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ENTR > SEC Filings for ENTR > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for ENTROPIC COMMUNICATIONS INC

Form 10-Q for ENTROPIC COMMUNICATIONS INC


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended December 31, 2011 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K, or Annual Report.

Forward-Looking Statements

All statements included in this Quarterly Report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning our ability to sustain profitability; our recent acquisition of the assets used in or related to the STB business, or STB Business, of Trident Microsystems, Inc. and certain of its subsidiaries, collectively Trident, the competitive nature of the markets in which we compete and the effect of competing products and technologies; the demand for our solutions; the adoption of our technologies and the Multimedia over Coax Alliance, or MoCA, standard; the competitive nature of service providers; our dependence on manufacturers, sales representatives, distributors and other third parties; our ability to create and introduce new solutions and technologies; our ability to effectively manage our growth; our ability to successfully acquire companies or technologies that would complement our business; the ability of our contract manufacturers to produce and deliver products in a timely manner and at satisfactory prices; our ability to protect our intellectual property and avoid infringement of the intellectual property of others; our reliance on our key personnel; the effects of government regulation; our ability to obtain sufficient capital to expand our business; our ability to manage our business in the midst of a fragile economy; the cyclical nature of our industry; our ability to effectively transact business in foreign countries; and our ability to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

The forward-looking statements contained in this Quarterly Report are based on our current expectations, estimates, approximations and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing" and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report, and in our other filings with the Securities and Exchange Commission, or SEC. These forward-looking statements reflect our management's belief and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report and are subject to risks and uncertainties. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements in this Quarterly Report or in our other filings with the SEC.

In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Except as required by law, we undertake no obligation to revise our forward-looking statements to reflect events or circumstances that arise after the date of this Quarterly Report. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in these forward-looking statements.

In this Quarterly Report, "Entropic Communications, Inc.," "Entropic Communications," "Entropic," the "Company," "we," "us" and "our" refer to Entropic Communications, Inc. and its subsidiaries, taken as a whole, unless otherwise noted.


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Overview

Entropic Communications is a leading fabless semiconductor company that designs, develops and markets semiconductor solutions to enable home entertainment. Our technologies significantly change the way traditional broadcast video, streaming video and multimedia content such as movies, music, games and photos are seamlessly, reliably, and securely brought into, distributed and processed throughout the home.

Our next-generation set-top-box, or STB, system-on-a-chip, or SoC, and home connectivity, or Connectivity, solutions enable pay-TV service providers to offer consumers a more captivating whole-home entertainment experience by delivering new, high-performing ways to connect, engage, and enjoy multimedia content. Our portfolio of STB SoC and Connectivity solutions include the following:

• STB SoC Solutions: We added the STB SoC assets to our portfolio in connection with our April 2012 acquisition of the assets used in or related to the STB business of Trident. The acquired assets included a complete STB product portfolio, comprised of a comprehensive suite of digital STB components and system solutions for the worldwide satellite, terrestrial, cable and Internet protocol television, or IPTV markets. The STB offering includes STB SoCs, DOCSIS modems, interface devices and media processors. In addition, these products feature a range of ARM® application processor-based SoCs that have been optimized for leading Web technologies, in addition to traditional standard-definition, STBs and advanced high-definition, or HD, STBs.

• Connectivity Solutions: Our Connectivity solutions enable access to broadcaster services as well as deliver and distribute content throughout the home and include:

• Home networking solutions based on the MoCA standard. We are recognized as the pioneer of MoCA technology, enabling connected home networking of digital entertainment over existing coaxial cable. We are a founding member of MoCA, a global home networking consortium that sets standards for the distribution of video and other multimedia entertainment over coaxial cable;

• High-speed broadband access solutions, based on the MoCA standard;

• Direct broadcast satellite outdoor unit, or DBS ODU, solutions which consist of our band translation switch and channel stacking switch products which simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable; and

• Silicon tuner integrated circuit solutions for cable and terrestrial applications that conform to most major digital and analog video broadcast standards, including the U.S. and international broadcasting standards.

Our products allow telecommunications carriers, cable operators, DBS ODU, over-the-air, and over-the-top, or OTT, service providers, which we collectively refer to as service providers, to enhance and expand their service offerings and reduce deployment costs in an increasingly competitive environment. Our STB SoC and Connectivity solutions are now being deployed into consumer homes to support advanced services such as multi-room DVR, HD video calling, and OTT content delivery. Our products are deployed by major service providers globally, including Comcast, Cox Communications, DIRECTV, DISH Network, OCN (China), Time Warner Cable, Topway (China), UPC (Netherlands), Liberty Global and Verizon, as well as by a number of smaller service providers.

Our deployment history began in December 2004, when we introduced and commenced commercial shipments of our Connectivity solutions for home networking. In the first quarter of 2006, we began commercially shipping our Connectivity solutions for broadband access. In May 2007, we acquired Arabella Software Ltd., a developer of embedded software. In June 2007, we acquired RF Magic, Inc., a provider of DBS ODU and silicon tuner solutions. In 2008, we acquired certain specified assets of Vativ Technologies, Inc., or Vativ, a provider of high-bandwidth, advanced digital processing solutions for digital television and 10 gigabit Ethernet markets. In April 2012, we acquired assets used in or related to the STB Business from Trident. With this acquisition, we gained greater scale, further diversified our product portfolio by adding STB SoC solutions to our Connectivity offerings, deeper technical expertise, and a broader global customer base. In July 2012, we acquired specific direct broadcast satellite intellectual property and corresponding technologies from PLX Technology, Inc., or PLX. The acquired assets are complementary to our current DBS ODU solutions and provide a path to future DBS ODU technologies.


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Since inception, we have invested heavily in product development and have only achieved profitability on an annual basis for the first time in 2010, with net income of $64.7 million. For the year ended December 31, 2011 net income was $26.6 million and for the three and nine months ended September 30, 2012 net income was $0.4 million and $4.5 million, respectively. In 2011, our net revenues increased to $240.6 million from $210.2 million in 2010. Our net revenues were $232.0 million for the nine months ended September 30, 2012 compared to $184.5 million for the nine months ended September 30, 2011. The annual revenue increase in 2011 was primarily due to the increased demand for our Connectivity solutions, which was directly related to the increased deployment of our products into consumer homes by satellite and cable operators. The increase in net revenues during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, was primarily due to the additional revenues generated by the STB SoC solutions that we acquired from Trident in April 2012, as well as an increase in the demand for our Connectivity solutions during the nine months ended September 30, 2012. As of September 30, 2012, we had an accumulated deficit of $146.2 million.

We generate the majority of our revenues from sales of our semiconductor solutions to original design manufacturers and original equipment manufacturers that provide customer premises equipment to service providers. We price our products based on market and competitive conditions and reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly, we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.

We rely on a limited number of customers for a significant portion of our net revenues. Sales to these customers are in turn driven by service providers that purchase our customers' products which incorporate our semiconductor solutions. A substantial percentage of our net revenues are dependent upon five major service providers: Comcast, DIRECTV, DISH Network, Time Warner Cable and Verizon. In addition, we are dependent on sales outside of the United States for almost all of our net revenues and expect that to continue in the future.

We use third-party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our semiconductor solutions and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the purchase of wafers and for manufacturing, assembly and test services.

We expect research and development expenses in future years to continue to increase in total dollars as we develop additional semiconductor solutions and expand our business, and to fluctuate over the course of the year based on the timing of our development tools and supply costs, which include outside services, masks costs and software licenses. We also anticipate that our sales and marketing expenses will increase as we expand our domestic and international sales and marketing organization and activities and build brand awareness. Due to the lengthy sales cycles that we face, we may experience significant delays from the time we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products.

Since our inception, we have funded our operations using a combination of preferred stock issuances, cash collections from customers, bank credit facilities, cash received from the exercise of stock options and proceeds from public offerings of our common stock. We intend to continue spending substantial amounts in connection with the growth of our business to pursue our business strategy, develop new products, respond to competition and market opportunities, and possibly acquire complementary businesses or technologies.


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Results of Operations

The following table sets forth selected condensed consolidated statements of
operations data as a percentage of total net revenues for each of the periods
indicated:



                                     Three Months Ended           Nine Months Ended
                                       September  30,               September  30,
                                     2012            2011         2012           2011
      Net revenues                      100 %          100 %         100 %         100 %
      Cost of net revenues               51             45            48            45

      Gross profit                       49             55            52            55
      Operating expenses:
      Research and development           31             29            30            23
      Sales and marketing                 8              8             8             7
      General and administrative          6              6             8             5

      Total operating expenses           45             43            46            35

      Income from operations              4             12             6            20
      Income tax provision                1              4             2             7

      Net income                          3 %            8 %           4 %          13 %

Comparison of Three and Nine months Ended September 30, 2012 and 2011

(Tables presented in thousands, except percentage amounts)

Net Revenues

Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Net revenues $ 89,825 $ 51,465 75 % $ 231,980 $ 184,459 26 %

Our net revenues for the three months ended September 30, 2012 were $89.8 million compared to net revenues of $51.5 million during the same period in 2011, an increase of $38.3 million or 75%. Our net revenues for the nine months ended September 30, 2012 were $232.0 million compared to net revenues of $184.5 million during the same period in 2011, an increase of $47.5 million or 26%. The increase in net revenues during the three and nine months ended September 30, 2012 compared to the same periods ended September 30, 2011 was due to revenues from the STB SoC solutions that we acquired from Trident in April 2012 as well as an increase in the demand for our Connectivity solutions during these periods.

Gross Profit



                                          Three Months Ended September 30,                     Nine Months Ended September 30,
                                      2012                2011           % Change           2012               2011          % Change
Gross profit                      $     44,047        $     28,469              55 %    $    120,094        $  101,878              18 %
% of net revenues                           49 %                55 %                              52 %              55 %

Gross profit for the three months ended September 30, 2012 was $44.0 million, an increase of $15.5 million, or 55%, from gross profit of $28.5 million during the same period in 2011. Gross profit for the nine months ended September 30, 2012 was $120.1 million, an increase of $18.2 million, or 18%, from gross profit of $101.9 million during the same period in 2011. The increase in gross profits during the three and nine months ended September 30, 2012 compared to the same periods ended September 30, 2011 was primarily due to additional revenues associated with the STB SoC solutions that we acquired from Trident in April 2012 as well as an increase in the revenues associated with our Connectivity solutions.


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As a result of our acquisition of the STB Business from Trident in April 2012, during the three and nine months ended September 30, 2012, we recorded amortization expense of $2.0 million and $3.8 million, respectively, relating to the developed technology intangible asset acquired. This expense negatively impacted gross margins by approximately 2% during the three and nine months ended September 30, 2012. Gross margins were also unfavorably impacted by sales of lower margin products associated with STB Business, offset by a positive impact from lower unit costs of our Connectivity solutions, principally as a result of more favorable manufacturing costs.

Cost of net revenues for the three months ended September 30, 2012 was unchanged compared to the three months ended September 30, 2011, while the nine months ended September 30, 2012 included a net increase in the reserve for excess and obsolete inventory of $0.4 million over the nine months ended September 30, 2011. Cost of net revenues for the three and nine months ended September 30, 2011 included a net increase in the reserve for excess and obsolete inventory of $0.5 million and $1.5 million, or approximately 1% of net revenues, respectively.

Research and Development Expenses



                                                Three Months Ended September 30,                      Nine Months Ended September 30,
                                            2012                2011           % Change           2012                2011           % Change
Research and development                $     28,072        $     15,142              85 %    $     69,214        $     42,439              63 %
% of net revenues                                 31 %                29 %                              30 %                23 %

Research and development expenses increased by $13.0 million, or 85%, to $28.1 million during the three months ended September 30, 2012 from $15.1 million during the same period in 2011. This increase was due to increased personnel costs of $5.8 million (of which $0.5 million was due to stock-based compensation) which was due to a 143% headcount increase in the number of employees engaged in research and development activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the three months ended September 30, 2012 compared to the same period in 2011. Of this increase in research and development expenses, $4.3 million was related to an overall increase in development tool costs, supply costs and outside service costs, which was primarily driven by increased research and development activities associated with our acquisition of the STB Business from Trident. The remaining increase of $2.9 million was primarily due to an increase in the facility costs and overhead allocation expenses as a result of our increased headcount during the three months ended September 30, 2012 as compared to the same period in 2011.

Research and development expenses increased by $26.8 million, or 63%, to $69.2 million during the nine months ended September 30, 2012 from $42.4 million during the same period in 2011. This increase was due to increased personnel costs of $12.3 million (of which $1.0 million was due to stock-based compensation) which was due to a 79% average headcount increase in the number of employees engaged in research and development activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the nine months ended September 30, 2012 compared to the same period in 2011. Of this increase in research and development expenses, $9.7 million was related to an overall increase in development tool costs, supply costs and outside service costs, which was primarily driven by increased research and development activities associated with our acquisition of the STB Business from Trident. The remaining increase of $4.8 million was primarily due to an increase in the facility costs and overhead allocation expenses as a result of our increased headcount during the nine months ended September 30, 2012 as compared to the same period in 2011.


Table of Contents

Sales and Marketing Expenses



                                              Three Months Ended September 30,                      Nine Months Ended September 30,
                                          2012                2011           % Change           2012                2011           % Change
Sales and marketing                    $     6,966         $     4,073              71 %    $     18,986        $     13,196              44 %
% of net revenues                                8 %                 8 %                               8 %                 7 %

Sales and marketing expenses increased by $2.9 million, or approximately 71%, to $7.0 million during the three months ended September 30, 2012 from $4.1 million during the same period in 2011. This increase was due to increased personnel costs of $1.9 million (of which $0.2 million was due to stock-based compensation) which was due to a 29% headcount increase in the number of employees engaged in sales and marketing activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the three months ended September 30, 2012 as compared to the same period in 2011. General customer support and marketing and trade show related activities accounted for $0.7 million of the increase and facility costs and overhead allocations accounted for the remaining $0.3 million of the increase during the three months ended September 30, 2012 as compared to the same period in 2011.

Sales and marketing expenses increased by $5.8 million, or approximately 44%, to $19.0 million during the nine months ended September 30, 2012 from $13.2 million during the same period in 2011. This increase was due to increased personnel costs of $4.0 million (of which $0.2 million was due to stock-based compensation) which was due to a 15% average headcount increase in the number of employees engaged in sales and marketing activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the nine months ended September 30, 2012 as compared to the same period in 2011. General customer support and marketing and trade show related activities accounted for $1.3 million of the increase and facility costs and overhead allocations accounted for the remaining $0.5 million of the increase during the nine months ended September 30, 2012 as compared to the same period in 2011.

General and Administrative Expenses



                                                 Three Months Ended September 30,                      Nine Months Ended September 30,
                                             2012                2011           % Change           2012                2011           % Change
General and administrative                $     5,718         $     2,939              95 %    $     19,592        $     10,143              93 %
% of net revenues                                   6 %                 6 %                               8 %                 5 %

General and administrative expenses increased by $2.8 million, or approximately 95%, to $5.7 million during the three months ended September 30, 2012 from $2.9 million during the same period in 2011. This increase was due to increased personnel costs of $2.2 million (of which $0.3 million was due to stock-based compensation) which was due to a 79% headcount increase in the number of employees engaged in general and administrative activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the three months ended September 30, 2012 as compared to the same period in 2011. This increase was also driven by an increase in outside service and consulting costs of $1.2 million and $0.2 million of transaction related costs associated with our acquisition of the STB Business from Trident. This increase was offset by a net reduction in overhead allocation costs, facility and general costs of $0.8 million during the three months ended September 30, 2012 as compared to the same period in 2011.

General and administrative expenses increased by $9.5 million, or approximately 93%, to $19.6 million during the nine months ended September 30, 2012 from $10.1 million during the same period in 2011. This increase was driven by an increase of $4.5 million of transaction related costs associated with our acquisition of the STB Business from Trident, an increase in personnel costs of $3.7 million which was due to a 51% average headcount increase in the number of employees engaged in general and administrative activities, primarily resulting from our acquisition of the STB Business from Trident, as well as overall increase in variable compensation expenses during the three months ended and an increase in outside service and consulting costs of $2.4 million. This increase was offset by a net reduction in overhead allocation costs, facility and general costs of $1.1 million during the nine months ended September 30, 2012 as compared to the same period in 2011.


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