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ENTR > SEC Filings for ENTR > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for ENTROPIC COMMUNICATIONS INC

Form 10-Q for ENTROPIC COMMUNICATIONS INC


5-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended December 31, 2012 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K, or Annual Report, filed with the Securities and Exchange Commission, or SEC on March 1, 2013.

Forward-Looking Statements
All statements included in this Quarterly Report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements concerning our ability to return to profitability; our acquisitions or plans for future acquisitions; the competitive nature of the markets in which we compete and the effect of competing products and technologies; the demand for our solutions; the adoption of our technologies and the Multimedia over Coax Alliance, or MoCA, standard; the competitive nature of service providers; our dependence on manufacturers, sales representatives, distributors and other third parties; our ability to create and introduce new solutions and technologies; our ability to effectively manage our growth; our ability to successfully acquire companies or technologies that would complement our business; the ability of our contract manufacturers to produce and deliver products in a timely manner and at satisfactory prices; our ability to protect our intellectual property and avoid infringement of the intellectual property of others; our reliance on our key personnel; the effects of government regulation; our ability to obtain sufficient capital to expand our business; our ability to manage our business in the midst of a fragile economy; the cyclical nature of our industry; our ability to effectively transact business in foreign countries; and our ability to maintain effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002.
The forward-looking statements contained in this Quarterly Report are based on our current expectations, estimates, approximations and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing" and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report, and in our other filings with the SEC. These forward-looking statements reflect our management's belief and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report . We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements in this Quarterly Report or in our other filings with the SEC.
In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.
In this Quarterly Report, "Entropic Communications, Inc.," "Entropic Communications," "Entropic," the "Company," "we," "us" and "our" refer to Entropic Communications, Inc. and its subsidiaries, taken as a whole, unless otherwise noted.


Table of Contents

Overview
Entropic is a world leader in semiconductor solutions for the connected home. We transform how traditional HDTV broadcast and Internet Protocol, or IP, -based streaming video content is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home. Entropic's next-generation Set-top Box, or STB, System-on-a-Chip, or SoC, and home connectivity, or Connectivity, solutions enable global Pay-TV operators to offer consumers more captivating whole-home entertainment experiences by evolving the way digital entertainment is delivered, connected and consumed - in the home and on the go.
We are recognized as the only pure-play platform semiconductor company in connected home entertainment. Our platform semiconductor solutions provide a unified vision for how our core silicon can be leveraged in reference hardware and software coupled with middleware and applications to enhance consumers' overall digital entertainment experiences. Our platform solutions power next-generation TV engagement experiences by:
• Reliably delivering broadcast and IP content into the home with our end-to-end Satellite and Broadband Access solutions;

• Seamlessly connecting digital entertainment to consumer devices throughout the home via a dependable MoCA® (Multimedia over Coax Alliance) backbone; and

• Ensuring consumers can securely consume rich digital entertainment with our advanced, open standards-based media processing SoC solutions.

The Entropic platform is at the heart of the digital entertainment ecosystem - connecting technologies, applications, services and people. Looking specifically at products, we offer a diverse portfolio of STB SoC and Connectivity solutions that include the following:
• STB SoC Solutions: We added STB SoC solutions to our product offerings in April 2012, when we completed the acquisition of assets related to the STB business of Trident Microsystems, Inc., or Trident. The acquired assets included a diverse STB product portfolio, comprised of a comprehensive suite of digital STB components and system solutions for the worldwide satellite, terrestrial, cable and IP television, or IPTV, markets. Our STB products primarily consist of STB SoCs, but also include DOCSIS modems, interface devices and media processors. In addition to traditional standard-definition, or SD, STBs and advanced high-definition, or HD, STBs, many of these products feature ARM ® application processor-based SoCs that have been optimized for leading Web technologies.

• Connectivity Solutions: Our Connectivity solutions enable access to broadcast and IPTV services as well as deliver and distribute other media content, such as movies, music, games and photos, throughout the home and include:

•            Home networking solutions based on the MoCA standard which use
             existing coaxial cable to create a robust IP-based network for easy
             sharing of HD video and other multimedia content throughout
             the home;


•            High-speed broadband access solutions which use coaxial cable
             infrastructure to deliver "last few hundred meter" connectivity for
             high-speed broadband access to single-family homes and multiple
             dwelling units; and


•            Direct Broadcast Satellite outdoor unit, or DBS ODU, solutions which
             consist of our band translation switch, or BTS, and channel stacking
             switch, or CSS, products which simplify the installation required to
             support simultaneous reception of multiple channels from multiple
             satellites over a single cable. Adding to our breadth of DBS ODU
             offerings, in July 2012, we acquired specific direct broadcast
             satellite intellectual property and corresponding technologies from
             PLX Technology, Inc. or PLX, a leading global supplier of high-speed
             connectivity solutions enabling emerging data center architectures.
             The purchased assets provided an accelerated roadmap for our digital
             channel stacking switch, or dCSS, semiconductor product, which will
             ultimately lead toward highly-integrated products that incorporate
             broadband capture and IP output.


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In June 2013, we enhanced our analog mixed signal expertise, ultimately strengthening our competitive product offering in both the cable and satellite markets through the acquisition of Mobius. Mobius' technology blends signal processing with analog circuit design to dramatically reduce power dissipation while attaining leading-edge performance. The addition of the Mobius technology will enable Entropic to provide cable and satellite operators with solutions that encompass system designs that are low power, broadband, high-speed, and which capture the full bandwidth of the signal payload - to drive more entertainment streams and IP services to more connected devices in the home. This technology can also be leveraged by global satellite service providers to migrate to digital single-wire communications.
Our products allow telecommunications carriers, cable operators, DBS ODU, over-the-air, and over-the-top, or OTT, service providers, which we collectively refer to as service providers, to enhance and expand their service offerings and reduce deployment costs in an increasingly competitive environment. Our STB SoC and Connectivity solutions are now being deployed into consumer homes to support advanced services such as multi-room DVR, HD video calling, and OTT content delivery. Our products are deployed by major Pay-TV service providers globally, including Comcast, Cox Communications, DIRECTV, DISH Network, OCN (China), Time Warner Cable, Topway (China), UPC (Netherlands) and Verizon, as well as by a number of smaller service providers.
We have extensive core competencies in video communications, networking algorithms and protocols, SoC design, embedded software, analog and high-speed mixed signal, radio frequency integrated circuit design and systems and communications. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home and processing those video streams for display on televisions or other devices in the home.
After making two acquisitions in 2012, we updated our brand identity in January 2013, to represent the significant shift in our overall vision, look and message. The corporate logo was modernized to reflect the newly integrated company. Under the new brand identity, we dropped "Communications" from our name in all new marketing communications programs.
Since inception, we have invested heavily in product development. We achieved profitability on an annual basis in fiscal years 2010 through 2012, with net income of $64.7 million, $26.6 million and $4.5 million, respectively. However, for the nine months ended September 30, 2013 we had a net loss of $54.3 million. In 2012, our net revenues increased to $321.7 million from $240.6 million in 2011. The increase in net revenues during the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarily due to the additional revenues generated by the STB SoC solutions that we acquired from Trident in April 2012, as well as an increase in the demand for our Connectivity solutions during the year ended December 31, 2012. Our net revenues were $201.4 million for the nine months ended September 30, 2013 compared to $232.0 million for the nine months ended September 30, 2012. The decrease in net revenues during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily due to a decrease in the demand for our Connectivity solutions, partially offset by additional revenues generated by the STB SoC solutions that we acquired from Trident in April 2012. As of September 30, 2013, we had an accumulated deficit of $200.4 million. We generate the majority of our revenues from sales of our semiconductor solutions to original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, that provide customer premises equipment to service providers. We price our products based on market and competitive conditions and generally reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly, we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.
We rely on a limited number of customers for a significant portion of our net revenues. Sales to these customers are in turn driven by service providers that purchase our customers' products which incorporate our semiconductor solutions. A substantial percentage of our net revenues are dependent upon six major service providers: Comcast, Cox Communications, DIRECTV, DISH Network, Time Warner Cable and Verizon. In addition, we are dependent on sales outside of the United States for almost all of our net revenues and expect that to continue in the future.
We use third-party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our semiconductor solutions and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the purchase of wafers and for manufacturing, assembly and test services.


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We expect research and development expenses in future years to continue to increase in total dollars as we develop additional semiconductor solutions and expand our business, and to fluctuate over the course of the year based on the timing of our development tools and supply costs, which include outside services, masks costs and software licenses. We also anticipate that our sales and marketing expenses will increase as we expand our domestic and international sales and marketing organization and activities and build brand awareness. Due to the lengthy sales cycles that we face, we may experience significant delays from the time we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products. Results of Operations
The following table sets forth selected condensed consolidated statements of operations data as a percentage of total net revenues for each of the periods indicated:

                                    Three Months Ended September 30,         Nine Months Ended September 30,
                                        2013                 2012               2013                 2012
Net revenues                            100  %               100  %             100  %               100  %
Cost of net revenues                     51                   51                 52                   48
Gross profit                             49                   49                 48                   52
Operating expenses:
Research and development                 51                   31                 42                   30
Sales and marketing                      11                    8                  9                    8
General and administrative               10                    6                  9                    8
Amortization of intangibles               1                    1                  1                    1
Restructuring charges                     -                    -                  1                    -
Total operating expenses                 73                   46                 62                   47
Income (loss) from operations           (24 )                  3                (14 )                  5
Loss related to equity method
investment                                -                   (1 )               (1 )                 (1 )
Impairment of investment                  -                    -                 (2 )                  -
Other income, net                         1                    -                  1                    -
Income (loss) before income taxes       (23 )                  2                (16 )                  4
Income tax (benefit) provision           (2 )                  1                 11                    2

Net (loss) income (21 )% 1 % (27 )% 2 %

Comparison of Three and Nine Months Ended September 30, 2013 and 2012
(Tables presented in thousands, except percentage amounts)
Net Revenues
                          Three Months Ended September 30,                 Nine Months Ended September 30,
                         2013            2012         % Change           2013            2012         % Change
Net revenues        $      56,376     $  89,825          (37 )%     $     201,445     $ 231,980          (13 )%

Our net revenues for the three months ended September 30, 2013 were $56.4 million compared to net revenues of $89.8 million during the same period in 2012, a decrease of $33.4 million or 37%. Our net revenues for the nine months ended September 30, 2013 were $201.4 million compared to net revenues of $232.0 million during the same period in 2012, a decrease of $30.6 million or 13%. The decrease in net revenues during the three months ended September 30, 2013 compared to the same period ended September 30, 2012 was due to a decrease in the demand for both our Connectivity and STB SoC solutions during this period. The decrease in net revenues during the nine months ended September 30, 2013 compared to the same period ended September 30, 2012 was primarily due to a decrease in the demand for our Connectivity solutions during this period, partially offset by additional revenues from the STB SoC solutions that we acquired from Trident in April 2012.


Table of Contents

Gross Profit
                            Three Months Ended September 30,                     Nine Months Ended September 30,
                         2013               2012          % Change           2013              2012           % Change
Gross profit        $     27,513       $     44,047          (38 )%     $    96,608       $     120,094          (20 )%
% of net revenues             49 %               49 %                            48 %                52 %

Gross profit for the three months ended September 30, 2013 was $27.5 million, a decrease of $16.5 million, or 38%, from gross profit of $44.0 million during the same period in 2012. The decrease in gross profit during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was due to lower revenues associated with both our Connectivity and STB SoC solutions, partially offset by a positive impact from lower unit costs of our Connectivity solutions, principally as a result of more favorable manufacturing costs. Gross profit for the nine months ended September 30, 2013 was $96.6 million, a decrease of $23.5 million, or 20%, from gross profit of $120.1 million during the same period in 2012. The decrease in gross profit during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was due to sales of lower margin products associated with the STB business acquired from Trident in April 2012, as well as an overall decrease in the sales of higher margin Connectivity solutions, partially offset by a positive impact from lower unit costs of our Connectivity solutions, principally as a result of more favorable manufacturing costs.
As a result of our acquisition of the STB business from Trident in April 2012, during the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012, we recorded amortization expense of $2.4 million, $2.0 million, $6.9 million and $3.8 million, respectively, relating to certain intangible assets acquired. This expense negatively impacted gross margins by approximately 4%, 2%, 3% and 2% during the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012, respectively.
Cost of net revenues for the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012 included a net increase in the reserve for excess and obsolete inventory of $2.6 million, $8,000, $3.5 million and $0.4 million, respectively.


Table of Contents

Research and Development Expenses
                                  Three Months Ended September 30,                     Nine Months Ended September 30,
                               2013               2012           % Change           2013               2012          % Change
Research and development $      28,510       $      28,072            2 %      $     84,914       $     69,214           23 %
% of net revenues                   51 %                31 %                             42 %               30 %

Research and development expenses increased by $0.4 million, or 2%, to $28.5 million during the three months ended September 30, 2013 from $28.1 million during the same period in 2012. This increase was due to an increase of $0.5 million in development tool costs, supply costs and outside service costs during the three months ended September 30, 2013 compared to the same period in 2012. In addition, personnel costs increased by $0.4 million due to an increase in stock-based compensation expense of $0.7 million, offset by a decrease in personnel compensation expense of $0.3 million due to a 14% headcount decrease in the number of employees engaged in research and development activities during the three months ended September 30, 2013 compared to the same period in 2012. These increases were partially offset by an overall decrease in facility costs and overhead allocation expenses of $0.5 million as a result of our decreased headcount during the three months ended September 30, 2013 compared to the same period in 2012.
Research and development expenses increased by $15.7 million, or 23%, to $84.9 million during the nine months ended September 30, 2013 from $69.2 million during the same period in 2012. This increase was due to increased personnel costs of $8.0 million (of which $1.2 million was due to stock-based compensation) which were due to a 15% average headcount increase in the number of employees engaged in research and development activities during the nine months ended September 30, 2013 as compared to the same period in 2012, which was due to our acquisition of the STB business from Trident in April 2012. In addition, there was an overall increase in development tool costs, supply costs and outside service costs of $4.6 million during the nine months ended September 30, 2013 compared to the same period in 2012, which was driven by increased research and development activities associated with our acquisition of the STB business. The remaining increase of $3.1 million was due to an increase in facility costs and overhead allocation expenses as a result of our increased headcount during the nine months ended September 30, 2013 compared to the same period in 2012.
Sales and Marketing Expenses

                            Three Months Ended September 30,                    Nine Months Ended September 30,
                         2013              2012          % Change           2013               2012          % Change
Sales and marketing $     6,137       $     6,966           (12 )%     $     18,609       $     18,986           (2 )%
% of net revenues            11 %               8 %                               9 %                8 %

Sales and marketing expenses decreased by $0.9 million, or 12%, to $6.1 million during the three months ended September 30, 2013 from $7.0 million during the same period in 2012. The decrease was due to decreased personnel costs of $1.0 million which were due to a 21% headcount reduction in the number of employees engaged in sales and marketing activities, as well as an overall decrease in variable compensation costs during the three months ended September 30, 2013 as compared to the same period in 2012. Costs associated with general customer support, marketing and trade show related activities decreased by $0.1 million during the three months ended September 30, 2013 as compared to the same period in 2012. These decreases were partially offset by an increase in overhead allocations of $0.2 million during the three months ended September 30, 2013 compared to the same period in 2012.
Sales and marketing expenses decreased by $0.4 million, or 2%, to $18.6 million during the nine months ended September 30, 2013 from $19.0 million during the same period in 2012. The decrease was due to decreased personnel costs of $1.0 million, of which $0.4 million was due to a reduction in stock-based compensation expense and the remainder was due to a decrease in variable compensation costs during the nine months ended September 30, 2013 as compared to the same period in 2012. This decrease was partially offset by an increase in overhead allocations of $0.6 million during the nine months ended September 30, 2013 compared to the same period in 2012.


Table of Contents

General and Administrative Expenses
                             Three Months Ended September 30,                      Nine Months Ended September 30,
                         2013               2012            % Change           2013               2012          % Change
General and
administrative      $      5,751       $      5,718              1 %      $     17,290       $     19,592          (12 )%
% of net revenues             10 %                6 %                                9 %                8 %

General and administrative expenses were consistent at approximately $5.8 million during the three months ended September 30, 2013 as compared to the same . . .

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