Overview
Entropic is a world leader in semiconductor solutions for the connected home. We transform how traditional HDTV broadcast and Internet protocol, or
IP,-based streaming video content is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home. Entropics next-generation Set-top Box, or STB, System-on-a-Chip, or SoC, and home connectivity, or
Connectivity, solutions enable global Pay-TV operators to offer consumers more captivating whole-home entertainment experiences by evolving the way digital entertainment is delivered, connected and consumedin the home and on the go.
We are recognized as the only pure-play platform semiconductor company in connected home entertainment. Our platform semiconductor
solutions provide a unified vision for how our core silicon can be leveraged in reference hardware and software coupled with middleware and applications to enhance consumers overall digital entertainment experiences. Our platform solutions
power next-generation TV engagement experiences by:
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Reliably delivering broadcast and IP content into the home with our end-to-end Satellite and Broadband Access solutions;
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Seamlessly connecting digital entertainment to consumer devices throughout the home via a dependable MoCA
®
(Multimedia over Coax Alliance) backbone; and
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Ensuring consumers can securely consume rich digital entertainment with our advanced, open standards-based media processing SoC solutions.
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The Entropic platform is at the heart of the digital entertainment ecosystemconnecting technologies,
applications, services and people. Looking specifically at products, we offer a diverse portfolio of STB, SoC and Connectivity solutions that include the following:
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STB SoC Solutions
: We added STB SoC solutions to our product offering in April 2012, when we completed the acquisition of assets related to the STB
business of Trident Microsystems, Inc. and certain of its subsidiaries, collectively Trident. The acquired assets included a diverse STB product portfolio, composed of a comprehensive suite of digital STB components and system solutions for the
worldwide satellite, terrestrial, cable and IP television, or IPTV, markets. Our STB products primarily consist of STB SoCs, but also include DOCSIS modems, interface devices and media processors. In addition to traditional standard-definition, or
SD, STBs and advanced high-definition, or HD, STBs, many of these products feature ARM
®
application processor-based SoCs that have been optimized for leading Web
technologies
.
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Connectivity Solutions
: Our Connectivity solutions enable access to broadcast and IPTV services as well as deliver and distribute other media content,
such as movies, music, games and photos, throughout the home and include:
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Home networking solutions based on the MoCA standard which use existing coaxial cable to create a robust IP-based network for easy sharing of HD video and other
multimedia content throughout the home;
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High-speed broadband access solutions which use coaxial cable infrastructure to deliver last few hundred meter connectivity for high-speed broadband
access to single-family homes and multiple dwelling units; and
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Direct Broadcast Satellite outdoor unit, or DBS ODU, solutions which consist of our band translation switch, or BTS, and channel stacking switch, or CSS,
products which simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable. Adding to our breadth of DBS ODU offerings, in July 2012 we acquired specific direct broadcast
satellite intellectual property and corresponding technologies from PLX Technology, Inc. The purchased assets provided an accelerated roadmap for our digital channel stacking switch, or dCSS, semiconductor product, which will ultimately lead toward
highly-integrated products that incorporate broadband capture and IP output.
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Our products allow telecommunications
carriers, cable operators, DBS ODU, over-the-air and over-the-top, or OTT, service providers, which we collectively refer to as service providers, to enhance and expand their service offerings and reduce deployment costs in an increasingly
competitive environment. Our STB SoC and Connectivity solutions are now being deployed into consumer homes to support advanced services such as multi-room DVR, HD video calling and OTT content delivery. Our products are deployed by major service
providers globally, including Comcast, Cox Communications, DIRECTV, DISH Network, OCN (China), Time Warner Cable, Topway (China), UPC (Netherlands) and Verizon, as well as by a number of smaller service providers.
We have extensive core competencies in video communications, networking algorithms and protocols, SoC design, embedded software, mixed signal and
radio frequency integrated circuit design, and communications and radio frequency systems. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with
delivering multiple streams of HD video into and throughout the home and processing those video streams for display on televisions or other devices in the home.
Since making two transformative acquisitions in 2012, we updated our brand identity in January 2013 to represent the significant shift in our overall vision, look and message. The corporate logo was modernized to
reflect the newly integrated company and the word Communications is dropped from our name in all new marketing communications programs.
We were incorporated in Delaware in January 2001. Our principal executive offices are located at 6290 Sequence Drive, San Diego, California 92121, and our telephone number is (858) 768-3600. Our corporate
website address is www.entropic.com. Our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the Securities and Exchange Commission, or SEC, are, and will continue
to be, available, free of charge, through the investor relations section of our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. The information contained on, or accessible
through, our website is not intended to be part of this or any other report we file with, or furnish to, the SEC and shall not be incorporated by reference into this 10-K. Our common stock trades on The NASDAQ Global Select Market under the symbol
ENTR.
Industry Background
Intense competition among service providers, including new emerging OTT service providers, is driving a revolution in the delivery of video and
other multimedia content into and throughout the home. According to research by IMS Research, the number of worldwide HD video consumer premise equipment (consisting of HD-DTAs / STBs / Gateways / Media Servers / HD DVRs) is expected to grow from
79 million in 2011 to approximately 182 million by 2015, representing a compound annual growth rate of approximately 23 percent. Service providers are making significant infrastructure investments to differentiate their offerings by adding
new video services such as HD video, video-on-demand, whole-home DVR, as well as bundled video, voice, broadband data, 3G/4G/Wi-Fi
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coverage (via strategic partnerships) and now home automation and security or quintuple-play, services leveraging the technology in STBs to act as part of the consumers
mesh-network. This enables the consumer to not only enjoy advanced new services no matter where they are or the device they have, but also control a variety of functions from temperature, lighting and IP cameras via their mobile device
when they are away from the home. The more services that are bundled, the more integral the service provider becomes in the day-to-day life of the consumer, reducing subscriber turnover all the while increasing the average revenue per
user and driving subscriber growth. With every one of these new services introduced, the IP-backbone of the home is becoming more and more critical in terms of reliability, quality of service, or QoS, low-latency and remote management by
the service provider.
Several favorable consumer entertainment trends are contributing to the increasing video and multimedia revenue
opportunity for service providers. These trends include:
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Increasing availability of digital multimedia content
. The conversion of multimedia content from an analog to a digital format and
the increasing number of broadcast content providers who make their video content available for online video streaming are significantly increasing the amount and variety of video, music, photos and other multimedia content that consumers buy,
receive and store. In North America, cable providers are moving to all-digital services to reclaim network bandwidth for new, advanced services, such as faster broadband tiers. In Asia, the conversion is being driven by regulation mandates and an
increase in competition between providers.
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Introduction of new video formats requiring greater bandwidth.
The development and introduction of digital video formats starting
with SD and progressing to HD, three dimensional, or 3D, and Ultra High Definition Television, or UHDTV (4K), not only provide the consumer with a higher quality viewing experience, but also increase the data throughput by up to 16 times
the current HD requirements.
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Proliferation of connected digital multimedia devices within the home
. As a result of the increasing availability of multimedia
content from sources inside the home and from the Internet, connected digital multimedia devices such as HDTVs, desktop and laptop personal computers, DVD players, tablets, Blu-ray players, portable media players, gaming consoles, DVRs and OTT STBs
can now be found in U.S. households in increasing numbers.
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Introduction of new multimedia applications
. An increasing number of multimedia applications utilize digital video and other
multimedia content for consumer home entertainment. Some examples of these applications include video time shifting, or the ability to pause, fast forward and rewind live or stored video, the ability to watch and record multiple
television shows at once, video-on-demand, multi-room DVR or placeshifting which enables the sharing of multimedia content across devices and between rooms throughout the home, online gaming, streaming of downloaded movies stored on a
personal computer to a television, IP calling services such as Skype, and OTT services that directly deliver Internet video content into the home.
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Increasing consumer adoption of OTT services
. Consumer demand for fully customizable viewing experiences that allow them to select
the time, place and content has increased the availability of OTT services such as those offered from Apple (iTunes), Google (Google Play), Netflix, Hulu, BestBuy (CinemaNow), Amazon (Unbox) and Wall-Mart (Vudu), all of which benefit from having a
high-speed, highly reliable network connection to digital multimedia devices, such as connected HD video and game consoles, within a home
.
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Increasing number of services being provided
. Consumers have always envied the idea of whole-home automation, but until recently,
has been a service only afforded by only a small portion of the population due to the high initial device and equipment installation costs.
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With the advent of premium services like SignatureHome
®
service from Time Warner Cable and
Comcasts Xfinity
®
Signature Service, a much larger customer base can enjoy such conveniences in addition to now folding in home security and
surveillance, all of which mandate a highly-reliable IP-backbone within the consumers home. As a result, MoCA is the premier choice of home networking of the various cable and pay satellite devices.
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By providing more advanced customer premises equipment, service providers are able to more easily introduce new
services, simplify and enhance the user experience, and maintain content security and service reliability while meeting these increasing consumer entertainment demands.
We believe traditional cable, satellite and telco/IPTV service providers are competitively positioned to provide these services because they already have licensed access and distribution rights to premium video
content, have established the infrastructure that enables carrier class QoS and have developed new system in-home gateway or media server topologies to leverage the demand for changing consumer behavior. These new gateways or
media servers in North America will connect to MoCA-enabled client devices creating a system architecture for multiple system operators with lower total cost of ownership than current deployments. In other countries, we see leading video providers
considering similar Client/Server architectures as the most efficient way to deliver broadcast and broadband video.
The stringent
communications requirements associated with high-quality HD video, 3D video and other multimedia content present a significant challenge for service providers today. In response, service providers require solutions that enable the distribution of
video and other multimedia content into and throughout the home, and processing of such content for display on televisions and other devices, while maintaining the high-quality standards demanded by subscribers. For any such technology solution to
succeed, we believe it must satisfy the following requirements:
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High bandwidth, reliability and full QoS for HD video
. Due to the fact that video is typically a streaming, real-time, visual
experience, video quality can rapidly degrade with errors or delays in packet delivery. A high-quality video experience requires reliable first-pass transmission, very low packet error rate, low latency and low jitter. Moreover, video consumes up to
10 times more bandwidth than typical voice and data services and has higher QoS requirements. A connected home with capacity to support multiple high-quality HD video streams requires a high bandwidth network with net throughput in excess of 100
megabits per second for todays services. In the future, we believe more IP-based video will be distributed around the home along with broadband service bandwidth, thereby increasing need for a home network that can support greater than 250
Mbps.
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Cost-effective deployment
. It is important for service providers to leverage the existing installed network infrastructure inside
and outside the home to minimize incremental cost and expedite new service deployments. Service providers prefer plug-and-play installation of new services as opposed to having to dispatch a service vehicle to customer premises, often referred to as
a truck roll. Service providers are focused on saving installation time and minimizing customer service calls, thereby reducing total costs to deliver video services. In some cases, service providers may install customer premise
equipment that is capable of providing services that are not ordered by the customer at the time of installation but which may be switched on remotely at a later time, thereby potentially avoiding the need for future truck rolls.
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Customer ease of use
. Most consumers have little tolerance for complicated devices and service disruptions. Therefore, mainstream
consumer adoption requires an easy to use and compelling service offering and plug-and-play service installation with minimal ongoing maintenance.
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Co-existence with other services and devices
. Consumers currently subscribe to a broad array of communications services, including
traditional voice, broadcast television, broadband access and cellular wireless services that are delivered using a number of different technologies. In addition, consumers may use a multitude of computing, communications and consumer electronics
devices, such as personal computers, video players, gaming consoles, set-top boxes and televisions. Any successful home networking or access solution must seamlessly co-exist with existing services and devices with minimal interference or
degradation in performance.
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Security
. The ability to ensure the secure delivery of content and consumer privacy is an essential element of any successful
bundled service offering. Therefore, home networking and access solutions require robust data encryption and other security mechanisms to be considered viable. Service providers have multiple security technology options to choose from in the market
today.
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To address these requirements and find ways to increase revenues, service providers are exploring new
technology platforms that enable delivery of new services into and throughout the home. Our STB and Connectivity solutions help meet this need.
Our
Solutions
We provide systems solutions comprised of silicon integrated circuits and software as a platform to enable delivery of
multiple streams of HD video and other multimedia content into and throughout the home and which process those video streams for display on HDTVs and other devices. Our solutions are based upon our ability to combine the following core competencies:
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Video communications, networking algorithms and protocols
. We have extensive experience in defining and developing physical layer
and media access controller protocols as well as networking, routing and security protocols. This includes expertise in advanced equalization, modulation and coding techniques, and contention-free media access controller protocols required for high
QoS video delivery.
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Broad format HD content decoding
. Our solutions ensure STB compatibility for current broadcast MPEG and emerging HD resolutions
with commonly used online video on demand, or VOD, and OTT services, including native support for VP8 codec.
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Extensive video security support
. Our STB SoCs support advanced security features and protocols with hardened cryptology to
implement digital rights management and conditional access, or CA, technologies for protecting operator video services with leading CA vendors.
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Enhanced power management
. We ensure low-power designs to meet the compliance needs of North American, Asian and European energy
mandates and/or regulations.
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SoC design, mixed signal and embedded software capabilities
. Our ability to integrate multiple complex functions into a single
silicon solution is a result of our significant experience in many disciplines, including embedded system architecture, high-speed and very large-scale integration design, microcontrollers, embedded software, packet processing and high-performance
mixed signal design. Our mixed signal design expertise includes designing high-performance analog-to-digital and digital-to-analog converters. We also have in-depth experience in packaging design and automated high-volume test development, which
allows us to develop cost-effective solutions.
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Radio frequency integrated circuit design expertise
. We have extensive experience developing highly-integrated radio frequency
integrated circuits. Our broad radio frequency systems and design capability allow us to provide solutions that seamlessly integrate radio frequency functionality within a digital communications platform. We have extensive
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experience with the complex task of integrating digital, high-speed mixed signal and radio frequency integrated circuit designs into complementary metal-oxide semiconductor SoC.
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Broad communications and radio frequency systems-level capabilities
. Our system-level knowledge is the result of significant
experience supplying solutions for service provider networks and includes an understanding of the critical elements in coaxial cable and satellite networks, such as service provider equipment and other devices both inside and outside the home.
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Domain expertise in operator-based deployments
. We have close working relationships with service providers, their original design
manufacturer, or ODM, and original equipment manufacturer, or OEM, partners, and the consumer electronics markets that they serve. Our extensive experience with service provider deployments allows us to deliver rapid time-to-market solutions over
multiple generations of customer premises equipment and access equipment. These close working relationships allow us to serve as a trusted advisor and contribute to and gain insight into future service provider, ODM and OEM roadmaps.
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Our product lines include STB SoC, Home Networking, DBS outdoor unit and Broadband Access solutions. Our solutions
target applications in HD video and other multimedia content distribution networks through cable, satellite, telecommunications and terrestrial mediums. Our solutions are currently used in consumer electronic and service provider customer premises
equipment, including set-top boxes, digital transport adapters, or DTAs, broadband routers, DOCSIS gateways, cable modems, optical network terminals, low-noise block converters, multi-room DVRs, residential gateways and Ethernet-to-coax adapters,
MoCA-to-WiFi products, and can potentially be used in other devices, such as digital televisions, gaming consoles, connected HDTVs, OTT STBs, media servers and network attached storage devices.
STB SoC
We provide STB SoCs for the
worldwide satellite, terrestrial, cable and IPTV markets. STBs have the capability to receive and process DTV signals, which then drive a television that is capable of displaying digital content. This digital content is broadcast via satellite,
cable networks or over the air (terrestrial broadcast) in multiple regions throughout the world. Todays STB market is characterized by advanced video services that drive new capabilities such as 3DTV, 3D graphics user interfaces, personalized
multi-screen services, rich navigation and improved multimedia and Internet TV experiences. Service providers are competing to deliver these solutions at the highest quality level, the lowest cost and with the highest security protection in order to
win new and retain existing subscribers for pay-TV services. At the same time, this market is also experiencing a rapid transition towards a connected home where semiconductor solutions are making it possible for consumers to access their
entertainment and content anywhere and at any time throughout the home.
Our STB products include SoCs and discrete
components, providing a family of solutions that deliver advanced performance, industry leading power management and support for on-line VOD services. We offer products targeted for the major markets within STB: satellite, cable and IPTV, and
terrestrial STB. For the satellite set-top box market, we offer a full range of chipset solutions for pay-TV operator and free-to-air STBs including DVB-S/DVB-S2/8-PSK demodulators, highly integrated SoCs and PSTN modem interface ICs. The STB SoC
portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. For the cable television and telco/IPTV markets, we offer a full range of chipset solutions for STBs including highly
integrated SoCs. The cable and IPTV STB SoC portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. We also offer products for
DOCSIS
R
modems. For the terrestrial broadcast television market, we also offer
a full range of free-to-air STB solutions, including DVB-T demodulators and highly integrated
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SoCs. The terrestrial broadcast STB SoC portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. Our STB chipset solutions are
supported with complete system hardware reference designs and embedded system software. Multiple generations of these SoCs have been deployed in leading operator networks worldwide and support the industry leading conditional access security systems
and middleware platforms for various applications including: DVRs, IP Client STBs and Zappers.
In the next generation of STB SoCs
identified on our roadmap, we will move to a higher level of integration of discrete components into our SoCs. This is primarily focused on integrating MoCA 2.0 from our Connectivity business to address the growing needs of North American cable and
satellite operators. We have also been working on High Efficiency Video Codec, which is the next evolution of the MPEG video compression technology; we expect this will become an industry requirement over the coming two to five years.
Home Networking
Our home networking
solutions, which are based on the MoCA standard, target a large and growing market. We are a founding member of MoCA, a global home networking consortium that sets standards for the distribution of video and other multimedia entertainment over
coaxial cable, and we are recognized as the pioneer of MoCA technology. MoCA was established in 2004 and includes as its members many major service providers, communications equipment companies, semiconductor manufacturers and consumer electronics
companies. MoCA-based products use existing coaxial cable to create a robust Internet protocol-based network for easy sharing of HD video and other multimedia content throughout the home. MoCA is being deployed as the home networking standard
for Verizons FiOS offering and for high-definition STBs, or HD STBs, for DIRECTV, DISH Network, Comcast, Time Warner Cable, Cox Communications and other service providers. We believe that additional service providers are in the process
of evaluating, adopting or deploying MoCA-based technology for digital home entertainment networking.
The implementation of home
networking chipsets based on the MoCA specification requires expertise in multiple technical disciplines as well as extensive integration and testing. Any home network technology using the existing coaxial cable must overcome the inherent
constraints of such infrastructure. The in-home coaxial cable network was designed to isolate individual cable outlets from each other in order to eliminate potential video signal interference between television sets that reside at different coaxial
cable outlets in the home. The successful implementation of MoCA requires integrated circuits that support high wire speed signal transmission and enable low-level signal detection, real-time error correction and recovery. The broad range of
expertise required for such implementation includes physical layer and media access controller system engineering, radio frequency integrated circuit and high-speed mixed signal design, complex baseband system-on-a-chip experience and embedded
software expertise. In addition, MoCA designs must undergo a formal certification process in order to ensure interoperability and full compliance with the MoCA specification.
We have been working on home networking technologies on which the MoCA specification is based since 2001 and began shipping
production quantities of MoCA-compliant chipsets in December 2004. In September 2009, we began shipping our third generation of MoCA 1.1-compliant products and announced the first complete MoCA 2.0 solution in January 2011. During 2012 we
announced our multi-band technology in conjunction with our 4
th
generation
MoCA 1.1 solution and have been sampling our MoCA 2.0 solution to our key customers for products currently in development. Our MoCA-compliant chipsets are incorporated in equipment being deployed by Verizon, DIRECTV, Comcast, Time Warner Cable, Cox
and other service providers. Our MoCA-compliant products can be used to support on demand video services, online video streaming
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services, personal computer-to-television content sharing, multi-room DVR and online gaming. We see a growing need for a highly reliable wired home networking solution to support these new
multimedia applications. We believe that our new MoCA 2.0 chipset will answer the growing demand for powerful connectivity within the home.
Broadband Access
Our broadband
access solutions are designed to meet broadband access requirements in areas characterized by fiber optic networks that terminate within a few hundred meters of a customers premises. In particular, our solutions allow cable service operators
with fiber optic deployments to offer broadband triple-play services that are competitive with very high-speed digital subscriber line services offered by telecommunications carriers. We believe that this is a large potential target market for our
broadband access products and we have several deployments underway with service providers in China. Our broadband access solutions also have applications in vertical markets beyond broadband residential access. Our broadband access solutions have
been incorporated into systems currently being deployed in hospitality networks, providing video and broadband services over coax to multiple hotel residents.
Our broadband access solutions use coaxial cable infrastructure to deliver the last few hundred meters of connectivity for high-speed broadband access to single-family homes and multiple dwelling units.
They incorporate the same physical layer used in our home networking products and a different network-optimized media access controller technology. Our broadband access solutions offer high performance with net throughput in excess of 100 megabits
per second. The point-to-multi-point architecture of our solutions currently supports up to 63 subscribers on a single radio frequency channel. Our solutions are capable of supporting multiple channels simultaneously over a single coaxial cable. As
a result, this increases the number of subscribers that can be supported and the net throughput that is available by a multiple of the number of channels that are activated, in a single distribution cable. Our high-speed broadband access solutions
enable service providers to offer bundled triple-play services over their existing services and cable infrastructure.
DBS Outdoor Unit
Our DBS outdoor unit solutions target the large and growing digital broadcast satellite market. In a traditional satellite
installation, the ability to select multiple channels simultaneously frequently requires multiple cables from the satellite dish to the set-top box. For example, in order to simultaneously view and record separate programs from the full channel
lineup with DVRs in three rooms in a house, a user typically needs six separate cables from outside the home. Our DBS outdoor unit products can significantly reduce the deployment costs for digital broadcast satellite providers by allowing them to
send multiple video streams from individual or multiple satellites into the home over a single cable. This simplified cabling architecture enables digital broadcast satellite providers to deploy set-top boxes, with multiple tuner capabilities, in
multiple rooms and roll out new services without expensive installation and retrofitting while at the same time improving aesthetics of the home by not damaging walls while installing multiple cables. We believe that our solutions can improve the
competitiveness of digital broadcast satellite services by reducing subscriber acquisition costs, decreasing deployment costs for additional services and enabling a more attractive product offering.
Our DBS outdoor unit products include band translation switch and channel stacking switch integrated circuits, which are highly complex single-chip
radio frequency integrated circuits that integrate multiple independent signal receivers and multiple discrete analog functions onto a single silicon die. Moreover, as many as four channel stacking switch integrated circuits can be linked to provide
up to 12 digital broadcast satellite signals on a single cable. Our band translation switch products were specifically designed to operate with DISH Network Corporations, or DISH Network,
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service offerings. We sell our channel stacking switch products to customers who incorporate them into products deployed by other DBS service providers. We are the pioneers in developing band
translation switch and channel stacking switch radio frequency integrated circuits and we have helped to define the standard for satellite signal distribution over a single cable in conjunction with members of the European Committee for
Electrotechnical Standardization, or CENELEC. We believe that single cable standardization will lead to more rapid adoption and further expand the market for our products. Our band translation switch products are currently used in outdoor equipment
deployed by DISH Network and one other North American operator and our channel stacking switch products are currently used in outdoor equipment deployed by DIRECTV, DIRECTV PanAmericana, ClaroTV (formerly Via Embratel), Sky Italia, BSkyB and other
service providers.
Our Strategy
Our goal is to be the leading provider of systems solutions for the connected home entertainment market by enabling the delivery, connection and
consumption of multiple streams of HD video and other multimedia content into and throughout the home. The key elements of our strategy are to:
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Extend our technology leadership
. We believe that our success has been, and will continue to be, largely attributable to our
interdisciplinary skill set that we leverage to create innovative systems-level solutions. As the incumbent supplier of key video delivery, distribution and processing technologies in service provider-based deployments, we gain critical insight into
next generation product and system requirements. We have and will continue to use these insights to enhance our products. For example, as a result of our leadership in developing MoCA 1.0 and 1.1 compliant solutions, we were a leading contributor to
the development of the next generation MoCA 2.0 specification. We intend to extend our technology leadership by focusing on our research and development efforts and through targeted technology acquisitions
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Expand relationships with industry leaders and customers.
We work very closely with leading service providers, ODMs and OEMs around
the world to increase the adoption of connected home entertainment solutions that utilize our technology. We have been selected in deployments by leading service providers including Verizon, DIRECTV, Comcast, Cox Communications and Time Warner
Cable, among others, and leading ODMs and OEMs such as Motorola Mobility Inc. (formerly Motorola, Inc.), or Motorola, Wistron NeWeb Corporation, or Wistron, and Actiontec Electronics, Inc., or Actiontec, Technicolor (formerly Thomson), Humax Co.,
Ltd., or Humax, and Cisco Systems Inc., or Cisco. We believe that expanding our relationships with these companies and further aligning our product and technology roadmap with their strategies will contribute to our future growth. We intend to
expand our existing customer relationships by securing additional design wins with our customers and by positioning our connected home entertainment technology as the key differentiator in next generation customer premises equipment. We also intend
to expand our relationships with consumer electronics OEMs to increase adoption of our solutions and further develop a retail market for connected home entertainment solutions.
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Continue to broaden our solutions and pursue complementary acquisitions.
We seek to provide our customers with full platform
solutions. Historically, we have used acquisitions to broaden our technology and solutions capabilities and expand our customer base. For example, our company was originally focused on the development of MoCA home networking solutions. In 2007, we
expanded our product offerings to include DBS outdoor unit solutions by acquiring RF Magic, Inc. and in 2012, we expanded our product offerings to include STB SoC solutions by acquiring from Trident the assets of its STB business, and accelerated
our product roadmap for digital CSS by acquiring assets from PLX Technology, Inc. Over time, we intend to address the large and growing connected home entertainment
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market by adding additional features and capabilities to our products and provide full platform solutions and opportunistically pursue acquisitions that contribute complementary technology or
provide access to new customers
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Expand our presence in international markets
. Historically, we have been principally focused on ODMs and OEMs that supply equipment
for service provider-based deployments in the United States. We intend to continue to expand our sales and technical support organization to broaden our service provider reach in international markets, primarily in Asia, Europe and South America.
For example, we are actively marketing our STB SoC products in Europe and Asia, our MoCA home networking solutions in Europe and South America, our broadband access solutions in China, and our DBS outdoor unit solutions in Europe, South America, and
Africa.
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Drive industry standards
. We use our technology leadership to define specifications and drive industry standards, such as MoCA,
which we believe will lead to widespread adoption of our solutions. In Europe, we have actively worked with members of European Committee for Electrotechnical Standardization, or CENELEC, to develop a standard for satellite signal distribution over
a single cable. We intend to continue to participate in other standards-settings bodies that we believe will influence our target markets, including CableLabs, the ITU, the Institute of Electrical and Electronics Engineers, the RVU Alliance and
Digital Living Network Alliance.
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Our Products
We offer products that provide solutions for the delivery, connectivity and consumption of HD video, SD video and other multimedia content into and throughout the connected home. Our products include STB SoC,
Home Networking, Broadband Access and DBS outdoor unit solutions. The chart below lists, for certain representative products, a description of the product, its target markets and representative target devices or applications:
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Product
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Description
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Target Markets
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Representative Target Devices or
Applications
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Set-Top Box SoC
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EN757x TSC17x
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Integrated High Definition IP STB SoC with built-in QAM demodulation for Cable networks available in single and dual-core
ARM
®
Cortex-A9-CPU with Neon SIMD extensions, and Advanced 3D Graphics Capabilities
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Cable Operator STBs
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HD Cable STBs for two-way communication, Web based processing, OTT STBs, Android based STBs, Hybrid DVB + IP STBs
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EN758x TSC18x
|
|
Integrated High Definition IP STB SoC, available in single and dual-core ARM
®
Cortex-A9-based CPU with Neon SIMD
extensions, and Advanced 3D Graphics Capabilities
|
|
Cable Operator STBs, Telco/IPTV STBs and OTT
|
|
HD IP Client STBs for two-way communication, Web based processing, OTT STBs, Android based STBs, Hybrid DVB + IP STBs
|
|
|
|
|
EN 753x TSC13x
|
|
Integrated High Definition IP STB SoC with Advanced 3D Graphics Capabilities
|
|
Telco/IPTV STBs
|
|
HD IP Client STBs, OTT STBs, Android based STBs, Hybrid DVB + IP STBs
|
|
|
|
|
EN754x TSC14x
|
|
Integrated High Definition SoC with built in DVB-S2 demodulation for Satellite Networks and Advanced 3D Graphics Capabilities
|
|
Satellite Operator STBs
|
|
HD Broadcast Zappers for Satellite, DVR capable STBs, Hybrid DVBS+IP STBs
|
|
|
|
|
EN755x TSC15x
|
|
Integrated High Definition SoC with built in QAM demodulation for Cable Networks and Advanced 3D Graphics Capabilities
|
|
Cable Operator STBs
|
|
HD Broadcast Zappers for Cable, DVR capable STBs, Hybrid DVBC+IP STBs
|
11
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Target Markets
|
|
Representative Target Devices or
Applications
|
|
|
|
|
PNX847x/848x
|
|
Integrated High Definition IP STB SoC with Advanced 3D Graphics Capabilities and options for DVR
|
|
Multiple Service Operators
|
|
HD Broadcast Zappers for Cable, DVR capable STBs, Hybrid DVB+IP STBs and Networked DVR Controller
|
|
|
|
|
PNX849x
|
|
Integrated High Definition SoC with built in DVB-S2 & QPSK demodulation for Satellite Networks with Advanced 3D Graphics Capabilities and options for DVR
|
|
Satellite Pay Operator, DVB Free-to-Air Operators
|
|
HD Broadcast Zappers for Satellite, DVR capable STBs, Hybrid DVB+IP STBs
|
|
|
|
|
CX2448x
|
|
Integrated Standard Definition single chip interactive STB SoC with built in QAM demodulation for Cable Networks
|
|
Cable Operator STBs
|
|
SD Broadcast Zappers for Cable
|
|
|
|
|
CX2415x
|
|
Integrated Standard Definition MPEG2/DVB single chip interactive STB SoC with built in QPSK demodulator
|
|
Satellite Operator STBs
|
|
SD Broadcast Zappers for Satellite
|
Home Networking
|
|
|
|
|
EN101x
|
|
Coaxial network
interface radio frequency
integrated circuit
|
|
Networked home entertainment devices
|
|
Multi-room DVR, STB, digital television, gaming console, home media server, residential gateway, personal computer and optical network terminal
|
|
|
|
|
EN 105x
|
|
Integrated coaxial network power amplifier, low-noise amplifier and radio frequency switch
|
|
Networked home entertainment devices
|
|
Multi-room DVR, STB, digital television, gaming console, home media server, residential gateway, personal computer and optical network terminal
|
|
|
|
|
EN12xx
|
|
Coaxial network interface radio frequency integrated circuit
|
|
Networked home entertainment devices
|
|
Multi-room DVR, STB, digital television, gaming console, home media server, residential gateway, personal computer and optical network terminal
|
|
|
|
|
EN2xxx
|
|
Coaxial network controller
integrated
circuit
|
|
Networked home entertainment devices
|
|
Multi-room DVR, STB, digital television, gaming console, home media server, residential gateway, personal computer and optical network terminal
|
Broadband Access
|
|
|
|
|
|
|
EN101x
|
|
Coaxial network
interface radio
frequency
integrated circuit
|
|
Broadband access, internet protocol television, and voice over internet protocol
|
|
Optical network terminal, point-of-entry network controller, and access customer premises equipment for single family homes and multiple dwelling units
|
|
|
|
|
EN3xx1
|
|
Access network controller
integrated
circuit
|
|
Broadband access, internet protocol television and voice over internet protocol
|
|
Optical network terminal and point-of-entry network controller for single family homes and multiple dwelling units
|
|
|
|
|
EN3xx0
|
|
Access client integrated circuit
|
|
Broadband access, internet protocol television and voice over internet protocol
|
|
Access customer premises equipment for single family homes and multiple dwelling units
|
DBS Outdoor Unit
|
|
|
|
|
|
|
RF5000
|
|
Band translation switch-Dual 2-channel integrated circuit
|
|
U.S. digital broadcast satellite
|
|
Low-noise block converter and multi-switch digital broadcast satellite products for single family homes and multiple dwelling units
|
|
|
|
|
RF510x
|
|
Band translation switch-Triple 2-channel integrated circuit
|
|
U.S. digital broadcast satellite
|
|
Low-noise block converter and multi-switch digital broadcast satellite products for single family homes and multiple dwelling
units
|
12
|
|
|
|
|
|
|
Product
|
|
Description
|
|
Target Markets
|
|
Representative Target Devices or
Applications
|
|
|
|
|
RF520x
|
|
Channel stacking switch-3-channel integrated circuit
|
|
U.S. digital broadcast satellite
|
|
Low-noise block converter and multi-switch digital broadcast satellite products for single family homes and multiple dwelling units
|
|
|
|
|
RF521x
|
|
Channel stacking switch-3-channel integrated circuit
|
|
Global digital broadcast satellite
|
|
Low-noise block converter and multi-switch digital broadcast satellite products for single family homes and multiple dwelling units
|
|
|
|
|
RF528x
|
|
Channel stacking switch-2-channel integrated circuit
|
|
Global digital broadcast satellite
|
|
Low-noise block converter and multi-switch digital broadcast satellite products for single family homes and multiple dwelling units
|
Customers
We work closely with ODMs, OEMs and leading service providers around the world to increase the adoption of connected home entertainment solutions
that incorporate our technology. Service providers that utilize our products are mainly served by major consumer electronic ODMs and OEMs of connected home entertainment solutions. We have been selected by leading equipment manufacturers such as
Actiontec, Cisco Systems, Inc., or Cisco, Motorola, Samsung Electronics Co., Ltd., or Samsung, Technicolor (formerly named Thomson), GlobalSat, Humax Co., Ltd., Wistron and Zinwell Corporation, or Zinwell, for deployments by leading service
providers such as DIRECTV, DISH Network, Comcast, Time Warner Cable, Cox and Verizon.
We currently rely, and expect to continue to
rely, on a limited number of customers for a significant portion of our net revenues. For example, for the year ended December 31, 2012, Wistron and Motorola accounted for 21% and 13% of our net revenues, respectively. For the year ended
December 31, 2011, Wistron and Motorola accounted for 25% and 17% of our net revenues, respectively. For the year ended December 31, 2010, Wistron and Motorola accounted for 21% and 17% of our net revenues, respectively. In addition, we
depend on a limited number of service providers that purchase products from customers that incorporate our products.
For the year ended
December 31, 2012, 88% of our net revenues were derived from Asia, 10% were derived from North America and 2% were derived from Europe. For the year ended December 31, 2011, 89% of our net revenues were derived from Asia, 11% were derived
from North America and less than 1% were derived from Europe. For the year ended December 31, 2010, 93% of our net revenues were derived from Asia, 6% were derived from North America and 1% were derived from Europe. Many of our ODM and OEM
customers in Asia incorporate our chipsets into products that they sell to U.S.-based service providers. Additional information concerning the allocation of our net revenues and long-lived assets by geographic region can be found in note 11 to our
consolidated financial statements included elsewhere in this report.
Research and Development
We believe our future success depends, in part, on our ability to introduce enhancements to our existing products and to develop new products for
existing and emerging markets. We work closely with service providers and their ODM and OEM partners to understand their requirements and align our research and development efforts to meet their system requirements. We are also actively engaged in
advancing industry initiatives, such as the MoCA standard, through our research and development efforts. We have assembled a team of highly skilled design engineers with core competencies in complex communications chipsets, radio frequency
integrated circuits and embedded application software expertise. Our engineers are responsible for new product
13
development efforts while continuing to enhance existing products and provide critical technical support to our customers.
As of December 31, 2012, we had 449 full-time employees engaged in research and development. For the years ended December 31, 2012, 2011
and 2010, the total amount that we spent on research and development activities was $98.4 million, $60.1 million and $48.7 million, respectively.
Manufacturing
We use third-party foundries
and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our products and avoid the cost associated with owning
and operating our own manufacturing facility. Our engineers work closely with foundries and other contractors to increase yields, lower manufacturing costs and improve quality.
We currently outsource the manufacturing of our STB SoC, home networking and broadband access products, principally to Taiwan Semiconductor
Manufacturing Company, or TSMC, and United Microelectronics Corporation, or UMC, and the manufacturing of our DBS outdoor unit products to TowerJazz, the name under which Tower Semiconductor Ltd. and its fully owned U.S. subsidiary Jazz
Semiconductor operate. Our products are shipped from such third-party foundries to third-party assembly and testing facilities. Our STB SoC, home networking and our broadband access chipsets are primarily assembled and tested by Amkor Technologies,
Inc., or Amkor, Advanced Semiconductor Engineering Group, or ASE Group and NXP Semiconductors, or NXP, while our DBS outdoor unit products are primarily assembled by Amkor and tested by Giga Solution Tech. Co., Ltd., or Giga Solution. We have
implemented a robust quality management system designed to assure high levels of product quality for our customers. We have completed and have been awarded ISO 9001:2000 certification. In addition, the independent foundries, assembly and test
subcontractors identified above have been awarded ISO 9001:2000 certifications, among others.
Sales and Marketing
We sell our products worldwide through multiple channels, including our direct sales force and our network of domestic and international sales
representatives and distributors. We have strategically located our direct sales personnel in the United States, Europe, China, Taiwan, Japan and Korea, where each salesperson targets a specific end-user market. Our sales directors focus their
efforts on leading ODMs and OEMs. We also have field application engineers who provide technical support and assistance to existing and potential customers in designing, testing, qualifying and certifying systems that incorporate our products.
Our sales and marketing strategy is to achieve design wins with leading ODMs and OEMs and mass deployment of our solutions with service
providers worldwide. This requires us to work extensively and collaboratively with our ODM and OEM customers as well as the service providers who purchase products from them. As a result, we believe that our established relationships allow us faster
time to market and will lead to greater proliferation of our products.
Our marketing group focuses on our product strategy and
management, product development roadmaps, product positioning, new product launch and transition, demand assessment and competitive analysis. The group also ensures that product development activities, product launch, channel marketing program
activities, and ongoing demand and supply planning occur in a well-managed and timely manner in coordination with our development, operations and sales groups as well as our service provider representatives, ODMs and OEMs. Our marketing group also
has
14
programs in place to work closely with service providers in the role of a trusted advisor for STB deployments and initiatives designed to heighten industry awareness of our company,
products and technologies, including participating in technical conferences, support of industry initiatives such as MoCA and RVU at the Board of Directors level, publication of technical white papers and exhibition at trade shows.
Backlog
Our sales are made primarily
pursuant to standard purchase orders for delivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in our customers needs. Additionally, customer orders generally can be
canceled or rescheduled without significant penalty to the customer. For these reasons, our backlog of product inventory as of any particular date is not representative of actual sales for any succeeding period and, therefore, we believe that our
backlog is not necessarily a reliable indicator of future net revenue levels.
Competition
The markets for our products are extremely competitive and are characterized by rapid technological change, evolving industry standards and new
demands for features and performance of multimedia content delivery solutions. We believe the principal competitive factors in our markets include the following:
|
|
|
The adoption of our products and technologies by service providers, ODMs and OEMs;
|
|
|
|
The performance and cost effectiveness of our products relative to our competitors products;
|
|
|
|
Our ability to deliver high quality and reliable products in large volumes and on a timely basis;
|
|
|
|
Our ability to build close relationships with service providers, ODMs and OEMs;
|
|
|
|
Our success in developing and utilizing new technologies to offer products and features not previously available in the marketplace that are technologically
superior to those offered by our competitors;
|
|
|
|
Our ability to identify new and emerging markets and market trends;
|
|
|
|
Our ability to recruit design and application engineers and other technical personnel; and
|
|
|
|
Our ability to protect our intellectual property and obtain licenses to the intellectual property of others on commercially reasonable terms.
|
We believe that we compete favorably with respect to each of these criteria. However, conditions in our markets could
change rapidly and significantly as a result of technological advancements or the adoption of new standards for the delivery of HD video and other multimedia content. In addition, many of our current and potential competitors have longer operating
histories, significantly greater resources, stronger name recognition and a larger base of customers than we do. This may allow our competitors to respond more quickly than we are able to respond to new or emerging technologies or changes in
customer requirements or it may allow them to deliver products that are priced lower than our products or which include features and functions that are not included in our products.
In the market for STB SoCs we compete primarily against Broadcom Corporation and ST Microelectronics. Broadcom offers a full range of products with
new technology, comprehensive customer support and aggressive pricing on high capability devices. ST Microelectronics still has a
15
large presence but has reduced investment in software and newer devices and is typically found competing against us in lower cost programs. However, newer Asian entrants such as HiSilicon and
MediaTek are aggressively pricing lower cost products along with ST Microelectronics. MediaTek (which has announced plans to acquire MStar Semiconductor) is also attempting to enter higher value markets such as North America. Given significant
hurdles to market entry in North America, Broadcom continues to be our primary competitor in these markets.
In the market for home
networking solutions, we compete against other semiconductor manufacturers that offer functionality based on the MoCA standard. For example, for the last two years we have been competing with MoCA solutions offered by Broadcom, and we expect to
continue to compete with Broadcom and other semiconductor manufacturers in the manufacture and sale of MoCA-compliant chipsets in the future. We also compete against companies that offer products based on non-MoCA home networking solutions, such as
Ethernet, HomePNA, Home Plug AV and Wi-Fi, and potentially G.hn when products incorporating the standard for that technology are introduced to the market.
In the DBS market, our band translation switch and channel stacking switch products face competition from discrete solution providers and other semiconductor manufacturers who offer products with similar
functionality.
In the broadband access market, our broadband access products compete with other, more
well-established high-speed wide area networking technologies such as data over cable service interface specifications, or DOCSIS, versions of Digital Subscriber Line, or xDSL, Ethernet, xPON, and 3
rd
Generation Partnership Project Long Term Evolution and Worldwide Interoperability for Microwave Access, or WiMAX.
While we believe that our products compete favorably against alternative technologies in these markets, the ultimate competitiveness of our
products is highly dependent on, and sensitive to, the particular facts and circumstances of each service provider and its end user customers, such as the type of media content being distributed, the environment in which the distribution is taking
place, the available network bandwidth and distribution mediums and the number of devices connected to a network.
Intellectual Property
Our success and future revenue growth depend, in part, on our ability to develop and protect our intellectual property. We rely
primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these measures may not provide meaningful protection for our
intellectual property. We review our technological developments to identify features that provide us with a technological or commercial advantage and we file patent applications when we deem it to be appropriate to protect these features in the
United States and internationally in select countries. In addition to developing technology internally, some of which is patentable, we continually evaluate the acquisition and licensing of intellectual property from third-parties that complements
our business. As of December 31, 2012, we had over 400 issued U.S. patents. In addition, as of December 31, 2012, we had over 1,000 granted foreign patents and over 600 patent applications that were pending in the United States and foreign
countries. Our patent portfolio expanded significantly during 2012, largely as a result of our acquisition of the STB business from Trident. The term of an issued patent in the United States is at least 20 years from its filing date, unless subject
to a terminal disclaimer. The U.S. Patent and Trademark Office provides term extensions for those applications that have been pending for more than three years and for which the duration of the pendency is not the fault of the applicant.
Accordingly, many of our patents may receive a longer term due to the benefit of such patent term
16
extensions. Taking such patent terms and any terminal disclaimers into account, the remaining terms of our issued U.S. patents range from 14 to 17 years and the remaining terms for counter-part
patents in most foreign jurisdictions are similar, provided we pay the applicable maintenance fees throughout the terms of our issued U.S. and granted foreign patents.
We are the owner of several registered trademarks in the United States and in certain foreign countries, including Entropic, Entropic Communications, c.LINK, CSS and
RF Magic.
In connection with our membership in MoCA, we are required to license any of our patent claims that are essential
to implement the MoCA specification to other MoCA members under reasonable and non-discriminatory terms. Because our core home networking technology is a primary component of the MoCA specification, we are required to license portions of this
technology to other MoCA members, including other semiconductor manufacturers that may compete with us in the sale of MoCA-compliant chipsets. However, only essential patent claims necessary to implement the MoCA specification are subject to this
requirement. We are not required to license patent claims that are not essential to implement the MoCA specification, nor are we required to license patent claims that are unrelated to the MoCA specification. To date we have not entered into a
license of our MoCA-related patent claims, so the terms of any required license have not been established.
In addition to the licensing
requirements of standards bodies to which we belong, such as MoCA, in connection with our sales or product development activities, we are also sometimes required by our customers or service providers to license to unrelated third parties, on
reasonable and non-discriminatory terms, patents and patent applications associated with technologies purchased or used by, or developed with or for, such customers or service providers. We expect that in the future we may be required to agree to
such licensing arrangements in order to secure sales, receive development funds or settle disputes.
In addition to our patent rights,
we hold significant intellectual property in the form of proprietary trade secrets which we rely on to compete. Designing integrated circuits for set-top boxes (including those that comply with the MoCA specification) or that implement our DBS
outdoor unit solutions is technically difficult and requires the application of a wide range of complex engineering disciplines. During the course of creating the technology on which these products are based, we developed significant proprietary
know-how and techniques for overcoming the engineering challenges involved in designing such products. We retain such know-how and techniques as proprietary trade secrets that we are not required to license to others as a result of our membership in
MoCA. Similarly, we have developed significant proprietary know-how and techniques for implementing our DBS outdoor unit solutions in satellite installations. Consequently, even though we are required to license patent claims that are essential to
implement the MoCA standard to other MoCA members and have agreed to license patents and patent applications related to other technologies, such as our DBS outdoor unit solutions and Set-top Box SoC solutions, to third parties on reasonable and
non-discriminatory terms, we believe that such licensees would need to overcome significant engineering challenges and develop or obtain comparable proprietary know-how and techniques in order to design products that compete successfully against
ours.
We generally enter into nondisclosure agreements with our employees, consultants and strategic partners, and typically control
access to and distribution of our proprietary information. Our employees are generally required to assign their intellectual property rights to us and to treat all technology as our confidential information.
Government Regulation
As a company that
provides systems solutions composed of silicon integrated circuits with embedded software, we are subject to certain government regulations, including U.S. export controls
17
and foreign countries import regulations, as well as customs duties and export quotas, regulations relating to the materials that comprise our products (such as the European Unions
Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment and equivalent regulations adopted by China), and regulations placing constraints on our customers and service providers services (such as the
Federal Communications Commissions regulations relating to radio frequency signals emitted in the United States and laws and regulations regarding local cable franchising).
Employees
As of December 31, 2012, we employed a total of 693 people on a full-time
basis, including 449 in research and development, 164 in sales, marketing and general and administrative, and 80 in operations. We also engage temporary employees and consultants. Our ability to attract and retain qualified personnel is essential to
our continued success. None of our employees are subject to a collective bargaining agreement. We have never experienced a work stoppage and we consider our relations with our employees to be good.
18
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding our executive officers as of January 31, 2013.
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Patrick Henry
|
|
50
|
|
Chief executive officer and member of our board of directors since September 2003 and president since February 2008. Mr. Henry also served as chairman of our board of directors from July
2007 to January 2009 and as our president from September 2003 to July 2007. From February 2003 to September 2003, he was president and chief executive officer of Pictos Technologies Inc., a developer of digital imaging products which was acquired by
ESS Technology. Prior to 2003, Mr. Henry served as chief executive officer of Lincom Wireless, Inc., a chip manufacturing company focused on Wi-Fi products; vice president and general manager at LSI Logic Corporation, a provider of silicon, systems
and software technologies; and senior vice president at C-Cube Microsystems Inc., a developer of digital video integrated circuits.
|
|
|
|
David Lyle
|
|
48
|
|
Chief financial officer since June 2007. From August 2005 to June 2007, Mr. Lyle was the chief financial officer at RF Magic, acquired by Entropic in June 2007. Prior to RF Magic, Mr. Lyle
was finance director and controller for the mobile communications business unit at Broadcom, a provider of highly-integrated semiconductor solutions. He joined Broadcom in July 2004 through its acquisition of Zyray Wireless Inc., a WCDMA baseband
co-processor company, where he served as chief financial officer beginning in January 2004. Prior to 2004, Mr. Lyle served as chief financial officer at Mobilian Corporation, a wireless data communications semiconductor company, and in various
finance roles at Intel Corporation, a semiconductor company. At Intel, Mr. Lyle served in the microprocessor and networking groups and in the strategic investment arm of Intel, now known as Intel Capital.
|
|
|
|
Mark Samuel
|
|
44
|
|
Senior vice president and general manager of the STB business unit since May 2012. Prior to joining Entropic, from February 2010 until April 2012, Mr. Samuel served in senior
management, most recently as senior vice president, at Trident Microsystems, Inc., a semiconductor company serving the
|
19
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
|
|
|
television and set-top box markets. From September 2006 to February 2010, Mr. Samuel worked for NXP Semiconductors, Inc., a semiconductor company, most recently as its vice
president. Before that, Mr. Samuel held management positions with Philips Semiconductors and Sony Corporation.
|
|
|
|
Charlie Lesko
|
|
|
54
|
|
|
Senior vice president of worldwide sales since July 2012. Prior to joining Entropic, from November 2010 until July 2012, Mr. Lesko served as senior vice president of the
Automotive Products Business Group at CSR, plc., a semiconductor company and a leader in connectivity, applications processing, video and imaging technology. From August 2008 until November 2010, Mr. Lesko was senior vice president, worldwide
sales at CSR, plc. From March 2008 until August 2008, he served as vice president worldwide sales at Maxlinear, Inc., a semiconductor company. From April 2003 to March 2008, Mr. Lesko served as senior vice president of sales and marketing at AMI
Semiconductor. Prior to this, Mr. Lesko held management sales positions with various semiconductor companies, including Broadcom Corporation, Axcelis Technologies and Teradyne Inc.
|
|
|
|
Vahid Manian
|
|
|
52
|
|
|
Senior vice president of global operations since August 2012. Prior to joining Entropic, from September 2010 until June 2011, Mr. Manian served as senior vice president of
business operations at Telegent Systems, a semiconductor company serving the mobile TV market that was later acquired by Spreadtrum Communication, a Shanghai-based semiconductor company. From April 2004 until December 2008, Mr. Manian was in
senior management at Broadcom Corporation, a leading communications semiconductor company, most recently serving as senior vice president of global manufacturing operations where he oversaw Broadcoms operations and manufacturing
activities.
|
|
|
|
Vinay Gokhale
|
|
|
49
|
|
|
Senior vice president, corporate development and strategy since April 2012. Mr. Gokhale joined Entropic in January 2009 as senior vice president, marketing and business development. Prior
to joining Entropic, from September 2006 until January 2009, Mr. Gokhale served as vice president, wireless
|
20
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
|
|
|
segment at SiRF Technology, Inc., a supplier of products related to global positioning systems. From September 2002 until September 2006, Mr. Gokhale served at Impinj Inc., a
developer of ultra high frequency, or UHF, radio frequency identification, or RFID, solutions for both item-level and supply-chain tagging. Initially, Mr. Gokhale served as vice president, marketing, and later as executive vice president, RFID
products. From July 1995 until September 2002, Mr. Gokhale served in various positions of increasing responsibility at Conexant Systems, Inc., or Conexant, a provider of solutions for imaging, video, audio and internet connectivity applications, and
held the position of vice president and business unit director for Conexants wireless data business unit.
|
|
|
|
Michael Farese
|
|
|
66
|
|
|
Senior vice president global engineering since August 2012. Dr. Farese joined Entropic in June 2010 as senior vice president, engineering and operations. Prior to joining Entropic, from
September 2007 until May 2010, Dr. Farese served as chief executive officer at Bitwave Semiconductor, Inc., a fabless semiconductor company and innovator in the development of programmable radio integrated circuits. From September 2005 until
September 2007, Dr. Farese served as the senior vice president of engineering at Palm, Inc., a leading developer of PDAs and wireless smartphones. From March 2002 until July 2005, Dr. Farese served as president and chief executive officer
at WJ Communications, Inc., a radio frequency semiconductor company providing radio frequency integrated circuits to the wireless infrastructure market, and from October 1999 until January 2002, Dr. Farese served as the president and chief executive
officer at Tropian, Inc., a provider of cellular, application-specific integrated circuits. Dr. Farese has also held senior management positions at Motorola, Nokia Mobile Phones Inc. and Ericsson Inc. Dr. Farese is a member of the board of
directors of Quicklogic Corporation and PMC-Sierra Inc.
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|
|
|
Lance Bridges
|
|
|
51
|
|
|
Senior vice president and general counsel since February 2012. Mr. Bridges joined Entropic in May 2007 as vice president of corporate development, general counsel and secretary. Prior to
joining Entropic, Mr. Bridges was a partner at Cooley LLP, where he practiced law since 1991.
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21
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|
Name
|
|
Age
|
|
|
Position
|
|
|
|
Trevor Renfield
|
|
|
41
|
|
|
Vice president, accounting and chief accounting officer since April 2012. From October 2010 to April 2012, Mr. Renfield served as Entropics corporate controller and principal
accounting officer. Prior to joining Entropic, from August 2007 until October 2010, Mr. Renfield served as vice president, finance and treasurer at DivX, Inc., a creator, distributor and licensor of digital video technologies. From January 2004
until August 2007, Mr. Renfield served as the senior director of finance at Novatel Wireless, Inc., a provider of wireless broadband access solutions, and from June 2003 until January 2004, Mr. Renfield served as the director of financial reporting
at Remec, Inc. (acquired by Powerwave Technologies in 2005), a wireless infrastructure business.
|
22
Investing in our common stock involves a high degree of risk. Before deciding to purchase, hold or sell our common stock, you should carefully consider the following information, the other information in this
Annual Report on Form 10-K, or Annual Report, and in our other filings with the Securities and Exchange Commission, or SEC. If any of these risks were to occur, our business, financial condition, results of operations or prospects could be
materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment. These risks and uncertainties may be interrelated or co-related, and as a result, the
occurrence of one risk might directly affect other risks described below, make them more likely to occur or magnify their impact. Moreover, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also affect our business.
Risks Related to Our Business
We have had net operating losses for most of the time we have been in existence, had an accumulated deficit of $146.1 million as of December 31, 2012 and
only recently became profitable on an annual basis, and we are unable to predict whether we will remain profitable.
We were
incorporated in 2001, did not commence shipping production quantities of our home networking, high-speed broadband access and direct broadcast satellite outdoor unit, or DBS ODU, and collectively, our Connectivity solutions, until December 2004 and
only became profitable on an annual basis for the first time in 2010. Additionally, we recently acquired the assets comprising our set-top box, or STB, system-on-a-chip, or SoC, solutions from Trident Microsystems, Inc. and certain of its
subsidiaries, collectively Trident, and the integration of those assets into our legacy operations is in its initial phase. Consequently, any predictions about future performance of our going forward operations may not be as accurate as they could
be if we had a longer history of successfully commercializing our Connectivity solutions and the more recently acquired STB SoC solutions, and of profitable operations. You should not rely on our operating results for any prior quarterly or annual
periods as an indication of our future operating performance.
For the years ended December 31, 2012 and 2011, we generated net
income of $4.5 million and $26.6 million, respectively, and for the year ended December 31, 2010, we generated net income of $64.7 million. Although we have been profitable on an annual basis since 2010, we have incurred substantial net losses
since our inception and, as of December 31, 2012, we had an accumulated deficit of $146.1 million. Despite our recent profitability, we may incur operating losses in the future as we continue to make significant expenditures related to the
development of our STB SoC and Connectivity solutions and the expansion of our business, including in connection with our recent acquisition of certain assets, including STB SoC assets, used in or related to the STB business of Trident. Prior to our
acquisition, the STB business of Trident was not profitable and unless or until we are able to make the STB business profitable, it will negatively impact our overall profitability going forward. In addition, the costs associated with integrating
the STB business into our existing operations could impair our financial condition and results of operations.
Our ability to sustain
profitability depends on the extent to which we can maintain or increase revenue and control our costs in order to, among other things, counter any unforeseen difficulties, complications, product delays or other unknown factors that may require
additional expenditures, or unforeseen difficulties or costs associated with the integration of acquired assets or businesses, including the STB business. Because of the numerous risks and uncertainties associated with our growth prospects, product
development, sales and marketing and other efforts, we are unable to predict the extent of our profitability or future losses. If we are unable to achieve adequate growth, we may not sustain profitability.
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Our recently completed acquisition of the STB business from Trident may not provide the anticipated benefits
when and to the extent we expect, which could negatively impact our business and harm our financial position.
In April 2012, we
completed our acquisition of the STB business from Trident. While we anticipate numerous benefits and synergies from this acquisition, our ability to achieve such benefits in a timely and cost-efficient manner is dependent on our ability to manage
the risks associated with this acquisition. We are continuing to integrate the STB business into our existing operations and expect to encounter ongoing challenges and risks in connection with this integration, including:
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the necessity of investing substantially more time and financial resources in the growth and development of the STB business, or in integrating the STB business
with our existing operations, than presently anticipated, resulting in increased costs and demands on management and time which could otherwise be devoted to more profitable activities;
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our ability to integrate, on a timely and cost efficient basis, the STB business, which is more geographically dispersed and substantially more complex than our
business prior to the acquisition, including the addition of 356 global employees to our headcount (nearly doubling the size of our headcount);
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difficulty dealing with tax, employment, logistics, and other related issues resulting from our expanded international operations;
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the ability of our existing systems, infrastructure and personnel to accommodate the integration of the STB business into our existing operations, including the
need to establish uniform standards, controls, procedures and policies (including internal control over financial reporting required by the Sarbanes-Oxley Act of 2002) across our entire business;
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our lack of expertise with respect to the STB business and with maintaining and improving upon the quality of products and services that Trident historically
provided;
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the potential need to record accounting charges for restructuring and related expenses, impairment of goodwill and amortization of intangible assets in the
future;
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difficulties in combining corporate cultures, including in geographic locations distant from our headquarters and senior management;
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issues with maintaining and improving relationships with present and prospective customers of the STB business, and distributors and suppliers of Trident;
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our ability to generate profits from the STB business to fund other company initiatives; and
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the dependence of the STB business on a limited number of suppliers and customers, including reliance on NXP Semiconductors Netherlands B.V., or NXP, for the
manufacture of certain STB products.
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As a result of these difficulties and risks, we may not accomplish the
integration of the STB business smoothly, successfully or within our budgetary expectations and anticipated timetable. If we do not achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or analysts may not
perceive the same benefits of the acquisition as we do and our business may be negatively impacted and our financial condition may be harmed.
We
face intense competition and expect competition to increase in the future, with many of our competitors being larger, more established and better capitalized than we are.
The markets for our STB SoC and Connectivity solutions are extremely competitive and have been characterized by rapid technological change, evolving
industry standards, rapid changes in customer requirements, short product life cycles and frequent introduction of next generation and
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new solutions, as well as competing technologies. This competition could make it more difficult for us to sell our solutions and result in increased pricing pressure, reduced gross profit as a
percentage of revenues or gross margins, increased sales and marketing expenses and failure to increase or the loss of market share or expected market share. Semiconductor solutions in particular have a history of declining prices driven by customer
insistence on lower prices as the cost of production is reduced and as demand falls when competitive products or newer, more advanced, products are introduced. If market prices decrease faster than product costs, our gross margins and operating
margins would be adversely affected.
Moreover, we expect increased competition from other established and emerging companies both
domestically and internationally. In particular, we currently face, or in the future expect to face, competition from companies such as Broadcom Corporation, STMicroelectronics N.V., or STMicro, Sigma Designs, Inc., MStar Semiconductor, Inc., Intel
Corporation, Marvell Technology Group Ltd., MaxLinear, Inc., or MaxLinear, Qualcomm Incorporated, Lantiq Deutschland GmbH and Vixs Systems, Inc., in the sale of MoCA compliant chipsets and technology, and from companies such as Broadcom, NXP
Semiconductors N.V., MaxLinear, STMicro, Qualcomm and Mobius Semiconductor, in the sale of DBS ODU products and from companies such as Broadcom, STMicro, MediaTek Inc., MStar Semiconductor, Inc., Sigma Designs, Inc., Marvell, AMlogic, Abilis, Intel,
Qualcomm, HiSilicon Technologies and Vixs in the sale of STB SoCs, and other STB solutions. In addition, current and potential competitors may establish cooperative relationships among themselves or with third parties. If so, competitors or
alliances that include our competitors may emerge and could acquire significant market share. Further, our current and potential competitors may also enter into licensing arrangements with third parties with respect to MoCA chipsets or other
technology on licensing terms that are more favorable than the licensing terms that we would be able to offer through the direct licensing of our MoCA chipsets and other technology to such third parties. We expect these trends to continue as
companies attempt to strengthen or maintain their market positions in an evolving industry. In addition, our competitors could develop solutions or technologies that cause our solutions and technologies to become non-competitive or obsolete, or
cause us to substantially reduce our prices.
In addition to direct competitors, we also face competition from a number of established
companies that offer products based on competing technologies. For example, our Connectivity products compete with home networking and access products based on other technologies, such as Data over Cable Service Interface Specifications, or DOCSIS,
versions of Digital Subscriber Line, or DSL, Ethernet, HomePNA, HomePlug AV, Broadband over Power Line, High Performance Network Over Coax, or HiNOC, Wi-Fi and LTE solutions. Although some of these competing technologies were not originally designed
to operate over coaxial cables, our competitors have modified certain technologies, including HomePNA, HomePlug AV, Broadband over Power Line and Wi-Fi, to work on the same in-home coaxial cables that our Connectivity solutions use. We also expect
to face competition from companies that offer products based on G.hn technology in the future. Many of our competitors and potential competitors are substantially larger and have longer operating histories, larger customer bases and significantly
greater financial, technical, sales, marketing and other resources than we do. Given their capital resources, many of these larger organizations are in a better position to withstand any significant reduction in customer purchases or market
downturns. Many of our competitors also have broader product lines and market focus, allowing them to bundle their products and services and effectively use other products to subsidize lower prices for those products that compete with ours or to
provide integrated product solutions that offer cost advantages to their customers. In addition, many of our competitors have been in operation much longer than we have and therefore have better name recognition and more long-standing and
established relationships with service providers, original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs.
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Our ability to compete depends on a number of factors, including:
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the adoption of our solutions and technologies by service providers, ODMs and OEMs;
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the performance and cost effectiveness of our solutions relative to our competitors products;
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our ability to deliver high quality and reliable solutions in large volumes and on a timely basis;
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our ability to build close relationships with service providers, ODMs, OEMs, retailers and consumer electronics manufacturers;
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our success in developing and utilizing new technologies to offer solutions and features previously not available in the marketplace that are technologically
superior to those offered by our competitors;
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our ability to identify new and emerging markets and market trends;
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our ability to reduce our product costs and receive favorable pricing from our suppliers;
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our ability to recruit design and application engineers and other technical personnel;
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our ability to protect our intellectual property and obtain licenses to the intellectual property of others on commercially reasonable terms;
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our ability to transition our customers from older to newer generations of our solutions;
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our ability to expand our market penetration and revenue growth outside of the United States; and
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our ability to create a retail market for our Connectivity solutions in consumer electronics devices, such as televisions.
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Our inability to address any of these factors effectively, alone or in combination with others, could seriously harm our business, operating
results and financial condition.
In addition, consolidation by industry participants could result in competitors with further increased
market share, larger customer bases, greater diversified product offerings and greater technological and marketing expertise, which would allow them to compete more effectively against us. As previously discussed, current and potential competitors
may also gain such competitive advantages by establishing financial or strategic relationships with existing or potential customers, suppliers or other third-parties. These new competitors or alliances among competitors, customers, or suppliers
could emerge rapidly and acquire significant market share. In addition, some of our suppliers and customers offer, or may in the future offer, products that compete with our solutions. Depending on the participants, industry consolidation or the
formation of strategic relationships could have a material adverse effect on our business and results of operations by reducing our ability to compete successfully in our current markets and the markets we are seeking to serve.
We depend on a limited number of customers, and ultimately service providers, for a substantial portion of our revenues, and the loss of, or a significant
shortfall in, orders from any of these parties could significantly impair our financial condition and results of operations.
We
derive a substantial portion of our revenues from a limited number of customers. For example, for the year ended December 31, 2012, Wistron and Motorola accounted for 21% and 13% of our net revenues, respectively; for the year ended
December 31, 2011, Wistron and Motorola accounted for 25% and 17% of our net revenues, respectively; and for the year ended December 31, 2010, Wistron and Motorola accounted for 21% and 17% of our net revenues, respectively. Our inability
to generate anticipated revenues from our key existing or targeted customers, or a significant
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shortfall in sales to certain of these customers would significantly reduce our revenues and adversely affect our operating results. Our operating results in the foreseeable future will continue
to depend on our ability to sell our solutions to our existing and prospective large customers.
Further, we depend on a limited number
of service providers that purchase products from our customers which incorporate our solutions. If these service providers, or other service providers that elect to use our solutions, reduce or eliminate purchases of our customers products
which incorporate our solutions, this would significantly reduce our revenues and adversely affect our operating results. In addition, any sudden or unexpected slowdown in deployments by service providers that incorporate our solutions may lead to
an inventory buildup by our customers who may, in turn, postpone taking delivery of our solutions or wait to clear their existing inventory before ordering more solutions from us, which, in turn, may adversely affect our results. Our operating
results for the foreseeable future will continue to depend on a limited number of service providers demand for products which incorporate our solutions.
We may have conflicts with our customers, including customers we have acquired as part of our acquisition of the STB business from Trident with whom we have a limited history, or the service providers that purchase
products from our customers that incorporate our solutions. Any such conflict could result in events that have a negative impact on our business, including:
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reduced purchases of our solutions or our customers products that incorporate them;
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uncertainty regarding ownership of intellectual property rights;
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litigation or the threat of litigation; or
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settlements or other business arrangements imposing obligations on us or restrictions on our business, including obligations to license intellectual property
rights or make cash payments.
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If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to
attract and retain customers could be impaired, and our competitive position may be harmed.
The industries in which we compete
are highly volatile and competitive. In order to compete effectively, we must continually introduce new products or enhance existing products and accurately anticipate customer requirements for new and upgraded products. The introduction of new
products by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our existing or future solutions obsolete. Our failure to anticipate or timely develop
new or enhanced solutions or technologies in response to technological shifts or changes in customer requirements could result in decreased revenues and an increase in design wins by our competitors.
New product development or the enhancement of existing products is subject to a number of risks and uncertainties. We may experience difficulties
with solution design, manufacturing or certification that could delay or prevent the introduction of new or enhanced solutions. Alternatively, even if technical engineering hurdles can be overcome, we must successfully anticipate customer
requirements regarding features and performance, the new or enhanced products must be competitively priced, and they must become available during the window of time when customers are ready to purchase our solutions.
Even after new or enhanced products are developed, we must be able to successfully bring them to market. The success of new product introductions
depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product production ramp-up issues, the effective management of purchase
commitments and inventory levels in line with anticipated product demand, the availability
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of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects in the early stages of introduction. Accordingly, we
cannot determine in advance the ultimate effect of new product introductions and transitions, and any failure to manage new product introduction risks could adversely affect our business.
Our results could be adversely affected if our customers or the service providers who purchase their products are unable to successfully compete in their respective markets.
Our customers and the service providers that purchase products from our customers face significant competition from their competitors. We rely on
these customers and service providers ability to develop products and/or services that meet the needs of their customers in terms of functionality, performance, availability and price. If these customers and service providers do not
successfully compete, they may lose market share, which would negatively impact the demand for our solutions. For example, for our Connectivity solutions there is intense competition among service providers to deliver video and other multimedia
content into and throughout the home. For the sale of our Connectivity solutions, we are currently dependent on the ability of a limited number of service providers to compete in the market for the delivery of high-definition television-quality
video, or HD video, and other multimedia content. Therefore, factors influencing the ability of these service providers to compete in this market, such as competition from alternative content providers or laws and regulations regarding local cable
franchising or satellite broadcasting rights, could have an adverse effect on our ability to sell Connectivity solutions. In addition, our digital broadcast satellite outdoor unit solutions are primarily supplied to digital broadcast satellite
service providers by our ODM and OEM customers. Digital broadcast satellite service providers are facing significant competition from telecommunications carriers and cable service operators as they compete for customers in terms of video, voice and
data services. Moreover, ODMs and OEMs who market cable and satellite STBs are competing with a variety of Internet protocol-based video delivery solutions, including versions of DSL technology and certain fiber optic-based solutions. Many of these
technologies compete effectively with cable and satellite STBs. If our customers and the service providers who purchase products from our customers that incorporate our solutions do not successfully compete, they may lose market share, which would
reduce demand for our solutions.
If the market for HD video and other multimedia content delivery solutions does not continue to develop as we
anticipate, our revenues may decline or fail to grow, which would adversely affect our operating results.
We derive, and expect
to continue to derive for the foreseeable future, a significant portion of our revenues from sales of our Connectivity solutions based on the MoCA standard. The market for multimedia content delivery solutions based on the MoCA standard is
relatively new, still evolving and difficult to predict. Currently, the growth of the MoCA-based multimedia content delivery market and the success of our business are largely driven by the adoption and deployment of existing and future generations
of the technology by service providers, ODMs and OEMs and, to a lesser extent, by consumer adoption of such technology which is dependent on upgrades from standard definition television services to high-definition television services, or HD
services, and on the availability of over-the-top, or OTT, services that directly deliver Internet video content into the home. It is difficult to predict whether the MoCA standard will continue to achieve and sustain high levels of demand and
market acceptance by service providers or consumers, the rate at which consumers will upgrade to HD services, whether the availability of OTT services will continue to grow or whether consumers beyond the early technology adopters will embrace OTT
services in increasing numbers, if at all.
Many of these same market dynamics apply to advanced STB SoCs which we acquired when we
purchased the STB business of Trident. For example, some of our STB solutions use Googles Android operating system, which allows third party applications and other advanced features to be
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deployed by service providers. The market for such advanced STB features is relatively new, still evolving and difficult to predict. The future success of our STB solutions line may depend on the
adoption and deployment of advanced STB features by service providers and the availability of OTT services that deliver Internet video content into the home. As with our Connectivity solutions, it is difficult to predict the levels of demand and
market acceptance of advanced STB solutions, and therefore, if may be difficult to predict future revenues and our investment return from STB solutions that offer advanced features.
With regard to Connectivity solutions, some service providers, ODMs and OEMs have adopted, and others may adopt, multimedia content delivery
solutions that rely on technologies other than the MoCA standard or may choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, MoCA-based solutions. The
alternative technology solutions which compete with MoCA-based solutions include Ethernet, HomePNA, HomePlug AV and Wi-Fi. It is critical to our success that additional service providers, including telecommunications carriers, digital broadcast
satellite service providers and cable operators, adopt the MoCA standard for home networking and deploy MoCA solutions to their customers. If the market for MoCA-based solutions does not continue to develop or develops more slowly than we expect, or
if we make errors in predicting adoption and deployment rates for these solutions, our revenues may be significantly adversely affected. Our operating results may also be adversely affected by any delays in consumer upgrade to HD services, delays in
consumer adoption of OTT services, or if the market for OTT services develops more slowly than we expect.
Even if service providers, ODMs and
OEMs adopt multimedia content delivery solutions based on the MoCA standard, we may not compete successfully in the market for MoCA-compliant chipsets.
As a member of MoCA, we are required to license any of our patent claims that are essential to implement the MoCA specifications to other MoCA members on reasonable and non-discriminatory terms. As a result, we are
required to license some of our important intellectual property to other MoCA members, including other semiconductor manufacturers that may compete with us in the sale of MoCA-compliant chipsets. Furthermore, there may be disagreements among MoCA
members as to specifically which of our patent claims we are required to license to them. If we are unable to differentiate our MoCA-compliant chipsets from other MoCA-compliant chipsets by offering superior pricing and features outside MoCA
specifications, we may not be able to compete effectively in the market for such chipsets. Moreover, although we are currently and actively involved in the ongoing development of the MoCA standard, we cannot guarantee that future MoCA specifications
will incorporate technologies or product features we are developing or that our solutions will be compatible with future MoCA specifications. As additional members, including our competitors, continue to join MoCA, they and existing members may
exert greater influence on MoCA and the development of the MoCA standard in a manner that is adverse to our interests. If our Connectivity solutions fail to comply with future MoCA specifications, the demand for these solutions could be severely
reduced.
The semiconductor and communications industries are highly cyclical and subject to rapid change and evolving industry standards and,
from time to time, have experienced significant downturns in customer demand as well as unexpected increases in demand resulting in production capacity constraints. These factors could impact our operating results, financial condition and cash flows
and may increase the volatility of the price of our common stock.
The semiconductor and communications industries are highly
cyclical and subject to rapid change and evolving industry standards and, from time to time, have experienced significant downturns in customer demand. These downturns are characterized by decreases in product
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demand, excess customer inventories and accelerated erosion of prices; factors which have caused, and could continue to cause, substantial fluctuations in our net revenue and in our operating
results. Any downturns in the semiconductor and communications industries may be severe and prolonged, and any failure of these industries to fully recover from downturns could harm our business. For example, because a significant portion of our
expense is fixed in the near term or is incurred in advance of anticipated sales, during these downturns we may not be able to decrease our expenses rapidly enough to offset unanticipated shortfalls in revenues during industry downturns, which would
adversely affect our operating results. Even as the industry recovers from a downturn, some OEMs and ODMs may continue to slow down their research and development activities, cancel or delay new product development, reduce their inventories and/or
take a cautious approach to acquiring products, which may negatively impact our business.
The semiconductor and communications
industries also periodically experience increased demand and production capacity constraints, which may affect the ability of companies such as ours to ship products to customers. Any factor adversely affecting either the semiconductor or
communications industries in general, or the particular segments of any of these industries that our solutions target, may adversely affect our ability to generate revenue and could negatively impact our operating results, cash flow and financial
condition. The semiconductor and communications industries may experience supply shortages due to sudden increases in demand beyond foundry capacity. In addition to capacity issues, during periods of increased demand these industries may also
experience difficulty obtaining sufficient manufacturing, assembly and test resources from manufacturers. If, as a result of these industry issues or other factors that cause capacity constraints at our suppliers, we are unable to meet our
customers increased demand for our solutions, we would miss opportunities for additional revenue and could experience a negative impact on our relationships with affected customers. Further, in response to the cyclical and rapidly changing
nature of the semiconductor and communications industries, our operating results may fluctuate from period to period as we adjust our inventory and production requirements to meet the changing demands of our customers, which could impact our
financial condition and cash flows and may increase the volatility of the price of our common stock.
Our operating results have fluctuated
significantly in the past and we expect them to continue to fluctuate in the future, which could lead to volatility in the price of our common stock.
Our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside of our control. These
fluctuations in our operating results may cause our stock price to fluctuate as well. The primary factors that are likely to affect our quarterly and annual operating results include:
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changes in demand for our solutions or products offered by service providers and our customers;
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the timing and amount of orders, especially from significant service providers and customers;
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the seasonal nature of the sales of products that incorporate our solutions by certain service providers which may affect the timing of orders for our solutions;
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the level and timing of capital spending of service providers, both in the United States and in international markets;
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competitive market conditions, including pricing actions by us or our competitors;
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adverse market perception of our products or their features;
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any delay in the development, certification or adoption associated with new MoCA standards (e.g., MoCA 2.0) by the alliance, OEMs or service providers;
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any cut backs or delayed deployments of products that include our solutions, and particularly our STB SoC solutions, by service providers;
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our unpredictable and lengthy sales cycles;
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the mix of solutions and solution configurations sold;
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our ability to successfully define, design and release new solutions on a timely basis that meet customers or service providers needs;
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costs related to acquisitions of complementary products, technologies or businesses, including costs associated with our recent acquisitions of the STB business
of Trident and broadcast satellite intellectual property and corresponding technologies from PLX Technology, Inc., or PLX;
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uncertainty regarding the anticipated benefits and synergies of the STB business with our prior existing operations;
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new solution introductions and enhancements, or the market anticipation of new solutions and enhancements, by us or our competitors;
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the timing of revenue recognition on sales arrangements, which may include multiple deliverables and the effect of our use of inventory hubbing
arrangements;
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unexpected changes in our operating expenses;
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general economic conditions (including the recent industry and economic downturn) and political conditions in the countries where we operate or our solutions are
sold or used;
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our ability to attain and maintain production volumes and quality levels for our solutions, including adequate allocation of wafer, assembly and test capacity
for our solutions by our subcontractors;
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our customers ability to obtain other components needed to manufacture their products;
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the cost and availability of components and raw materials used in our solutions, including, without limitation, the price of gold and copper;
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changes in manufacturing costs, including wafer, test and assembly costs, manufacturing yields and solution quality and reliability;
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our ability to obtain continuous cost reductions from wafer, assembly and test vendors;
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productivity of our sales and marketing force;
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our ability to reduce operating expenses in a particular quarter if revenues for that quarter fall below expectations;
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future accounting pronouncements and changes in accounting policies;
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disputes between content owners and service providers that result in the delay or elimination of the sale of products using our technology;
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costs associated with litigation; and
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domestic and international regulatory changes.
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Unfavorable changes in any of the above factors, many of which are beyond our control, could significantly harm our business and results of operations. You should not rely on the results of prior periods as an
indication of our future performance.
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Adverse U.S. and international economic conditions have affected and may continue to adversely affect our
revenues, margins and profitability.
Since September 2008, the credit markets and the financial services industry in the United
States and Europe have been experiencing a period of unprecedented turmoil and upheaval. These conditions, together with the slow and fragile recovery facing the broader economy and, in particular, the semiconductor and communications industries,
have adversely affected, and may continue to adversely affect, our business as service providers cut back or delay deployments that include our solutions and to the extent that consumers decrease their discretionary spending for enhanced video
offerings from service providers, which may in turn lead to cautious or reduced spending by service providers and, in turn, may lead to a decrease in orders for our solutions, thereby adversely affecting our operating results. Our operating results
may also be adversely affected by changes in tax laws as governments react to address the gap between their spending outflows and tax revenue inflows.
We may also experience adverse conditions in our cost base due to changes in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increase research and development expenses and
otherwise harm our business. These conditions may harm our margins and prevent us from sustaining profitability if we are unable to increase the selling prices of our solutions or reduce our costs sufficiently to offset the effects of effective
increases in our costs. Our attempts to offset the effects of cost increases through controlling our expenses, passing cost increases on to our customers or any other method may not succeed. To protect against reductions in value and the volatility
of future cash flows caused by changes in foreign exchange rates, in 2012, we began entering into foreign currency forward contracts. The contracts are intended to reduce, but will not eliminate, the impact of foreign currency exchange rate
movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.
The success of our DBS ODU solutions depends on the demand for our solutions within the satellite digital television market and the growth of this overall market.
We derive a significant portion of our revenues from sales of our digital broadcast satellite outdoor unit solutions into markets served by digital
broadcast satellite providers and their ODM and OEM partners, the deployment of which may also increase demand for our MoCA-compliant Connectivity solutions. These revenues result from the demand for HD based TVs and DVRs within single
family households, multi dwelling units and hospitality establishments that receive their video from digital broadcast satellites. The digital broadcast satellite market may not grow in the future as anticipated or a significant market slowdown may
occur, which would in turn reduce the demand for applications or devices, such as multi-switch and low-noise block converters that rely on our digital broadcast satellite outdoor unit solutions. Because of the intense competition in the satellite,
terrestrial and cable digital television markets, the unproven technology of many products addressing these markets and the short product life cycles of many consumer applications or devices, it is difficult to predict the potential size and future
growth rate of the markets for our digital broadcast satellite outdoor unit solutions. If the demand for our digital broadcast satellite outdoor unit solutions is not as great as we expect, or if we are unable to produce competitive solutions to
meet that demand, our revenues could be adversely affected.
The market for our broadband access solutions is limited and these solutions may not
be widely adopted.
Our broadband access solutions are designed to meet broadband access requirements in areas characterized by
fiber optic network deployments that terminate within one kilometer of customer premises. We believe the primary geographic markets for our broadband access solutions are currently in China and in parts of Europe where there are many multi-dwelling
units and fiber optic
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networks that extend to or near a customer premises. We do not expect to generate significant revenues from sales of our broadband access solutions in North America, which is generally
characterized by low-density housing, or in developing nations that do not generally have extensive fiber optic networks. To the extent our efforts to sell our broadband access solutions into currently targeted markets are unsuccessful, the demand
for these solutions may not develop as anticipated or may decline, either of which could adversely affect our future revenues. Moreover, these markets have a large number of service providers and varying regulatory standards, both of which may delay
any widespread adoption of our solutions and increase the time during which competing technologies could be introduced and displace our solutions.
In addition, if areas characterized by fiber optic networks that terminate within one kilometer of customer premises do not continue to grow, or we are unable to develop broadband access solutions that are
competitive outside of these areas, the demand for our broadband access solutions may not grow and our revenues may be limited. Even if the markets in which our broadband access solutions are targeted continue to grow or we are able to serve
additional markets, customers and service providers may not adopt our technology. There are a growing number of competing technologies for delivering high-speed broadband access from the service providers network to the customers
premises. For example, our broadband access solutions face competition from products using DOCSIS, versions of DSL, Ethernet, fiber to the home and LTE solutions. Moreover, there are many other access technologies that are currently in development
including some low cost proprietary solutions. If service providers adopt competing products or technologies, the demand for our broadband access solutions will decline and we may not be able to generate significant revenues from these solutions.
We have and in the future intend to continue to expand our operations and increase our expenditures in an effort to grow our business. If we are
not able to manage this expansion and growth, or if our business does not continue to grow as we expect, we may not be able to realize a return on the resources we devote to expansion.
We added 346 additional global employees to our employee headcount during 2012, primarily as a result of our acquisition of the STB business from
Trident. We also recently acquired direct broadcast satellite intellectual property and corresponding technologies from PLX. We anticipate that we will continue to expand our infrastructure and grow our headcount to accommodate changes in our
research and development strategy and achieve planned expansion of our solution offerings, projected increases in our customer base and anticipated growth in the number of our solution deployments. This rapid growth will place a strain on our
administrative and operational infrastructure. Our success in managing our growth will be dependent upon our ability to:
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enhance our operational, financial and management controls, reporting systems and procedures;
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expand our facilities and equipment and develop new sources of supply for the manufacture, assembly and testing of our semiconductor solutions when and as needed
and on commercially reasonable terms;
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successfully hire, train, motivate and productively deploy additional employees, including technical personnel; and
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expand our international resources.
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Our inability to address effectively any of these factors, alone or in combination with others, could harm our ability to execute our business strategy.
Further, our acquisition of the STB business from Trident increased our international footprint and opened up new markets in which we had not
previously operated. We intend to continue to grow our business geographically and also to develop new solution offerings and pursue new customers. If we
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fail to timely or efficiently expand operational and financial systems in connection with such growth or if we fail to implement or maintain effective internal controls and procedures, resulting
operating inefficiencies could increase costs and expenses more than we planned and might cause us to lose the ability to take advantage of market opportunities, enhance existing solutions, develop new solutions, satisfy customer requirements,
respond to competitive pressures, control our inventory or otherwise execute our business plan. Failure to implement or maintain such controls and procedures could also impact our ability to produce timely and accurate financial statements.
Additionally, if we increase our operating expenses in anticipation of the growth of our business and such growth does not meet our expectations, our financial results likely would be negatively impacted.
Our joint development and technology licensing arrangements with customers, companies that we have investments in and other third parties may not be
successful.
We have entered into joint development, product collaboration and technology licensing arrangements with customers,
companies we have investments in and other third parties, and we expect to enter into new arrangements of these kinds from time to time in the future. Currently we have investments in, and various obligations and commitments to, third parties
related to these arrangements. Such arrangements can magnify several risks for us, including loss of control over the development and development timeline of jointly developed products. Accordingly, we face increased risk that our joint development
activities may result in products that are not commercially successful or that are not available in a timely fashion. In addition, any third party with whom we enter into a joint development, product collaboration or technology licensing arrangement
may fail to commit sufficient resources to the project, change its policies or priorities and abandon or fail to perform its obligations related to the collaboration. The failure to timely develop commercially successful products through our joint
development activities as a result of any of these and other challenges could have a material adverse affect on our business, results of operations, and financial condition.
We are currently in the process of developing an integrated chip that combines our MoCA functionality with a third partys independently developed transcoding technology. We lack experience in developing a
highly integrated chip of this nature, and therefore may encounter unexpected engineering challenges and difficulties. This integrated chip, which is being jointly developed with Zenverge, Inc., or Zenverge, will be significantly more complex than
other chips that we have developed in the past. Consequently, it might take longer and cost more to develop than we currently anticipate. In addition, given the complexity of this integrated chip and its related software, we may not be successful in
addressing cost, quality and reliability issues, which could result in a final product that is more expensive to produce and support or less reliable than other chips we have developed. If this occurs, or if other customer requirements or program
objectives are not met, the integrated chip may not achieve widespread market acceptance or meet our profit margin targets, and consequently, our sales may not meet our expectations or the profits from the product may not be sufficient to provide us
with an adequate return on our investment. There can be no assurances that our joint development arrangement with Zenverge will be successful or that the resulting integrated chip will be cost-competitive or include all of the functionality required
by our customers, or released to production on time.
Any acquisition, strategic relationship, joint venture or investment could disrupt our
business and harm our financial condition.
We will continue to actively pursue acquisitions, strategic relationships, joint
ventures, collaborations, technology licenses and investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into adjacent markets, or broaden our technology and intellectual
property.
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Such transactions, including our recently completed acquisitions of the STB business from Trident and
broadcast satellite intellectual property and corresponding technologies from PLX, are often complex, time consuming and expensive, and may present numerous challenges and risks including:
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difficulties in assimilating any acquired workforce and merging operations;
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attrition and the loss of key personnel;
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an acquired company, asset or technology, or a strategic collaboration or licensed asset or technology not furthering our business strategy as anticipated;
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uncertainty related to the value, benefits or legitimacy or intellectual property or technologies acquired in such transaction;
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acquisition of a partner with which we have a joint venture, investment or strategic relationship by an unaffiliated third party that either delays or
jeopardizes the original intent of the partnering relationship or investment;
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our overpayment for a company, asset or technology or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition
may subsequently make the acquisition less profitable or strategic than originally anticipated;
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an acquisition, strategic relationship, joint venture or investment in an unproven development stage company not furthering our business strategy as anticipated
as a result of limited financial or other resources, lack of management experience or expertise or for other reasons unknown to us at the time of such transaction;
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our inability to liquidate an investment in a privately held company when we believe it is prudent to do so which results in a significant reduction in value or
loss of our entire investment;
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difficulties entering and competing in new product categories or geographic markets and increased competition, including price competition;
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significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses,
assets or technologies;
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in connection with any such transaction, the need to use a significant portion of our available cash, issue additional equity securities that would dilute the
then-current stockholders percentage ownership, make unanticipated follow-on investments or incur substantial debt or contingent liabilities in an effort to preserve any value in the initial transaction;
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requirements to devote substantial managerial and engineering resources to any strategic relationship, joint venture or collaboration, which could detract from
our other efforts or significantly increase our costs;
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lack of control over the actions of our business partners in any strategic relationship, joint venture, collaboration or investment, which could significantly
delay the introduction of planned solutions or otherwise make it difficult or impossible to realize the expected benefits of such relationship; and
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requirements to record substantial charges and amortization expense related to certain intangible assets, deferred stock compensation and other items.
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Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic
relationships, joint ventures or investments after we have expended resources on them.
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We may enter into negotiations for acquisitions, relationships, joint ventures or investments that are
not ultimately consummated. These negotiations could result in significant diversion of our managements time, as well as substantial out-of-pocket costs, which could materially and adversely affect our operating results during the periods in
which such costs are incurred.
We cannot forecast the number, timing or size of future acquisitions, strategic relationships, joint
ventures or investments, or the effect that any such transactions might have on our operating or financial results. Any such transaction could disrupt our business and harm our operating results and financial condition.
We may not realize the anticipated financial and strategic benefits from the businesses we have acquired or be able to successfully integrate such businesses
with ours.
We will need to overcome challenges, some of which may be significant, in order to realize the benefits or synergies
from the acquisitions we have completed to date and any acquisitions that we may complete from time to time in the future, including our recently completed acquisitions of the STB business of Trident and broadcast satellite intellectual property and
corresponding technologies from PLX. These challenges include the following:
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integrating businesses, operations and technologies;
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retaining and assimilating key personnel;
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retaining existing customers and attracting additional customers;
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creating uniform standards, controls, procedures, policies and information systems, including with respect to our expanded international operations;
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obtaining intellectual property rights, contractual rights or other rights or resources from third parties necessary to achieve the anticipated benefits and
synergies associated with the acquired business;
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meeting the challenges inherent in efficiently managing an increased number of employees, including nearly half of our employees who are located at geographic
locations distant from our headquarters and senior management; and
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implementing appropriate systems, policies, benefits and compliance programs.
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Integration in particular may involve considerable risks and may not be successful. These risks include the following:
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the potential disruption of our ongoing business and distraction of our management;
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the potential strain on our financial and managerial controls and reporting systems and procedures;
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unanticipated expenses and potential delays related to integration of the operations, technology and other resources of the acquired companies;
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the impairment of relationships with employees, suppliers and customers; and
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potential unknown or contingent liabilities.
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The inability to integrate successfully any businesses we acquire, or any significant delay in achieving integration, could delay introduction of new solutions and require expenditure of additional resources to
achieve integration.
Investors should not rely on attempts to combine our historical financial results with those of any of our
acquired businesses as separate operating entities to predict our future results of operations as a combined entity.
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The average selling prices of our solutions have historically decreased over time and will likely do so in the
future, which may reduce our revenues and gross margin.
Our solutions and products sold by other companies in our industry have
historically experienced a decrease in average selling prices over time. We anticipate that the average selling prices of our solutions will continue to decrease in the future in response to competitive pricing pressures, increased sales discounts
and new product introductions from our competitors. For example, we expect that other chipset manufacturers who are members of MoCA will produce competing chipsets and create pricing pressure for such solutions. Broadcoms announcements about
the availability of competing discrete MoCA chipsets and integrated MoCA SoCs in certain applications will put further pressure on pricing. Our future operating results may be harmed due to the decrease of our average selling prices. To maintain our
current gross margins or increase our gross margins in the future, we must develop and introduce on a timely basis new solutions and solution enhancements, continually reduce our solution costs and manage solution transitions in a timely and
cost-effective manner. Our failure to do so would likely cause our revenues and gross margins to decline, which could have a material adverse effect on our operating results and cause the value of our common stock to decline.
Fluctuations in the mix of solutions we sell may adversely affect our financial results.
Because of differences in selling prices and manufacturing costs among our solutions, the mix and types of solutions sold affect the average selling
price of our solutions and have a substantial impact on our revenues and profit margins. To the extent our sales mix shifts toward increased sales of our relatively lower-margin solutions, our overall gross margins will be negatively affected.
Fluctuations in the mix and types of our solutions sold may also affect the extent to which we are able to recover our costs and expenditures associated with a particular solution, and as a result, can negatively impact our financial results.
Our product development efforts are time-consuming, require substantial research and development expenditures and may not generate an acceptable
return.
Our product development efforts require substantial research and development expense. Our research and development
expense was $98.4 million and $60.1 million for the years ended December 31, 2012 and 2011, respectively. There can be no assurance that we will achieve an acceptable return on our research and development efforts.
The development of our solutions is also highly complex. Due to the relatively small size of our solution design teams, our research and
development efforts in our core technologies may lag behind those of our competitors, some of whom have substantially greater financial and technical resources. In the past, we have occasionally experienced delays in completing the development and
introduction of new solutions and solution enhancements, and we could experience delays in the future. Unanticipated problems in developing solutions could also divert substantial engineering resources, which may impair our ability to develop new
solutions and enhancements and could substantially increase our costs. Furthermore, we may expend significant amounts on a research and development program that may not ultimately result in a commercially successful solution, and we have in the past
terminated ongoing research and development programs before they could be brought to successful conclusions. As a result of these and other factors, we may be unable to develop and introduce new solutions successfully and in a cost-effective and
timely manner, and any new solutions we develop and offer may never achieve market acceptance. Any failure to develop future solutions that are commercially successful would have a material adverse effect on our business, financial condition and
results of operations.
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Our solutions typically have lengthy sales cycles, which may cause our operating results to fluctuate, and a
service provider, ODM or OEM customer may decide to cancel or change its service or product plans, which could cause us to lose anticipated sales and expected revenue.
Our solutions typically have lengthy sales cycles. Before deciding to deploy a product containing one of our solutions, a service provider must first evaluate our solutions. This initial evaluation period can vary
considerably based on the service provider and solution being evaluated, and could take a significant amount of time to complete. Solutions incorporating new technologies generally require longer periods for evaluation. After this initial evaluation
period, if a service provider decides to adopt our solutions, that service provider and the applicable ODM or OEM customers will need to further test and evaluate our solutions prior to completing the design of the equipment that will incorporate
our solutions. Additional time is needed to begin volume production of equipment that incorporates our solutions. Due to these lengthy sales cycles, we may experience significant delays from the time we incur research and development and sales
expenses until the time, if ever, that we generate sales and revenue from these solutions. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel or change its product plans. From time to time, we
have experienced changes, delays and cancellations in the purchase plans of service providers or our customers. A cancellation or change in plans by a service provider, ODM or OEM customer could prevent us from realizing anticipated sales and the
associated revenue. In addition, our anticipated sales could be lost or substantially reduced if a significant service provider, ODM or OEM customer reduces or delays orders during our sales cycle or chooses not to release equipment that contains
our solutions. We may invest significant time and effort in marketing to a particular customer that does not ultimately result in a sale to that customer. As a result of these lengthy and uncertain sales cycles for our solutions, it is difficult for
us to predict if or when our customers may purchase solutions in volume from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.
We have limited control over the indirect channels of distribution we utilize, which makes it difficult to accurately forecast orders and could result in the
loss of certain sales opportunities.
A portion of our revenue is realized through independent resellers and distributors that
are not under our control. For the year ended December 31, 2012, 5% of our net revenues were through these entities. These independent sales organizations generally represent product lines offered by several companies and thus could reduce
their sales efforts applied to our products or terminate their representation of us. Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial condition of one or more
significant resellers or distributors were to decline. In addition, as our business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance that we will be successful in maintaining or expanding
these indirect channels of distribution. This uncertainty could result in the loss of certain sales opportunities. Furthermore, our reliance on indirect channels of distribution may reduce visibility with respect to future business opportunities,
thereby making it more difficult to accurately forecast orders. Further, we use the sell-through accounting policy model which recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because
we use the sell-through methodology, we may have variability in our revenue from quarter to quarter.
If we do not achieve additional
design wins in the future or if we do not complete our design-in activities before a customers design window closes, our future sales and revenues could be adversely affected and our customer relationships could be harmed.
To achieve design wins with OEM customers and ODMs, we must define and deliver cost-effective, innovative and high performance solutions on a timely
basis, before our competitors do so. In addition, the timing of our design-in activities with key customers and prospective customers may not align with their open design windows, which may or may not be known to us, making design win
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predictions more difficult. If we miss a particular customers design window, we may be forced to wait an entire year or even longer for the next opportunity to compete for the
customers next design. The loss of a particular design opportunity could eliminate or substantially delay revenues from certain target customers and markets, which could have a material adverse effect on our results of operations and future
prospects as well as our customer relationships. Even after a design win, customers are not obligated to purchase our products and can choose at any time to reduce or cease use of our products, for example, if its own products are not commercially
successful, or for any other reason. We may not continue to achieve design wins or to convert design wins into actual sales, and failure to do so could materially and adversely affect our operating results.
Our solutions must interoperate with many software applications and hardware found in service providers networks and other devices in the home, and if
they do not interoperate properly our business would be harmed.
Our solutions must interoperate with service providers
networks and other devices in the home, which often have varied and complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors, and contain multiple generations of products that have been
added over time. As a result, we must continually ensure that our solutions interoperate properly with existing and planned future networks. To meet these requirements, we must undertake development efforts that involve significant expense and the
dedication of substantial employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. If we fail to maintain or anticipate compatibility with products, software or equipment found in our
customers networks, we may face substantially reduced demand for our solutions, which would adversely affect our business, operating results and financial condition.
From time to time, we may enter into collaborations or interoperability arrangements with equipment and software vendors providing for the use, integration or interoperability of their technology with our
solutions. These arrangements would give us access to and enable interoperability with various products or technologies in the connected home entertainment market. If these relationships fail to achieve their goals, we would have to devote
substantially more resources to the development of alternative solutions and the support of our existing solutions, or the addressable market for our solutions may become limited. In many cases, these parties are either companies that we compete
with directly in other areas or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of these customers. A number of our competitors have stronger relationships
than we do with some of our existing and potential customers and, as a result, our ability to have successful arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and
software vendors may harm our ability to successfully sell and market our solutions. We are currently devoting significant resources to the development of these relationships. Our operating results could be adversely affected if these efforts do not
result in the revenues necessary to offset these investments.
In addition, if we find errors in the software or hardware used in
service providers networks or problematic network configurations or settings we may have to modify our solutions so that they will interoperate with these networks. This could cause longer installation times for our solutions and order
cancellations, either of which would adversely affect our business, operating results and financial condition.
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We do not have long-term commitments from our customers and our customers may cancel their orders, change
production quantities or delay production, and if we fail to forecast demand for our solutions accurately, we may incur solution shortages, delays in solution shipments or excess or insufficient solution inventory.
We sell our solutions to customers who integrate them into their products. We do not obtain firm, long-term purchase commitments from our customers.
We have limited visibility as to the volume of our solutions that our customers are selling or carrying in their inventory. In addition, certain service providers are affected by seasonality in their deployment of products that incorporate our
solutions, which may in turn impact the timing of our sales. Because production lead times often exceed the amount of time required to fulfill orders, we often must build inventory in advance of orders, relying on an imperfect demand forecast to
project volumes and solution mix. Further, because we acquired the STB business of Trident out of bankruptcy proceedings, Tridents customers may have switched to alternative suppliers to meet their needs and we may be unable to secure such
customers business in the future, which could result in lost sales and revenues which we otherwise would have received had Tridents business not deteriorated prior to the closing of our acquisition of the STB business. In addition, we
may incur costs in building a relationship or improving upon existing relationships with these customers which could affect our profit margins and results of operations, with no guarantee of any commitment in return.
Our demand forecast accuracy, and our ability to manage our inventory carrying levels accurately, can be adversely affected by a number of factors,
including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our solution order mix and demand for our customers products. We have in the past had customers dramatically decrease and increase their
requested production quantities with little or no advance notice to us. Even after an order is received, our customers may cancel these orders, postpone taking delivery or request a decrease in production quantities. Any such cancellation,
postponement of delivery or decrease in production quantity subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls, reduced profit margins and
excess or obsolete inventory which we may be unable to sell to other customers or which we may be required to sell at reduced prices or write off entirely. Furthermore, changes to our customers requirements may result in disputes with our
customers which could adversely impact our future relationships with those customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough solutions, which could lead to delays in solution shipments
and lost sales opportunities in the near term, as well as force our customers to identify alternative sources of supply, which could affect our ongoing relationships with these customers and potentially reduce our market share. If we do not timely
fulfill customer demands, our customers may cancel their orders and we may be subject to customer claims for cost of replacement.
Our ability to
accurately predict revenues and inventory needs, and to effectively manage inventory levels, may be adversely impacted due to our use of inventory hubbing arrangements.
We are party to an inventory hubbing arrangement with Motorola and we may enter into similar arrangements with other customers
(including customers of the recently acquired STB business) in the future. Pursuant to these arrangements, we ship our solutions to a designated third-party warehouse, or hub, rather than shipping them directly to the customer. The solutions
generally remain in the hub until the customer removes them for incorporation into its own products. In the absence of any hubbing arrangement, we generally recognize revenues on sales of our solutions upon shipment of those solutions to the buyer.
Under our hubbing arrangement with Motorola, however, we maintain ownership of our solutions in the hub, and therefore do not recognize the related revenue until the date Motorola removes them from the hub. As a result, our ability to accurately
predict future revenues recognized from sales to Motorola or any other customers with which we implement
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hubbing arrangements may be impaired, and we may experience significant fluctuations in our quarterly operating results depending on when Motorola or any such other customers remove our solutions
from the hub, which they may do with little or no lead time. In the short term, we may experience an increase in operating expenses as we build and ship inventory to the hub and will not recognize revenues from sales of this inventory, if at all,
until Motorola or any such other customers remove it from the hub at a later time. Furthermore, because we continue to own but do not maintain control over our solutions after they are shipped to the hub, our ability to effectively manage inventory
levels may be impaired as our shipments under the hubbing arrangement increase and we may be exposed to additional risk that the inventory in the hub becomes obsolete before sales are recognized.
We extend credit to our customers, sometimes in large amounts, but there is no guarantee every customer will be able to pay our invoices when they become
due.
As part of our routine business, we extend credit to customers purchasing our solutions. While our customers may have the
ability to pay on the date of shipment or on the date credit is granted, their financial condition could change and there is no guarantee that customers will ever pay the invoices. Rapid changes in our customers financial conditions and risks
associated with extending credit to our customers can subject us to a higher financial risk and could have a material adverse effect on our business, financial condition and results of operations. This risk is exacerbated by our reliance on a
limited number of customers who purchase our solutions.
We depend on a limited number of third parties to manufacture, assemble and test our
solutions which reduces our control over key aspects of our solutions and their availability.
We do not own or operate a
manufacturing, assembly or test facility for our solutions. Rather, we outsource the manufacture, assembly and testing of our solutions to third-party subcontractors including Taiwan Semiconductor Manufacturing Company, Ltd., Jazz Semiconductor,
Inc. (a wholly owned subsidiary of Tower Semiconductor, Inc), Amkor Technologies, Inc., Advance Semiconductor Engineering Group and Giga Solution Tech. Co., Ltd. Further, the STB business recently acquired from Trident relies heavily on NXP to
manufacturer certain STB solutions. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality solutions on time. Our reliance on sole or limited suppliers involves several risks, including susceptibility to increased
manufacturing costs if competition for foundry capacity intensifies and reduced control over the following:
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supply of our solutions available for sale;
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pricing, quality and timely delivery of our solutions;
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prices and availability of components for our solutions; and
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production capacity for our solutions, including shortages due to the difficulties of suppliers to meet production capacities because of unexpected increases in
demand.
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Because we rely on a limited number of third-party manufacturers, if we elect to expand the number of
third-party manufacturers to whom we outsource the manufacture, assembly or testing of our solutions, or if we are required to change contract manufacturers because any of our contract manufacturers become unable or unwilling to continue
manufacturing our solutions for any reason, we may sustain lost revenues, increased costs and damage to our customer relationships or other harm to our business. Any engagement of new or alternative third-party manufacturers will require us to spend
significant time and expense in identifying and qualifying such manufacturers and solutions manufactured by such manufacturers will, in turn, need to be qualified by our customers. The lead time required to establish a relationship with a new
manufacturer is long, and it takes time to adapt a solutions design and technological requirements to a particular manufacturers processes. In
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connection with our engagement of new or alternative third-party manufacturers, we may experience bugs and defects as we work through the process, which could result in delayed or decreased
revenue and harm to our reputation and our relationship with our customers.
Manufacturing defects may not be detected by the testing
process performed by our subcontractors. If defects are discovered after we have shipped our solutions, we may be exposed to warranty and consequential damages claims from our customers. Such claims may have an adverse impact on our revenues and
operating results. Furthermore, if we are unable to deliver quality solutions, our reputation would be harmed, which could result in the loss of future orders and business with our customers.
When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which may be costly and negatively impact our operating results.
The ability of each of our suppliers manufacturing facilities to provide us with chipsets is limited by its available capacity and existing
obligations. Although we may have purchase order commitments to supply products to our customers, we do not have a guaranteed level of production capacity from any of our suppliers facilities to produce our solutions. Facility capacity may not
be available when we need it or at reasonable prices. In addition, our subcontractors may allocate capacity to the production of other companies products and thereby reduce deliveries to us on short notice.
In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks associated with an inability to meet our
customers demands for our solutions, we may enter into various arrangements with suppliers that could be costly and harm our operating results, including:
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option payments or other prepayments to a supplier;
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nonrefundable deposits with or loans to suppliers in exchange for capacity commitments;
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contracts that commit us to purchase specified quantities of components over extended periods; and
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purchase of testing equipment for specific use at the facilities of our suppliers.
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We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial
flexibility and not be on terms favorable to us. Moreover, if we are able to secure capacity, we may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and require significant capital and
could harm our business.
We believe that transitioning certain of our silicon solutions to newer or better manufacturing process technologies
will be important to our future competitive position. If we fail to make this transition efficiently, our competitive position could be seriously harmed.
We continually evaluate the benefits, on a solution-by-solution basis, of migrating to higher performance or lower cost process technologies in order to produce higher performance, more efficient or better
integrated circuits because we believe this migration is required to remain competitive. Other companies in our industry have experienced difficulty in migrating to new process technologies and, consequently, have suffered reduced yields, delays in
product deliveries and increased expense levels. We may experience similar difficulties. Moreover, we are dependent on our relationships with subcontractors and the products of electronic design automation tool vendors to successfully migrate to
newer or better process technologies. Our third-party manufacturers may not make newer or better process technologies available to us on a timely or cost-effective basis, if at all.
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If our third-party manufacturers do not make newer or better manufacturing process technologies available to us on a timely or cost-effective basis, or if we experience difficulties or delays in
migrating to these processes, it could have a material adverse effect on our competitive position and business prospects.
Our solutions may
contain defects or errors which may adversely affect their market acceptance and our reputation and expose us to product liability claims.
Our solutions are very complex and may contain defects or errors, especially when first introduced, when in full production, or when new versions are released. Despite testing, errors may occur. Such errors may
include manufacturing defects, design defects of software bugs. Solution errors could affect the performance of our solutions, delay the development or release of new solutions or new versions of solutions, adversely affect our reputation and our
customers willingness to buy solutions from us, and adversely affect market acceptance of our solutions. Any such errors or delays in releasing new solutions or new versions of solutions or allegations of unsatisfactory performance could cause
us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning our solutions, subject us to liability for damages and divert our resources from other tasks. Our solutions must successfully
interoperate with products from other vendors. As a result, when problems occur in a device or application in which our solution is used, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors,
whether or not caused by our solutions, could result in the delay or loss of market acceptance of our solutions, and therefore delay our ability to recognize revenue from sales, and any necessary revisions may cause us to incur significant expenses.
Moreover, problems with our solutions that are only discovered after they have been deployed by a service provider could result in a greater number of truck rolls, and this in turn could adversely affect our sales or increase the cost of
remediation. The occurrence of any such problems could harm our business, operating results and financial condition.
The use of our
solutions also entails the risk of product liability claims. Such claims may require us to incur additional development and remediation costs, pursuant to warranty and indemnification provisions in our customer contracts and purchase orders. We
maintain insurance to protect against certain claims associated with the use of our solutions, but our insurance coverage may not cover any claim asserted against us adequately, or at all. In addition, even claims that ultimately are unsuccessful
could result in our expenditure of funds in litigation which may divert our technical and other resources from solution development efforts and divert our managements time and other resources. Any limitation of liability provisions in our
standard terms and conditions of sale may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries.
We depend on key personnel to operate our business, and if we are unable to retain our current personnel and hire additional qualified personnel, our ability
to develop and successfully market our solutions could be harmed.
We believe our future success will depend in large part upon
our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. There is significant competition for qualified personnel in the markets in which we compete and in the geographical locations in which we
operate. We do not have employment agreements with most of our executive or key employees and the unexpected loss of any key employees, including our president and chief executive officer, other members of our senior management or our senior
engineering personnel, or an inability to attract additional qualified personnel, including engineers and sales and marketing personnel, could delay the development, introduction and sale of our solutions and our ability to execute our business
strategy may suffer. In addition, in the event that there is a loss of any of our key personnel, there is a
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potential for loss of important knowledge that may delay or negatively impact development or sale of our solutions and our ability to execute on our business strategy. We do not currently have
any key person life insurance covering any executive officer or employee.
Our implementation of a new enterprise resource planning, or ERP,
system could cause disruption to our operations.
We are in the process of transitioning to a new ERP system, which is currently
scheduled to be fully implemented during fiscal year 2013. If the implementation of the ERP system does not proceed as expected, it could impede our ability to manufacture products, order materials, generate management reports, invoice customers,
and comply with laws and regulations. Any of these types of disruptions could have a material adverse effect on our net sales and profitability.
Increasingly stringent environmental laws, rules and regulations could adversely affect our ability to cost-effectively produce our solutions and if we fail
to comply with environmental regulatory requirements, our operating results could be adversely affected.
The electronics
industry has been subject to increasing environmental regulations. At the same time, we face increasing complexity in our solution design and procurement operations as we adjust to requirements relating to the materials composition of many of our
solutions. The European Union has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the European Union, including the Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment, directive that restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006. Many other countries, including China,
Taiwan and Korea, where the majority of our solutions are manufactured and packaged and sold, have also adopted similar directives banning or limiting the use of specified substances in products introduced into their domestic markets. We have
incurred costs in connection with our compliance with these environmental laws and regulations, such as costs related to eliminating lead from our semiconductor solution packaging. Other environmental regulations may be enacted in the future,
including in the United States, that require us to re-engineer or redesign our solutions and processes to utilize components that are compatible with these regulations and this re-engineering and redesign may result in additional costs to us or
disrupt our operations or logistics. If we or the third-party manufacturers of our solutions are unable to meet future environmental regulations in a timely and cost-effective manner, it could have a material adverse effect on our business, results
of operations and financial condition.
New rules related to conflict minerals disclosure could negatively impact our business.
The SEC recently adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply
chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These new rules and verification requirements, which will apply to our activities in
calendar 2013, will impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face
challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.
Certain of our
customers products and service providers services are subject to governmental regulation.
Governmental regulation
could place constraints on our customers and service providers services and, consequently, reduce our customers demand for our solutions. For example, the Federal Communications Commission has broad jurisdiction over products that emit
radio frequency
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signals in the United States. Similar governmental agencies regulate these products in other countries. Moreover, laws and regulations regarding local cable franchising or satellite broadcasting
rights could have an adverse effect on service providers ability to compete in the HD video and multimedia content delivery market. Although most of our solutions are not directly subject to current regulations of the Federal Communications
Commission or any other federal or state communications regulatory agency, much of the equipment into which these solutions are incorporated is subject to direct governmental regulation. Accordingly, the effects of regulation on our customers or the
industries in which they operate may, in turn, impede sales of our solutions. For example, demand for these solutions will decrease if equipment into which they are incorporated fails to comply with the specifications of the Federal Communications
Commission.
Our effective tax rate may increase or fluctuate, and we may not derive the anticipated tax benefits from any expansion of our
international operations.
Our effective tax rate could be adversely affected by various factors, many of which are outside of
our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws,
regulations and interpretations in multiple jurisdictions in which we operate as well as the requirements of certain tax rulings. Changes in applicable tax laws may cause fluctuations between reporting periods in which the changes take place. If our
business opportunities outside the United States continue to grow, we may expand our international operations and staff to better support our expansion into international markets. We anticipate that this expansion will include the implementation of
an international organizational structure that could result in an increasing percentage of our consolidated pre-tax income being derived from, and reinvested in, our international operations. Moreover, we anticipate that this pre-tax income would be
subject to foreign tax at relatively lower tax rates when compared to the U.S. federal statutory tax rate and as a consequence, our future effective income tax rate may be lower than the U.S. federal statutory rate. There can be no
assurance that significant pre-tax income will be derived from or reinvested in our international operations, that our international operations and sales will result in a lower effective income tax rate, or that we will implement an international
organizational structure. In addition, our future effective income tax rate could be adversely affected if tax authorities challenge any international tax structure that we implement or if the relative mix of U.S. and international income changes
for any reason. Accordingly, there can be no assurance that our effective income tax rate will be less than the U.S. federal statutory rate.
Our
ability to utilize our net operating loss and tax credit carryforwards may be limited, which could result in our payment of income taxes earlier than if we were able to fully utilize our net operating loss and tax credit carryforwards.
As of December 31, 2012, we had federal and state net operating loss carryforwards of $0.3 million and $32.0 million,
respectively, and federal and state research and development tax credit carryforwards of $9.9 million and $17.2 million, respectively. The tax benefits related to utilization of net operating loss and tax credit carryforwards may be limited due
to ownership changes or as a result of other events. For example, Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limitation on the amount of net operating loss carryforwards and tax credit carryforwards
that may be used to offset federal taxable income and federal tax liabilities when a corporation has undergone a significant change in its ownership. While prior changes in our ownership of acquired entities have resulted in annual limitations on
the amount of our net operating loss and tax credit carryforwards that may be utilized in the future, we do not anticipate that such annual limitations will preclude the utilization of substantially all the net operating loss and tax credit
carryforwards described above in the event we remain profitable. However, to the extent our use of net operating loss and tax credit carryforwards is further limited by future offerings or transactions or
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by our implementation of an international tax structure or other future events, our income would be subject to cash payments of income tax earlier than it would be if we were able to fully
utilize our net operating loss and tax credit carryforwards without such further limitation.
If we fail to manage our exposure to global
financial and securities market risks successfully, our operating results could be adversely impacted.
We are exposed to
financial market risks, including changes in interest rates, foreign currency exchange rates, credit markets and prices of marketable equity and fixed-income securities. The primary objective of most of our investment activities is to preserve
principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments
denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially
harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio is affected by the credit condition of the U.S. financial sector. Although there have been recent signs of
improvement within the U.S. financial sector, the sector remains fragile and conditions may deteriorate rapidly, which could adversely affect the value, realized or unrealized, of our investments and cause us to record significant impairment losses.
We may not be able to obtain the financing necessary to operate and grow our business.
In October 2010, we completed a public offering of 10,750,000 shares of our common stock, which resulted in net proceeds of $99.3 million. In the
future we may not be able to obtain such financing on favorable terms or at all. If we were to raise additional capital through further sales of our equity securities, our stockholders would suffer dilution of their equity ownership. If we engage in
debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, prohibit us from repurchasing our stock or making investments or force us to maintain specified
liquidity or other ratios, any of which could harm our business, operating results and financial condition.
Risks Related to Our Intellectual
Property
Our ability to compete and our business could be jeopardized if we are unable to secure or protect our intellectual property.
We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect our proprietary rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not
issue as patents at all or they may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated, rendered unenforceable or circumvented, which could limit
our ability to stop competitors from marketing related products. Furthermore, we may not be able to detect infringement by our competitors of some of the inventions protected by our patents. Although we have taken steps to protect our intellectual
property and proprietary technology, there is no assurance that third parties will not be able to invalidate, render unenforceable, infringe without detection or design around our patents. Additionally, in September 2011, the Leahy-Smith America
Invests Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also
affect patent litigation. The United States patent office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law
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associated with the Leahy-Smith Act will not become effective until one year or 18 months after its enactment. Even after full implementation, it is not clear what, if any, impact the Leahy-Smith
Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued
patents, all of which could have a material adverse effect on our business and financial condition.
Furthermore, although we have
entered into nondisclosure agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other
proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Moreover, we are required to license any of our patent claims that are essential to implement MoCA specifications to other MoCA members, who
could potentially include our competitors, on reasonable and non-discriminatory licensing terms. In addition, in connection with commercial arrangements with our customers and the service providers who deploy equipment containing our solutions, we
may be required to license our intellectual property to third parties, including competitors or potential competitors.
Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our trademarks, products or technology. Monitoring unauthorized use of our trademarks and technology is difficult and we cannot be
certain that the steps we have taken to prevent such unauthorized use will be successful, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. In addition, if we become
aware of a third partys unauthorized use or misappropriation of our trademarks or technology, it may not be practicable, effective or cost-efficient for us to enforce our intellectual property and contractual rights, particularly where the
initiation of a claim might harm our business relationships or risk a costly and protracted lawsuit, including a potential countersuit by a competitor with patents that may implicate our solutions. If competitors engage in unauthorized use or
misappropriation of our trademarks or technology, our ability to compete effectively could be harmed.
The acquisition of the STB business of
Trident greatly expands the size of our patent portfolio and our ability to manage this growth could have significant effects on our business.
Upon closing the Trident acquisition, both the number of issued and granted patents under our control and the number of pending patent applications under our control increased substantially. The risks associated
with managing what is now a complex portfolio of patents are significant. Our ability to manage these risks, including increased costs related to patent prosecution, maintenance costs and potential legal costs in protecting, defending and enforcing
our rights under these patents may consume more resources than we expect, and could negatively impact our business. There is no guarantee that the patents we have acquired are sufficient to provide meaningful protection. If we are unsuccessful in
managing the expanded portfolio or if the value of the patents is less than we anticipate, we may not fully achieve the anticipated benefits of our acquisition and our financial results may suffer.
Our participation in patent pools and standards setting organizations, or other business arrangements, may require us to license our patents to
competitors and other third parties and limit our ability to enforce or collect royalties for our patents.
In addition to our
existing obligations to license our patent claims that are essential to implement the MoCA specifications to other MoCA members, in the course of participating in patent pools and other standards setting organizations or pursuant to other business
arrangements, we may agree to license certain of our technologies on a reasonable and non-discriminatory basis and, as a result, our
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control over the license of such technologies may be limited. We may also be unable to limit to whom we license some of our technologies and may be unable to restrict many terms of the license.
Consequently, our competitors may obtain the right to use our technology. In addition, our control over the application and quality control of our technologies that are included in patent pools or otherwise necessary for implementing industry
standards may be limited.
Any dispute with a MoCA member regarding what patent claims are necessary to implement MoCA specifications could result
in litigation which could have an adverse effect on our business.
We are required to grant to other MoCA members a non-exclusive
and world-wide license on reasonable and non-discriminatory terms to any of our patent claims that are essential to implement MoCA specifications. The meaning of reasonable and non-discriminatory has not been settled by the courts, and accordingly,
it is not a well-defined concept. If we had a disagreement with a MoCA member regarding which of our patent claims are necessary to implement MoCA specifications or regarding whether the terms of any license by us under reasonable and
non-discriminatory terms fall within the scope and meaning of reasonable and non-discriminatory, this could result in litigation. Any such litigation, regardless of its merits, could be time-consuming, expensive to resolve, divert our
managements time and attention and harm our reputation. In addition, any such litigation could result in us being required to license on reasonable and non-discriminatory terms certain of our patent claims which we previously believed did not
need to be licensed under our MoCA agreement. Significant disagreements or any litigation between us and any MoCA member regarding patent claims necessary to implement MoCA or the scope and meaning of our reasonable and non-discriminatory terms
could have an adverse effect on our business and harm our competitive position.
Possible third-party claims of infringement of proprietary rights
against us, our customers or the service providers that purchase products from our customers, or other intellectual property claims or disputes, could have a material adverse effect on our business, results of operations or financial condition.
The semiconductor industry is characterized by a high level of litigation based on allegations of infringement of proprietary
rights. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are selling and developing solutions. Because patent applications take many years to issue, currently pending
applications, known or unknown to us, may later result in issued patents that we infringe. In addition, third parties continue to actively seek new patents in our field. It is difficult or impossible to keep fully abreast of these developments and
therefore, as we develop new and enhanced solutions, we may sell or distribute solutions that inadvertently infringe patents held by third parties.
We have in the past received, and in the future we, our customers or the service providers that purchase products from our customers may receive, inquiries from other patent holders and may become subject to claims
that we infringe their intellectual property rights. Furthermore, we are, and may in the future be, engaged in development projects with technology partners that will result in the incorporation of technology contributed by us and our technology
partners into one or more jointly developed products. Accordingly, even if our own technology and stand-alone products do not infringe third party patents, the technology that is contributed by any of our technology partners, or the combination of
our technology with that of our technology partners, may infringe third party patents, subjecting us through the use, manufacture, sale, offer for sale or importation of our solutions to claims that we infringe the intellectual property rights of
others. Any intellectual property claim or dispute, regardless of its merits, could force us, our customers or the service providers that purchase our solutions from our customers to license the third-partys patents for substantial royalty
payments or cease the sale of the alleged infringing products or use of the alleged infringing technologies, or
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force us to defend ourselves and possibly our customers or contract manufacturers in litigation. Any cessation of solution sales by us, our customers or the service providers that purchase
products from our customers could have a substantial negative impact on our revenues. Any litigation, regardless of its outcome, could result in substantial expense and significant diversion of our managements time and other resources.
Moreover, any such litigation could subject us, our customers or the service providers that purchase our solutions from our customers to significant liability for damages (including treble damages), temporary or permanent injunctions, or the
invalidation of proprietary rights or require us, our customers or the service providers that purchase products from our customers to license the third-party patents for substantial royalty or other payments.
In addition, we may also be required to indemnify our customers and contract manufacturers under our agreements if a third party alleges or if a
court finds that our products or activities have infringed upon, misappropriated or misused another partys proprietary rights. We have received requests from certain customers to include increasingly broad indemnification provisions in our
agreements with them. These indemnification provisions may, in some circumstances, extend our liability beyond the products we provide to include liability for combinations of components or system level designs and for consequential damages and/or
lost profits. Even if claims or litigation against us are not valid or successfully asserted, these claims could result in significant costs and diversion of the attention of management and other key employees to defend.
Finally, if another supplier to one of our customers, or a customer of ours itself, were found to be infringing upon the intellectual property
rights of a third party, the supplier or customer could be ordered to cease the manufacture, import, use, sale or offer for sale of its infringing product(s) or process(es), either of which could result, indirectly, in a decrease in demand from our
customers for our products. If such a decrease in demand for our products were to occur, it could have an adverse impact on our operating results.
Our use of open source software and third-party technologies, including software, could impose limitations on our ability to commercialize our solutions.
We incorporate open source software into our solutions, including certain open source code which is governed by the GNU General
Public License, Lesser GNU General Public License and Common Development and Distribution License. In addition, open source software may be incorporated into the technology developed by our technology partners either with or without our knowledge
and may be incorporated into our solutions either with or without our knowledge. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a manner that could
impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such event, we could be required to seek licenses from third parties in order to continue offering our solutions, make our proprietary code generally
available in source code form (for example, proprietary code that links in particular ways to certain open source modules), which could result in our trade secrets being disclosed to the public and the potential loss of intellectual property rights
in our software, require us to re-engineer our solutions, discontinue the sale of our solutions if re-engineering cannot be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could adversely
affect our business, operating results and financial condition.
In addition to technologies we have already licensed, we may find that
we need to incorporate certain proprietary third-party technologies, including software programs, into our solutions in the future. However, licenses to relevant third-party technologies may not be available to us on commercially reasonable terms,
if at all. Therefore, we could face delays in solution releases until alternative technology can be identified, licensed or developed, and integrated into our current solutions. Such alternative technology may not be available to us on reasonable
terms, if at all, and
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may ultimately not be as effective as the preferred technology. Any such delays or failures to obtain licenses, if they occur, could materially adversely affect our business, operating results
and financial condition.
Because we license some of our software source code directly to customers, we face increased risks that our trade
secrets will be exposed through inadvertent or intentional disclosure, which could harm our competitive position or increase our costs.
We license some of our software source code to our customers, which increases the number of people who have access to some of our trade secrets and other proprietary rights. Contractual obligations of our licensees
not to disclose or misuse our source code may not be sufficient to prevent such disclosure or misuse. The costs of enforcing contractual rights could substantially increase our operating costs and may not be cost-effective, reasonable under the
circumstances or ultimately succeed in protecting our proprietary rights. If our competitors access our source code, they may gain further insight into the technology and design of our solutions, which would harm our competitive position.
Because we rely extensively on our information technology systems and network infrastructure, any disruption or infiltration of such systems
could materially adversely affect our business.
We maintain and rely extensively on information technology systems and network
infrastructures for the effective operation of our business. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, computer viruses, cyber attacks,
employee theft or misuse, power disruptions, natural disasters or accidents could cause breaches of data security and loss of critical data, which in turn could materially adversely affect our business. Our security procedures, such as virus
protection software and our business continuity planning, such as our disaster recovery policies and back-up systems, may not be adequate or implemented properly to fully address the adverse effect of such events, which could adversely impact our
operations. In addition, our business could be adversely affected to the extent we do not make the appropriate level of investment in our technology systems as our technology systems become out-of-date or obsolete and are not able to deliver the
type of data integrity and reporting we need to run our business. Furthermore, when we implement new systems and or upgrade existing systems, we could be faced with temporary or prolonged disruptions that could adversely affect our business.
Risks Related to International Operations
A significant portion of our revenue comes from our international customers, most of our products are manufactured overseas and a significant portion of our
employees live and work outside the United States. As a result, our business may be harmed by political and economic conditions in foreign markets and the challenges associated with operating internationally.
We have derived, and expect to continue to derive, a significant portion of our revenues from international markets. Many of our customers in Asia
incorporate our chipsets into their products that are then sold to U.S.-based service providers. Net revenues outside of the United States comprised approximately 99% of our total revenues for the year ended December 31, 2012 and more than 99%
of our revenues for the year ended December 31, 2011. In addition, most of our products are manufactured overseas and a significant portion of our labor force is outside the United States. Our international presence has significantly increased
as a result of our acquisition of the STB business from Trident and as a result our exposure to the risks of international business activities has increased. Certain of these risks, include:
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difficulties involved in the staffing and management of geographically dispersed operations;
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complying with local laws and regulations, which are interpreted and enforced differently across jurisdictions and which can change significantly over time;
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longer sales cycles in certain countries, especially on initial entry into a new geographical market;
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greater difficulty evaluating a customers ability to pay, longer accounts receivable payment cycles and greater difficulty in the collection of past-due
accounts;
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general economic conditions in each country;
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challenges associated with operating in diverse cultural and legal environments;
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seasonal reductions in business activity specific to certain markets;
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loss of revenue, property and equipment from expropriation, natural disasters, nationalization, war, insurrection, terrorism and other political risks;
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foreign taxes and the overlap of different tax structures, including modifications to the U.S. tax code as a result of international trade regulations;
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foreign technical standards;
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changes in currency exchange rates; and
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import and export licensing requirements, tariffs, and other trade and travel restrictions.
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To the extent our international sales are adversely affected by any of these risks or are otherwise unsuccessful, we could experience a reduction
in revenue and our operating results could suffer.
Because we operate in jurisdictions in which local business practices may be
inconsistent with international regulatory requirements, including anti-corruption and anti-bribery regulations prescribed under the U.S. Foreign Corrupt Practices Act, or FCPA, which, among other things, prohibits giving or offering to give
anything of value with the intent to influence the awarding of government contracts. Although we believe that we have adequate policies and enforcement mechanisms to ensure legal and regulatory compliance with the FCPA and other similar regulations,
it is possible that some of our employees, subcontractors, agents or partners may violate any such legal and regulatory requirements, which may expose us to civil and/or criminal penalties and other sanctions, which could have a material adverse
effect on our business, financial condition and results of operations. If we fail to comply with legal and regulatory requirements, our business and reputation may be harmed.
In addition, the laws that govern the protection of intellectual property rights in certain foreign countries where we sell our solutions, such as China and Korea, can make recognition and enforcement of
contractual and intellectual property rights more expensive and difficult than is the case in the United States. In particular, we may have difficulty preventing ODMs and OEMs in these countries from incorporating our inventions, technologies,
copyrights or trademarks into their products without our authorization or without paying us licensing fees. We may also experience difficulty enforcing our intellectual property rights in these countries, where intellectual property rights are not
as respected as they are in the United States, Japan and Europe. Unauthorized use of our technologies and intellectual property rights may dilute or undermine the strength of our brand. Further, if we are not able to adequately monitor the use of
our technologies by foreign-based ODMs and OEMs, or enforce our intellectual property rights in foreign countries, our revenue potential could be adversely affected.
Our solutions are subject to export and import controls that could subject us to liability or impair our ability to compete in international markets.
Our solutions are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or
through an export license exception, in part because
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we incorporate encryption technology into our solutions. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to
distribute our solutions or could limit our customers ability to implement our solutions in those countries. Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions in
international markets, prevent our customers with international operations from deploying our solutions throughout their global systems or, in some cases, prevent the export or import of our solutions to certain countries altogether. Any change in
export or import regulations or related legislation, or change in the countries, persons or technologies targeted by such regulations or legislation, could result in decreased use of our solutions by, or in our decreased ability to export or sell
our solutions to, existing or potential customers internationally.
In addition, we may be subject to customs duties and export quotas,
which could have a significant impact on our revenue and profitability. The future imposition of significant increases in the level of customs duties or export quotas could have a material adverse effect on our business.
Substantially all of our solutions, and the products of many of our customers, are manufactured by third-party contractors located in the Pacific Rim, a
region subject to earthquakes and other natural disasters, as well as economic and political instability. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our solutions.
Substantially all of our solutions are manufactured by third-party contractors located in the Pacific Rim. The risk of an
earthquake in this area is significant due to the proximity of major earthquake fault lines to the facilities of our foundry, assembly and test subcontractors. The occurrence of earthquakes or other natural disasters, or the occurrence of other
catastrophic events such as a pandemic in the region, could result in the disruption of our foundry or assembly and test capacity or in the ability of our customers to purchase the raw materials or parts necessary to manufacture products, such as
digital video recorders, or DVRs, into which our solutions are incorporated. In addition, many countries within the Pacific Rim have experienced, and continue to experience, periods of economic and political instability. Any deterioration in the
economic and political conditions in the Pacific Rim that disrupts the operations of our third-party contractors could also result in the disruption of our foundry or assembly and test capacity. Any disruption caused by an earthquake or other
catastrophic event or from the deterioration of economic and political conditions could cause significant delays in the production or shipment of our solutions until we are able to shift our manufacturing, assembling or testing from the affected
contractor to another third-party vendor. We may not, and our customers may not, be able to obtain alternate capacity on favorable terms, if at all.
As a result of our acquisition of the STB business from Trident and our efforts to increase our sales in China, we are increasingly exposed to risks of doing
business in China.
We have a large STB product design center in Shanghai, and we are particularly exposed to risks of doing
business in China. We expect to continue to expand our business and operations in China. Our success in the Chinese markets may be adversely affected by Chinas continuously evolving laws and regulations, including those relating to taxation,
import and export tariffs, currency controls, environmental regulations, indigenous innovation, and intellectual property rights and enforcement of those rights. Enforcement of existing laws or agreements may be inconsistent. In addition, changes in
the political environment, governmental policies or U.S.-China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property, increased taxation, restrictions on
imports, import duties or currency revaluations, which could have an adverse effect on our business plans and operating results. Further, the evolving labor market and increasing labor unrest in China may have a negative impact on our customers
which would result in a negative impact on our business and results of operations.
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If our employees in China or India were to unionize, our operating costs with respect to our China or India
operations would likely increase.
In connection with our acquisition of the STB business from Trident, we significantly expanded
our operations and employee headcount in China and India. One of the key benefits of having design centers in China and India are the relatively lower operating costs in those countries. Our China and India employees are not currently represented by
a collective bargaining agreement. However, we have no assurance that our China or India employees will not unionize, or be required by the government or other administrative authority to unionize or bargain collectively, in the future, which could
increase our operating costs, limit our ability to hire and terminate employees in China or India on terms acceptable to us, force us to alter our operating methods in those countries and have a material adverse effect on our operating results in
those countries.
Risks Related to Ownership of Our Common Stock
Our stock price is volatile and may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased such shares.
The market price for our common stock is volatile and may fluctuate significantly in response to a number of factors, most of which we cannot
control, including:
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price and volume fluctuations in the overall stock market;
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market conditions or trends in our industry or the economy as a whole;
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changes in operating performance and stock market valuations of other technology companies generally, or those that sell semiconductor products in particular;
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the timing of customer or service provider orders that may cause quarterly or other periodic fluctuations in our results that may, in turn, affect the market
price of our common stock;
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the seasonal nature of the deployment of products that incorporate our solutions by certain service providers which may affect the timing of orders for our
solutions;
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the timing of revenue recognition on sales arrangements, which may include multiple deliverables, and the effect of our use of inventory hubbing
arrangements;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those
analysts to initiate or maintain coverage of our common stock;
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the publics response to press releases or other public announcements by us or third parties, including our filings with the SEC and announcements relating
to solution development, litigation and intellectual property impacting us or our business;
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the sustainability of an active trading market for our common stock;
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future sales of our common stock by our executive officers, directors and significant stockholders;
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announcements of mergers or acquisition transactions;
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market acceptance and understanding of our recent acquisitions of the STB business of Trident and direct broadcast satellite intellectual property from PLX;
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announcements of technical innovations, new products or design wins by our competitors or customers;
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other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and
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changes in accounting principles.
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In addition, the stock markets, and in particular NASDAQ, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology
companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following
periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
Future sales of our common stock or the issuance of securities convertible into or exercisable for shares of our common stock may depress our stock price.
A significant number of shares of our common stock are held by a small number of stockholders. Sales of a substantial number of
shares of our common stock, the issuance of securities convertible into or exercisable for shares of our common stock or the expectation or perception in the market that the holders of a large number of our shares of common stock intend to sell
their shares, could significantly reduce the market price of our common stock. Although the average daily trading volume of our common stock has slowly increased in recent months, our common stock is still less liquid than the stock of companies
with broader public ownership and, as a result, the trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock and lead to increased volatility in our stock price. In particular, certain
venture capital funds have held shares of our common stock for a substantial period of time and may distribute shares to their limited partners or members at any time and without notice. Any such distribution may result in a substantial number of
our shares being sold, which could have an adverse effect on the trading price of our common stock.
Anti-takeover provisions in our charter
documents and Delaware law might deter acquisition bids for us that you might consider favorable.
Our amended and restated
certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:
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establish a classified board of directors so that not all members of our board are elected at one time;
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authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and
which may include rights superior to the rights of the holders of common stock;
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
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provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws;
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establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder
meetings; and
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provide that in addition to any vote required by law or by our amended and restated certificate of incorporation, the approval by holders of at least 66-2/3% of
our then outstanding common stock is required to adopt, amend or repeal any provision of our amended and restated bylaws.
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In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. These anti-takeover provisions and other
provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.
Our
principal stockholders, executive officers and directors have substantial control over the company, which may prevent you and other stockholders from influencing significant corporate decisions and may harm the market price of our common stock.
As of December 31, 2012, our executive officers, directors and holders of five percent or more of our outstanding common
stock, beneficially owned, in the aggregate, 17.4% of our outstanding common stock. These stockholders may have interests that conflict with our other stockholders and, if acting together, have the ability to influence the outcome of matters
submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, this concentration of ownership may harm the market price of
our common stock by:
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delaying, deferring or preventing a change of control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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We do not expect to pay any cash dividends for the foreseeable future.
The continued expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any
determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors
our board of directors deems relevant. Investors seeking cash dividends in the foreseeable future should not purchase or hold our common stock.