Loan Agreement (the “Liquidity Requirement”) and a 0.25% margin for prime rate advances when we are not in compliance with theLiquidity Requirement. We may not request LIBOR advances when not in compliance with the Liquidity Requirement. Interest on each advance is due andpayable monthly and the principal balance is due at maturity. Our obligations under the revolving credit facility are secured by a security interest onsubstantially all of its assets, excluding intellectual property. The Loan Agreement contains customary affirmative and negative covenants. We must complywith financial covenants requiring maintaining (i) a minimum short-term asset to short-term liabilities ratio and (ii) minimum adjusted EBITDA, in theamounts and for the periods as set forth in the Loan Agreement. We must also maintain a minimum liquidity amount, comprised of unrestricted cash held ataccounts with the Bank plus proceeds available to be drawn under the Loan Agreement, equal to $10.0 million at all times. There were no borrowings underthe Loan Agreement from the closing of the Loan Agreement through December 31, 2017. As of December 31, 2017, we were in compliance with thecovenants under the Loan Agreement.The table below presents selected cash flow data for the periods presented (in thousands):48Table of Content Year ended December 31, 2017 2016 2015 (In thousands)Net cash provided by operating activities$3,064 $438 $6,351Net cash used in investing activities(4,213) (70,478) (10,414)Net cash provided by (used in) financing activities895 (152) 57,533Effect of exchange rate changes on cash and cash equivalents1,643 (363) (312)Net increase (decrease) in cash and cash equivalents$1,389 $(70,555) $53,158Operating ActivitiesNet cash provided by operating activities increased $2.6 million in 2017 compared to 2016, primarily due to more cash being generated from networking capital, offset in part by a $1.2 million increase in net loss, after adjustments for non-cash items.Net cash provided by operating activities decreased $5.9 million in 2016 compared to 2015, primarily due to a $43.5 million increase in net loss, afteradjustments for non-cash items, mainly attributable to a lower operating margin and the payment of TVN’s post-acquisition expenses and restructuringexpenses. These decreases were offset in part by less cash used for net working capital needs, primarily attributable to an increase in deferred revenue due tothe timing of customer renewals of their annual service and support contracts, and, to a lesser extent, less cash spent on the purchase of inventory .We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in ouroperating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, and the timing and amount ofcompensation and other payments.Investing ActivitiesNet cash used in investing activities decreased $66.3 million in 2017 compared to 2016, primarily due to the $75.7 million net cash paid for the TVNacquisition in 2016 and less cash used for purchases of property and equipment, offset in part by lesser proceeds from sale and maturities of marketableinvestments.Net cash used in investing activities increased $60.1 million in 2016 compared to 2015, primarily due to the $75.7 million net cash paid for the TVNacquisition in 2016, offset in part by lower cash used for purchases of marketable investments. In 2016, no cash was used for the purchase of marketableinvestments, compared to $25.3 million used for purchases of marketable investments in 2015.Financing ActivitiesNet cash provided by financing activities increased $1.0 million in 2017 compared to 2016, primarily due to lower net debt payments in 2017, offset inpart by higher payments of tax withholding obligations related to net share settlements of RSUs in 2017.Net cash provided by financing activities decreased $57.7 million in 2016 compared to 2015, primarily due to the net proceeds of $124.7 million fromthe sale and issuance of the Notes in December 2015, offset in part by $72.9 million cash used for share repurchases in 2015.Off-Balance Sheet ArrangementsNone as of December 31, 2017.Contractual Obligations and CommitmentsFuture payments under contractual obligations and other commercial commitments, as of December 31, 2017 are as follows (in thousands):49Table of Content Payments due in each fiscal year TotalAmountsCommitted Less than 1 year 1 to 3 years 4 to 5 years More than 5yearsConvertible debt$128,250 $— $128,250 $— $—Interest on convertible debt15,390 5,130 10,260 — —Other debts21,847 6,674 14,083 989 101Capital Lease1,099 930 146 23 —Operating leases (1)48,982 13,534 20,848 5,455 9,145Purchase commitments (2)40,226 30,711 7,596 1,919 —TVN VDP obligations (3)5,128 3,186 1,942 — —Avid litigation settlement fees3,500 — 3,500 — — Total contractual obligations$264,422 $60,165 $186,625 $8,386 $9,246Other commercial commitments: Standby letters of credit$265 $198 $67 $— $— Indemnification obligations (4)— — — — — Total commercial commitments$265 $198 $67 $— $—(1) We lease facilities under operating leases expiring through June 2028. Certain of these leases provide for renewal option for periods ranging fromone to five years in the normal course of business.(2) During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreementswith certain contract manufacturers and suppliers that allow them to procure inventory and services based upon criteria as defined by the Company.(3) In 2016, we established the TVN VDP to enable the French employees of TVN to voluntarily terminate their employment with certain benefits. SeeNote 10, “Restructuring and Related Charges-TVN VDP,” of the notes to our Consolidated Financial Statements for additional information.(4) We indemnify our officers and the members of our Board pursuant to our bylaws and contractual indemnity agreements. We also indemnify some ofour suppliers and most of our customers for specified intellectual property matters and some of our other vendors, such as building contractors, pursuant tocertain parameters and restrictions. The scope of these indemnities varies, but, in some instances, includes indemnification for defense costs, damages andother expenses (including reasonable attorneys’ fees).Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2017, we areunable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $0.9 million of unrecognizedtax benefits classified as “Income taxes payable, long-term” in the accompanying Consolidated Balance Sheet as of December 31, 2017, had been excludedfrom the contractual obligations table above. See Note 14, “Income Taxes,” of the notes to our Consolidated Financial Statements for a discussion on incometaxes.New Accounting PronouncementsSee Note 2 of the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including therespective expected dates of adoption and effects on results of operations and financial condition.Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Foreign Currency Exchange RiskWe market and sell our products and services through our direct sales force and indirect channel partners in North America, EMEA, APAC and LatinAmerica. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates, primarily the Euro, British pound andJapanese yen. Our U.S. dollar functional subsidiaries, which50Table of Contentaccount for approximately 95%, 88% and 100% of our consolidated net revenues in 2017, 2016 and 2015, respectively, recorded net billings denominated inforeign currencies of approximately 18%, 13% and 12% of their net revenues in 2017, 2016 and 2015, respectively. The increase was primarily due to theacquisition of TVN which increased our foreign customer base. In addition, a portion of our operating expenses, primarily the cost of personnel to delivertechnical support on our products and professional services, sales and sales support and research and development, are denominated in foreign currencies,primarily the Israeli shekel.We use derivative instruments, primarily forward contracts, to manage exposures to foreign currency exchange rates and we do not enter into foreigncurrency forward contracts for trading purposes.Derivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)We enter into forward currency contracts to hedge foreign currency denominated monetary assets and liabilities. These derivative instruments aremarked to market through earnings every period and mature generally within three months. Changes in the fair value of these foreign currency forwardcontracts are recognized in “Other expense, net” in the Consolidated Statement of Operations, and are largely offset by the changes in the fair value of theassets or liabilities being hedged. The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands): December 31, 2017 2016Derivatives not designated as hedging instruments: Purchase $12,875 $4,056 Sell $1,509 $11,157Interest Rate RiskOur exposure to market risk for changes in interest rates relates primarily to our investment portfolio of marketable investment securities andoutstanding debt arrangements with variable rate interests as well as our borrowings under the Loan Agreement.On September 27, 2017, we entered into the Loan Agreement with Silicon Valley Bank. The Loan Agreement provides for a secured revolving creditfacility in an aggregate principal amount of up to $15.0 million. Loans under the Loan Agreement will bear interest, at our option, and subject to certainconditions, at an annual rate of either a prime rate or a LIBOR rate (each as customarily defined), plus an applicable margin. The applicable margin for LIBORrate advances is 2.25%. There will be no applicable margin for prime rate advances when we are in compliance with the Liquidity Requirement and a marginof 0.25% for prime rate advances when we are not in compliance with the Liquidity Requirement. We may not request LIBOR advances when it is not incompliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and the principal balance is due at maturity.We have no borrowings under the Loan Agreement from the closing of the Loan Agreement through December 31, 2017.As of December 31, 2017, our cash balance was $57.0 million. We had no short-term investments as of December 31, 2017.As a result of the TVN acquisition, we assumed various debt instruments. The aggregate debt balance of such instruments at December 31, 2017 was$22.9 million, of which $1.1 million relates to obligations under capital leases with fixed interest rates. The remaining $21.8 million are debt instrumentsprimarily financed by French government agencies, and, to a lesser extent, term loans from other financing institutions. These debt instruments havematurities ranging from three to eight years; expiring from 2018 through 2025. A majority of the loans are tied to the 1 month EURIBOR rate plus spread.(See Note 11, “Convertible notes, Other Debts and Capital Leases,” of the notes to our Consolidated Balance Sheets for additional information). As ofDecember 31, 2017, a hypothetical 1.0% increase in market interest rates on our debts subject to variable interest rate fluctuations would increase our interestexpense by approximately $0.3 million annually.As of December 31, 2017, we had $128.25 million aggregate principal amount of the Notes outstanding, which have a fixed 4.0% coupon rate.51Table of ContentItem 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAIndex to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm53Consolidated Balance Sheets55Consolidated Statements of Operations56Consolidated Statements of Comprehensive Loss57Consolidated Statements of Stockholders’ Equity58Consolidated Statements of Cash Flows59Notes to Consolidated Financial Statements6052Table of ContentReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of Harmonic Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Harmonic Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and2016, and the related consolidated statements of operations, comprehensive loss, stockholder’s equity, and cash flows for each of the three years in the periodended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited theCompany's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report onInternal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financialstatements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the PublicCompany Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whethereffective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a testbasis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit ofinternal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements.53Table of ContentBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate./s/PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 5, 2018We have served as the Company’s auditor since 1989. 54Table of ContentHARMONIC INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) December 31, 2017 2016ASSETS Current assets: Cash and cash equivalents$57,024 $55,635 Short-term investments— 6,923 Accounts receivable, net69,844 86,765 Inventories25,976 41,193 Prepaid expenses and other current assets18,931 26,319Total current assets171,775 216,835Property and equipment, net29,265 32,164Goodwill242,827 237,279Intangibles, net21,279 29,231Other long-term assets42,913 38,560Total assets$508,059 $554,069LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Other debts and capital lease obligations, current$7,610 $7,275 Accounts payable33,112 28,892 Income taxes payable233 1,166 Deferred revenue52,429 52,414 Accrued and other current liabilities48,705 55,150Total current liabilities142,089 144,897Convertible notes, long-term108,748 103,259Other debts and capital lease obligations, long-term15,336 13,915Income taxes payable, long-term917 2,926Other non-current liabilities22,626 18,431Total liabilities289,716 283,428Commitments and contingencies (Note 18) Stockholders’ equity: Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding— — Common stock, $0.001 par value, 150,000 shares authorized; 82,554 and 78,456 shares issued andoutstanding at December 31, 2017 and 2016, respectively83 78 Additional paid-in capital2,272,690 2,254,055 Accumulated deficit(2,057,812) (1,976,222) Accumulated other comprehensive income (loss)3,382 (7,270)Total stockholders’ equity218,343 270,641Total liabilities and stockholders’ equity$508,059 $554,069The accompanying notes are an integral part of these consolidated financial statements.55Table of ContentHARMONIC INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data) Year ended December 31, 2017 2016 2015Revenue: Product$224,645 $285,260 $276,876 Service133,601 120,651 100,151Total net revenue358,246 405,911 377,027Cost of revenue: Product119,802 145,714 121,988 Service68,624 59,447 52,327Total cost of revenue188,426 205,161 174,315Total gross profit169,820 200,750 202,712Operating expenses: Research and development95,978 98,401 87,545 Selling, general and administrative136,270 144,381 120,960 Amortization of intangibles3,142 10,402 5,783 Restructuring and related charges5,307 14,602 1,372Total operating expenses240,697 267,786 215,660Loss from operations(70,877) (67,036) (12,948)Interest expense, net(11,078) (10,628) (333)Other expense, net(2,222) (31) (282)Loss on impairment of long-term investment(530) (2,735) (2,505)Loss before income taxes(84,707) (80,430) (16,068)Benefit from income taxes(1,752) (8,116) (407)Net loss$(82,955) $(72,314) $(15,661) Net loss per share: Basic and diluted$(1.02) $(0.93) $(0.18)Shares used in per share calculations: Basic and diluted80,974 77,705 87,514The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentHARMONIC INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(In thousands) Year ended December 31, 2017 2016 2015Net loss$(82,955) $(72,314) $(15,661)Other comprehensive income (loss), before tax: Change in unrealized gain (loss) on cash flow hedges: Unrealized gain (loss), net arising during the period— 202 (133) Loss (gain) reclassified into earnings— 44 (424) — 246 (557) Change in unrealized gain (loss) on available-for-sale securities: Unrealized loss, net arising during the period(658) (903) (785) Loss reclassified into earnings384 2,735 — (274) 1,832 (785) Adjustment to pension benefit plan528 (279) — Unrealized foreign exchange loss, net on intercompany long-term loans arising during theperiod(1,705) — — Change in foreign currency translation adjustments: Translation gain (loss) arising during the period11,471 (4,633) (1,111) Loss reclassified into earnings106 — — 11,577 (4,633) (1,111) Other comprehensive income (loss) before tax10,126 (2,834) (2,453)Provision for (benefit from) income taxes(526) 18 (15)Other comprehensive income (loss), net of tax10,652 (2,852) (2,438)Total comprehensive loss$(72,303) $(75,166) $(18,099)The accompanying notes are an integral part of these consolidated financial statements.57Table of ContentHARMONIC INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss TotalStockholders’Equity Shares Amount Balance at December 31, 201487,700 $88 $2,261,952 $(1,888,247) $(1,980) $371,813Net loss— — — (15,661) — (15,661)Other comprehensive loss, net of tax— — — — (2,438) (2,438)Issuance of common stock under option, stock award andpurchase plans2,855 3 5,670 — — 5,673Repurchase of common stock(14,540) (15) (72,848) — — (72,863)Stock-based compensation— — 15,582 — — 15,582Conversion feature of convertible notes due 2020— — 26,062 — — 26,062Balance at December 31, 201576,015 76 2,236,418 (1,903,908) (4,418) 328,168Net loss— — — (72,314) — (72,314)Other comprehensive loss, net of tax— — — — (2,852) (2,852)Issuance of common stock under option, stock award andpurchase plans2,441 2 2,798 — — 2,800Stock-based compensation— — 13,242 — — 13,242Issuance of warrant— — 1,597 — — 1,597Balance at December 31, 201678,456 78 2,254,055 (1,976,222) (7,270) 270,641Cumulative effect to retained earnings related to adoptionof ASU 2016-09 (1)— — 69 (69) — —Cumulative effect to retained earnings related to adoptionof ASU 2016-16 (1)— — — 1,434 — 1,434Balance at January 1, 201778,456 78 2,254,124 (1,974,857) (7,270) 272,075Net loss— — — (82,955) — (82,955)Other comprehensive income, net of tax— — — — 10,652 10,652Issuance of common stock under option, stock award andpurchase plans4,098 5 1,954 — — 1,959Stock-based compensation— — 16,612 — — 16,612Balance at December 31, 201782,554 $83 $2,272,690 $(2,057,812) $3,382 $218,343(1) See Note 2, “Summary of Significant Accounting Policies-Recent Accounting Pronouncements,” for more information on the adoption of these newaccounting standard updates (“ASU”) issued by the Financial Accounting Standards Board.The accompanying notes are an integral part of these consolidated financial statements.58Table of ContentHARMONIC INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year ended December 31, 2017 2016 2015Cash flows from operating activities: Net loss$(82,955) $(72,314) $(15,661)Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of intangibles8,322 14,836 6,502 Depreciation14,599 18,819 13,241 Stock-based compensation16,610 13,060 15,582 Amortization of discount on convertible debt5,489 4,964 216 Provision for non-cash warrant153 434 — Restructuring, asset impairment and loss on retirement of fixed assets1,906 2,305 641 Loss on impairment of long-term investment530 2,735 2,505 Unrealized foreign exchange (gain) loss2,369 (856) (1,047) Gain on pension curtailment— (1,955) — Deferred income taxes, net2,189 (10,085) (512) Provision for doubtful accounts, returns and discounts4,912 2,589 2,034 Provision for excess and obsolete inventories6,005 6,871 1,585 Other non-cash adjustments, net445 408 — Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable12,598 (2,563) 2,595 Inventories11,687 (4,107) (5,954) Prepaid expenses and other assets6,642 (1,892) (8,206) Accounts payable3,432 5,793 4,683 Deferred revenues(392) 18,106 (4,541) Income taxes payable(2,978) (133) (1,637) Accrued and other liabilities(8,499) 3,423 (5,675)Net cash provided by operating activities3,064 438 6,351Cash flows from investing activities: Acquisition of business, net of cash acquired— (75,669) — Purchases of investments— — (25,261) Proceeds from maturities of investments3,106 19,707 30,379 Proceeds from sales of investments3,792 — — Purchases of property and equipment(11,399) (15,107) (14,356) Purchases of long-term investments— — (85) Decrease (increase) in restricted cash288 591 (1,091)Net cash used in investing activities(4,213) (70,478) (10,414)Cash flows from financing activities: Proceeds from convertible debt— — 128,250 Payment of convertible debt issuance cost— (582) (3,527) Proceeds from other debts6,344 5,968 — Repayment of other debts and capital leases(7,408) (8,338) — Proceeds from common stock issued to employees4,716 4,444 9,222 Payment of tax withholding obligations related to net share settlements of restricted stock units(2,757) (1,644) (3,549) Payments for repurchases of common stock— — (72,863)Net cash provided by (used in) financing activities895 (152) 57,533Effect of exchange rate changes on cash and cash equivalents1,643 (363) (312)Net increase (decrease) in cash and cash equivalents1,389 (70,555) 53,158Cash and cash equivalents at beginning of period55,635 126,190 73,032Cash and cash equivalents at end of period$57,024 $55,635 $126,190Supplemental disclosures of cash flow information: Income tax payments (refunds), net$2,141 $(54) $952 Interest payments, net5,515 5,275 —Supplemental schedule of non-cash investing and financing activities: Capital expenditures incurred but not yet paid$337 $394 $235 Debt issuance costs incurred but not yet paid— — 582The accompanying notes are an integral part of these consolidated financial statements.59Table of ContentHARMONIC INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1: DESCRIPTION OF BUSINESSHarmonic Inc. (“Harmonic” or the “Company”) designs, manufactures and sells versatile and high performance video infrastructure products and systemsolutions that enable its customers to efficiently create, prepare and deliver a full range of video and broadband services to customer devices, such astelevisions, personal computers, laptops, tablets and smart phones. Our products generally fall into three principal categories: video production platforms andplayout solutions, video processing solutions and cable edge solutions. Harmonic also provides technical support and professional services to its customersworldwide. We sell our products and services to cable operators, broadcast and media companies, satellite and telecommunications (telco) Pay-TV serviceproviders and streaming new media companies.NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe accompanying consolidated financial statements of Harmonic include the accounts of the Company and its wholly-owned subsidiaries. Allintercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal quarters are based on 13-week periods, except for thefourth quarter which ends on December 31.On February 29, 2016, the Company completed the acquisition of Thomson Video Networks (“TVN”) and its results of operations are included in theCompany’s Consolidated Statements of Operations beginning March 1, 2016.Use of EstimatesThe preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.ReclassificationsCertain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications did not have material impact onpreviously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.Cash and Cash EquivalentsCash and cash equivalents include all cash and highly liquid investments with maturities of three months or less at the date of purchase. The carryingamount of cash and cash equivalents approximates fair value because of the short maturity of those instruments.Restricted Cash and DepositsThe Company had $1.7 million and $1.8 million of total restricted cash deposits, as of December 31, 2017 and 2016, respectively. These restricted cashdeposits serve as collateral for certain bank guarantees and they are invested in bank deposits and cannot be withdrawn from the Company’s accountswithout the prior written consent of the applicable secured party. In the Company’s Consolidated Balance Sheets, $0.5 million and $0.7 million of therestricted cash balances as of December 31, 2017 and 2016, respectively, were included in “Prepaid expenses and other currents”, and the remaining restrictedcash balances of $1.2 million and $1.1 million as of December 31, 2017 and 2016, respectively, were included in “Other Long-term Assets”.Short-Term InvestmentsAs of December 31, 2017, the Company did not have any outstanding short-term investments. The short-term investments as of December 31, 2016 of$6.9 million, which consisted of commercial bonds, were sold or redeemed during 2017 and the realized gain was not material. Since these available-for-saleinvestments were intended to support current operations, they are presented as “Current Assets” in the Consolidated Balance Sheet as of December 31, 2016.Investments in Equity Securities60Table of ContentFrom time to time, the Company may acquire certain equity investments for the promotion of business and strategic objectives and these investmentsmay be in marketable equity securities or non-marketable equity securities. The Company accounts for its investments in entities that it does not havesignificant influence under the cost method. Investments in equity securities are carried at fair value if the fair value of the security is readily determinable.Equity investments carried at fair value are classified as long-term investments and included in “Other long-term assets” in the Company’s ConsolidatedBalance Sheet. Unrealized gains and losses, net of taxes, on the long-term investments are included in the Company’s Consolidated Balance Sheet as acomponent of accumulated other comprehensive loss. Investments in equity securities that do not qualify for fair value accounting or equity methodaccounting are accounted for under the cost method. In accordance with the cost method, the Company’s initial investment is recorded at cost and theCompany reviews all of its cost method investments quarterly to determine if impairment indicators exist. Cost method investments are classified as long-term investments and included in “Other long-term assets” in the Company’s Consolidated Balance Sheet.The Company’s total investment in equity securities of other privately and publicly held companies, were $3.6 million and $4.4 million, as ofDecember 31, 2017 and December 31, 2016, respectively.LiquidityAs of December 31, 2017, the Company’s principal sources of liquidity consisted of cash and cash equivalents of $57.0 million, net accounts receivableof $69.8 million, its $15 million line of credit with Silicon Valley Bank and financing from French government agencies. As of December 31, 2017, theCompany had $128.25 million in convertible senior notes outstanding (“Notes”), which are due on December 1, 2020. The Notes bear interest at a fixed rateof 4.00% per year, payable semiannually in arrears on June 1 and December 1 of each year. The Company also had debts with French government agenciesand to a lesser extent, with other financial institutions, primarily in France, in the aggregate of $22.9 million at December 31, 2017.The Company’s principal uses of cash will include repayments of debt and related interest, purchases of inventory, payroll, restructuring expenses, andother operating expenses related to the development and marketing of our products, purchases of property and equipment and other contractual obligationsfor the foreseeable future. The Company believes that its cash and cash equivalents of $57.0 million at December 31, 2017 will be sufficient to fund itsprincipal uses of cash for at least the next 12 months. However, if its expectations are incorrect, it may need to raise additional funds to fund our operations,to take advantage of unanticipated strategic opportunities or to strengthen our financial position. Additional funds may not be available on terms favorableto us or at all.Credit Risk and Major Customers/Supplier ConcentrationFinancial instruments which subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investmentsand accounts receivable. Cash, cash equivalents and short-term investments are invested in short-term, highly liquid, investment-grade obligations ofcommercial or governmental issuers, in accordance with the Company’s investment policy. The investment policy limits the amount of credit exposure toany one financial institution, commercial or governmental issuer.The Company’s accounts receivable are derived from sales to worldwide cable, satellite, telco, and broadcast and media companies. The Companygenerally does not require collateral from its customers, and performs ongoing credit evaluations of its customers and provides for expected losses. TheCompany maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. No customers had a balancegreater than 10% of the Company’s net accounts receivable balance as of December 31, 2017 and 2016. In the years ended December 31, 2017 and 2016, nocustomer accounted for more than 10% of the Company’s net revenue.Certain of the components and subassemblies included in the Company’s products are obtained from a single source or a limited group of suppliers.Although the Company seeks to reduce dependence on those sole source and limited source suppliers, the partial or complete loss of certain of these sourcescould have at least a temporary adverse effect on the Company’s results of operations and damage customer relationships.Revenue RecognitionThe Company’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and end-to-endsolutions, encompassing design, manufacture, test, integration and installation of products. The Company also derives subscription revenues, which arecomprised of subscription fees from customers utilizing the Company’s cloud-based media processing solutions. The Company recognizes revenue whenpersuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the sale price is fixed or determinable, and collectabilityis reasonably assured. Subscription revenue is recognized over the subscription period as the service is delivered.61Table of ContentRevenue from the sale of hardware and software products is recognized when risk of loss and title have transferred. For most of the Company’s productsales, these criteria are met at the time the product is shipped or delivery has occurred. Revenue from distributors and system integrators is recognized ondelivery of the related products, provided all other revenue recognition criteria have been met. The Company’s agreements with these distributors and systemintegrators have terms which are generally consistent with the standard terms and conditions for the sale of the Company’s equipment to end users, and donot provide for product rotation or pricing allowances, as are typically found in agreements with stocking distributors. The Company accrues for sales returnsand other allowances based on the expected customer returns at the end of each reporting period.Deferred revenue includes billings in excess of revenue recognized and invoiced amounts remain deferred until applicable revenue recognition criteriaare met.Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of revenue in the Company’s ConsolidatedStatements of Operations. Costs associated with services are generally recognized as incurred.The Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of thehardware in accordance with applicable revenue recognition accounting guidance. For the sale of stand-alone software products, bundled with hardware butnot essential to the functionality of the hardware, revenue is allocated between the hardware, including essential software and related elements, and the non-essential software and related elements. Revenue for the hardware and essential software elements are recognized under the relative allocation method.Revenue for the non-essential software and related elements are recognized under the residual method in accordance with software accounting guidance.Revenue associated with service and maintenance agreements is recognized on a straight-line basis over the period in which the services are performed,generally one year. Further details of these accounting policies are described below.Multiple Element Arrangements. The Company has revenue arrangements that include hardware and software essential to the hardware product’sfunctionality, and non-essential software, services and support. The Company allocates revenue to all deliverables based on their relative selling prices. TheCompany determines the relative selling prices by first considering vendor-specific objective evidence of fair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. If neither VSOE nor TPE exists for a deliverable, the Company uses a best estimate of the selling price(“BESP”) for that deliverable. Once revenue is allocated to all deliverables based on their relative selling prices, revenue related to hardware elements(hardware, essential software and related services) are recognized using a relative selling price allocation and non-essential software and related services arerecognized under the residual method.The Company has established VSOE for certain elements of its arrangements based on either historical stand-alone sales to third parties or statedrenewal rates for maintenance. The Company has VSOE of fair value for maintenance, training and certain professional services.TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is typically not able to determine TPE forcompetitors’ products or services. Generally, the Company’s go-to-market strategy differs from that of its competitors’ and the Company’s offerings contain asignificant level of differentiation, such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company isunable to reliably determine what competitor similar products’ selling prices are on a stand-alone basis.When the Company is unable to establish fair value of non-software deliverables using VSOE or TPE, the Company uses BESP in its allocation ofarrangement consideration. The objective of using BESP is to determine the price at which the Company would transact a sale if the product or service weresold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors, including, but not limited to, pricingpractices, market conditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultationwith Company’s management, taking into consideration the Company’s go-to-market strategy.Software. Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the softwarerevenue recognition guidance.In accordance with the software revenue recognition guidance, the Company applies the residual method to recognize revenue for the deliveredelements in stand-alone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangementconsideration, less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value exists for all undeliveredelements. VSOE of fair value is based on the price charged when the element is sold separately or, in the case of maintenance, VSOE may be based onsubstantive renewal rates.62Table of ContentSolution Sales. Solution sales for the design, manufacture, test, integration and installation of products, including equipment acquired from thirdparties to be integrated with Harmonic’s products, that are customized to meet the customer’s specifications are accounted for in accordance with applicableguidance on accounting for performance of construction/production contracts. Accordingly, for each arrangement that the Company enters into that includesboth products and services, the Company performs a detailed evaluation to determine whether the arrangement should be accounted for under guidance forconstruction/production contracts or, alternatively, for arrangements that do not involve significant production, modification or customization, under otherapplicable accounting guidance. The Company has a long-standing history of entering into contractual arrangements to deliver the solution sales described.InventoriesInventories are stated at the lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in,first-out basis. The cost of inventories is comprised of material, labor and manufacturing overhead. The Company’s manufacturing overhead standards forproduct costs are calculated assuming full absorption of forecasted spending over projected volumes. The Company establishes provisions for excess andobsolete inventories to reduce such inventories to their estimated net realizable value after evaluation of historical sales, future demand and marketconditions, expected product life cycles and current inventory levels. Such provisions are charged to cost of revenue in the Company’s ConsolidatedStatements of Operations.Capitalized Software Development CostsExternal-use software. Research and development costs are generally charged to expense as incurred. The Company has not capitalized any suchdevelopment costs because the costs incurred between the attainment of technological feasibility for the related software product through the date when theproduct is available for general release to customers has been insignificant.Internal-use software. The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that havereached the application development stage. Capitalized costs include external direct costs of materials and services utilized in developing or obtaininginternal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the internal-use softwareproject. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project issubstantially complete and ready for its intended purpose. These capitalized costs are amortized on a straight-line basis, generally three years.During the year ended December 31, 2017, the Company capitalized $1.1 million of its software development costs related to the development of itsVOS Cloud and VOS 360 SaaS offerings. In the years ended December 31, 2016 and 2015, research and development costs capitalized for internal usesoftware were not significant.Property and EquipmentProperty and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful livesof the assets. Estimated useful lives are generally, five years for furniture and fixtures, three years for software and four years for machinery and equipment.Depreciation and amortization for leasehold improvements are computed using the shorter of the remaining useful lives of the assets, up to 10 years, or thelease term of the respective assets.Business CombinationThe Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date ismeasured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. Determiningthe fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions,including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items. Fair value isdefined as the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants at themeasurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset orliability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, the Companymay have been required to value the acquired assets at fair value measurements that do not reflect its intended use of those assets. Use of different estimatesand judgments could yield different results. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.Goodwill63Table of ContentAs of December 31, 2017, the Company had goodwill of $242.8 million which represents the difference between the purchase price and the estimatedfair value of the identifiable assets acquired and liabilities assumed. The Company tests for goodwill impairment at the reporting unit level on an annualbasis in the fourth quarter of each of its fiscal years, and at any other time at which events occur or circumstances indicate that the carrying amount ofgoodwill may exceed its fair value. The Company uses a two-step process to determine the amount of goodwill impairment. The first step requires comparingthe fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower thanits net book value. The second step of the process, which is performed only if a potential impairment exists, involves determining the difference between thefair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. If this difference is less than the net book value ofgoodwill, an impairment exists and is recorded.The Company has two reporting units, which are the same as its operating segments. Goodwill is assigned to the reporting units using the relative fairvalues of the reporting units and the fair values of the reporting units were determined utilizing a blend of the income approach and the market approach.There was no impairment of goodwill resulting from the Company’s fiscal 2017 annual impairment testing in the fourth quarter of 2017. (See Note 7,“Goodwill and Identified Intangible Assets,” for additional information).Long-lived AssetsLong-lived assets represent property and equipment and purchased intangible assets. Purchased intangible assets from business combinations and assetacquisitions include customer contracts, trademarks and trade names, and maintenance agreements and related relationships, the amortization of which ischarged to general and administrative expenses, and core technology and developed technology, the amortization of which is charged to cost of revenue. TheCompany evaluates the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicatorsare present, the Company evaluates the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows expected toresult from the use of each asset group and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of theasset, an impairment loss is recognized in order to write down the carrying value of the asset to its estimated fair market value. There were no impairmentcharges for long-lived assets in the years ended December 31, 2017, 2016 and 2015.Foreign CurrencyThe functional currency of the Company’s Israeli, Cayman and Swiss operations is the U.S. dollar. All other foreign subsidiaries use the respective localcurrency as the functional currency. When the local currency is the functional currency, gains and losses from translation of these foreign currency financialstatements into U.S. dollars are recorded as a separate component of other comprehensive loss in stockholders’ equity.The Company’s foreign currency exposure is also related to its net position of monetary assets and monetary liabilities held by its subsidiaries in theirnonfunctional currencies. These monetary assets and monetary liabilities are being remeasured into the functional currencies of the subsidiaries usingexchange rates prevailing on the balance sheet date. Such remeasurement gains and losses are included in other expense, net in the Company’s ConsolidatedStatements of Operations. During the years ended December 31, 2017, 2016 and 2015, the Company recorded remeasurement losses of $2.2 million, $0.2million and $0.5 million, respectively.Derivative InstrumentsThe Company enters into derivative instruments, primarily foreign currency forward contracts, to minimize the short-term impact of foreign currencyexchange rate fluctuations on certain foreign currency denominated assets and liabilities as well as certain foreign currencies denominated expenses. TheCompany does not enter into derivative instruments for trading purposes and these derivatives generally have maturities within twelve months.The derivative instruments are recorded at fair value in prepaid expenses and other current assets or accrued and other current liabilities in theCompany’s Consolidated Balance Sheet. For derivative instruments designated and qualifying as cash flow hedges of forecasted foreign currencydenominated transactions expected to occur within twelve months, the effective portion of the gain or loss on these hedges is reported as a component of“Accumulated other comprehensive loss” in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If thetransaction being hedged fails to occur, or if a portion of any derivative is (or becomes) ineffective, the gain or loss on the associated financial instrument isrecorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gains or losses onthese hedges are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.The Company did not enter into any cash flow hedges during the year ended December 31, 2017.64Table of ContentResearch and DevelopmentResearch and development (“R&D”) costs are expensed as incurred and consists primarily of employee salaries and related expenses, contractors andoutside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products andenhancements of existing products. R&D expense was $96.0 million, $98.4 million and $87.5 million for the years ended December 31, 2017, 2016 and2015, respectively.R&D expense was net of $6.0 million of reimbursements from one of our large customers in each of the years ended December 31, 2017 and 2016. TheCompany’s TVN French Subsidiary participates in the French Crédit d’Impôt Recherche (“CIR”) program which allows companies to monetize eligibleresearch expenses. The R&D tax credits receivable from the French government for spending on innovative R&D under the CIR program is recorded as anoffset to R&D expenses. In the years ended December 31, 2017 and 2016, the R&D expenses were net of $5.9 million and $6.1 million of R&D tax credits,respectively. There were no such reimbursement from customers or R&D tax credits in the year ended December 31, 2015.Restructuring and Related ChargesThe Company’s restructuring charges consist primarily of employee severance, one-time termination benefits related to the reduction of its workforce,lease exit costs, and other costs. Liabilities for costs associated with a restructuring activity are recognized when the liability is incurred and are measured atfair value. One-time termination benefits are expensed at the date the entity notifies the employee, unless the employee must provide future service, in whichcase the benefits are expensed ratably over the future service period. Termination benefits are calculated based on regional benefit practices and localstatutory requirements. Costs to terminate a lease before the end of its term are recognized when the entity terminates the contract in accordance with thecontract terms. The Company determines the excess facilities accrual based on expected cash payments, under the applicable facility lease, reduced by anyestimated sublease rental income for such facility. (See Note 10, “Restructuring and related Charges” for additional information).WarrantyThe Company accrues for estimated warranty costs at the time of revenue recognition and records such accrued liabilities as part of cost of revenue.Management periodically reviews its warranty liability and adjusts the accrued liability based on the terms of warranties provided to customers, historicaland anticipated warranty claims experience, and estimates of the timing and cost of warranty claims.Advertising ExpensesAll advertising costs are expensed as incurred and included in “Selling, general and administrative expenses” in the Company’s ConsolidatedStatements of Operations. Advertising expense was $0.7 million, $1.4 million and $1.4 million for the years ended December 31, 2017, 2016 and 2015,respectively.Stock-based Compensation ExpenseThe Company measures and recognizes compensation expense for all stock-based compensation awards made to employees and non-employeedirectors, including stock options, restricted stock units (“RSUs”) and awards related to the Company’s Employee Stock Purchase Plan (“ESPP”), based uponthe grant-date fair value of those awards.Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures over the requisite service period and, accordingly,was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of the Accounting Standard Update No. 2016-09,Compensation - Stock Compensation (Topic 718), issued by the Financial Accounting Standards Board. The Company changed its accounting policy toaccount for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 toretained earnings as of January 1, 2017 (which increased the accumulated deficit).The fair value of the Company’s stock options and ESPP is estimated at grant date using the Black-Scholes option pricing model. The fair value of theCompany’s RSUs is calculated based on the fair market value of the Company’s stock at the grant date. The fair value of the Company’s market-based RSUsis estimated using the Monte-Carlo valuation model with market vesting conditions.The Company recognizes the stock-based compensation expense for performance-based RSUs (“PRSUs”) based on the probability of achieving certainperformance criteria, as defined in the PRSU agreements. The Company estimates the number of PRSUs ultimately expected to vest and recognizes expenseusing the graded vesting attribution method over the requisite service period. Changes in the estimates related to probability of achieving certainperformance criteria and number of PRSUs expected to vest could significantly affect the stock-based compensation expense from one period to the next.65Table of ContentPension PlanUnder French law, the Company’s subsidiaries in France, including the acquired TVN French Subsidiary, is obligated to provide for a defined benefitplan to its employees upon their retirement from the Company. The Company’s defined benefit pension plan in France is unfunded.The Company records annual amounts relating to the pension plans based on calculations which include various actuarial assumptions includingemployees’ age and period of service with the company; projected mortality rates, mobility rates and increases in salaries; and a discount rate. The Companyreviews its actuarial assumptions on an annual basis as of December 31 (or more frequently if a significant event requiring remeasurement occurs) andmodifies the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recordingits obligations under its pension plan are reasonable based on its experience, market conditions and input from its actuaries.The Company accounts for the actuarial gains (losses) in accordance with ASC 715, “Compensation - Retirement Benefits”. If the net accumulated gainor loss exceeds 10% of the projected plan benefit obligation a portion of the net gain or loss is amortized and included in expense for the following yearbased upon the average remaining service period of active plan participants, unless the Company’s policy is to recognize all actuarial gains (losses) whenthey occur. The Company elected to defer actuarial gains (losses) in accumulated other comprehensive loss. As of December 31, 2017, the Company did notmeet the 10% requirement, and therefore no amortization of 2017 actuarial gain would be recorded in 2018.See Note 12, “Employee Benefit Plans and Stock-based Compensation-French Retirement Benefit Plan,” for additional information.Income TaxesIn preparing the Company’s financial statements, the Company estimates the income taxes for each of the jurisdictions in which the Company operates.This involves estimating the Company’s actual current tax exposures and assessing temporary and permanent differences resulting from differing treatment ofitems, such as reserves and accruals, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included withinthe Company’s Consolidated Balance Sheet.The Company’s income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilitiesand amounts reported in the Company’s accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Companyfollows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated BalanceSheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing offuture events, including the probability of expected future taxable income and available tax planning opportunities. A history of operating losses in recentyears has led to uncertainty with respect to our ability to realize certain of our net deferred tax assets, and as a result we applied full valuation allowanceagainst our U.S. net deferred tax assets as of December 31, 2017. In the event that actual results differ from these estimates or the Company adjusts theseestimates in future periods, the Company’s operating results and financial position could be materially affected.The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses thelikelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied theprovisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-notthreshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits theCompany to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company’s judgment, is more than 50% likely to be realizedupon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earningsin the period of such change.The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain taxposition is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain taxposition, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves and penalties, as wellas the related interest, in light of changing facts and circumstances. Changes in the Company’s assessment of its uncertain tax positions or settlement of anyparticular position could materially and adversely impact the Company’s income tax rate, operating results, financial position and cash flows.Sales Taxes66Table of ContentThe Company accounts for sales taxes imposed on its goods and services and collected from customers on a net basis in the Consolidated Statements ofOperations.Segment ReportingOperating segments are defined as components of an enterprise that engage in business activities for which separate financial information is availableand is evaluated by the Chief Operating Decision Maker (“CODM”), which for the Company is its Chief Executive Officer, in deciding how to allocateresources and assess performance. The Company has two operating segments: Video and Cable Edge.Comprehensive Income (Loss)Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includescumulative translation adjustments, unrealized foreign exchange gains and losses on intercompany long-term loans, unrealized gains and losses on certainforeign currency forward contracts that qualify as cash flow hedges and available-for-sale securities, as well as actuarial gains and losses on pension plan.Recent Accounting PronouncementsNew Standards to be ImplementedIn May 2014, Financial Accounting Standards Board (“FASB”) issued a new Accounting Standards Update (“ASU”) No. 2014-09, Revenue fromContracts with Customers, as amended, which will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity is required torecognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange forthose goods or services. ASU No. 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment andestimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cashflows arising from contracts with customers, including significant judgments and estimates used.The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property andidentifying performance obligations. The amendments include ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606)-Principal versusAgent Considerations, which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09,and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing, which was issued in April2016, and amends the guidance in ASU No. 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property.The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modifiedretrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certainadditional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted forannual reporting periods beginning after December 15, 2016. The Company will adopt the new standard effective January 1, 2018.The Company plans to adopt using the modified retrospective approach. The Company currently believes that there will be changes to the timing ofrecognition of software licenses with undelivered features and professional services revenue related to service contracts with acceptance terms. Under currentindustry-specific software revenue recognition guidance, the Company has historically concluded that it did not have vendor-specific objective evidence(“VSOE”) of fair value of the undelivered features relating to delivered software licenses, and accordingly, it has deferred entire revenue for such softwarelicenses until the delivery of features. Professional services included in arrangements with acceptances have also been recognized on receipt of acceptance.The new standard, which does not retain the concept of VSOE, requires an evaluation of whether the undelivered features are distinct performance obligationsand, therefore, should be separately recognized when delivered compared to the timing of delivery of software licenses. Professional services will generallybe recorded as services are provided. As a result, the timing of when revenue is recognized is expected to be earlier for future features and professionalservices under the new standard.The revenue allocated to hardware and services (including professional services) will also likely change due to the change in contingent revenue rulesunder the new standard. 67Table of ContentThe Company has substantially completed its evaluation of the impact of the new standard on its accounting policies, processes, and systemrequirements. However, due to the modified retrospective method’s requirement to quantify the impact of the changes on open contracts as of December 31,2017, and the implementation of revenue system changes and the volume of the required data analysis, the Company is finalizing its assessments, includingthe transition adjustment for open contracts and expects to complete that before the Q1, 2018 10Q filing.As part of the Company’s evaluation, it has also considered the impact of the guidance in Accounting Standards Codification (“ASC”) 340-40, OtherAssets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (“TRG”) fromtheir November 7, 2016 meeting with respect to capitalization and amortization of incremental costs of obtaining a contract. The Company does not expectthis standard to have a significant impact on the accounting for costs to obtain the contract. Under the Company’s current accounting policy, it expenses thecommission costs as incurred.In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets andFinancial Liabilities, which requires equity investments to be measured at fair value with changes in fair value recognized in net income and simplifies theimpairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. This ASUwill be effective for the Company beginning in the first quarter of fiscal 2018. The Company only has one available-for-sale equity investment, Vislink plc,which was fully written off as of December 31, 2017 and the Company only has one cost method equity investment, EDC, which will be subject to this newASU. The adoption of this new ASU is not expected to have a material impact on the Company’s consolidated financial statements. (See note 3, “Investmentsin Other Equity Securities,” for more information on Vislink and EDC).In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), to amend the existing accounting standard for lease accounting. Under thisguidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including subleases) and eliminate the concept of operatingleases and off-balance sheet leases. This new leases standard requires a modified retrospective transition approach for all leases existing at, or entered intoafter, the date of initial application, with an option to use certain transition relief. This new ASU will be effective for the Company beginning in the firstquarter of fiscal 2019 and early adoption is permitted. The Company is currently evaluating the methods and impact of adopting the new ASU on itsconsolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments, which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, theCompany will be required to use a new forward-looking “expected loss” model. Additionally, credit losses on available-for-sale debt securities should berecorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. This new ASU will be effective for theCompany beginning in the first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact of adopting this newASU on its consolidated financial statements.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to present theaggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cashflows will be required to present restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents.The new ASU will be effective for the Company beginning in the first quarter of fiscal 2018 on a retrospective basis. The Company’s total restricted cashbalances was $1.7 million, $1.8 million and $1.1 million, as of December 31, 2017, 2016, and 2015, respectively, and accordingly, these balances will bepresented as a part of the beginning and ending balances of cash and cash equivalents for the preparation of the Company’s Consolidated Statements of CashFlows for the corresponding periods.In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Thisnew ASU removes Step 2 of the goodwill impairment test and requires the assessment of fair value of individual assets and liabilities of a reporting unit tomeasure goodwill impairments. Goodwill impairment will then be the amount by which a reporting unit's carrying value exceeds its fair value. This new ASUwill be effective for the Company beginning in the first quarter of fiscal 2020 on a prospective basis, and early adoption is permitted. The Company iscurrently evaluating the impact of adopting this new ASU on its consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The objective of ASU2017-01 is to clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (ordisposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill andconsolidation. ASU 2017-01 is effective for68Table of Contentthe Company beginning in the first quarter of fiscal 2018. This new ASU is not expected to have a material impact on the Company’s consolidated financialstatements.Standards ImplementedIn March 2016, the FASB issued ASU No. 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Methodof Accounting. This guidance eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for using theequity method due to an increase in the level of ownership interest or degree of influence. In that situation, the ASU requires an investor to apply the equitymethod only on a go-forward basis. Under this new ASU, an investor that has an available-for-sale security that subsequently qualifies for the equity methodwill recognize in net income the unrealized holding gains or losses in accumulated other comprehensive income related to that security when it beginsapplying the equity method. The Company adopted this new ASU beginning in the first quarter of fiscal 2017 and it did not have any impact to theCompany’s 2017 consolidated financial statements because none of its equity investments qualify for equity method of accounting during 2017.In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting, for the accounting of share-based payment transactions, including the income tax consequences, classification of awards as eitherequity or liabilities and classification on the statement of cash flows. The new standard eliminated the requirement to report excess tax benefits and certaintax deficiencies related to share-based payment transactions as additional paid-in capital. It also removes the requirement to delay recognition of a windfalltax benefit until it reduces current taxes payable. Under the new guidance, the benefit will be recorded when it arises, subject to normal valuation allowanceconsiderations. The Company adopted this new ASU beginning in the first quarter of fiscal 2017 using a modified-retrospective transition method andrecorded a cumulative effect of $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuationallowance of the same amount, therefore resulting in no net impact to the Company’s beginning retained earnings. Prior to January 1, 2017, stock-basedcompensation expense was recorded net of estimated forfeitures in the Company’s Consolidated Statements of Operations and, accordingly, was recorded foronly those stock-based awards that the Company expected to vest. Upon the adoption of this ASU, effective January 1, 2017, the Company changed itsaccounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustmentof $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit). The implementation of this ASU has no impact to theCompany’s Consolidated Statement of Cash Flows because the Company does not have any excess tax benefits from share-based compensation because itstax provision is primarily under full valuation allowance. In addition, the Company has historically been reporting excess tax benefits as an operatingactivity in the Company’s Consolidated Statement of Cash Flows, therefore, no prior periods were recast as a result of this change in accounting policy.In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requirescompanies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entitywould recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of thattransaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer.The Company early adopted this ASU during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effectadjustment of $1.4 million to the retained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter offiscal 2017, the Company recognized an additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and writeoff the remaining $0.3 million of unamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal2017.NOTE 3: INVESTMENTS IN OTHER EQUITY SECURITIESVislinkIn 2014, the Company acquired a 3.3% interest in Vislink plc (“Vislink”), a U.K. public company listed on the AIM exchange, for $3.3 million. Theinvestment in Vislink is being accounted for as a cost method investment as the Company does not have significant influence over the operational andfinancial policies of Vislink. Since the Vislink investment is also an available-for-sale security, its value is marked to market for the difference in fair value atperiod end. The accumulated unrealized gain (loss) arising from the change in Vislink’s fair value for each reporting period is included in the ConsolidatedBalance Sheet as a component of “Accumulated other comprehensive loss (AOCI)”.Since mid-2016, Vislink’s stock price has traded below its cost basis since mid-2016. The Company assessed this available-for-sale investment on anindividual basis to determine if the decline in fair value was other than temporary. The assessment as to the nature of a decline in fair value is based on,among other things, the length of time and the extent to which69Table of Contentthe market value has been less than the Company’s cost basis; the financial condition and near-term prospects of the investment; and the Company’s intentand ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these assessments,impairment charges of $1.5 million and $1.2 million were recognized in the first and third quarter of 2016, respectively, reflecting new reduced cost basis atSeptember 30, 2016. In the fourth quarter of 2016, Vislink’s stock price recovered 67% from September 30, 2016, and the carrying value as of December 31,2016 was $0.8 million. Vislinks accumulated unrealized gain recorded in AOIC was $0.3 million at December 31, 2016.On February 3, 2017, Vislink (from thereon, referred to as Pebble Beach Systems) completed the disposal of its hardware division and changed its nameto Pebble Beach Systems. On February 6, 2017, Pebble Beach Systems announced its financial results for fiscal 2016 which showed a significant increase inoperating losses and at the same time Pebble Beach Systems announced the consideration to sell the company. Since February 2017, Pebble Beach Systems’stock price began to decline to below the Company’s reduced cost basis. In view of Pebble Beach Systems’ potential sale opportunity, the Companydetermined that the decline in the fair value of Pebble Beach Systems’ investment in the first nine months of 2017 was not considered permanent yet.However, in the fourth quarter of 2017, Pebble Beach announced that it had withdrawn from the sale process due to a lack of viable offers and that it wouldwork on refinancing their debts and revising the bank covenants to improve its liquidity. Based on Pebble Beach Systems’ fourth quarter announcement,without the sale opportunity and its highly leveraged financial conditions, the Company believes that it is more-likely-than-not that Pebble Beach Systems’investment is recoverable. As a result, during the fourth quarter of 2017, the Company wrote off the remaining carrying value and released all the balances inthe AOCI to earnings, resulting in an impairment charge of $0.5 million in the fourth quarter of 2017.Unconsolidated Variable Interest Entities (“VIE”)From time to time, the Company may enter into investments in entities that are considered variable interest entities under Accounting StandardsCodification (ASC) Topic 810. If the Company is the primary beneficiary of a variable interest entity (“VIE”), it is required to consolidate it. To determine ifthe Company is the primary beneficiary of a VIE, the Company evaluates whether it has (1) the power to direct the activities that most significantly impactthe VIE’s economic performance, and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant tothe VIE. The assessment of whether the Company is the primary beneficiary of its VIE requires significant assumptions and judgments.EDCIn 2014, the Company acquired an 18.4% interest in Encoding.com, Inc. (“EDC”), a video transcoding service company headquartered in SanFrancisco, California, for $3.5 million by purchasing EDC’s Series B preferred stock. EDC is considered a VIE but the Company determined that it is not theprimary beneficiary of EDC. As a result, EDC is accounted for as a cost method investment.The Company determined that there were no indicators existing at December 31, 2017 that would indicate that the EDC investment was impaired. TheCompany’s maximum exposure to loss from the EDC’s investment at December 31, 2017 was limited to its investment cost of $3.6 million, including $0.1million of transaction costs.VJUIn 2014, the Company acquired a 19.8% interest in VJU ITV Development GmbH (“VJU”), a software company based in Austria, for $2.5 million. InMarch 2015, at the VJU board meeting, the Company was made aware of significant decreases in VJU’s business prospects, VJU’s existing working capitaland prospects for additional funding. Based on the Company’s assessment, of VJU’s expected cash flows, the entire investment is expected to be non-recoverable. As a result, the Company recorded an impairment charge of $2.5 million in the first quarter of 2015. The VJU investment was sold for $6,000 inthe fourth quarter of 2017.NOTE 4: DERIVATIVES AND HEDGING ACTIVITIESDerivatives Not Designated as Hedging Instruments (Balance Sheet Hedges)The Company’s balance sheet hedges consist of foreign currency forward contracts which mature generally within three months, These forwardcontracts are carried at fair value and they are used to minimize the short-term impact of foreign currency exchange rate fluctuation on cash and certain tradeand inter-company receivables and payables. Changes in the fair value of these foreign currency forward contracts are recognized in “Other expense, net” inthe Consolidated Statement of Operations and are largely offset by the changes in the fair value of the assets or liabilities being hedged.70Table of ContentThe locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the Company’s AOCI andConsolidated Statements of Operations are as follows (in thousands): Year ended December 31, Financial StatementLocation 2017 2016 2015Derivatives not designated as hedging instruments: Gains recognized in income Other income (expense),net $155 $343 $344 Derivatives designated as hedging instruments (1): Gains (losses) in AOCI on derivatives (effective portion) AOCI $— $202 $(133) Gains (losses) reclassified from AOCI into income (effective portion) Cost of Revenue $— $(6) $59 Operating Expense — (38) 365 Total $— $(44) $424 (Losses) recognized in income on derivatives (ineffectiveness portionand amount excluded from effectiveness testing) Other income (expense),net $— $(63) $(87)(1) The Company did not enter into any new cash flow hedge contracts since December 31, 2016.The U.S. dollar equivalents of all outstanding notional amounts of foreign currency forward contracts are summarized as follows (in thousands): December 31, 2017 2016Derivatives not designated as hedging instruments: Purchase $12,875 $4,056 Sell $1,509 $11,157The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated Balance Sheets are as follows (inthousands): Asset Derivatives Liability Derivatives Balance Sheet Location December 31,2017 December 31,2016 Balance SheetLocation December 31,2017 December 31,2016Derivatives not designated ashedging instruments: Foreign currency contracts Prepaid expenses andother current assets $33 $54 Accrued and othercurrent Liabilities $4 $40 $33 $54 $4 $40Offsetting of Derivative Assets and LiabilitiesThe Company recognizes all derivative instruments on a gross basis in the Consolidated Balance Sheets. However, the arrangements with itscounterparties allows for net settlement, which are designed to reduce credit risk by permitting net settlement with the same counterparty. As of December 31,2017, information related to the offsetting arrangements was as follows (in thousands):71Table of Content Gross Amounts of Derivatives NotOffset in the Consolidated BalanceSheets Gross Amounts ofDerivatives Gross Amounts ofDerivatives Offset inthe ConsolidatedBalance Sheets Net Amounts ofDerivatives Presentedin the ConsolidatedBalance Sheets FinancialInstrument CashCollateralPledged Net AmountDerivative Assets $33 $— $33 $(4) $— $29Derivative Liabilities $4 $— $4 $(4) $— $—In connection with the foreign currency derivatives entered in Israel, the Company’s subsidiaries in Israel are required to maintain a compensatingbalance with their bank at the end of each month. These compensating balance arrangements do not legally restrict the use of cash. As of December 31, 2017,the total compensating balance maintained was $1.0 million.NOTE 5: FAIR VALUE MEASUREMENTSThe applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements ofassets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well asfair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair valuehierarchy as described below.The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, in the principal or mostadvantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date.Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Theguidance describes three levels of inputs that may be used to measure fair value:•Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.•Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are notactive, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.The Company primarily uses broker quotes for valuation of its short-term investments. The forward exchange contracts are classified as Level 2because they are valued using quoted market prices and other observable data for similar instruments in an active market.•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.The carrying value of the Company’s financial instruments, including cash equivalents, restricted cash, short-term investments, accounts receivable,accounts payable and accrued and other current liabilities, approximate fair value due to their short maturities.The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevantinformation generated by market transactions involving identical or comparable assets or liabilities. The fair value of the Company’s convertible notes isinfluenced by interest rates, the Company’s stock price and stock market volatility. The fair values of the Company’s convertible notes as of December 31,2017 and 2016 was $129.9 million and $143.5 million, based on the bond’s quoted market price as of December 31, 2017 and 2016, respectively, andrepresents a Level 2 valuation. The Company’s other debts assumed from the TVN acquisition are classified within Level 2 because these borrowings are notactively traded and the majority of them have a variable interest rate structure based upon market rates currently available to the Company for debt withsimilar terms and maturities, therefore, the carrying value of these debts approximate its fair value. The other debts, excluding capital leases, outstanding as ofDecember 31, 2017 and 2016 were in the aggregate of $21.8 million and $19.3 million, respectively.The fair value of the Company’s TVN defined pension benefit plan liability as of December 31, 2017 and 2016 of $5.0 million and $4.3 million,respectively, is disclosed in Note 12, “Employee Benefit Plans and Stock-based Compensation-TVN Retirement Benefit Plan.”72Table of ContentDuring the years ended December 31, 2017, 2016 and 2015 there were no nonrecurring fair value measurements of assets and liabilities subsequent toinitial recognition.The following tables provide the fair value measurement amounts for other financial assets recorded in the Company’s Consolidated Balance Sheetsbased on the three-tier fair value hierarchy: Level 1 Level 2 Level 3 (1) TotalAs of December 31, 2017 Cash equivalents Money market funds$22 $— $— $22Prepaids and other current assets Derivative assets— 33 — 33Total assets measured and recorded at fair value$22 $33 $— $55Accrued and other current liabilities Derivative liabilities$— $4 $— $4Total liabilities measured and recorded at fair value$— $4 $— $4(1) The Company’s liability for the TVN VDP at December 31, 2017 was $5.1 million. This amount is not included in the table above because its fairvalue at inception, based on Level 3 inputs, was determined during the fourth quarter of fiscal 2016. Subsequently there is no recurring fair valueremeasurement for this liability based on the applicable accounting guidance. Level 1 Level 2 Level 3 (1) TotalAs of December 31, 2016 Cash equivalents Money market funds$8,301 $— $— $8,301Short-term investments Corporate bonds— 6,923 — 6,923Prepaids and other current assets Derivative assets— 54 — 54Other assets Long-term investment809 — — 809Total assets measured and recorded at fair value$9,110 $6,977 $— $16,087Accrued and other current liabilities Derivative liabilities$— $40 $— $40 Accrued TVN VDP, current portion— — 6,597 6,597Other non-current liabilities Accrued TVN VDP, long-term portion— — 3,053 3,053Total liabilities measured and recorded at fair value$— $40 $9,650 $9,690(1) The Company’s liability for the TVN VDP is classified within Level 3 because discount rates which are unobservable in the market were being usedto measure the fair value of this liability during the fourth quarter of fiscal 2016.NOTE 6: BUSINESS ACQUISITIONOn February 29, 2016, the Company completed its acquisition of TVN, a global leader in advanced video compression solutions headquartered inRennes, France, for $82.5 million in cash. The acquisition strengthened the Company’s competitive position in the video infrastructure market and enhancedthe depth and scale of the Company’s research and development and service and support capabilities in the video arena.During the fourth quarter of 2016, the Company completed the accounting for this business combination. The purchase price has been allocated totangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’sallocation of TVN purchase consideration is as follows (in thousands):73Table of ContentAssets: Cash and cash equivalents$6,843 Accounts receivable, net14,933 Inventories3,462 Prepaid expenses and other current assets2,412 Property and equipment, net9,942 French R&D tax credit receivables (1)26,421 Other long-term assets2,134Total assets$66,147Liabilities: Other debts and capital lease obligations, current8,362 Accounts payable12,494 Deferred revenue2,504 Accrued and other current liabilities18,365 Other debts and capital lease obligations, long-term16,087 Other non-current liabilities6,467 Deferred tax liabilities2,126Total liabilities$66,405 Goodwill41,670Intangibles41,100Total purchase consideration$82,512(1) See Note 9, “Certain Balance Sheet Components-Prepaid expenses and other current assets,” for more information on French R&D tax creditreceivables.The following table presents details of the intangible assets acquired through this business combination (in thousands, except years): Estimated Useful Life Fair ValueBacklog6 months $3,600Developed technology4 years 21,700Customer relationships5 years 15,200Trade name4 years 600 $41,100Acquired identifiable intangible assets were valued using the income method and are amortized on a straight line basis over their respective estimateduseful lives. Goodwill of $41.7 million arising from the acquisition was derived from expected benefits from the business synergies to be derived from thecombined entities and the experienced workforce who joined the Company in connection with the acquisition. The goodwill is not expected to be deductiblefor income tax purposes but the intangibles assets acquired are expected to be deductible for income tax purposes in certain jurisdictions. Both goodwill andintangibles assets acquired were assigned to the Company’s video reporting unit.Acquisition-and integration-related expensesAs a result of the TVN acquisition, the Company incurred acquisition-and integration-related expenses and these costs are expensed as incurred.Acquisition-related costs include outside legal, accounting and other professional services.Acquisition-and integration-related expenses for the TVN acquisition are summarized in the table below (in thousands):74Table of Content Acquisition-relatedIntegration-related(1) Year ended December 31,2016 Year ended December31, 2017 (unaudited) Year ended December31, 2016 (unaudited)Product cost of revenue$— $342 $1,049Research and development— 7 974Selling, general and administrative3,855 2,469 11,058 Total acquisition- and integration-related expenses$3,855 $2,818 $13,081(1) Integration-related costs include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits once theintegration is fully consummated. All integration efforts were completed by 2017 and the Company does not expect any more such expenses to continue after2017.NOTE 7: GOODWILL AND IDENTIFIED INTANGIBLE ASSETSGoodwillGoodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed.Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below anoperating segment. The Company has two reporting units, Video and Cable Edge.The Company tests for goodwill impairment at the reporting unit level on an annual basis, or more frequently if events or changes in circumstancesindicate that the asset is more likely than not impaired. The Company’s annual goodwill impairment test is performed in the fiscal fourth quarter, with atesting date at the end of fiscal October.The changes in the Company’s carrying amount of goodwill are as follows (in thousands): Video Cable Edge TotalBalance as of December 31, 2015 $136,904 $60,877 $197,781Goodwill from TVN acquisition (1) 41,670 — 41,670 Foreign currency translation adjustment (2,055) (117) (2,172)Balance as of December 31, 2016 $176,519 $60,760 $237,279 Foreign currency translation adjustment 5,493 55 5,548Balance as of December 31, 2017 $182,012 $60,815 $242,827(1) Goodwill from the TVN acquisition is assigned to the Company’s Video reporting unit.Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities toreporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate thefair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premiumand other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit whichcould trigger impairment. If the Company’s assumptions and related estimates change in the future, or if the Company’s reporting structure changes or otherevents and circumstances change (e.g. such as a sustained decrease in the Company’s stock price), the Company may be required to record impairmentcharges in future periods. Any impairment charges that the Company may take in the future could be material to its results of operations and financialcondition.The Company performed its annual goodwill impairment review at October 31, 2017. As of October 31, 2017, with a closing stock price of $3.70 onThe NASDAQ Stock Market, the Company’s market capitalization was approximately $302 million. When assessing goodwill for impairment, the Companyused multiple valuation methodologies to determine its enterprise value and reporting units fair values. The valuation methods used included the Company’smarket capitalization adjusted for a control premium and the Company’s discounted cash flow analysis, which involves making significant assumptions andestimates, including expectations of the Company’s future financial performance, the Company’s weighted average cost of capital and the Company’sinterpretation of then currently enacted tax laws. Based on the impairment test performed, management concluded that goodwill was not impaired.75Table of ContentThe Company has not recorded any impairment charges related to goodwill for any prior periods.Intangible AssetsThe table below is a summary of the Company’s identified intangible assets (in thousands): December 31, 2017 December 31, 2016 WeightedAverageRemaining Life(Years) GrossCarryingAmount AccumulatedAmortization NetCarryingAmount GrossCarryingAmount AccumulatedAmortization NetCarryingAmountDeveloped core technology2.2 $31,707 $(20,396) $11,311 $31,707 $(15,216) $16,491Customer relationships/contracts3.2 44,819 (35,205) 9,614 44,384 (32,098) 12,286Trademarks and tradenames2.2 654 (300) 354 573 (119) 454Maintenance agreements and relatedrelationshipsN/A 5,500 (5,500) — 5,500 (5,500) —Order BacklogN/A 3,177 (3,177) — 3,011 (3,011) —Total identifiable intangibles $85,857 $(64,578) $21,279 $85,175 $(55,944) $29,231Amortization expense for the identifiable intangible assets was allocated as follows (in thousands): Year Ended December 31, 2017 2016 2015Included in cost of revenue$5,180 $4,434 $719Included in operating expenses3,142 10,402 5,783 Total amortization expense$8,322 $14,836 $6,502The estimated future amortization expense of identifiable intangible assets with definite lives as of December 31, 2017 is as follows (in thousands): Cost of Revenue OperatingExpenses TotalYear ended December 31, 2018$5,180 $3,199 $8,37920195,180 3,199 8,3792020951 3,063 4,0142021— 507 507Total future amortization expense$11,311 $9,968 $21,279NOTE 8: ACCOUNTS RECEIVABLEAccounts receivable, net of allowances, consisted of the following (in thousands): December 31, 2017 2016Accounts receivable, net: Accounts receivable$74,475 $91,596 Less: allowance for doubtful accounts and sales returns(4,631) (4,831) Total$69,844 $86,765Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The Company generally does not require collateral and performsongoing credit evaluations of its customers and provides for expected losses. The Company maintains an allowance for doubtful accounts based upon theexpected collectability of its accounts receivable. The expectation76Table of Contentof collectability is based on the Company’s review of credit profiles of customers, contractual terms and conditions, current economic trends and historicalpayment experience.The following table is a summary of activities in allowances for doubtful accounts and sales returns (in thousands): Balance atBeginning ofPeriod Charges toRevenue Charges(Credits) toExpense Additions to(Deductionsfrom) Reserves Balance at Endof PeriodYear ended December 31, 2017$4,831 $4,030 $881 $(5,111) $4,6312016$4,340 $1,488 $1,100 $(2,097) $4,8312015$7,057 $1,826 $208 $(4,751) $4,340NOTE 9: CERTAIN BALANCE SHEET COMPONENTSThe following tables provide details of selected balance sheet components (in thousands): December 31, 2017 2016Prepaid expenses and other current assets: French R&D tax credits receivables (1)6,609 5,895 Deferred cost of revenue4,440 6,856 Prepaid maintenance, royalty, rent, property taxes and value added tax3,867 5,526 Restricted cash (2)530 731Other3,485 7,311 Total$18,931 $26,319(1) The Company’s acquired TVN subsidiary in France (the “TVN French Subsidiary”) participates in the French Crédit d’Impôt Recherche (“CIR”)program (the “R&D tax credits”) which allows companies to monetize eligible research expenses. The R&D tax credits can be used to offset against incometax payable to the French government in each of the four years after being incurred, or if not utilized, are recoverable in cash. The amount of R&D tax creditsrecoverable are subject to audit by the French government and in the year ended December 31, 2017 and 2016, the French government approved the 2013and 2012 claims and refunded $6.4 million and $5.8 million to the TVN French Subsidiary, respectively. The remaining R&D tax credit receivables atDecember 31, 2017 were approximately $28.5 million and are expected to be recoverable from 2018 through 2021 with $6.6 million reported under “Prepaidand other Current Assets” and $21.9 million reported under “Other Long-term Assets” on the Company’s Consolidated Balance Sheets.(2) The restricted cash balances are held as cash collateral security for certain bank guarantees. These restricted funds are invested in bank deposits andcannot be withdrawn from the Company’s accounts without the prior written consent of the applicable secured party. Additionally, as of December 31, 2017,the Company had approximately $1.2 million of restricted cash for the bank guarantee associated with the TVN French Subsidiary’s office building lease.This amount is reported under “Other Long-term Assets” on the Company’s Consolidated Balance Sheets. December 31, 2017 2016Inventories: Raw materials$2,881 $9,889 Work-in-process933 2,318 Finished goods10,130 17,776 Service-related spares12,032 11,210 Total$25,976 $41,19377Table of Content December 31, 2017 2016Property and equipment, net: Machinery and equipment (1)$87,121 $97,989 Capitalized software35,139 34,519 Leasehold improvements15,051 14,455 Furniture and fixtures (1)6,534 8,993 Property and equipment, gross143,845 155,956 Less: accumulated depreciation and amortization (1)(114,580) (123,792) Total$29,265 $32,164(1) The reductions in these balances in 2017, compared to 2016, were due to retirement of fully depreciated assets. December 31, 2017 2016Accrued and other current liabilities: Accrued employee compensation and related expenses$16,414 $19,377Customer deposits5,020 4,537Accrued warranty4,381 4,862Contingent inventory reserves3,806 2,210Accrued TVN VDP, current (1)3,186 6,597Accrued royalty payments2,195 1,912 Other13,703 15,655 Total$48,705 $55,150(1) See Note 10, “Restructuring and related charges” for additional information on the Company’s TVN VDP liabilities.78Table of ContentNOTE 10: RESTRUCTURING AND RELATED CHARGESThe Company implemented several restructuring plans in the past few years. The goal of these plans was to bring operational expenses to appropriatelevels relative to Company’s net revenues, while simultaneously implementing extensive company-wide expense control programs.The Company accounts for its restructuring plans under the authoritative guidance for exit or disposal activities. The restructuring and asset impairmentcharges are included in “Product cost of revenue” and “Operating expenses-restructuring and related charges” in the Consolidated Statements of Operations.The following table summarizes the Company’s restructuring and related charges (in thousands): Year ended December 31, 2017 2016 (1) 2015Product cost of revenue$1,279 $3,400 $113Operating expenses-Restructuring and related charges5,307 14,602 1,372 Total$6,586 $18,002 $1,485(1) The restructuring and related charges for the year ended December 31, 2016 is net of $0.6 million and $1.4 million, in product cost of revenue andoperating expenses-restructuring and related charges, respectively, of gain from TVN pension curtailment. See discussion below “Harmonic 2016Restructuring Plan-TVN VDP” for additional information on the gain from TVN pension curtailment.Harmonic 2017 RestructuringIn the third quarter of 2017, the Company implemented a restructuring plan (the “Harmonic 2017 Restructuring Plan”) to better align its operating costswith the continued decline in its net revenues. In 2017, the Company recorded $2.5 million of restructuring and related charges under this plan consisting of$2.1 million of employee severance and $0.4 million related to the closure of one of the Company’s offices in New York. The activities under this plan werecompleted in 2017. In 2017, the Company made $2.0 million payments for this plan and the remaining $0.5 million liability outstanding at December 31,2017 which relates to the accrual for thew New York excess facility will be paid out over the remainder of the New York leased properties’ terms, whichcontinue through August 2020.Harmonic 2016 RestructuringIn the first quarter of 2016, the Company implemented a restructuring plan (the “Harmonic 2016 Restructuring Plan”) to reduce operating costs byconsolidating duplicative resources in connection with the acquisition of TVN. The planned activities included global workforce reductions, exiting certainoperating facilities and disposing of excess assets and an employee voluntary departure plan in France (the “TVN VDP”).In 2016, the Company recorded an aggregate of $20.0 million of restructuring and related charges under the Harmonic 2016 Restructuring Plan, ofwhich $2.2 million is primarily related to the exit from the excess facility at the U.S. headquarters and the remaining $17.8 million is related to severance andbenefits for the termination of 118 employees worldwide, including 83 employees in France who participated in the TVN VDP. Additionally, therestructuring and related charges under this plan were offset by $2.0 million of gain from TVN pension curtailment. For the employees who participated in theTVN VDP, their pension benefit will be funded by the TVN VDP and as a result, the TVN defined benefit pension plan was remeasured at December 31, 2016,which resulted in a non-cash curtailment gain. In 2017, the Company recorded an additional $1.1 million in severance and benefits and this plan wascompleted in June 2017.TVN VDPBased on the applicable accounting guidance, the Company recorded $1.8 million and $13.1 million of TVN VDP costs in the years ended December31, 2017 and 2016, respectively. In aggregate, in 2016 and 2017, the Company had paid $10.7 million of TVN VDP costs. The TVN VDP liability balance asof December 31, 2017 was $5.1 million, payable from 2018 through 2020.Excess Facilities in San Jose, CaliforniaIn January 2016, the Company exited an excess facility at its U.S. headquarters in San Jose, California and recorded $1.4 million in facility exit costs.The fair value of these liabilities is based on a net present value model using a credit-adjusted risk-79Table of Contentfree rate. The liability will be paid out over the remainder of the leased properties’ terms, which continue through August 2020. As of the cease-use date, thefair value of this restructuring liability totaled $2.5 million. Offsetting these charges was an adjustment for deferred rent liability relating to this space of $1.1million. As a result of a change in the estimate of the sublease income, the restructuring liability was increased by $1.2 million and $0.6 million, as ofDecember 31, 2017 and 2016, respectively.The following table summarizes the activity in the Company’s restructuring accrual related to the Harmonic 2016 Restructuring Plan (in thousands): Excess facilities VDP Non-VDP Severanceand benefits Other charges TotalCharges for 2016 Restructuring Plan$1,655 $13,175 $4,702 $247 $19,779Adjustments to restructuring provisions582 — (88) (247) 247Reclassification of deferred rent1,087 — — — 1,087Cash payments(948) (3,484) (3,075) — (7,507)Foreign exchange loss(1) (41) (20) — (62)Balance at December 31, 20162,375 9,650 1,519 — 13,544Adjustments to restructuring provisions1,223 1,766 1,134 — 4,123Cash payments(1,172) (7,203) (2,690) — (11,065)Foreign exchange gain— 915 37 — 952Balance at December 31, 20172,426 5,128 — — 7,554Less: current portion (1)(645) (3,186) — — (3,831)Long-term portion (1)$1,781 $1,942 $— $— $3,723(1) The current portion and long-term portion of the restructuring liability are reported under “Accrued and other current liabilities” and “Other non-current liabilities”, respectively, on the Company’s Consolidated Balance Sheets.Harmonic 2015 RestructuringIn the fourth quarter of 2014, the Company implemented the Harmonic 2015 Restructuring Plan to reduce operating costs. The plan was completed in2015 and the Company recorded $3.7 million restructuring charges, in aggregate, under this plan, of which $2.2 million and $1.5 million were recorded in2014 and 2015, respectively. All liabilities under this plan were fully paid in 2016.NOTE 11: CONVERTIBLE NOTES, OTHER DEBTS AND CAPITAL LEASES4.00% Convertible Senior NotesIn December 2015, the Company issued $128.25 million aggregate principal amount of 4.00% unsecured convertible senior notes due December 1,2020 (the “offering” or “Notes”, as applicable) through a private placement with a financial institution. The Notes do not contain any financial covenantsand the Company can settle the Notes in cash, shares of common stock, or any combination thereof. The Notes can be converted under certain circumstancesdescribed below, based on an initial conversion rate of 173.9978 shares of common stock per $1,000 principal amount of Notes (which represents an initialconversion price of approximately $5.75 per share). Interest on the Notes is payable semiannually in arrears on June 1 and December 1 of each year.Concurrent with the closing of the offering, the Company used $49.9 million of the net proceeds to repurchase 11.1 million shares of the Company’scommon stock from purchasers of the offering in privately negotiated transactions. In addition, the Company incurred approximately $4.1 million of debtissuance cost resulting in net proceeds to the Company of approximately $74.2 million, which was used to fund the TVN acquisition.Prior to September 1, 2020, the Notes will be convertible only under the following circumstances: (1) during any fiscal quarter (and only during suchfiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion priceof the Notes on each applicable trading day; (2) during the five business day period after any 5 consecutive trading day period (the “ measurement period ”)in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than80Table of Content98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon theoccurrence of specified corporate events. Commencing on September 1, 2020 until the close of business on the second scheduled trading day immediatelypreceding the maturity date, the Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.If a fundamental change occurs, holders of the Notes may require the Company to purchase all or any portion of their Notes for cash at a repurchaseprice equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental changerepurchase date. In addition, if specific corporate events occur prior to the maturity date, the conversion rate may be increased for a holder who elects toconvert the Notes in connection with such a corporate event.In accordance with accounting guidance on embedded conversion features, the conversion feature associated with the Notes is valued and bifurcatedfrom the host debt instrument and recorded in stockholders’ equity. The resulting debt discounts on the Notes are being amortized to interest expense at theeffective interest rate over the contractual terms of the Notes. The following table presents the components of the Notes as of December 31, 2017 andDecember 31, 2016 (in thousands, except for years and percentages): December 31, 2017 2016Liability: Principal amount$128,250 128,250 Less: Debt discount, net of amortization(17,404) (22,302) Less: Debt issuance costs, net of amortization(2,098) (2,689) Carrying amount$108,748 103,259 Remaining amortization period (years)2.9 years 3.9 years Effective interest rate on liability component9.94% 9.94% Carrying amount of equity component$26,062 $26,062The following table presents interest expense recognized related to the Notes (in thousands): Year ended December 31, 2017 2016 2015Contractual interest expense$5,130 5,130 240Amortization of debt discount4,898 4,430 193Amortization of debt issuance costs591 534 23 Total interest expense recognized$10,619 10,094 456Other Debts and Capital LeasesIn connection with the TVN acquisition, the Company assumed a variety of debt and credit facilities in France to satisfy the financing requirements ofTVN operations. These arrangements are summarized in the table below (in thousands): December 31, 2017 2016Financing from French government agencies related to various government incentive programs (1)20,565 17,930Term loans1,282 1,400Obligations under capital leases1,099 1,860 Total debt obligations22,946 21,190 Less: current portion(7,610) (7,275) Long-term portion15,336 13,91581Table of Content(1) Loans backed by French R&D tax credit receivables were $17.7 million and $14.7 million as of December 31, 2017 and 2016, respectively. As ofDecember 31, 2017, the TVN French Subsidiary had an aggregate of $28.5 million of R&D tax credit receivables from the French government from 2018through 2021. (See Note 9, “Certain Balance Sheet Components-Prepaid expenses and other current assets,” for more information). These tax loans have afixed rate of 0.6%, plus EURIBOR 1 month plus 1.3% and mature between 2018 through 2020. The remaining loans of $2.9 million and $3.2 million as ofDecember 31, 2017 and 2016, respectively, primarily relate to financial support from French government agencies for R&D innovation projects at minimalinterest rates and the loans outstanding at December 31, 2017 mature between 2020 through 2025.Future minimum repaymentsThe table below shows the future minimum repayments of debts and capital lease obligations as of December 31, 2017 (in thousands):Years ending December 31,Capital lease obligations Other Debt obligations2018930 6,674201995 7,141202051 6,942202123 5152022— 474Thereafter— 101Total$1,099 $21,847Line of CreditOn September 27, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”). TheLoan Agreement provides for a secured revolving credit facility in an aggregate principal amount of up to $15.0 million. Under the terms of the LoanAgreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time cannot exceed up to 85% of the Company’seligible receivables. Under the terms of the Loan Agreement, the Company may also request letters of credit from the Bank. The proceeds of any loans underthe Loan Agreement will be used for working capital and general corporate purposes.Loans under the Loan Agreement will bear interest, at the Company’s option, and subject to certain conditions, at an annual rate of either a prime rate ora LIBOR rate plus an applicable margin of 2.25%. There will be no applicable margin for prime rate advances when the Company is in compliance with theliquidity requirement of at least $20.0 million in the aggregate of consolidated cash plus availability under the Loan Agreement (the “LiquidityRequirement”) and a 0.25% margin for prime rate advances when the Company is not in compliance with the Liquidity Requirement. The Company may notrequest LIBOR advances when it is not in compliance with the Liquidity Requirement. Interest on each advance is due and payable monthly and theprincipal balance is due at maturity. The Company’s obligations under the revolving credit facility are secured by a security interest on substantially all of itsassets, excluding intellectual property. The Loan Agreement contains customary affirmative and negative covenants. The Company must comply withfinancial covenants requiring it to maintain (i) minimum a short-term asset to short-term liabilities ratio and (ii) minimum adjusted EBITDA, in the amountsand for the periods as set forth in the Loan Agreement. The Company must also maintain a minimum liquidity amount, comprised of unrestricted cash held ataccounts with the Bank plus proceeds available to be drawn under the Loan Agreement, equal to $10.0 million at all times. As of December 31, 2017, theCompany was in compliance with the covenants under the Loan Agreement.There were no borrowings under the Loan Agreement from the closing of the Loan Agreement through December 31, 2017.NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATIONEquity Award Plans1995 Stock PlanThe 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and RSUs. Incentive stock options may be grantedonly to employees. All other awards may be granted to employees and consultants. Under the terms of the 1995 Stock Plan, incentive stock options may begranted at prices not less than 100% of the fair value of the82Table of ContentCompany’s common stock on the date of grant and non-statutory stock options may be granted at prices not less than 85% of the fair value of the Company’scommon stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Company’s Board ofDirectors (the “Board”), generally two to four years, and expire seven years from date of grant. Grants of RSUs and any non-statutory stock options issued atprices less than the fair market value on the date of grant decrease the plan reserve 1.5 shares for every unit or share granted and any forfeitures of theseawards due to their not vesting would increase the plan reserve by 1.5 shares for every unit or share forfeited. The Company’s stockholders approved anamendment to the 1995 Stock Plan at the Company’s 2017 annual meeting of stockholders (“2017 Annual Meeting”) which increased the number of sharesof common stock reserved for issuance under the 1995 Stock Plan by 7,000,000 shares. As of December 31, 2017, an aggregate of 14,858,418 shares ofcommon stock were reserved for issuance under the 1995 Stock Plan, of which 8,381,707 shares remained available for grant.2002 Director PlanThe 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company. Under the terms ofthe 2002 Director Plan, non-statutory stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the dateof grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Board, generally three years for the initial grantand one year for subsequent grants to a non-employee director, and expire seven years from date of grant. Grants of RSUs decrease the plan reserve 1.5 sharesfor every unit granted and any forfeiture of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit forfeited. TheCompany’s stockholders approved an amendment to the 2002 Director Stock Plan at the 2017 Annual Meeting which increased the number of shares ofcommon stock reserved for issuance under the 2002 Director Stock Plan by 400,000 shares. As of December 31, 2017, an aggregate of 837,174 shares ofcommon stock were reserved for issuance under the 2002 Director Plan, of which 623,034 shares remained available for grant.Employee Stock Purchase PlanThe 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share purchase rights to employees of the Company. The ESPP isintended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase sharesat 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Offering periods generally begin onthe first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. Inthe event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on theircontributions relative to the total contributions received for the offering period. Under the ESPP, 1,291,875, 1,265,458 and 888,152 shares were issued duringfiscal 2017, 2016 and 2015, respectively, representing $4.4 million, $3.7 million and $5.2 million in contributions. As of December 31, 2017, 1,114,796shares were reserved for future purchases by eligible employees.Stock Option and RSU activitiesThe following table summarizes the Company’s stock option and RSU activities during the year ended December 31, 2017 (in thousands, except pershare amounts): Stock OptionsOutstanding Restricted Stock UnitsOutstanding SharesAvailablefor Grant NumberofShares WeightedAverageExercisePrice NumberofUnits WeightedAverageGrant DateFair ValueBalance at December 31, 20163,912 5,019 $6.01 3,864 $4.26Authorized7,400 — — — Granted(5,351) 30 5.10 3,546 5.12Options exercised— (106) 2.97 — Shares released— — — (3,184) 4.10Forfeited or canceled3,043 (1,063) 6.18 (1,322) 5.14Balance at December 31, 20179,004 3,880 $6.04 2,904 $5.09The following table summarizes information about stock options outstanding as of December 31, 2017 (in thousands, except per share amounts andterm):83Table of Content NumberofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (Years) AggregateIntrinsicValueVested and expected to vest3,845 $6.06 2.8 $946Exercisable3,367 6.21 2.6 664The intrinsic value of options vested and expected to vest and exercisable as of December 31, 2017 is calculated based on the difference between theexercise price and the fair value of the Company’s common stock as of December 31, 2017. The intrinsic value of options exercised during the years endedDecember 31, 2017, 2016 and 2015 was $0.3 million, $0.1 million and $1.7 million, respectively, and is calculated based on the difference between theexercise price and the fair value of the Company’s common stock as of the exercise date.The following table summarizes information about RSUs outstanding as of December 31, 2017 (in thousands, except term): Number ofSharesUnderlyingRestrictedStock Units WeightedAverageRemainingVesting Period(Years) AggregateFairValueVested and expected to vest2,402 0.6 $10,088The fair value of RSUs vested and expected to vest as of December 31, 2017 is calculated based on the fair value of the Company’s common stock as ofDecember 31, 2017.Performance- and Market-based awardsStarting 2015, the Company began to fund a portion of its incentive bonus payment to its eligible employees issuing performance-based RSU (“PRSU”)awards from the 1995 Stock Plan. The Company granted 1,165,685, 898,533 and 395,760 shares of PRSUs to its employees during the years ended December31, 2017, 2016 and 2015, respectively, of which 1,165,685, 610,579 and 239,744 shares of PRSUs vested during the years December 31, 2017, 2016 and2015, respectively. No PRSUs awards were outstanding as of December 31, 2017. The vesting of the PRSUs awards is based on the achievement of certainfinancial and non-financial operating goals of the Company. The stock-based compensation recognized for PRSUs were $3.2 million, $2.8 million and $0.6million, for the years ended December 31, 2017, 2016 and 2015, respectively.In 2017, the Company granted 344,500 market-based RSUs (“MRSUs”) under the 1995 Stock Plan to its key executives and certain eligible employees thatmay vest during a three-year period as part of its long-term incentive program. The vesting conditions of these awards are tied to the market value of theCompany's common stock. None of the MRSUs vested during the year ended December 31, 2017. The fair value of these shares was estimated using a Monte-Carlo simulation and the stock-based compensation recognized in 2017 for these MRSUs was $0.9 million. The unrecognized stock-based compensation atDecember 31, 2017 was $0.2 million for the MRSU and is expected to be fully recognized in 2018.TVN Employee Equity Benefit PlanIn connection with the TVN acquisition, the Company assumed two of TVN’s existing employee equity benefit plans, which were fully vested andsettled in 2016 for $2.9 million.French Retirement Benefit PlanUnder French law, the Company’s subsidiaries in France, including the acquired TVN French Subsidiary, are obligated to make certain payments to itsemployees upon their retirement from the Company. These payments are based on the retiring employee’s salary for a number of months that varies accordingto the employee’s period of service and position. Salary used in the calculation is the employee’s average monthly salary for the twelve months prior toretirement. The payments are made in one lump-sum at the time of retirement. The French pension plan is unfunded and there are no contributions to the planrequired by any laws or funding regulations, discretionary contributions or non-cash contributions expected to be made.The company’s defined benefit pension obligations are measured as of December 31. The present value of these lump-sum payments is determined onan actuarial basis and the actuarial valuation takes into account the employees’ age and period of service with the company, projected mortality rates,mobility rates and increases in salaries, and a discount rate.84Table of ContentThe table below shows the present value of the Company’s pension obligations as of December 31, 2017 and December 31, 2016 and the changes to theCompany’s pension obligations for each of those years (in thousands): December 31, 2017 2016Projected benefit obligation: Balance at January 1$4,264 $— Acquired from TVN acquisition— 5,907 Service cost259 217 Interest cost71 87 Actuarial (gains) losses(528) 279 Curtailment (1)— (1,955) Adjustment for prior year balance343 — Foreign currency translation adjustment624 (271)Balance at December 31$5,033 $4,264 Presented on the Consolidated Balance Sheets under: Current portion (presented under “Accrued and other current liabilities”)$34 27Long-term portion (presented under “Other non-current liabilities”)$4,999 4,237(1) As a result of the TVN VDP, the defined benefit pension plan was remeasured in the fourth quarter of 2016, which resulted in a non-cash curtailmentgain of $2.0 million. The curtailment gain was recognized in the Consolidated Statement of Operations during the fourth quarter of 2016 and the Company’spension liability was reduced by the same amount. Of the $2.0 million pension curtailment gain, $0.6 million is included in product cost of revenue and theremaining $1.4 million is included in operating expenses-restructuring and related charges in the Consolidated Statement of Operations. The remeasurementdid not have a material effect on other components of net periodic pension expense for the year ended December 31, 2016.The table below shows the components of net periodic benefit costs (in thousands): Year ended December 31, 2017 2016Service cost$259 $217Interest cost71 87Amortization of net actuarial loss (gain) (1)— — Net periodic benefit cost included in operating loss$330 $304(1) The Company uses the allowable 10% corridor approach to determine the amount of actuarial gains or losses subject to amortization in pensioncost. Gains or losses are amortized on a straight-line basis over the average future remaining service period of active plan participants.The following assumptions were used in determining the Company’s pension obligation: December 31, 2017 2016 Discount rate1.5% 1.5% Mobility rate6.0% 3.0% Salary progression rate2.0% 2.0%The Company evaluates the discount rate assumption annually. The discount rate is determined using the average yields on high-quality fixed-incomesecurities that have maturities consistent with the timing of benefit payments.The Company also evaluates other assumptions related to demographic factors, such as retirement age, mortality rates and turnover periodically,updating them to reflect experience and expectations for the future. The mortality assumption related85Table of Contentto the Company’s defined benefit pension plan used mortality tables published in January 2017, which is the most current, by the French National Institute ofStatistics and Economic Studies.As of December 31, 2017, future benefits expected to be paid in each of the next five years, and in the aggregate for the five year period thereafter are asfollows (in thousands):Years ending December 31, 2018$342019532020—20214420221432023 - 20272,858 $3,132401(k) PlanThe Company has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allowsparticipants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company can make discretionary contributions to theplan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The Company’scontributions to the plan were $0.3 million for fiscal year 2017 and $0.4 million for each of the fiscal years 2016 and 2015.Stock-based CompensationThe following table summarizes stock-based compensation expense for all plans (in thousands): Year ended December 31, 2017 2016 2015Stock-based compensation in: Cost of revenue$2,370 $1,554 $1,862 Research and development expense5,313 3,711 4,435 Selling, general and administrative expense8,927 7,795 9,285 Total stock-based compensation in operating expense14,240 11,506 13,720Total stock-based compensation recognized in net loss$16,610 $13,060 $15,582As of December 31, 2017, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock options and RSUswas $9.9 million and is expected to be recognized over a weighted-average period of 1.4 years.Valuation AssumptionsThe Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuationmodel. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of thecall option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. At thedate of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weightedaverage assumptions: Employee Stock Options ESPP 2017 2016 2015 2017 2016 2015Expected term (in years)4.30 4.30 4.65 0.50 0.50 0.50Volatility42% 36% 38% 48% 70% 34%Risk-free interest rate1.8% 1.4% 1.5% 1.2% 0.6% 0.3%Expected dividends0.0% 0.0% 0.0% 0.0% 0.0% 0.0%86Table of ContentThe expected term of the employee stock option represents the weighted-average period that the stock options are expected to remain outstanding. Thecomputation of expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected term of the stock purchase right under ESPP represents theperiod of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to theexpected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuationmodel is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cashdividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures in the Company’s Consolidated Statements ofOperations and, accordingly, was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of the accountingstandard update (ASU 2016-09, “Improvements to Employee Share-Based payments”) issued by FASB, effective January 1, 2017, the Company changed itsaccounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustmentof $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit).The weighted-average fair value per share of options granted for the years ended December 31, 2017, 2016 and 2015 was $1.85, $0.99 and $2.51,respectively. The fair value of all stock options vested during the years ended December 31, 2017, 2016 and 2015 was $1.7 million, $2.3 million and $3.0million, respectively.The estimated weighted-average fair value per share of stock purchase rights granted for the years ended December 31, 2017, 2016 and 2015 was $1.50,$1.04 and $1.69, respectively.The Company realized no income tax benefit from stock option exercises for the years ended December 31, 2017, 2016 and 2015 due to recurringlosses and valuation allowances.The estimated fair value of RSUs is based on the market price of the Company’s common stock on the grant date. The fair value of all restricted stockunits issued during the years ended December 31, 2017, 2016 and 2015 was $13.0 million, $9.7 million and $11.1 million, respectively.NOTE 13: STOCKHOLDERS’ EQUITYPreferred StockHarmonic has 5,000,000 authorized shares of preferred stock. No shares of preferred stock were issued or outstanding in any of the periods presented.Common Stock RepurchasesOur stock repurchase program expired on December 31, 2016. No stock was repurchased during the fiscal year of 2017 and 2016. Any further stockrepurchases would require authorization from the Board.Accumulated Other Comprehensive Income (Loss) (“AOCI”)The components of AOCI, on an after-tax basis where applicable, were as follows (in thousands): December 31, 2017 2016Foreign currency translation adjustments$4,310 $(7,267)Unrealized foreign exchange loss on intercompany long-term loans, net of taxes(1,177) —Gain on investments, net of taxes (1)— 276Actuarial gain (loss)249 (279) Total accumulated other comprehensive income (loss)$3,382 $(7,270)(1) See Consolidated Statements of Comprehensive Loss for the amounts related to investments that were reclassified into the Consolidated Statementsof Operations for the periods presented.NOTE 14: INCOME TAXES87Table of ContentLoss from operations before income taxes consists of the following (in thousands): Year ended December 31, 2017 2016 2015United States$(50,041) $(53,833) $(16,826)International(34,666) (26,597) 758Loss before income taxes$(84,707) $(80,430) $(16,068)The components of the benefit from income taxes consist of the following (in thousands): Year ended December 31, 2017 2016 2015Current: Federal$(4,530) $(950) $(1,981)State129 181 120International273 2,738 1,966Deferred: Federal— (713) —State— — —International2,376 (9,372) (512)Total benefit from income taxes$(1,752) $(8,116) $(407)The differences between the benefit from income taxes computed at the U.S. federal statutory rate at 35% and the Company’s actual benefit fromincome taxes are as follows (in thousands): Year ended December 31, 2017 2016 2015Benefit from for income taxes at U.S. Federal statutory rate$(29,648) $(28,150) $(5,624)Differential in rates on foreign earnings15,920 11,741 1,584Non-deductible amortization expense— 617 947Tax Reform Tax rate reduction14,527 — —Change in valuation allowance(2,834) 4,465 2,230Change in liabilities for uncertain tax positions(2,009) (960) (1,083)Non-deductible stock-based compensation1,934 1,480 1,398Non-deductible meals and entertainment380 441 395Non-deductible acquisition cost— — 457Adjustments related to tax positions taken during prior years(473) (163) (781)Adjustments made under intercompany transactions— 1,779 —Tax Refund(834)——Other1,285 634 70 Total benefit from income taxes$(1,752) $(8,116) $(407)The Company operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax ratemay be affected by changes in or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical mix of income and expense, and changes in management’s assessment of matters such as the ability to realize deferred taxassets. The Company’s effective tax rate varies from year to year primarily due to the absence of several onetime, discrete items that benefited or decrementedthe tax rates in the previous years.In 2017, the Company had a worldwide consolidated loss before tax of $84.7 million and tax benefit of $1.8 million, with an effective income tax rateof 2%. The Company’s 2017 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to the Company’s geographicalincome mix, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, tax rate change in foreign jurisdictions, taxbenefits associated with the release of tax reserves for uncertain tax positions resulting from the expiration of the statutes of limitations, a one-time benefit of$2.6 million88Table of Contentfrom the reduction of a valuation allowance on alternative minimum tax (“AMT”) credit carryforwards that will be refundable as a result of the TCJA,partially offset by the increase in the valuation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductiblestock-based compensation, and the net of various other discrete tax adjustments.On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted which, among other things, lowered the U.S. federal corporate income taxrate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred andcreates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed the accounting for the tax effects ofenactment of the TCJA; however, the effects on existing deferred tax balances has been determined and recorded. The impact of remeasuring deferred taxassets at the lower tax rate is a $14.5 million reduction of the value of net deferred tax assets (which represent future tax benefits), which is offset by acorresponding reduction in the related valuation allowance. As a result, there is net zero impact to the Company’s tax expense for 2017. Under the TCJA, thecorporate AMT was repealed. Therefore, corporations which have been unable to utilize AMT credit carryforwards now have the opportunity to realize themthrough cash refunds. The Company has an AMT credit carryforward of $2.6 million that previously was not considered realizable and as such had avaluation allowance recorded. As a result of the TCJA, the valuation allowance was released and is reflected as a benefit in the Company's 2017 income taxprovision. The Company has reclassified the $2.6 million credit carryforward to other receivables in the consolidated balance sheet to reflect the expectedcash refund.The TCJA also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously notrepatriated for U.S. income tax purposes. Although the Company currently does not expect to be impacted by the mandatory deemed repatriation provision ofthe TCJA., because the Company believes our cumulative unremitted earnings and profits are negative, due to the complexity of our international tax andlegal entity structure, the Company will continue to analyze the earnings and profits and tax pools of our foreign subsidiaries to reasonably estimate theeffects of the mandatory deemed repatriation provision of the TCJA over the one-year measurement period.In 2016, the Company had a worldwide consolidated loss before tax of $80.4 million and tax benefit of $8.1 million, with an annual effective tax rateof 10%. The Company’s 2016 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to geographical income mix and itstax valuation allowance, favorable tax rates associated with certain earnings from operations in lower-tax jurisdictions, favorable resolutions of uncertain taxpositions, and the tax benefit from the realization of certain deferred tax assets as a result of the TVN acquisition, partially offset by the increase in thevaluation allowance against U.S. federal, California and other state deferred tax assets, detriment from non-deductible stock-based compensation, non-deductible amortization of foreign intangibles, and the net of various discrete tax adjustments.In 2015, the Company had a worldwide consolidated loss before tax of $16.1 million and tax benefit of $0.4 million, with an effective income tax rateof 3%. The Company’s 2015 effective income tax rate differed from the U.S. federal statutory rate of 35% primarily due to a difference in foreign tax rates andthe Company’s U.S. losses generated for the year received no tax benefit as a result of a full valuation allowance against all of its U.S. deferred tax assets, aswell as adjustments relating to its 2014 U.S. federal tax return filed in September 2015 and the reversal of uncertain tax positions resulting from theexpiration of the statutes of limitations. In addition, the impairment of the VJU investment (see Note 3, “Investments in Other Equity Securities”) received notax benefit.The components of net deferred tax assets included in the Consolidated Balance Sheets are as follows (in thousands):89Table of Content December 31, 2017 2016Deferred tax assets: Reserves and accruals$17,247 $25,527 Net operating loss carryforwards34,915 33,321 Research and development credit carryforwards34,419 28,759 Deferred stock-based compensation2,677 4,292 Depreciation and amortization— 554 Intangibles2,062 — Other tax credits— 2,738 Other1,441 — Gross deferred tax assets92,761 95,191 Valuation allowance(77,756) (74,480) Gross deferred tax assets after valuation allowance15,005 20,711Deferred tax liabilities: Depreciation and amortization(259) — Intangibles— (1,417) Convertible notes(4,284) (8,603) Other— (510) Gross deferred tax liabilities(4,543) (10,530) Net deferred tax assets$10,462 $10,181The following table summarizes the activities related to the Company’s valuation allowance (in thousands): Year ended December 31, 2017 2016 2015Balance at beginning of period$74,480 $64,545 $75,199 Additions9,028 18,291 3,068 Deductions(5,752) (8,356) (13,722)Balance at end of period$77,756 $74,480 $64,545Management regularly assesses the ability to realize deferred tax assets recorded based upon the weight of available evidence, including such factors asrecent earnings history and expected future taxable income on a jurisdiction by jurisdiction basis. In the event that the Company changes its determination asto the amount of realizable deferred tax assets, the Company will adjust its valuation allowance with a corresponding impact to the provision for incometaxes in the period in which such determination is made.In 2017, the Company continued to record a valuation allowance against all of its United States deferred tax assets as well as its net operating lossesgenerated in 2017 due to significant cumulative losses in the United States, resulting in a net increase in valuation allowance of $9.0 million. This increase invaluation allowance is offset partially by the release of $3.2 million of valuation allowance associated with the Company’s foreign subsidiaries and $2.6million associated with the AMT refund related to the TCJA. As of December 31, 2017, the Company had a valuation allowance of $77.8 million against allof its U.S. federal, California and other state net deferred tax assets, including net operating loss carryforwards and R&D tax credit carryforwards, and againstthe majority of its foreign deferred tax assets.The Company adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting, using a modified-retrospective transition method, in the first quarter of fiscal 2017. As a result, the Company recorded a cumulative effectof $4.6 million of additional gross deferred tax asset associated with shared-based payment and an offsetting valuation allowance of the same amount,therefore resulting in no net impact to the Company’s beginning retained earnings or effective tax rate for 2017.In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requirescompanies to recognize the income tax consequences of all intra-entity sales of assets other than inventory when they occur. As a result, a reporting entitywould recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of thattransaction are eliminated in90Table of Contentconsolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The Company early adoptedthis ASU during the first quarter of fiscal 2017 on a modified retrospective approach and recorded a cumulative-effect adjustment of $1.4 million to theretained earnings as of January 1, 2017 (which reduced the accumulated deficit). Correspondingly, in the first quarter of fiscal 2017, the Company recognizedan additional $1.1 million of net deferred tax assets, after netting with $2.1 million of valuation allowance, and write off the remaining $0.3 million ofunamortized tax expenses deferred under the previous guidance to provision for income taxes in the first quarter of fiscal 2017.On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, 145 T.C. No.3 (2015) related to the treatment of stock-basedcompensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. On February19, 2016, the U.S. Internal Revenue Service filed a notice of appeal in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015), to the Ninth Circuit Court ofAppeal. The Ninth Circuit will decide whether a regulation that mandates that stock-based compensation costs related to the intangible development activityof a qualified cost sharing arrangement (a “QCSA”) must be included in the joint cost pool of the QCSA (the “all costs rule”) is consistent with the arm’slength standard as set forth in Section 482 of the Internal Revenue Code. The Company concluded that no adjustment to the consolidated financialstatements as of December 31, 2016 and 2017 is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.As of December 31, 2017, the Company had $111.4 million, $49.1 million, $25.4 million and $53.2 million of foreign, U.S. federal, U.S. Californiastate, and U.S. other states net operating loss carryforwards (“NOL”), respectively. There is no expiration to the utilization of the foreign NOL, while the U.S.federal and California NOL will begin to expire at various dates beginning in 2018 through 2037, if not utilized.As of December 31, 2017, the Company had U.S. federal and California state tax credit carryforwards of approximately $11.3 million and $33.9 million,respectively. If not utilized, the U.S. federal tax credit carryforwards will begin to expire in 2031, while the California tax credit forward will not expire.The Company has not provided U.S. federal and California state income taxes, as well as foreign withholding taxes, on approximately $10.5 million ofcumulative undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of theamount of unrecognized deferred tax liability for temporary differences related to investment in these non-U.S. subsidiaries that are essentially permanent induration is not practicable.The Company applies the provisions of the applicable accounting guidance regarding accounting for uncertainty in income taxes, which requiresapplication of a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, theapplicable accounting guidance permits the recognition of a tax benefit measured at the largest amount of such tax benefit that, in our judgment, is more thanfifty percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain taxpositions be recognized in earnings in the period in which such determination is made. The Company will continue to review its tax positions and providefor, or reverse, unrecognized tax benefits as issues arise. As of December 31, 2017, the Company had $18.8 million that would favorably impact the effectivetax rate in future periods if recognized. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions): Year ended December 31, 2017 2016 2015Balance at beginning of period$19.2 $15.6 $15.7 Increase in balance related to tax positions taken during current year1.4 4.6 0.7 Decrease in balance as a result of a lapse of the applicable statues of limitations(2.2) (1.0) (0.9) Increase in balance related to tax positions taken during prior years1.8 — 0.3 Decrease in balance related to tax positions taken during prior years(1.4) — (0.2)Balance at end of period$18.8 $19.2 $15.6The Company recognizes interest and penalties related to unrecognized tax positions in income tax expenses on the Consolidated Statements ofOperations. The net interest and penalties charges recorded for the years ended December 31, 2015 through 2017, were not material. The Company hadapproximately $0.5 million of accrued interest and penalties related to uncertain tax positions as of December 31, 2017 and December 31, 2016.The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returnsmay be audited and adjusted by the relevant tax authorities. In 2016, the U.S. Internal Revenue Service concluded its audit for the Company’s 2012 tax year.As a result, the Company released $1.1 million of related tax reserves, including accrued interests and penalties in 2016.91Table of ContentThe 2014 through 2016 tax years generally remain subject to examination by U.S. federal and most state tax authorities. In significant foreignjurisdictions, the 2007 through 2015 tax years generally remain subject to examination by their respective tax authorities. In addition, a subsidiary of theCompany is under audit for the 2013 and 2016 tax years, by the Israel tax authority. If, upon the conclusion of these audits, the ultimate determination oftaxes owed in the United States or Israel is for an amount in excess of the tax provision the Company has recorded in the applicable period, the Company’soverall tax expense, effective tax rate, operating results and cash flow could be materially and adversely impacted in the period of adjustment.The Company’s operations in Switzerland are subject to a reduced tax rate under the Switzerland tax holiday which requires various thresholds ofinvestment and employment in Switzerland. The Company has met these various thresholds and the Switzerland tax holiday is effective through the end of2018. The income tax benefits attributable to the Switzerland holiday were estimated to be approximately $0.6 million for fiscal year 2017 andapproximately $0.7 million for each of the fiscal years 2016 and 2015, increasing diluted earnings per share by approximately $0.007, $0.008 and $0.008 foreach of the fiscal years 2017, 2016 and 2015, respectively.NOTE 15: NET LOSS PER SHAREBasic net loss per share is computed by dividing the net loss attributable to common stockholders for the applicable period by the weighted averagenumber of common shares outstanding during the period. Potentially dilutive shares, consisting of outstanding stock options, restricted stock units, ESPPplan awards as well as the Notes, are excluded from the net loss per share computations when their effect is anti-dilutive.The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts): Year Ended December 31, 2017 2016 2015Numerator: Net loss$(82,955) $(72,314) $(15,661)Denominator: Weighted average number of shares outstanding: Basic and diluted80,974 77,705 87,514Net loss per share: Basic and diluted$(1.02) $(0.93) $(0.18)The diluted net loss per share is the same as basic net loss per share for the years ended December 31, 2017, 2016 and 2015 because potential commonshares are only considered when their effect would be dilutive. The following table presents the potential weighted common shares outstanding that wereexcluded from the computation of basic and diluted net loss per share calculations (in thousands): December 31, 2017 2016 2015Stock options4,470 5,295 6,460Restricted stock units3,059 2,536 2,178Stock purchase rights under the ESPP620 659 518Warrants (1)782 206 — Total (2)8,931 8,696 9,156(1) In 2016, in connection with the execution of a product supply agreement the Company granted Comcast a warrant to purchase shares of its commonstock. (See Note 16, “Warrants” for additional information).(2) Excluded from the table above are the Notes, which are convertible under certain conditions into an aggregate of 22,304,348 shares of commonstock (see Note 11, “Convertible Notes, Other Debts and Capital Leases” for additional information on the Notes). Since the Company’s intent is to settle theprincipal amount of the Notes in cash, the treasury stock92Table of Contentmethod is being used to calculate any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spreadwill have a dilutive impact on diluted net income per share when the Company’s average market price of its common stock for a given period exceeds theconversion price of $5.75 per share.NOTE 16: WARRANTSOn September 26, 2016, the Company granted a warrant to purchase shares of common stock (the “Warrant”) to Comcast pursuant to which Comcastmay, subject to certain vesting provisions, purchase up to 7,816,162 shares of the Company’s common stock subject to adjustment in accordance with theterms of the Warrant, for a per share exercise price of $4.76. Comcast may exercise the Warrant for cash or on a net share basis. The Warrant expires onSeptember 26, 2023 or the prior consummation of a change of control of the Company.Comcast’s right to purchase 781,617 shares vested as of the issuance date as an incentive to enter into the software license product supply agreement.Comcast’s rights to purchase an additional 1,954,042 shares vest upon achievement of milestones that occur upon or prior to Comcast’s election forenterprise license pricing for certain of the Company’s software products. Such pricing would obligate Comcast to make certain total payments to theCompany over the term of the product supply agreement. Comcast’s rights to purchase an additional 1,172,425 shares vest when Comcast exceeds specifiedcumulative purchase amounts from the Company under the product supply agreement. Comcast’s rights to purchase the remaining shares vest in specifiedtranches at the earlier of Comcast’s enterprise license pricing election (if completed by a certain date) or achievement of specified cumulative purchaseamounts from the Company.Because the Warrant contains performance criteria under which Comcast must achieve for the Warrant to vest, the final measurement date for theWarrant is the date on which the Warrant vests. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, theestimated fair value of the Warrant is recorded as a reduction to net revenue based on the projected number of shares underlying the Warrant that are expectedto vest, the proportion of purchases by Comcast and its affiliates within the period relative to the aggregate purchase levels required for the Warrant to vestand the then-current fair value of the Warrant. To the extent that projections change as to the number of shares underlying the Warrant that will vest, fairmarket value of the Warrant changes, a cumulative catch-up adjustment is recorded in the period in which the estimates change.The fair value of the Warrant is determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes modelinclude the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest rate over the expected life is equal to the prevailing U.S.Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of theWarrant. Expected life is equal to the remaining contractual term of the Warrant. The dividend yield is assumed to be zero since we have not historicallydeclared dividends and does not have any plans to declare dividends in the future.A portion of the Warrant vested on September 26, 2016 and had a fair value of $1.6 million. During the year ended December 31, 2017 and 2016, theCompany recorded as a reduction to net revenues in connection with the Warrant of $0.2 million and $0.4 million, respectively. The remaining unamortizedvalue of $1.0 million is recorded as an asset under “Prepaid expenses and other current assets” on the Company’s Consolidated Balance Sheet as of December31, 2017.NOTE 17: SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND CUSTOMER CONCENTRATIONSegment InformationOperating segments are defined as components of an enterprise that engage in business activities for which separate financial information is availableand evaluated by the Company’s CODM, which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance.Based on our internal reporting structure, the Company consists of two operating segments: Video and Cable Edge. The operating segments were determinedbased on the nature of the products offered. The Video segment sells video processing and production and playout solutions and services worldwide tobroadcast and media companies, streaming new media companies, cable operators, and satellite and telecommunications (telco) Pay-TV service providers.The Cable Edge segment sells CableOS, cable edge solutions and related services to cable operators globally.The Company does not allocate amortization of intangibles, stock-based compensation, restructuring and related charges, TVN acquisition- andintegration-related costs, and certain other non-recurring charges to the operating income (loss) for each93Table of Contentsegment because management does not include this information in the measurement of the performance of the operating segments. A measure of assets bysegment is not applicable as segment assets are not included in the discrete financial information provided to the CODM.On February 29, 2016, the Company completed its acquisition of 100% of the outstanding equity of TVN and assigned TVN to its Video operatingsegment.The following table provides summary financial information by reportable segment (in thousands): Year ended December 31, 2017 (1) 2016 2015Video Revenue$319,473 $351,489 $291,779Gross profit173,414 194,044 167,573Operating income (loss)(2,024) 11,963 13,529Cable Edge Revenue$38,773 $54,422 $85,248Gross profit8,892 21,174 37,832Operating loss(23,154) (12,131) (1,599)Total Revenue$358,246 $405,911 $377,027Gross profit182,306 215,218 205,405Operating income (loss)(25,178) (168) 11,930(1) The Company has historically employed an aggregate allocation methodology based on total revenues to attribute professional services revenueand sales expenses between its Video and Cable Edge segments. Beginning in the fourth quarter of 2017, the Company has prospectively changed to a moreprecise attribution methodology as the activities of selling and supporting the CableOS solution have become increasingly distinct from those of Videosolutions. The impact of making this change in the fourth quarter of 2017 compared to the Company’s historical approach was a reduction in operatingincome of $2.4 million from the Video segment and a corresponding increase to the operating income of the Cable Edge segment. The Company believesthat the updated allocation methodology will provide greater clarity regarding the operating metrics of the Video and Cable Edge business segments.A reconciliation of the Company’s consolidated segment operating income (loss) to consolidated loss before income taxes is as follows (in thousands): Year ended December 31, 2017 (1) 2016 2015Total segment operating income (loss)$(25,178) $(168) $11,930Unallocated corporate expenses (1)(20,767) (38,972) (2,794)Stock-based compensation(16,610) (13,060) (15,582)Amortization of intangibles(8,322) (14,836) (6,502)Consolidated loss from operations(70,877) (67,036) (12,948)Non-operating expense, net(13,830) (13,394) (3,120)Loss before income taxes$(84,707) $(80,430) $(16,068)(1) For the years ended December 31, 2017 and 2016, the unallocated corporate expenses included TVN acquisition- and integration-related costs, TVNVDP costs (see Note 10, “Restructuring and Related charges-TVN VDP,” for more information on TVN VDP ) and Cable Edge product line inventoryobsolescence costs, totaling $7.9 million and $32.2 million, respectively. In addition, in fiscal year 2017, the unallocated corporate expenses included $8.0million of Avid litigation settlement cost and associated legal fees (see Note 19, “Legal Proceedings,” for more information). The remaining unallocatedcorporate expenses for all years presented above include primarily other restructuring charges and excess facilities charges.Geographic Information94Table of ContentThe geographic distribution of Harmonics’ revenue and property and equipment, net is summarized in the tables below (in thousands): Year ended December 31, 2017 2016 2015Net revenue (1): United States$131,773 $171,016 $175,466 Other countries226,473 234,895 201,561 Total$358,246 $405,911 $377,027(1) Revenue is attributed to countries based on the location of the customer.Other than the U.S., no single country accounted for 10% or more of the Company’s net revenues for the years ended December 31, 2017, 2016 and2015. As of December 31, 2017 2016Property and equipment, net: United States$13,786 $15,197 Israel8,904 9,966 France4,573 4,872 Other countries2,002 2,129 Total$29,265 $32,164Customer ConcentrationDuring the years ended December 31, 2017 and 2016, no single customer accounted for more than 10% of our net revenue. Net revenue from Comcastaccounted for 12% of the Company’s total net revenue during the year ended December 31, 2015. Other than Comcast, no single customer accounted for 10%or more of the Company’s total net revenue for fiscal year 2015.NOTE 18: COMMITMENTS AND CONTINGENCIESLeasesThe Company leases its facilities under non-cancelable operating leases which expire at various dates through June 2028. In addition, the Companyleases vehicles and phones in Israel under non-cancelable operating leases, the last of which expires in 2020. Total rent expense related to these operatingleases was $10.2 million, $9.7 million and $9.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum leasepayments under non-cancellable operating leases at December 31, 2017, are as follows (in thousands): Operating LeasesYear ending December 31, 2018$13,534201912,13220208,71620212,95820222,497Thereafter9,145Total minimum payments$48,982WarrantyThe Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated warranty liabilityand records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of thetiming and cost of warranty claims. Activities for the Company’s95Table of Contentwarranty accrual for each fiscal year, which is included in accrued and other current liabilities, is summarized below (in thousands): 2017 2016 2015Balance at beginning of period$4,862 $3,913 $4,242 Accrual for current period warranties5,117 5,482 5,378 Balance assumed from TVN acquisition— 1,012 — Warranty costs incurred(5,598) (5,545) (5,707)Balance at end of period$4,381 $4,862 $3,913Bank Guarantees and standby Letters of CreditAs of December 31, 2017, the Company has outstanding bank guarantees and standby letters of credit in aggregate of $2.7 million, consisting primarilyof $1.4 million for a building lease for the TVN French Subsidiary and $0.5 million for a credit card facility, and the remainder mainly related to performancebonds issued to customers.During 2017, one of the Company’s subsidiaries entered into a $2.0 million credit facility with a foreign bank for the purpose of issuing performanceguarantees. The credit facility is secured by a $2.2 million indemnity issued by the parent company. There were no amounts outstanding under this creditfacility as of December 31, 2017.IndemnificationThe Company is obligated to indemnify its officers and its directors pursuant to its bylaws and contractual indemnity agreements. The Company alsoindemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject tocertain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonableattorneys’ fees). There have been no amounts accrued in respect of the indemnification provisions through December 31, 2017.RoyaltiesThe Company has licensed certain technologies from various companies. It incorporates these technologies into its own products and is required to payroyalties for such use, usually based on shipment of the related products. In addition, the Company has obtained research and development grants undervarious Israeli government programs that require the payment of royalties on sales of certain products resulting from such research. Royalty expenses were$5.2 million, $4.1 million and $2.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, and they are included in product cost ofrevenue in the Company’s Consolidated Statements of Operations.Purchase ObligationsThe Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of itsproducts. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year. The Company had approximately$40.2 million of non-cancelable commitments to purchase inventories and other commitments as of December 31, 2017. The Company recognized $3.8million of net losses on firm inventory purchase commitments as of December 31, 2017.NOTE 19: LEGAL PROCEEDINGSIn October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging thatHarmonic’s Media Grid product infringes two patents held by Avid. A jury trial on this complaint commenced on January 23, 2014 and, on February 4, 2014,the jury returned a unanimous verdict in favor of us, rejecting Avid’s infringement allegations in their entirety. In January 2015, Avid filed an appeal withrespect to the jury’s verdict with the Federal Circuit. In January 2016, the Federal Circuit issued an order vacating the verdict of noninfringement andremanding the case to the trial court for a new trial on infringement.In June 2012, Avid served a subsequent complaint in the United States District Court for the District of Delaware alleging that the Company’s Spectrumproduct infringes one patent held by Avid. The complaint sought injunctive relief and unspecified damages. In September 2013, the U.S. Patent Trial andAppeal Board (“PTAB”) authorized an inter partes review to be instituted as to claims 1-16 of the patent asserted in this second complaint. In July 2014, thePTAB issued a decision finding claims 1-10 invalid and claims 11-16 not invalid. We filed an appeal with respect to the PTAB’s decision on claims 11-16 inSeptember 2014, and the Federal Circuit affirmed the PTAB’s decision in April 2016.96Table of ContentIn July 2017, the court issued a scheduling order consolidating both cases and setting the trial date for November 6, 2017.On October 19, 2017, the parties agreed to settle the consolidated cases by entering into a settlement and patent portfolio cross-license agreement, andthe cases were dismissed with prejudice. In connection with the agreement, the Company recorded a $6.0 million litigation settlement expense in “Selling,general and administrative expenses” in the Company’s 2017 Consolidated Statement of Operations. Of the associated $6.0 million settlement liability, $2.5million was paid in October 2017 and the remaining $1.5 million and $2.0 million will be paid in the second quarter of 2019 and the third quarter of 2020,respectively.From time to time, the Company is involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigationsin the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial,employment, and other matters. The Company assesses potential liabilities in connection with each lawsuit and threatened lawsuits and accrues an estimatedloss for these loss contingencies if both of the following conditions are met: information available prior to issuance of the financial statements indicates thatit is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. While certainmatters to which the Company is a party specify the damages claimed, such claims may not represent reasonably probable losses. Given the inherentuncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any,be reasonably estimated.NOTE 20: SUBSEQUENT EVENTHarmonic 2018 RestructuringTo better align the Company's resources and strategic goals, in the first quarter of 2018, the Company committed to a new restructuring plan (the“Harmonic 2018 Restructuring Plan”). The restructuring activities under this plan primarily include workforce reductions of the company worldwide. Theestimated cost for implementing this plan is approximately $1.7 million. The restructuring activities under this plan will commence in the first quarter of2018 and are expected to continue into the second quarter of 2018.NOTE 21: SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)The following table sets forth our unaudited quarterly Consolidated Statement of Operations data for each of the eight quarters ended December 31,2017. In management’s opinion, the data has been prepared on the same basis as the audited Consolidated Financial Statements included in this report, andreflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data.97Table of Content Fiscal 2017 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share amounts)Quarterly Data: Net revenue$82,943 $82,315 $92,014 $100,974Gross profit (4)40,408 33,815 47,025 48,572Net loss (2) (5) (6)$(24,027) $(31,500) $(15,583) $(11,516)Net loss per share: Basic and diluted$(0.30) $(0.39) $(0.19) $(0.14)Shares used in per share calculations: Basic and diluted79,810 80,590 81,445 82,014 Fiscal 2016 (1) 1st Quarter (6) 2nd Quarter 3rd Quarter 4th Quarter (3) (In thousands, except per share amounts)Quarterly Data: Net revenue$81,832 $109,571 $101,406 $113,102Gross profit40,654 51,040 51,363 57,693Net loss (2) (5) (6)$(25,180) $(20,679) $(16,012) $(10,443)Net loss per share: Basic and diluted$(0.33) $(0.27) $(0.21) $(0.13)Shares used in per share calculations: Basic and diluted76,996 77,342 78,092 78,389(1) On February 29, 2016, the Company completed the acquisition of TVN and applied the acquisition method of accounting for the business combination.The selected quarterly financial data for the year ended December 31, 2016 of the combined entity includes 10 months of operating results of TVN beginningMarch 1, 2016.(2) As a result of the TVN acquisition, in 2016 and 2017, the Company incurred acquisition- and integration-related expenses of $3.0 million, $3.4 million,$5.3 million and $5.2 million, in the first through fourth quarter of 2016, respectively, and $2.2 million, $0.5 million, $0.1 million and $0.1 million in thefirst through fourth quarter of 2017. These costs consisted of acquisition-related costs which include outside legal, accounting and other professional servicesas well as integration-related costs which include incremental costs resulting from the TVN acquisition that are not expected to generate future benefits oncethe integration is fully consummated. These costs are expensed as incurred and the Company does not expect to incur any TVN acquisition- and integration-related expenses after 2017.(3) In 2016, as part of the TVN integration plan, the Company established the TVN VDP to enable the French employees of TVN to voluntarily terminate withcertain benefits. The Company recorded a charge of $13.1 million for TVN VDP in the fourth quarter of 2016.(4) Gross margin decreased to 41.1% in the second quarter of 2017 compared to 48.7% in the first quarter of 2017, primarily due to lower service margins andhigher inventory obsolescence charges for the Company’s legacy broadcast video inventory due to reduced demand, as well as higher inventoryobsolescence charge for our older Cable Edge product lines. The factors negatively impacting the gross margin in the second quarter of 2017 were mostlyabsent in the third quarter of 2017, and together with a more favorable product mix, the gross margin increased to 51.1% in the third quarter of 2017compared to 41.1% in the second quarter of 2017. Gross margin increased to 50.7% in the third quarter of 2016 compared to 46.6% in the second quarter of2016 primarily due to the absence of the Cable Edge inventory obsolescence charge in the third quarter of 2016.(5) In the fourth quarter of 2016 and 2017, the Company recorded additional valuation allowances of $18.3 and $9.0 million against all of the U.S. deferredtax assets, respectively. These increases in valuation allowances were offset partially by the release of $8.4 million and $5.8 million in the fourth quarter of2016 and 2017, respectively, of valuation allowances associated with the Company’s foreign subsidiaries, including a one-time benefit associated with thealternative minimum tax refund related to the TCJA in the fourth quarter of 2017.(6) In the first and third quarter of 2016 and the fourth quarter of 2017, the Company recorded impairment charges of $1.5 million, $1.2 million, and $0.5million, respectively, for its investment in Vislink. (See Note 3, “Investments in Other Equity Securities,” of the notes to the Consolidated FinancialStatements for additional information).98Table of Content99Table of ContentItem 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.Item 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresWe maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure thatinformation required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controlsand procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures were effective.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on thecriteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on the Company’s assessment, management concluded that its internal control over financial reporting was effective as of December 31, 2017.The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internalcontrol over financial reporting, as stated in their report which appears in Part II, Item 8 of this Form 10-K.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting during our fourth quarter of fiscal year 2017, which were identified in connectionwith management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.Item 9B.OTHER INFORMATIONNone.PART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K pursuant to Instruction G to Exchange Act Form 10-K, and theRegistrant will file its definitive Proxy Statement for its 2018 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of1934, as amended (the “2018 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, andcertain information included in the 2018 Proxy Statement is incorporated herein by reference.100Table of ContentItem 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by reference.Harmonic has adopted a Code of Business Conduct and Ethics for Senior Operational and Financial Leadership (the “Code”), which applies to its ChiefExecutive Officer, its Chief Financial Officer, its Corporate Controller and other senior operational and financial management. The Code is available on theCompany’s website at www.harmonicinc.com.Harmonic intends to satisfy the disclosure requirement under Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethicsby posting such information on our website, at the address specified above, and, to the extent required by the listing standards of The NASDAQ Global SelectMarket, by filing a Current Report on Form 8-K with the Securities and Exchange Commission disclosing such information.Item 11.EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by reference.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSInformation related to security ownership of certain beneficial owners and security ownership of management and related stockholder matters will beset forth in the 2018 Proxy Statement and is incorporated herein by reference.Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by reference.Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by reference.PART IVItem 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES1. Financial Statements. See Index to Consolidated Financial Statements in Item 8 on page of this Annual Report on Form 10-K.2. Financial Statement Schedules. Financial statement schedules have been omitted because the information is not required to be set forth herein, is notapplicable or is included in the financial statements or the notes thereto.3. Exhibits. The documents listed in the Exhibit Index of this Annual Report on Form 10-K are filed herewith or are incorporated by reference in thisAnnual Report on Form 10-K, in each case as indicated therein.101Table of ContentExhibitNumberDescription 3.1(ii)Certificate of Incorporation of Harmonic Inc., as amended 3.2Amended and Restated Bylaws of Harmonic Inc. 4.1(i)Form of Common Stock Certificate 4.2(iii)Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Harmonic Inc. 4.3(x)Indenture, dated December 14, 2015, by and between the Company and U.S. Bank National Association 4.4(x)Form of 4.00% Senior Convertible Note due 2020 (included in Exhibit 4.3) 4.5(xi)†Warrant to Purchase Shares of Common Stock of Harmonic, Inc. 10.1(i)*Form of Indemnification Agreement 10.2(viii)*1995 Stock Plan, as amended and restated on June 13, 2017 10.3(viii)*2002 Director Stock Plan, as amended and restated on June 13, 2017 10.4(viii)*2002 Employee Stock Purchase Plan, as amended and restated on June 13, 2017 10.5(iv)*Amended and Restated Change of Control Severance Agreement between Harmonic Inc. and Patrick Harshman, effective September 25,2017 10.6(iv)*Amended and Restated Change of Control Severance Agreement between Harmonic Inc. and Neven Haltmayer, effective September 25,2017 10.7(iv)*Amended and Restated Change of Control Severance Agreement between Harmonic Inc. and Nimrod Ben-Natan, effective September 25,2017 10.8(viii)*Harmonic Inc. 2002 Director Stock Plan Restricted Stock Unit Agreement 10.9(v)Professional Service Agreement between Harmonic Inc. and Plexus Services Corp., dated September 22, 2003 10.10(v)Amendment, dated January 6, 2006, to the Professional Services Agreement for Manufacturing between Harmonic Inc. and PlexusServices Corp., dated September 22, 2003 10.11(v)Addendum 1, dated November 26, 2007, to the Professional Services Agreement between Harmonic Inc. and Plexus Services Corp., datedSeptember 22, 2003 10.12Harmonic Inc. 1995 Stock Plan Restricted Stock Unit Agreement 10.13(vi)Lease Agreement between Harmonic Inc. and CRP North First Street, L.L.C. dated December 15, 2009 10.14(iv)*Amended and Restated Change of Control Severance Agreement between Harmonic Inc. and Sanjay Kalra, effective September 25, 2017 10.15(vii)*Amended and Restated Loan and Security Agreement, dated as of December 18, 2017, by and among Harmonic Inc., HarmonicInternational AG and Silicon Valley Bank 10.16 (ix)Purchase Agreement, dated as of December 8, 2015, by and between Harmonic Inc. and Merrill Lynch, Pierce, Fenner & SmithIncorporated 10.17(xiii)Put Option Agreement, dated as of December 7, 2015, by and between Harmonic Inc. and Mr. Eric Louvet, Mr. Eric Gallier, Mr. Jean-MarcGuiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr. Christophe Delahousse, Mr.Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CIC Mezzanine 3 10.18(xiii)Sale and Purchase Agreement, dated as of February 11, 2016, by and between Harmonic International AG and Mr. Eric Louvet, Mr. EricGallier, Mr. Jean-Marc Guiot, Mr. Claude Perron, Mrs. Crystele Trévisan-Jallu, Mrs. Delphine Sauvion, Mr. Marc Procureur, Mr.Christophe Delahousse, Mr. Hervé Congard, Mr. Arnaud de Puyfontaine, FPCI Winch Capital 3, Montalivet Networks and FPCI CICMezzanine 3 for the acquisition of Thomson Video Networks 102Table of Content10.19(xii)Registration Rights Agreement, dated September 26, 2016, by and between the Company and Comcast. 21.1Subsidiaries of Harmonic Inc. 23.1Consent of Independent Registered Public Accounting Firm 31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 32.2Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 101The following materials from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in ExtensibleBusiness Reporting Language (XBRL) includes: Consolidated Balance Sheets at December 31, 2017 and December 31, 2016; (ii)Consolidated Statements of Operations for the Years Ended December 31, 2017, December 31, 2016 and December 31, 2015; (iii)Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2017, December 31, 2016 and December 31, 2015;(iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, December 31, 2016 and December 31,2015; (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, December 31, 2016 and December 31, 2015;and (vi) Notes to Consolidated Financial Statements.*Indicates a management contract or compensatory plan or arrangement relating to executive officers or directors of the Company.†Registrant has omitted portions of this exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant to a grant ofconfidential treatment under Rule 406 promulgated under the Securities Act.(i)Previously filed as an Exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752.(ii)Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.(iii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 25, 2002.(iv)Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017.(v)Previously filed as an Exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008.(vi)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 18, 2009.(vii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 21, 2017.(viii)Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8, dated June 22, 2017.(ix) Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 7, 2015.(x)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 14, 2015.(xi)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016.(xii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 26, 2016.(xiii) Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.103Table of ContentItem 16.FORM 10-K SUMMARYNone.104Table of ContentSIGNATURESPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation, hasduly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State ofCalifornia, on March 5, 2018.HARMONIC INC. By:/s/ PATRICK J. HARSHMAN Patrick J. Harshman President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.SignatureTitleDate /s/ PATRICK J. HARSHMANPresident & Chief Executive Officer (Principal Executive Officer)March 5, 2018(Patrick J. Harshman) /s/ SANJAY KALRAChief Financial OfficerMarch 5, 2018(Sanjay Kalra)(Principal Financial and Accounting Officer) /s/ PATRICK GALLAGHERChairmanMarch 5, 2018(Patrick Gallagher) /s/ E. FLOYD KVAMMEDirectorMarch 5, 2018(E. Floyd Kvamme) /s/ WILLIAM REDDERSENDirectorMarch 5, 2018(William Reddersen) /s/ SUSAN G. SWENSONDirectorMarch 5, 2018(Susan G. Swenson ) /s/ MITZI REAUGHDirectorMarch 5, 2018(Mitzi Reaugh) /s/ NIKOS THEODOSOPOULOSDirectorMarch 5, 2018(Nikos Theodosopoulos) /s/ DAVID KRALLDirectorMarch 5, 2018(David Krall) 105

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