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SIMG > SEC Filings for SIMG > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for SILICON IMAGE INC


9-May-2013

Quarterly Report


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

This report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q entitled "Risk Factors," that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements.
Forward-looking statements within this Form 10-Q are identified by words such as "believes," "anticipates," "expects," "intends," "estimates," "may," "will" and variations of such words and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

Silicon Image and the Silicon Image logo are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and other countries. All other trademarks and registered trademarks are the property of their respective owners.

Company 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.


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Concentrations

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our largest customer generated 40.8% and 34.3% of our revenues for the three months ended March 31, 2013 and 2012, respectively. In addition, our top five customers, including distributors, generated 65.2% and 62.8% of our revenue for three months ended March 31, 2013 and 2012, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third party manufacturers or distributors to provide purchasing and inventory management services. Revenue generated through distributors was 30.2% of our total revenue for both the three months ended March 31, 2013 and 2012. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenue, we would expect a decrease in the percentage of our total revenue generated through distributors.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and accompanying notes. For a discussion of the critical accounting estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations

REVENUE



                                             Three Months Ended March 31,
                                            2013           2012        Change
                                                (dollars in thousands)
           Product revenue
           Mobile                        $   33,603      $ 22,256         51.0 %
           Consumer Electronics              13,667        16,511        -17.2 %
           Personal Computers                 3,071         4,257        -27.9 %

           Total product revenue             50,341        43,024         17.0 %
           Percentage of total revenue         81.1 %        78.2 %
           Licensing revenue                 11,698        11,979         -2.3 %
           Percentage of total revenue         18.9 %        21.8 %

           Total revenue                 $   62,039      $ 55,003         12.8 %

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 for the three months ended March 31, 2013 when compared to the same period in 2012 was primarily due to the continued success of our MHL product line. We have seen increased shipments of these products quarter after quarter since their introduction in the latter part of fiscal year 2010. Our MHL products represent the majority of our mobile revenue. For the first quarter of fiscal 2013, mobile revenue represented 66.8% of our total product revenue. The decrease in our CE revenue for the three months ended March 31, 2013 when compared to the same period in 2012 was primarily the result of a broad-based market shift to lower-end DTV products that incorporate our HDMI semiconductor products less frequently. We expect products that incorporate both MHL and HDMI to represent a larger portion of our CE revenue going forward. Our PC revenue continued to decline as we are no longer making any investments in these legacy products.

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 decrease in licensing revenue for the three months ended March 31, 2013 when compared to the same period in 2012 is primarily the result of lower revenue from settlements being closed in this period as compared to the same period last year, offset by an increase in the HDMI adopter base due to the continued adoption of the HDMI standard. Our licensing revenue may fluctuate quarter to quarter as a result of the timing of completion of IP license arrangements and related settlement of royalty audits.


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Revenue by Geography Based on Customers' Headquarters



                                      Three Months Ended March 31,
                                     2013            2012       Change
                                         (dollars in thousands)
                  Asia-Pacific    $   51,289       $ 47,625         7.7 %
                  United States        5,038          3,048        65.3 %
                  Europe               5,487          3,975        38.0 %
                  Others                 225            355       -36.7 %

                  Total revenue   $   62,039       $ 55,003        12.8 %

The increase in revenues in Asia-Pacific or APAC, which includes Japan and Korea, for the three months ended March 31, 2013, compared to the same period in 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 the United States for the three months ended March 31, 2013, compared to the same period in 2012, was primarily due to increased demand for our CE transmitter and receiver products and increased licensing revenue. The increase in revenues in Europe for the three months ended March 31, 2013 compared to the same period in 2012 was primarily due to increased demand for our legacy control module business, which is part of our PC category.

For the break-down of the revenue by countries based on customers' headquarters, please refer to note 10 of Notes to Condensed Consolidated Financial Statements under Part I Item 1 of this Form 10-Q.

COST OF REVENUE AND GROSS PROFIT



                                                      Three Months Ended March 31,
                                                     2013           2012        Change
                                                         (dollars in thousands)
  Cost of product revenue (1)                     $   25,798      $ 23,099         11.7 %
  Product gross profit                                24,543        19,925         23.2 %
  Product gross profit margin                           48.8 %        46.3 %

  (1) Includes stock-based compensation expense   $      135      $    218
  Cost of licensing revenue                       $      267      $    125        113.6 %
  Licensing gross profit                              11,431        11,854         -3.6 %
  Licensing gross profit margin                         97.7 %        99.0 %
  Total cost of revenue                           $   26,065      $ 23,224         12.2 %
  Total gross profit                                  35,974        31,779         13.2 %
  Total gross profit margin                             58.0 %        57.8 %

Cost of Product 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 for the three months ended March 31, 2013 increased compared to the same period in 2012 was primarily due to the growth in revenue volume.

Product Gross Margin

Our product gross margin increased primarily due to average product cost reductions exceeding average selling price reductions. The decrease in product cost is primarily due to a decrease 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.


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Licensing Gross Margin

Licensing gross margin during the three months ended March 31, 2013 was comparable to the licensing gross margin in the same period in 2012.

OPERATING EXPENSES

Research and Development (R&D)



                                                              Three Months Ended March 31,
                                                          2013               2012          Change
                                                         (dollars in thousands)
Research and development (1)                          $      18,558        $ 21,707          -14.5 %
Percentage of total revenue                                    29.9 %          39.5 %

(1)  Includes stock-based compensatio n expense       $       1,018        $  1,160

R&D expense consists primarily of employee compensation and benefits, including stock-based compensation, fees for independent contractors, cost of software tools used for designing and testing our products and costs associated with prototype materials. The decrease in R&D expense for the three months ended March 31, 2013 when compared to the same period in 2012 was primarily due to the transition of 75 consultants in India to full time engineers of Silicon Image resulting in lower consultant cost of $2.7 million. Our R&D headcount as of March 31, 2013 was 359 employees as compared to 336 employees as of March 31, 2012 primarily due to the expansion of our R&D capabilities in India.

Selling, General and Administrative (SG&A)



                                                             Three Months Ended March 31,
                                                        2013               2012           Change
                                                        (dollars in thousands)
Selling, general and administrative (1)              $    16,402         $ 16,137             1.6 %
Percentage of total revenue                                 26.4 %           29.3 %

(1)  Includes stock-based compensation expense       $     1,771         $  1,910

SG&A expense consists primarily of compensation and benefits, including stock-based compensation, sales commissions, professional fees, and marketing and promotional expenses. SG&A expense during the three months ended March 31, 2013 increased when compared to the same period in 2012 was primarily due to an increase in compensation related expenses of $1.0 million driven by headcount growth and an increase in consultant expenses, trade show expenses and bad debt expenses of $0.7 million, partially offset by lower personal time-off and stock-based compensation expenses. Our SG&A headcount as of March 31, 2013 was 208 employees as compared to 189 employees as of March 31, 2012.

Amortization of Acquisition-Related Intangible Assets



                                                Three Months Ended March 31,
                                             2013              2012        Change
                                            (dollars in thousands)
      Amortization of intangible assets   $      251         $    496        -49.4 %
      Percentage of total revenue                0.4 %            0.9 %

The decrease in amortization expense for the three months ended March 31, 2013 when compared to the same period in 2012 was primarily due to the correction of certain errors related to intangible assets that were made in the fourth quarter of 2012. These adjustments reduced the carrying value of intangible assets as of December 31, 2012, and thus resulted in reduced amortization expense in the three months ended March 31, 2013.


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Interest Income and Other, net



                                               Three Months Ended March 31,
                                            2013              2012        Change
                                           (dollars in thousands)
        Interest income and other, net   $      391         $    538        -27.3 %
        Percentage of total revenue             0.6 %            1.0 %

The interest and other income for the three months ended March 31, 2013 decreased as compared to the same period last year primarily due to lower interest income on lower cash invested in short-term investments.

Provision for Income Taxes



                                             Three Months Ended March 31,
                                          2013              2012        Change
                                         (dollars in thousands)
         Income tax expense            $     1,742         $ 2,948        -40.9 %
         Percentage of total revenue           2.8 %           5.4 %

The effective tax rate for the three months ended March 31, 2013 was 150%. The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign withholding taxes associated with licensing revenue.

The effective tax rates for the three months ended March 31, 2012 was (48.9%). The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign taxes (including foreign withholding taxes), a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital, and state taxes.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

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).

                                         March 31, 2013           December 31, 2012           Change
Cash and cash equivalents               $         45,964         $            29,069         $ 16,895
Short term investments                            70,522                      78,398           (7,876 )

Total cash, cash equivalents and
short term investments                  $        116,486         $           107,467         $  9,019
Percentage of total assets                          48.5 %                      47.4 %
Total current assets                    $        178,939         $           165,617         $ 13,322
Total current liabilities                        (51,956 )                   (42,815 )         (9,141 )

Working capital                         $        126,983         $           122,802         $  4,181

As of March 31, 2013, $11.6 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 increase in current assets at March 31, 2013 as compared to December 31, 2012 was primarily due to a $9.0 million increase in total cash and cash equivalents and short-term investments, $3.1 million increase in accounts receivable and $3.0 million increase in inventory, partially offset by a decrease in prepaid expenses and other assets. The increase in accounts receivable was primarily due to revenue growth and timing of invoicing relative to the quarter end over collections during the three months ended March 31, 2013. The increase in inventory was primarily to meet the anticipated revenue levels for the next quarter. The decrease in prepaid expenses and other current assets was primarily due to amortization of prepaid software maintenance and a decrease in prepaid trade show.

The net increase in current liabilities at March 31, 2013 as compared to December 31, 2012 was mainly due to an $8.3 million increase in accounts payable and $2.9 million increase in deferred margin on sales to distributors, partially offset by a $2.5 million decrease in accrued and other current liabilities. The increase in accounts payable was primarily due to the increased payables related to our inventory purchases. The increase in deferred margin on sales to distributors was mainly due to the increasing shipment to our distributors driven by the acceleration of demand for our products while the decrease in accrued and other current liabilities was mainly attributable to a decrease in accrued vacation as we changed the personal time-off policy for U.S exempt salaried employees starting on January 1, 2013 and paid off all previously accrued personal time-off to our employees.

Summary of Cash Flows. The table below summarizes the cash and cash equivalents provided by (used in) in our operating, investing and financing activities (in thousands).

                                                           Three Months Ended March 31,
                                                           2013                   2012
Cash provided by (used in) operating activities        $       9,030          $      (5,002 )
Cash provided by investing activities                          6,083                  1,043
Cash provided by financing activities                          1,916                  1,331
Effect of exchange rate changes on cash and cash
equivalents                                                     (134 )                  (26 )

Net increase (decrease) in cash and cash
equivalents                                            $      16,895          $      (2,654 )

Operating Activities

Cash provided by operating activities is generated by net loss adjusted for certain non-cash items and changes in assets and liabilities.

During the three months ended March 31, 2013, we incurred a net loss of $581,000 which included non-cash charges of approximately $6.1 million (primarily related to stock based compensation, depreciation and amortization). Changes in assets and liabilities that generated cash were primarily prepaid expenses and other current assets, accounts payable 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 three months ended March 31, 2012, we incurred a net loss of $9.6 million which included non-cash charges of approximately $6.8 million (primarily related to stock based compensation, depreciation and amortization). Changes in assets and liabilities that generated cash were primarily prepaid expenses and other current assets, accounts payable 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.

Investing Activities

Cash provided by our investing activities during the three months ended March 31, 2013 was primarily a result of the $7.6 million net proceeds from the sales and maturities of short-term investments, partially offset by $0.8 million used for capital expenditures, $300,000 used for strategic business investment and $378,000 used for purchases of intellectual properties.

Cash provided by our investing activities during the three months ended March 31, 2012 was primarily a result of the $7.2 million net proceeds from the sales and maturities of short-term investments, partially offset by $2.2 million used for capital expenditures, $3.5 million used for strategic business investment and $500,000 used for other investing activities.

We are not a capital-intensive business. Our purchases of property and equipment relate mainly to testing equipment, leasehold improvements and information technology infrastructure.


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Financing Activities

Cash generated from our financing activities during the three months ended . . .

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