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IPHI > SEC Filings for IPHI > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for INPHI CORP


8-May-2013

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 analog semiconductor solutions, our plans for future products, such as our isolation memory buffer, or iMB™, clock and data recovery, or CDR, complementary metal oxide semiconductor, or CMOS, 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, 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, repatriation of cash, our anticipated growth and growth strategies, interest rate sensitivity, adequacy of our disclosure controls, customer concentration, foundry constraints, competition, protection of our intellectual property, our dividend policy and our legal proceedings. 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 II, " 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 analog and mixed signal semiconductor solutions for the communications, datacenter and computing markets. Our semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications, datacenter 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, datacenters and enterprise servers, storage platforms, test and measurement equipment and military systems. We provide 40G and 100G high-speed analog semiconductor solutions for the communications market and high-speed memory interface solutions for the computing market.

We have a broad product portfolio with over 170 products as of March 31, 2013, including our 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, or 100 GbE, solutions to address bandwidth bottlenecks in next generation data center and communications infrastructures.

In the first quarter of 2013, we introduced the second generation 100G CMOS SerDes gearbox integrated circuit, or GB IC, for data center, enterprise and service provider line cards. The new GB IC with Tri-rate™ foundation is designed to enable seamless support of 10G, 40G and 100G Ethernet and optical transport network on a single line card.

A detailed discussion of our business may be found in Part I, Item 1, "Business," of our 2012 Annual Report on Form 10-K.


Table of Contents

Quarterly Update

As discussed in more detail below, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, we delivered the following financial performance:

• Total revenues increased by $2.4 million, or 12%, to $22.6 million.

• Gross profit as a percentage of revenue was consistent at 63%.

• Total operating expenses increased by $2.9 million, or 18%, to $18.7 million.

• Income from operations decreased by $1.4 million, or 46%, to a loss of $4.4 million.

• Diluted earnings per share decreased by $0.22, to $(0.27).

The increase in our revenue was a result of increase in consumption of our dual, differential linear TIA and iPHY 100Gbe CMOS CDR and gearbox products. In addition, the increase in revenue was due to a provision for estimated settlement of a warranty claim with a customer that was several years old which reduced our revenues in the three months ended March 31, 2012.

Our income from operations decreased due to increased operating expenses. 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 April 2012 to March 2013, we hired 73 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 decreased primarily due to increases in operating expenses and provision for income taxes.

Our cash and cash equivalents were $29.7 million at March 31, 2013, compared with $30.2 million at December 31, 2012. We generated cash flow from operations of $1.1 million during the three months ended March 31, 2013 compared to $0.1 million during the three months ended March 31, 2012. Cash used in investing activities during the three months ended March 31, 2013 was $4.4 million primarily due to purchases of marketable securities and purchases of property and equipment of $14.9 million offset by sales and maturities of marketable securities of $10.6 million. We generated cash flow from financing activities of $2.8 million primarily due to proceeds from exercise of stock options and employee stock purchase plan of $1.4 million and excess tax benefit on stock-based compensation of $2.0 million offset by minimum tax withholding paid on behalf of employees of $0.5 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, 2012. There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2013.


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
                                                     Ended March  31,
                                                    2013           2012
            Total revenue                              100 %         100 %
            Cost of revenue                             37            37

            Gross profit                                63            63

            Operating expense:
            Research and development                    51            43
            Sales and marketing                         18            17
            General and administrative                  14            18

            Total operating expenses                    83            78

            Income (loss) from operations              (20 )         (15 )
            Other income                                 1             1

            Income (loss) before income taxes          (19 )         (14 )
            Provision (benefit) for income taxes        15            (6 )

            Net income (loss)                          (34 )%         (8 )%

Comparison of Three Months Ended March 31, 2013 and 2012

Revenue

Three Months Ended March 31, Change
2013 2012 Amount %
(dollars in thousands)

Total revenue $ 22,584 $ 20,201 $ 2,383 12 %

Total revenue for the three months ended March 31, 2013 increased by $2.4 million primarily due to an increase of 15% in the average selling price of our products, partially offset by a decrease in the number of units sold of 6%. The increase in average selling price was due to change in product mix that resulted in an increase in sales of our higher priced products. The increase in revenue was also due to provision of $0.7 million for estimated settlement of a warranty claim with a customer that was several years old, which was recorded as reduction in revenue for the three months ended March 31, 2012.

Cost of Revenue and Gross Profit



                                                Three Months Ended March 31,                  Change
                                                2013                   2012             Amount         %
                                                                (dollars in thousands)
Cost of revenue                             $       8,292          $       7,424        $   868         12 %
Gross profit                                $      14,292          $      12,777        $ 1,515         12 %
Gross profit as a percentage of revenue                63 %                   63 %           -          -

Cost of revenue for the three months ended March 31, 2013 increased by $0.9 million primarily due to increases in revenue as described above. Gross profit as a percentage of revenue was unchanged compared to prior year.

Research and Development

Three Months Ended March 31, Change
2013 2012 Amount %
(dollars in thousands)

Research and development $ 11,598 $ 8,662 $ 2,936 34 %

Research and development expense for the three months ended March 31, 2013 increased by $2.9 million due to the increase in research and development headcount and equity awards, which resulted in a $1.8 million increase in personnel costs and stock-based compensation expense. In addition, CAD software tool license expense increased by $0.4 million as we increased the headcount of engineers. The increase in research and development expense was primarily driven by our strategy to expand our product offerings and enhance our existing products.


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Sales and Marketing

Three Months Ended March 31, Change
2013 2012 Amount %
(dollars in thousands)

Sales and marketing $ 3,947 $ 3,523 $ 424 12 %

Sales and marketing expense for the three months ended March 31, 2013 increased by $0.4 million primarily due to increase in personnel costs, including stock-based compensation expense, consulting fees and travel expense of $0.3 million to support increasing sales activities.

General and Administrative

Three Months Ended March 31, Change
2013 2012 Amount %
(dollars in thousands)

General and administrative $ 3,155 $ 3,612 $ (457 ) (13 )%

General and administrative expenses for the three months ended March 31, 2013 decreased by $0.5 million. The decrease was due to accrual of provisional costs with regard to employment and other related claims as well as associated costs of $0.8 million we recorded during the three months ended March 31, 2012. The decrease was partially offset by increase in stock-based compensation expense of $0.4 million as a result of equity awards.

Provision (benefit) for Income Tax

Three Months Ended March 31, Change
2013 2012 Amount %
(dollars in thousands)

Provision (benefit) for income tax $ 3,476 $ (1,270 ) $ 4,746 374 %

We normally determine our interim provision using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. We incurred pretax loss during the three months ended March 31, 2013 and will not recognize tax benefit of the losses due to full valuation allowance established against deferred tax assets in the U.S. and Singapore. Thus, separate effective tax rate was applied to losses from each loss jurisdiction to compute the interim tax expense.

The income tax expense of $3.5 million for the three months ended March 31, 2013 reflects an effective tax rate of (83%). This effective tax rate for the three months ended March 31, 2013 differed from the statutory rate of 35% primarily due to the change in valuation allowance (originally established in the fourth quarter of 2012), foreign income taxes provided at lower rates, geographic mix in profitability, unrecognized tax benefits and stock-based compensation adjustments.

The income tax benefit of $1.3 million for the three months ended March 31, 2012 reflects an effective tax rate of 46%. This effective tax rate for the three months ended March 31, 2012 differed 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 March 31, 2013, we had cash, cash equivalents and investments in marketable securities of $121.6 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.


Table of Contents

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

                                                                Three Months
                                                              Ended March 31,
                                                             2013          2012
                                                               (in thousands)
    Net cash provided by operating activities              $  1,097      $     97
    Net cash used in investing activities                    (4,362 )      (2,768 )
    Net cash provided by financing activities                 2,840         2,341

    Net increase (decrease) in cash and cash equivalents   $   (425 )    $   (330 )

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the three months ended March 31, 2013 primarily reflected a decrease in accounts receivable of $1.8 million, increase in deferred revenue of $0.3 million, change in income tax payable/receivable of $2.9 million, depreciation and amortization of $1.7 million, deferred income taxes and deferred tax charge of $0.7 million and stock-based compensation of $4.0 million partially offset by net loss of $7.7 million, decrease in accrued expenses of $1.1 million and excess tax benefit related to stock-based compensation of $2.0 million. Our accounts receivable decreased due to collections. Our deferred revenue increased due to shipment to distributors to meet the demands of end customers in the second quarter. Our accrued expenses decreased as a result of payment of employee related costs.

Net cash provided by operating activities during the three months ended March 31, 2012 primarily reflected an increase in accounts payable and accrued expenses of $2.6 million, depreciation and amortization of $0.8 million, stock-based compensation of $2.6 million and deferred income taxes of $0.9 million partially offset by net loss of $1.5 million, increases in accounts receivable of $1.1 million, inventories of $0.6 million and prepaid expense and other assets of $0.6 million, and change in income tax payable/receivable of $2.2 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 receivables increased due to shipments made in the last month of the quarter. Our inventories increased due to increasing forecasted sales for second quarter of 2012 and prepaid expenses increased as a result of new subscriptions and prepayments to vendors based on the agreements we entered into.

Net Cash Used in Investing Activities

Net cash used in investing activities during the three months ended March 31, 2013, consisted of cash used to purchase property and equipment of $3.7 million and purchases of marketable securities of $11.2 million, offset by sales and maturities of marketable securities of $10.6 million.

Net cash used in investing activities during the three months ended March 31, 2012, consisted of cash used to purchase property and equipment of $1.8 million and purchases of marketable securities of $9.3 million, 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 three months ended March 31, 2013 consisted of proceeds from exercise of stock options and employee stock purchase plan of $1.4 million and excess tax benefit related to stock-based compensation of $2.0 million, offset by minimum tax withholding paid on behalf of employees for restricted stock units of $0.5 million.

Net cash provided by financing activities during the three months ended March 31, 2012 consisted of proceeds from exercise of stock options of $1 million and excess tax benefit related to stock-based compensation of $1.4 million.

Operating and Capital Expenditure Requirements

Our principal source of liquidity as of March 31, 2013 consisted of $121.6 million of cash, cash equivalents and investments in marketable securities, of which $7.2 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 operating activities. We would then be required to use existing cash and cash


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equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.

We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United States. There may be adverse tax effects upon repatriation of these funds to the United States.

Recent Authoritative Accounting Guidance

See note 2 of the notes to our unaudited condensed consolidated financial statements for information regarding recently issued accounting pronouncements.

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