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 Quarterly Report.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and this report contain 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 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 and anticipated features and benefits thereof,
expansion of our product offerings
and enhancements of existing products, critical accounting policies and estimates, our
expectations regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits of our products and services, our technological capabilities and expertise, timing of the development of our products, our liquidity position and sufficiency thereof, including our anticipated cash needs, our operating capital expenditures and requirements and our needs for additional financing and potential consequences thereof, our anticipated growth and growth strategies, our ability to retain and attract customers, particularly in light of our dependence on a limited number of customers for a substantial portion of our revenue, our expectations regarding competition, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and warranty claims. 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™, iKON
™, ColorZ™
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. We often refer to our business as covering various data transport segments from “fiber to memory”. Our analog and mixed signal 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, datacenter 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 wide range product portfolio with many products sold in communication and datacenter markets as of March 31, 2016.
In the first quarter of 2016, we announced the availability of our highly integrated, lowest power 4-level Pulse Amplitude Modulation (PAM4) chipset solutions for intra-data center and inter-data center cloud interconnects. We introduced ColorZ™ reference design, the industry’s first Silicon Photonics 100G PAM4 platform solution for 80km DWDM Data Center Interconnect in QSFP28 form factor. Utilizing advanced Pulse Amplitude Modulation signaling, ColorZ delivers up to 4Tb/s of bandwidth over a single fiber and allows multiple data centers located up to 80km of each other to be connected and act like a single data center. We introduced a highly integrated Silicon Photonics (SiPho) technology platform for 100Gbit/s data center applications. The single-chip SiPho optics includes multi-channel modulators, photodetectors, multiplexers, demultiplexers, optical power monitors and fiber coupling structures all integrated onto a single integrated circuit. We also announced the availability of the industry’s lowest power Clock and Data Recovery Retimer for module applications, IN012525-CQ CMOS CDR and 45GBaud Linear Coherent Product Family, the industry’s first linear ICs enabling 400G coherent solutions for next-generation long haul, metro, and data center applications.
A detailed discussion of our business may be found in Part I, Item 1, “Business,” of our 2015 Annual Report on Form 10-K.
Quarterly Update
As discussed in more detail below, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, we delivered the following financial performance:
|
•
|
|
Total revenue increased by $7.4 million, or 12%, to $66.5 million.
|
|
•
|
|
Gross profit as a percentage of revenue increased from 51% to 64%.
|
|
|
|
|
|
•
|
|
Total operating expenses increased by $4.3 million, or 12%, to $39.7 million.
|
|
•
|
|
Income from operations increased by $8.0 million, to $2.5 million.
|
|
•
|
|
Diluted earnings per share increased by $0.27, to $0.01.
|
The increase in our revenue for the three months ended March 31, 2016 was primarily a result of the increase in consumption of our
dual linear transimpedance amplifiers (TIA), quad linear driver products and iPHY products
.
The increase in gross margin was due to increase in sale of high margin products as discussed above and lower product cost from the inventory fair value step-up related to the acquired Cortina inventories for the three months ended March 31, 2016 compared to three months ended March 31, 2015.
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 April 2015 to March 2016, our headcount increased by 31 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 increased primarily due to increase in operating expenses and provision for income taxes, partially offset by increase in revenues.
Our cash and cash equivalents were $138.9 million at March 31, 2016, compared with $283.0 million at December 31, 2015. Cash provided by operating activities of $13.1 million during the three months ended March 31, 2016 compared to $13.5 million during the three months ended March 31, 2015. Cash used in investing activities during the three months ended March 31, 2016 was $155.2 million primarily due to purchases of marketable securities of $148.9 million, purchases of property and equipment of $7.0 million and cost method investment of $2.0 million partially offset by sales and maturities of marketable securities of $2.7 million. Cash used in financing activities of $2.0 million was primarily due to minimum tax withholding paid on behalf of employees of $5.6 million partially offset by proceeds from exercise of stock options and employee stock purchase plan of $4.0 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 and intangible assets valuation, deferred income tax asset valuation allowances, uncertain tax positions, litigation, other loss contingencies and business combinations. 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, 2015. There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2016. We early adopted Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. The effect of adoption is discussed in Note 12 of Notes to Unaudited Condensed Consolidated Financial Statements.
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
Ended March 31,
|
|
|
|
2016
|
|
|
201
5
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
36
|
|
|
|
49
|
|
Gross profit
|
|
|
64
|
|
|
|
51
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42
|
|
|
|
38
|
|
Sales and marketing
|
|
|
11
|
|
|
|
12
|
|
General and administrative
|
|
|
7
|
|
|
|
10
|
|
Total operating expenses
|
|
|
60
|
|
|
|
60
|
|
Income (loss) from operations
|
|
|
4
|
|
|
|
(9
|
)
|
Interest expense
|
|
|
(5
|
)
|
|
|
—
|
|
Other income
|
|
|
1
|
|
|
|
—
|
|
Income (loss) before income taxes
|
|
|
—
|
|
|
|
(9
|
)
|
Provision (benefit) for income taxes
|
|
|
—
|
|
|
|
7
|
|
Net income (loss)
|
|
|
—
|
|
|
|
(16
|
)%
|
Comparison of Three Months Ended March 31, 201
6
and 201
5
Revenue
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Revenue
|
|
$
|
66,531
|
|
|
$
|
59,160
|
|
|
$
|
7,371
|
|
|
|
12
|
%
|
Total revenue for the three months ended March 31, 2016 increased by $7.4 million primarily due to an increase in average selling price of 39% partially offset by decrease in number of units sold by 19%. The increase in average selling price was due mainly from increased sales and mix of our higher priced products, including dual linear TIA,
quad linear driver products and iPHY products.
For the three months ended March 31, 2016, the number of units sold decreased by 19% mainly from decrease in consumption of our high speed memory interface products as the enterprise server memory market transitioned from DDR3 solutions to a greater amount of DDR4 solutions where our market share was lower.
Cost of Revenue and Gross Profit
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Cost of revenue
|
|
$
|
24,272
|
|
|
$
|
29,238
|
|
|
$
|
(4,966
|
)
|
|
|
(17%
|
)
|
Gross profit
|
|
|
42,259
|
|
|
|
29,922
|
|
|
|
12,377
|
|
|
|
41
|
%
|
Gross profit as a percentage of revenue
|
|
|
64
|
%
|
|
|
51
|
%
|
|
|
—
|
|
|
|
13
|
%
|
Cost of revenue decreased by $5.0 million and gross profit increased by $12.4 million for the three months ended March 31, 2016 compared to the prior year primarily due to increase in revenue from sales our dual linear TIA, quad linear driver and iPHY products
which generated higher margins. Gross profit, as a percentage of revenue increased due to sale of high margin products as discussed above and lower product cost from inventory fair value step-up related to the acquired Cortina inventories by $5.9 million, sold during the three months ended March 31, 2015.
Research and Development
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Research and development
|
|
$
|
27,663
|
|
|
$
|
22,722
|
|
|
$
|
4,941
|
|
|
|
22
|
%
|
Research and development expense for the three months ended March 31, 2016 increased by $5.0 million due, in part to an increase in research and development headcount and equity awards, which resulted in a $1.4 million increase in personnel costs and stock-based compensation expense. In addition, external test services, pre-production engineering mask costs and laboratory supplies increased by $0.7 million. Further, reimbursement from customers related to research and development contracts decreased by $2.7 million due to completion of projects. Depreciation and allocated expenses increased by $0.8 million, primarily, due to an increase in equipment and research and development activities. These increases were partially offset by decrease in third-party consultants by $0.4 million due to increase in number of employees. 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 March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Sales and marketing
|
|
$
|
7,093
|
|
|
$
|
6,869
|
|
|
$
|
224
|
|
|
|
3
|
%
|
Sales and marketing expense for the three months ended March 31, 2016 increased slightly primarily due to increase in personnel costs, including stock-based compensation expense of $0.1 million and expenses related to trade shows of $0.1 million.
General and Administrative
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
General and administrative
|
|
$
|
4,957
|
|
|
$
|
5,812
|
|
|
$
|
(855
|
)
|
|
|
(15%
|
)
|
General and administrative expenses for the three months ended March 31, 2016 decreased by $0.9 million primarily due to decrease in outside legal and accounting fees by $0.6 million in connection with the completion of the Cortina acquisition and reduced expenditures for litigation matters described in Note 15 of the notes to our condensed consolidated financial statements.
Provision for Income Tax
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
201
6
|
|
|
201
5
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Provision (benefit) for income tax
|
|
$
|
(161
|
)
|
|
$
|
4,394
|
|
|
$
|
(4,555
|
)
|
|
|
(104%
|
)
|
We determined its interim provision using an estimated single annual effective tax rate for all tax jurisdictions for the three months ended March 31, 2016. For the three months ended March 31, 2015, the Company determined its interim tax provision applying a separate estimated annual effective tax rate to its loss 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 months ended March 31, 2015 from the Singapore operation and did not recognize tax benefit of the losses due to full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to the Singapore jurisdiction to compute the March 31, 2015 interim tax provision.
The income tax benefit of $0.2 million for the three months ended March 31, 2016 reflects an effective tax rate of (273%). The effective tax rate for the three months ended March 31, 2016 differed from the statutory rate of 34% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits and windfall tax benefits from stock-based compensation from early adoption of Accounting Standards Update 2016-9.
The income tax expense of $4.4 million for the three months ended March 31, 2015 reflects an effective tax rate of (83%). This effective tax rate for the three months ended March 31, 2015 differed from the statutory rate of 34% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits and recognition of state research and development credits.
Liquidity and Capital Resources
As of March 31, 2016, we had cash, cash equivalents and investments in marketable securities of $328.2 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. In 2015, we issued convertible debt, which resulted in an increase in cash, cash equivalents and investments in marketable securities. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the payment cycles of our major customers.
The following table summarizes our cash flows for the periods indicated:
|
|
Three Months
Ended March 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
|
$
|
13,078
|
|
|
$
|
13,505
|
|
Net cash used in investing activities
|
|
|
(155,230
|
)
|
|
|
(3,211
|
)
|
Net cash used in financing activities
|
|
|
(1,953
|
)
|
|
|
(1,118
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(144,105
|
)
|
|
$
|
9,176
|
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the three months ended March 31, 2016 primarily reflected depreciation and amortization of $7.2 million, stock-based compensation expense of $7.0 million, accretion of convertible debt of $2.4 million and increase in accounts payable of $3.4 million partially offset by increases in accounts receivable of $2.6 million, prepaid expenses and other assets of $1.4 million and decrease in accrued expenses of $3.4 million. Our accounts payable increased due to increased production volume. Our accounts receivable increased due to shipments to higher product shipments to customers. Our accrued expenses decreased due to timing of payment of employee related expenses.
Net cash provided by operating activities during the three months ended March 31, 2015 primarily reflected decreases in inventories of $3.3 million and prepaid expenses and other assets of $1.6 million, change in income tax payable/receivable of $2.3 million, depreciation and amortization of $6.4 million, stock-based compensation expense of $6.4 million and deferred income taxes of $2.6 million, partially offset by net loss of $9.7 million. Our inventories decreased due to shipments and amortization of inventory step-up value and prepaid expenses and other assets decreased due to settlement of non-trade receivable.
Net Cash Used in Investing Activities
Net cash used in investing activities during the three months ended March 31, 2016 consisted of cash used to purchase property and equipment of $7.0 million and purchases of marketable securities of $148.9 million and cost method investment of $2.0 million, partially offset by sales and maturities of marketable securities of $2.7 million.
Net cash used in investing activities during the three months ended March 31, 2015, consisted of cash used to purchase property and equipment of $3.4 million and purchases of marketable securities of $4.6 million, partially offset by sales and maturities of marketable securities of $4.7 million.
Net Cash Used in Financing Activities
Net cash used in financing activities during the three months ended March 31, 2016 consisted of minimum tax withholding paid on behalf of employees for restricted stock units of $5.6 million, payment of costs related to debt issuance of $0.4 million partially offset by proceeds from exercise of stock options and employee stock purchase plan of $4.0 million.
Net cash used in financing activities during the three months ended March 31, 2015 consisted of minimum tax withholding paid on behalf of employees for restricted stock units of $4.1 million partially offset by proceeds from exercise of stock options and employee stock purchase plan of $3.0 million.
Operating and Capital Expenditure Requirements
Our principal source of liquidity as of March 31, 2016 consisted of $328.2 million of cash, cash equivalents and investments in marketable securities, of which $28.1 million is held by our foreign subsidiaries. Based on our current operating plan, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described in Part II, Item 1A, Risk Factors
. If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United States. There may be adverse tax effects upon repatriation of these funds to the United States.
Contractual Payment Obligations
Our contractual obligations for 2016 and beyond are included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016. See note 15 of the notes to our unaudited condensed consolidated financial statements for information regarding obligations as of March 31, 2016.
Off-Balance Sheet Arrangements
At March 31, 2016, we had no material off-balance sheet arrangements, other than our facility operating leases.
Recent Authoritative Accounting Guidance
See note 2 of the notes to our unaudited condensed consolidated financial statements for information regarding recently issued accounting pronouncements.