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IPHI > SEC Filings for IPHI > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for INPHI CORP


7-Nov-2012

Quarterly Report


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

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Report. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the terms "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements relate to future periods and include statements regarding our anticipated trends and challenges in our business and the markets in which we operate, including the market for 40G and 100G high-speed mixed signal and analog semiconductor solutions, our plans for future products, such as our isolation memory buffer, or iMB™, clock and data recovery, or CDR, and serializer/deserializer, or SerDes, products, our transimpedance amplifier, or TIA products, our quad linear driver products, expansion of our product offerings and enhancements of existing products, our expectations regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits of our products and services, timing of the development of our products, our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing, our anticipated growth and growth strategies, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as factors affecting our results of operations, our ability to manage our growth, our ability to sustain or increase profitability, demand for our solutions, the effect of declines in average selling prices for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the semiconductor industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including the risks set forth under Part I, " Item 1A, Risk Factors". Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's opinions only as of the date hereof. These forward-looking statements speak only as of the date of this Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

All references to "Inphi," "we," "us" or "our" mean Inphi Corporation.

Inphi®, iMB™ and the Inphi logo are trademarks or service marks owned by Inphi. All other trademarks, service marks and trade names appearing in this report are the property of their respective owners.

Overview

Our Company

We are a fabless provider of high-speed mixed signal semiconductor solutions for the communications and computing markets. Our end-to-end data transport platform delivers high signal integrity at leading-edge data speeds, addressing performance and bandwidth bottlenecks in networks, from fiber to memory. Our solutions minimize latency in computing environments and enable the rollout of next generation communications and computing infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment, datacenter and enterprise servers and storage platforms. We provide 40G and 100G high-speed mixed signal semiconductor solutions for the communications market and high-speed memory interface solutions for the computing market.

We have a broad product portfolio with 19 product lines and over 200 products as of September 30, 2012, including our new 100 GbE CMOS SerDes architecture, or iPHY, which is designed to enable the development of next generation low power and high port density 100 Gigabit Ethernet (100 GbE) solutions to address bandwidth bottlenecks in next generation data center and communications infrastructures.

In 2012, we started shipping samples of the IN3250TA, the first transimpedance amplifier, or TIA, for 100G reconfigurable colorless networks. We also introduced the industry's first quad linear driver designed for linear transmitters to enable next-generation 100G/400G coherent systems to address the need for higher speed, higher performance networking infrastructure. We also began shipping in production volume our lowest power integrated phase lock loop and register buffer, which is shipping in the form of product number INSSTE32882XV.

A detailed discussion of our business may be found in Part I, Item 1, "Business," of our 2011 Annual Report on Form 10-K.


Table of Contents

Quarterly Update

As discussed in more detail below, for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, we delivered the following financial performance:

• Total revenue increased by $8.3 million, or 50%, to $24.8 million in the three months ended September 30, 2012. In the nine months ended September 30, 2012, total revenues increased by $6.3 million, or 10%, to $68.3 million.

• Gross profit as a percentage of revenue increased to 64.7% from 60.1% in the three months ended September 30, 2012. In the nine months ended September 30, 2012, gross profit as a percentage of revenue increased to 64.1% from 63.8%.

• Total operating expenses increased by $3.4 million, or 26%, to $16.8 million in the three months ended September 30, 2012. In the nine months ended September 30, 2012, total operating expenses increased by $11.8 million, or 32%, to $49.0 million.

• Loss from operations decreased by $2.7 million, or 77%, to a loss from operations of $0.8 million in the three months ended September 30, 2012. In the nine months ended September 30, 2012, income from operations decreased by $7.6 million, or 323%, to a loss from operations of $5.3 million.

• Diluted earnings per share increased by $0.06 to ($0.04) in the three months ended September 30, 2012. In the nine months ended September 30, 2012, diluted earnings per share decreased by $0.23 to ($0.15).

The increase in our revenue for the three and nine months ended September 30, 2012 was a result of an increase in demand for our high speed memory interface products, transimpedance- amplifiers and isolation memory buffer.

Total operating expenses increased due primarily to an increase in headcount and stock-based compensation expense. Our expenses primarily consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-based compensation. From October 2011 to September 2012, we hired 62 new employees, primarily in the engineering department. We expect expenses to continue to increase in absolute dollars as we continue to invest resources to develop more products and to support the growth of our business. Our diluted earnings per share changed primarily due to fluctuations in revenues and operating expenses.

Our cash and cash equivalents were $31.7 million at September 30, 2012, compared with $29.7 million at December 31, 2011. We generated cash flow from operations of $5.9 million during the nine months ended September 30, 2012 compared to $5.0 million during the nine months ended September 30, 2011. Cash used in investing activities during the nine months ended September 30, 2012 was $8.5 million primarily due to purchases of marketable securities and purchases of property and equipment offset by sales and maturities of marketable securities. We generated cash flow from financing activities of $4.5 million primarily due to proceeds from exercise of stock options and employee stock purchase plan of $2.6 million and excess tax benefit of stock-based compensation of $2.1 million.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, goodwill valuation, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2012.


Table of Contents

Results of Operations

The following table sets forth a summary of our statement of operations as a
percentage of each line item to the revenue:



                                                   Three Months                        Nine Months
                                               Ended September 30,                 Ended September 30,
                                              2012               2011             2012               2011
Total revenue                                    100 %             100 %             100 %             100 %
Cost of revenue                                   35                40                36                36

Gross profit                                      65                60                64                64

Operating expense:
Research and development                          42                42                43                33
Sales and marketing                               13                23                15                16
General and administrative                        13                15                14                11

Total operating expenses                          68                80                72                60

Income (loss) from operations                     (3 )             (20 )              (8 )               4
Other income                                       1                -                  1                -

Income (loss) before income taxes                 (2 )             (20 )              (7 )               4
Provision (benefit) for income taxes               2                (4 )              (1 )               1

Net income (loss)                                 (4 )%            (16 )%             (6 )%              3 %

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

Revenue

Three Months Ended September 30, Change
2012 2011 Amount %
(dollars in thousands)

Total revenue $ 24,762 $ 16,482 $ 8,280 50 %

Nine Months Ended September 30, Change 2012 2011 Amount %

(dollars in thousands)

Total revenue $ 68,271 $ 61,987 $ 6,284 10 %

Total revenue for three and nine months ended September 30, 2012 increased compared to corresponding 2011 periods due to increase in demand for our high speed memory interface products, transimpedance- amplifiers and isolation memory buffer of $7.6 million and $8.8 million, respectively. The increase in revenue for the nine months ended September 30, 2012 was partially offset by the discontinuance of legacy products supported by our Taiwan subsidiary of $1.3 million and settlement of a warranty claim with a customer that was several years old for $0.8 million.

Cost of Revenue and Gross Profit



                                                Three Months Ended September 30,              Change
                                                   2012                   2011           Amount       %
                                                                (dollars in thousands)
Cost of revenue                               $         8,734         $       6,573      $ 2,161       33 %
Gross profit                                  $        16,028         $       9,909      $ 6,119       62 %
Gross profit as a percentage of revenue                    65 %                  60 %         -         5 %


Table of Contents
                                               Nine Months Ended September 30,               Change
                                                 2012                   2011            Amount        %
                                                               (dollars in thousands)
Cost of revenue                             $       24,490         $       22,418       $ 2,072         9 %
Gross profit                                $       43,781         $       39,569       $ 4,212        11 %
Gross profit as a percentage of revenue                 64 %                   64 %          -         -

Gross profit for the three and nine months ended September 30, 2012 increased primarily due to increases in revenue as described above. The increase in gross profit as a percentage of revenue in the three months ended September 30, 2012 was due to a write off of developed technology intangible asset of our Taiwan subsidiary as a result of restructuring of our Taiwan subsidiary in the three months ended September 30, 2011. Gross profit as a percentage of revenue was unchanged for the nine months ended September 30, 2012 as compared to prior year.

Research and Development

Three Months Ended September 30, Change
2012 2011 Amount %
(dollars in thousands)

Research and development $ 10,500 $ 6,951 $ 3,549 51 %

Nine Months Ended September 30, Change 2012 2011 Amount %

(dollars in thousands)

Research and development $ 29,072 $ 20,612 $ 8,460 41 %

Research and development expenses for three and nine months ended September 30, 2012 increased due to the increase in research and development headcount and equity awards, which resulted in $2.3 million and $5.2 million increase in personnel costs and stock-based compensation expense, respectively. In addition, packaging and pre-production engineering mask costs increased by $0.4 million and $1.5 million, and consulting fees increased by $0.6 million and $1.6 million for the three and nine months ended September 30, 2012, respectively. The increase in research and development expense was primarily driven by our strategy to expand our product offerings and enhance our existing products. Specifically, we accelerated the development of our products for next generation communications networks and high-speed memory interfaces.

Sales and Marketing

Three Months Ended September 30, Change
2012 2011 Amount %
(dollars in thousands)

Sales and marketing $ 3,079 $ 3,886 $ (807 ) (21 )%

Nine Months Ended September 30, Change 2012 2011 Amount %

(dollars in thousands)

Sales and marketing $ 10,347 $ 9,605 $ 742 8 %

Sales and marketing expenses for three months ended September 30, 2012 decreased primarily due to a write off of customer relationship intangible asset taken as a result of restructuring of our Taiwan subsidiary in the three months ended September 30, 2011. Sales and marketing expenses for the nine months ended September 30, 2012 increased primarily due to an increase in personnel costs, including stock-based compensation expense, consulting and recruiting fees of $1.3 million to support sales activities offset by write-off of customer relationship intangible asset of $0.7 million.


Table of Contents

General and Administrative



                                  Three Months Ended September 30,               Change
                                    2012                     2011           Amount       %
                                                  (dollars in thousands)
 General and administrative   $          3,263         $          2,570     $   693       27 %

                                   Nine Months Ended September 30,               Change
                                    2012                     2011           Amount       %
                                                  (dollars in thousands)
 General and administrative   $          9,630         $          6,989     $ 2,641       38 %

General and administrative expenses for the three and nine months ended September 30, 2012 increased primarily due to an increase in personnel costs and legal fees. Personnel costs, including stock-based compensation expense increased by $0.6 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, due to an increase in headcount and equity awards. In addition, we recorded an accrual of costs with regard to employment and other related claims as well as associated costs of $0.2 million and $1.0 million during the three months and nine months ended September 30, 2012, respectively. Outside legal fees increased by $0.3 million for the nine months ended September 30, 2011, related primarily to litigation matters described in note 13 of the notes to our unaudited condensed consolidated financial statements.

Provision (benefit) for Income Taxes



                                            Three Months Ended September 30,                   Change
                                              2012                     2011             Amount           %
                                                                (dollars in thousands)
Provision (benefit) for income taxes     $          471           $         (725 )      $ 1,196           165 %

                                             Nine Months Ended September 30,                   Change
                                              2012                     2011             Amount           %
                                                                (dollars in thousands)
Provision (benefit) for income taxes     $         (453 )         $          424        $  (877 )        (207 )%

The income tax expense for the three and nine months ended September 30, 2012 reflects an effective tax rate of (81%) and 10%, respectively. The effective tax rates for the three and nine months ended September 30, 2012 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates, geographic mix in profitability, recognition of research and development credits, unrecognized tax benefits and stock-based compensation adjustments. The income tax expense for the three and nine months ended September 30, 2011 reflects an effective tax rate of 22% and 16%, respectively. The effective tax rates for the three and nine months ended September 30, 2011 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates, geographic mix in profitability, recognition of research and development credits, unrecognized tax benefits and stock-based compensation adjustments.

Liquidity and Capital Resources

As of September 30, 2012, we had cash, cash equivalents and investments in marketable securities of $122.7 million. Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the payment cycles of our major customers.

The following table summarizes our cash flows for the periods indicated:

                                                                Nine Months
                                                            Ended September 30,
                                                            2012           2011
                                                               (in thousands)
   Net cash provided by operating activities              $   5,904      $   5,020
   Net cash used in investing activities                     (8,456 )      (93,682 )
   Net cash provided by financing activities                  4,507          6,879
   Effect of currency exchange rate on cash                      -              (1 )

   Net increase (decrease) in cash and cash equivalents   $   1,955      $ (81,784 )


Table of Contents

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2012 primarily reflected an increase in accounts payable and accrued expenses of $1.3 million, an increase in deferred revenue of $0.5 million, decrease in inventory of $1.1 million, change in income tax payable/receivable of $0.8 million, depreciation and amortization of $3.1 million, stock-based compensation of $9.3 million, amortization of premium in marketable securities of $0.9 million offset by net loss of $4.1 million and increases in accounts receivable of $3.6 million, deferred income taxes of $1.3 million and excess tax benefit related to stock-based compensation of $2.1 million. Our accounts payable and accrued expenses increased as a result of increased production volume, provision for warranty costs, employment and other related claims. Our deferred revenue increased as distributors increased their inventory level for shipment to customers in fourth quarter. Our inventory decreased due to shipments to customers in the last month of the quarter. Our receivables increased due to shipments made in the last month of the quarter.

Net cash provided by operating activities for the nine months ended September 30, 2011 primarily reflected net income of $2.2 million, change in income tax payable/receivable of $5.4 million, depreciation and amortization of $2.4 million, stock-based compensation of $4.9 million and assets written off of $1.5 million, offset by increases to inventories of $1.7 million and prepaid expenses and other assets of $0.7 million, decreases to accounts payable of $0.5 million and deferred revenue of $0.9 million, deferred income taxes of $5.0 million and excess tax benefit related to stock-based compensation of $2.7 million. Our inventories increased as a result of growing production for expected delivery to customers in the fourth quarter of 2011. Our prepaid expenses and other assets increased as a result of new subscriptions with vendors and related prepayments. Our accounts payable decreased due to payments to vendors. Our deferred revenue decreased as distributors reduced their inventory levels and shipped parts to end customers to meet their demand.

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2012, consisted of cash used to purchase property and equipment of $6.7 million and purchases of marketable securities of $33.7 million, offset by sales and maturities of marketable securities of $31.7 million.

During the nine months ended September 30, 2011, net cash used in investing activities consisted of cash used to purchase investments in marketable securities of $97.5 million and property and equipment of $4.5 million mainly for laboratory equipment and leasehold improvements for our offices in California, offset by sales and maturities of marketable securities of $8.3 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2012 consisted primarily of proceeds from exercise of stock options and employee stock purchase plan of $2.6 million and excess tax benefit related to stock-based compensation of $2.1 million.

Net cash provided by financing activities during the nine months ended September 30, 2011 consisted primarily of $2.7 million excess tax benefit related to stock-based compensation, net proceeds from secondary offering of $1.0 million and proceeds from the exercise of stock options and warrants of $4.2 million. In addition, we also paid $1.1 million of expenses related to our initial public offering.

Operating and Capital Expenditure Requirements

Our principal source of liquidity as of September 30, 2012 consisted of $122.7 million of cash, cash equivalents and investments in marketable securities, of which $5.4 million is held by our foreign subsidiaries. Based on our current operating plan, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 to 18 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described in Part II, Item 1A, Risk Factors. If any of these risks occur, we may be unable to generate or sustain positive cash flow from . . .

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