Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations and this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the terms “may,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “seek,” “future,” “strategy,” “likely,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements include statements regarding our anticipated trends and challenges in our business and the markets in which we operate, including the market for 25G to 600G high speed analog semiconductor solutions,
demand for our current products, our plans for future products and anticipated features and benefits thereof, expansion of our product offerings and business activities, enhancements of existing products, our ability to forecast demand and its effects, critical accounting policies and estimates, our expectations regarding our expenses and revenue,
sources of revenue, our effective tax rate and tax benefits, the benefits of our products and services, our technological capabilities and expertise, our liquidity position and sufficiency thereof, including our anticipated cash needs and uses of cash, our ability to generate cash, our operating and capital expenditures and requirements and our needs for additional financing and potential consequences thereof, repatriation of cash balances from our foreign subsidiaries, our contractual obligations, our anticipated growth and growth strategies, including growing our end customer base, interest rate sensitivity, adequacy of our disclosure controls, our legal proceedings and
warranty claims. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as factors affecting our results of operations, our ability to manage our growth, our ability to sustain or increase profitability, demand for our solutions, the effect of declines in average selling prices for our products,
our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, our ability to qualify for tax holidays and incentives, trends in the semiconductor industry and fluctuations in general economic conditions, and the risks set forth throughout this report, including the risks set forth under Part II, “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's opinions only as of the date hereof. These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.
All references to “Inphi,” “we,” “us” or “our” mean Inphi Corporation.
Inphi®, iKON™, InphiNityCore™, ColorZ®,
ColorZ-Lite™,
Polaris™, Vega™,
M200 LightSpeed-III
™,
Porrima
™
and the Inphi logo are among the trademarks, registered trademarks, or service marks owned by Inphi.
Overview
Our Company
We are a fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and datacenter markets. Our analog and mixed signal semiconductor solutions provide high signal integrity at leading-edge data speeds while reducing system power consumption. Our semiconductor solutions are designed to address bandwidth bottlenecks in networks, maximize throughput and minimize latency in computing environments and enable the rollout of next generation communications and datacenter infrastructures. Our solutions provide a vital high-speed interface between analog signals and digital information in high-performance systems such as telecommunications transport systems, enterprise networking equipment and datacenters. We provide 25G to 600G high-speed analog semiconductor solutions for the communications market.
A detailed discussion of our business may be found in Part I, “Item 1. Business.” of our Annual Report on Form 10-K for the year ended December 31, 2018.
Quarterly Update
As discussed in more detail below, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, we delivered the following financial performance:
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•
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Revenue increased by $22.1 million, or 37%, to $82.2 million.
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•
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Gross profit as a percentage of revenue increased from 54% to 58%.
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•
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Total operating expenses increased by $2.6 million, or 4%, to $63.1 million.
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•
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Loss from operations decreased by $12.5 million, to $15.5 million.
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•
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Diluted loss per share decreased to $0.51 from $0.53.
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The increase in our revenue for the three months ended March 31, 2019 was primarily a result of higher level of consumption of our long-haul, metro and datacenter products.
The increase in gross profit as a percentage of revenue was due to changes in product and revenue mix.
Total operating expenses for the three months ended March 31, 2019 increased year-over-year primarily due to an increase in stock-based compensation expense as a result of new grants. Our expenses primarily consist of personnel costs, which include compensation, benefits, payroll related taxes and stock-based compensation. We expect expenses to continue to increase in absolute dollars as we continue to invest resources to develop more products and to support the growth of our business. Our diluted loss per share decreased primarily due to higher gross profit, partially offset by an increase in operating expenses, a decrease in other income due to net unrealized gain on investment recorded in the first quarter of 2018 and an increase in provision for income tax due to benefit for income tax recorded in the first quarter of 2018 as a result of partial release of valuation allowance.
Our cash and cash equivalents were $217.8 million at March 31, 2019, compared with $172.0 million at December 31, 2018. Cash provided by operating activities was $25.9 million during the three months ended March 31, 2019 compared to $17.2 million during the three months ended March 31, 2018. Cash provided by investing activities during the three months ended March 31, 2019 was $19.9 million due to maturities and sales of marketable securities of $79.5 million, partially offset by purchases of marketable securities of $48.1 million, purchases of property and equipment of $4.4 million and payments related to the purchase of intangible assets of $7.2 million. Cash provided by financing activities during the three months ended March 31, 2019 was almost zero primarily due to proceeds from ESPP purchases and exercise of stock options of $4.1 million, partially offset by minimum tax withholding paid on behalf of employees for restricted stock of $4.0 million and payment of obligations related to equipment financing of $0.1 million.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and intangible assets valuation, allowance for distributors’ price discounts, valuation of equity securities, recognition and disclosure of fair value of convertible debt, deferred income tax asset valuation allowances, uncertain tax positions, litigation, other loss contingencies and business combinations. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes in any of our critical accounting policies during the three months ended March 31, 2019. On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). The effects of this adoption are discussed in Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.
Results of Operations
The following table sets forth a summary of our statements of income (loss) as a percentage of each line item to the revenue:
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Three Months
Ended March 31,
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2019
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2018
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Revenue
|
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100
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%
|
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|
100
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%
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|
Cost of revenue
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42
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|
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46
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Gross profit
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58
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54
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Operating expenses:
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Research and development
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54
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71
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Sales and marketing
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15
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19
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General and administrative
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8
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10
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Total operating expenses
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77
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|
100
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Loss from operations
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(19
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)
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(46
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)
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Interest expense
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(10
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)
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(13
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)
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Other income
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3
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7
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Loss before income taxes
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(26
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)
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(52
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)
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Provision (benefit) for income taxes
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|
2
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(14
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)
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Net loss
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(28
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)%
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(38
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)%
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Comparison of Three Months Ended March 31, 201
9
and 201
8
Revenue
|
|
|
Three Months Ended March 31,
|
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Change
|
|
|
|
|
201
9
|
|
|
201
8
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Amount
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%
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|
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(dollars in thousands)
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Revenue
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$
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82,223
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$
|
60,136
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$
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22,087
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37
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%
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Revenue for the three months ended March 31, 2019 increased by $22.1 million primarily due to an increase in average selling price (“ASP”) partially offset by decrease in number of units sold. Revenue for the three months ended March 31, 2019 increased due to increase in revenue from long haul and metro products by $18.6 million and data center products by $8.2 million. These increases were partially offset by a decrease in revenue from legacy products by $4.7 million. The ASP for the three months ended March 31, 2019 increased by 186% due to changes in product mix, mainly from a decrease in the number of units sold of lower ASP products, such as legacy products, because of larger shipments to customers in the first quarter of 2018 due to end of life programs initiated in 2017.
Cost of Revenue and Gross Profit
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|
Three Months Ended March 31,
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Change
|
|
|
|
|
201
9
|
|
|
201
8
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Amount
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%
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|
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|
(dollars in thousands)
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|
Cost of revenue
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$
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34,592
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$
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27,590
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$
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7,002
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|
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25
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%
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|
Gross profit
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|
|
47,631
|
|
|
|
32,546
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$
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15,085
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46
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%
|
|
Gross profit as a percentage of revenue
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58
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%
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54
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%
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|
—
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4
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%
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Cost of revenue and gross profit increased by $7.0 million and $15.1 million, respectively, for the three months ended March 31, 2019 compared to the prior year primarily due to a higher level of sales. Gross profit, as a percentage of revenue increased mainly due to changes in product and revenue mix.
Research and Development
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Three Months Ended March 31,
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Change
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201
9
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201
8
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Amount
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%
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(dollars in thousands)
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Research and development
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$
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44,399
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$
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42,938
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$
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1,461
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3
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%
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Research and development expense for the three months ended March 31, 2019 increased by $1.5 million, primarily due to an increase in stock-based compensation of $2.2 million as a result of new grants. Testing, laboratory supplies, packaging and pre-production engineering mask costs increased by $1.4 million due to an increase research and development activities. These increases were partially offset by a decrease in salary and employee benefits by $2.2 million due to severance payments and reduction in headcount during the three months ended March 31, 2018.
Sales and Marketing
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Three Months Ended March 31,
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Change
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201
9
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201
8
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Amount
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%
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(dollars in thousands)
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Sales and marketing
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$
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11,879
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$
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11,342
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$
|
537
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5
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%
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Sales and marketing expense for the three months ended March 31, 2019 increased primarily due to an increase in stock-based compensation of $0.9 million due to new grants, partially offset by a decrease in salary and employee benefits by $0.6 million due to severance payments and reduction in headcount during the three months ended March 31, 2018.
General and Administrative
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|
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Three Months Ended March 31,
|
|
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Change
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|
|
201
9
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|
|
201
8
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Amount
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%
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|
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|
(dollars in thousands)
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|
General and administrative
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|
$
|
6,833
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|
|
$
|
6,218
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|
$
|
615
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|
|
|
10
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%
|
General and administrative expenses for the three months ended March 31, 2019 increased by $0.6 million primarily due to an increase in stock-based compensation of $0.8 million due to new grants.
Provision for Income Tax
|
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
|
201
9
|
|
|
201
8
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|
|
Amount
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|
%
|
|
|
|
|
(dollars in thousands)
|
|
|
Provision (benefit) for income tax
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|
$
|
1,220
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|
|
$
|
(8,261
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)
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$
|
9,481
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|
|
|
(115
|
)%
|
We normally determine our interim provision for income tax using an estimated single annual effective tax rate for all tax jurisdictions. ASC 740 provides that when an entity operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, a separate effective tax rate should be computed and applied to ordinary income (or loss) in that jurisdiction. We incurred a pretax loss during the three months ended March 31, 2019 and 2018 from our U.S. operations and will not recognize tax benefit of the losses due to the full valuation allowance established against deferred tax assets. Thus, a separate effective tax rate was applied to losses from the U.S. jurisdiction to compute our March 31, 2019 and 2018 interim tax provision.
The income tax expense of $1.2 million for the three months ended March 31, 2019 reflects an effective tax rate of (6%). The effective tax rate for the three months ended March 31, 2019 differed from the statutory rate of 21% primarily due to the change in valuation allowance, foreign income taxes paid at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits, windfall tax benefits from stock-based compensation, and GILTI inclusion.
The income tax benefit of $8.3 million for the three months ended March 31, 2018 reflects an effective tax rate of 26%. The effective tax rate for the three months ended March 31, 2018 differed from the statutory rate of 21% primarily due to the change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in operating results, unrecognized tax benefits, recognition of federal and state research and development credits, windfall tax benefits from stock-based compensation, and GILTI inclusion. The income tax benefit for the three months ended March 31, 2018, primarily consist of the partial release of federal valuation allowance resulting from the transfer of an acquired in-process research and development to developed technology which allowed the related deferred tax liability to be considered a source of income for realizing deferred tax assets, as well as the revaluation of the foreign deferred tax liability on the in-process research and development based on the foreign tax rates applicable to the anticipated reversal periods.
Liquidity and Capital Resources
As of March 31, 2019, we had cash, cash equivalents and investments in marketable securities of $428.9 million. Our primary uses of cash are to fund operating expenses, purchase inventory and acquire property and equipment and business acquisitions. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the changes in our outstanding accounts payable and accrued expenses. Our primary sources of cash are cash receipts on accounts receivable from our revenue. In 2015 and 2016, we issued convertible debt, which resulted in an increase in cash, cash equivalents and investments in marketable securities. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period, depending on the payment cycles of our major customers.
The following table summarizes our cash flows for the periods indicated:
|
|
|
Three Months
Ended March 31,
|
|
|
|
|
201
9
|
|
|
201
8
|
|
|
|
|
(in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
25,915
|
|
|
$
|
17,194
|
|
|
Net cash provided by (used in) investing activities
|
|
|
19,912
|
|
|
|
(38,575
|
)
|
|
Net cash provided by financing activities
|
|
|
3
|
|
|
|
2,031
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
45,830
|
|
|
$
|
(19,350
|
)
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the three months ended March 31, 2019 primarily reflected depreciation and amortization of $24.2 million, stock-based compensation expense of $18.8 million, accretion of convertible debt and amortization of issuance expenses of $6.8 million, deferred income taxes of $1.0 million, decreases in accounts receivable of $3.2 million and inventories of $1.3 million, partially offset by a net loss of $22.7 million, increase in prepaid expenses and other assets by $1.0 million, decreases in accounts payable of $2.1 million, accrued expenses of $3.1 million and other liabilities of $1.0 million. Our accounts receivable decreased due mainly to collections. Our inventory decreased due to shipments made. Our prepaid expenses and other assets increased due to advance payment to a vendor. Our accounts payable, accrued expenses and other liabilities decreased due to payments.
Net cash provided by operating activities during the three months ended March 31, 2018 primarily reflected depreciation and amortization of $18.9 million, stock-based compensation expense of $14.6 million, accretion of convertible debt and amortization of issuance expenses of $6.3 million, decrease in accounts receivable of $19.1 million and increase in accounts payable of $0.8 million, partially offset by a net loss of $23.0 million, deferred income taxes of $9.2 million, net unrealized gain on equity investments of $3.0 million, increase in inventory of $3.0 million, decrease in accrued expenses of $3.9 million, and change in income tax payable/receivable of $0.7 million. Our accounts receivable decreased due mainly to collections. Our inventory and accounts payable increased due to increased production volume for shipment in the second quarter of 2018. Our accrued expenses decreased mainly due to the timing of payment of employee-related expenses.
Net Cash
Provided by
(Used in)
Investing Activities
Net cash provided by investing activities during the three months ended March 31, 2019 primarily consisted of proceeds from maturities and sales of marketable securities of $79.5 million, partially offset by purchases of marketable securities of $48.1 million, purchases of property and equipment of $4.4 million and payment related to the purchase of intangible assets of $7.2 million.
Net cash used in investing activities during the three months ended March 31, 2018 primarily consisted of purchases of marketable securities of $86.2 million, purchases of property and equipment of $14.5 million, purchases of equity investments of $12.8 million, and payment related to the purchase of intangible assets of $6.3 million, partially offset by proceeds from maturities and sales of marketable securities of $78.7 million and proceeds from sale of equity investment of $2.4 million.
Net Cash
Provided by
Financing Activities
Net cash provided by financing activities during the three months ended March 31, 2019 primarily consisted of proceeds from the exercise of stock options and ESPP purchases of $4.1 million, partially offset by minimum tax withholding paid on behalf of employees for restricted stock of $4.0 million and payment of obligations related to equipment financing of $0.1 million.
Net cash provided by financing activities during the three months ended March 31, 2018 primarily consisted of proceeds from the exercise of stock options and ESPP purchases of $4.0 million and repayment of a long-term loan provided to a supplier of $0.1 million, partially offset by minimum tax withholding paid on behalf of employees for restricted stock of $1.9 million and payment of obligations related to equipment financing of $0.2 million.
Operating and Capital Expenditure Requirements
Our principal source of liquidity as of March 31, 2019 consisted of $428.9 million of cash, cash equivalents and investments in marketable securities, of which $34.1 million is held by our foreign subsidiaries. Based on our current operating plan, we believe that our existing cash and cash equivalents from operations will be sufficient to finance our operational cash needs through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities and grow our end customer base which will result in higher needs for working capital. Our ability to generate cash from operations is also subject to substantial risks described in Part II, Item 1A, Risk Factors. If any of these risks occur, we may be unable to generate or sustain positive cash flow from operating activities. We would then be required to use existing cash and cash equivalents to support our working capital and other cash requirements. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through debt financing or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
We do not plan to repatriate cash balances from foreign subsidiaries to fund our operations in the United States. There may be adverse tax effects upon repatriation of these funds to the United States.
Contractual Payment Obligations
Our outstanding contractual obligations as of December 31, 2018 are included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019. See note 16 in the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding certain contractual obligations as of March 31, 2019.
Off-Balance Sheet Arrangements
At March 31, 2019, we had no material off-balance sheet arrangements, other than certain noncancelable purchase obligations.
Recent Authoritative Accounting Guidance
See note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.