Item 1. Business
General
Silicon Laboratories Inc. is a leading provider of silicon, software and solutions for a smarter, more connected world. Our award-winning
technologies are shaping the future of the Internet of Things (IoT), Internet infrastructure, industrial automation, consumer and automotive markets. Our world-class engineering team creates products
focused on performance, energy savings, connectivity and simplicity.
Our
primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into
digital signals that electronic products can process. Our mixed-signal ICs leverage standard complementary metal oxide semiconductor (CMOS), a low cost, widely available process technology. Use of
CMOS technology enables smaller, more cost-effective and energy-efficient solutions. Our expertise in analog-intensive, mixed-signal IC design in CMOS allows us to develop new and innovative products
that are highly integrated, simplifying our customers' designs and improving their time-to-market.
Industry Background
The pervasiveness of connectivity and mobile devices is driving semiconductor consumption. Intelligence is being added to electronic systems to
enable Internet connectivity, power efficiency and an improved user experience. This in turn is increasing the demand for bandwidth, requiring more infrastructure to support higher performance
networks. The nearly ubiquitous availability of Internet access and the increasing intelligence of electronic devices and mobility are enabling what is called the Internet of Things, a term that
describes the exponential increase in IP-enabled devices connected to the Internet.
These
trends require more and more interaction between the analog world we live in and the digital world of computing, which is driving the need for analog-intensive, mixed-signal
circuits in a wide range of electronic products. Traditional mixed-signal designs relied upon solutions built with numerous, complex discrete analog and digital components. While these traditional
designs provide the required functionality, they are often inefficient and inadequate for use in markets where size, cost, power consumption and performance are increasingly important product
differentiators. To improve their competitive position, electronics manufacturers must reduce the cost and complexity of their systems and enable new features or functionality to differentiate
themselves from their competitors.
Simultaneously,
these manufacturers face accelerating time-to-market demands and must rapidly adapt to evolving industry standards and new technologies. Because analog-intensive,
mixed-signal design
expertise is difficult to find, these manufacturers increasingly are turning to third parties, like us, to provide advanced mixed-signal solutions. Mixed-signal design requires specific expertise and
relies on creative, experienced engineers to deliver solutions that optimize speed, power and performance, despite the noisy digital environment, and within the constraints of standard manufacturing
processes. The development of this design expertise typically requires years of practical analog design experience under the guidance of a senior engineer, and engineers with the required level of
skill and expertise are in short supply.
Many
IC solution providers lack sufficient analog expertise to develop compelling mixed-signal products. As a result, manufacturers of electronic devices value providers that can supply
them with mixed-signal solutions offering greater functionality, smaller size and lower power requirements at a reduced cost and shorter time-to-market.
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Products
We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the IoT
including connected home and security, industrial, smart energy, consumer, automotive and lighting applications. We are a supplier of wireless connectivity solutions for the IoT based on
Zigbee®, sub-GHz proprietary technologies, Bluetooth®, Z-Wave®, Thread, and Wi-Fi®.
We
provide a wide range of timing and isolation products for infrastructure applications including high-performance clocks and oscillators for networking equipment, data centers and
wireless base stations, as well as digital isolators and current sensors for industrial power supplies, motor control, solar inverters and hybrid-electric vehicles. We also provide broadcast products,
such as TV tuners and demodulators and automotive radio tuners, and access products including subscriber line interface circuits for voice over IP (VoIP), embedded modems, and Power over Ethernet
(PoE) power source equipment and powered device ICs.
Our
products integrate complex mixed-signal functions that are frequently performed by numerous discrete components in competing products into a single chip or chipset. By doing so, we
create products that, when compared to many competing products, offer the following benefits:
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Require less printed circuit board (PCB) space;
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Reduce the use of external components lowering the system cost and simplifying design;
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Offer superior performance improving our customers' end products;
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Provide increased reliability and manufacturability, improving customer yields; and/or
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Reduce system power requirements enabling smaller form factors and/or longer battery life.
We
group our products into the following categories:
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Internet of Things products, which include our microcontroller (MCU), wireless and sensor products;
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Broadcast products, which include our broadcast consumer and automotive products;
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Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and
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Access products, which include our Voice over IP (VoIP) products, embedded modems and Power over Ethernet (PoE) devices.
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The
following table summarizes the diverse product areas and applications for the various products that we have introduced to customers:
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Product Areas and Description
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Applications
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Internet of Things Products
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Microcontrollers and Wireless Products
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We offer a family of products ideal for embedded systems that include energy friendly 8-bit mixed-signal microcontrollers, 32-bit wireless MCUs and
ultra-low-power 32-bit MCUs based on scalable ARM® Cortex-M0+/M3/M4 cores, as well as wireless connectivity devices such as our multiprotocol Wireless Gecko system-on-chip (SoC) devices. Our wireless modules provide flexible, highly integrated
products that meet demanding requirements and can be used in many applications. Our wireless connectivity solutions for the IoT are based on Zigbee, sub-GHz proprietary technologies, Bluetooth, Z-Wave, Thread and Wi-Fi. Our EFM32, EFM8,
8051, wireless MCUs and wireless SoCs are supported by Simplicity Studio, which provides one-click access to design tools, documentation, software and support resources. We also offer a Micrium® real-time operating system (RTOS) to help
simplify software development for IoT applications by coordinating and prioritizing multiprotocol connectivity, SoC peripherals and other system-level activities. Our broad portfolio addresses a variety of target markets, including smart home,
commercial (building automation and retail) and industrial (smart energy, factory automation, smart cities).
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Home automation
Security systems
Smart lighting
Smart metering
Wearables
Industrial automation and
control
Consumer
electronics
Medical
instrumentation
Automotive sensors and controls
Electronic test and
measurement equipment
White goods
Remote controls
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Sensors
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Our sensor products include optical sensors (proximity, ambient light gestures and heart rate monitoring), as well as relative humidity (RH) / temperature
sensors and Hall effect magnetic sensors. These devices leverage our mixed-signal capability to provide high accuracy, process technology to improve performance and lower power consumption than competing parts.
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Consumer
health & fitness (wearables)
Smart home sensing
Industrial controls
Toys and consumer electronics
Monitors and lavatory
controls
Consumer
medical
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Infrastructure Products
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Timing Devices
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Robust demand for bandwidth is driving the deployment of next-generation Internet infrastructure equipment to deliver higher speed, higher capacity and
more flexible networks. This transition puts unique requirements on the clocks and oscillators used to provide timing and synchronization for the equipment responsible for switching, transporting, processing and storing network traffic. To meet this
need, we provide low-jitter, frequency-flexible, mass-customizable timing solutions that accelerate development time, minimize cost and improve system reliability. Our high-performance "clock-tree-on-a-chip" products offer highly integrated
single-chip IC solutions for clock synthesis and jitter attenuation, offering superior jitter performance and frequency flexibility for high data rate applications.
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Optical
networking
Telecommunications
Data
communications
Switches/routers
Industrial
Servers and storage
Mobile fronthaul and
backhaul
Wireless base
stations
Small
cells
Broadcast
video
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Product Areas and Description
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Applications
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Isolation Products
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Our digital isolation techniques enable customers to deploy more energy efficient power solutions that meet isolation safety standards and solve difficult
electronic noise issues. Systems such as data center servers, cellular base stations, uninterruptable power supplies and electric vehicles require increasingly energy efficient power solutions. Electric motors used in electric vehicles, pumps, HVAC
compressors, fans and automated machinery need more sophisticated and efficient digital controls. Our isolation technology enables customers to address these demanding requirements. Products include multi-channel isolators, isolated drivers, isolated
power converters and mixed-signal devices that simplify design, improve reliability, minimize noise emissions and reduce system cost
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Industrial control and
automation systems
Cloud, datacenter and telecom power supplies
Electric vehicle charging stations
Solar inverters
Hybrid / Electric
automotive drive trains
Motor control
High power audio
Test and measurement equipment
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Broadcast Products
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Broadcast Consumer
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Our single-chip hybrid TV tuners and analog TV demodulators leverage our proven digital low-IF architecture and exceed the performance of traditional
discrete TV tuners, enabling TV makers worldwide to deliver improved picture quality and better reception for both analog and digital broadcasts. Our small, low-power and high-performance single and dual digital video demodulators support DVB-T/T2,
DVB-S/S2/S2X, DVB-C/C2, and/or ISDB-T in a single chip and are ideal for equipment receiving digital terrestrial, satellite and/or cable services. Our AM/FM, HD Radio and DAB/DAB+ receivers deliver a complete radio solution from antenna input
to audio output in a single chip. The broadcast audio products are based on an innovative digital architecture that enables significant improvements in performance, which translates to a better consumer experience, while reducing system cost and
board space for our customers.
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Integrated digital
televisions (iDTV)
Free-to-Air (FtA) or pay-TV set-top boxes
PVR/DVD/Blu-Ray/HDD video recorders
PC-TV applications
AM/FM clock
radios
DAB digital
radios
HD Radio digital
radios
Home theater
systems
Portable audio
devices
MP3/digital media
players
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Broadcast Automotive
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Our high-performance solutions for car audio systems include high-fidelity radio ICs that improve the end user experience, reduce system cost and offer
the latest digital radio technologies like DAB/DAB+ and HD Radio. Our scalable architecture enables infotainment system suppliers to leverage their investments across multiple product lines ranging from entry-level car radios to cutting-edge
multi-tuner, multi-antenna radios for premium vehicles.
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Automotive OEM
infotainment systems
Aftermarket car radios
Navigation/GPS devices
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Access Products
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ProSLIC® Subscriber Line Interface Circuits for VoIP
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Our ProSLIC provides the analog subscriber line interface on the source end of the telephone which generates dial tone, busy tone, caller ID and ring
signal. Our offerings are well suited for the market for Voice over IP telephony applications deployed over cable, DSL, optical and wireless fixed terminal networks.
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Voice functionality for
cable, DSL and optical digital modems and terminal adapters
VoIP residential gateways
Wireless local loop remote access systems
PBXs
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Product Areas and Description
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Applications
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ISOmodem® Embedded Modems
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Our ISOmodem embedded modems leverage innovative silicon direct access arrangement (DAA) technology and a digital signal processor (DSP) to deliver a
globally compliant, compact analog modem for embedded applications.
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Fax machines and
multi-function printers
Point of sale (POS) terminals
Security systems
Industrial monitoring
Remote medical
monitoring
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Power over Ethernet
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Our PoE power source equipment and powered device ICs offer highly differentiated solutions with a reduced total bill of materials (BOM) and improved
performance and reliability. Our solutions offer a higher level of integration not available with competing solutions.
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Enterprise networking
routers and switches
Wireless access points (WAP)
VoIP phones
POS terminals
Security cameras
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Revenues
during fiscal 2018, 2017 and 2016 were generated predominately by sales of our mixed-signal products. The following summarizes our revenue by product category (in thousands):
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Fiscal Year
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2018
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2017
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2016
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Internet of Things
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$
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463,838
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$
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395,012
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$
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314,614
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Infrastructure
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199,478
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152,158
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147,677
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Broadcast
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141,412
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152,980
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157,746
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Access
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63,539
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68,717
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77,589
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Revenues
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$
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868,267
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$
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768,867
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$
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697,626
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Customers, Sales and Marketing
We market our products through our direct sales force and through a network of independent sales representatives and distributors. Direct and
distributor customers buy on an individual purchase order basis, rather than pursuant to long-term agreements.
We
consider our customer to be the end customer purchasing either directly from a distributor, a contract manufacturer or us. During fiscal 2018, our ten largest end customers accounted
for 20% of our revenues. We had no customer that represented more than 10% of our revenues during this period. An end customer purchasing through a contract manufacturer typically instructs such
contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we sell the products to, and are
paid by distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell directly to our customers, Arrow Electronics and Edom Technology, each
represented 21% and 17% of our revenues during fiscal 2018, respectively. There were no contract manufacturers that accounted for 10% or more of revenues for fiscal 2018. During fiscal 2018, we
consolidated our distribution relationships to a single global distributor, Arrow Electronics. We are maintaining our extensive network of regional distributor partners and etailers to complement our
single global distributor partner.
We
maintain numerous sales offices in Asia, the Americas and Europe. Revenue is attributed to a geographic area based on the shipped-to location. The percentage of our revenues derived
from outside of the United States was 83% in fiscal 2018. For further information regarding our revenues and long-lived assets by geographic area, see Note 18,
Segment
Information
, to the Consolidated Financial Statements.
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Our direct sales force is comprised of many sales professionals who possess varied levels of responsibility and experience, including directors, country managers,
regional sales managers, district sales managers, strategic account managers, field sales engineers and sales representatives. We also utilize independent sales representatives and distributors to
generate sales of our products. We have relationships with many independent sales representatives and distributors worldwide whom we have selected based on their understanding of the mixed-signal
marketplace and their ability to provide effective field sales applications support for our products.
Our
marketing efforts are targeted at both identified industry leaders and emerging market participants. Direct marketing activities are supplemented by a focused marketing
communications effort that seeks to raise awareness of our company and products. Our public relations efforts are focused on leading trade and business publications. Our external website is used to
deliver corporate and product information. We also pursue targeted advertising in key trade publications and we have a cooperative marketing program that allows our distributors and representatives to
promote our products to their local markets in conjunction with their own advertising activities. Finally, we maintain a presence at strategic trade shows and industry events. These activities, in
combination with direct sales activities, help drive demand for our products.
Due
to the complex and innovative nature of our products, we employ experienced applications engineers who work closely with customers and distributors to support the design-win process,
and can significantly accelerate the customer's time to market. A design win occurs when a customer has designed our ICs into its product architecture and ordered product from us. A considerable
amount of effort to help a customer incorporate our ICs into its products is typically required prior to any sale. In many cases, our innovative ICs require significantly different implementations
than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design win can vary
substantially depending on a customer's development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Not all
design wins ultimately result in revenue, or may result in less revenue than expected. However, once a completed design architecture has been implemented and produced in high volumes, our customers
are reluctant to significantly alter their designs due to this extensive design-win process. We believe this process, coupled with our intellectual property protection, promotes relatively longer
product life cycles for our products and high barriers to entry for competitive products, even if such competing products are offered at lower prices. Our close collaboration with our customers
provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions.
Research and Development
Through our research and development efforts, we leverage experienced analog and mixed-signal engineering talent and expertise to create new ICs
that integrate functions typically performed less efficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced
price/performance characteristics. We attempt to reuse successful techniques for integration in new applications where similar benefits can be realized. We believe that we have attracted many of the
best engineers in our industry. We believe that reliable and precise analog and mixed-signal ICs can only be developed by teams of engineers who have significant analog experience and are familiar
with the intricacies of designing these ICs for commercial volume production. The development of test methodologies is just one example of a critical activity requiring experience and know-how to
enable the rapid release of a new product for commercial success. We have accumulated a vast set of trade secrets that allow us to pursue innovative approaches to mixed-signal problems that are
difficult for competitors to duplicate. We highly value our engineering talent and strive to maintain a very high bar when bringing new recruits to the company.
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Research
and development expenses were $238.3 million, $209.5 million and $199.7 million in fiscal 2018, 2017 and 2016, respectively.
Technology
Our product development process facilitates the design of highly-innovative, analog-intensive, mixed-signal ICs. Our engineers' deep knowledge
of existing and emerging standards and performance requirements helps us to assess the technical feasibility of a particular IC. We target areas where we can provide compelling product improvements.
Once we have solved the primary challenges, our field application engineers continue to work closely with our customers' design teams to maintain and develop an understanding of our customers' needs,
allowing us to formulate derivative products and refined features.
In
providing mixed-signal ICs for our customers, we believe our key competitive advantages are:
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Analog and RF design expertise in CMOS;
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Mixed-signal, firmware and system design expertise;
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Microcontroller and system on a chip design expertise;
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Software expertise, including multiprotocol connectivity and real-time operating systems for the IoT;
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Module integration and wireless design expertise; and
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Our broad understanding of systems technology and trends.
To
fully capitalize on these advantages, we have assembled a world-class development team with exceptional analog and mixed-signal design expertise led by accomplished senior engineers.
We believe that our most significant core competency is world-class analog and RF design capability. Additionally, we strive to design
substantially all our ICs in standard CMOS processes. Most of our product designs now incorporate some type of RF in CMOS technology. While it is often significantly more difficult to design analog
ICs in CMOS, CMOS provides multiple benefits versus existing alternatives, including significantly reduced cost, reduced technology risk and greater worldwide foundry capacity. CMOS is the most
commonly used process technology for manufacturing digital ICs and as a result is most likely to be used for the manufacturing of ICs with finer line geometries. These finer line geometries can enable
smaller and faster ICs. By designing our ICs in CMOS, we enable our products to benefit from this trend towards finer line geometries, which allows us to integrate more digital functionality into our
mixed-signal ICs.
Designing
analog and mixed-signal ICs is significantly more complicated than designing standalone digital ICs. While advanced software tools exist to help automate digital IC design,
there are far fewer tools for advanced analog and mixed-signal IC design. In many cases, our analog circuit design efforts begin at the fundamental transistor level. We believe that we have a
demonstrated ability to design the most difficult analog and RF circuits using standard CMOS technologies.
Mixed-Signal, Firmware and System Design Expertise
We consider the partitioning of a circuit to be a proprietary and creative design technique. Deep systems knowledge allows us to use our
mixed-signal and RF in CMOS design expertise to maximize the price/performance characteristics of both the analog and digital functions and allow our ICs to work in an optimized manner to accomplish
particular tasks. Generally, we attempt to
move analog functions into the digital domain as quickly as possible, creating system efficiencies without compromising
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performance.
These patented approaches require our advanced signal processing and systems expertise. We then leverage our firmware know-how to change the 'personality' of our devices, optimizing
features and functions needed by various markets we serve. For example, our wireless SoC devices for IoT applications integrate both digital and analog domains in a single chip. The SoCs combine ARM
Cortex-M processor cores, a variety of digital and analog peripherals, hardware cryptography accelerators, and analog-intensive multiprotocol radio transceivers. This system integration at the chip
level leverages our deep expertise in mixed-signal and RF design, and low-power wireless MCU architectures pioneered for more than a decade.
We have the talent and circuit integration methodologies required to combine precision analog, high-speed digital, flash memory and in-system
programmability into a single, monolithic CMOS integrated circuit. Our microcontroller products are designed to capture an external analog signal, convert it to a digital signal, compute digital
functions on the stream of data and then communicate the results through a standard digital interface. The ability to develop standard products with the broadest possible customer application base
while being cost efficient with the silicon area of the monolithic CMOS integrated circuit requires a keen sense of customer value and engineering capabilities. Additionally, to manage the wide
variety of signals on a monolithic piece of silicon including electrical noise, harmonics and other electronic distortions requires a fundamental knowledge of device physics and accumulated design
expertise.
Our software expertise allows us to develop products for markets where intelligent data capture, high-performance processing and communication
are increasingly important product differentiators. The software we have developed to address these markets enables machine-to-machine communications, providing intelligence to electronic systems. Our
products integrate high-performance,
low-power wireless and microcontroller ICs with reliable and scalable software into a flexible and robust networking platform.
The
demand for low-power, small-footprint wireless technology is accelerating as more and more IP-enabled end points are being connected to the IoT. Our software enables a broad range of
power-sensitive applications for the IoT, including smart energy, home automation, security and other connected products. We believe that the combination of our software and IC design expertise
differentiates us from many of our competitors.
As
the IoT continues to mature, a new class of embedded applications is emerging, presenting feature-rich and task-intensive use cases. This growing complexity is driving the need for
real-time operating systems to help simplify software development for IoT applications by coordinating and prioritizing multiprotocol connectivity, SoC peripherals and other system-level activities.
In addition to being able to manage numerous application tasks, an RTOS enhances scalability, and makes complex applications predictable and reliable. To address these application needs, we acquired
Micrium, an embedded RTOS provider. Micrium has established itself as a reliable, high performance and trusted RTOS software platform, with an installed base that has grown to millions of devices.
The market for wireless modules has grown as customers search for solutions that provide turnkey wireless connectivity to their products. The
development of modules is difficult due to stringent requirements, including high levels of integration, programmability, performance, reliability, security and power efficiency. In addition, designs
must meet numerous wireless standards deployed in various environments and serving diverse requirements.
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Our
combined expertise in IC design and software development allows us to engineer modules that provide robust, high-performance connections in challenging wireless environments. We have
developed wireless modules based on numerous wireless standards, including Z-Wave, Bluetooth, Zigbee, Thread, Wi-Fi and sub-GHz. We believe our demonstrated proficiency in the design of modules
provides our customers with significant advantages such as fast time to market, reduced development cost, global wireless certifications and software reuse.
Our focused expertise in mixed-signal ICs is the result of the breadth of engineering talent we have assembled with experience working in
analog-intensive CMOS design for a wide variety of applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends
that impact electronic systems and markets. Our expertise includes:
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Isolation, which is critical for existing and emerging industrial applications and telecom networks;
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Frequency synthesis, which is core technology for wireless and clocking applications;
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Integration, which enables the elimination of discrete components in a system; and
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Signal processing and precision analog, which forms the heart of consumer, industrial, medical and automotive electronics applications.
Our
understanding of the role of analog/digital interfaces within electronic systems, standards evolution, and end market drivers enables us to identify product development opportunities
and capitalize on market trends.
Manufacturing
As a fabless semiconductor company, we conduct IC design and development in our facilities and electronically transfer our proprietary IC
designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs typically use industry-standard CMOS manufacturing process technology to
achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs
within a lower cost framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus increasing the likelihood that
manufacturing capacity will be available throughout our products' life cycles. We currently partner with Taiwan Semiconductor Manufacturing Co. (TSMC) and Semiconductor Manufacturing
International Corporation (SMIC) to manufacture the majority of our semiconductor wafers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us
to focus our resources on design, development and marketing of our ICs.
Once
the silicon wafers have been produced, they are shipped directly to our third-party assembly subcontractors. The assembled ICs are then moved to the final testing stage. This
operation can be performed by the same contractor that assembled the IC, other third-party test subcontractors or within our internal facilities prior to shipping to our customers. During fiscal 2018,
most of our units shipped were tested by offshore third-party test subcontractors. We expect that our utilization of offshore third-party test subcontractors will remain substantial during fiscal
2019.
Backlog
We include in backlog accepted product purchase orders from customers and worldwide distributor stocking orders. Product orders in our backlog
are subject to changes in delivery schedules or
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cancellation
at the option of the purchaser typically without penalty. Our backlog may fluctuate significantly depending upon customer order patterns which may, in turn, vary considerably based on
rapidly changing business circumstances. Accordingly, we do not believe that our backlog at any time is necessarily representative of actual sales for any succeeding period.
Competition
The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We anticipate that the
market for our products will continually evolve and will be subject to rapid technological change. We believe the principal competitive factors in our industry are:
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Product size;
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Power
requirement;
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Level of
integration;
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Customer
support;
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Product
capabilities;
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Reputation;
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Reliability;
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Ability to rapidly
introduce new products to market;
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Price;
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Intellectual property;
and
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Performance;
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Software.
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We
believe that we are competitive with respect to these factors, particularly because our ICs typically are smaller in size, are highly integrated, achieve high performance
specifications at lower price points than competitive products and are manufactured in standard CMOS which generally enables us to supply them on a relatively rapid basis to customers to meet their
product introduction schedules.
However, disadvantages we face include our relatively short operating history in certain of our markets and the need for customers to redesign their products and modify their software to implement our
ICs in their products.
Due
to our diversified product portfolio and the numerous markets and applications we serve, we target a relatively large number of competitors. We compete with Analog Devices, Broadcom,
Cypress, IDT, Infineon, Maxim Integrated Products, MaxLinear, Microchip, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Synaptics, Texas Instruments and
others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors and start-up semiconductor design companies. Our competitors may
also offer bundled solutions offering a more complete product, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our
customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. We could also face competition from module makers
or other systems suppliers that may include mixed-signal components in their products that could eliminate the need for our ICs.
Many
of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, complementary product offerings, and
significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial
and strategic relationships between themselves or with our existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share.
Intellectual Property
Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents,
copyrights, trade secrets, trademarks and confidentiality procedures. As of December 29, 2018, we had approximately 1,730 issued or pending United States and foreign patents. There can be no
assurance that patents will ever be issued with respect to our patent applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented,
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challenged
or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue
to file new patent applications with respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the future.
We
claim copyright protection for proprietary documentation for our products. We have filed for registration, or are in the process of filing for registration, the visual images of
certain ICs with the U.S. Copyright Office. We have registered the "Silicon Labs" logo and a variety of other product and product family names as trademarks in the United States and selected foreign
jurisdictions. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. We also attempt to protect our trade secrets and other
proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures. We intend to protect our rights vigorously, but
there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to
the same extent as the laws of the United States.
While
our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new
products in a timely manner will be an important factor in maintaining our competitive position.
Many
participants in the semiconductor and electronics industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on
allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be
able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and
diversion of our resources, including our management's time. Any such litigation could materially adversely affect us.
Our
licenses include industry standard licenses with our vendors, such as wafer fabrication tool libraries, third-party core libraries, computer-aided design applications and business
software applications.
Employees
As of December 29, 2018, we employed 1,505 people. Our success depends on the continued service of our key technical and senior
management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a
work stoppage and none of our U.S. employees are represented by a labor organization. We consider our employee relations to be good.
Environmental Regulation
Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and
gases used in the semiconductor industry. Our compliance with these laws and regulations has not had a material impact on our financial position or results of operations.
Available Information
Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of
our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our website and the
information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors
Risks Related to our Business
We may not be able to maintain our historical growth and may experience significant period-to-period
fluctuations in our revenues and operating results, which may result in volatility in our stock price
Although we have generally experienced revenue growth in our history, we may not be able to sustain this growth. We may also experience
significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate. In some future
period our revenues or operating results may be below the expectations of public market analysts or investors. If this occurs, our stock price may drop, perhaps significantly.
A
number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our revenues and operating results,
including:
-
-
The timing and volume of orders received from our customers;
-
-
The timeliness of our new product introductions and the rate at which our new products may cannibalize our older products;
-
-
The rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the
products manufactured by such customers, which we refer to as "design wins";
-
-
The time lag and realization rate between "design wins" and production orders;
-
-
The demand for, and life cycles of, the products incorporating our mixed-signal solutions;
-
-
The rate of adoption of mixed-signal products in the markets we target;
-
-
Deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other
providers of mixed-signal ICs;
-
-
Changes in product mix;
-
-
The average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing;
-
-
The average selling prices for our products generally decline over time;
-
-
Changes in market standards;
-
-
Impairment charges related to inventory, equipment or other long-lived assets;
-
-
The software used in our products, including software provided by third parties, may not meet the needs of our customers;
-
-
Our customers may not be able to obtain other components such as capacitors (which are currently in short supply) that they need to incorporate
in conjunction with our products, leading to potential downturn in the demand for our products;
-
-
Significant legal costs to defend our intellectual property rights or respond to claims against us; and
-
-
The rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop
products for these new markets.
The
markets for consumer electronics, for example, are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our
products that
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are
incorporated in such devices. Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC
into their products until the new IC has achieved market acceptance. Once a new IC achieves market acceptance, demand for the new IC can quickly accelerate to a point and then level off such that
rapid historical growth in sales of a product should not be viewed as indicative of continued future growth. In addition, demand can quickly decline for a product when a new IC product is introduced
and receives market acceptance. Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating
performance.
If we are unable to develop or acquire new and enhanced products that achieve market acceptance in a timely
manner, our operating results and competitive position could be harmed
Our future success will depend on our ability to develop or acquire new products and product enhancements that achieve market acceptance in a
timely and cost-effective manner. The development of mixed-signal ICs is highly complex, and we have at times experienced delays in completing the development and introduction of new products and
product enhancements. Successful product development and market acceptance of our products depend on a number of factors, including:
-
-
Requirements of customers;
-
-
Accurate prediction of market and technical requirements;
-
-
Timely completion and introduction of new designs;
-
-
Timely qualification and certification of our products for use in our customers' products;
-
-
Commercial acceptance and volume production of the products into which our ICs will be incorporated;
-
-
Availability of foundry, assembly and test capacity;
-
-
Achievement of high manufacturing yields;
-
-
Quality, price, performance, power use and size of our products;
-
-
Availability, quality, price and performance of competing products and technologies;
-
-
Our customer service, application support capabilities and responsiveness;
-
-
Successful development of our relationships with existing and potential customers;
-
-
Technology, industry standards or end-user preferences; and
-
-
Cooperation of third-party software providers and our semiconductor vendors to support our chips within a system.
We
cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in
development of many products. If our products fail to achieve market acceptance, or if we fail to develop new products
on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The growth of the IoT market is dependent on the
adoption of industry standards to permit devices to connect and communicate with each other. If the industry cannot agree on a common set of standards, then the growth of the IoT market may be slower
than expected.
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Our research and development efforts are focused on a limited number of new technologies and products, and
any delay in the development, or abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position
Our products serve as components and solutions in electronic devices in various markets. As a result, we have devoted and expect to continue to
devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Research and development expense during
fiscal 2018 was $238.3 million, or 27.5% of revenues. A number of companies are actively involved in the development of these new technologies and standards. Should any of these companies delay
or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards
likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards
fail to achieve market acceptance, our competitors may be better able to address market demand than we would. Furthermore, if markets for these new technologies and standards develop later than we
anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate.
Significant litigation over intellectual property in our industry may cause us to become involved in costly
and lengthy litigation which could adversely affect our business
The semiconductor and software industries have experienced significant litigation involving patents and other intellectual property rights. From
time to time, third parties, including non-practicing entities, allege intellectual property infringement by our products, our customers' products, or products using technologies or communications
standards used in our industry. We also receive communications from customers or suppliers requesting indemnification for allegations brought against them by third parties. Some of these allegations
have resulted, and may result in the future, in our involvement in litigation. We have certain contractual obligations to defend and indemnify our
customers from certain infringement claims. We also have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the
future.
Given
the unpredictable nature of litigation and the complexity of the technology, we may not prevail in any such litigation. Legal proceedings could subject us to significant liability,
invalidate our proprietary rights, or harm our businesses and our ability to compete. Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims
or countersuits against us. Any litigation, regardless of its outcome or merit, could be time-consuming and expensive to resolve and could divert our management's time and attention. Intellectual
property litigation also could force us to take specific actions, including:
-
-
Cease using, selling or manufacturing certain products, services or processes;
-
-
Attempt to obtain a license, which license may require the payment of substantial royalties or may not be available on reasonable terms or at
all;
-
-
Incur significant costs, time delays and lost business opportunities to develop alternative technologies or redesign products; or
-
-
Pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.
Any acquisitions we make could disrupt our business and harm our financial condition
As part of our growth and product diversification strategy, we continue to evaluate opportunities to acquire other businesses, intellectual
property or technologies that would complement our current
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offerings,
expand the breadth of our markets or enhance our technical capabilities. On April 18, 2018, we acquired the Z-Wave business from Sigma Designs. This acquisition and other
acquisitions that we have made and may make in the future entail a number of risks that could materially and adversely affect our business and operating results,
including:
-
-
Problems integrating the acquired operations, technologies or products with our existing business and products;
-
-
Diversion of management's time and attention from our core business;
-
-
Need for financial resources above our planned investment levels;
-
-
Difficulties in retaining business relationships with suppliers and customers of the acquired company;
-
-
Risks associated with entering markets in which we lack prior experience;
-
-
Risks associated with the transfer of licenses of intellectual property;
-
-
Increased operating costs due to acquired overhead;
-
-
Tax issues associated with acquisitions;
-
-
Acquisition-related disputes, including disputes over earn-outs and escrows;
-
-
Potential loss of key employees of the acquired company; and
-
-
Potential impairment of related goodwill and intangible assets.
Future
acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the ownership percentages of existing
shareholders.
We may be unable to protect our intellectual property, which would negatively affect our ability to compete
Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business. We rely on a combination
of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our
employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other
proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is
difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit
us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others
will not develop effective competing technologies on their own.
Failure to manage our distribution channel relationships could impede our future growth
The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and
sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships. During fiscal 2018, 71% of our revenue was derived from distributors.
As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts. For example, conflicts with
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a distributor
may arise when a customer begins purchasing directly from us rather than through the distributor. The inability to successfully execute or manage a multi-channel sales strategy
could impede our future growth. In addition, relationships with our distributors often involve the use of price protection and inventory return rights. This often requires a significant amount of
sales management's time and system resources to manage properly. Because we consolidated our distribution relationships to a single global distributor, Arrow Electronics, in fiscal 2018, termination
of the relationship with Arrow Electronics, either by us or by Arrow Electronics, could result in a temporary or permanent loss of revenue. If Arrow Electronics fails to effectively market and sell
our products in full compliance with applicable laws, or if we are unable to maintain our existing relationship with Arrow Electronics, we may not be able to find a distributor with the scale and
resources of Arrow Electronics, maintain existing levels of international revenue or realize expected long-term international revenue growth. We may not be successful in finding suitable alternative
global distributors on satisfactory terms, or at all, and this could adversely affect our ability to effectively sell our solutions in certain geographical locations or to certain end customers.
We depend on a limited number of customers for a significant portion of our revenues, and the loss of, or a
significant reduction in orders from, any key customer could significantly reduce our revenues
The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and
adversely affect our business. During fiscal 2018, our ten largest customers accounted for 20% of our revenues. Some of the markets for our products are dominated by a small number of potential
customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell
products that incorporate our IC products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past or alter their purchasing
patterns, particularly because:
-
-
We do not have material long-term purchase contracts with our customers;
-
-
Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product
purchase commitments with little or no notice to us and without penalty;
-
-
Some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our products; and
-
-
Some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could
affect our customers' purchasing decisions in the future.
Our
customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to
secure these components. We believe that any expansion of our customers' supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell
to our customers, which would negatively affect our revenues and operating results.
We are subject to increased inventory risks and costs because we build our products based on forecasts
provided by customers before receiving purchase orders for the products
In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of
receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until
they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our
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products may
not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs, increased obsolescence and increased operating costs. These
inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate because this causes us to
have less visibility regarding the accumulated levels of inventory for such customers. A resulting write-off of unusable or excess inventories would adversely affect our operating results.
Our products are complex and may contain errors which could lead to liability, an increase in our costs
and/or a reduction in our revenues
Our products are complex and may contain errors, particularly when first introduced and/or when new versions are released. Our products are
increasingly designed in more complex processes, including higher levels of software and hardware integration in modules and system-level solutions and/or include elements provided by third parties
which further increase the risk of errors. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors or vulnerabilities prior to delivery of our
products to our customers.
Should
problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers. These
errors could also cause significant re-engineering costs, the diversion of our engineering personnel's attention from our product development efforts and cause significant customer relations and
business reputation problems. Any defects could result in refunds, product replacement, product recall or other liability. Any of the foregoing could impose substantial costs and harm our business.
Product
liability, data breach or cyber liability claims may be asserted with respect to our products. Many of our products focus on wireless connectivity and the IoT market and such
connectivity may make these products particularly susceptible to cyber-attacks. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they
are incorporated. A defect, failure or vulnerability in our product could cause failure in our customer's end-product, so we could face claims for damages that are disproportionately higher than the
revenues and profits we receive from the products involved. Furthermore, product liability risks are particularly significant with respect to medical and automotive applications because of the risk of
serious harm to users of these end-products. There can be no assurance that any insurance we maintain will sufficiently protect us from such claims.
We rely on third parties to manufacture, assemble and test our products and the failure to successfully
manage our relationships with our manufacturers and subcontractors would negatively impact our ability to sell our products
We do not have our own wafer fab manufacturing facilities. Therefore, we rely on third-party vendors to manufacture the products we design. We
also currently rely on Asian third-party assembly subcontractors to assemble and package the silicon chips provided by the wafers for use in final products. Additionally, we rely on these offshore
subcontractors for a substantial portion of the testing requirements of our products prior to shipping. We expect utilization of third-party subcontractors to continue in the future.
The
cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors. On occasion, we have been unable to adequately respond to
unexpected increases in customer demand due to capacity constraints and, therefore, were unable to benefit from this incremental demand. We may be unable to obtain adequate foundry, assembly or test
capacity from our third-party subcontractors to meet our customers' delivery requirements even if we adequately forecast customer demand.
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There
are significant risks associated with relying on these third-party foundries and subcontractors, including:
-
-
Failure by us, our customers or their end customers to qualify a selected supplier;
-
-
Potential insolvency of the third-party subcontractors;
-
-
Reduced control over delivery schedules and quality;
-
-
Limited warranties on wafers or products supplied to us;
-
-
Potential increases in prices or payments in advance for capacity;
-
-
Increased need for international-based supply, logistics and financial management;
-
-
Their inability to supply or support new or changing packaging technologies; and
-
-
Low test yields.
We
typically do not have long-term supply contracts with our third-party vendors which obligate the vendor to perform services and supply products to us for a specific period, in
specific quantities, and at specific prices. Our third-party foundry, assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time
required to meet demand for our products. In the event that these vendors fail to meet our demand for whatever reason, we expect that it would take up to 12 months to transition performance of
these services to new providers. Such a transition may also require qualification of the new providers by our customers or their end customers.
Most
of the silicon wafers for the products that we have sold were manufactured either by TSMC or SMIC. Our customers typically complete their own qualification process. If we fail to
properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab
lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to
support the fab line transition, which would adversely affect our operating results.
Our customers require our products to undergo a lengthy and expensive qualification process without any
assurance of product sales
Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of
the products in the customer's system as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does
not ensure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the product or software, changes in the IC's
manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products
are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we
devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or
delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to
suffer.
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We are a global company, which subjects us to additional business risks including logistical and financial
complexity, political instability and currency fluctuations
We have established international subsidiaries and have opened offices in international markets to support our activities in Asia, the Americas
and Europe. This has included the establishment of a headquarters in Singapore for non-U.S. operations. The percentage of our revenues derived from outside of the United States was 83% during fiscal
2018. We may not be able to maintain or increase global market demand for our products. Our international operations are subject to a number of risks,
including:
-
-
Complexity and costs of managing international operations and related tax obligations, including our headquarters for non-U.S. operations in
Singapore;
-
-
Protectionist laws and business practices, including trade restrictions, tariffs, quotas and other trade barriers, particularly with respect to
China-U.S. trade policies;
-
-
Difficulties related to the protection of our intellectual property rights in some countries;
-
-
Multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other
liabilities and result in increased complexity and costs, including the impact of the Tax Cuts and Jobs Act;
-
-
Longer sales cycles;
-
-
Greater difficulty in accounts receivable collection and longer collection periods;
-
-
High levels of distributor inventory subject to price protection and rights of return to us;
-
-
Political and economic instability;
-
-
Greater difficulty in hiring and retaining qualified personnel; and
-
-
The need to have business and operations systems that can meet the needs of our international business and operating structure.
To
date, substantially all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less
competitive. Similarly, a decrease in the value of the U.S. dollar could reduce our buying power with respect to international suppliers.
Our inability to manage growth could materially and adversely affect our business
Our past growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel,
systems and resources. We anticipate that we will need to implement a variety of new and upgraded sales, operational and financial enterprise-wide systems, information technology infrastructure,
procedures and controls, including the improvement of our accounting and other internal management systems to manage this
growth and maintain compliance with regulatory guidelines, including Sarbanes-Oxley Act requirements. To the extent our business grows, our internal management systems and processes will need to
improve to ensure that we remain in compliance. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial
management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to plan for the succession from time to time of certain
persons who have been key management and technical personnel. If we are unable to effectively manage our expanding global operations, including our international headquarters in Singapore, our
business could be materially and adversely affected.
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Our products incorporate technology licensed from third parties
We incorporate technology (including software) licensed from third parties in our products. We could be subjected to claims of infringement
regardless of our lack of involvement in the development of the licensed technology. Although a third-party licensor is typically obligated to indemnify us if the licensed technology infringes on
another party's intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent. See
Significant
litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business.
Furthermore, any
failure of third-party technology to perform properly would adversely affect sales of our products incorporating such technology.
We are subject to risks relating to product concentration
We derive a substantial portion of our revenues from a limited number of products, and we expect these products to continue to account for a
large percentage of our revenues in the near term. Continued market acceptance of these products, is therefore, critical to our future success. In addition, substantially all of our products that we
have sold include technology related to one or more of our issued U.S. patents. If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that
could reduce both the volume and price per unit of our products. Our business, operating results, financial condition and cash flows could therefore be adversely affected
by:
-
-
A decline in demand for any of our more significant products;
-
-
Failure of our products to achieve continued market acceptance;
-
-
Competitive products;
-
-
New technological standards or changes to existing standards that we are unable to address with our products;
-
-
A failure to release new products or enhanced versions of our existing products on a timely basis; and
-
-
The failure of our new products to achieve market acceptance.
We are subject to credit risks related to our accounts receivable
We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers. Accordingly,
we are not protected against accounts receivable default or bankruptcy by these entities. Our ten largest customers or distributors represent a substantial majority of our accounts receivable. If any
such customer or distributor, or a material portion of our smaller customers or distributors, were to become insolvent or otherwise not satisfy their obligations to us, we could be materially harmed.
We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are
unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed
We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and
marketing personnel. We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our
reliance on specific individuals, and on properly managing the transition of key roles when they occur. There is currently a shortage of qualified personnel with significant experience in the design,
development, manufacturing, marketing and sales of analog and mixed-signal products. In particular, there is a shortage of engineers who are familiar with the
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intricacies
of the design and manufacturability of analog elements, and competition for such personnel is intense. Our key technical personnel represent a significant asset and serve as the primary
source for our technological and product innovations. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. The loss of any
of our key employees or the inability to attract or retain qualified personnel both in the United States and internationally, including engineers, sales, applications and marketing personnel, could
delay the development and introduction of, and negatively impact our ability to sell, our products.
Any dispositions could harm our financial condition
Any disposition of a product line would entail a number of risks that could materially and adversely affect our business and operating results,
including:
-
-
Diversion of management's time and attention from our core business;
-
-
Difficulties separating the divested business;
-
-
Risks to relations with customers who previously purchased products from our disposed product line;
-
-
Reduced leverage with suppliers due to reduced aggregate volume;
-
-
Risks related to employee relations;
-
-
Risks associated with the transfer and licensing of intellectual property;
-
-
Security risks and other liabilities related to the transition services provided in connection with the disposition;
-
-
Tax issues associated with dispositions; and
-
-
Disposition-related disputes, including disputes over earn-outs and escrows.
Our stock price may be volatile
The market price of our common stock has been volatile in the past and may be volatile in the future. The market price of our common stock may
be significantly affected by the following factors:
-
-
Actual or anticipated fluctuations in our operating results;
-
-
Changes in financial estimates by securities analysts or our failure to perform in line with such estimates;
-
-
Changes in market valuations of other technology companies, particularly semiconductor companies;
-
-
Announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital
commitments;
-
-
Introduction of technologies or product enhancements that reduce the need for our products;
-
-
The loss of, or decrease in sales to, one or more key customers;
-
-
A large sale of stock by a significant shareholder;
-
-
Dilution from the issuance of our stock in connection with acquisitions;
-
-
The addition or removal of our stock to or from a stock index fund;
-
-
Departures of key personnel;
-
-
The required expensing of stock awards; and
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-
-
The required changes in our reported revenue and revenue recognition accounting policy under ASC Topic 606,
Revenue
from Contracts with Customers
.
The
stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall
regardless of our performance.
Most of our current manufacturers, assemblers, test service providers, distributors and customers are
concentrated in the same geographic region, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could disrupt our operations or sales
Most of our foundries and several of our assembly and test subcontractors' sites are located in Taiwan and most of our other foundry, assembly
and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the Pacific Rim region is
significant due to the proximity of major earthquake fault lines in the area. Earthquakes, tsunamis, fire, flooding, lack of water or other natural disasters, an epidemic, political unrest, war, labor
strikes or work stoppages in countries where our semiconductor manufacturers, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test
capacity. There can be no assurance that alternate capacity could be obtained on favorable terms, if at all.
A
natural disaster, epidemic, labor strike, war or political unrest where our customers' facilities are located would likely reduce our sales to such customers. North Korea's recent
geopolitical maneuverings, including nuclear weapons and long-range missile testing, have created unrest. Such unrest could create economic uncertainty or instability, could escalate to war or
otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results. In addition, a
significant portion of the assembly and testing of our products occurs in South Korea. Any disruption resulting from these events could also cause significant delays in shipments of our products until
we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third-party vendor.
The semiconductor manufacturing process is highly complex and, from time to time, manufacturing yields may
fall below our expectations, which could result in our inability to satisfy demand for our products in a timely manner and may decrease our gross margins due to higher unit costs
The manufacturing of our products is a highly complex and technologically demanding process. Although we work closely with our foundries and
assemblers to minimize the likelihood of reduced manufacturing yields, we have from time to time experienced lower than anticipated manufacturing yields. Changes in manufacturing processes or the
inadvertent use of defective or contaminated materials could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies, which could lower our gross margins. If our
foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet our customers' demand for our products in a timely manner, which would
adversely affect our operating results and damage our customer relationships.
We depend on our customers to support our products, and some of our customers offer competing products
We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products
supplied by our customers. If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that
incorporate our products may diminish or we may otherwise be materially adversely affected. Any reduction in the demand for these devices would significantly reduce our revenues.
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certain products, some of our customers offer their own competitive products. These customers may find it advantageous to support their own offerings in the marketplace in lieu of
promoting our products.
Our convertible senior notes could adversely affect our operating results and financial condition
Upon conversion, our convertible senior notes may be settled in cash, shares of our common stock or a combination of cash and shares, at our
election. We intend to settle the principal amount of the notes in cash. If we do not have adequate cash available, we may not be able to settle the principal amount in cash. In such case, we will be
required to settle the principal amount in stock, which would result in immediate, and likely material, dilution to the ownership interests of our existing stockholders. Any sales in the public market
of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.
Following
any conclusion that we no longer have the ability to settle the convertible senior notes in cash, we will be required on a going forward basis to change our accounting policy
for earnings per share from the treasury stock method to the if-converted method. Earnings per share may be lower under the if-converted method as compared to the treasury stock method.
The
principal balance of the convertible senior notes was separated into liability and equity components, which were recorded initially at fair value. The excess of the principal amount
of the liability component over its carrying amount represents the debt discount, which is accreted to interest expense over the term of the notes using the effective interest method. Accordingly, we
will report higher interest expense because of the recognition of both the debt discount amortization and the notes' coupon interest.
Our debt could adversely affect our operations and financial condition
We believe we have the ability to service our debt, but our ability to make the required payments thereunder when due depends upon our future
performance, which will be subject to general economic conditions, industry cycles and other factors affecting our operations, including risk factors described herein, many of which are beyond our
control. Our credit facility also contains covenants, including financial covenants. If we breach any of the covenants under our credit facility and do not obtain appropriate waivers, then, subject to
any applicable cure periods, our outstanding indebtedness thereunder could be declared immediately due and payable.
We could seek to raise additional debt or equity capital in the future, but additional capital may not be
available on terms acceptable to us, or at all
We believe that our existing cash, cash equivalents, investments and credit under our credit facility will be sufficient to meet our working
capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, our ability to borrow further under the credit facility is dependent upon
our ability to satisfy various conditions, covenants and representations. It is possible that we may need to raise additional funds to finance our activities or to facilitate acquisitions of other
businesses, products, intellectual property or technologies. We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors. In addition,
even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. However, we may not be able to obtain
additional funds on favorable terms, or at all. If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be
reduced.
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We have limited resources compared to some of our current and potential competitors and we may not be able to
compete effectively and increase market share
Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies
and devote greater resources to the development, promotion and sale of their products than we can to ours. In addition, some of our current and potential competitors have already established supplier
or joint development relationships with the decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers
from purchasing products from us or persuade them to replace our products with their products. Our competitors may also offer bundled solutions offering a more complete product despite the technical
merits or advantages of our products. These competitors may elect not to support our products which could complicate our sales efforts. These and other competitive pressures may prevent us from
competing successfully against current or future competitors, and may materially harm our business. Competition could decrease our prices, reduce our sales, lower our gross margins and/or decrease our
market share.
Provisions in our charter documents and Delaware law could prevent, delay or impede a change in control of us
and may reduce the market price of our common stock
Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition
that a stockholder may consider favorable. For example, our certificate of incorporation and bylaws provide for:
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The division of our Board of Directors into three classes to be elected on a staggered basis, one class each year;
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The ability of our Board of Directors to issue shares of our preferred stock in one or more series without further authorization of our
stockholders;
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A prohibition on stockholder action by written consent;
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Elimination of the right of stockholders to call a special meeting of stockholders;
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A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be
considered at any meeting of stockholders; and
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A requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation.
We
also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of
our common stock.
Risks related to our industry
We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant
fluctuations
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and
price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant fluctuations, often connected with, or in
anticipation of, maturing product cycles and new product introductions of both semiconductor companies' and their customers' products and fluctuations in general economic conditions. Deteriorating
general worldwide economic conditions, including
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reduced
economic activity, concerns about credit and inflation, increased energy costs, decreased consumer confidence, reduced corporate profits, decreased spending and similar adverse business
conditions, would make it very difficult for our customers, our vendors, and us to accurately forecast and plan future business activities and could cause U.S. and foreign businesses to slow spending
on our products. We cannot predict the timing, strength, or duration of any economic slowdown or economic recovery. If the economy or markets in which we operate deteriorate, our business, financial
condition, and results of operations would likely be materially and adversely affected.
Downturns
have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. We believe the
semiconductor industry is currently suffering a downturn due in large part to adverse macroeconomic conditions,
characterized by a slowdown in overall GDP performance and factory activity in certain regions, particularly in China , higher levels of customer inventory, the impact of tariffs on trade relations,
and greater overall uncertainty regarding the economy. This downturn has had, and may continue to have, a material adverse effect on our business and operating results.
Upturns
have been characterized by increased product demand and production capacity constraints created by increased competition for access to third-party foundry, assembly and test
capacity. We are dependent on the availability of such capacity to manufacture, assemble and test our products. None of our third-party foundry, assembly or test subcontractors have provided
assurances that adequate capacity will be available to us.
The average selling prices of our products could decrease rapidly which may negatively impact our revenues
and gross margins
We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We
have reduced the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our competitors and other factors. If we are
unable to offset any such reductions in our average selling prices by increasing our sales volumes, increasing our sales content per application or reducing production costs, our gross margins and
revenues will suffer. To maintain our gross margin percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs. Our
failure to do so could cause our revenues and gross margin percentage to decline.
Competition within the numerous markets we target may reduce sales of our products and reduce our market
share
The markets for semiconductors in general, and for mixed-signal products in particular, are intensely competitive. We expect that the market for
our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous markets and applications, we face competition from a
relatively large number of competitors. We compete with Analog Devices, Broadcom, Cypress, IDT, Infineon, Maxim Integrated Products, MaxLinear, Microchip, Nordic Semiconductor, NXP Semiconductors,
Qualcomm, Renesas, STMicroelectronics, Synaptics, Texas Instruments and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of
semiconductors, and start-up semiconductor design companies. As the markets for communications products grow, we also may face competition from traditional communications device companies. These
companies may enter the mixed-signal semiconductor market by introducing their own products or by entering into strategic relationships with or acquiring other existing providers of semiconductor
products. In addition, large companies may restructure their operations to create separate companies or may acquire new businesses that are focused on providing the types of products we produce or
acquire our customers.
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We may be the victim of business disruptions and security breaches, including cyber-attacks, which could lead
to liability or could damage our reputation and financial results
Information technology system and/or network disruptions, regardless of the cause, but including acts of sabotage, error, or other actions,
could harm the company's operations. Failure to effectively prevent, detect, and recover from security breaches, including cyber-attacks, could result in the misuse of company assets, disruption to
the company, diversion of management resources, regulatory inquiries, legal claims or proceedings, reputational damage, loss of sales and other costs to the company. We routinely face attacks that
attempt to breach our security protocols, gain access to or disrupt our computerized systems or steal proprietary company, customer, partner or employee information. These attacks are sometimes
successful. These attacks may be due to security breaches, employee error, theft, malfeasance, phishing schemes, ransomware, faulty password or data security management, or other irregularities. The
theft, loss, destruction, unavailability or misuse of personal or business data collected, used, stored or transferred by us to run our business could result in increased security costs or costs
related to defending legal claims. Industrial espionage, theft or loss of our intellectual property data could lead to counterfeit products or harm the competitive position of our products and
services. Costs to implement, test and maintain measures to promote compliance with applicable privacy and data security laws as well as to protect the overall security of our system could be
significant. Attempted or successful attacks against our products and services could damage our reputation with customers or users and reduce demand for our products and services.
Changes in the Privacy and Data Security/Protection Laws Could Have an Adverse Effect on our Operations
Federal, state and international privacy-related or data protection laws and regulations could have an adverse effect on our operations.
Complying with these laws and the possibility of proceedings against us by governmental entities or others in relation to these laws could increase operational costs. In May 2018, the European Union's
General Data Protection Regulation ("GDPR") went into effect, replacing the EU's 1995 Data Protection Directive. The costs of compliance with the GDPR and the potential for fines and penalties in the
event of a breach of the GDPR may have an adverse effect on our operations.
We may be subject to information technology failures that could damage our reputation, business operations
and financial condition
We rely on information technology for the effective operation of our business. Our systems are subject to damage or interruption from a number
of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, theft, physical or electronic break-ins,
cyber-attacks, sabotage, vandalism, or similar events or disruptions. Our security measures may not detect or prevent such security breaches. Any such compromise of our information security could
result in the theft or unauthorized publication or use of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a
violation of privacy or other laws, expose us to a risk of litigation or damage our reputation. In addition, our inability to use or access information systems at critical points in time could
unfavorably impact the timely and efficient operation of our business, which could negatively affect our business and operating results.
Third
parties with which we conduct business, such as foundries, assembly and test contractors, distributors and customers, have access to certain portions of our sensitive data. In the
event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our reputation, business operations and financial results.
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Our products must conform to industry standards and technology in order to be accepted by end users in our
markets
Generally, our products comprise only a part of a device. All components of such devices must uniformly comply with industry standards in order
to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more
influential in affecting industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our
customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which
would harm our business.
Products
for certain applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure
compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be
required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with
prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins.
Our
pursuit of necessary technological advances may require substantial time and expense. We may not be successful in developing or using new technologies or in developing new products
or product enhancements that achieve market acceptance. If our products fail to achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected.
Customer demands and new regulations related to conflict-free minerals may adversely affect us
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of "conflict" minerals mined
from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements could affect the pricing, sourcing
and availability of minerals used in the manufacture of semiconductor devices (including our products). There will be additional costs associated with complying with the disclosure requirements, such
as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We
may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free.