Signal management

INFINERA CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. Such
forward-looking statements include, but are not limited to, our expectations
regarding revenue, gross margin, operating expenses, cash flows and other
financial items and the drivers related to these; the magnitude and duration of
supply constraints, including delays, shortages and increased costs and our
ability to mitigate such supply constraints, and the extent to which
supply-related impacts could materially and adversely affect our business
operations, financial performance, results of operations, financial position,
and stock price; the adverse impact inflation may have on us by increasing costs
beyond what we can recover through price increases; the extent to which the
ongoing COVID-19 pandemic and related impacts could materially and adversely
affect our business operations, financial performance, results of operations,
financial position, stock price and personnel; achievement of strategic
objectives, any statements regarding our plans, strategies and objectives;
progress and remaining payments under the 2021 Restructuring Plan; the impact of
new customer network footprint on our gross margin; statements regarding our ERP
systems; the effects of seasonal patterns in our business; factors that may
affect our operating results; anticipated customer acceptance of our solutions;
statements concerning new products or services, including new product features;
our beliefs about who we may compete with and how we are differentiated from
those competitors; statements regarding our production capacity and facilities
requirements; statements related to capital expenditures; statements related to
working capital and liquidity; the sufficiency of our cash to operate our
business; expectations regarding research and development investments; our
ability to realize deferred tax assets; statements related to future economic
conditions, performance, market growth, competitor consolidation or our sales
cycle; our ability to identify, attract and retain highly skilled personnel;
statements regarding our corporate culture; our ability to protect our
technology and intellectual property, the frequency of claims related to our
intellectual property and the value of our intellectual property; statements
related to our convertible senior notes and our Credit Facility; statements
related to the impact of tax regulations; statements related to the
proliferation and impact of environmental, social and governance regulation;
statements related to the effects of litigation on our financial position,
results of operations or cash flows; statements related to factors beyond our
control, such as natural disasters, acts of war or terrorism, epidemics and
pandemics; statements related to new accounting standards; statements as to
industry trends and other matters that do not relate strictly to historical
facts; and statements of assumptions underlying any of the foregoing. These
statements are often identified using words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," or "would,"
and similar expressions or variations. These statements are based on the beliefs
and assumptions of our management based on information currently available to
management. Such forward-looking statements are subject to risks, uncertainties
and other factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled "Risk Factors" included in Part II, Item 1A. of
this Quarterly Report on Form 10-Q and in our other filings with the Securities
and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for
the fiscal year ended December 25, 2021 as filed on February 23, 2022. You
should review these risk factors for a more complete understanding of the risks
associated with an investment in our securities. Such forward-looking statements
speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements. The following discussion and
analysis should be read in conjunction with our condensed consolidated financial
statements and notes thereto included elsewhere in this Quarterly Report on Form
10-Q.

Overview

We are a global supplier of networking solutions comprised of networking
equipment, software and services. Our portfolio of solutions includes optical
transport platforms, converged packet-optical transport platforms, compact
modular platforms, optical line systems, coherent optical subsystems, a suite of
automation software offerings, and support and professional services.
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Our customers include operators of fixed line and mobile networks, including
telecommunications service providers, internet content providers ("ICPs"), cable
providers, wholesale carriers, research and education institutions, large
enterprises, utilities and government entities. Our networking solutions enable
our customers to deliver high-bandwidth business and consumer communications
services and scale their transport networks as end-user services and
applications continue to drive growth in demand for network bandwidth. These
end-user services and applications include, but are not limited to, high-speed
internet access, business ethernet services, 4G/5G mobile broadband, cloud-based
services, high-definition video streaming services, virtual and augmented
reality and the Internet of Things.

Our systems are highly scalable, flexible and designed with open networking
principles for ease of deployment. We build our systems using a combination of
internally manufactured and third-party components. Our portfolio includes
systems that leverage our innovative, vertically integrated optical engine
technology, comprised of large-scale photonic integrated circuits ("PICs") and
digital signal processors ("DSPs"). We optimize the manufacturing process by
using indium phosphide to build our PICs, which enables the integration of
hundreds of optical functions onto a single, monolithic semiconductor chip. This
large-scale integration of our PICs and advanced DSPs allows us to deliver
high-performance transport networking platforms with features that customers
care about the most, including low cost per bit, capacity per fiber, power
consumption and space savings. In addition, we design our optical engines to
increase the capacity and reach performance of our products by leveraging
coherent optical transmission technology. Coherent optical solutions are
becoming increasingly important across the network as our customers transition
to 800 gigabits per second ("Gb/s") per wavelength transmission speeds in the
core, 400 Gb/s in the metro and 100 Gb/s in the access market segment.

We have grown our solutions portfolio through internal development as well as
acquisitions, including the acquisition of Telecom Holding Parent LLC
("Coriant"), a privately held global supplier of open network solutions for the
largest global network operators (the "Acquisition"). These developments
positioned us to be one of the leading providers of vertically integrated
optical networking solutions in the world with the ability to serve a global
customer base with accelerated delivery of the innovative solutions our
customers demand. In 2021, we announced an expansion of our portfolio with the
introduction of a suite of coherent optical pluggables designed to seamlessly
address the rapidly growing market for point-to-point solutions as well as
create a new category of point-to-multipoint solutions that can enable a
dramatically more cost-efficient network architecture. Based on our XR optics
technology, this suite of pluggables builds on Infinera's history of delivering
innovative, highly differentiated, and vertically integrated coherent optical
engines.

Our high-speed optical transport platforms are differentiated by our Infinite
Capacity Engine (ICE) coherent optical engine technology. Our latest generation
of coherent optical engine technology delivers multi-terabit opto-electronic
subsystems powered by our fifth-generation PIC and latest generation DSP (the
combination of which we market as "ICE6"). ICE6 is capable of delivering 1.6
terabits per second (Tb/s; 2x800 Gb/s wavelengths) in a single optical engine.
ICE6 will be integrated into various networking platforms in our product
portfolio.

Our systems and subsystems products are designed to be managed by a suite of
software solutions that enable simplified and automated operations. We also
provide software-enabled programmability that offers differentiated capabilities
such as Instant Bandwidth. Combined with our differentiated hardware solutions,
Instant Bandwidth enables our customers to purchase and activate bandwidth as
needed through our unique software licensing feature set. This, in turn, allows
our customers to accomplish two key objectives: (1) limit their initial network
startup costs and investments; and (2) instantly activate new bandwidth as their
customers' and their own network needs evolve.

We believe that our system and subsystem solutions benefit our customers by providing a unique combination of highly scalable capabilities and features that address diverse applications and ultimately simplify and automate network operations.

Impact of the COVID-19 pandemic

COVID-19 was declared a global pandemic in March 2020. Since then, we have monitored and adjusted our operations as necessary in response to the evolving COVID-19 pandemic and will continue to do so.

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Employees

We have taken a number of precautionary steps to safeguard our business and our
employees from the effects and impact of COVID-19, including at times
temporarily closing or substantially limiting the presence of personnel in our
offices in several global locations, implementing travel restrictions and
modifying our participation in various industry events. Since a large percentage
of our workforce is accustomed to online work environments and online
collaboration tools, we have been able to remain productive and in contact with
one another and our customers and vendors. For those employees who may need to
be in offices, laboratory and manufacturing environments, or at business partner
sites to perform their roles, we have taken and will continue to take
appropriate measures to protect their health and safety and create and maintain
a safe working environment. Since the outbreak of the COVID-19 pandemic,
however, sustained restrictions on the ability of our engineers to work in our
offices as a result of restrictions imposed by governments, or us, has made it
more difficult at times for them to collaborate as effectively as desired in the
development of new products, which has in the past affected development
schedules. Although some of these restrictions have been reduced or eliminated
in many jurisdictions where we operate, the uncertainty surrounding the COVID-19
pandemic could continue to make such collaboration difficult in the future if
restrictions are reimposed.

Business Operations

In addition, we have implemented certain business continuity plans in response
to the COVID-19 pandemic in order to minimize any business disruption and to
protect our supply chain, customer fulfillment sites and support operations.
Although we believe these actions have mitigated the impact of the COVID-19
pandemic on our business, we have experienced some disruption, increased costs
and delays in our supply chain and manufacturing operations, logistics, and
customer support operations, including shipping delays, supply decommitments,
higher logistics and freight costs, and certain limitations on our ability to
access customer fulfillment and service sites. We are dependent on sole source
and limited source suppliers for several key components, and we have experienced
capacity issues, increasingly longer lead times and increased costs with certain
of these component suppliers, impacting our operational processes and results of
operations. We have also seen disruptions in customer demand, including due to
delays in the customer certification process resulting from customer facility
closures or access restrictions. During 2021 and the first three quarters of
2022, some of these disruptions negatively impacted our revenue and our results
of operations. The impact of the COVID-19 pandemic on our business and results
of operations during the remainder of 2022 remains uncertain and is dependent in
part on future infection rates, the emergence of new strains of the virus, the
effectiveness and availability of vaccinations and vaccine boosters, new
government restrictions and broader global macroeconomic developments, including
inflationary pressures.

We continue to monitor the COVID-19 pandemic and actively assess potential
implications to our business, supply chain and customer demand. If the COVID-19
pandemic or its adverse effects become more severe or prevalent or are prolonged
in the locations where we, our customers, suppliers or contract manufacturers
conduct business, or we experience more pronounced disruptions in our
operations, or in economic activity and demand generally, our business and
results of operations in future periods could be materially adversely affected.

Cash and capital resources

We have implemented measures to preserve cash and enhance liquidity, including
business travel reductions, strategically managing capital expenditures, and
delaying or eliminating discretionary spending. We are also focused on managing
our working capital needs, maintaining as much flexibility as possible around
timing of taking and paying for inventory and manufacturing our products while
managing potential changes or delays in customer readiness, including
installations. In addition, we issued the 2028 Notes and completed a partial
repurchase of the 2024 Notes, which resulted in net proceeds of $81.7 million,
net of debt issuance costs.

While we believe we have enough cash, including availability under our Credit
Facility, to operate our business for the next 12 months, if the impact of the
COVID-19 pandemic and the global macroeconomic environment to our business and
financial position is more extensive than expected, we may need additional
capital to enhance liquidity and working capital. We have historically been
successful in our ability to secure other sources of financing, such as
accessing capital markets, and implementing other cost reduction initiatives
such as restructuring, delaying or eliminating discretionary spending to satisfy
our liquidity needs. However, our access to these sources of capital could be
materially and adversely impacted and we may not be able to receive terms as
favorable as we have historically received, whether due to inflation or
otherwise. Capital markets have been volatile, and recently have been subject to
inflationary pressures, and there is no assurance that we would have access to
capital markets at a reasonable cost, or at all, at times when capital is
needed. In addition, some of our existing debt
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has restrictive covenants that may limit our ability to raise new debt, which
would limit our ability to access liquidity by those means without obtaining the
consent of our lenders.

Significant Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our condensed consolidated financial statements, which
we have prepared in accordance with the U.S. generally accepted accounting
principles ("U.S. GAAP"). The preparation of these financial statements requires
management to make estimates, assumptions and judgments that can affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.

An accounting policy is deemed to be critical if it requires a significant
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, if different estimates
reasonably could have been used, or if changes in the estimate that are
reasonably likely to occur could materially impact the financial statements.
Management believes that there have been no significant changes during the
nine-months ended September 24, 2022 to the items that we disclosed as our
critical accounting policies and estimates in Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the fiscal year ended December 25, 2021.

Inflation, disruption in the global economy and financial markets, and the
ongoing effects of the COVID-19 pandemic, continue to create uncertainty.
However, we are not aware of any specific event or circumstance that would
require updates to our estimates or judgments or require us to revise the
carrying value of our assets or liabilities as of the date we filed this
Quarterly Report on Form 10-Q. These estimates may change as new events occur
and additional information is obtained. Actual results could differ from these
estimates under different assumptions or conditions.
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  Table of Contents
Results of Operations

The following sets forth, for the periods presented, certain unaudited condensed
consolidated statements of operations information (in thousands, except
percentage data):

                                                                              Three Months Ended
                                                     September 24, 2022                                 September 25, 2021
                                                                      % of total                                         % of total
                                               Amount                   revenue                   Amount                   revenue              Change             % Change
Revenue:
Product                                 $         317,439                      81  %       $         270,818                      76  %       $ 46,621                     17  %
Services                                           73,008                      19  %                  84,996                      24  %        (11,988)                   (14) %
Total revenue                           $         390,447                     100  %       $         355,814                     100  %       $ 34,633                     10  %
Cost of revenue:
Product                                 $         210,018                      54  %       $         187,956                      54  %       $ 22,062                     12  %
Services                                           39,765                      10  %                  43,722                      12  %         (3,957)                    (9) %
Amortization of intangible assets                   6,227                       2  %                   4,609                       1  %          1,618                     35  %

Restructuring and other related costs                  22                       -  %                   1,434                       -  %         (1,412)                   (98) %
Total cost of revenue                   $         256,032                      66  %       $         237,721                      67  %       $ 18,311                      8  %
Gross profit                            $         134,415                      34  %       $         118,093                      33  %       $ 16,322                     14  %

                                                                               Nine Months Ended
                                                     September 24, 2022                                 September 25, 2021
                                                                      % of total                                         % of total
                                               Amount                   revenue                   Amount                   revenue              Change             % Change
Revenue:
Product                                 $         869,744                      80  %       $         782,420                      76  %       $ 87,324                     11  %
Services                                          217,562                      20  %       $         242,528                      24  %        (24,966)                   (10) %
Total revenue                           $       1,087,306                     100  %       $       1,024,948                     100  %       $ 62,358                      6  %
Cost of revenue:
Product                                           597,027                      54  %                 525,494                      51  %       $ 71,533                     14  %
Services                                          116,145                      11  %                 128,428                      13  %        (12,283)                   (10) %
Amortization of intangible assets                  18,687                       2  %                  13,839                       1  %          4,848                     35  %

Restructuring and other related costs                 185                       -  %                   1,679                       -  %         (1,494)                   (89) %
Total cost of revenue                   $         732,044                      67  %       $         669,440                      65  %       $ 62,604                      9  %
Gross profit                            $         355,262                      33  %       $         355,508                      35  %       $   (246)                     -  %


Revenue

Total product revenue increased by $46.6 million, or 17%, during the
three-months ended September 24, 2022 compared to the corresponding period in
2021. This year-over-year increase in revenue was driven by the ramp of new
products, particularly ICE6, and growth in the ICP and other service provider
verticals, partially offset by decreased revenue from our cable vertical and
continued supply constraints. Total product revenue increased by $87.3 million,
or 11%, during the nine-months ended September 24, 2022 compared to the
corresponding period in 2021. This year-over-year increase in revenue was driven
by the ramp of new products, particularly ICE6, and growth in the ICP and other
service provider verticals, partially offset by decreased revenue from certain
Tier 1 customers and continued supply constraints.
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Total services revenue decreased by $12.0 million, or 14%, for the three-months
ended September 24, 2022 compared to the corresponding period in 2021, and
decreased by $25.0 million, or 10%, during the nine-months ended September 24,
2022 compared to the corresponding periods in 2021. The decrease in revenue was
primarily attributable to a decline in professional services revenue related to
network installation completion timing, which was driven by delays in customer
readiness and related supply constraints. In addition, maintenance revenue
declined due to the transition of new products into the installed base in
connection with the decommissioning of older products.

We expect our total revenue to be higher in the fourth quarter of 2022 than in the third quarter of 2022, thanks to the ramp-up of new products, in particular ICE6.

The following table summarizes our revenues by geography and sales channel for the periods presented (in thousands, except percentage data):

                                                                   Three 

Months ended

                                              September 24, 2022                        September 25, 2021
                                                            % of total                                % of total
                                         Amount               revenue              Amount               revenue             Change              %
Change
Total revenue by geography:
Domestic                              $  222,071                    57  %       $  163,583                    46  %       $ 58,488                     36  %
International                            168,376                    43  %          192,231                    54  %        (23,855)                   (12) %
                                      $  390,447                   100  %       $  355,814                   100  %       $ 34,633                     10  %
Total revenue by sales channel:
Direct                                $  287,055                    74  %       $  259,349                    73  %       $ 27,706                     11  %
Indirect                                 103,392                    26  %           96,465                    27  %          6,927                      7  %
                                      $  390,447                   100  %       $  355,814                   100  %       $ 34,633                     10  %


                                                                           Nine Months Ended
                                                  September 24, 2022                               September 25, 2021
                                                                   % of total                                       % of total
                                             Amount                  revenue                  Amount                  revenue             Change              % Change
Total revenue by geography:
Domestic                              $         573,786                    53  %       $         496,416                    48  %       $ 77,370                     16  %
International                                   513,520                    47  %                 528,532                    52  %        (15,012)                    (3) %
                                      $       1,087,306                   100  %       $       1,024,948                   100  %       $ 62,358                      6  %
Total revenue by sales channel:
Direct                                $         821,666                    76  %       $         795,672                    78  %       $ 25,994                      3  %
Indirect                                        265,640                    24  %                 229,276                    22  %         36,364                     16  %
                                      $       1,087,306                   100  %       $       1,024,948                   100  %       $ 62,358                      6  %


Domestic revenue increased by $58.5 million, or 36%, during the three-months
ended September 24, 2022 compared to the corresponding period in 2021, driven
primarily by increased revenue from our ICP and other service provider verticals
and certain Tier 1 customers. Domestic revenue increased by $77.4 million, or
16%, during the nine-months ended September 24, 2022 compared to the
corresponding period in 2021, driven primarily by increased revenue from our ICP
and other service provider verticals, which was partially offset by decreased
revenue from certain Tier 1 customers and our cable vertical.

International revenue decreased by $23.9 million, or 12%, during the
three-months ended September 24, 2022 compared to the corresponding period in
2021, driven primarily by certain Tier 1 customers and our cable and other
service provider verticals, including our suspension of operations in Russia.
International revenue decreased by $15.0 million, or 3%, during the nine-months
ended September 24, 2022 compared to the corresponding period in 2021, driven
primarily by decreased revenue from certain Tier 1 customers and our ICP
vertical, including our suspension of operations in Russia, which was partially
offset by increased revenue from our other service provider vertical.
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Direct revenue increased by $27.7 million, or 11%, and indirect revenue
increased by $6.9 million, or 7%, during the three-months ended September 24,
2022 compared to the corresponding period in 2021. The increase in direct
revenue was driven by increased revenue from our ICP, cable and other service
provider verticals and certain Tier 1 customers. The increase in indirect
revenue was driven by ICP customers who purchased through our indirect sales
channel. Direct revenue increased by $26.0 million, or 3%, and indirect revenue
increased by $36.4 million, or 16%, during the nine-months ended September 24,
2022, compared to the corresponding period in 2021. The increase in direct
revenue was driven by increased revenue from our ICP and other service provider
verticals and certain Tier 1 customers. The increase in indirect revenue was
driven by ICP customers who purchased through our indirect sales channel.

Revenue Cost and Gross Margin

Gross profit was $134.4 million during the three-months ended September 24,
2022, with gross margin increasing to 34% compared to 33% in the corresponding
period in 2021. In the three-months ended September 24, 2022, the increase was
driven by the ramp of new vertically-integrated products, particularly ICE6, and
ongoing cost improvement and quality initiatives, partially offset by higher
costs related to component price increases, higher logistics and freight costs,
and supply constrained manufacturing volumes. Gross profit was $355.3 million
during the nine-months ended September 24, 2022, with gross margin decreasing to
33% compared to 35% in the corresponding period in 2021. In the nine-months
ended September 24, 2022, the decrease was driven by higher costs related to
component price increases, higher logistics and freight costs, and supply
constrained manufacturing volumes, partially offset by ongoing cost improvement
and quality initiatives. In addition, we incurred $0.9 million and $14.7 million
of charges as a result of the exit from certain product lines in the three- and
nine-months ended September 24, 2022, respectively.

We currently expect gross margin in the fourth quarter of 2022 to be higher than
the third quarter of 2022 as we increase the proportion of revenue derived from
sales of our vertically integrated products, including ICE6, but we currently
expect elevated component prices and elevated logistics and freight costs to
continue to impact gross margin.

Amortization of intangible assets

Amortization of intangible assets increased by $1.6 million, or 35%, during the
three-months ended September 24, 2022, and by $4.8 million, or 35%, during the
nine-months ended September 24, 2022, respectively, compared to the
corresponding periods in 2021. The increase in both periods was due to the
shortened life of certain developed technologies resulting from us having exited
certain product lines in the fourth quarter of 2021.

Restructuring and other related costs

Restructuring and other related costs primarily consisting of severance and
other related costs primarily reflect the substantial completion of our 2021
Restructuring Plan as well as the completion of our 2020 Restructuring Plan. See
Note 9, "Restructuring and Other Related Costs" to the Notes to Condensed
Consolidated Financial Statements for more information.
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Functionnary costs

The following tables summarize our operating expenses for the periods presented (in thousands, except percentages):

                                                                          Three Months Ended
                                                    September 24, 2022                           September 25, 2021
                                                                  % of total                                   % of total
                                             Amount                revenue                Amount                revenue               Change             % Change
Operating expenses:
Research and development                  $   76,156                       20  %       $   76,648                       22  %       $   (492)                  (1)  %
Sales and marketing                           33,919                        9  %           33,223                        9  %            696                    2   %
General and administrative                    28,923                        7  %           28,301                        8  %            622                    2   %
Amortization of intangible assets              3,582                        1  %            4,351                        1  %           (769)           

(18)%

Restructuring and other related costs          1,142                        -  %            6,546                        2  %         (5,404)                 (83)  %
Total operating expenses                  $  143,722                       37  %       $  149,069                       42  %       $ (5,347)                  (4)  %

                                                                           Nine Months Ended
                                                    September 24, 2022                           September 25, 2021
                                                                  % of total                                   % of total
                                             Amount                revenue                Amount                revenue               Change             % Change
Operating expenses:
Research and development                  $  228,202                       21  %       $  224,111                       22  %       $  4,091                    2   %
Sales and marketing                          105,072                       10  %           99,777                       10  %          5,295                    5   %
General and administrative                    86,963                        8  %           87,004                        8  %            (41)                   0   %
Amortization of intangible assets             10,995                        1  %           13,148                        1  %         (2,153)                 (16)  %
Acquisition and integration costs                  -                        -  %              614                        -  %           (614)           

NMF*

Restructuring and other related costs          9,545                        1  %            8,191                        1  %          1,354                   17   %
Total operating expenses                  $  440,777                       41  %       $  432,845                       42  %       $  7,932                    2   %


*NMF = Not meaningful

Research and development costs

Research and development expenses decreased by $0.5 million, or 1% during the
three-months ended September 24, 2022 and increased by $4.1 million, or 2%,
during the nine-months ended September 24, 2022, respectively, compared to the
corresponding periods in 2021. The increase during the nine-months ended
September 24, 2022 was primarily attributable to higher employee-related
expenses, material costs, and equipment costs related to bringing our new
technologies to market and investments in future technologies. These costs were
offset by lower facility costs due to site optimization and lower depreciation
related to legacy technologies. We expect to increase research and development
investments in our vertically integrated product portfolio expansion strategy,
which we believe will drive higher revenue and profitability.

Sales and marketing expenses

Sales and marketing expenses increased by $0.7 million, or 2%, during the
three-months ended September 24, 2022 and increased by $5.3 million, or 5%,
during the nine-months ended September 24, 2022, respectively, compared to the
corresponding periods in 2021. These increases were primarily attributable to
higher employee-related expenses, increased travel costs as COVID-related
restrictions eased, and higher marketing costs related to the resumption of
in-person trade shows partially offset by lower facility costs and spending on
trial equipment.
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General and administrative expenses

General and administrative expenses increased by $0.6 million, or 2%, during the
three-months ended September 24, 2022 compared to the corresponding period in
2021, driven primarily by higher employee-related expenses and outside
professional services, partially offset by lower stock-based compensation,
litigation settlement costs and tax expenses and higher bad debt recoveries.
General and administrative expenses decreased by less than $0.1 million, during
the nine-months ended September 24, 2022 compared to the corresponding period in
2021, driven by lower stock-based compensation, legal fees, settlement costs and
professional services expenses, partially offset by higher employee-related
expenses and the absence of sales tax credits recorded in the nine-months ended
September 25, 2021.

Amortization of intangible assets

Amortization of intangible assets decreased by $0.8 million, or 18%, during the
three-months ended September 24, 2022, and decreased by $2.2 million, or 16%,
during the nine-months ended September 24, 2022, respectively, compared to the
corresponding periods in 2021. The decreases were largely due to lower
amortization of the value of customer relationships and backlog.

Acquisition and integration costs

There were no integration costs for the three-months ended September 24, 2022
due to the completion of our integration efforts related to the Acquisition in
the first quarter of 2021.
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Restructuring and other related costs

Restructuring and other related costs decreased by $5.4 million, or 83%, during
the three-months ended September 24, 2022, compared to the corresponding period
in 2021. The decrease was primarily due to lower severance and other related
expenses. Restructuring and other related costs increased by $1.4 million, or
17%, during the nine-months ended September 24, 2022, compared to the
corresponding period in 2021. The increases were primarily due to lease-related
impairment charges incurred for various sites.

See Note 9, “Restructuring and other related costs” of the Notes to the summary consolidated financial statements for more information.

Other Income (Expense), Net

                                                           Three Months Ended
                                     September 24,       September 25,
                                          2022                2021            Change       % Change
                                                      (In thousands)
Interest income                     $          269      $           22      $    247        1,123  %
Interest expense                            (6,516)            (12,622)        6,106          (48) %
Gain on extinguishment of debt              15,521                   -        15,521            NMF*
Other loss                                  (7,105)             (4,763)       (2,342)         (49) %
Total other income (expense), net   $        2,169      $      (17,363)     $ 19,532          112  %

                                                           Nine Months Ended
                                     September 24,       September 25,
                                          2022                2021            Change       % Change
                                                      (In thousands)
Interest income                     $          426      $           89      $    337          379  %
Interest expense                           (18,760)            (36,482)       17,722          (49) %
Gain on extinguishment of debt              15,521                   -        15,521            NMF*
Other loss                                  (4,605)            (14,439)     

9,834 (68)% Total other income (expense), net ($7,418) $(50,832) $43,414 (85)%


*NMF = Not meaningful

Interest income during the three and nine month periods ended September 24, 2022 and September 25, 2021respectively, was unimportant.

Interest expense decreased $6.1 million, or 48%, and $17.7 million, or 49%,
during the three- and nine-months ended September 24, 2022, respectively,
compared to the corresponding period in 2021, primarily due to the adoption of
ASU 2020-06, which resulted in the elimination of the debt discounts for our
convertible senior notes that were amortized to interest expense over their
contractual terms prior to its adoption, offset by the write off of unamortized
deferred debt issuance costs related to the asset-based revolving credit
facility under the Prior Credit Agreement. See Note 12, "Debt" to the Notes to
Condensed Consolidated Financial Statements for more information.

The gain on extinguishment of debt was $15.5 million during the three and nine month periods ended September 24, 2022 due to the partial redemption of our 2024 Bonds at a price below their nominal value. The gain includes and was reduced by the write-off of the related deferred issue costs of $3.5 million.

Other loss, decreased by $2.3 million, or 49%, during the three-months ended
September 24, 2022 compared to the corresponding periods in 2021, primarily due
to realized foreign exchange losses driven by foreign currency exchange rate
changes. Other loss increased $9.8 million, or 68%, during the nine-months ended
September 24, 2022 compared to the corresponding periods in 2021, primarily due
to unrealized foreign exchange gains driven by foreign currency exchange rate
changes.
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Provision for income tax

Income taxes for the three- and nine-months ended September 24, 2022 represented
a tax expense of $4.8 million and $16.6 million on pre-tax losses of $7.1
million and $92.9 million, respectively. This compared to a tax expense of $5.5
million and $9.5 million, on pre-tax losses of $48.3 million and $128.2 million,
for the three- and nine-months ended September 25, 2021, respectively. Provision
for income taxes decreased by approximately $0.7 million and increased by
approximately $7.0 million during the three- and nine-months ended September 24,
2022, respectively, compared to the corresponding period in 2021. The increase
during the nine-months ended September 24, 2022 is a result of an increase in
income taxes and withholding taxes in foreign jurisdictions, primarily driven by
an increase in Germany's withholding tax rate to 18.8% as compared to 5.3% in
the nine-months ended September 25, 2021.

Our effective tax rate was lower for the three-months ended September 24, 2022,
due to an internal restructuring of our supply chain and customer-facing
entities. The structure aligned and consolidated our intellectual property and
the associated commercial risk and reward with the customer-facing entities that
manage our supply chain.

Cash and capital resources

                                                    Nine Months Ended
                                        September 24, 2022      September 25, 2021

                                                      (In thousands)
Net cash flow provided by (used in):
Operating activities                   $          (36,996)     $           26,759
Investing activities                   $          (37,750)     $          (32,314)
Financing activities                   $           86,672      $          (96,729)



                             September 24, 2022      December 25, 2021

                                           (In thousands)
Cash and cash equivalents   $          198,044      $          190,611
Restricted cash                         11,973                  11,910
                            $          210,017      $          202,521


Our restricted cash balances are primarily pledged for certain standby letters of credit related to customer performance bonds, value added tax licenses and real estate leases.

Operational activities

Net cash used in operating activities during the nine-months ended September 24,
2022 was $37.0 million compared to $26.8 million net cash provided by operating
activities for the corresponding period in 2021.

Net loss during the nine-months ended September 24, 2022 was $109.5 million,
which included non-cash charges of $112.4 million such as depreciation,
amortization of intangibles, restructuring charges and other related costs,
amortization of debt issuance costs, operating lease expense, and stock-based
compensation, compared to a net loss during the nine-months ended September 25,
2021 of $137.7 million, which included non-cash charges of $139.0 million.

Net cash used in working capital was $39.9 million during the nine-months ended
September 24, 2022. Accounts receivable decreased by $64.8 million due to timing
of customer billings and collections. Inventory levels increased by $45.5
million primarily due to our efforts to purchase more inventory to manage lead
time challenges resulting from the industry-wide supply chain environment.
Prepaid and other current assets increased by $37.0 million primarily due to an
increase in customer contract assets as a result of shipment linearity patterns,
other receivables and timing of prepaid software and tax payments. Accounts
payable increased by $37.3 million primarily due to timing of payments to
suppliers. Accrued expenses and other current liabilities decreased by $23.1
million primarily due to payout of management bonuses, timing of other
compensation related expenses and tax payments. Deferred revenue decreased by
$36.5 million primarily due to amortization of maintenance renewals during the
period.
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Net cash provided by working capital was $25.2 million during the nine-months
ended September 25, 2021. Accounts receivable decreased by $42.5 million due to
timing of customer billings and collections. Inventory levels increased by $24.9
million due to our efforts to purchase more inventory to manage lead time due to
the industry semiconductor shortage. Prepaid and other assets decreased by $15.0
million primarily due to timing of tax payments and a lower contract asset
balance due to timing of billings and revenue recognition. Accounts payable
decreased by $2.1 million primarily due to timing of payments to suppliers.
Accrued liabilities and other expenses increased by $19.1 million primarily due
to higher accrued compensation and related benefits. Deferred revenue decreased
by $24.2 million due primarily to the amortization of annual maintenance
renewals during the period.

Investing activities

Net cash used in investing activities during the nine months ended September 24, 2022 has been $37.8 million entirely for the purchase of goods and equipment.

Net cash used in investing activities during the nine months ended September 25, 2021 has been $32.3 million entirely for the purchase of goods and equipment.

Fundraising activities

Net cash provided by financing activities during the nine-months ended
September 24, 2022 was $86.7 million compared to net cash used in financing
activities of $96.7 million in the corresponding period of 2021. Financing
activities during the nine-months ended September 24, 2022 primarily included
net proceeds of $92.9 million from our issuance of the 2028 Notes and partial
repurchase of the 2024 Notes, and $15.2 million from the issuance of shares of
our common stock under the ESPP. These proceeds were offset by $5.4 million term
license purchases, $11.2 million payment of debt issuance costs incurred in
connection with the issuance of the 2028 Notes and entering into the asset-based
revolving credit facility under the Loan Agreement, $1.1 million payments on
finance lease obligations, and tax withholdings in the amount of $3.3 million
paid on behalf of certain employees for net share settlements of RSUs.

Net cash used in financing activities during the nine-months ended September 25,
2021 was $96.7 million. Financing activities during the nine-months ended
September 25, 2021 primarily included payments of $77.0 million towards the
Prior Credit Agreement, a $24.6 million repayment of third-party manufacturing
funding, and a $5.5 million term license purchases. The period also included net
proceeds of $16.5 million from the issuance of shares of our common stock under
the ESPP. These proceeds were offset by tax withholdings in the amount of $4.7
million paid on behalf of certain employees for net share settlements of RSUs.

Liquidity

We believe that our current cash, along with the Credit Facility, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures, and the interest payments on the Notes and the Credit Facility for
at least 12 months. If the impact to our business and financial position of the
COVID-19 pandemic, supply chain challenges, and disruptions in the global
economy and financial markets is more extensive or prolonged than expected and
our existing sources of cash are insufficient to satisfy our liquidity
requirements, we may require additional capital from equity or debt financings
to fund our operations, to respond to competitive pressures or strategic
opportunities, or otherwise. In addition, we are continuously evaluating
alternatives for efficiently funding our capital expenditures and ongoing
operations. We may, from time to time engage in a variety of financing
transactions for such purposes. We may not be able to secure timely additional
financing, or restructure existing debt, on favorable terms or at all. The terms
of any additional financings or restructurings may place limits on our financial
and operating flexibility. If we raise additional funds through further
issuances of equity or equity-linked securities, our existing stockholders could
suffer dilution in their percentage ownership of us, and any new securities we
issue could have rights, preferences and privileges senior to those of holders
of our common stock.

On August 8, 2022, we issued the 2028 Notes, which will mature on August 1,
2028, unless earlier repurchased, redeemed or converted. Interest is payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 2023. The net proceeds from the 2028 Notes issuance were
approximately $362.4 million. We used approximately $283.6 million, which
includes accrued and unpaid interest, of the net proceeds from this offering to
repurchase approximately $299.8 million in aggregate principal amount of the
2024 Notes in privately negotiated transactions concurrently with the offering.
We intend to use the remaining net proceeds from this offering for general
corporate purposes, including working capital and to fund growth and potential
strategic projects.
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In the event that all of the 2028 Notes are converted, the Company would be
required to repay the principal amount in cash and the conversion premium in any
combination of cash and shares of its common stock at our election. As of
September 24, 2022, long-term debt, net, included $363.0 million outstanding for
the 2028 Notes, which represents the principal balance of $373.8 million, net of
$10.8 million of unamortized debt issuance costs. The debt issuance costs are
currently being amortized over the remaining term until maturity of the 2028
Notes on August 1, 2028. To the extent that the holders of the 2028 Notes
request conversion during an early conversion window, we may require funds for
repayment of such 2028 Notes prior to their maturity date.

As of September 24, 2022, there are no contractual obligations related to the
2028 Notes due for the remainder of 2022. Interest cash payments begin on
February 1, 2023, with payments of $13.7 million due in 2023 and $14.0 million
due each year from 2023 through 2028. Principal of $373.8 million will be due
upon maturity in 2028. Any future redemption or conversion of the Notes could
impact the amount or timing of our cash payments. For more information regarding
the 2028 Notes, see Note 12, "Debt" to the Notes to Condensed Consolidated
Financial Statements.

On June 24, 2022, we entered into a Loan Agreement with the lenders party
thereto, and Bank of America, N.A., as agent. The Loan Agreement provides for a
senior secured asset-based revolving credit facility of up to $200 million,
which we may draw upon from time to time. We may increase the total commitments
under the revolving credit facility by up to an additional $100 million, subject
to certain conditions. In addition, the Loan Agreement provides for a $50
million letter of credit subfacility and a $20 million swingline loan facility.

The proceeds of the loans under the Loan Agreement may be used to pay the fees,
costs, and expenses incurred in connection with the Loan Agreement, repay
existing debt and for working capital and general corporate purposes, including
to fund growth. The Credit Facility has a stated maturity date of June 24, 2027.

Availability under the Credit Facility will be based upon periodic borrowing
base certifications valuing certain inventory and accounts receivable, as
reduced by certain reserves. The Credit Facility is secured by first-priority
security interest (subject to certain exceptions) in inventory, certain related
assets, specified deposit accounts, and certain other accounts.

Outstanding borrowings bear interest at variable rates plus an applicable margin of 1.25% to 1.75% for SOFR rate borrowings and 0.25% to 0.75% for base rate borrowings . The unused line charge rate payable on the unused portion of the credit facility is equal to 0.25% per annum based on the use of the credit facility.

As of September 24, 2022, we had not drawn upon the Credit Facility and we had
availability of $112.7 million under the Credit Facility. For more information
regarding the Credit Facility, see Note 12, "Debt" to the Notes to Condensed
Consolidated Financial Statements.

On March 9, 2020, we issued the 2027 Notes, which will mature on March 1, 2027,
unless earlier repurchased, redeemed or converted. Interest is payable
semi-annually in arrears on March 1 and September 1 of each year, commencing on
September 1, 2020. The net proceeds from the 2027 Notes issuance were
approximately $194.5 million and we intend to use the net proceeds for general
corporate purposes, including working capital to fund growth and potential
strategic projects.

For the conversion obligation, we intend to pay or deliver, as the case may be,
cash, shares of our common stock, or a combination of cash and shares of our
common stock, at our election. As of September 24, 2022, long-term debt, net,
included $195.6 million outstanding for the 2027 Notes, which represents the
principal balance of $200.0 million, net of $4.4 million of unamortized debt
issuance costs. The debt issuance costs are currently being amortized over the
remaining term until maturity of the 2027 Notes on March 1, 2027. To the extent
that the holders of the 2027 Notes request conversion during an early conversion
window, we may require funds for repayment of such 2027 Notes prior to their
maturity date.

As of September 24, 2022, there are no remaining contractual obligations related
to the 2027 Notes due for the remainder of 2022, $5.0 million due each year from
2023 through 2026 and $202.5 million due in 2027. These amounts represent
principal and interest cash payments over the term of the 2027 Notes. Any future
redemption or conversion of the Notes could impact the amount or timing of our
cash payments. For more information regarding the 2027 Notes, see Note 12,
"Debt" to the Notes to Condensed Consolidated Financial Statements.

The Prior Credit Agreement entered with Wells Fargo Bank, N.A., in December 2019
provided for a senior secured asset-based revolving credit facility of up to
$150.0 million, which we could draw upon from time to time. It also provided for
a $50.0 million letter of credit sub-facility and a $10.0 million swing loan
sub-facility. In June 2022,
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the Company terminated the Prior Credit Agreement and repaid the entire
outstanding principal balance of $40.0 million, in addition to accrued interest
and other fees of $0.5 million. See Note 12, "Debt" to the Notes to Condensed
Consolidated Financial Statements for more information.

In September 2018, we issued the 2024 Notes, which will mature on September 1,
2024, unless earlier repurchased, redeemed or converted. Interest is payable
semi-annually in arrears on March 1 and September 1 of each year, which
commenced on March 1, 2019. The net proceeds from the 2024 Notes issuance were
approximately $391.4 million, of which approximately $48.9 million was used to
pay the cost of the Capped Calls. We also used a portion of the remaining net
proceeds to fund the cash portion of the purchase price of the Acquisition,
including fees and expenses relating thereto, and intend to use the remaining
net proceeds for general corporate purposes.

For the conversion obligation, we intend to pay or deliver, as the case may be,
cash, shares of our common stock, or a combination of cash and shares of our
common stock, at our election. As of September 24, 2022, long-term debt, net,
included $101.6 million for 2024 Notes which represents the principal balance of
$102.7 million, net of $1.1 million of unamortized debt issuance costs. The debt
issuance costs are currently being amortized over the remaining term until
maturity of the 2024 Notes on September 1, 2024. To the extent that the holders
of the 2024 Notes request conversion during an early conversion window, we may
require funds for repayment of such 2024 Notes prior to their maturity date.

As of September 24, 2022, there are no remaining contractual obligations related
to the 2024 Notes due for the remainder of 2022, $2.2 million due in 2023 and
$104.8 million due in 2024. These amounts represent principal and interest cash
payments over the term of the 2024 Notes. Any future redemption or conversion of
the 2024 Notes could impact the amount or timing of our cash payments. For more
information regarding the 2024 Notes, see Note 12, "Debt" to the Notes to
Condensed Consolidated Financial Statements.

As of September 24, 2022, we had $210.0 million of cash, cash equivalents and
restricted cash including $89.6 million held by our foreign subsidiaries. Our
policy with respect to undistributed foreign subsidiaries' earnings is to
consider those earnings to be indefinitely reinvested. As a result of the
enactment in the United States of the Tax Cuts and Jobs Act of 2017 (the "2017
Tax Act"), if and when funds are actually distributed in the form of dividends
or otherwise, we expect minimal tax consequences, except for foreign withholding
taxes, which would be applicable in some jurisdictions.

Off-balance sheet arrangements

As of September 24, 2022, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.

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