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IKAN > SEC Filings for IKAN > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for IKANOS COMMUNICATIONS

Form 10-Q for IKANOS COMMUNICATIONS


6-May-2014

Quarterly Report


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

This Quarterly Report on Form 10-Q, particularly in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and industry in general. Statement that include the words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential," or the negative of these terms, or other similar expressions, identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, the following: our ability to raise additional capital in the future; our history of losses; our utilization of a revolving credit facility; our ability to amend our credit facility; the risk that our common stock will be delisted; the volatility of our common stock; the opinions of the securities analysts that publish reports regarding our Company; our ability to develop and achieve market acceptance of new products and technologies as we transition away from older products; our dependence on a relatively small number of customers; the intensity of the competition we face in the semiconductor industry and the broadband communications market; general macroeconomic declines could reduce demand for our products; cyclical and unpredictable decreases in demand for our semiconductors; our ability to adequately forecast demand for our products; the length of our sales cycle; that the selling prices of our products are subject to decline over time and may do so more rapidly than we anticipate; our reliance on subcontractors to manufacture, test, and assemble our products; our dependence on and qualification of foundries to manufacture our products; changes in our product sales mix; our ability to secure production capacity; our ability to recruit and retain personnel, including our senior management team; the fluctuations in our operating results and expenses; our reliance on third-party technologies in our products; the development and future growth of the broadband digital subscriber line (DSL) and communications processing markets in general; the defense of third-party claims of infringement and the protection of our own intellectual property; currency fluctuations; undetected defects, errors, or failures in our products; the significant number of shares held by a single group of investors; rapidly changing technologies, standards, and regulations; and our accounting policies and disclosure controls.

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this Quarterly Report on Form 10-Q, including under the caption "Risk Factors" in Part II, Item 1A. Moreover, we operate in a very competitive and rapidly changing environment in which new risk factors emerge from time-to-time. It is not possible for our management to predict all risk factors, 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. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.


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The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 above and with our financial statements and notes thereto for the fiscal year ended December 29, 2013, contained in our Annual Report on Form 10-K filed on February 28, 2014.

In this Quarterly Report on Form 10-Q, references to "Ikanos," "we," "us," "our" or the "Company" means Ikanos Communications, Inc. and our subsidiaries except where it is made clear that the term means only the parent company.

Overview

We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the digital home. Our broadband multi-mode and digital subscriber line (DSL) processors and other semiconductor offerings power carrier infrastructure (referred to as Access or CO) and customer premises equipment (referred to as Gateway or CPE) for network equipment manufacturers (NEMs) supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs), and residential gateways (RGs). Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America, and are also actively being evaluated and scheduled to be evaluated by other service providers for deployment in their networks.

Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly scalable. Our expertise in the integration of digital signal processor (DSP) algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL (ADSL) and very-high bit rate DSL (VDSL) products. We are releasing new VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers' multi-play deployment plans to the digital home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance CO and CPE chips. We have demonstrated:
(1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and
(2) 150Mbps aggregate data rate up to a distance of 500 meters. Our product revenue mix over the last three years has transitioned away from ADSL in favor of VDSL, in-line with global market trends. We also offer a line of multi-mode communications processors (CPs) for RGs that support a variety of wide area network (WAN) topologies for telecom carriers, wireless carriers, and cable multiple system operators (MSOs), including Ethernet and gigabit Ethernet, passive optical network (PON), DSL, and wireless broadband. In addition to our DSL and RG processors, we recently announced inSIGHT, our new suite of CPE-based software products. inSIGHT will offer carriers the ability to remotely monitor and diagnose line impairments and noise issues to facilitate fast and cost-effective discovery and resolution of service disruptions, thereby increasing their subscriber satisfaction rate and reducing operating costs.

We outsource all of our semiconductor fabrication, assembly, and test functions, which allows us to focus on the design, development, sales, and marketing of our products and reduces the level of our capital investment. In 2012, we expanded our outsourced model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions (Master Services) to eSilicon Corporation (eSilicon) under a Master Services and Supply Agreement (Service Agreement). Pursuant to the Service Agreement, we place orders for our finished goods products with eSilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day level. During the first half of 2012, we began to transition these Master Services to eSilicon. As of the end of 2013, we had completed the transition of Master Services to eSilicon.

Our semiconductor customers consist primarily of NEMs, original design manufacturers (ODMs), contract manufacturers (CMs), and original equipment manufacturers (OEMs), and include vendors such as Sagemcom SAS (Sagemcom), Askey Computer Corporation (Askey), NEC Corporation (NEC), and AVM Computersysteme Vertriebs GmbH (AVM). Our products are deployed in the networks of telecom carriers such as AT&T Inc. (AT&T), Bell Canada, Orange S.A. (formerly, France Telecom) (Orange), KDDI Corporation (KDDI), and Nippon Telegraph and Telephone Corporation (NTT).

We incurred a net loss of $10.3 million for the quarter ended March 30, 2014 and had an accumulated deficit of $336.4 million as of March 30, 2014. To achieve consistent profitability, we will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business.

In January 2011, we entered into a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB), which provides us with a revolving line of credit of up to $15.0 million. The Loan Agreement's original maturity date was April 14, 2013, but the Loan Agreement has been amended and modified periodically - on April 12, 2012, February 19, 2013, and August 8, 2013 - and the term extended to April 14, 2015.

From time-to-time we have drawn down our line of credit for working capital purposes and to partially fund our operations, and subsequently we have repaid the amount. As of March 30, 2014, $8.5 million was outstanding under the Loan Agreement. Interest on advances against the line is equal to 6.5% as of March 30, 2014 and is payable monthly. We may repay the advances under the Loan Agreement, in whole or in part, at any time, without premium or penalty. All cash collections are applied to the outstanding balance, but may be borrowed immediately after pay down.


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As of March 30, 2014, we were in compliance with all covenants contained in the Loan Agreement. However, we anticipated that we may not be in compliance with a certain covenant as of the end of the second quarter of 2014, and therefore sought and received a waiver from SVB with respect to this covenant, but only for the second quarter. Because we foresee challenges in complying with some of the covenants after the second quarter of 2014, we have begun comprehensive discussions with SVB to revise these covenants.

We filed a Registration Statement on Form S-1 on August 23, 2013 and amended it thereafter (and was declared effective on November 6, 2013) under which we might offer and sell up to $35.0 million of common stock. On November 7, 2013 and November 22, 2013, we sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs we realized net proceeds of $24.0 million.

Beginning on January 31, 2014, our common stock began to trade below $1.00 per share on The NASDAQ Capital Market (NASDAQ). On March 18, 2014, we received notification from NASDAQ indicating that we were not in compliance with Nasdaq Marketplace Rule 5550(a)(2), which Rule provides that securities listed by NASDAQ must maintain a minimum closing bid price of $1.00 per share and that based upon the closing bid price for our securities for the previous 30 consecutive business days, we no longer meet this requirement. NASDAQ further notified the us that, in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until September 15, 2014, to regain compliance by achieving a closing bid price of our securities of at least $1.00 per share for a minimum of ten consecutive business days at any time during the 180 calendar day period. However, there can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2) within the 180 calendar day period. In the event that we do not regain compliance by September 15, 2014, NASDAQ also notified us that we may be eligible for a second 180 calendar day compliance period provided that we continues to meet the continued listing requirements of NASDAQ, with the exception of the bid price requirement, and provide written notice of the our intention to cure the deficiency during the second 180 calendar day compliance period. Even if granted a second 180 calendar day compliance period, there can be no guarantee that we will be able to regain compliance with the continued listing requirement of Nasdaq Marketplace Rule 5550(a)(2) within the second 180 calendar day compliance period.

We were incorporated in April 1999 and, through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Our revenue was $136.6 million in 2011, $125.9 million in 2012, and $79.7 million in 2013.

Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers and the limited number of products that we offer. These quarterly fluctuations can result from a variety of factors, including a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service providers may deploy equipment more slowly than initially planned, while OEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, service providers will reduce orders with OEMs for new equipment, and OEMs, in turn, will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be generally increasing.

Our industry is continually transitioning to new technologies and products. Large industry transitions are unpredictable due to factors including, but not limited to, extended product trials, qualifications, and the transformation of existing platforms to new platforms. Furthermore, the environment in which we market and sell our products has become increasingly competitive and cost sensitive. Our competitors may also be able to provide higher degrees of integration due to their broader range of products.

Our future revenue growth depends on the successful qualification and adoption of our new product platforms. In addition to these qualifications, our operations may be adversely affected by our customers' transition strategies from existing systems that use our product to systems that may not use our products. As is customary in our industry, we may elect to end-of-life certain products and, as a result, certain customers may enter into last time buy arrangements which could impact future revenues. In some cases products may become mature or uncompetitive causing customers to transition to solutions from other manufacturers, in whole or in part.

It is inherently difficult to predict if and when platforms will pass qualification, when service providers will begin to deploy the equipment, and at what rate, because we do not control the qualification criteria or process, and the systems manufacturers and service providers do not always share all of the information available to them regarding qualification and deployment criteria. Additionally, we have limited visibility into the buying patterns of our OEMs, who, in turn, are affected by changes in the buying and roll out patterns of the service provider market. To the extent that we manufacture inventory to a forecast, we may have excess inventory if the forecast differs from actual results.


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We have several new products in development. We believe that our team of engineers, our current products, technology, patents, and other intellectual property will allow us to create new products that could increase our market share and enable us to implement our digital home initiatives, our next generation VDSL development, and our future G.fast products. However, many of these new products may not offset the declines in revenue of our more mature products during the near term. Failure to generate revenues from these new products, or delays in the timing of the release of these products, could have a material adverse effect on our revenues, results of operations, cash flows, and financial position.

Critical Accounting Policies and Estimates

In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results.

The critical accounting policies, are described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013, and have not changed materially as of March 30, 2014.

Results of Operations

Revenue

Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates, and allowances. Depending on the distributor, product sales to a distributor are recognized either based on contract terms or when the distributor has sold through to the end customer. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer demand and obtain new customers. The continuing effects of the worldwide recession have adversely affected the businesses of service providers around the world, causing them to re-evaluate how they employ capital. Consequently the rate at which broadband infrastructure is upgraded may slow or new broadband programs could be delayed.

Total revenue for the first quarter of 2014 declined by $11.6 million, or 45%, to $14.5 million from $26.2 for the first quarter of 2013 and $3.1 million or 17% from the fourth quarter of 2013. Our three largest customers accounted for approximately 69% of our revenue in the first quarter of 2014 while our three largest customers accounted for 56% of our revenue in the first quarter of 2013. Revenue from Asia as a percent of total revenue decreased marginally to 55% from 59%, while revenue from Europe increased to 42% from 34%. Revenue from the Americas (including Latin America) was 3% of total revenue. Sales from our next generation CPE product chipsets (Fusiv Vx185, Vx183, Vx175, and Vx173) continues to grow as a percentage of total revenue. However, even with the introduction of these new products, we continue to be adversely affected by the aging of our more mature products.

Two factors are primarily responsible for our continuing revenue decline from 2013 into 2014 and this trend may continue. First, the decline that we have seen in our more mature products, particularly in Korea and Japan, has been greater than expected and outpaced the growth in revenue of our new products. However, concurrent with this, we have seen a continuing shift in our revenue mix in favor of our new products. Revenue from new products (Vx183/185/180/175/173 and Velocity-1) reached approximately 84% in the first quarter of 2014 versus approximately 55% and 67%, respectively, in the first and fourth quarters of 2013. Secondly, we experienced delays in the introduction of certain new products, which pushed out the ramp of these new products in some end markets. We anticipate that customer ramps of our new products will continue to gain momentum.

We generally sell our products to OEMs through a combination of our direct sales force, third-party sales representatives and distributors. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements with certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers' systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue, and we expect that significant customer concentration will continue for the foreseeable future. However, customer concentration may diversify across more carrier customers as we expect more service providers to begin deployments of our broadband solutions worldwide.


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The following direct customers accounted for more than 10% of our revenue for the periods indicated. Sales made to OEMs are based on information that we receive at the time of ordering.

                                                 Three Months Ended
                                            March 30,          March 31,
            Our Direct Customer                2014               2013
            Sagemcom SAS                            31 %               24 %
            Amod Technology Co., Ltd.**             21                  *
            NEC Corporation of America              17                  *
            Askey Computer Corporation***            *                 22
            Paltek Corporation                       *                 10

* Less than 10%

** Amod is a distributor whose purchases from Ikanos are contracted to its end customer Askey.

*** Askey is a contract manufacturer for Sagemcom.

Revenue by Country as a Percentage of Total Revenue

                                         Three Months Ended
                                    March 30,          March 31,
                                       2014               2013
                    France                  31 %               25 %
                    Taiwan                  26                 23
                    Japan                   26                 18
                    Germany                  8                  6
                    China                    2                  7
                    United States            1                  4
                    Other                    6                 17

The table above reflects sales to our direct customers based on the country in which the customer's headquarters is located. It does not necessarily reflect carrier deployment of our products as we do not sell directly to them. France, Taiwan, and Japan continue to be the countries to which we sell the large majority of our products. Actual sales to each country declined in the first quarter of 2014 compared to the first quarter of 2013.

Revenue by Product Family as a Percentage of Total Revenue



                                      Three Months Ended
                                 March 30,          March 31,
                                    2014               2013
                       Gateway           71 %               76 %
                       Access            29                 24

We track our products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure, as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises. Gateway products enable service providers to offer their subscribers a variety services, including internet access, voice, over-the-top content, and security, among others.

Cost and Operating Expenses



                                                     Three Months Ended
                                           March 30,       March 31,         %
                                             2014            2013          Change
                                                 (in millions)
      Cost of revenue                     $       7.4     $      12.2          (39 )%
      Research and development                   12.7            13.5           (6 )
      Sales, general and administrative           4.8             4.8           -

Cost and Operating Expenses as a Percentage of Total Revenue:



                                                   Three Months Ended
                                              March 30,          March 31,
                                                 2014               2013
          Cost of revenue                             51 %               47 %
          Research and development                    87                 52
          Sales, general and administrative           33                 18


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Cost of Revenue

Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling and testing our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers into usable die. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases which could have a . . .

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