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

Show all filings for INPHI CORP

Form 10-Q for INPHI CORP


7-Nov-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 product portfolio with many products sold in communication and datacenter markets as of September 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 nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012, we delivered the following financial performance:

• Total revenues increased by $1.8 million, or 7%, to $26.6 million in the three months ended September 30, 2013. In the nine months ended September 30, 2013, total revenues increased by $5.3 million, or 8%, to $73.5 million.

• Gross profit as a percentage of revenue decreased to 63.2% from 64.7% in the three months ended September 30, 2013. In the nine months ended September 30, 2013, gross profit as a percentage of revenue decreased to 63.3% from 64.1%.

• Total operating expenses increased by $3.0 million, or 18%, to $19.9 million in the three months ended September 30, 2013. In the nine months ended September 30, 2013, total operating expenses increased by $8.9 million, or 18%, to $57.9 million.

• Income from operations decreased by $2.3 million, or 278%, to a loss from operations of $3.1 million in the three months ended September 30, 2013. In the nine months ended September 30, 2013, income from operations decreased by $6.1 million, or 116%, to a loss from operations of $11.4 million.

• Diluted earnings per share decreased by $0.05 to ($0.09) in the three months ended September 30, 2013. In the nine months ended September 30, 2013, diluted earnings per share decreased by $0.26 to ($0.41).

The increase in our revenue was a result of increase in consumption of our high speed memory interface products, 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 October 2012 to September 2013, we hired 54 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 $27.8 million at September 30, 2013, compared with $30.2 million at December 31, 2012. We generated cash flow from operations of $11.2 million during the nine months ended September 30, 2013 compared to $5.9 million during the nine months ended September 30, 2012. Cash used in investing activities during the nine months ended September 30, 2013 was $16.3 million primarily due to purchases of marketable securities and noncurrent investment and purchases of property and equipment offset by sales and maturities of marketable securities. 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 $4.4 million offset by minimum tax withholding paid on behalf of employees of $1.8 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 nine months ended September 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                       Nine Months
                                              Ended September 30,               Ended September 30,
                                             2013              2012            2013              2012
Total revenue                                   100 %            100 %            100 %            100 %
Cost of revenue                                  37               35               37               36

Gross profit                                     63               65               63               64

Operating expense:
Research and development                         49               42               51               43
Sales and marketing                              16               13               16               15
General and administrative                       10               13               12               14

Total operating expenses                         75               68               79               72

Income (loss) from operations                   (12 )             (3 )            (16 )             (8 )
Other income                                      1                1                1                1

Income (loss) before income taxes               (11 )             (2 )            (15 )             (7 )
Provision (benefit) for income taxes             (1 )              2                1               (1 )

Net income (loss)                               (10 )%            (4 )%           (16 )%            (6 )%

Comparison of Three and Nine Months Ended September 30, 2013 and 2012

Revenue

Three Months Ended September 30, Change
2013 2012 Amount %
(dollars in thousands)

Total revenue $ 26,611 $ 24,762 $ 1,849 7 %

Nine Months Ended September 30, Change 2013 2012 Amount %

(dollars in thousands)

Total revenue $ 73,534 $ 68,271 $ 5,263 8 %

Total revenue for three and nine months ended September 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 September 30, 2013, number of units sold increased by 33% mainly from sale of our high speed memory interface products, dual, differential linear TIA, and iPHY 100Gbe CMOS gearbox products. The increase was offset partially by decrease in average selling price of 19% due to product mix, mainly from reduction of average selling price of our high speed memory interface products. For the nine months ended September 30, 2013, number of units sold increased by 12%. The increase in number of units sold was due to sale of our high speed memory interface products, dual, differential linear TIA, and isolation memory buffer. The increase in revenue for the nine months ended September 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 nine months ended September 30, 2012. The increases in revenue were partially offset 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.

Cost of Revenue and Gross Profit



                                              Three Months Ended September 30,                Change
                                                2013                    2012             Amount        %
                                                               (dollars in thousands)
Cost of revenue                            $         9,796         $         8,734       $ 1,062        12 %
Gross profit                               $        16,815         $        16,028       $   787         5 %
Gross profit as a percentage of revenue                 63 %                    65 %          -         (2 )%


Table of Contents
                                               Nine Months Ended September 30,               Change
                                                 2013                   2012            Amount        %
                                                               (dollars in thousands)
Cost of revenue                             $       26,981         $       24,490       $ 2,491        10 %
Gross profit                                $       46,553         $       43,781       $ 2,772         6 %
Gross profit as a percentage of revenue                 63 %                   64 %          -         (1 )%

Gross profit for the three and nine months ended September 30, 2013 increased primarily due to increases in revenue as described above. Gross profit as a percentage of revenue decreased for both periods as compared to the prior year due to a reduction in average selling prices.

Research and Development



                                 Three Months Ended September 30,             Change
                                    2013                  2012           Amount       %
                                                 (dollars in thousands)
    Research and development   $        12,995       $        10,500     $ 2,495       24 %

                                  Nine Months Ended September 30,             Change
                                    2013                  2012           Amount       %
                                                 (dollars in thousands)
    Research and development   $        37,389       $        29,072     $ 8,317       29 %

Research and development expenses for three and nine months ended September 30, 2013 increased due to the increase in research and development headcount and equity awards, which resulted in $1.6 million and $5.4 million increase in personnel costs and stock-based compensation expense, respectively. In addition, CAD software tool license expense increased by $0.5 million and $1.3 million for the three and nine months ended September 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 September 30,             Change
                                 2013                  2012           Amount       %
                                              (dollars in thousands)
      Sales and marketing   $         4,118       $         3,079     $ 1,039       34 %

                               Nine Months Ended September 30,             Change
                                 2013                  2012           Amount       %
                                              (dollars in thousands)
      Sales and marketing   $        11,771       $        10,347     $ 1,424       14 %

Sales and marketing expenses for nine months ended September 30, 2013 increased primarily due to an increase in personnel costs, including stock-based compensation expense of $0.8 million and $0.9 million, respectively to support increasing sales activities.


Table of Contents

General and Administrative



                                          Three Months Ended September 30,                   Change
                                            2013                     2012             Amount           %
                                                             (dollars in thousands)
General and administrative            $          2,779         $          3,263       $  (484 )        (15 )%

                                           Nine Months Ended September 30,                   Change
                                            2013                     2012             Amount           %
                                                             (dollars in thousands)
General and administrative            $          8,776         $          9,630       $  (854 )         (9 )%

General and administrative expenses for the three months and nine months ended September 30, 2013 decreased by $0.5 million and $0.9 million, respectively. The decrease for the three months and nine months ended September 30, 2013 was due to reduction of legal costs of $0.4 million and $0.2 million, respectively, primarily related to reduced expenditures for litigation matters described in Note 13 of the notes to our financial statements. In addition, the decrease for the nine months ended September 30, 2012 was due to accrual of provisional costs with regard to employment and other related claims as well as associated costs of $1.0 million we recorded during the nine months ended September 30, 2012. The decrease for the nine months ended September 30, 2013 was partially offset by increase in stock-based compensation expense of $0.7 million as a result of equity awards.

Provision (benefit) for Income Taxes



                                         Three Months Ended September 30,                      Change
                                          2013                       2012              Amount            %
                                                             (dollars in thousands)
Provision (benefit) for income
taxes                               $           (107 )          $          471         $  (578 )         (123 )%

                                         Nine Months Ended September 30,                       Change
                                          2013                       2012              Amount            %
                                                             (dollars in thousands)
Provision (benefit) for income
taxes                               $          1,158            $         (453 )       $ 1,611            356 %

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 nine months ended September 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 nine months ended September 30, 2013 reflects an effective tax rate of 4% and (11%), respectively. The effective tax rates for the three and nine months ended September 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 nine months ended September 30, 2012 reflects an effective tax rate of (81%) and 10%, respectively. The effective tax rates for the three and nine months ended September 30, 2012 differs from the statutory rate of 35% primarily due to foreign income taxes provided at lower rates, geographic mix in profitability, recognition of research and development credits, unrecognized tax benefits and stock-based compensation adjustments.

Liquidity and Capital Resources

As of September 30, 2013, we had cash, cash equivalents and investments in marketable securities of $119.3 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:

                                                                Nine Months
                                                            Ended September 30,
                                                             2013           2012
                                                               (in thousands)
   Net cash provided by operating activities              $   11,235      $  5,904
   Net cash used in investing activities                     (16,314 )      (8,456 )
   Net cash provided by financing activities                   2,763         4,507

   Net increase (decrease) in cash and cash equivalents   $   (2,316 )    $  1,955

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2013 primarily reflected a decrease in accounts receivable of $0.9 million, change in income tax payable/receivable of $2.5 million, depreciation and amortization of $5.5 million and stock-based compensation of $13.0 million offset by net loss of $11.9 million and increase in inventories of $0.6 million. Our receivables decreased due to collections. Our inventories increased a result of growing production for expected delivery to customers in the fourth quarter of 2013.

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

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2013, consisted of cash used to purchase property and equipment of $12.5 million, mainly for laboratory, production equipment and leasehold improvements for our offices in California, purchase of minority interest in an early stage private company for $2.6 million and purchases of marketable securities of $32.1 million, offset by sales and maturities of marketable securities of $31.0 million.

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

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2013 consisted of proceeds from exercise of stock options and employee stock purchase plan of $4.4 million, offset by minimum tax withholding paid on behalf of employees for restricted stock units of $1.8 million.

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


Table of Contents

Operating and Capital Expenditure Requirements

Our principal source of liquidity as of September 30, 2013 consisted of $119.3 . . .

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