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SILICON IMAGE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Overview
Silicon Image is a leading provider of connectivity solutions that enable the
reliable distribution and presentation of high-definition (HD) content for
mobile, consumer electronics (CE), and personal computing (PC) markets. We
deliver our technology via semiconductor and intellectual property (IP) products
that are compliant with global industry standards and feature market leading
Silicon Image innovations such as InstaPort™ and InstaPrevue™. Silicon Image's
products are deployed by the world's leading electronics manufacturers in
devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc™
players, audio-video receivers, digital cameras, as well as desktop and notebook
PCs. Silicon Image has driven the creation of the highly successful
High-Definition Multimedia Interface (HDMI®), the latest standard for mobile
devices-Mobile High-Definition Link (MHL®), Digital Visual Interface (DVI™)
industry standards and the leading 60GHz wireless HD video standard-WirelessHD®.
Via its wholly-owned subsidiary, Simplay Labs, Silicon Image offers
manufacturers comprehensive standards interoperability and compliance testing
services.
Silicon Image was founded in 1995. We are a Delaware corporation headquartered
in Sunnyvale, California, with regional engineering and sales offices in China,
Japan, Korea, Taiwan and India. Our Internet website address is
www.siliconimage.com.
Our mission is to be the leader in advanced HD connectivity solutions for
mobile, CE, and PC markets to enhance the consumer experience. Our "standards
plus" business strategy is to grow the available market for our products and IP
solutions through the development, introduction and promotion of market leading
products which are based on industry standards but also include Silicon Image
innovations that our customers value. We believe that our innovation around our
core competencies, establishing industry standards and building strategic
relationships, positions us to continue to drive change in the emerging world of
high quality digital media storage, distribution and presentation.
Our customers are product manufacturers in each of our target markets -mobile,
CE, and PC. Because we leverage our technologies across different markets,
certain of our products may be incorporated into our customers' products used in
multiple markets. We sell our products to original product manufacturers (OEMs)
throughout the world using a direct sales force and through a network of
distributors and manufacturer's representatives. Our revenue is generated
principally by sales of our semiconductor products, with other revenues derived
from IP core/design licensing and royalty and adopter fees from our standards
licensing activities. We maintain relationships with the eco-system of companies
that make the products that drive digital content creation, distribution and
consumption, including major Hollywood studios, service providers, consumer
electronics companies and retailers. Through these and other relationships, we
have formed a strong understanding of the requirements for distributing and
presenting HD digital video and audio in the home and mobile environments. We
have also developed a substantial IP base for building the standards and
products necessary to promote opportunities for our products.
Historically, we have grown our business by introducing and promoting the
adoption of new technologies and standards and entering new markets. We
collaborated with other companies to jointly develop the DVI and HDMI standards.
Our first DVI products addressed the PC market. We then introduced products for
a variety of CE market segments, including the set top box (STB), game console
and DTV markets. In 2011, we began selling products in the mobile device market
using our innovative interconnect core technology. In May 2011, we acquired
SiBEAM, Inc., a provider of high-speed wireless communication products for
uncompressed HD video in consumer electronics and personal computer
applications. With this acquisition, we became a promoter of the WirelessHD
standard for transmitting HD content using 60GHz wireless technology. SiBEAM's
60GHz wireless technology enables us to rapidly bring the highest quality of
wirelessly transmitted HD video and audio to market.
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Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. Generally Accepted
Accounting Principles (GAAP) requires management to make estimates and
assumptions that affect amounts reported in our consolidated financial
statements and accompanying notes. We base our estimates on historical
experience and all known facts and circumstances that we believe are relevant.
Actual results may differ materially from our estimates. We believe the
accounting policies discussed below to be most critical to an understanding of
our financial condition and results of operations because they require us to
make estimates, assumptions and judgments about matters that are inherently
uncertain.
Revenue Recognition
We recognize revenue when the earnings process is complete, as evidenced by an
agreement with the customer, delivery or performance has occurred, pricing is
fixed or determinable and collectability is reasonably assured.
Product Revenue
"Sell-In"-Product revenue is generally recognized at the time of shipment to
customers not eligible for price concessions and rights of return (including
shipments to direct customers and certain shipments to distributors). Revenue
from products sold to distributors with agreements allowing for stock rotations,
but not price protection, is generally recognized upon shipment. Reserves for
stock rotations are estimated based primarily on historical experience and
provided for at the time of shipment, and are not significant.
"Sell-Through"-Product revenue is recognized only when the distributor reports
that it has sold the product to its end customer. This method of product revenue
recognition is used for products sold to distributors with agreements allowing
for price concessions and stock rotation or product return rights, as the sales
price is not fixed or determinable at the time of shipment to the distributor.
Our recognition of such distributor sell-through is based on point of sales
reports received from the distributor which establish a customer, quantity and
final price. Price concessions are recorded when incurred, which is generally at
the time the distributor sells the product to its customer. Once we receive the
point of sales reports from the distributor, our sales price for the products
sold to end customers is fixed, as any product returns, stock rotation and price
concession rights for that product lapse upon the sale to the end customer.
From time to time, at our distributors' request, we enter into "conversion
agreements" to convert certain products, which are designated for a specific end
customer, from "sell-through" to "sell-in" products. The effect of these
conversions is to eliminate any price protection or return rights on such
products. Revenue for such conversions is recorded at the time such conversion
agreements are signed, as it is at that point that the distributor ceases to
have any price protection or return rights for such products.
At the time of shipment to distributors for which revenue is recognized on a
sell-through basis, we record a trade receivable for the selling price (since
there is a legally enforceable right to payment), we relieve inventory for the
carrying value of goods shipped (since legal title has passed to the
distributor) and, until revenue is recognized, we record the gross margin in
"deferred margin on sale to distributors," a component of current liabilities in
our consolidated balance sheet. However, the amount of gross margin we recognize
in future periods will be less than the originally recorded deferred margin on
sales to distributor as a result of negotiated price concessions. We sell each
item in our product price book to all of our "sell-through" distributors
worldwide at a relatively uniform list price. However, distributors resell our
products to end customers at a very broad range of individually negotiated price
points based on customer, product, quantity, geography, competitive pricing and
other factors. The majority of our distributors' resales are priced at a
discount from the list price. Often, under these circumstances, we remit back to
the distributor a portion of their original purchase price after the resale
transaction is completed. Thus, a portion of the "deferred margin on the sale to
distributor" balance represents a portion of distributors' original purchase
price that will be remitted back to the distributor in the future. The wide
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range and variability of negotiated price concessions granted to the
distributors does not allow us to accurately estimate the portion of the balance
in the deferred margin on the sale to distributors that will be remitted back to
the distributors. In addition to the above, we also reduce the deferred margin
by anticipated or determinable future price protections based on revised price
lists, if any.
Licensing Revenue
We enter into IP licensing agreements that generally provide licensees the right
to incorporate our IP components in their products with terms and conditions
that vary by licensee and revenue earned under such agreements is classified as
licensing revenue. Our IP licensing agreements generally include multiple
elements, which may include one or more off-the-shelf and/or customized IP
licenses bundled with support services covering a fixed period of time, usually
one year.
During 2010, we followed the guidance in Financial Accounting Standard Board
(FASB) Accounting Standards Codification (ASC) No. 605-25-25, "Multiple-Element
Arrangements Revenue Recognition ," to determine whether there was more than one
unit of accounting. To the extent that the deliverables were separable into
multiple units of accounting, we allocated the total fee on such arrangements to
the individual units of accounting using the residual method, if objective and
reliable evidence of fair value did not exist for delivered elements. We then
recognized revenue for each unit of accounting depending on the nature of the
deliverable(s) comprising the unit of accounting in accordance with the revenue
recognition criteria. Beginning in the year ended December 31, 2011, for such
multiple element IP licensing arrangements, we follow the guidance in FASB
Accounting Standards Update (ASU) No. 2009-13, "Revenue Recognition (ASC Topic
605)-Multiple-Deliverable Revenue Arrangements.", to determine whether there is
more than one unit of accounting.
For multiple-element arrangements, we allocate revenue to all deliverables based
on their relative selling prices. In such circumstances, we use a hierarchy to
determine the selling price to be used for allocating revenue to deliverables:
(i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party
evidence of selling price (TPE), and (iii) best estimate of the selling price
(ESP). VSOE generally exists only when we sell the deliverable separately and is
the price actually charged by us for that deliverable. ESPs reflect our best
estimates of what the selling prices of elements would be if they were sold
regularly on a stand-alone basis. For the elements of IP licensing agreements we
concluded that VSOE exists only for our support services based on periodic
stand-alone renewals. For all other elements in IP licensing agreements, we
concluded that no VSOE or TPE exists because these elements are almost never
sold on a stand-alone basis by us or our competitors.
Our process for determining ESP for deliverables without VSOE or TPE considers
multiple factors that may vary depending upon the unique facts and circumstances
related to each deliverable. The key factors considered by us in developing the
ESPs include prices charged by us for similar offerings, if any, our historical
pricing practices, the nature and complexity of different technologies being
licensed.
Amounts allocated to the delivered off-the-shelf IP licenses are recognized at
the time of sale provided the other conditions for revenue recognition have been
met. Amounts allocated to the support services are deferred and recognized on a
straight-line basis over the support period, usually one year.
Certain licensing agreements provide for royalty payments based on agreed upon
royalty rates. Such rates can be fixed or variable depending on the terms of the
agreement. The amount of revenue we recognize is determined based on a time
period or on the agreed-upon royalty rate, extended by the number of units
shipped by the customer. To determine the number of units shipped, we rely upon
actual royalty reports from our customers when available and rely upon estimates
in lieu of actual royalty reports when we have a sufficient history of receiving
royalties to enable us to make a reliable estimate of the amount of royalties
owed to us. These estimates for royalties necessarily involve the application of
management judgment. As a result of our use
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of estimates, period-to-period numbers are "trued-up" in the following period to
reflect actual units shipped per the royalty reports ultimately received from
the customer. In cases where royalty reports and other information are not
available to allow us to estimate royalty revenue, we recognize revenue only
when royalty reports are received. We also perform compliance audits for our
licenses and any additional royalties as a result of the compliance audits are
recorded as revenue in the period when the compliance audits are settled and the
customers agrees to pay the amounts due.
For contracts related to licenses of our technology that involve significant
modification, customization or engineering services, we recognize revenue in
accordance with the provisions of FASB ASC No. 605-35-25, "Construction-Type and
Production-Type Contracts Revenue Recognition." Revenues derived from such
license contracts are accounted for using the percentage-of-completion method.
We determine progress to completion based on input measures using labor-hours
incurred by our engineers. The amount of revenue recognized is based on the
total contract fees and the percentage of completion achieved. Estimates of
total project requirements are based on prior experience of customization,
delivery and acceptance of the same or similar technology and are reviewed and
updated regularly by management. The estimates for labor-hours have not been
significantly different as compared to actual labor-hours. If there is
significant uncertainty about customer acceptance, or the time to complete the
development or the deliverables by either party, we apply the completed contract
method. The contract is considered substantially complete upon customer
acceptance. If application of the percentage-of-completion method results in
recognizable revenue prior to an invoicing event under a customer contract, we
recognize the revenue and record an unbilled receivable assuming collectability
is reasonably assured. Amounts invoiced to our customers in excess of
recognizable revenues are recorded as deferred revenue.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of ASC
No. 718-10-30, "Stock Compensation Initial Measurement," which requires the
measurement and recognition of compensation expense for all stock-based awards
made to employees and directors including employee stock options, restricted
stock units (RSUs), performance share awards and employee stock purchases under
our Employee Stock Purchase Plan (ESPP) based on estimated fair
values. Following the provisions of ASC No. 718-50-25, "Employee Share Purchase
Plans Recognition," our ESPP is considered a compensatory plan, therefore, we
are required to recognize compensation cost for grants made under the ESPP. We
estimate the fair value of stock options granted using the Black-Scholes-Merton
(BSM) option-pricing model and a single option award approach. The BSM model
requires various highly subjective assumptions including volatility, expected
option life, and risk-free interest rate. Management estimates volatility for a
given option grant by evaluating the historical volatility of the period
immediately preceding the option grant date that is at least equal in length to
the option's expected term. Consideration is also given to unusual events
(either historical or projected) or other factors that might suggest that
historical volatility will not be a good indicator of future volatility. The
expected life of an award is based on historical experience and on the terms and
conditions of the stock awards granted to employees, as well as the potential
effect from options that had not been exercised at the time. In accordance with
ASC No. 718-10-35 , "Subsequent Measurement of Stock Compensation," we recognize
stock-based compensation expense, net of estimated forfeitures, on a ratable
basis for all share-based payment awards over the requisite service periods of
the awards, which is generally the vesting period or the remaining service
(vesting) period.
The assumptions used in calculating the fair value of share-based payment awards
represent management's best estimates. These estimates involve inherent
uncertainties and the application of management's judgment. If factors change
and we use different assumptions, our stock-based compensation expense could be
materially different in the future. In addition, we are required to estimate the
expected forfeiture rate and recognize expense only for those shares
expected-to-vest. If our actual forfeiture rate is materially different from our
estimate, our recorded stock-based compensation expense could be different.
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The fair value of market-based RSUs has been determined by management, with the
assistance of an independent valuation firm using the Monte Carlo Simulation
method which takes into account multiple input variables that determine the
probability of satisfying the market conditions stipulated in the award. This
method requires the input of assumptions, including the expected volatility of
our common stock, and a risk-free interest rate. Compensation expense related to
awards that are expected to vest with a market-based condition is recognized on
a straight-line basis regardless of whether the market condition is satisfied,
provided that the requisite service has been achieved. The amount of expense
attributed to market-based RSUs is based on the estimated forfeiture rate, which
is updated according to our actual forfeiture rates. The financial statements
include amounts that are based on our best estimates and judgments.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts, when appropriate, for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, our actual
losses may exceed our estimates, and additional allowances would be required. To
date, our actual results have not been materially different than our estimates.
Inventories and Inventory Valuation
We record inventories at the lower of actual cost, or market value. Market value
is based upon an estimated average selling price reduced by the estimated costs
of disposal. The determination of market value involves numerous judgments
including estimating average selling prices based up recent sales, industry
trends, existing customer orders, and other factors. Should actual market
conditions differ from our estimates, our future results of operations could be
materially affected.
Provisions are recorded for excess and obsolete inventory and are estimated
based on a comparison of the quantity and cost of inventory on hand to our
forecast of customer demand. Customer demand is dependent on many factors and
requires us to use significant judgment in our forecasting process. We also make
assumptions regarding the rate at which new products will be accepted in the
marketplace and at which customers will transition from older products to newer
products. Generally, inventories in excess of six months forecasted demand are
written down to zero (unless specific facts and circumstances warrant no
write-down or a write-down to a different value) and the related provision is
recorded as a cost of sales. Once a provision is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product. To the extent our
demand forecast for specific products is less than the combination of our
product on-hand and our non-cancelable orders from suppliers, we could be
required to record additional inventory reserves, which would have a negative
impact on our gross margin. If we ultimately sell inventory that we have
previously written down, our gross margins in future periods will be positively
impacted.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill
We test long-lived assets, including intangible assets with finite lives for
impairment whenever events or circumstances suggest that such assets may not be
recoverable. An impairment is only deemed to have occurred if the sum of the
forecasted undiscounted future cash flows related to the assets are less than
the carrying value of the asset we are testing for impairment. If the forecasted
cash flows are less than the carrying value, then we must write down the
carrying value to its estimated fair value based primarily upon forecasted
discounted cash flows. These forecasted discounted cash flows include estimates
and assumptions related to revenue growth rates and operating margins,
risk-adjusted discount rates based on our weighted average cost of capital,
future economic and market conditions and determination of appropriate market
comparables. If future forecasts are revised, they may indicate or require
future impairment charges. We base our fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain.
Actual future results may differ from those estimates.
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We amortize our intangible assets with finite lives over their estimated useful
lives. We are currently amortizing our acquired intangible assets with definite
lives over periods ranging from two to six years.
Goodwill is tested for impairment on an annual basis (on September 30th) using a
two-step model. The first step, identifying a potential impairment, compares the
fair value of the reporting unit with its carrying amount. Management has
determined that we have one reporting unit. If the carrying value of the
reporting unit exceeds its fair value, the second step would need to be
conducted; otherwise, no further steps are necessary as no potential impairment
exists. The second step, measuring the impairment loss, compares the implied
fair value of the goodwill with the carrying amount of that goodwill. Any excess
of the goodwill carrying value over the respective implied fair value is
recognized as an impairment loss, and the carrying value of goodwill is written
down to fair value. In each period presented the fair value of the reporting
unit exceeded its carrying value, thus the we were not required to perform the
second step of the analysis, and no goodwill impairment charges were recorded
Investments in Privately Held Companies
Investments in privately-held companies are reviewed on a quarterly basis to
determine if their values have been impaired and adjustments are recorded as
necessary. We assess the potential impairment of these investments by
considering available evidence such as the investee's historical and projected
operating results, progress towards meeting business milestones, ability to meet
expense forecasts, and the prospects for industry or market in which the
investee operates. Upon disposition of these investments, the specific
identification method is used to determine the cost basis in computing realized
gains or losses. Declines in value that are judged to be other-than-temporary
are reported in interest income and other, net in the accompanying consolidated
statements of operations.
Income Taxes
Income tax expense is an estimate of current income taxes payable or refundable
in the current fiscal year based on reported income before income taxes.
Deferred income taxes reflect the effect of temporary differences and
carry-forwards that are recognized for financial reporting and income tax
purposes.
We account for income taxes under the provisions of ASC 740, "Income Taxes."
Under the provisions of ASC 740, deferred tax assets and liabilities are
recognized based on the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases,
utilizing the tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. We recognize valuation allowances to reduce any deferred tax assets to
the amount that we estimate will more likely than not be realized based on
available evidence and management's judgment. In addition, the calculation of
liabilities for uncertain tax positions involves significant judgment in
estimating the impact of uncertainties in the application of complex tax laws.
Resolution of these uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations and financial
position.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the
ordinary course of business. We consider the likelihood of loss or impairment of
an asset, or the incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that an asset has been impaired
or a liability has been incurred and the amount of loss can be reasonably
estimated. We record a charge equal to the minimum estimated liability for
litigation costs or a loss contingency only when both of the following
conditions are met: (i) information available prior to issuance of our
consolidated financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date of the financial
statements and (ii) the range of loss can be reasonably estimated and
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no point within the range of probable loss is more likely than other points
within the range. We regularly evaluate current information available to us to
determine whether such accruals should be adjusted and whether new accruals are
required.
From time to time, we are involved in disputes, litigation, and other legal
actions. We are aggressively defending our current litigation matters. However,
there are many uncertainties associated with any litigation and these actions or
other third-party claims against us may cause us to incur costly litigation
and/or substantial settlement charges. In addition, the resolution of any future
intellectual property litigation may require us to make royalty payments, which
could adversely affect gross margins in future periods. If any of those events
were to occur, our business, financial condition, results of operations, and
cash flows could be adversely affected. The actual liability in any such matters
may be materially different from our estimates, which could result in the need
to adjust our liability and record additional expenses.
Certain of our licensing agreements indemnify our customers for expenses or
liabilities resulting from claimed infringements of patent, trademark or
copyright by third parties related to the intellectual property content of our
products. Certain of these indemnification provisions are perpetual from
execution of the agreement and, in some instances; the maximum amount of
potential future indemnification is not limited. To date, we have not paid any
such claims or been required to defend any lawsuits with respect to a claim.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting
Assets and Liabilities." ASU 2011-11 will require us to disclose information
about offsetting related arrangements to enable users of our financial
statements to understand the effect of those arrangements on our financial
position. The new guidance is effective for annual reporting periods beginning
on or after January 1, 2013, and interim periods within those annual periods.
The disclosures required are to be applied retrospectively for all comparative
periods presented. We do not expect that this standard will materially impact
our disclosures included in condensed consolidated financial statements.
Annual Results of Operations
Revenue by product line was as follows:
2012 Change 2011 Change 2010
(Dollars in thousands)
Mobile $ 120,936 83.8 % $ 65,789 525.1 % $ 10,525
Consumer Electronics 62,236 -29.2 % 87,922 -25.6 % 118,192
Personal Computers 20,315 -1.0 % 20,523 -14.9 % 24,124
Total product revenue $ 203,487 16.8 % $ 174,234 14.0 % $ 152,841
Percentage of total revenue 80.6 % 78.8 % 79.9 %
Licensing revenue $ 48,877 4.5 % $ 46,775 21.5 % $ 38,506
Percentage of total revenue 19.4 % 21.2 % 20.1 %
Total revenue $ 252,364 14.2 % $ 221,009 15.5 % $ 191,347
Product Revenue
The increase in product revenue was primarily due to increased demand for our
mobile products offset in part by lower CE and PC revenue. The increase in our
mobile products from 2011 to 2012 was primarily due to the continued success of
our MHL product line. These products were introduced in the latter part of
fiscal year 2010. Since then, we have seen increased shipments of MHL products
quarter over quarter. For the fourth quarter, mobile revenue grew 42.4% year
over year and represented over 64.3% of our total product revenue. For the year,
our mobile revenue grew 83.8 % and represented over 59.4% of total product
revenue up from 37.8% a
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year ago. Our MHL products represent the majority of our mobile revenue. The
decrease in our CE revenue from 2011 to 2012 was primarily the result of a
broad-based market shift to lower-end DTV products that incorporate our
semiconductor products less frequently. Our PC revenue continued to decline in
2012 as we did not make any investments in these legacy products in prior years.
However, our MHL and HDMI technologies are applied in various PC devices, and we
also expect our 60GHz WirelessHD to be a key technology in the coming years
Revenue from our mobile products increased from 2010 to 2011 primarily due to
the successful launch of our newest MHL transmitter product. The revenue growth
in our mobile market was partially offset by the decrease in revenue in our CE
market. Revenue from our CE market decreased from 2010 to 2011 primarily due to
global macro-economic pressures that drove consumers to purchase lower priced CE
products, and the 9.0 magnitude earthquake and subsequent tsunami that hit Japan
in March 2011, which has affected both demand in Japan and the global supply
chain for CE products. High-end DTVs with the latest features and capabilities
(the market segment where we typically deliver our latest CE innovations) have
been particularly affected by this trend. The earthquake in Japan had a two-fold
impact. First, it reduced demand for higher-end TVs in the domestic Japanese
market. Secondly, as a result of damage to the production facilities, the
Japanese OEM manufacturers shifted a portion of their TV production to original
design manufacturers (ODMs) outside of Japan which typically supply the
lower-end to mid-range DTV market. Our revenue from Japan for the year ended
December 31, 2011 was 19.7% as compared to 29.9% for the same period in 2010.
Licensing Revenue
Our licensing activity is complementary to our product sales and helps us to
monetize our intellectual property and accelerate market adoption curves
associated with our technology and standards. The increase in licensing revenue
from 2011 to 2012 was primarily the result of increased in MHL adopter base due
to the continued success of our MHL product adoption in various segments and an
increase in royalty revenues. Our licensing revenue may fluctuate year over year
as a result of the timing of completion of IP license arrangements.
Licensing revenue increased from 2010 to 2011 primarily due to increase in new
IP licenses sold by us during 2011, increase in HDMI licensing and increase in
royalties. HDMI LLC revenue was higher mainly due to increase in HDMI product
shipment activity reported by adopters in 2011 as compared to 2010.
Revenue by Geography Based on Customers' Headquarters
2012 Change 2011 Change 2010
(Dollars in thousands)
Asia Pacific $ 216,389 15.9 % $ 186,712 14.4 % $ 163,164
United States 18,686 -2.8 % 19,226 21.6 % 15,810
Europe 16,138 19.1 % 13,555 20.8 % 11,225
Others 1,151 -24.1 % 1,516 32.1 % 1,148
Total revenue $ 252,364 14.2 % $ 221,009 15.5 % $ 191,347
The increase in revenues in Asia-Pacific or APAC, which includes Japan and
Korea, from 2011 to 2012, was primarily due to increased demand for our MHL
products by our customers who have their headquarters in APAC. The increase in
revenues in Europe from 2011 to 2012 was primarily due to increase demand for
our legacy control module business, which is part of our PC category. Revenues
in the United States decreased from 2011 to 2012 due to more of our customers
moving their manufacturing offshore.
The increase in revenue for APAC and Europe from 2010 to 2011 was primarily due
to the Company's entry into the mobile market with the introduction of HDMI
transmitter products. Revenue for the United States increased from 2010 to 2011
primarily due to additional revenues relating to the acquisitions of SiBEAM and
ABT.
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COST OF REVENUE AND GROSS MARGIN
2012 Change 2011 Change 2010
(Dollars in thousands)
Cost of product revenue (1) $ 109,815 22.0 % $ 90,035 16.2 % $ 77,480
Product gross profit 93,672 11.3 % 84,199 11.7 % 75,361
Product gross profit margin 46.0 % 48.3 % 49.3 %
(1) Includes stock-based
compensation expense $ 523 $ 670 $ 558
Cost of licensing revenue $ 626 -21.2 % $ 794 195.2 % $ 269
Licensing gross profit 48,251 4.9 % 45,981 20.3 % 38,237
Licensing gross profit margin 98.7 % 98.3 % 99.3 %
Total cost of revenue $ 110,441 21.6 % $ 90,829 16.8 % $ 77,749
Total gross profit 141,923 9.0 % 130,180 14.6 % 113,598
Total gross profit margin 56.2 % 58.9 % 59.4 %
Cost of Revenue
Cost of revenue consists primarily of costs incurred to manufacture, assemble
and test our products, and costs to license our technology which involves
modification, customization or engineering services, as well as other overhead
costs relating to the aforementioned costs including stock-based compensation
expense. Total cost of revenue increased from 2011 to 2012 primarily due to the
growth in revenue volume and a $6.2 million write down of unusable parts as a
result of defective material used by one of our vendors. We are seeking
compensation for this loss from our supplier, but no assurance can be provided
regarding the amount of such compensation, if any.
Total cost of revenue increased from 2010 to 2011 primarily due to the growth in
revenue volume during the same comparative periods.
Product Gross Profit Margin
Our product gross profit margin decreased from 2011 to 2012 primarily due to the
decrease in average selling price (ASP) per unit from $1.23 in 2011 to $1.03 in
2012, which was primarily driven by the increase in mobile revenue-which carries
a lower ASP-as a share of total revenue and a $6.2 million write down of
unusable parts as a result of defective material used by one of our vendors,
partially offset by decreases in wafer, assembly, packaging and testing costs,
improved freight and warehouse efficiencies, better absorption of fixed and
semi-variable overheads as a result of increased revenue and lower depreciation
expense due to fully depreciated testers. Product mix is a major factor in the
changes in our overall ASP for products.
Product gross profit margin decreased from 2010 to 2011 primarily due to the
decrease in ASP per unit from $1.45 in 2010 to $1.23 in 2011, partially offset
by decrease in wafer, testing and assembly cost in 2011 than in 2010 and better
overhead absorption due to the increase in volume.
Licensing Gross Profit Margin
Licensing gross profit margin was comparable in 2012 and 2011.
Licensing gross profit margin decreased from 2010 to 2011 primarily due to
higher mix of IP customization projects during 2011.
OPERATING EXPENSES
Research and development 2012 Change 2011 Change 2010
(Dollars in thousands)
Research and development(1) $ 77,372 16.3 % $ 66,533 20.3 % $ 55,313
Percentage of total revenue 30.7 % 30.1 % 28.9 %
(1) Includes stock-based
compensation expense 3,585 3,774 2,631
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Research and development (R&D). R&D expense consists primarily of employee
compensation and benefits, fees for independent contractors, the cost of
software tools used for designing and testing our products and costs associated
with prototype materials. R&D expense increased from 2011 to 2012 primarily due
to an increase in compensation related expenses as a result of the SiBEAM
acquisition in May 2011 of $3.6 million, higher mask-set costs and project
related expenses of approximately $5.9 million and $2.0 million of additional
costs as a result of our expansion in India. Our R&D headcount as of
December 31, 2012 was 350 employees as compared to 257 employees as of
December 31, 2011 primarily due to the expansion of our R&D capabilities in
India.
R&D expense increased from 2010 to 2011 primarily due to the increase in
compensation related expenses as a result of the two acquisitions that we
completed in 2011, increase in project related expenses and increase in
stock-based compensation expense. R&D expense for the year ended December 31,
2011 included stock-based compensation expense of $3.8 million, as compared to
$2.6 million for the year ended December 31, 2010. Our R&D headcount as of
December 31, 2011 was 257 employees as compared to 207 employees as of
December 31, 2010 with the increase primarily due to the acquisitions of SiBEAM
and ABT.
Selling, general and administrative 2012 Change 2011 Change 2010
(Dollars in thousands)
Selling, general and administrative (1) $ 57,446 3.9 % $ 55,277 18.3 % $ 46,710
Percentage of total revenue 22.8 % 25.0 % 24.4 %
(1) Includes stock-based compensation
expense 5,096 5,076 4,152
Selling, general and administrative (SG&A). SG&A expense consists primarily of
compensation, including stock-based compensation expense, sales commissions,
professional fees, and marketing and promotional expenses. SG&A expense
increased from 2011 to 2012 primarily due to an increase in consultant expense
of approximately $1.5 million. Our SG&A headcount as of December 31, 2012 were
198 employees as compared to 187 employees as of December 31, 2011.
SG&A expense increased from 2010 to 2011 primarily due to the increase in
compensation related expenses of approximately $2.7 million, additional
marketing activities of approximately $2.8 million, stock-based compensation
expense of approximately $0.9 million and transaction expenses of approximately
$1.0 million in relation to the two business acquisitions that we completed
during the year ended December 31, 2011. Our SG&A headcount as of December 31,
2011 was 187 employees as compared to 156 employees as of December 31, 2010.
Restructuring 2012 Change 2011 Change 2010
(Dollars in thousands)
Restructuring expense $ 110 -95.2 % $ 2,269 -30.4 % $ 3,259 Percentage of total revenue 0.0 % 1.0 % 1.7 %
Restructuring. The total restructuring expense for the year ended December 31,
2012 primarily related to adjustments to previously established accrual for
facility exit costs.
The total restructuring expense for the year ended December 31, 2011 consisted
primarily of $0.9 million related to severance benefits and exit costs we
incurred as a result of SiBEAM acquisition, $0.4 million related to our storage
business restructuring, $0.3 million relating to operating lease termination
costs and $0.7 million related to severance benefits for the headcount reduction
in the fourth quarter of 2011.
The total restructuring expense for the year ended December 31, 2010 consisted
primarily of $2.0 million related to contract termination cost, a charge of $0.9
million relating to operating lease termination costs and a charge of $0.3
million related to retirement of certain fixed assets. During 2010, we were in
the process of transitioning certain R&D work from Europe to Asia and as a
result of this transition, we decided to cease using
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the services of certain European engineers which resulted in an accrual of
future costs of $2.0 million payable under the related contract without any
future economic benefit to us. We recorded such future costs as restructuring
expense in 2010.
Amortization of acquisition-related intangible assets 2012 Change
2011 Change 2010
(Dollars in thousands)
Amortization of acquisition-related intangible assets $ 599 -62.2 % $ 1,585 963.8 % $ 149
Percentage of total revenue 0.2 % 0.7 % 0.1 %
Amortization of acquisition-related intangible assets. The decrease in
amortization expense from 2011 to 2012 was primarily due to the reversal of
amortization expense related to the trademark acquired in the SiBEAM acquisition
of $825,000 and correcting the useful life of the core technology acquired in
the ABT acquisition from three to five years of approximately $355,000. See Note
1 to our consolidated financial statements for further discussion of these
out-of-periods adjustments.
The increase in the amortization of intangible assets for the year ended
December 31, 2011 as compared to the same period in 2010 was primarily due to
amortization of the intangible assets acquired from the two acquisitions
completed during 2011.
Impairment of intangible assets. In the fourth quarter of 2011, we assessed our
advances to a third party for intellectual properties for impairment. We
concluded that the intangible assets related to these advances amounting to $8.5
million were fully impaired as of December 31, 2011, and recorded an impairment
charge for the full amount in 2011.
Interest income and others, net 2012 Change 2011 Change 2010
(Dollars in thousands)
Interest income $ 1,654 -13.9 % $ 1,920 -17.8 % $ 2,335
Impairment of investment in an
unconsolidated affiliate (7,467 ) 0.0 % - 0.0 % -
Reversal of a subsidiary's
accumulated currency translation
adjustment - 100.0 % (132 ) -109.7 % 1,366
Other income (expense), net 7 -94.6 % 130 268.8 % (77 )
Total $ (5,806 ) -402.7 % $ 1,918 -47.1 % $ 3,624
Percentage of total revenue -2.3 % 0.9 % 1.9 %
Interest income decreased from 2011 to 2012 primarily due to the decrease in our
short-term investments as a result of the cash used in the repurchase of
treasury stock.
Interest income decreased from 2010 to 2011 primarily due to the decrease in our
short-term investments as a result of the cash used in business acquisitions.
In 2012, we recorded a non-cash impairment charge of $7.5 million representing
the carrying value of our investment in a U.S. based privately-held company. See
Note 5 to our consolidated financial statements for further discussion of this
impairment of investment in privately-held company.
In 2010, we recognized as income the accumulated foreign currency translation
adjustment of our wholly owned subsidiary in Germany whose facilities and
offices had been substantially liquidated during 2010.
Provision for income taxes 2012 Change 2011 Change 2010
(Dollars in thousands)
Provision for income taxes $ 9,979 16.3 % $ 8,583 137.8 % $ 3,609
Percentage of total revenue 3.9 % 3.9 % 1.9 %
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Provision for income taxes. For the year ended December 31, 2012, we recorded an
income tax provision of $10.0 million, as compared to income tax provision of
$8.6 million and $3.6 million in 2011 and 2010, respectively. Our effective
income tax rate was 1,691% in 2012. In 2012, the primary reconciling items
between our effective tax rate and the U.S. statutory tax rate of 35% included
approximately $6.7 million of income tax expense primarily due to foreign
withholding taxes and foreign income inclusions. In addition, we provided
approximately $10.3 million for an increase to the valuation allowance to offset
deferred tax assets which are not more likely than not to be realized and
approximately $1.0 million for stock based compensation. The primary benefit
provided was for approximately $6.6 million related to the use of foreign tax
credits.
Our effective income tax rate was (415.4%) in 2011. In 2011, the primary
reconciling items between our effective tax rate and the U.S. statutory tax rate
of 35% included approximately $8.9 million of income tax expense primarily due
to foreign withholding taxes and foreign income inclusions. In addition, we
provided approximately $ 8.2 million for an increase to the valuation allowance
to offset deferred tax assets which are not more likely than not to be realized
and approximately $1.0 million for stock based compensation. The primary benefit
provided was for approximately $6.8 million related to the use of foreign tax
credits and R&D tax credits.
Our effective income tax rate was 30.6% in 2010. In 2010, the difference between
the expense for income taxes and the income tax expense determined by applying
the statutory federal income tax rate of 35% was due primarily to foreign
withholding taxes and changes in the valuation allowance.
Liquidity and Capital Resources
The following sections discuss the effects of changes in our balance sheet and
cash flows, contractual obligations and other commitments on our liquidity and
capital resources.
Cash and Cash Equivalents, Short-term Investments and Working Capital. The table
below summarizes our cash and cash equivalents, investments and working
capital and the related movements (in thousands).
2012 Change 2011 Change 2010
(Dollars in thousands)
Cash and cash equivalents $ 29,069 $ (8,056 ) $ 37,125 $ 7,183 $ 29,942
Short term investments 78,398 (45,903 ) 124,301 (36,237 ) 160,538
Total cash, cash equivalents
and short term investments $ 107,467 $ (53,959 ) $ 161,426 $ (29,054 ) $ 190,480
Percentage of total assets 47.4 % 60.7 % 76.0 %
Total current assets $ 165,617 $ (43,048 ) $ 208,665 $ (22,148 ) $ 230,813
Total current liabilities (42,815 ) 3,927 (46,742 ) (675 ) (46,067 )
Working capital $ 122,802 $ (39,121 ) $ 161,923 $ (22,823 ) $ 184,746
As of December 31, 2012, $12.1 million of the cash and cash equivalents and
short term investments was held by foreign subsidiaries. Local government
regulations may restrict our ability to move cash balances from our foreign
subsidiaries to meet cash needs under certain circumstances; however, any
current restrictions are not material. We do not currently expect such
regulations and restrictions to impact our ability to pay vendors and conduct
operations. If these funds are needed for our operations in the U.S., we may be
required to accrue and pay U.S. taxes to repatriate these funds. However, our
intent is to indefinitely reinvest these funds outside of the U.S. and our
current plans do not demonstrate a need to repatriate them to fund our U.S.
operations.
The significant components of our working capital are cash and cash equivalents,
short-term investments, accounts receivable, inventories and prepaid expenses
and other current assets, reduced by accounts payable, accrued and other current
liabilities, deferred license revenue and deferred margin on sales to
distributors.
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The net decrease in current assets at December 31, 2012 as compared to
December 31, 2011 was primarily due to a $54.0 million decrease in total cash
and cash equivalents and short-term investments, partially offset by $10.5
million increase in accounts receivable. The net change in the Company's cash
position on a year over year basis was primarily the results of cash used for
share repurchases, long term strategic investments and working capital coverage.
The increase in accounts receivable was primarily due to timing of invoicing
relative to the quarter end over collections during the year ended December 31,
2012.
The net decrease in current liabilities at December 31, 2012 as compared to
December 31, 2011 was mainly due to a $3.6 million decrease in accrued and other
current liabilities, partially offset by a $2.5 million increase in deferred
margin on sales to distributors. The increase in deferred margin on sales to
distributors was mainly due to the increasing activities with our distributors
driven by the acceleration of demand for our products while the decrease in
accrued and other current liabilities was mainly attributable to the payment of
2011 bonus accrued at the end of 2011 and paid in the first quarter of 2012,
product rebates and payment of milestone to ABT.
Summary of Cash Flows. The table below summarizes the cash and cash equivalents
provided by (used in) in our operating, investing and financing activities.
2012 2011 2010
(Dollars in thousands)
Cash provided by operating activities $ 4,676 $ 7,458 $ 46,494
Cash provided by (used in) investing activities 24,076 (4,762 ) (50,725 )
Cash provided by (used in) financing activities (36,788 ) 4,501 3,954
Effect of exchange rate changes on cash and cash
equivalents (20 ) (14 ) 463
Net increase (decrease) in cash and cash
equivalents $ (8,056 ) $ 7,183 $ 186
Operating Activities
Cash provided by operating activities is generated by net income (loss) adjusted
for certain non-cash items and changes in assets and liabilities.
During the year ended December 31, 2012, we incurred a net loss of $11.2 million
which included non-cash charges of approximately $28.5 million (primarily
related to stock based compensation, depreciation and amortization, and
impairment charges). Changes in assets and liabilities that generated cash were
primarily prepaid expenses and other current assets and deferred margin on sales
to distributors. These increases were offset by changes in operating assets and
liabilities that used cash, primarily accounts receivable, inventories and
accrued and other liabilities.
During the year ended December 31, 2011, we incurred a net loss of $11.6 million
which included non-cash charges of approximately $30.2 million (primarily
related to stock based compensation, depreciation and amortization, and
impairment charges). Changes in assets and liabilities that generated cash were
primarily inventories and accrued and other liabilities. These increases were
offset by changes in operating assets and liabilities that used cash, primarily
accounts receivable, prepaid expenses and other current assets, accounts
payable, deferred margin on sales to distributors and deferred license revenue.
During the year ended December 31, 2010, we had a net income of $8.2 million
which included non-cash charges of approximately $14.0 million (primarily
related to stock based compensation, depreciation and amortization, and
impairment charges). Changes in assets and liabilities that generated cash were
primarily prepaid expense and other current assets, accounts payable, deferred
license revenue and deferred margin on sales to distributors. These increases
were offset by changes in operating assets and liabilities that used cash,
primarily accounts receivable, inventories and accrued and other liabilities.
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Investing Activities
Cash provided by investing activities during the year ended December 31, 2012
was primarily a result of $44.2 million net proceeds from the sales and
maturities of short-term investments, partially offset by $8.9 million used for
capital expenditures, $10.0 million used for various strategic business
investments and $1.2 million used for purchases of intellectual properties.
During the year ended December 31, 2012, we sold $104.8 million and purchased
$60.6 million of short-term investments.
Cash used in our investing activities during the year ended December 31, 2011
was due primarily to $15.9 million used in connection with our business
acquisitions, $7.5 million used to make an investment in an unconsolidated
affiliate, $7.2 million used for advances for intellectual properties, net of
repayments of secured notes and $7.8 million net investment in property and
equipment, partially offset by $33.7 million net proceeds from the sales and
maturities of short-term investments. During the year ended December 31, 2011,
we sold $147.0 million and purchased $113.3 million of short-term investments.
Cash used in investing activities during the year ended December 31, 2010 was
due primarily to net purchases of short-term investments of approximately $42.8
million, net investment in property and equipment of approximately $4.7 million
and other investing activities amounting to approximately $3.2 million. During
the year ended December 31, 2010, we purchased $166.9 million and sold $124.1
million of short-term investments.
We are not a capital-intensive business. Our purchases of property and equipment
in 2012, 2011 and 2010 related mainly to testing equipment, leasehold
improvements and information technology infrastructure.
Financing Activities
Cash used in our financing activities during the year ended December 31, 2012
was primarily due to $39.7 million used to repurchase our common stock, $2.2
million used to repurchase restricted stock units for minimum statutory income
tax withholding and $1.1 million cash paid to settle contingent consideration
liabilities, partially offset by the proceeds from stock option exercises and
purchases under our employee stock purchase program of approximately $5.6
million.
Cash generated from our financing activities during the year ended December 31,
2011 was primarily due to the proceeds from stock option exercises and purchases
under our employee stock purchase program of approximately $6.2 million and to
the excess tax benefits from employee stock-based transactions of approximately
$2.1 million, partially offset by $3.3 million used to repurchase restricted
stock units for minimum statutory income tax withholding and $0.5 million used
to pay a line of credit assumed from business acquisition.
Cash generated from our financing activities during the year ended December 31,
2010 was primarily due to the proceeds from stock option exercises and purchases
under our employee stock purchase program totaling approximately $5.6 million
and to the excess tax benefits from employee stock-based transactions of
approximately $0.8 million, partially offset by payments to vendor of financed
purchases of software and intangibles of approximately $1.2 million and cash to
repurchase restricted stock units for income tax withholding of approximately
$1.2 million.
Cash Requirements and Commitments
In addition to our normal operating cash requirements, our principal future cash
requirements will be to fund capital expenditures, share repurchases and any
strategic investments or acquisitions, in addition we have approximately
$13.9 million in commitments for fiscal years including and beyond 2013 as
disclosed in the contractual obligations section below.
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Contractual Obligations
Our contractual obligations as of December 31, 2012 were as follows (in
thousands):
Payments Due In
Less Than More Than
Contractual Obligations: Total 1 Year 1-3 Years 3-5 Years 5 Years
Operating lease obligations $ 12,933 $ 3,115 $ 5,058 $ 3,837 $ 923
Contingent payment to acquire
additional preferred stock 1,000 - 1,000 - -
$ 13,933 $ 3,115 $ 6,058 $ 3,837 $ 923
On December 21, 2012, we signed a Securities Purchase Agreement and agreed to
purchase a 17.7% equity ownership interest in a privately-held company for $3.5
million in cash. We have paid $2.5 million in 2012 and the remaining $1.0
million is in the form of contingent payment to acquire additional preferred
stock in the privately-held Company, over a period of time based on achievement
of certain milestones by the privately-held company.
The amounts above exclude liabilities under FASB ASC 740-10, "Income Taxes -
Recognition section" amounting to approximately $27.2 million as of December 31,
2012 as we are unable to reasonably estimate the ultimate amount or timing of
settlement. See Note 12, "Income Taxes," in our notes to consolidated financial
statements included in Item 15(a) of this report for further discussion.
Liquidity and Capital Resource Requirements
Based on our estimated cash flows, we believe our existing cash and cash
equivalents and short-term investments are sufficient to meet our capital and
operating requirements for at least the next 12 months.
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