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IPHI > SEC Filings for IPHI > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for INPHI CORP


7-Aug-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 June 30, 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.

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 and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012, we delivered the following financial performance:

• Total revenues increased by $1.0 million, or 4%, to $24.3 million in the three months ended June 30, 2013. In the six months ended June 30, 2013, total revenues increased by $3.4 million, or 8%, to $46.9 million.

• Gross profit as a percentage of revenue slightly decreased to 63.5% from 64.3% in the three months ended June 30, 2013. In the six months ended June 30, 2013, gross profit as a percentage of revenue decreased to 63.4% from 63.8%.

• Total operating expenses increased by $2.9 million, or 18%, to $19.3 million in the three months ended June 30, 2013. In the six months ended June 30, 2013, total operating expenses increased by $5.8 million, or 18%, to $38.0 million.

• Income from operations decreased by $2.5 million, or 172%, to a loss from operations of $3.9 million in the three months ended June 30, 2013. In the six months ended June 30, 2013, income from operations decreased by $3.9 million, or 86%, to a loss from operations of $8.3 million.

• Diluted earnings per share increased by $0.01 to ($0.05) in the three months ended June 30, 2013. In the six months ended June 30, 2013, diluted earnings per share decreased by $0.20 to ($0.31).

This increase in our revenue was a result of increase in consumption of our dual, differential linear TIA, iPHY 100Gbe CMOS gearbox products and isolation memory buffer.

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 July 2012 to June 2013, we hired 70 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 increase in operating expenses.

Our cash and cash equivalents were $29.2 million at June 30, 2013, compared with $30.2 million at December 31, 2012. We generated cash flow from operations of $7.2 million during the six months ended June 30, 2013 compared to $8.1 million during the six months ended June 30, 2012. Cash used in investing activities during the six months ended June 30, 2013 was $9.0 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 $0.8 million primarily due to proceeds from exercise of stock options and employee stock purchase plan of $1.7 million and excess tax benefit on stock-based compensation of $0.5 million offset by minimum tax withholding paid on behalf of employees of $1.4 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 six months ended June 30, 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               Six Months
                                            Ended June  30,            Ended June 30,
                                           2013          2012         2013         2012
   Total revenue                              100 %        100 %         100 %       100 %
   Cost of revenue                             36           36            37          36

   Gross profit                                64           64            63          64

   Operating expense:
   Research and development                    53           42            52          43
   Sales and marketing                         15           16            16          17
   General and administrative                  12           12            13          14

   Total operating expenses                    80           70            81          74

   Income (loss) from operations              (16 )         (6 )         (18 )       (10 )
   Other income                                 1            1             1           1

   Income (loss) before income taxes          (15 )         (5 )         (17 )        (9 )
   Provision (benefit) for income taxes        (9 )          2             3          (2 )

   Net income (loss)                           (6 )%        (7 )%        (20 )%       (7 )%

Comparison of Three and Six Months Ended June 30, 2013 and 2012

Revenue



                               Three Months Ended June 30,             Change
                                2013                 2012          Amount       %
                                           (dollars in thousands)
           Total revenue   $       24,339       $       23,308     $ 1,031       4 %

                                Six Months Ended June 30,              Change
                                2013                 2012          Amount       %
                                           (dollars in thousands)
           Total revenue   $       46,923       $       43,509     $ 3,414       8 %

Total revenue for three and six months ended June 30, 2013 increased compared to corresponding 2012 periods due to changes in number of units sold and average selling price. For the three months ended June 30, 2013, number of units sold increased by 10% mainly from sale of our dual, differential linear TIA, iPHY 100Gbe CMOS gearbox products and isolation memory buffer. The increase was offset partially by decrease in average selling price of 5% due to product mix, mainly from reduction of average selling price of our high speed memory interface products. For the six months ended June 30, 2013, number of units sold and average selling price increased by 2% and 4%, respectively. The increase in number of units sold was due to sale of our dual, differential linear TIA, iPHY 100Gbe CMOS gearbox products, isolation memory buffer and high speed memory interface products. The increase in average selling price was due to product mix that resulted in an increase in sales of our higher priced products. The increase in revenue for the six months ended June 30, 2013 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 six months ended June 30, 2012.

Cost of Revenue and Gross Profit



                                                   Three Months Ended June 30,               Change
                                                   2013                  2012            Amount       %
                                                                 (dollars in thousands)
Cost of revenue                                $       8,893         $       8,332      $    561        7 %
Gross profit                                   $      15,446         $      14,976      $    470        3 %
Gross profit as a percentage of revenue                   64 %                  64 %          -        -


Table of Contents
                                                Six Months Ended June 30,                Change
                                                 2013                2012           Amount        %
                                                              (dollars in thousands)
Cost of revenue                              $     17,185        $     15,756       $ 1,429         9 %
Gross profit                                 $     29,738        $     27,753       $ 1,985         7 %
Gross profit as a percentage of revenue                63 %                64 %          -         (1 )%

Gross profit for the three and six months ended June 30, 2013 increased primarily due to increases in revenue as described above. Gross profit as a percentage of revenue was relatively unchanged for both periods as compared to the prior year.

Research and Development



                                    Three Months Ended June 30,              Change
                                     2013                 2012          Amount       %
                                                 (dollars in thousands)
     Research and development   $       12,796       $        9,910     $ 2,886       29 %

                                     Six Months Ended June 30,               Change
                                     2013                 2012          Amount       %
                                                 (dollars in thousands)
     Research and development   $       24,394       $       18,572     $ 5,822       31 %

Research and development expenses for three and six months ended June 30, 2013 increased due to the increase in research and development headcount and equity awards, which resulted in $2.1 million and $3.8 million increase in personnel costs and stock-based compensation expense, respectively. In addition, CAD software tool license expense increased by $0.5 million and $0.9 million for the three and six months ended June 30, 2013, respectively, due mainly to increased 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.

Sales and Marketing



                                Three Months Ended June 30,             Change
                                 2013                2012          Amount        %
                                             (dollars in thousands)
       Sales and marketing   $       3,706       $       3,745     ($   39 )      (1 %)

                                 Six Months Ended June 30,              Change
                                 2013                2012          Amount        %
                                             (dollars in thousands)
       Sales and marketing   $       7,653       $       7,268     $   385         5 %

Sales and marketing expenses for six months ended June 30, 2013 increased primarily due to an increase in personnel costs, including stock-based compensation expense of $0.1 million, to support sales activities.

General and Administrative



                                    Three Months Ended June 30,             Change
                                     2013                2012          Amount        %
                                                 (dollars in thousands)
    General and administrative   $       2,842       $       2,755     $    87         3 %

                                     Six Months Ended June 30,              Change
                                     2013                2012          Amount        %
                                                 (dollars in thousands)
    General and administrative   $       5,997       $       6,367     ($  370 )      (6 %)


Table of Contents

General and administrative expenses for the six months ended June 30, 2013 decreased by $0.4 million. The decrease was due to accrual of provisional costs with regard to employment and other related claims as well as associated costs of $0.7 million we recorded during the six months ended June 30, 2012. The decrease was partially offset by increase in stock-based compensation expense of $0.5 million as a result of equity awards.

Provision (benefit) for Income Taxes



                                             Three Months Ended June 30,                    Change
                                              2013                  2012             Amount           %
                                                              (dollars in thousands)
Provision (benefit) for income taxes     ($       2,211 )        $       346        $ (2,557 )        (739 )%

                                              Six Months Ended June 30,                     Change
                                              2013                  2012             Amount           %
                                                              (dollars in thousands)
Provision (benefit) for income taxes     $        1,265          ($      924 )      $  2,189           237 %

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 and six months ended June 30, 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 (benefit) for the three and six months ended June 30, 2013 reflects an effective tax rate of 60% and (16%), respectively. The effective tax rates for the three and six months ended June 30, 2013 differs 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 expense for the three and six months ended June 30, 2012 reflects an effective tax rate of (28%) and 23%, respectively. The effective tax rates for the three and six months ended June 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, and unrecognized tax benefits. For the three and six months ended June 30, 2012, the discrete method was used to calculate the interim tax expense. We determined that a calculation of an annual effective tax rate would not represent a reliable estimate due to the sensitivity of the annual effective tax rate estimate to even minimal changes to forecasted earnings for the year. Under the discrete method, we determine the tax expense based upon actual results as if the interim period were an annual period.

Liquidity and Capital Resources

As of June 30, 2013, we had cash, cash equivalents and investments in marketable securities of $118.9 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:

                                                                 Six Months
                                                               Ended June 30,
                                                             2013          2012
                                                               (in thousands)
    Net cash provided by operating activities              $  7,210      $  8,089
    Net cash used in investing activities                    (8,956 )      (4,974 )
    Net cash provided by financing activities                   762           952

    Net increase (decrease) in cash and cash equivalents   $   (984 )    $  4,067


Table of Contents

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2013 primarily reflected a decrease in accounts receivable of $2.4 million, change in income tax payable/receivable of $2.8 million, depreciation and amortization of $3.6 million and stock-based compensation of $8.3 million offset by net loss of $9.1 million and increase in inventories of $0.7 million. Our receivables decreased due to collections. Our inventories increased a result of growing production for expected delivery to customers in the third quarter of 2013.

Net cash provided by operating activities during the six months ended June 30, 2012 primarily reflected an increase in accounts payable and accrued expenses of $3.7 million, an increase in deferred revenue of $0.9 million, decrease in inventory of $0.8 million, depreciation and amortization of $2.0 million and stock-based compensation of $5.9 million offset by net loss of $3.1 million and increases in accounts receivable of $1.7 million and change in income tax payable/receivable of $0.6 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 deferred revenue increased as distributors increased their inventory level for shipment to customers in third quarter. Our inventory decreased due to shipments to customers in the last month of the quarter.

Net Cash Used in Investing Activities

Net cash used in investing activities during the six months ended June 30, 2013, consisted of cash used to purchase property and equipment of $9.7 million and purchases of marketable securities of $21.8 million, offset by sales and maturities of marketable securities of $22.5 million.

Net cash used in investing activities during the six months ended June 30, 2012, consisted of cash used to purchase property and equipment of $4.3 million and purchases of marketable securities of $18.6 million, offset by sales and maturities of marketable securities of $17.7 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2013 consisted of proceeds from exercise of stock options and employee stock purchase plan of $1.7 million and excess tax benefit related to stock-based compensation of $0.5 million, offset by minimum tax withholding paid on behalf of employees for restricted stock units of $1.4 million.

Net cash provided by financing activities during the six months ended June 30, 2012 consisted primarily of proceeds from exercise of stock options of $1.2 million.

Operating and Capital Expenditure Requirements

Our principal source of liquidity as of June 30, 2013 consisted of $118.9 million of cash, cash equivalents and investments in marketable securities, of which $6.7 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 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 . . .

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