TMCnet News

MAXLINEAR INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 30, 2014]

MAXLINEAR INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The information in this management's discussion and analysis of financial condition and results of operations contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words "anticipates", "believes", "estimates", "expects", "intends", "may", "plans", "projects", "will", "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in our other filings with the SEC. We do not assume any obligation to update any forward-looking statements.



Overview We are a provider of integrated, radio-frequency and mixed-signal integrated circuits for broadband communications applications. Our high performance radio-frequency, or RF, receiver products capture and process digital and analog broadband signals to be decoded for various applications. These products include both RF receivers and RF receiver systems-on-chip, or SoCs, which incorporate our highly integrated radio system architecture and the functionality necessary to receive and demodulate broadband signals. Our current products enable the display of broadband video content in a wide range of electronic devices, including cable and terrestrial and satellite set top boxes, DOCSIS data and voice gateways, and hybrid analog and digital televisions.

Our net revenue has grown from approximately $0.6 million in fiscal 2006 to $119.6 million in fiscal 2013. In the nine months ended September 30, 2014 and 2013, respectively, our net revenue was primarily derived from sales of cable modems and gateways and global digital RF receiver products for analog and digital television applications. Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set top boxes and cable modems and gateways for the cable and satellite industries.


Products shipped to Asia accounted for 90% and 94% of net revenue in the three and nine months ended September 30, 2014, respectively, and 94% and 93% of net revenue in the three and nine months ended September 30, 2013, respectively. A significant but declining portion of these sales in Asia is through distributors. Although a large percentage of our products is shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, we believe revenue generated from sales of our digital terrestrial set top box products during the nine months ended September 30, 2014 and 2013 related principally to sales to Asian set top box manufacturers delivering products into Europe, Middle East, and Africa, or EMEA markets. Similarly, revenue generated from sales of our cable modem products during the nine months ended September 30, 2014 and 2013 related principally to sales to Asian ODM's and contract manufacturers delivering products into European and North American markets. To date, all of our sales have been denominated in United States dollars.

A significant portion of our net revenue has historically been generated by a limited number of customers. In the three months ended September 30, 2014, one of our customers accounted for 25% of our net revenue, and our ten largest customers collectively accounted for 67% of our net revenue. For the nine months ended September 30, 2014, one customer accounted for 31% of our net revenue, and our ten largest customers accounted for 69% of our net revenue. In the three months ended September 30, 2013, one of our customers accounted for 27% of our net revenue, and our ten largest customers collectively accounted for 71% of our net revenue. In the nine months ended September 30, 2013, one customer accounted for 29% of our net revenue, and our ten largest customers collectively accounted for 73% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems and cable set-top boxes.

Our business depends on winning competitive bid selection processes, known as design wins, to develop semiconductors for use in our customers' products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer's device is a first generation or subsequent generation product. Our customers' products can be 17 -------------------------------------------------------------------------------- complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue.

We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated into a customer's design, however, we believe that our product is likely to remain a component of the customer's product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the hybrid television market, a design-in can have a product life cycle of 9 to 18 months. In the terrestrial retail digital set top box market, a design-in can have a product life cycle of 18 to 24 months. In the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the satellite operator gateway and outdoor unit sectors, a design-in can have a product life cycle of 24 to 60 months and beyond.

Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations is based upon our financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, allowance for doubtful accounts, inventory valuation, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

There were no significant changes during the quarter ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in Note 1 to our consolidated financial statements for the year ended December 31, 2013 contained in the Annual Report on Form 10-K filed with the SEC on February 6, 2014.

Results of Operations The following describes the line items set forth in our consolidated statements of operations.

Net Revenue. Net revenue is generated from sales of integrated radio frequency analog and mixed signal semiconductor solutions for broadband communication applications. A significant but declining portion of our end customers purchase products indirectly from us through distributors. Although we actually sell the products to, and are paid by, the distributors, we refer to these end customers as our customers.

Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of certain production mask costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs.

Research and Development. Research and development expense includes personnel-related expenses, including stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred.

Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including stock-based compensation, distributor and other third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs.

Interest Income. Interest income consists of interest earned on our cash, cash equivalents and investment balances.

Interest Expense. Interest expense consists primarily of imputed interest on i) the purchase of licensed technology and ii) property and equipment capital leases.

Other Income (Expense). Other income (expense) generally consists of income (expense) generated from non-operating transactions.

18 -------------------------------------------------------------------------------- Provision (Benefit) for Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years.

Comparison of the Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 The following table presents a comparison of each line item in the consolidated statements of operations as a percentage of revenue for the three and nine months ended September 30, 2014 and 2013: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Net revenue 100 % 100 % 100 % 100 % Cost of net revenue 39 38 38 39 Gross profit 61 62 62 61 Operating expenses: Research and development 46 46 42 44 Selling, general and administrative 25 31 24 29 Total operating expenses 71 77 66 73 Loss from operations (10 ) (15 ) (4 ) (12 ) Interest income - - - - Interest expense - - - - Other expense, net - - - - Loss before income taxes (10 ) (15 ) (4 ) (12 ) Provision for income taxes - - - - Net loss (10 )% (15 )% (4 )% (12 )% Net Revenue Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change (dollars in thousands) (dollars in thousands) Cable $ 19,318 $ 22,173 (13 )% $ 65,617 $ 60,726 8 % % of net revenue 59 % 70 % 65 % 69 % Terrestrial 13,223 9,592 38 % 35,017 27,346 28 % % of net revenue 41 % 30 % 35 % 31 % Total net revenue $ 32,541 $ 31,765 2 % $ 100,634 $ 88,072 14 % The increase in net revenue in the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, was primarily due to $3.6 million of growth in terrestrial applications, contributed primarily from terrestrial set-top box and hybrid TV applications, which offset a $2.9 million decline in cable applications, as declines in media server and other video applications offset growth in DOCSIS 3.0 data gateway applications. The increase in net revenue in the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, was primarily due to $7.7 million from terrestrial applications driven primarily by hybrid TV applications, and $4.9 million of growth in cable applications driven by DOCSIS 3.0 data gateway and DTA applications, partially offset by declines in media server and other cable video applications.

19 --------------------------------------------------------------------------------Cost of Net Revenue and Gross Profit Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change (dollars in thousands) (dollars in thousands) Cost of net revenue $ 12,632 $ 11,934 6 % $ 38,426 $ 34,233 12 % % of net revenue 39 % 38 % 38 % 39 % Gross profit 19,909 19,831 - % 62,208 53,839 16 % % of net revenue 61 % 62 % 62 % 61 % The decline in the gross profit percentage for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, was due to a decrease in sales of higher margin products.

The increase in the gross profit percentage for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, was primarily due to the absence of production mask impairments in the nine months ended September 30, 2014, partially offset by declines in average selling prices of certain key products across both cable and terrestrial applications at a quicker rate than declines in their average manufacturing costs. We currently expect that gross profit percentage will fluctuate in the future, from quarter-to-quarter, based on changes in product mix, average selling prices, and average manufacturing costs.

Research and Development Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change (dollars in thousands) (dollars in thousands) Research and development $ 14,957 $ 14,569 3 % $ 41,944 $ 38,395 9 % % of net revenue 46 % 46 % 42 % 44 % The increase in research and development expense for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, was primarily due to an increase in headcount-related items (including stock-based compensation) of $0.8 million and prototype expense of $0.5 million, offset by a decrease in performance based compensation of $0.9 million.

The increase in research and development expense for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, was primarily due to an increase in headcount-related items (including stock-based compensation) of $3.5 million and combined increases in design tools, prototype, and occupancy expenses of $1.4 million, offset by a decrease in performance based compensation of $1.3 million. The increases in the headcount-related items are primarily due to increases in our average full-time-equivalent headcount compared to the same nine month period of the prior year. The non-headcount related increases are primarily due to increased project related prototyping and design tools usage, and several facilities relocation and facilities expansions in Bangalore, India and Carlsbad, California.

We expect our research and development expenses to increase as we continue to focus on expanding our product portfolio and enhancing existing products.

Selling, General and Administrative Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change (dollars in thousands) (dollars in thousands) Selling, general and administrative $ 8,141 $ 9,965 (18 )% $ 24,590 $ 25,136 (2 )% % of net revenue 25 % 31 % 24 % 29 % The decrease in selling, general and administrative expense in the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, was primarily due to decreases in legal fees of $1.9 million and performance 20 -------------------------------------------------------------------------------- based compensation of $0.5 million, offset by a combination of increases in headcount-related items (including stock-based compensation) of $0.4 million, and professional, consulting and outside services, and travel-related expenses of $0.2 million.

The decrease in selling, general and administrative expense in the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, was primarily due to a decrease in legal fees of $3.0 million, offset by an increase in headcount-related items (including stock-based compensation) of $1.5 million, and increases in professional, consulting and outside services, and travel-related expenses of $0.8 million. We expect selling, general and administrative expenses to increase in the future as we expand our sales and marketing organization to enable expansion into existing and new markets and continue to build our international administrative infrastructure.

Interest and Other Income (Expense) Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (dollars in thousands) (dollars in thousands) Interest income $ 61 $ 53 $ 182 $ 170 Interest expense - - - (4 ) Other expense, net (49 ) (77 ) (79 ) (194 ) Interest income increased in the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 due to higher cash equivalent and investment balances. Interest expense decreased in the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 due to a reduction in our capital leases which were completed in 2013. Other expense, net in the three and nine months ended September 30, 2014 and 2013 consisted primarily of losses on foreign currency transactions and investment management fees.

Provision (Benefit) for Income Taxes Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (dollars in thousands) (dollars in thousands) Provision for income taxes $ 28 $ 155 $ 456 $ 366 The provision for income taxes for the three months ended September 30, 2014 was $0.03 million or approximately (0.9)% of pre-tax loss compared to a provision for income taxes of $0.2 million or approximately (3.3)% for the three months ended September 30, 2013. The provision for income taxes for the nine months ended September 30, 2014 was $0.5 million or approximately (10.8)% of pre-tax loss compared to a provision for income taxes of $0.4 million or approximately (3.8)% for the nine months ended September 30, 2013. The provision for income taxes for the three and nine months ended September 30, 2014 and 2013 primarily relates to income tax in foreign jurisdictions as well as accruals for tax contingencies. We continue to maintain a valuation allowance to offset the federal and California deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating positive and negative evidence that may exist.

Until such time that we remove the valuation allowance against our federal and California deferred tax assets, our provision for income taxes will primarily consist of taxes associated with our foreign subsidiaries. Furthermore, we do not incur expense or benefit in certain tax free jurisdictions in which we operate.

Income tax expense in the foreign jurisdictions in which we are subject to tax is expected to remain relatively constant due to the cost plus nature of these entities and the relatively consistent operating expenses in each jurisdiction.

Fluctuations in world-wide income occur mostly outside of these jurisdictions and therefore have an insignificant effect on our provision for income taxes.

We expect this relationship to continue until the time that we either recognize all or a portion of our federal and California deferred tax assets or implement changes to our global operations.

Subsequent Event On October 6, 2014, we announced that we had signed a definitive agreement to acquire Physpeed Co., Ltd., a privately held developer of high-speed physical layer interconnect products addressing enterprise and telecommunications infrastructure market applications. At the closing of the acquisition, we expect to pay approximately $11.0 million in cash in exchange for all outstanding shares of capital stock and equity of Physpeed. A portion of the consideration payable to the shareholders will be 21 -------------------------------------------------------------------------------- placed into escrow pursuant to the terms of the definitive merger agreement. In addition, the definitive merger agreement provides for potential earnout consideration of up to $750,000 for the achievement of certain 2015 and 2016 revenue milestones. In addition, we plan to enter into retention and performance-based agreements with Physpeed employees for up to $3.25 million to be paid in cash or our Class A common stock based on the achievement of 2015 and 2016 revenue milestones.

The boards of directors of each of the companies have approved the merger. The closing, which is expected to occur during the three months ended December 31, 2014, remains subject to customary closing conditions, including the approval of Physpeed's shareholders.

Liquidity and Capital Resources As of September 30, 2014, we had cash and cash equivalents of $34.1 million, short- and long-term investments of $59.9 million, and net accounts receivable of $20.5 million.

Following is a summary of our working capital and cash and cash equivalents and investments as of September 30, 2014 and December 31, 2013: September 30, December 31, 2014 2013 (in thousands) Working capital $ 74,209 $ 56,558 Cash and cash equivalents $ 34,055 $ 26,450 Short-term investments 47,740 35,494 Long-term investments 12,122 24,410Total cash and cash equivalents and investments $ 93,917 $ 86,354 Cash Flows from Operating Activities Net cash provided by operating activities was $18.0 million for the nine months ended September 30, 2014. Net cash provided by operating activities primarily consisted of $15.2 million in non-cash operating expenses and $7.5 million in changes in operating assets and liabilities, partially offset by a net loss of $4.7 million. Non-cash items included in net loss for the nine months ended September 30, 2014 included depreciation and amortization expense of $3.5 million, amortization of net investment premiums of $0.6 million, and stock-based compensation of $11.1 million.

Net cash provided by operating activities was $10.1 million for the nine months ended September 30, 2013. Net cash provided by operating activities primarily consisted of $14.5 million in non-cash operating expenses and $5.7 million in changes in operating assets and liabilities, partially offset by a net loss of $10.1 million. Non-cash items included in net loss for the nine months ended September 30, 2013 included depreciation and amortization expense of $2.9 million, amortization of net investment premiums of $0.7 million, stock-based compensation of $9.6 million and impairment of property and equipment of $1.2 million.

Cash Flows from Investing Activities Net cash used in investing activities was $8.3 million for the nine months ended September 30, 2014. Net cash used in investing activities consisted of $36.5 million in purchases of securities and $7.8 million in purchases of property and equipment, offset by $35.9 million in maturities of securities. Net cash used in investing activities was $5.4 million for the nine months ended September 30, 2013. Net cash used in investing activities consisted of $56.8 million in purchases of securities, $1.0 million in purchases of intangible assets and $2.6 million in purchases of property and equipment, partially offset by $55.0 million in maturities of securities.

Cash Flows from Financing Activities Net cash used in financing activities for the nine months ended September 30, 2014 consisted primarily of $1.6 million in net proceeds from issuance of common stock, offset by $3.6 million in minimum tax withholding paid on behalf of employees for restricted stock units. Net cash used in financing activities for the nine months ended September 30, 2013 consisted primarily of $1.2 million in net proceeds from issuance of common stock, offset by $1.2 million in minimum tax withholding paid on behalf of employees for restricted stock units and payments on capital leases.

We believe that our $34.1 million of cash and cash equivalents and $59.9 million in short- and long-term investments at September 30, 2014 will be sufficient to fund our projected operating requirements for at least the next twelve months.

Our 22 -------------------------------------------------------------------------------- cash and cash equivalents as of September 30, 2014 have been favorably affected by our implementation of an equity-based bonus program. In connection with that bonus program, in May 2014, we issued 0.6 million freely-tradable shares of our Class A common stock in settlement of bonus awards for the fiscal 2013 performance period under our bonus plan. We expect to implement a similar equity-based plan for fiscal 2014, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.

Notwithstanding the foregoing, we may need to raise additional capital or incur additional indebtedness to continue to fund our operations in the future. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and potential material investments in, or acquisitions of, complementary businesses, services or technologies. Additional funds may not be available on terms favorable to us or available at all. If we are unable to raise additional funds when needed, we may not be able to sustain our operations.

Warranties and Indemnifications In connection with the sale of products in the ordinary course of business, we often make representations affirming, among other things, that our products do not infringe on the intellectual property rights of others, and agree to indemnify customers against third-party claims for such infringement. Further, our certificate of incorporation and bylaws require us to indemnify our officers and directors against any action that may arise out of their services in that capacity, and we have also entered into indemnification agreements with respect to all of our directors and certain controlling persons.

Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2014, we were not involved in any unconsolidated SPE transactions.

Contractual Obligations There have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within "Management's Discussion and Analysis of Financial Condition and Results of Operations", as contained in our Annual Report on Form 10-K filed with the SEC on February 6, 2014.

We entered into a lease for approximately 45,000 square feet of office space in Carlsbad, California. The lease has a term of five years, six months, commencing on May 21, 2014. We relocated current operations in Carlsbad, California to the new facility during the nine months ended September 30, 2014.

23--------------------------------------------------------------------------------

[ Back To TMCnet.com's Homepage ]