2953 Bunker Hill Lane, Suite 300
Santa Clara, CA 95054
Phone (408) 217-7300
Fax (408) 217-7350
Sales@inphi.com
Copyright ©2019 Inphi Corporation.
All rights reserved. Inphi is a registered
trademark of Inphi Corporation
The global leader in high-speed
data movement interconnects
2018 Annual Report
World-leading innovations
Inphi Annual Report 2019 R4.indd 1
4/15/2019 3:57:58 PM
We Move Big Data Fast
Data Manipulation
Data Movement
Inphi Recognized for Excellence
16 New Awards for Quality & Technology in 2017-2019
Processor, GPU, NIC, Switch
Optical, Networking
Digital
Analog, Mixed Signal, DSP
Inside and Between Cloud Data Centers and in Telecom Networks
Cloud Data Centers
Telecom
The Data Center is the ComputerTM
The Cloud is the NetworkTM
√ PAM is a once in a multi-decade
change in data transmission
√ Inside: 30 m - 10 km
√ Between: 10 - 120 km
√ Mostly coherent transmission
√ Metro: 600 km
√ Long Haul: 1,000s km
√ Access: 5G, Cable, 10 - 300 km
Investor Information
Stock Exchange Listing: NYSE
Ticker Symbol: IPHI
Investor Relations (408) 217-7308 investors@inphi.com
American Stock Transfer & Trust Company, LLC Phone: 800-937-5449 www.amstock.com
Huawei
Best Quality
Company
Fujitsu
Technical
Advancement
Innolight
Innovation
FiberHome
Core Partner
2017
2018
2019
2017
2017
2018
2017
2018
Lightwave
Innovation for
COLORZ®, PAM4,
Polaris and Porrima
Hisense
Sumitomo
Best Technical
Support
(SEDI)
Best Delivery
Award
2017
2019
2018
2018
2018
Cisco
Excellence in
Emerging
Technology
2017
ECN
COLORZ
2017
Forward Looking Statements
This Annual Report to Stockholders contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not
limited to, statements regarding our strategy, the anticipated benefits and features of our products, use of our products, market acceptance and market share of our
products, industry and market trends and investments in technology. These statements involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, and reported results should
not be considered as an indication of future performance. More information regarding such risks and uncertainties is contained in our Form 10-K attached hereto, and
in other reports filed by us with the SEC from time-to-time. You are cautioned not to unduly rely on these forward-looking statements, which speak only as of the date
of this Annual Report. Inphi Corporation undertakes no obligation to publicly revise any forward-looking statement to reflect circumstances or event after the date of this
Annual Report or to report the occurrence of unanticipated events.
Inphi Annual Report 2019 R4.indd 2
4/15/2019 3:58:00 PM
April 25, 2018
Dear Inphi Stockholders:
Inphi delivered a solid performance to our stockholders in 2018. While the year started off as challenging with significant headwinds, we
persevered. We set our sails and successfully navigated rough waters. Thanks to our strong product portfolio, market expansion strategies and
determined team, we stayed on course and are heading steadily into calmer waters. Despite starting the year in a downturn, the result of an
inventory build in China, through prudent financial management and focused product strategy, Inphi delivered improved results in each
successive quarter. Looking into 2019, we are confident that we have the right products and customer focus to continue as the global leader
in high-speed data movement interconnects.
In Long Haul and Metro, Coherent DSPs provide
our second booster rocket.
Our coherent DSPs were also strong contributors to our 2018
rebound. We also look to these products to help propel our growth in
the year ahead. With more than 10 customers and 25 design wins
worldwide, we see increasing momentum in the
long-haul and metro market place. We expect that these applications
will continue to drive our business and we anticipate 20%
compounded revenue growth from our coherent DSPs in the coming
few years. Our M200 success spans the various form factors we
support to meet customer demands: line card offerings and MSA,
CFP or CFP2 modules. 2018 also marked the production availability
of our 64 Gigabaud drivers and TiAs for 400G, 600G and 1.2 Terabit
per second applications, offering another promising growth vector for
the years ahead.
Links between Data Centers provide our third driver
with our growing ZR product line.
Our third growth engine is our ZR product line, for between data
center interconnects. Microsoft remains our #1 customer for our
COLORZ® solution, our 100G PAM solution for 80km data center
interconnects (defined as ZR distance by the IEEE standard body).
As we look down the road, we will deliver our 400G ZR solution, a
400G Coherent solution for 120km data center interconnects (the new
ZR standard). Inphi’s new 400G ZR also supports metro and long
haul distances up to thousands of kilometers, described as ZR+.
These upcoming product lines are garnering interest from both cloud
providers and telecom operators. We remain on track for initial
deliveries of the 400G ZR this year and expect that these components
for switches and routers will contribute meaningfully to our revenue
in 2020.
Figure 1: 400G ZR delivers IP over DWDM for cloud switch/routers in 2020
Improving financial results despite challenging market conditions.
Total revenue for 2018 approached $295 million, a 15% decline as
compared to 2017 revenue of $348 million. The decline reflects the
challenging start to the year both as the inventory situation in China
took time to clear and the impact of ongoing, uncertain geopolitical
factors. While we faced challenges early in the year, by the fourth
quarter, we were back on track and able to post year-over-year
revenue growth. Importantly, from the first quarter’s low, we were
able to deliver 3 consecutive quarters of sequential revenue gains of
16%, 12% and 11% in the 2nd, 3rd, and 4th quarters respectively.
Unfortunately, our stock price was not immune to the winds buffeting
our company, industry and the overall markets as our shares fell by
13% during the year as compared to a 4% decline in the tech heavy
Nasdaq.
On a brighter note, over the course of 2018, our non-GAAP operating
margin rebounded from a loss of 3.5% in Q1 to a profit of 23.7% in
Q4. This also represented a meaningful improvement over the 20.1%
non-GAAP operating margin in Q4, 2017. (see note below)
Moving toward further diversification.
International markets are very important to our business but clearly
not the only source of growth. As we move through 2019, we are
already working to diversify our business with new products and an
enhanced presence in important and rapidly growing market
segments. We continue to focus on growing our share in the cloud
data center market, primarily with US cloud operators. We have
always maintained that there are multiple factors driving the demand
for high-speed data interconnects: the transition to cloud computing,
the growing reliance on big data analytics, artificial intelligence (AI),
and the continually expanding volume of data traffic. These drivers
accelerate the need for solutions to move more data, more rapidly
across all distances and continues to fuel demand for Inphi products.
Cloud data center growth drives Inphi’s PAM product line success.
As bandwidth requirements evolved in 2018 from 10 and 40 to 50,
100, 200, and 400 Gigabits-per-second networks, customers
embraced our PAM DSP, and companion driver and TiA solutions.
Specifically, during 2018, customer enthusiasm for our 50G and
100G PAM platforms for 200G and 400G modules was so significant
that our PAM revenues exceeded our expectations by more than 50%.
We expect that customers focused on the ongoing massive build-out
inside the data center will continue to fuel the demand for our PAM
offerings, and we look for these products as one of our key growth
drivers in the years ahead.
Another year of high praise and industry recognition.
Our differentiated products and customer support efforts did not go
unnoticed in 2018 as evidenced by the 16 important customer and
industry awards the team received over the past two years (see inside
back cover). We were honored to earn several of these meaningful
accolades in the year’s final quarter. We were delighted to be
honored by Fujitsu, Innolight, Huawei, Hisense, and Sumitomo with
awards that included excellence in emerging technology, best quality
company, supplier of the year and best technical support and
delivery. While their confidence in us is best demonstrated by their
repeat orders, we were honored to have been formally recognized as a
top performing partner by these important customers. In addition, our
Porrima PAM DSP recently won the 2019 Lightwave Innovation
Review award.
Moving to Inphi 3.0
Inphi 1.0 was focused on taking Inphi public in 2010, and creating a
diversified high speed analog business for memory and optical
interconnects. Inphi 2.0 was focused on establishing Inphi as the
leader in data movement interconnects for cloud and telecom
operators, from 2012 to 2018. During that period, we grew our
communication revenue from $36 million to $295 million. In that
same timeframe, we diversified the company from 82% telecom
revenue exposure in 2012, to 51% data center revenue in 2018. We
now have robust growth drivers in place for 2019 and 2020, and are
working on putting new ones in place for 2021 and beyond. By
doing so, we are laying a solid foundation for Inphi 3.0. There, we
will focus on differentiating with the highest speed DSP-based data
movement interconnect platforms, and on the integration of optics
and electronics. This will open up substantial new markets for Inphi
that we believe will support our future growth for many years. We
will continue to approach these new markets with Tier 1 teaching
customers by creating win-win partnerships with cloud and telecom
operators, networking system OEMs, and module and optics partners.
Thank you for your continued support.
With continued growth in all of our key markets, including data
center, long haul metro and between data centers, the wind is once
again firmly at our back. We continue to thank our stockholders for
their on-going support and look forward to delivering another year of
strong customer engagements, innovative product introductions and
strong financial results. We thank you again for your support and
confidence.
Sincerely,
Ford Tamer
Inphi President and Chief Executive Officer
5G offers a compelling opportunity for strong future growth.
As we look out further, our fourth major growth vector will come
from our efforts around the emerging 5G market. 5G is the emerging
standard for cellular communications that promises advances in high
data rate, energy saving, and reduced cost and latency for data
transmission via cellular connectivity. Our 5G components are
currently in large-scale field trials for midhaul and backhaul
applications and are already gaining ground, particularly in China,
Korea and Japan. We expect production deployment, with a
corresponding revenue ramp, in the second half of 2020.
Figure 2: Inphi supports 5G midhaul and backhaul infrastructure ramp in 2020
With four separate growth engines driving Inphi forward, we are in a
solid position to continue our growth in 2019, and should be one of
the fastest growing companies in our industry for years ahead. To
summarize from above, in the cloud data centers, our 50G and 100G
PAM DSPs, drivers and TiAs continue to gather customer
momentum. In the long haul and metro markets, our 200G Coherent
DSPs and our 64 Gigabaud drivers and TiAs are performing well and
attracting important new customers and design wins. In between data
centers, our ZR product line is fueling our growth. And looking
ahead, we are well positioned with the right product roadmap as the
transition from 4G to 5G becomes a reality in the coming years.
While 2018 was a challenging year for Inphi and our industry, I am
convinced that it is the trying times that make us stronger. I could
not be more proud of the way our employees rose to the challenge in
2018. As the year progressed, our business rebound provided
testament to our resilient business model and focus.
NOTE:
Reconciliation of GAAP to Non GAAP Operating Income from above:
Q4 '17
Q1 '18
Q4 '18
Revenue
$85,683
$60,136
$86,531
GAAP Operating Income
(5,287)
(27,952)
Stock Based Compensation
Acquisition Related Expenses
Amortization of Intangibles
Depreciation Step Up
Restructuring Expenses
Non GAAP Operating Income
As a % of Revenue
12,465
569
9,300
160
$17,207
20.1%
14,553
461
9,246
101
1,482
-$2,109
-3.5%
(8,241)
16,375
12,271
107
$20,512
23.7%
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34942
Or
Inphi Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
77-0557980
(I.R.S. Employer Identification No.)
2953 Bunker Hill Lane, Suite 300, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 217-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $0.001 par value
Name of Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☑
As of June 30, 2018, the aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $1.4
billion, based on the closing price of $32.61 per share of common stock as reported on the New York Stock Exchange for June 29, 2018.
The total number of shares outstanding of the Registrant’s common stock, $0.001 par value per share, as of February 25, 2019 was 44,488,751.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2019 Annual Meeting of Stockholders to
be filed no later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
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INPHI CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Page
PART I
Item 1.
Business ........................................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................
Properties ......................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings ........................................................................................................................................
Item 4. Mine Safety Disclosures ...............................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................
Item 6.
Selected Financial Data ................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......................................................................
Financial Statements and Supplementary Data ............................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................
Item 9A. Controls and Procedures ...............................................................................................................................
Item 9B. Other Information .........................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...........................................................................
Item 11. Executive Compensation ..............................................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .....
Item 13. Certain Relationships and Related Transactions, and Director Independence .............................................
Principal Accountant Fees and Services .......................................................................................................
Item 14.
PART IV
Item 15. Exhibits, Financial Statement Schedules ......................................................................................................
Form 10-K Summary ....................................................................................................................................
Item 16.
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PART I
ITEM 1.
BUSINESS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. When used in this report, the terms “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,”
“would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “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, demand for our current products, our plans for future products and anticipated features and benefits thereof,
expansion of our product offerings, business activities and international operations, enhancements of existing products,
anticipated benefits of our acquisition of ClariPhy and the divestiture of our memory product business, critical accounting
policies and estimates, our expectations regarding our expenses and revenue, sources of revenue, our tax benefits, the benefits
of our products and services, increase in headcount, our technological capabilities and expertise, timing of the development
of our products, 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, our ability to retain and attract customers, particularly in light of our
dependence on a limited number of customers for a substantial portion of our revenue, increase in competition and the impact
thereof, our target markets, interest rate sensitivity, adequacy of our disclosure controls, and the impact of any 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, 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 I, “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 and mixed 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 and mixed signal
semiconductor solutions for the communications market.
On August 4, 2016, we completed the sale of our memory product business to Rambus Inc. for $90 million in cash.
The divestiture of the memory product business was part of a strategic plan to focus on and increase investments in the
communication business. As a result of the sale, our consolidated financial statements and accompanying notes for 2016 and
prior periods have been retrospectively reclassified to present the results of operations of memory product business as
discontinued operations. In addition, discussions in this Annual Report on Form 10-K focused only on continuing operations.
On December 12, 2016, we completed the acquisition of ClariPhy Communications, Inc. (ClariPhy) for $303.7 million
in cash. We acquired ClariPhy to provide a more complete coherent platform to our customers in long haul, metro and
datacenter interconnect applications.
1
We leverage our proprietary high-speed analog and mixed signal processing expertise and our deep understanding of
system architectures to address data bottlenecks in current and emerging communications, enterprise network, computing and
storage architectures. We develop these solutions as a result of our competitive strengths, including our system-level
simulation capabilities, analog design expertise, strong relationships with industry leaders, extensive broad process
technology experience and high-speed package modeling and design expertise. We use our core technology and strength in
high-speed analog design to enable our customers to deploy next generation communications systems that operate with high
performance at high-speed. We believe we are at the forefront of developing semiconductor solutions that deliver up to multi-
Terabit speeds throughout the network infrastructure, including core, metro and the datacenter.
We have ongoing, informal collaborative discussions with industry and technology leaders in Tier-1 cloud providers,
telecom operators, network system original equipment manufacturers (OEMs) and optical module and component vendors to
design architectures and products that solve bandwidth bottlenecks in existing and next generation communications systems.
Although we generally do not have any formal collaboration agreements with these entities, we often engage in informal
discussions with these entities with respect to anticipated technological challenges, next generation customer requirements
and industry conventions and standards. We help define industry conventions and standards within the markets we target by
collaborating with technology leaders, OEMs systems manufacturers and standards bodies. Our products are designed into
systems sold by OEMs, including Tier-1 OEMs in the telecom and networking system markets worldwide. We believe we
are one of a limited number of suppliers to these OEMs for the type of products we sell, and in some cases we may be the
sole supplier for certain applications. We sell both directly to these OEMs and to other intermediary systems or module
manufacturers that, in turn, sell to these OEMs.
Our Business
Our semiconductor solutions leverage our deep understanding of high-speed analog and mixed signal processing and
our system architecture knowledge to address data bottlenecks in current and emerging network and datacenter architectures.
We design and develop our products for the communications and computing markets, which typically have two to three year
design cycles, and product life cycles of five or more years. We believe our leadership position in developing high-speed
analog and mixed signal semiconductors is a result of the following core strengths:
•
•
•
System-Level Simulation Capabilities. We design our high-speed analog and mixed signal semiconductor
solutions to be critical components in complex systems. In order to understand and solve system problems, we
work closely with systems vendors to develop proprietary component, channel and system simulation models.
We use these proprietary simulation and validation tools to accurately predict system performance prior to
fabricating the semiconductor or alternatively, to identify and optimize critical semiconductor parameters to
satisfy customer system requirements. We use these simulation and validation capabilities to reduce our
customers’ time to market and engineering investments, thus enabling us to establish differentiated design
relationships with our customers.
Analog Design Expertise. We believe that we are a leader in developing broadband analog and mixed signal
semiconductors operating at high frequencies of up to 100 GHz. High-speed analog circuit design is extremely
challenging because, as frequencies increase, semiconductors are increasingly sensitive to temperature, power
supply noise, process variation and interaction with neighboring circuit elements. Development of components
that work robustly at high frequencies requires an understanding of analog circuit design, including
electromagnetic theory and practical experience in implementation and testing. Our analog design expertise has
enabled us to design and commercially ship several first in the world technologies including the first 100G linear
transimpedance amplifier (TIA) and the first 400G linear modulator driver that is now being widely deployed in
volume globally in long haul and metro networking infrastructures. We launched the world’s first
50/100/200/400G PAM4 interconnect ICs for cloud interconnects. The chipset solution included multiple
variants of the PAM4 PHY IC based on a highly adaptable and scalable InphiNityCore™ digital signal processing
(DSP) engine and the OmniConnect™ transmitter for copper and optics media along with a companion linear
TIA for Nx50G PAM4 interfaces.
Strong Relationships with Industry Leaders. We develop many of our high-speed analog and mixed signal
semiconductor solutions for applications and systems that are driven by industry leaders in the communications,
datacenter and computing markets. Through our established relationships with industry leaders, we have
repeatedly demonstrated the ability to address their technological challenges. As a result, we are designed into
several of their current systems and believe we are well-positioned to develop high-speed analog and mixed
signal semiconductor solutions for their emerging architectures. We have ongoing, informal collaborative
discussions with communication, networking companies, and datacenter companies in Tier-1 cloud providers,
telecom operators, network system OEMs and optical module and component vendors to address their next
2
generation 100G and beyond 100G efforts. Specifically, we engage in informal discussions with these entities
with respect to anticipated technological challenges, next generation customer requirements and industry
conventions and standards. As a result of our development efforts with industry leaders, we help define industry
conventions and standards within the markets we target by collaborating with technology leaders, OEMs and
systems manufacturers, as well as standards bodies such as the Institute of Electrical and Electronic Engineers
(IEEE) and the Optical Internetworking Forum (OIF) to establish industry standards.
Broad Process Technology. We employ process technology experts, device technologists and circuit designers
who have extensive experience in many process technologies including CMOS, SiGe, Silicon photonics (Sipho)
and III-V technologies such as gallium arsenides or indium phosphide. We have developed specific internal
models and design kits for each process to support a uniform design methodology across all of our semiconductor
solutions. For example, our products using 16 nanometer CMOS technology require development of accurate
models for sub-circuits such as integrated phase lock loops, varactors and inductors. In addition, for Sipho and
III-V materials-based processes, in-house model development is a necessity and we believe also provides a
substantial competitive advantage because these processes have complex material and device interactions.
Combined with our fabless manufacturing strategy, our design expertise, proprietary model libraries and uniform
design methodology allow us to use the best possible materials and substrates to design and develop our
semiconductor solutions. We believe that our ability to design high-speed analog and mixed signal
semiconductors in a wide range of materials and process technologies allows us to provide superior performance,
power, cost and reliability for a specific set of market requirements.
High-Speed Package Modeling and Design. We have developed deep expertise in high-speed package modeling
and design, since introducing the first high-speed 50 GHz MUX and DEMUX product in 2001. At high
frequencies, the interaction between an analog device, its package and the external environment can significantly
affect product performance. Accurately modeling and developing advanced packaging allows semiconductor
solutions to address this challenge. Due to the advanced nature of this work, there is a limited supply of engineers
with experience in high-speed package modeling and design, and therefore, this required expertise can be difficult
to acquire for companies that have not invested in developing such a skill set. We have developed an
infrastructure to simulate electrical, mechanical and thermal properties of devices and packages that we integrate
within our semiconductor design process and implement at our third-party packaging providers. Modeling is an
inherently iterative process, and since our model libraries are used extensively by our circuit designers, the
accuracy and value of these models increases over time. Our current packaging and modeling techniques enable
us to deliver semiconductors that are energy efficient, offer high-speed processing and enable advanced signal
integrity, all in a small footprint.
Silicon Photonics Design Expertise. We have developed deep expertise in Silicon photonics (Sipho) and
successfully commercialized the world first 100G DWDM Sipho-based solutions that consumes as little as 4.5W
of power versus alternate solutions at 25W. This Sipho-based solution has been deployed in high volume at a
Tier-1 Cloud vendor and continues to gain market acceptance at Tier-1 OEMs for the Enterprise and Internet
Exchange customers.
•
•
•
We believe that our system-level simulation capabilities, our analog design and broad process technology design
capabilities as well as our strengths in packaging enable us to differentiate ourselves by delivering advanced high-speed
analog and mixed signal processing solutions. For example, we believe we are the first vendor who has successfully
commercialized DSP base 100G Ethernet PHYs running PAM4 standard CMOS process.
We believe the key benefits that our solutions provide to our customers are as follows:
•
•
High Performance. Our high-speed analog and mixed signal semiconductor solutions are designed to meet the
specific technical requirements of our customers in their respective end markets. In many cases, our close design
relationships and deep engineering expertise put us in a position where we are one of a limited group of
semiconductor vendors that can provide the necessary solution. For instance, in the broadband communications
market, we believe our products achieve the highest signal integrity and attain superior signal transmission
distance at required error-free or low error rates.
Low Power and Small Footprint. In each of the end markets that we serve, the power budget of the overall
system is a key consideration for systems designers. Power consumption greatly impacts system operation cost,
footprint and cooling requirements, and is increasingly becoming a point of focus for our customers. We believe
that our high-speed analog and mixed signal processing solutions enable our customers to implement system
architectures that reduce overall system power consumption. We also believe that, at high frequencies, our high-
speed analog and mixed signal semiconductor devices typically consume less power than competitors’ standard
3
designs, which often incorporate power-consuming digital signal processing to perform data transfer functions,
thereby further reducing overall system power consumption. In addition, in many of our applications, we are able
to design and deliver semiconductors that have a smaller footprint and therefore reduce the overall system size.
•
Faster Time to Market. Our customers compete in markets that require high-speed, reliable semiconductors that
can be integrated into their systems as soon as new market opportunities develop. To meet our customers’ time-
to-market requirements, we work closely with them early in their design cycles and are actively involved in their
development processes. Over the past ten years, we have developed methodologies and simulation environments
that accurately predict the behavior of complex integrated circuits within various communications systems. In
addition, we have developed an extensive internal library of proven building block circuits such as amplifiers,
phase frequency detectors and transmitters that are reused to shorten design cycles and reduce risk.
Products
Our leading edge, high-speed, mixed signal semiconductor solutions equate to the planes, trains and trucks used by
physical delivery services to quickly and reliably speed information from place to place.
Our long haul and metro solutions are our planes, working across distances of 100s to 1000s kilometers. Products
include our coherent transimpedance amplifiers, drivers and DSPs which set the gold standard for leading edge performance,
quality, and reliability. Our data center edge interconnect solutions are our trains, delivering a large amount of packages,
across 80 km distances. Our ColorZ® is the industry's first 100G DWDM solution in QSFP28 form factor, utilizing advanced
silicon photonics and PAM4 modulation, to deliver up to 4Tb/s of bandwidth over a single fiber. Our inside data center
interconnects are our trucks, working across hundreds of meters up to kilometers. Our PAM interconnects along with
accompanying TIAs and drivers deliver low power, cost effective solutions for cloud and enterprise customers.
As of December 31, 2018, we have a wide range of products in our portfolio, including products that have commercially
shipped, products for which we have shipped engineering samples and products under development, that perform a wide
range of functions such as amplifying, encoding, multiplexing, demultiplexing, and retiming signals at speeds up to 400 Gbps.
These products are key enablers for servers, routers, switches, storage and other equipment that process, store and transport
data traffic. We introduced 45 and 28 new products in 2018 and 2017, respectively. We design and develop our products for
the communications and computing markets, which typically have two to three year design cycles, and product life cycles as
long as five years or more.
We introduced ColorZ® in 2016 and began to ship in commercial volume in 2017. Sales of ColorZ® comprised 18%
and 17% of our total revenue in 2018 and 2017, respectively. In 2012, we introduced and began to ship in commercial volume
a dual, differential input linear transimpedance/variable-gain amplifier that we identify as product number IN3250TA-SO2D.
Sales of IN3250TA-SO2D product comprised 10% and 25% of our total revenue in 2017 and 2016, respectively. There were
no other products that generated more than 10% of our total revenue in 2018, 2017 or 2016.
Customers
We sell our products directly to OEMs and indirectly to OEMs through module manufacturers, original design
manufacturers (ODMs) and sub-systems providers. We work closely with technology leaders to design architectures and
4
products that help solve bandwidth bottlenecks in and between systems. These technology leaders often design our products
into reference designs, which they provide to their customers and suppliers. In the networking market, we work closely with
OEMs to deliver high performance communication links. These OEMs design our products into their systems and then require
their ODM and electronics manufacturing services suppliers to purchase and use that specific product from us. We also work
directly with optical module manufacturers to design our products into their modules, which they sell to OEMs.
We work closely with our customers throughout design cycles that often last two to three years and we are able to
develop long-term relationships with them as our technology becomes embedded in their products. As a result, we believe
we are well-positioned to not only be designed into their current systems, but also to continually develop next generation
high-speed analog and mixed signal semiconductor solutions for their future products. During the year ended December 31,
2018, we sold our products to more than 100 customers.
Sales to customers in Asia accounted for 57%, 62% and 70% of our total revenue in 2018, 2017 and 2016, respectively.
Because many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future
revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in
Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor
products are then sold to end-users outside Asia.
In
that
the year ended December 31, 2018, we believe
We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our
revenue.
to Microsoft Corporation
(Microsoft), Huawei Technologies Co., Ltd. (Huawei), and Cisco Systems, Inc. (Cisco), directly and indirectly, through
subcontractors, accounted for approximately 18%, 14%, and 11% of our total revenue, respectively, and that our 10 largest
direct customers collectively accounted for 74% of our total revenue. Included in the 10 largest direct customers is sales to
Cyberlink which is 11% of our total revenue for the year ended December 31, 2018. We sell products to Cyberlink Electronics
Limited (Cyberlink), a distributor who sells to various end customers. In the year ended December 31, 2017, we believe that
sales to Microsoft, Huawei, and Cisco, directly and indirectly, through subcontractors, accounted for approximately 17%,
14%, and 11% of our total revenue, respectively, and that our 10 largest direct customers collectively accounted for 70% of
our total revenue. In the year ended December 31, 2016, we believe that sales to Huawei and Cisco, directly and indirectly,
through subcontractors, accounted for approximately 16% and 12% of our total revenue, respectively and that our 10 largest
direct customers collectively accounted for 73% of our total revenue. No other single customer directly or indirectly
accounted for more than 10% of our total revenue in 2018, 2017 or 2016.
sales
Sales and Marketing
Our design cycle from initial engagement to volume shipment is typically two to three years, with product life cycles
in the markets we serve ranging from five to 10 years or more. For many of our products, early engagement with our
customers’ technical staff is necessary for success. To ensure an adequate level of early engagement, our application and
development engineers work closely with our customers to identify and propose solutions to their systems challenges.
In addition to our direct customers, we work closely with technology leaders in Tier-1 cloud providers, telecom
operators, network system OEMs and optical module and component vendors for the datacenter, networking and
communications market to anticipate and solve next generation challenges facing our customers. As part of the sales and
product development process, we often design our products in close collaboration with these industry leaders and help define
their architecture. We also participate actively in setting industry standards with organizations such as IEEE and OIF to have
a voice in the definition of future market trends.
We sell our products worldwide through multiple channels, including our direct sales force and a network of sales
representatives and distributors. For the year ended December 31, 2018, 84% of our revenue was generated by our direct
sales team and third-party sales representatives. We operate marketing representative offices in China, Japan, Taiwan,
Germany, and the United States and employ marketing personnel that meet with our customers locally and interact with our
channel partners locally. Our channel network includes more than one hundred sales and support professionals to support
our products and customers. All of these sales professionals are sales agents and are employed by our distributors and sales
representatives. We believe these distributors and sales representatives have the requisite technical experience in our target
markets and are able to leverage existing relationships and understanding of our customers’ products to effectively sell our
products. Given the breadth of our target markets, customers and products, we provide our direct and indirect sales teams
with regular training and share product information with our customers and sales team using web-based tools.
5
Manufacturing
We operate a fabless business model and use third-party foundries and assembly and test manufacturing contractors to
manufacture, assemble and test our semiconductor products. We also inspect and test certain parts in our Irvine and Westlake
Village, California facilities. This outsourced manufacturing approach allows us to focus our resources on the design, sale
and marketing of our products. In addition, we believe outsourcing many of our manufacturing and assembly activities
provides us the flexibility needed to respond to new market opportunities, simplifies our operations and significantly reduces
our capital requirements.
We subject our third-party manufacturing contractors to qualification requirements in order to meet the high quality
and reliability standards required of our products. We carefully qualify critical partners and processes before applying the
technology to our products. Our engineers work closely with our foundries and other contractors to increase yield, lower
manufacturing costs and improve product quality.
•
•
•
Wafer Fabrication. We currently utilize a wide range of semiconductor processes to develop and manufacture
our products. Each of our foundries tends to specialize in a particular semiconductor wafer process technology.
We choose the semiconductor process and foundry that we believe provides the best combination of performance
attributes for any particular product. For most of our products, we utilize a single foundry for semiconductor
wafer production. Our international headquarters in Singapore purchases all wafer material and owns the material
until the manufacturing process is complete and the product is shipped to a customer either inside or outside
North America or to physical inventory for the respective region. Our principal foundries are Taiwan
Semiconductor Manufacturing Company Ltd. (TSMC) in Taiwan, WIN Semiconductors Corp. in Taiwan,
TowerJazz Semiconductor Ltd. in North America and GlobalFoundries in North America.
Package and Assembly. Upon the completion of processing at the foundry, the finished wafers are shipped to
our third-party assemblers for packaging and assembly. Currently, our principal packaging and assembly
contractors are STATS ChipPAC Ltd. in Korea, Kyocera Corporation in Japan, Tong Hsing Electronics
Industries Ltd. in Taiwan, Amkor Technology in Korea, LuxNet Corporation in Taiwan and ASE Technology in
Taiwan and Malaysia.
Test. At the last stage of integrated circuit production, our third-party test service providers test the packaged and
assembled integrated circuits. Currently, STATS ChipPAC in Korea, ISE Labs in North America, Giga Solution
Tech in Taiwan, WIN Semiconductors Corp. in Taiwan, ASEM Technology in Malaysia and Presto Engineering
in North America are our test partners. We also perform testing in our Irvine and Westlake Village, California
facilities.
We are committed to maintaining the highest level of quality in our products. Our objective is that our products meet
all of our customer requirements, are delivered on-time and function reliably throughout their useful lives. As part of our total
quality assurance program, our quality management system has been certified to ISO 9001:2008 standards. Our
manufacturing partners are also ISO 9001 certified.
Research and Development
We focus our research and development efforts on developing products that address bandwidth bottlenecks in networks
and minimize latency in computing environments. We believe that our continued success depends on our ability to both
introduce improved versions of our existing products and to develop new products for the markets that we serve. We devote
a portion of our resources to expanding our core technology including efforts in system-level simulation, high-speed analog
design, supporting a broad range of process technologies and high-speed package modeling and design.
We develop models that are used as an input to a combination of proprietary and commercially available simulation
tools. We use these tools to predict overall system performance based on the performance of our product. After our product
is manufactured, we perform system measurements and refine our model set to improve the model’s accuracy and predictive
ability. As a result, our models and simulation tools have improved over time and we have been able to accurately predict
overall system performance prior to fabricating a part.
We have assembled a core team of experienced engineers and systems designers in eight design centers located in the
United States, Canada, Germany, Singapore, United Kingdom and Argentina. Our technical team typically has, on average,
more than 21 years of industry experience with more than 53% having advanced degrees (master’s degree and above) and
more than 22% having Ph.Ds. These engineers and designers are involved in advancing our core technologies, as well as
applying these core technologies to our product development activities across a number of areas including
6
telecommunications transport systems, enterprise networking equipment, datacenters and enterprise servers, storage
platforms, test and measurement and military systems.
Competition
The global semiconductor market in general, and the communications market in particular, are highly competitive. We
expect competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased
competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and
adversely affect our business, revenue and operating results.
Currently, our competitors range from large, international companies offering a wide range of semiconductor products
to smaller companies specializing in narrow markets. Our primary competitors include Acacia Communications, Inc.,
Broadcom Ltd., Integrated Device Technology, Inc., M/A-COM Technology Solutions Inc., MaxLinear, Inc., Microchip
Technology Incorporated, NTT Electronics Corporation, Qorvo, Inc. and Semtech Corp. as well as other smaller analog and
mixed signal processing companies. We expect competition in our target markets to increase in the future as existing
competitors improve or expand their product offerings.
Our ability to compete successfully depends on elements both within and outside of our control, including industry and
general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate
intensified as our customers reduced their purchase orders. Many of our competitors are significantly larger, have greater
financial, technical, marketing, distribution, customer support and other resources, are more established than we are, and have
significantly better brand recognition and broader product offerings with which to withstand similar adverse economic or
market conditions in the future. These developments may materially and adversely affect our current and future target markets
and our ability to compete successfully in those markets.
We compete or plan to compete in different target markets to various degrees on the basis of a number of principal
competitive factors, including:
•
•
•
•
•
•
•
•
•
•
product performance;
power budget;
features and functionality;
customer relationships;
size;
ease of system design;
product roadmap;
reputation and reliability;
customer support; and
price.
We believe we compete favorably with respect to each of these factors. We maintain our competitive position through
our ability to successfully design, develop and market complex high-speed analog and mixed signal solutions for the
customers that we serve.
Intellectual Property
We rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks,
and contractual protections, to protect our core technology and intellectual property. As of December 31, 2018, we had 788
issued and allowed patents and other patent applications pending in the United States. The 718 issued and allowed patents in
the United States expire in the years beginning in 2019 through 2038. Many of our issued patents and pending patent
applications relate to high-speed circuit and package designs.
We may not receive competitive advantages from any rights granted under our patents, and our patent applications may
not result in the issuance of any patents. In addition, any future patent may be opposed, contested, circumvented, designed
around by a third party or found to be unenforceable or invalidated. Others may develop technologies that are similar or
7
superior to our proprietary technologies, duplicate our proprietary technologies or design around patents owned or licensed
by us.
In addition to our own intellectual property, we also use third-party licensors for certain technologies embedded in our
semiconductor solutions. These are typically non-exclusive contracts provided under paid-up licenses. These licenses are
generally perpetual or automatically renewed for so long as we continue to pay any maintenance fees that may be due. To
date, maintenance fees have not constituted a significant portion of our annual capital expenditures. We have entered into a
number of licensing arrangements pursuant to which we license third-party technologies. We do not believe our business is
dependent to any significant degree on any individual third-party license.
We generally control access to and use of our confidential information through the use of internal and external controls,
including contractual protections with employees, contractors and customers. We rely in part on United States and
international copyright laws to protect our mask work. All employees and consultants are required to execute confidentiality
agreements in connection with their employment and consulting relationships with us. We also require them to agree to
disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship.
Despite our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use
our software, technology or other information that we regard as proprietary intellectual property. In addition, we intend to
expand our international operations, and effective patent, copyright, trademark and trade secret protection may not be
available or may be limited in foreign countries.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and
positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received and,
particularly as a public company, we expect that in the future we may receive, communications from various industry
participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits could
subject us to significant liability for damages, invalidate our proprietary rights and harm our business and our ability to
compete. Any litigation, regardless of success or merit, could cause us to incur substantial expenses, reduce our sales and
divert the efforts of our technical and management personnel. In the event we receive an adverse result in any litigation, we
could be required to pay substantial damages, seek licenses from third parties, which may not be available on reasonable
terms or at all, cease sale of products, expend significant resources to develop alternative technology or discontinue the use
of processes requiring the relevant technology.
Cybersecurity
We have designed and implemented and continue to maintain a security program consisting of policies, procedures,
and technology meant to maintain the privacy, security and integrity of our information, systems, and networks. Among other
things, the program includes controls designed to limit and monitor access to authorized systems, networks, and data, prevent
inappropriate access or modification, and monitor for threats or vulnerability.
Employees
At December 31, 2018, we employed 580 full-time equivalent employees, including 385 in research, product
development and engineering, 48 in sales and marketing, 55 in general and administrative management and 92 in
manufacturing engineering and operations. We consider relations with our employees to be good and have never experienced
a work stoppage. None of our employees are either represented by a labor union or subject to a collective bargaining
agreement, except for certain employees in Argentina.
Other
We were incorporated in Delaware in November 2000 as TCom Communications, Inc. and changed our name to Inphi
Corporation in February 2001. Our principal executive offices are located at 2953 Bunker Hill Lane, Suite 300, Santa Clara,
California 95054. Our telephone number at that location is (408) 217-7300. Our website address is www.inphi.com.
Information on our website is not part of this report and should not be relied upon in determining whether to make an
investment decision. The inclusion of our website address in this report does not include or incorporate by reference into this
report any information on our website.
We electronically file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) with the
Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The address of that site is
http://www.sec.gov. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K and amendments to those reports with the SEC on our website.
8
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Our revenue and operating results can fluctuate from period to period, which could cause our share price to fluctuate.
Our revenue and operating results have fluctuated in the past and may fluctuate from period to period in the future due
to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these
fluctuations include the following factors, as well as other factors described elsewhere herein:
●
the receipt, reduction or cancellation of orders by customers;
●
fluctuations in the levels of component inventories held by our customers;
●
the gain or loss of significant customers;
●
changes in orders or purchasing patterns from one or more of our major customers;
● market acceptance of our products and our customers’ products;
● our ability to develop, introduce and market new products and technologies on a timely basis;
●
the timing and extent of product development costs;
● new product announcements and introductions by us or our competitors;
●
incurrence of research and development and related new product expenditures;
●
cyclical fluctuations in our markets;
●
fluctuations in our manufacturing yields;
●
significant warranty claims, including those not covered by our suppliers;
●
changes in our product mix or customer mix;
●
intellectual property disputes; and
●
loss of key personnel or the inability to attract qualified engineers.
9
As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as
indications of our future revenue or operating performance. Fluctuations in our revenue and operating results could cause our
share price to decline.
We incurred net losses in the past. We may incur net losses in the future.
As of December 31, 2018, we had an accumulated deficit of $169.9 million. We have incurred net losses in the past and
may incur net losses in the future. We generated a net income (loss) from continuing operations of ($95.8) million, ($74.9)
million and $26.5 million for years ended December 31, 2018, 2017 and 2016, respectively.
We depend on a limited number of customers for a substantial portion of our revenue, and the loss of, or a significant
reduction in sales to, one or more of our major customers could negatively impact our revenue and operating results. In
addition, if we offer more favorable prices to attract or retain customers, our average selling prices and gross margins
would decline.
In the year ended December 31, 2018, we believe that sales to Microsoft Corporation (Microsoft), Huawei Technologies
Co., Ltd. (Huawei), and Cisco Systems, Inc. (Cisco), directly and indirectly, through subcontractors, accounted for
approximately 18%, 14%, and 11% of our total revenue, respectively, and that our 10 largest direct customers collectively
accounted for 74% of our total revenue. Included in the 10 largest direct customers is sales to Cyberlink which is 11% of our
total revenue for the year ended December 31, 2018. We sell products to Cyberlink Electronics Limited (Cyberlink), a
distributor who sells to various end customers. In the year ended December 31, 2017, we believe that sales to Microsoft,
Huawei, and Cisco, directly and indirectly, through subcontractors, accounted for approximately 17%, 14%, and 11% of our
total revenue, respectively, and that our 10 largest direct customers collectively accounted for 70% of our total revenue. In
the year ended December 31, 2016, we believe that sales to Huawei and Cisco, directly and indirectly, through subcontractors,
accounted for approximately 16% and 12% of our total revenue, respectively and that our 10 largest direct customers
collectively accounted for 73% of our total revenue. No other single customer directly or indirectly accounted for more than
10% of our total revenue in 2018, 2017 or 2016. We believe our operating results for the foreseeable future will continue to
depend on sales to a relatively small number of customers. In the future, these customers may decide not to purchase our
products at all, may purchase fewer products than they did in the past or may alter their purchasing patterns. Further, the
amount of revenue attributable to any single customer or our customer concentration generally, may fluctuate in any given
period.
In addition, our relationships with some customers may deter other potential customers who compete with these
customers from buying our products. To attract new customers or retain existing customers, we may offer these customers
favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key
customer, a reduction in sales to any key customer or our inability to attract new significant customers could negatively
impact our revenue and materially and adversely affect our results of operations.
In January 2019, the U.S. Department of Justice indicted Huawei, certain of its subsidiaries and its chief financial officer,
for theft of trade secrets, financial fraud, obstruction of justice and other charges. We are currently unable to predict the
outcome of this case and therefore, cannot determine the likelihood of its impact on our business. However, due to the volume
of our sales, directly and indirectly, to Huawei, our business, financial condition and results of operations could be materially
and adversely affected pending and following the outcome of this proceeding and/or other related discussions between the
governments of China and the United States of America.
We do not have long-term purchase commitments from our customers and if our customers cancel or change their
purchase commitments, our revenue and operating results could suffer.
Substantially all of our sales to date have been made on a purchase order basis. We do not have any long-term
commitments with any of our customers. As a result, our customers may cancel, change or delay product purchase
commitments with little or no notice to us and without penalty. This in turn could cause our revenue to decline and materially
and adversely affect our results of operations.
We may face claims of intellectual property infringement, which could be time-consuming, costly to defend or settle
and result in the loss of significant rights and which could harm our relationships with our customers and distributors.
The semiconductor industry is characterized by companies that hold patents and other intellectual property rights and
that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us
and our customers and distributors their patent and other intellectual property rights to technologies that are important to our
business.
10
Claims that our products, processes or technology infringe third-party intellectual property rights, regardless of their
merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and
technical personnel. For example, Netlist, Inc. filed a suit against us in the United States District Court, Central District of
California, in September 2009, alleging that our iMB™ and certain other memory module components infringe three of
Netlist’s patents. This litigation is ongoing.
Infringement claims also could harm our relationships with our customers or distributors and might deter future
customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex
technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an
adverse outcome, we could be required to:
●
cease the manufacture, use or sale of the infringing products, processes or technology;
● pay substantial damages for infringement;
●
●
●
expend significant resources to develop non-infringing products, processes or technology, which may not be
successful;
license technology from the third-party claiming infringement, which license may not be available on commercially
reasonable terms, or at all;
cross-license our technology to a competitor to resolve an infringement claim, which could weaken our ability to
compete with that competitor; or
● pay substantial damages to our customers or end-users to discontinue their use of or to replace infringing technology
sold to them with non-infringing technology, if available.
Any of the foregoing results could have a material adverse effect on our business, financial condition and results of
operations.
Winning business is subject to lengthy competitive selection processes that require us to incur significant expenditures
prior to generating any revenue or without any guarantee of any revenue related to this business. Even if we begin a
product design, a customer may decide to cancel or change its product plans, which could cause us to generate no revenue
from a product. If we fail to generate revenue after incurring substantial expenses to develop our products, our business
and operating results would suffer.
We are focused on winning more competitive bid processes, known as “design wins,” that enable us to sell our high-
speed analog and mixed signal semiconductor solutions for use in our customers’ products. These selection processes
typically are lengthy and can require us to incur significant design and development expenditures and dedicate scarce
engineering resources in pursuit of a single customer opportunity. We may not win the competitive selection process and may
never generate any revenue despite incurring significant design and development expenditures. Failure to obtain a design win
could prevent us from offering an entire generation of a product. This could cause us to lose revenue and require us to write-
off obsolete inventory, and could weaken our position in future competitive selection processes. Even after securing a design
win, we may experience delays in generating revenue from our products as a result of the lengthy development cycle typically
required. Our customers generally take a considerable amount of time to evaluate our products. Our design cycle from initial
engagement to volume shipment is typically two to three years.
The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce
or delay its product plans or adopt a competing design from one of our competitors, causing us to lose anticipated revenue.
In addition, any delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we
may have incurred significant expense without generating any revenue. Finally, our customers’ failure to successfully market
and sell their products could reduce demand for our products and materially and adversely affect our business, financial
condition and results of operations. If we were unable to generate revenue after incurring substantial expenses to develop any
of our products, our business would suffer.
11
Our customers require our products and our third-party contractors to undergo a lengthy and expensive qualification
process which does not assure product sales. If we are unsuccessful or delayed in qualifying any of our products with a
customer, our business and operating results would suffer.
Prior to purchasing our products, our customers require that both our products and our third-party contractors undergo
extensive qualification processes, which involve testing of our products in the customers’ systems, as well as testing for
reliability. This qualification process may continue for several months. However, qualification of a product by a customer
does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a
customer, a subsequent revision in our third party contractors’ manufacturing process or our selection of a new supplier may
require a new qualification process with our customers, which may result in delays and in our holding excess or obsolete
inventory. After our products are qualified, it can take several months or more before the customer commences volume
production of components or systems that incorporate our products. Despite these uncertainties, we devote substantial
resources, including design, engineering, sales, marketing and management efforts, to qualify our products with customers
in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, sales of those
products to the customer may be precluded or delayed, which may impede our growth and cause our business to suffer.
The complexity of our products could result in undetected defects and we may be subject to warranty claims and
product liability, which could result in a decrease in customers and revenue, unexpected expenses and loss of market
share. In addition, our product liability insurance may not adequately cover our costs arising from product defects or
otherwise.
Our products are sold as components or as modules for use in larger electronic equipment sold by our customers. A
product usually goes through an intense qualification and testing period performed by our customers before being used in
production. We primarily outsource our product testing to third parties and also perform some testing in our Irvine and
Westlake Village, California facilities. We inspect and test parts, or have them inspected and tested in order to screen out
parts that may be weak or potentially suffer a defect incurred through the manufacturing process. From time to time, we are
subject to warranty or product liability claims that may require us to make significant expenditures to defend these claims or
pay damage awards.
Generally, our agreements seek to limit our liability to the replacement of the part or to the revenue received for the
product, but these limitations on liability may not be effective or sufficient in scope in all cases. If a customer’s equipment
fails in use, the customer may incur significant monetary damages including an equipment recall or associated replacement
expenses, as well as lost revenue. The customer may claim that a defect in our product caused the equipment failure and
assert a claim against us to recover monetary damages. The process of identifying a defective or potentially defective product
in systems that have been widely distributed may be lengthy and require significant resources. We may test the affected
product to determine the root cause of the problem and to determine appropriate solutions. We may find an appropriate
solution or a temporary fix while a permanent solution is being determined. If we are unable to determine the root cause, find
an appropriate solution or offer a temporary fix, we may delay shipment to customers. As a result, we may incur significant
replacement costs, customers may bring contract damage claims and our reputation may be harmed. In certain situations,
circumstances might warrant that we consider incurring the costs or expense related to a recall of one of our products in order
to avoid the potential claims that may be raised should the customer reasonably rely upon our product only to suffer a failure
due to a design or manufacturing process defect. Defects in our products could harm our relationships with our customers
and damage our reputation. Customers may be reluctant to buy our products, which could harm our ability to retain existing
customers and attract new customers and our financial results. In addition, the cost of defending these claims and satisfying
any arbitration award or judicial judgment with respect to these claims could harm our business prospects and financial
condition. Although we carry product liability insurance, this insurance may not adequately cover our costs arising from
defects in our products or otherwise.
We rely on our relationships with industry and technology leaders to enhance our product offerings and our inability
to continue to develop or maintain such relationships in the future would harm our ability to remain competitive.
We develop many of our semiconductor products for applications in systems that are driven by industry and technology
leaders in the communications market. We also work with OEMs, system manufacturers and standards bodies to define
industry conventions and standards within our target markets. We believe these relationships enhance our ability to achieve
market acceptance and widespread adoption of our products. If we are unable to continue to develop or maintain these
relationships, our semiconductor solutions would become less desirable to our customers, our sales would suffer and our
competitive position could be harmed.
12
If we fail to accurately anticipate and respond to market trends or fail to develop and introduce new or enhanced
products to address these trends on a timely basis, our ability to attract and retain customers could be impaired and our
competitive position could be harmed.
We operate in industries characterized by rapidly changing technologies and industry standards as well as technological
obsolescence. We have developed products that may have long product life cycles of 10 years or more. We believe that our
future success depends on our ability to develop and introduce new technologies and products that generate new sources of
revenue to replace, or build upon, existing product revenue streams that may be dependent upon limited product life cycles.
If we are not able to repeatedly introduce, in successive years, new products that ship in volume, our revenue will likely not
grow and may decline significantly and rapidly. For example, we introduced ColorZ® in 2016 and began to ship in
commercial volume in 2017. Sales of ColorZ® comprised 18% and 17% of our total revenue in 2018 and 2017, respectively.
In 2012, we introduced and began to ship in commercial volume a dual, differential input linear transimpedance/variable-
gain amplifier that we identify as product number IN3250TA-SO2D. Sales of IN3250TA-SO2D product comprised 10% and
25% of our total revenue in 2017 and 2016, respectively. There were no other products that generated more than 10% of our
total revenue in 2018, 2017 or 2016.
The IN3250TA-SO2D product matured in 2017 and as a result, sales of these products declined and were supplanted in
part by newer parts which we developed. This underscores the importance of the need for us to continually develop and
introduce new products to diversify our revenue base as well as generate new revenue to replace and build upon the success
of previously introduced products which may be rapidly maturing.
To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly
higher levels of performance and reliability while meeting the cost expectations of our customers. The introduction of new
products by our competitors, the delay or cancellation of a platform for which any of our semiconductor solutions are
designed, the market acceptance of products based on new or alternative technologies or the emergence of new industry
standards could render our existing or future products uncompetitive from a pricing standpoint, obsolete and otherwise
unmarketable. Our failure to anticipate or timely develop new or enhanced products or technologies in response to
technological shifts could result in decreased revenue and our competitors winning design wins. In particular, we may
experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our
development, introduction or marketing of new or enhanced products. Although we believe our products are fully compliant
with applicable industry standards, proprietary enhancements may not in the future result in full conformance with existing
industry standards under all circumstances. Due to the interdependence of various components in the systems within which
our products and the products of our competitors operate, customers are unlikely to change to another design, once adopted,
until the next generation of a technology. As a result, if we fail to introduce new or enhanced products that meet the needs of
our customers or penetrate new markets in a timely fashion, and our designs do not gain acceptance, we will lose market
share and our competitive position, very likely on an extended basis, and our operating results will be adversely affected.
If sufficient market demand for 100G/200G/400G solutions does not develop or develops more slowly than expected,
or if we fail to accurately predict market requirements or market demand for 100G/200G/400G solutions, our business,
competitive position and operating results would suffer.
We are currently investing significant resources to develop semiconductor solutions supporting 100G/200G/400G data
transmission rates in order to increase the number of such solutions in our product line. If we fail to accurately predict market
requirements or market demand for 100G/200G/400G semiconductor solutions, or if our 100G/200G/400G semiconductor
solutions are not successfully developed or competitive in the industry, our business will suffer. If 100G/200G/400G networks
are deployed to a lesser extent or more slowly than we currently anticipate, we may not realize any benefits from our
investment. As a result, our business, competitive position, market share and operating results would suffer.
Our target markets may not grow or develop as we currently expect and are subject to market risks including new
competition, any of which could materially harm our business, revenue and operating results.
To date, a substantial portion of our revenue has been attributable to demand for our products in the communications and
datacenter markets and the growth of these overall markets. These markets have fluctuated in size and growth in recent times.
Our operating results are impacted by various trends in these markets. These trends include the deployment and broader
market adoption of next generation technologies, such as 100G and 100Gbe CMOS CDR and SerDes, in datacenters,
communications and enterprise networks, timing of next generation network upgrades, the introduction and broader market
adoption of next generation server platforms and the timing of enterprise upgrades. We are unable to predict the timing or
direction of the development of these markets with any accuracy. In addition, because some of our products are not limited
in the systems or geographic areas in which they may be deployed, we cannot always determine with accuracy how, where
or into which applications our products are being deployed. If our target markets do not grow or develop in ways that we
13
currently expect, demand for our semiconductor products may decrease and our business, revenue, and operating results could
suffer.
We are closely following developments in one of our target markets, China, including a 5-year plan drafted by China’s
Ministry of Industry and Information Technology detailing objectives to further develop technology and an optical supply
chain domestically. While the potential impact of such plan is not clear at the moment, efforts in this direction over time
could pose a competitive threat to us.
We rely on a limited number of third parties to manufacture, assemble and test our products, and the failure to manage
our relationships with our third-party contractors successfully could adversely affect our ability to market and sell our
products and our reputation. Our revenue and operating results would suffer if these third parties fail to deliver products
or components in a timely manner and at reasonable cost or if manufacturing capacity is reduced or eliminated as we may
be unable to obtain alternative manufacturing capacity.
We operate an outsourced manufacturing business model. As a result, we rely on third-party foundry wafer fabrication
and assembly and test capacity. We also perform testing in our Irvine and Westlake Village, California facilities. We generally
use a single foundry for the production of each of our various semiconductors. Currently, our principal foundries are
GlobalFoundries, TSMC, TowerJazz Semiconductor Ltd., and WIN Semiconductors. We also use third-party contract
manufacturers for a significant majority of our assembly and test operations, including Kyocera, ASE, Giga Solution Tech,
ISE Labs, Presto, Tong Hsing, LuxNet and STATS ChipPAC.
Relying on third-party manufacturing, assembly and testing presents significant risks to us, including the following:
●
failure by us, our customers or their end customers to qualify a selected supplier;
●
capacity shortages during periods of high demand;
●
reduced control over delivery schedules and quality;
●
shortages of materials;
● misappropriation of our intellectual property;
●
limited warranties on wafers or products supplied to us; and
● potential increases in prices.
The ability and willingness of our third-party contractors to perform is largely outside our control. If one or more of our
contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels,
our ability to bring products to market and our reputation could suffer. For example, if that manufacturing capacity is reduced
or eliminated at one or more facilities, including as a response to the recent worldwide decline in the semiconductor industry,
or any of those facilities are unable to keep pace with the growth of our business, we could have difficulties fulfilling our
customer orders and our revenue could decline. In addition, if these third parties fail to deliver quality products and
components on time and at reasonable prices, we could have difficulties fulfilling our customer orders, our revenue could
decline and our business, financial condition and results of operations would be adversely affected.
Additionally, as many of our fabrication and assembly and test contractors are located in the Pacific Rim region,
principally in Taiwan, our manufacturing capacity may be similarly reduced or eliminated due to natural disasters, including
earthquakes, political unrest, war, labor strikes, work stoppages or public health crises. This could cause significant delays in
shipments of our products until we are able to shift our manufacturing, assembly or testing from the affected contractor to
another third-party vendor. There can be no assurance that alternative manufacturing capacity could be obtained on favorable
terms, if at all.
Our costs may increase substantially if the wafer foundries that supply our products do not achieve satisfactory
product yields or quality.
The wafer fabrication process is an extremely complicated process where the slightest changes in the design,
specifications or materials can result in material decreases in manufacturing yields or even the suspension of production.
From time to time, our third-party wafer foundries have experienced, and are likely to experience, manufacturing defects and
reduced manufacturing yields related to errors or problems in their manufacturing processes or the interrelationship of their
14
processes with our designs. In some cases, our third-party wafer foundries may not be able to detect these defects early in the
fabrication process or determine the cause of such defects in a timely manner. We may incur substantial research and
development expense for prototype or development stage products as we qualify the products for production.
Generally, in pricing our semiconductors, we assume that manufacturing yields will continue to increase, even as the
complexity of our semiconductors increases. Once our semiconductors are initially qualified with our third-party wafer
foundries, minimum acceptable yields are established. We are responsible for the costs of the wafers if the actual yield is
above the minimum. If actual yields are below the minimum we are not required to purchase the wafers. The minimum
acceptable yields for our new products are generally lower at first and increase as we achieve full production. Unacceptably
low product yields or other product manufacturing problems could substantially increase the overall production time and
costs and adversely impact our operating results on sales of our products. Product yield losses will increase our costs and
reduce our gross margin. In addition to significantly harming our operating results and cash flow, poor yields may delay
shipment of our products and harm our relationships with existing and potential customers.
We do not have any long-term supply contracts with our contract manufacturers or suppliers, and any disruption in
our supply of products or materials could have a material adverse effect on our business, revenue and operating results.
We currently do not have long-term supply contracts with any of our third-party contract manufacturers. We make
substantially all of our purchases on a purchase order basis, and our contract manufacturers are not required to supply us
products for any specific period or in any specific quantity. We expect that it would take approximately nine to 12 months to
transition from our current foundry or assembly services to new providers. Such a transition would likely require a
qualification process by our customers or their end customers. We generally place orders for products with some of our
suppliers several months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from
our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate and
cost-effective foundry or assembly capacity from our third-party contractors to meet our customers’ delivery requirements,
or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases
in customer purchase orders and therefore, were unable to benefit from this incremental demand. None of our third-party
contract manufacturers have provided any assurance to us that adequate capacity will be available to us within the time
required to meet additional demand for our products.
Our foundry vendors and assembly and test vendors may allocate capacity to the production of other companies’ products
while reducing deliveries to us on short notice. In particular, other customers that are larger and better financed than us or
that have long-term agreements with our foundry vendor or assembly and test vendors may cause our foundry vendor or
assembly and test vendors to reallocate capacity to those customers, decreasing the capacity available to us. We do not have
long-term supply contracts with our third-party contract manufacturers and if we enter into costly arrangements with suppliers
that include nonrefundable deposits or loans in exchange for capacity commitments, commitments to purchase specified
quantities over extended periods or investment in a foundry, our operating results could be harmed. We may not be able to
make any such arrangement 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 foundry capacity, we may be obligated to use all of
that capacity or incur penalties. These penalties may be expensive and could harm our financial results. To date, we have not
entered into such arrangements with our suppliers. If we need another foundry or assembly and test subcontractor because of
increased demand, or if we are unable to obtain timely and adequate deliveries from our providers, we might not be able to
cost effectively and quickly retain other vendors to satisfy our requirements.
Many of our customers depend on us as the sole source for a number of our products. If we are unable to deliver
these products as the sole supplier or as one of a limited number of suppliers, our relationships with these customers and
our business would suffer.
A number of our customers do not have alternative sources for our semiconductor solutions and depend on us as the sole
supplier or as one of a limited number of suppliers for these products. Since we outsource our manufacturing to third-party
contractors, our ability to deliver our products is substantially dependent on the ability and willingness of our third-party
contractors to perform, which is largely outside our control. Failure to deliver our products in sufficient quantities or at all to
our customers that depend on us as a sole supplier or as one of a limited number of suppliers may be detrimental to their
business and, as a result, our relationship with such customer would be negatively impacted. If we are unable to maintain our
relationships with these customers after such failure, our business and financial results may be harmed.
15
If we are unable to attract, train and retain qualified personnel, particularly our design and technical personnel, we
may not be able to execute our business strategy effectively.
Our future success depends on our ability to attract and retain qualified personnel, including our management, sales and
marketing, and finance, and particularly our design and technical personnel. We do not know whether we will be able to
retain all of these personnel as we continue to pursue our business strategy. Historically, we have encountered difficulties in
hiring qualified engineers because there is a limited pool of engineers with the expertise required in our field, especially in
the San Francisco Bay Area where our headquarters are located. Competition for these personnel is intense in the
semiconductor industry. As the source of our technological and product innovations, our design and technical personnel
represent a significant asset. The loss of the services of one or more of our key employees, especially our key design and
technical personnel, or our inability to attract and retain qualified design and technical personnel, could harm our business,
financial condition and results of operations.
We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address
the additional operational and control requirements of our growth, either of which could harm our business and operating
results.
To effectively manage our growth, we must continue to expand our operational, engineering and financial systems,
procedures and controls and to improve our accounting and other internal management systems. This may require substantial
managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures and
controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our
operational, financial and management information systems, or fail to effectively motivate or manage our new and future
employees, the quality of our products and the management of our operations could suffer, which could adversely affect our
operating results.
We face intense competition and expect competition to increase in the future. If we fail to compete effectively, it could
have an adverse effect on our revenue, revenue growth rate, if any, and market share.
The global semiconductor market in general, and the communications and computing markets in particular, are highly
competitive. We compete or plan to compete in different target markets to various degrees on the basis of a number of
principal competitive factors, including product performance, power budget, features and functionality, customer
relationships, size, ease of system design, product roadmap, reputation and reliability, customer support and price. We expect
competition to increase and intensify as more and larger semiconductor companies enter our markets. Increased competition
could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely
affect our business, revenue and operating results.
Currently, our competitors range from large, international companies offering a wide range of semiconductor products
to smaller companies specializing in narrow markets. Our primary competitors include Acacia Communications, Inc.,
Broadcom Ltd., Integrated Device Technology, Inc., M/A-COM Technology Solutions Inc., MaxLinear, Inc., Microchip
Technology Incorporated, NTT Electronics Corporation, Qorvo, Inc. and Semtech Corp. as well as other analog and mixed
signal processing companies. We expect competition in the markets in which we participate to increase in the future as
existing competitors improve or expand their product offerings.
Our ability to compete successfully depends on elements both within and outside of our control, including industry and
general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate
intensified as our customers reduced their purchase orders. Many of our competitors have substantially greater financial and
other resources with which to withstand similar adverse economic or market conditions in the future. These developments
may materially and adversely affect our current and future target markets and our ability to compete successfully in those
markets.
We use a significant amount of intellectual property in our business. Monitoring unauthorized use of our intellectual
property can be difficult and costly and if we are unable to protect our intellectual property, our business could be adversely
affected.
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents, copyrights, trademarks and trade secrets in the United States
and in selected foreign countries where we believe filing for such protection is appropriate. Effective protection of our
intellectual property rights may be unavailable, limited or not applied for in some countries. Some of our products and
technologies are not covered by any patent or patent application, as we do not believe patent protection of these products and
technologies is critical to our business strategy at this time. Failure to timely seek patent protection on products or
16
technologies generally precludes us from seeking future patent protection on these products or technologies. We cannot
guarantee that:
●
any of our present or future patents or patent claims will not lapse or be invalidated, circumvented, challenged or
abandoned;
● our intellectual property rights will provide competitive advantages to us;
● our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes
will not be limited by our agreements with third parties;
●
any of our pending or future patent applications will be issued or have the coverage originally sought;
● our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal
protection may be weak;
●
any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our
business will not lapse or be invalidated, circumvented, challenged or abandoned; or
● we will not lose the ability to assert our intellectual property rights against or to license our technology to others and
collect royalties or other payments.
In addition, our competitors or others may design around our protected patents or technologies. Effective intellectual
property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections
available in the United States, or may not be applied for in one or more relevant jurisdictions. If we pursue litigation to assert
our intellectual property rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual
property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results
of operations.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual
property may have occurred or may occur in the future. Although we have taken steps to minimize the risk of this occurring,
any such failure to identify unauthorized use and otherwise adequately protect our intellectual property would adversely affect
our business. Moreover, if we are required to commence litigation, whether as a plaintiff or defendant, not only would this
be time-consuming, but we would also be forced to incur significant costs and divert our attention and efforts of our
employees, which could, in turn, result in lower revenue and higher expenses.
We also rely on contractual protections with our customers, suppliers, distributors, employees and consultants, and we
implement security measures designed to protect our trade secrets. We cannot assure you that these contractual protections
and security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers,
employees or consultants will not assert rights to intellectual property arising out of such contracts.
In addition, we have a number of third-party patent and intellectual property license agreements. Some of these license
agreements require us to make one-time payments or ongoing royalty payments. We cannot guarantee that the third-party
patents and technology we license will not be licensed to our competitors or others in the semiconductor industry. In the
future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology.
We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on
acceptable terms, or at all.
Average selling prices of our products generally decrease over time, which could negatively impact our revenue and
gross margins.
Our operating results may be impacted by a decline in the average selling prices of our semiconductors. If competition
increases in our target markets, we may need to reduce the average unit price of our products in anticipation of competitive
pricing pressures, new product introductions by us or our competitors and for other reasons. If we are unable to offset any
reductions in our average selling prices by increasing our sales volumes or introducing new products with higher margins,
our revenue and gross margins will suffer. To maintain our revenue and gross margins, we must develop and introduce new
products and product enhancements on a timely basis and continually reduce our costs as well as our customers’ costs. Failure
to do so would cause our revenue and gross margins to decline.
17
We are subject to order and shipment uncertainties, and differences between our estimates of customer demand and
product mix and our actual results could negatively affect our inventory levels, sales and operating results.
Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase
commitments. In addition, our customers can cancel purchase orders or defer the shipments of our products under certain
circumstances. Our products are manufactured using semiconductor foundries according to our estimates of customer
demand, which requires us to make separate demand forecast assumptions for every customer, each of which may introduce
significant variability into our aggregate estimates. It is difficult for us to forecast the demand for our products, in part because
of the complex supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product
development cycle, it is critical for us to anticipate changes in demand for our various product features and the applications
they serve to allow sufficient time for product development and design. We have limited visibility into future customer
demand and the product mix that our customers will require, which could adversely affect our revenue forecasts and operating
margins. Moreover, because some of our target markets are relatively new, many of our customers have difficulty accurately
forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects
their demand for our products. Our failure to accurately forecast demand can lead to product shortages that can impede
production by our customers and harm our customer relationships. Conversely, our failure to forecast declining demand or
shifts in product mix can result in excess or obsolete inventory. For example, some of our customers may cancel purchase
orders or delay the shipment of their products that incorporate our products as a result of component shortages they may
experience due to earthquakes and tsunamis in Japan or Taiwan, or likewise with respect to flooding in Thailand, which may
result in excess or obsolete inventory and impact our sales and operating results. In addition, the rapid pace of innovation in
our industry could also render significant portions of our inventory obsolete. Excess or obsolete inventory levels could result
in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial
condition. In contrast, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable,
we could forego revenue opportunities, potentially lose market share and damage our customer relationships. In addition, any
significant future cancellations or deferrals of product orders or the return of previously sold products due to manufacturing
defects could materially and adversely impact our profit margins, increase our write-offs due to product obsolescence and
restrict our ability to fund our operations.
We rely on third-party sales representatives and distributors to assist in selling our products. If we fail to retain or
find additional sales representatives and distributors, or if any of these parties fail to perform as expected, it could reduce
our future sales.
For the year ended December 31, 2018, we derived 84% of our total revenue from sales by our direct sales team and
third-party sales representatives and 16% of our sales were made through third-party distributors. For the year ended
December 31, 2017, we derived 82% of our total revenue from sales by our direct sales team and third-party sales
representatives and 18% of our sales were made through third-party distributors. For the year ended December 31, 2016, we
derived 85% of our total revenue from sales by our direct sales team and third-party sales representatives and 15% of our
sales were made through third-party distributors. We are unable to predict the extent to which these third-party sales
representatives and distributors will be successful in marketing and selling our products. Moreover, many of these third-party
sales representatives and distributors also market and sell competing products, which may affect the extent to which they
promote our products. Even where our relationships are formalized in contracts, our third-party sales representatives and
distributors often have the right to terminate their relationships with us at any time. Our future performance will also depend,
in part, on our ability to attract additional third-party sales representatives and distributors who will be able to market and
support our products effectively, especially in markets in which we have not previously sold our products. If we cannot retain
our current distributors or find additional or replacement third-party sales representatives and distributors, our business,
financial condition and results of operations could be harmed. Additionally, if we terminate our relationship with a distributor,
we may be obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual
returns and credits exceed our estimates, our operating results could be harmed.
The facilities of our third-party contractors and distributors and a number of our facilities are located in regions that
are subject to earthquakes and other natural disasters. Any catastrophic loss to any of these facilities would likely disrupt
our operations and result in significant expenses and could adversely affect our business.
The facilities of our third-party contractors and distributors are subject to risk of catastrophic loss due to fire, flood or
other natural or man-made disasters. A number of our facilities and those of our contract manufacturers are located in areas
with above average seismic activity and also subject to typhoons and other Pacific storms. Several foundries that manufacture
our wafers are located in Taiwan, Japan and California, and a majority of our third-party contractors who assemble and test
our products are located in Asia. In addition, our headquarters are located in California. The risk of an earthquake in the
Pacific Rim region or California is significant due to the proximity of major earthquake fault lines. Any catastrophic loss to
any of these facilities would likely disrupt our operations, delay production, shipments and revenue and result in significant
18
expenses to repair or replace the facility. In particular, any catastrophic loss at our California locations would materially and
adversely affect our business.
We rely on third-party technologies for the development of our products and our inability to use such technologies in
the future would harm our ability to remain competitive.
We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly
and test technologies used by our contract manufacturers, as well as licensed architecture technologies. If we are unable to
continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may
not be able to secure alternatives in a timely manner or at all, and our ability to remain competitive would be harmed. In
addition, if we are unable to successfully license technology from third parties to develop future products, we may not be
able to develop such products in a timely manner or at all.
Our business would be adversely affected by the departure of existing members of our senior management team and
other key personnel.
Our success depends, in large part, on the continued contributions of our senior management team, in particular, the
services of certain key personnel. Changes in our management team could negatively affect our operations and our
relationships with our customers, employees and market leaders. In addition, we have not entered into non-compete
agreements with members of our senior management team. The loss of any member of our senior management team or key
personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions
in which we operate.
We may acquire businesses, enter into licensing arrangements or make investments in other companies or
technologies that disrupt our business, are difficult to integrate, impair our operating results, dilute our stockholders’
ownership, increase our debt, divert management resources or cause us to incur significant expense.
As part of our business strategy, we have pursued and may continue to pursue in the future acquisitions of businesses
and assets, as well as technology licensing arrangements that we believe will complement our business, semiconductor
solutions or technologies. For example, we acquired ClariPhy in December 2016 to help expand our optical networking
platform portfolio. We also may pursue strategic alliances that leverage our core technology and industry experience to
expand our product offerings or distribution, or make investments in other companies. Any acquisition involves a number of
risks, many of which could harm our business, including:
● difficulty in integrating the operations, technologies, products, existing contracts, accounting and personnel of the
acquired company or business;
●
realizing the anticipated benefits of any acquisition;
● difficulty in transitioning and supporting customers, if any, of the acquired company;
● difficulty in transitioning and collaborating with suppliers, if any, of the acquired company;
● diversion of financial and management resources from existing operations;
●
the risk that the price we pay or other resources that we devote may exceed the value we realize, or the value we
could have realized if we had allocated the purchase price or other resources to another opportunity;
● potential loss of key employees, customers and strategic alliances from either our current business or the acquired
company’s business;
●
inability to successfully bring newly acquired products to market or achieve design wins with such products;
●
fluctuations in industry trends that change the demand or purchasing volume of newly acquired products;
●
assumption of unanticipated problems or latent liabilities, such as problems with the quality of the acquired products;
●
inability to generate sufficient revenue to offset acquisition costs;
● dilutive effect on our stock as a result of any equity-based acquisitions;
19
●
inability to successfully complete transactions with a suitable acquisition candidate; and
●
in the event of international acquisitions, risks associated with accounting and business practices that are different
from applicable U.S. practices and requirements.
Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential
impairments, which could harm our financial results. For example, during the year ended December 31, 2017, we abandoned
a project related to certain developed technology and in-process research and development from the ClariPhy acquisition and
recorded an impairment charge of $47.0 million. The abandonment of the project was primarily related to change in product
roadmap that occurred during the year ended December 31, 2017. If we fail to properly evaluate acquisitions or investments,
it may impair our ability to achieve the anticipated benefits of any such acquisitions or investments, and we may incur costs
in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise
adequately address these risks could materially harm our business and financial results.
To finance any acquisitions or investments, we may choose to issue shares of our common stock or convertible debt as
consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we
may not be able to acquire other companies for stock. In addition, 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. Additional funds may not be available on terms that
are favorable to us, or at all.
We may not realize the anticipated benefits of our acquisitions, which in turn could harm our business and operating
results.
We may not achieve all of the anticipated benefits of any of our acquisitions in a timely manner or at all, including our
acquisitions of Cortina and ClariPhy, due to a number of factors including: failure to successfully integrate the acquired
business, unanticipated costs or liabilities associated with the acquisitions, incurrence of acquisition-related costs, harm to
our relationships with existing customers as a result of the acquisitions, harm to our brands and reputation, the loss of key
employees of the acquired companies, negative market reaction thereto, inability to successfully extend and expand product
offerings, significant impairments of anticipated goodwill and other intangible assets and the use of resources that are needed
in other parts of our business.
We may sell one or more of our product lines, from time to time, as a result of our evaluation of our products and
markets, and any divestiture could adversely affect our continuing business and our expenses, revenues, results of
operation, cash flows and financial position.
We periodically evaluate our various product lines and may, as a result, consider the divestiture of one or more of those
product lines. For example, in August 2016, we sold our memory product business to Rambus Inc. for $90 million in cash.
Any divestiture could adversely affect our continuing business and expenses, revenues, results of operations, cash flows and
financial position.
Divestitures of product lines have inherent risks, including the expense of selling the product line, the possibility that
any anticipated sale will not occur, delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the
divested business, unexpected costs associated with the separation of the business to be sold from the seller’s information
technology and other operating systems, and potential post-closing claims for indemnification or breach of transition services
obligations of the seller. Expected cost savings, which are offset by revenue losses from divested businesses, may also be
difficult to achieve or maximize due to the seller’s fixed cost structure, and a seller may experience varying success in
reducing fixed costs or transferring liabilities previously associated with the divested business.
Our business, particularly the high-speed interconnect and optical transport business, is dependent on capital
expenditures by service providers, and any downturn that they experience could negatively impact our business.
Our business, particularly the high-speed interconnect and optical transport business, which we acquired in connection
with our acquisition of Cortina, depends on continued capital expenditures by communication service providers and is subject
to the cyclicality of such expenditures. Our communications semiconductor products are sold primarily to network equipment
vendors that in turn sell their equipment to service providers. If the demand for our customers’ products declines or fails to
increase, as a result of lower capital expenditures by service providers or any other factors, demand for our products will be
similarly affected. The global economic downturn caused a significant reduction in capital spending on communications
network equipment. While we are beginning to see improvement, there are no guarantees that this growth will continue,
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which could result in market volatility or another downturn. If there is another downturn, our business, operating results and
financial condition may be materially harmed.
Our high-speed interconnect and optical transport business has historically relied on a small number of key customers
for a substantial portion of its revenue, and the loss of one or more of these key customers or the diminished demand for
these products from one or more such key customers would significantly reduce our revenue and profits.
With respect to our high-speed interconnect and optical transport business, a small number of customers have historically
accounted for a substantial portion of the revenues in any particular period. We anticipate that our relationships with these
key customers will continue to be important to this business, and we expect that this customer concentration will increase in
the future. We have no long-term volume purchase commitments from our key customers. These customers may decide not
to purchase our products at all, may purchase fewer products than they did in the past or may otherwise alter their purchasing
patterns. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers
would significantly reduce our revenue and profits.
The failure of our distributors to perform as expected could materially reduce our future revenue or negatively impact
our reported financial results.
We relied on a number of distributors, in particular Cyberlink Electronics Limited, Arrow Electronics, Inc. and Paltek
Corporation, to help generate customer demand, provide technical support and other value-added services to its customers,
fill customer orders and stock its products. These distributors do not sell those products exclusively, and to the extent they
choose to emphasize a competitor’s products over our products, our results of operations could be harmed. Our contracts with
these distributors may be terminated by either party with notice. Our distributors are located all over the world, and are of
various sizes and financial conditions. Lower sales, lower earnings, debt downgrades, the inability to access capital markets
and higher interest rates could potentially affect our distributors’ operations. Further, our distributors have contractual rights
to return unsold inventory to us, and, if this were to happen, we could incur significant cost in finding alternative sales
channels for these products or through write-offs. Any adverse condition experienced by our distributors could negatively
impact their level of support for our products or the rate at which they make payments to us and, consequently, could harm
our results of operations. We rely on accurate and timely sales reports from our distributors in order for our financial results
to represent the actual sales that our distributors make for us in any given period. Any inaccuracies or delays in these reports
could negatively affect our ability to produce accurate and timely financial reports and to recognize revenue. We also rely on
distributors for sales forecasts, and any inaccuracies in such forecasts could impair the accuracy of our projections and planned
operations.
Our portfolio of marketable securities is significant and subject to market, interest and credit risk that may reduce its
value.
We maintain a significant portfolio of marketable securities. Changes in the value of this portfolio could adversely affect
our earnings. In particular, the value of our investments may decline due to increases in interest rates, downgrades of money
market funds, U.S. Treasuries, municipal bonds, corporate bonds, certificates of deposit, variable rate demand notes,
commercial paper and asset-backed securities included in our portfolio, instability in the global financial markets that reduces
the liquidity of securities included in our portfolio, declines in the value of collateral underlying the asset-backed securities
included in our portfolio and other factors. Each of these events may cause us to record charges to reduce the carrying value
of our investment portfolio or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks
by investing in high quality securities and continuously monitoring our portfolio’s overall risk profile, the value of our
investments may nevertheless decline.
Tax benefits that we receive may be terminated or reduced in the future, which would increase our costs.
We continue to expand our international presence to take advantage of the opportunity to recruit additional engineering
design talent, as well as to more closely align our operations geographically with our customers and suppliers in Asia. In
certain international jurisdictions, we have also entered into agreements with local governments to provide us with, among
other things, favorable local tax rates if certain minimum criteria are met. These agreements may require us to meet several
requirements as to investment, headcount and activities to retain this status. We currently believe that we will be able to meet
all the terms and conditions specified in these agreements. However, if adverse changes in the economy or changes in
technology affect international demand for our products in an unforeseen manner or if we fail to otherwise meet the conditions
of the local agreements, or if we fail to extend the favorable local tax rate, we may be subject to additional taxes, which in
turn would increase our costs.
21
Changes in our effective tax rate may harm our results of operations. A number of factors may increase our future
effective tax rates, including:
●
the jurisdictions in which profits are determined to be earned and taxed;
●
the resolution of issues arising from tax audits with various tax authorities;
●
changes in the measurement of our deferred tax assets and liabilities and in deferred tax valuation allowances;
●
changes in the value of assets or services transferred or provided from one jurisdiction to another;
●
adjustments to income taxes upon finalization of various tax returns;
●
increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and
development and impairments of goodwill in connection with acquisitions;
●
changes in available tax credits; and
●
changes in tax laws, or the interpretation of such tax laws, and changes in U.S. generally accepted accounting
principles.
On December 22, 2017, Public Law 115-97, informally referred to as the Tax Cuts and Jobs Act (Tax Reform Act) was
signed into law. The Tax Reform Act made significant changes to U.S. federal corporate income taxation, including a
reduction of the corporate tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed mandatory
repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on
dividend distributions from foreign subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital
investments. Staff Accounting Bulletin 118 (SAB 118) allows for a measurement period of up to one year after the enactment
date of the new tax legislation to finalize the recording of the related tax impacts. In accordance with SAB 118, as of December
31, 2017, we made a provisional estimate of the remeasurement of the federal deferred tax assets and liabilities as of December
31, 2017 to reflect the reduced U.S. statutory corporate tax rate to 21%, the mandatory repatriation income which was fully
absorbed by the U.S. net operating loss, the related valuation allowance offset, and valuation allowance release on deferred
tax assets for the federal AMT credit that was made refundable by the Tax Reform Act. During 2018, we elected to account
for global intangible low-taxed income (GILTI) as a period cost in the year the tax is incurred and made changes to its
provisional estimates previously recorded for the mandatory repatriation upon filing of its 2017 U.S. income tax return. The
change in the mandatory repatriation income was fully absorbed by the U.S. net operating loss, which is subject to valuation
allowance, and resulted in no current tax liability. This measurement period adjustment had no net tax effect after the
offsetting change to the valuation allowance. At December 31, 2018, we have completed the accounting for all of the
enactment-date income tax effects of the Tax Reform Act.
We are subject to regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002,
which are costly to comply with, and our failure to comply with these requirements could harm our business and operating
results.
As a public company, we incur significant legal, accounting and other expenses related to compliance with laws such as
Section 404 of the Sarbanes-Oxley Act of 2002. Compliance with Section 404 requires that our management report on, and
our independent registered public accounting firm attest to, the effectiveness of our internal control over financial reporting
in our annual reports on Form 10-K. Section 404 compliance has in the past diverted, and may continue to divert, internal
resources, and require a significant amount of time and effort. If we fail to comply with Section 404, or if in the future our
Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal
control over financial reporting is not effective, we could be subject to sanctions or investigations by the New York Stock
Exchange, the SEC, or other regulatory authorities.
Furthermore, investor perceptions of us may suffer, and this could cause a decline in the market price of our stock.
Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our
stated results of operations and harm our reputation.
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The conditional conversion feature of our convertible senior notes, if triggered, may adversely affect our financial
condition and operating results.
In the event the conditional conversion feature of our convertible senior notes is triggered, holders of notes will be entitled
to convert such notes at any time during specified periods at their option. If one or more holders elect to convert their notes,
unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, thereby incurring share
dilution (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of
our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders
do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the
outstanding principal of the convertible notes as a current rather than long-term liability, which would result in a material
reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the convertible notes, could
have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC
470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such
as our convertible notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s
economic interest cost. The effect of ASC 470-20 on the accounting for the convertible notes is that the equity component is
required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and
the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of
the convertible notes. As a result, we are required to record a greater amount of non-cash interest expense in current periods
presented as a result of the amortization of the discounted carrying value of the convertible notes to their face amount over
the term of the convertible notes. We will report lower net income in our financial results because ASC 470-20 will require
interest to include both the current period’s amortization of the debt discount and the instrument’s non-convertible interest
rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the
trading price of the convertible notes.
In addition, under certain circumstances, convertible debt instruments (such as our convertible notes) that may be settled
entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares
issuable upon conversion of the convertible notes are not included in the calculation of diluted earnings per share except to
the extent that the conversion value of the convertible notes exceeds their principal amount. Under the treasury stock method,
for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that
would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the
accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the
treasury stock method in accounting for the shares issuable upon conversion of the convertible notes, then our diluted earnings
per share would be adversely affected.
We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive
pressures and to obtain sufficient funds to satisfy our future growth, business needs and development plans.
We have substantial existing indebtedness. For example, in September 2016 and December 2015, we issued $287.5
million and $230.0 million, respectively, in aggregate principal of convertible senior notes. The degree to which we are
leveraged could have negative consequences, including, but not limited to, the following:
• we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible
•
•
in responding to changing business and economic conditions;
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general
corporate or other purposes may be limited;
a substantial portion of our cash flows from operations in the future may be required for the payment of the principal
amount of our existing indebtedness when it becomes due; and
• we may elect to make cash payments upon any conversion of the convertible notes, which would reduce our cash
on hand.
Our ability to meet our payment obligations under our convertible notes depends on our ability to generate significant
cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory
factors as well as other factors that are beyond our control. There can be no assurance that our business will generate cash
flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our debt
payment obligations and to fund other liquidity needs. If we are unable to generate sufficient cash flow to service our debt
obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise
23
additional capital. If we were unable to implement one or more of these alternatives, we may be unable to meet our debt
payment obligations, which could have a material adverse effect on our business, results of operations, or financial condition.
Our business could be negatively impacted by information technology security events and other disruptions.
We face various cybersecurity threats, including threats to our information technology infrastructure and attempts to gain
access to our proprietary or classified information, denial-of-service attacks, requests for money transfers, ransomware, as
well as threats to the physical security of our facilities and employees. In addition, we face cyber threats from entities that
may seek to target us through our customers, vendors, subcontractors, employees, and other third parties with whom we do
business. Accordingly, we maintain information security partners and staff, policies and procedures for managing risk to our
information systems, and conduct employee training on cybersecurity to mitigate persistent and continuously evolving cyber
security threats. We have experienced cybersecurity threats such as viruses and attacks by hackers targeting our information
technology systems. Although such events have not had a material impact to date on our financial condition, results of
operations or liquidity or reputation, future threats could, among other things, cause harm to our business and our reputation;
disrupt our operations; expose us to potential liability, regulatory actions and the loss of business; as well as impact our results
of operations materially. Due to the evolving nature of these security threats, we cannot predict the potential impact of any
future incident.
Risks Related to Our Industry
We may be unable to make the substantial and productive research and development investments, which are required
to remain competitive in our business.
The semiconductor industry requires substantial investment in research and development in order to develop and bring
to market new and enhanced technologies and products. Many of our products originated with our research and development
efforts and have provided us with a significant competitive advantage. Our research and development expenses were $167.9
million, $200.5 million and $108.0 million in 2018, 2017 and 2016, respectively. We are committed to investing in new
product development in order to remain competitive in our target markets. We do not know whether we will have sufficient
resources to maintain the level of investment in research and development required to remain competitive. In addition, there
is no assurance that the technologies which are the focus of our research and development expenditures will become
commercially successful.
Our business, financial condition and results of operations could be adversely affected by worldwide economic
conditions, as well as political and economic conditions in the countries in which we conduct business.
Our business and operating results are impacted by worldwide economic conditions. Uncertainty about current global
economic conditions may cause businesses to continue to postpone spending in response to tighter credit, unemployment or
negative financial news. This in turn could have a material negative effect on the demand for our semiconductor products or
the products into which our semiconductors are incorporated. Multiple factors relating to our international operations and to
particular countries in which we operate could negatively impact our business, financial condition and results of operations.
These factors include:
●
changes in political, regulatory, legal or economic conditions;
●
restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments
and trade protection measures, including export duties and quotas and customs duties and tariffs;
● disruptions of capital and trading markets;
●
changes in import or export requirements;
●
transportation delays;
●
civil disturbances or political instability;
● geopolitical turmoil, including terrorism, war or political or military coups;
● public health emergencies;
● differing employment practices and labor standards;
24
●
limitations on our ability under local laws to protect our intellectual property;
●
local business and cultural factors that differ from our customary standards and practices;
● nationalization and expropriation;
●
changes in tax or intellectual property laws;
●
currency fluctuations relating to our international operating activities; and
● difficulty in obtaining distribution and support.
A significant portion of our products are manufactured, assembled and tested outside the United States. Any conflict or
uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns,
could harm our business, financial condition and results of operations. In addition, if the government of any country in which
our products are manufactured or sold sets technical standards for products manufactured in or imported into their country
that are not widely shared, it may lead some of our customers to suspend imports of their products into that country, require
manufacturers in that country to manufacture products with different technical standards and disrupt cross-border
manufacturing relationships which, in each case, could harm our business.
Changes in current or future laws or regulations or the imposition of new laws or regulations, including new or
changed tax regulations, environmental laws, export control laws, anti-corruption laws and conflict minerals rules or new
interpretations thereof, by federal or state agencies or foreign governments could impair our ability to compete in
international markets.
Changes in current laws or regulations applicable to us, the imposition of new laws and regulations in the United States
or other jurisdictions in which we do business, such as Argentina, Canada, China, Germany, Japan, Malaysia, Singapore,
Taiwan and United Kingdom, any changes or uncertainties with respect to such laws or regulations or with respect to trade
relations between the United States and any such jurisdictions or any adverse outcome as a result of a review or examination
by the applicable taxing authority, could materially and adversely affect our business, financial condition and results of
operations. For example, we have entered into agreements with local governments to provide us with, among other things,
favorable local tax rates if certain minimum criteria are met, as discussed in our risk factor entitled “Tax benefits that we
receive may be terminated or reduced in the future, which would increase our costs.” These agreements may require us to
meet several requirements as to investment, headcount and activities to retain this status. If we fail to otherwise meet the
conditions of the local agreements, we may be subject to additional taxes, which in turn would increase our costs. In addition,
potential future U.S. tax legislation could impact the tax benefits we effectively realize under these agreements.
Due to environmental concerns, the use of lead and other hazardous substances in electronic components and systems is
receiving increased attention. In response, the European Union passed the Restriction on Hazardous Substances (RoHS)
Directive, legislation that limits the use of lead and other hazardous substances in electrical equipment. The RoHS Directive
became effective July 1, 2006. We believe that our current product designs and material supply chains are in compliance with
the RoHS Directive. If our product designs or material supply chains are deemed not to be in compliance with the RoHS
Directive, we and our third-party manufacturers may need to redesign products with components meeting the requirements
of the RoHS Directive and we may incur additional expense as well as loss of market share and damage to our reputation.
We are also subject to export control laws, regulations and requirements that limit which products we sell and where and
to whom we sell our products. In some cases, it is possible that export licenses would be required from U.S. government
agencies for some of our products in accordance with the Export Administration Regulations and the International Traffic in
Arms Regulations. We may not be successful in obtaining the necessary export licenses in all instances. Any limitation on
our ability to export or sell our products imposed by these laws would adversely affect our business, financial condition and
results of operations. For example, in April 2018, the U.S. Department of Commerce banned all exports to ZTE, a Chinese
technology company. ZTE has been our customer and we expect a reduction in revenue as a result of the ban, at least in the
short-term. We are currently assessing the long-term impact of this ban. In addition, changes in our products or changes in
export and import laws and implementing regulations may create delays in the introduction of new products in international
markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import
of our products to certain countries altogether. While we are not aware of any other current or proposed export or import
regulations which would materially restrict our ability to sell our products in other countries, any change in export or import
regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the
countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our
decreased ability to export or sell our products to, existing or potential customers with international operations. In such event,
25
our business and results of operations could be adversely affected. In addition, we are subject to economic and trade sanctions
programs that are administered by the U.S. Treasury Department’s Office of Foreign Assets Control, that prohibit or restrict
transactions to or from or dealings with specified countries, their governments, and in certain circumstances, with individuals
and entities that are specially-designated nationals of those countries, narcotics traffickers and terrorists or terrorist
organizations. Violations of these trade control laws and sanctions regulations are punishable by civil penalties, including
fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts, and revocations or
restrictions of licenses, as well as criminal fines and imprisonment.
We are also subject to risks associated with compliance with applicable anti-corruption laws, including the Foreign
Corrupt Practices Act (FCPA), which generally prohibits companies and their employees and intermediaries from making
payments to foreign officials for the purpose of obtaining or keeping business, securing an advantage, or directing business
to another, and requires public companies to maintain accurate books and records and a system of internal accounting controls.
Under the FCPA, companies may be held liable for actions taken by directors, officers, employees, agents, or other strategic
or local partners or representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar
laws, governmental authorities in the United States and elsewhere could seek to impose civil and criminal fines and penalties
which could have a material adverse effect on our business, results of operations and financial condition.
Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations
or other social initiatives. For instance, the SEC adopted disclosure requirements in 2012 relating to the sourcing of certain
minerals from the Democratic Republic of Congo and certain other adjoining countries. These rules, which required reporting
starting in 2014, could adversely affect our costs, the availability of minerals used in our products and our relationships with
customers and suppliers. Also, since our supply chain is complex, we may face reputational challenges with our customers,
stockholders, and other stakeholders if we are unable to sufficiently verify the origins for any conflict minerals used in the
products that we sell.
We are subject to the cyclical nature of the semiconductor industry, which has suffered and may suffer from future
recessionary downturns.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving standards and wide fluctuations in product supply and demand. The industry
experienced a significant downturn during the current global recession. These downturns have been characterized by
diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices.
The most recent downturn and any future downturns could negatively impact our business and operating results. Furthermore,
any upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly
capacity. We are dependent on the availability of this capacity to manufacture and assemble our integrated circuits. None of
our third-party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the
future.
Our products must conform to industry standards in order to be accepted by end-users in our markets.
Our products comprise only a part of larger electronic systems. All components of these systems must uniformly comply
with industry standards in order to operate efficiently together. These industry standards are often developed and promoted
by larger companies who are industry leaders and provide other components of the systems in which our products are
incorporated. In driving industry standards, these larger companies are able to develop and foster product ecosystems within
which our products can be used. We work with a number of these larger companies in helping develop industry standards
with which our products are compatible. If larger companies do not support the same industry standards that we do, or if
competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business.
Some industry standards may not be widely adopted or implemented uniformly, and competing standards may still
emerge that may be preferred by our customers. Products for communications and computing applications are based on
industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify
and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our
products incompatible with products developed by other suppliers or make it difficult for our products to meet the
requirements of certain OEMs. As a result, we could be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with
prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We
may not be successful in developing or using new technologies or in developing new products or product enhancements that
achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense.
26
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue
as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market
positions in an evolving industry or are unable to continue operations. Companies that are strategic alliance partners in some
areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe
that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for
customers. This could lead to more variability in our operating results and could have a material adverse effect on our
business, operating results and financial condition.
Risks Related to Our Common Stock
The trading price and volume of our common stock is subject to price volatility. This volatility may affect the price at
which you could trade our common stock.
The trading price of our common stock has experienced wide fluctuations. For example, the closing sale prices for our
common stock have ranged from $24.44 to $41.35 in the twelve-month period ended December 31, 2018. Volatility in the
market price of our common stock may occur in the future in response to many risk factors discussed herein and others
beyond our control, including but not limited to:
●
actual or anticipated fluctuations in our financial condition and operating results;
●
changes in the economic performance or market valuations of other companies that provide high-speed analog and
mixed signal semiconductor solutions;
●
loss of a significant amount of existing business;
●
actual or anticipated changes in our growth rate relative to our competitors;
●
actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;
●
issuance of new or updated research or reports by securities analysts;
● our announcement of actual results for a fiscal period that are higher or lower than projected results or our
announcement of revenue or earnings guidance that is higher or lower than expected;
●
regulatory developments in our target markets affecting us, our customers or our competitors;
●
fluctuations in the valuation of companies perceived by investors to be comparable to us;
●
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
●
sales or expected sales of additional common stock or equity or equity-linked securities;
●
terrorist attacks or natural disasters or other such events impacting countries where we or our customers have
operations; and
● general economic and market conditions.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue
to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as
general economic, political and market conditions such as recessions, interest rate changes or international currency
fluctuations, may cause the market price of shares of our common stock to decline. In the past, companies that have
experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the
target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our
management’s attention from other business concerns, which could seriously harm our business. Each of these factors, among
others, could harm the value of our common stock.
27
Due to the nature of our compensation program, our executive officers can sell shares of our common stock, often
pursuant to trading plans established under Rule 10b5-1 of the Exchange Act, and certain of our executive officers currently
have 10b5-1 trading plans in place. As a result, sales of common stock by our executive officers may not be indicative of
their respective opinions of our performance at the time of sale or of our potential future performance. Nonetheless, the
market price of our common stock may be affected by sales of shares by our executive officers.
If securities or industry analysts do not publish research or reports about our business, or if they change their
recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities
analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price
would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders
and our failure to raise capital when needed could prevent us from executing our growth strategy.
We believe that our existing cash and cash equivalents, investments in marketable securities, and cash flows from our
operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 to 18 months. We operate in
an industry, however, that makes our financial prospects difficult to evaluate. It is possible that we may not generate sufficient
cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may
need additional financing to execute on our current or future business strategies, including to:
●
invest in our research and development efforts by hiring additional technical and other personnel;
●
expand our operating infrastructure;
●
acquire complementary businesses, products, services or technologies; or
● otherwise pursue our strategic plans and respond to competitive pressures.
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 operational
flexibility, and would also require us to incur interest expense. There is no assurance that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when
needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products,
or otherwise respond to competitive pressures could be significantly limited.
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage
takeover attempts that stockholders may consider favorable, which could also reduce the market price of our common
stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying
or preventing a change of control or changes in our management. These provisions include the following:
●
●
●
the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of
directors;
the classification of our board of directors so that only a portion of our directors are elected each year, with each
director serving a three-year term;
the requirement for advance notice for nominations for election to our board of directors or for proposing matters
that can be acted upon at a stockholders’ meeting;
●
the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
●
the ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred
stock with rights set by our board of directors, which rights could be senior to those of common stock;
28
●
the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding
the election and removal of directors and the ability of stockholders to take action by written consent;
●
the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written
consent; and
● designating the state and federal courts located within the State of Delaware as the exclusive forums for derivative
actions, claims of breach of fiduciary duty by any director, officer or other employee, claims arising pursuant to any
provisions of the Delaware General Corporation Law and claims governed by the internal affairs doctrine.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These provisions in our restated certificate of
incorporation and amended and restated bylaws and under Delaware law could discourage potential takeover attempts and
could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the
market price of our common stock being lower than they would without these provisions.
We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a return
on an investment in our stock will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the
foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. The success of an investment
in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that our common
stock will appreciate in value.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We lease 57,914 square feet of office space in Santa Clara, California, which currently serves as our principal executive
office that will expire on September 17, 2019, as well as 11,036 square feet of office space that expires on December 31,
2019. We also lease 42,197 square feet of office space in Westlake Village, California under a lease that will expire on
December 31, 2024. We also lease 27,797 square feet of office in Irvine, California under a lease that will expire on July 31,
2019. Our Singapore subsidiary currently leases 9,211 square feet of office space in Singapore under a lease that will expire
on April 30, 2020. Our United Kingdom subsidiary currently leases office space in Northamptonshire, England under a lease
that will expire on April 2, 2026. We also occupy space in Folsom, California, consisting of 7,532 square feet of office space
under a lease that will expire on November 30, 2020, and space in Durham, North Carolina, consisting of 1,572 square feet
of office space under a lease that expires on May 31, 2020. Our Canada subsidiary currently leases 13,951 square feet of
office space in Ottawa, Canada under a lease that will expire on October 31, 2021, as well as 1,546 square feet of office space
in Vancouver, Canada under a lease that expires on June 30, 2020. Our Argentina subsidiary currently leases 12,300 square
feet of office space that expires on September 30, 2022. We believe that our current facilities are sufficient to meet our needs
for the foreseeable future. For additional information regarding our obligations under property leases, see Note 17 of Notes
to our Consolidated Financial Statements, included in Part II, “Item 8, Financial Statements and Supplementary Data.”
ITEM 3.
LEGAL PROCEEDINGS
We are currently a party to the following legal proceedings:
Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)
On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California (Court)
asserting that we infringe U.S. Patent No. 7,532,537. Netlist filed an amended complaint on December 22, 2009, further
asserting that we infringe U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with U.S. Patent No. 7,532,537, the patents-
in-suit, and seeking both unspecified monetary damages to be determined and an injunction to prevent further infringement.
These infringement claims allege that the iMB™ and certain other memory module components infringe the patents-in-suit.
We answered the amended complaint on February 11, 2010 and asserted we do not infringe the patents-in-suit and that the
patents-in-suit are invalid. In 2010, we filed inter partes requests for reexamination with the United States Patent and
29
Trademark Office (USPTO), asserting that the patents-in-suit are invalid. As a result of the proceedings at the USPTO, the
Court has stayed the litigation, with the parties advising the Court on status every 120 days.
As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that were alleged to infringe,
and at present, the USPTO has determined that almost all of the originally filed claims are not valid, with certain amended
claims being determined patentable. The Reexamination Certificate for U.S. Patent No. 7,532,537 was issued on August 2,
2016 based upon amended claims. The Reexamination Certificate for U.S. Patent No. 7,636,274 was issued on November 5,
2018, indicating all claims 1-97 were cancelled. The parties continue to assert their respective positions with respect to the
reexamination proceeding for U.S. Patent No. 7,619,912.
While we intend to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO proceedings and
litigation, whether or not determined in our favor or settled, could be costly and time-consuming and could divert
management’s attention and resources, which could adversely affect our business.
Based on the nature of USPTO proceedings and litigation, we are currently unable to predict the final outcome of this
lawsuit and therefore, cannot determine the likelihood of loss nor estimate a range of possible loss. However, because of the
nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, our business, financial
condition, results of operations or cash flows could be materially and adversely affected.
Claims Against ClariPhy
Certain customers of ClariPhy have made claims associated with matters occurring prior to the acquisition date,
including a demand letter we received relating to products purchased by a customer from ClariPhy. The customer alleges
that the products did not meet the specification or workmanship warranties provided in the agreement with ClariPhy, and has
requested reimbursement and damages. We are currently reviewing whether or not these claims are valid, and we are unable
to reasonably estimate the amount of any potential liability at this time. Amounts payable as a result of these claims may be
recoverable from the escrow set up as part of the ClariPhy acquisition.
Other Litigation Matters
We are not currently a party to any other material litigation. The semiconductor industry is characterized by frequent
claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring
practices. We may from time to time become involved in litigation relating to claims arising from our ordinary course of
business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial
resources.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Equity
Our common stock is traded on the New York Stock Exchange under the symbol “IPHI”. As of February 25, 2019, we
had approximately 35 holders of record of our common stock. This number does not include the number of persons whose
shares are in nominee or in “street name” accounts through brokers.
We have never declared or paid any cash dividends on shares of our capital stock. We expect to retain all of our earnings
to finance the expansion and development of our business and we do not currently intend to pay any cash dividends on our
capital stock in the foreseeable future. Our board of directors will determine future dividends, if any.
Directors and executive officers have currently and may from time to time in the future, establish pre-set trading plans
in accordance with Rule 10b5-1 promulgated under the Exchange Act.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under
Part III, “Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Share Performance Graph
The following information is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to
Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed
to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we
specifically incorporate it by reference into such a filing.
31
Set forth below is a line graph showing the cumulative total stockholder return (change in stock price plus reinvested
dividends) assuming the investment of $100 on December 31, 2013 in each of our common stock, the S&P 500 Index and
PHLX Semiconductor Index for the period commencing on December 31, 2013 and ending on December 31, 2018. The
comparisons in the table are required by the SEC and are not intended to forecast or be indicative of future performance of
our common stock.
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.
32
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read together with Part II, “Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes
included elsewhere in this report. The selected balance sheet data as of December 31, 2018 and 2017, and the selected
statements of operations data for each of the years ended December 31, 2018, 2017, and 2016 have been derived from our
audited consolidated financial statements included elsewhere in this report. The selected balance sheet data as of
December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements not included in this
report. Our statements of operations have been retrospectively reclassified to present the results of operations of the memory
product business as discontinued operations. Historical results are not necessarily indicative of the results to be expected in
the future.
2018
Year Ended December 31,
2016
(in thousands, except share and per share data)
2017
2015
Consolidated Statement of Operations Data:
Revenue(1) ............................................................... $
Cost of revenue(1) (2) (3) .............................................
Gross profit .............................................................
Operating expenses:
Research and development(1) (2) (3) .......................
Sales and marketing(1) (2) .....................................
General and administrative(1) (2) ...........................
Total operating expenses .........................
Income (loss) from operations .................................
Interest expense(4) ................................................
Other income, net(5) .............................................
Income (loss) before income taxes from continuing
operations ............................................................
Provision (benefit) for income taxes(6) ....................
Net income (loss) from continuing operations ....
Discontinued operations:
Gain from sale .....................................................
Income (loss) from discontinued operations .......
Provision for income taxes ..................................
Net income from discontinued operations .......
Net income (loss) ................................................ $
Earnings per share:
Basic
Net income (loss) from continuing operations $
Net income from discontinued operations .......
Basic earnings per share .................................. $
Diluted
Net income (loss) from continuing operations $
Net income from discontinued operations .......
Diluted earnings per share ............................... $
Weighted-average shares used in computing
earnings per share:
294,490 $
129,345
165,145
348,201 $
151,698
196,503
266,277 $
85,581
180,696
192,710 $
72,694
120,016
167,924
43,080
28,302
239,306
(74,161)
(32,209)
2,408
(103,962)
(8,211)
(95,751)
—
—
—
—
(95,751) $
(2.19) $
—
(2.19) $
(2.19) $
—
(2.19) $
200,539
42,381
23,782
266,702
(70,199)
(29,842)
3,961
(96,080)
(21,176)
(74,904)
—
—
—
—
(74,904) $
(1.78) $
—
(1.78) $
(1.78) $
—
(1.78) $
108,013
26,534
21,201
155,748
24,948
(17,406)
3,914
11,456
(15,057)
26,513
78,544
(3,802)
(1,799)
72,943
99,456 $
0.65 $
1.80 $
2.45 $
0.60 $
1.65 $
2.25 $
87,774
21,462
20,322
129,558
(9,542)
(783)
221
(10,104)
5,857
(15,961)
—
4,535
(2,125)
2,410
(13,551) $
(0.41) $
0.06
(0.35) $
(0.41) $
0.06
(0.35) $
2014
96,145
44,244
51,901
56,508
15,136
16,153
87,797
(35,896)
—
495
(35,401)
1,131
(36,532)
—
14,531
(607)
13,924
(22,608)
(1.12)
0.43
(0.69)
(1.12)
0.43
(0.69)
Basic ............................................................
Diluted .........................................................
43,690,581
43,690,581
42,165,213
42,165,213
40,565,433
44,124,881
38,580,330
38,580,330
32,707,868
32,707,868
(1) On October 3, 2014, we completed the acquisition of Cortina, including its high-speed interconnect and optical transport product
lines, for approximately $52.5 million in cash and approximately 5.3 million shares of our common stock. On December 12,
2016, we completed the acquisition of ClariPhy for $303.7 million in cash. The results of operations of Cortina and ClariPhy and
estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements from the
acquisition dates. The acquisitions resulted in a significant change in our statement of operations in 2018, 2017, 2016, 2015 and
2014 which includes:
(i) charge to cost of goods sold resulting from the step-up inventory acquired from Cortina and ClariPhy; and
(ii) charge to cost of goods sold and operating expenses from amortization of acquired intangibles.
Footnotes continued on the following page.
33
2018
2017
As of December 31,
2016
(in thousands)
2015
2014
172,018 $
235,339
446,837
889,873
447,825
75,354
366,694
163,450 $
241,737
457,062
917,506
421,431
84,674
411,401
144,867 $
249,476
433,250
990,595
396,857
131,214
462,524
283,044 $
43,616
344,897
505,046
171,701
42,675
290,670
30,366
38,908
108,623
278,459
—
39,285
239,174
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................. $
Investments in marketable securities .............
Working capital .............................................
Total assets ....................................................
Long-term convertible debt ...........................
Other liabilities ..............................................
Total stockholders’ equity .............................
Footnotes continued from the prior page.
(2) Stock-based compensation expense is included in our results of operations as follows:
2018
2017
Year Ended December 31,
2016
(in thousands)
2015
2014
Operating expenses:
Cost of revenue ................................................. $
Research and development ...............................
Sales and marketing .........................................
General and administrative ...............................
Discontinued operations ...................................
2,527 $
37,397
13,470
10,490
—
2,045 $
28,846
8,340
5,602
—
1,796 $
17,390
4,405
4,407
2,194
1,359 $
13,268
3,213
5,473
4,980
1,154
9,670
2,998
4,701
3,937
(3) Cost of revenue and research and development expenses for the year ended December 31, 2017 included an impairment
charge of $47.0 million as a result of abandonment of a project related to certain developed technology and in-process
research and development from the ClariPhy acquisition.
(4) The interest expense resulted from convertible debts issued in December 2015 and September 2016.
(5) Other income, net included an impairment charge of $7.0 million related to a non-marketable equity investment for the
year ended December 31, 2018.
(6) The benefit for income taxes for the year ended December 31, 2016 included the release of valuation allowance against
deferred tax assets as a result of the acquisition of ClariPhy. The benefit for income taxes for the year ended December
31, 2017 included revaluation of deferred tax liabilities to the new federal tax rate of 21% and tax benefit from
intercompany transfer of intellectual property rights. The benefit for income taxes for the year ended December 31, 2018
included partial release of federal valuation allowance resulting from the transfer of an acquired in-process research and
development to developed technology in 2018 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.
34
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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,”
“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, demand for our current products, our plans for
future products and anticipated features and benefits thereof, expansion of our product offerings and enhancements of
existing products, anticipated benefits of our acquisition of ClariPhy, our ability to forecast demand and its effects, critical
accounting policies and estimates, our expectations regarding our expenses and revenue, average selling prices, 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 operating
and capital expenditures and requirements and our needs for additional financing and potential consequences thereof,
distributor price discounts and its effects, estimates regarding our inventory reserve, stock-based compensation expense and
taxable income, assessment of our tax return positions, our contractual obligations, our anticipated growth and growth
strategies, including growing our end customer base, our ability to forecast demand, competition, 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, 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 I, “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.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and
related notes that are included elsewhere in this Annual Report on Form 10-K.
Overview
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 and mixed signal semiconductor
solutions for the communications market. We have a wide range of products in our portfolio with many products sold in
communication and datacenter markets as of December 31, 2018. We have ongoing, informal collaborative discussions with
industry and technology leaders in Tier-1 cloud providers, telecom operators, network system OEMs and optical module and
component vendors to design architectures and products that solve bandwidth bottlenecks in existing and next generation
communications systems. Although we do not have any formal agreements with these entities, we engage in informal
discussions with these entities with respect to anticipated technological challenges, next generation customer requirements
and industry conventions and standards. We help define industry conventions and standards within the markets we target by
collaborating with technology leaders, OEMs, systems manufacturers and standards bodies.
35
The recent history of our product development and sales and marketing efforts is as follows:
•
•
•
•
•
•
•
In 2009, we began development of our low power CMOS SerDes product for next generation 100G
Ethernet in enterprise networks.
In 2010, we introduced and began to ship in commercial volume the industry’s first transimpedance
ampliform for 100G reconfigurable colorless networks, which we identify as product number 2850TA-
SO1D.
In 2011, we shipped engineering samples of our Optical PHY 100 Gb/sec CMOS CDR and SerDes
Gearbox products.
In 2012, we started shipping samples of the IN3250TA, our second-generation TIA for 100G
reconfigurable colorless networks. We also introduced the industry’s first quad linear driver designed for
linear transmitters to enable next-generation 100G/400G coherent systems to address the need for higher
speed and higher performance networking infrastructure. We also announced the availability of the
world’s first production ready 100G CMOS PHY/SerDes Gearbox products for next-generation data
center, enterprise and service provider line cards.
In 2013, we introduced the second generation 100G CMOS SerDes gearbox integrated circuit (GB IC)
for data center, enterprise and service provider line cards. The new GB IC with Tri-rate™ foundation is
designed to enable seamless support of 10G, 40G and 100G Ethernet and optical transport network on a
single line card. We also began shipping the industry’s first quad linear driver designed for linear
transmitters to enable next-generation 100G/400G coherent systems to address the need for higher speed,
higher performance networking infrastructure.
In 2014, we completed the acquisition of Cortina Systems Inc. which expands our market share of the
high-speed optical and networking interconnects. This added more than 130 products to our portfolio,
including high-speed interconnect and optical transport products. We also started sampling the
IN3252TA, the industry’s first 32 Gbps dual high gain linear/variable-gain amplifier. The IN3252TA is
designed specifically to address the demanding requirements for 100G coherent transmission for the metro
market. We also announced the availability of a new iKON™ family of 100G Clock and Data Recovery
Retimer integrated circuits (IC) targeted at next-generation 2-Terabit line cards. The first product in this
series, the IN112525-LC 100G CMOS CDR Retimer IC, is designed to accelerate deployment for higher
density 100G in service center and data center networks. We also announced the availability of
IN3216DZ, the first single chip quad channel linear Mach Zehnder driver in bare die form to address the
network needs for 100G coherent systems in small form factors for the metro market. Specifically
designed to be co-packaged with MZ modulators, the IN3216DZ will reduce size and cost of 100G
coherent systems to enable higher density metro solutions. We also started sampling 45GBaud Linear
Coherent Product Family, the industry’s first linear ICs enabling 400G coherent solutions for next-
generation metro to long haul applications. The initial product offerings includes IN4514SZ, a high-
performance octal linear differential to single-ended Mach-Zehnder Modulator Driver and IN4550TA, a
quad linear TIA/VGA Amplifier.
In 2015, we started sampling a new product in our 45GBaud Linear Coherent Product Family, IN4518SZ.
The IN4518SZ is a quad linear differential to single-ended Mach-Zehnder Modulator Driver, pin-
compatible with the linear driver IN3214SZ, for 200G coherent Optical interconnect applications. The
IN4518SZ extends the reach of 200G coherent for long haul applications and enables one set of hardware
to serve multiple segments in the long haul and metro markets. We also announced the availability of the
industry’s first, highly integrated, lowest power 4-level Pulse Amplitude Modulation (PAM4) chipset
solutions for intra-data center and inter-data center cloud interconnects. The PAM4 chipset solution is a
family of PAM4 PHY ICs for 40G (IN014020-XL), 50G (IN015050-SF), 100G (IN015025-CA), 400G
(IN015025-CD) and a companion linear TIA (IN2860TA) to enable platform solutions for multi-rate
PAM4 interconnects. We also started sampling IN3217SZ, a quad linear differential to single-ended
Mach-Zehnder Modulator Driver in a Surface Mount Technology (SMT) package. The new SMT quad
linear driver extends the product portfolio by utilizing cost effective packaging for higher volume
100G/200G coherent long haul and metro optical interconnect applications.
•
In 2016, we completed the acquisition of ClariPhy Communications, Inc. With this acquisition, we are
able to provide a complete coherent platform to our customers in long haul, metro, and datacenter
36
interconnect applications. We also introduced ColorZ® reference design, the industry’s first Silicon
Photonics 100G PAM4 platform solution for 80 km DWDM Data Center Interconnect in QSFP28 form
factor. Utilizing advanced Pulse Amplitude Modulation signaling, ColorZ® delivers up to 4Tb/s of
bandwidth over a single fiber and allows multiple data centers located up to 80 km of each other to be
connected and act like a single data center. We further introduced a highly integrated Silicon Photonics
(SiPho) technology platform for 100Gbit/s data center applications. The single-chip SiPho optics includes
multi-channel modulators, photodetectors, multiplexers, demultiplexers, optical power monitors and fiber
coupling structures all integrated onto a single integrated circuit. We also announced the availability of
the industry’s lowest power Clock and Data Recovery Retimer for module applications, IN012525-CQ
CMOS CDR and 45GBaud Linear Coherent Product Family, the industry’s first linear ICs enabling 400G
coherent solutions for next-generation long haul, metro, and data center applications. We also announced
the industry’s first 400GbE platform solution for next-generation 400G CFP8 modules. The platform
solution includes our PAM4 DSP IC that supports IEEE P802.3bs 400G/s Ethernet standard alongside its
companion market leading linear TIA and linear drivers for client based cloud interconnects. With the
introduction of these new products, we are offering customers an end-to-end platform solution for moving
data faster within and between data centers. We also announced the production availability of a new
product in the 32GBaud Linear Coherent Product Family. The IN3217SZ, a quad linear Mach-Zehnder
Modulator Driver in a SMT package, extends the product portfolio by utilizing cost effective packaging
for the 100G/200G coherent long haul and metro optical interconnect applications. We also announced
the sampling of IN6450TA, the world’s first 64GBaud dual channel linear TIA/VGA amplifier. The
IN6450TA supports data rates of 400Gbps to 600Gbps on a single wavelength for long haul, metro, and
data center interconnect networks using coherent technology.
In 2017, we started sampling IN6417SZ, the industry’s first 64GBaud quad linear differential to single-
ended Mach-Zehnder Modulator Driver in 14x9 mm Surface Mount Technology (SMT) package. This
new 64GBaud SMT quad linear driver extends our 64G product portfolio for next-generation 400G/600G
coherent, long haul, and metro optical interconnect applications. We introduced Polaris™, the industry’s
first 16nm CMOS 4-level Pulse Amplitude Modulation (PAM4) platform solution for next-generation
cloud deployments. The Polaris platform includes our highly integrated, lowest power PAM4 digital
signal processing IC alongside its companion market leading, low power linear driver and TIA for data
center connectivity. We announced the commercial availability and production ramp of ColorZ®, the
industry’s first Silicon Photonics 100G PAM4 platform solution for 80 km DWDM Data Center
Interconnect in QSFP28 form factor, and our IN6450TA, the world’s first 64GBaud dual channel linear
TIA/VGA amplifier. We also announced the new Vega™ family of low power 50/100/200/400G PAM4
Gearbox and Retimer DSPs for system line cards. Leveraging our DSP-based PAM4, the new Gearbox
and Retimer DSPs expand bandwidth capacity of next generation networks, delivering accelerated
connectivity for wired network infrastructure at cloud-scale data centers, enterprise, and service providers.
We also started sampling our M200, an ultra-low power, and high-performance Coherent DSP, supporting
100G and 200G data rates for long haul, metro and data center interconnect applications. We announced
the expansion of our ColorZ® portfolio with ColorZ-Lite™, 100G DWDM in QSFP28 form factor for
campus and data center interconnects. The addition of ColorZ-Lite™ offers campus and data centers a
cost optimized solution for shorter distances up to 20 km. We also expanded our 16nm Polaris™ PAM4
DSP portfolio for next generation 50G-400G cloud deployments. The new Polaris™ PAM4 DSP now
includes products supporting an integrated driver to address the growing demands for lower power and
reduced cost solutions over short reach data center optical connectivity.
In 2018, we announced our 16nm 400Gbps Porrima™ Single-Lambda PAM4 platform, the first complete
56GBaud platform solution for wired network infrastructure including hyperscale cloud data center,
service provider and enterprise network. We also announced the production availability of the Polaris™
16nm CMOS PAM4 platform. The Polaris platform is the industry’s first 16nm 28GBaud PAM4 DSP
that includes integrated driver options for EML and VCSEL lasers to cover a broad range of optical
interconnects from 50G to 400G. The platform also supports a family of discrete EML and VCSEL drivers
and linear TIAs. We started shipping the production version of its M200 LightSpeed-III™, Coherent DSP
with ultra-low power and high-performance supporting 100G and 200G data rates for long haul, metro
and data center interconnect applications. We announced the expansion of its 16nm Porrima™ Single-
Lambda PAM4 platform family, with the complete 100Gbps/56GBaud platform solution for 100G
QSFP28 and SFP-DD DR/FR optical modules for wired network infrastructure including hyperscale
cloud data center, service provider, wireless 5G and enterprise networks. We introduced the industry’s
smallest form factor, lowest power and highest performance 64GBaud quad coherent TIA and driver.
Paired up as a chipset, the new TIA and Driver will enable higher density line cards and pluggable
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•
•
solutions that are critical for next generation 400/600G long haul, metro and data center interconnect
(DCI) applications.
Our products are designed into systems sold by OEMs, including Tier-1 OEMs in the telecom and networking system
markets worldwide. We believe we are one of a limited number of suppliers to these OEMs for the types of products we sell,
and in some cases we may be the sole supplier for certain applications. We sell both directly to these OEMs and to module
manufacturers, ODMs, and subsystems providers that, in turn, sell to these OEMs. During the year ended December 31, 2018,
we sold our products to more than 100 customers. A significant portion of our revenue has been generated by a limited
number of customers. We believe that sales to Microsoft, Huawei, and Cisco, directly and indirectly, through subcontractors,
accounted for approximately 18%, 14%, and 11% of our total revenue, respectively, in the year ended December 31,
2018. Sales to Cyberlink was 11% of our total revenue for the year ended December 31, 2018. We believe that sales to
Microsoft, Huawei, and Cisco, directly and indirectly, through subcontractors, accounted for approximately 17%, 14%, and
11% of our total revenue, respectively, in the year ended December 31, 2017. In the year ended December 31, 2016, we
believe that sales to Huawei and Cisco, directly and indirectly, through subcontractors, accounted for approximately 16% and
12% of our total revenue, respectively. Substantially all of our sales to date, including our sales to Microsoft, Huawei and
Cisco, are made on a purchase order basis. Since the beginning of 2006, we have shipped more than 50 million high-speed
analog and mixed signal semiconductors. Our total revenue was $294.5 million, $348.2 million and $266.3 million for the
years ended December 31, 2018, 2017 and 2016, respectively. The decrease in our revenue in 2018 was primarily a result of
decreased consumption of our long haul and metro products and Cortina legacy and transport products due to announced end
of life programs.
Sales to customers in Asia accounted for 57%, 62% and 70% of our total revenue in 2018, 2017 and 2016, respectively.
Because many of our customers or their OEM manufacturers are located in Asia, we anticipate that a majority of our future
revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in
Asia, we believe that a significant number of the systems designed by these customers are then sold to end-users outside Asia.
In April 2010, we received approval from the government of Singapore to set up an international headquarters from
which to conduct our international operations. Because of its geographic alignment with suppliers and customers, we
established our operations in Singapore to become a new international headquarters office for receiving and fulfilling orders
for product shipped to locations outside the United States. In addition, we built a team of engineering capability in Singapore
both for development as well as testing associated with manufacturing. International operations in Singapore commenced on
May 1, 2010 and during 2010, we transitioned our international operations from the United States to our Singapore subsidiary.
Demand for new features changes rapidly. It is difficult for us to forecast the demand for our products, in part because
of the complex supply chain between us and the end-user markets that incorporate our products. Due to our lengthy product
development cycle, it is critical for us to anticipate changes in demand for our various product features and the applications
they serve to allow sufficient time for product development and design. Our failure to accurately forecast demand can lead
to product shortages that can impede production by our customers and harm our customer relationships. Conversely, our
failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory.
Although revenue generated by each design win and the timing of the recognition of that revenue can vary significantly,
we consider ongoing design wins to be a key factor in our future success. We consider a design win to occur when an OEM
or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under
development. The design win process is typically lengthy, and as a result, our sales cycles will vary based on the market
served, whether the design win is with an existing or new customer and whether our product is under consideration for
inclusion in a first or subsequent generation product. In addition, our customers’ products that incorporate our semiconductors
can be complex and can require a substantial amount of time to define, design and produce in volume. As a result, we can
incur significant design and development expenditures in circumstances where we do not ultimately recognize, or experience
delays in recognizing revenue. Our customers generally order our products on a purchase order basis. We do not have any
long-term purchase commitments (in excess of one year) from any of our customers. Once our product is incorporated into a
customer’s design, however, we believe that our product is likely to continue to be purchased for that design throughout that
product’s life cycle because of the time and expense associated with redesigning the product or substituting an alternative
semiconductor. Our design cycle from initial engagement to volume shipment is typically two to three years. Product life
cycles in the markets we serve typically range from five to 10 years or more and vary by application.
Summary of Consolidated Financial Results
As discussed in more detail below, for the year ended December 31, 2018, compared to the year ended December 31,
2017, we delivered the following financial performance.
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● Total revenue decreased by $53.7 million, or 15% to $294.5 million.
● Gross profit as a percentage of revenue was comparable at 56%.
● Total operating expenses decreased by $27.4 million, or 10% to $239.3 million.
● Loss from operations increased by $4.0 million to $74.2 million.
● Benefit for income taxes was $8.2 million in 2018, compared to $21.2 million in 2017.
● Loss per share increased by $0.41 to $2.19.
● During the year ended December 31, 2018, we reclassified the in-process research and development related to
the ClariPhy acquisition to developed technology and accordingly, started the amortization. In addition, we also
recorded an impairment charge of $7.0 million on a certain investment in non-marketable equity security.
● During the year ended December 31, 2018, we recorded a tax benefit of $8.2 million which included the partial
release of federal valuation allowance resulting from the transfer of an acquired in-process research and
development to developed technology in 2018 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.
The decrease in our revenue for the year ended December 31, 2018 was primarily the result of a lower level of
consumption of our long haul and metro products as well as our Cortina legacy products due to announced end of life
programs, partially offset by increase in consumption of our data center products.
Total operating expenses decreased in 2018 due primarily to an impairment of in-process research and development
cost of $36.8 million in 2017 and cost reduction program, partially offset by increase in stock-based compensation expense
due to higher equity awards. Our expenses mainly 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, to support the growth of our business. Our loss per share increased primarily
due to decrease in gross margin, increase in other expenses, decrease in benefit for income taxes, partially offset by decrease
in operating expenses.
Critical Accounting Policies and Significant Management Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles
(GAAP). In connection with the preparation of our consolidated financial statements, we are required to make assumptions
and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current
trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared.
On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated
financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences
could be material.
Our significant accounting policies are discussed in Note 1 of the Notes to our Consolidated Financial Statements. We
believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported
financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make
estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and
related disclosures with our audit committee.
Revenue Recognition
Prior to January 1, 2018, we recognized revenue when there was persuasive evidence of an arrangement, delivery had
occurred, the fee was fixed or determinable and collection was reasonably assured.
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contract with Customers
(Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1,
2018. The adoption of this guidance resulted in no cumulative effect adjustment as of January 1, 2018. Starting January 1,
2018, we recognize revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue
recognition), rather than deferring recognition until distributors report that they have sold the products to their customers
(known as “sell-through” revenue recognition). The impact on revenue for the year ended December 31, 2018 was an increase
of $3.8 million. The impact on cost of revenue for the year ended December 31, 2018 was an increase of $0.8 million. Results
for reporting periods beginning after January 1, 2018 are presented under the new revenue guidance, while prior periods were
not retrospectively adjusted and continue to be reported in accordance with our historic revenue recognition accounting.
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We recognize revenue when the control of the promised goods or services is transferred to customers in an amount that
reflects the consideration we expect to receive in exchange for such goods or services.
Our products are fully functional at the time of shipment and do not require additional production, modification, or
customization. We recognize revenue upon transfer of control at a point in time when title transfers either upon shipment to
or receipt by the customer, net of accruals for estimated sales returns and allowances. Sales and other taxes we collect are
excluded from revenue. The fee is based on specific products and quantities to be delivered at specified prices, which is
evidenced by a customer purchase order or other persuasive evidence of an arrangement. Certain distributors may receive a
credit for the price discounts associated with the distributors' customers that purchased those products. We estimate the extent
of these distributor price discounts at each reporting period to reduce accounts receivable and revenue. Although we accrue
an estimate of distributor price discount, we do not issue these discounts to the distributor until the inventory is sold to the
distributors' customers. As of December 31, 2018, the estimated price discount was $1.6 million. Payment terms of customers
are typically 30 to 60 days after invoice date. Our products are under warranty against defects in material and workmanship
generally for a period of one or two years. We accrue for estimated warranty cost at the time of sale based on anticipated
warranty claims and actual historical warranty claims experience including knowledge of specific product failures that are
outside of our typical experience.
Occasionally, we enter into license and development agreements with some of its customers and recognizes revenue
from these agreements upon completion and acceptance by the customer of contract deliverables by milestones or as services
are provided, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received prior to
completion of milestones or delivery of services. We believe the milestone method best depicts efforts expended to transfer
services to the customers. Certain contracts may include multiple performance obligations in which we allocate revenues to
each performance obligation based on relative stand-alone selling price. We determine stand-alone selling prices based on
the adjusted market assessment approach or residual approach, if applicable.
We monitor collectability of accounts receivable primarily through review of the accounts receivable aging. Our policy
is to record an allowance for doubtful accounts based on specific collection issues we have identified, aging of underlying
receivables and historical experience of uncollectible balances. As of both December 31, 2018 and 2017, our allowance for
doubtful accounts was $1.2 million and $0.2 million, respectively.
We have not made any material changes in the accounting methodology we use to record the allowance for doubtful
accounts during the past three years. If actual results are not consistent with the assumptions and estimates used, for example,
if the financial condition of the customer deteriorated, we may be required to record additional expense that could materially
negatively impact our operating results. To date, however, substantially all of our receivables have been collected within the
following quarter.
Inventory Valuation
We value our inventory, which includes materials, labor and overhead, at the lower of cost and net realizable value.
Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We periodically write-
down our inventory to the lower of cost and net realizable value based on our estimates that consider historical usage and
future demand. These factors are impacted by market and economic conditions, technology changes, new product
introductions and changes in strategic direction. The calculation of our inventory valuation requires management to make
assumptions and to apply judgment regarding forecasted customer demand and technological obsolescence that may turn out
to be inaccurate. Inventory valuation reserves were $6.2 million and $3.1 million as of December 31, 2018 and 2017,
respectively. Inventory valuation reserves, once established, are not reversed until the related inventory has been sold or
scrapped.
We have not made any material changes in the accounting methodology we use to record inventory reserves during the
past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates
or assumptions that we use to calculate our inventory reserve. However, if estimates regarding customer demand are
inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses
or gains that could be material.
Product Warranty
Our products are under warranty against defects in material and workmanship generally for a period of one or two
years. We accrue for estimated warranty cost at the time of sale based on anticipated warranty claims and actual historical
warranty claims experience including knowledge of specific product failures that are outside of our typical experience. The
warranty obligation is determined based on product failure rates, cost of replacement and failure analysis cost. We monitor
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product returns for warranty-related matters and monitor both a specific and general accrual for the related warranty expense
based on specific circumstances and general historical experience. Our warranty obligation requires management to make
assumptions regarding failure rates and failure analysis costs. If actual warranty costs differ significantly from these estimates,
adjustments may be required in the future, which would adversely affect our gross margins and operating results. The
warranty liability as of December 31, 2018 and 2017 was $0.1 million.
Business Combinations
We use the acquisition method of accounting for business combinations and recognize assets acquired and liabilities
assumed measured at their fair values on the date acquired. This requires us to recognize separately from goodwill the assets
acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as
the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities
assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the
acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may
adjust the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the
measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments are recognized in our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions,
especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed and pre-
acquisition contingencies, where applicable. Although we believe the assumptions and estimates we have made in the past
have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the
management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible
assets we have acquired include, but are not limited to: future expected cash flows from product sales, customer contracts
and acquired technologies, expected costs to develop in-process research and development into commercially viable products,
estimated cash flows from the projects when completed, and discount rates. Unanticipated events and circumstances may
occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill and Long-Lived Assets
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair
value of the acquired net tangible and intangible assets. We evaluate goodwill on an annual basis in the fourth quarter or more
frequently if we believe indicators of impairment exist. Significant management judgment is required in performing periodic
impairment tests. To review for impairment, we first assess qualitative factors to determine whether events or circumstances
lead to a determination that it is more likely than not that the fair value of any of our reporting unit is less than its carrying
amount. Our qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events
or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include:
(i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in
conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance;
or (iv) a sustained decrease in our market capitalization below our net book value. After assessing the totality of events and
circumstances, if we determine that it is not more likely than not that the fair value of any of our reporting unit is less than its
carrying amount, no further assessment is performed. If however, we determine that it is more likely than not that the fair
value of any of our reporting unit is less than its carrying amount, we calculate the fair value of that reporting unit and compare
the fair value to the reporting unit’s net book value. The estimate of implied fair value of goodwill may require valuations of
certain internally generated and unrecognized intangible assets such as our technology, customer relationships, patents and
trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to the excess. If our actual results, or the plans and estimates used in future impairment
analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional
impairment charges.
We assess the impairment of long-lived assets, which consist primarily of property and equipment and intangible assets,
including purchased in-process research and development, whenever events or changes in circumstances indicate that such
assets might be impaired and the carrying value may not be recoverable. Events or changes in circumstances that may indicate
that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative
to expected historical or projected future results of operations, a change in the extent or manner in which an asset is utilized,
significant declines in our overall estimated fair value for a sustained period, shifts in technology, loss of key management
or personnel, changes in our operating model or strategy and competitive forces. If events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows
attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s
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carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future
cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending
on the nature of the assets. Assumptions and estimates about future values and remaining useful lives are complex and often
subjective.
The acquisition of ClariPhy on December 12, 2016 increased our goodwill and identifiable intangible assets by $96.6
million and $236.0 million, respectively. During the year ended December 31, 2017, we abandoned a project related to certain
developed technology and in-process research and development that resulted to an impairment charge of $47.0 million. The
abandonment of the project was primarily related to change in product roadmap following the acquisition of ClariPhy. See
Note 2 to the Notes to our Consolidated Financial Statements. There was no evidence of additional impairment based on the
annual impairment testing for the year ended December 31, 2018.
Stock-Based Compensation
We account for stock-based compensation in accordance with authoritative guidance which requires the measurement
and recognition of compensation expense for all share-based payment awards made to employees and directors based on the
grant date fair values of the awards. The fair value of stock option awards is estimated using the Black-Scholes option pricing
model. The fair value of restricted stock units is based on the fair market value of our common stock on the date of grant.
The performance-based stock units are subject to the achievement of a pre-established revenue goal and earnings per share
on a non-GAAP basis. Once the goals are met, the performance-based stock units are subject to four years of vesting from
the original grant date, contingent upon continuous service. The fair value of the performance-based stock units is calculated
using the same method as our standard restricted stock units described above once the performance goals are met. The value
of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated
statements of operations. If the award has a market condition, we estimate the fair value using Monte Carlo simulation model
and recognize compensation ratably over the service period. We elected to treat share-based payment awards with graded
vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on
a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are
classified in the consolidated statement of operations based on the department to which the related employee reports.
We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to
non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing
model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the
services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period.
The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in
determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value
of underlying stock, expected volatility and expected term. In addition, the recognition of stock-based compensation expense
is impacted by estimated forfeiture rates.
Historically, we granted stock options to employees. We estimated the expected volatility from the historical volatilities
of several unrelated public companies within the semiconductor industry because our common stock has limited trading
history. When selecting the public companies used in the volatility calculation, we selected companies in the semiconductor
industry with comparable characteristics to us, including stage of development, lines of business, market capitalization,
revenue and financial leverage. The weighted average expected life of options was calculated using the simplified method.
This decision was based on the lack of relevant historical data due to our limited experience and the lack of active market for
our common stock. The risk-free interest rate is based on the U.S. Treasury yields in effect at the time of grant for periods
corresponding to the expected term of the options. The expected dividend rate is zero based on the fact that we have not
historically paid dividends and have no intention to pay cash dividends in the foreseeable future. The forfeiture rate is
established based on the historical average period of time that options were outstanding and adjusted for expected changes in
future exercise patterns.
We do not believe there is a reasonable likelihood that there will be material changes in the estimates and assumptions
we use to determine stock-based compensation expense. In the future, if we determine that other valuation models are more
reasonable, the stock-based compensation expense that we record in the future may differ significantly from what we have
recorded using the Black-Scholes option or Monte Carlo simulation pricing models.
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Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when and where the
differences are expected to reverse. We recognize the deferred income tax effects of a change in tax rates in the period of
enactment. We record a valuation allowance to reduce deferred tax assets to the amount that we believe is more likely than
not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, historical levels of income, projections of future income, expectations and risk
associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. To the extent
that we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase
the valuation allowance against deferred tax assets. The determination of recording or releasing a tax valuation allowance is
made, in part, pursuant to an assessment performed by management regarding the likelihood that we will generate sufficient
future taxable income against which the benefits of our deferred tax assets may or may not be realized. This assessment
requires management to exercise significant judgment and make estimates with respect to our ability to generate revenue,
gross profits, operating income and taxable income in future periods. Among other factors, management must make
assumptions regarding current and projected overall business and semiconductor industry conditions, operating efficiencies,
our ability to timely develop, introduce and consistently manufacture new products to meet our customers’ needs and
specifications, our ability to adapt to technological changes and the competitive environment, which may impact our ability
to generate taxable income and, in turn, realize the value of our deferred tax assets. Although we believe that the judgment
we used is reasonable, actual results can differ due to a change in market conditions, changes in tax laws and other factors.
We have valuation allowance against deferred tax assets for the years ended December 31, 2018, 2017 and 2016. The
valuation allowance was established due to negative evidence that included our cumulative losses in the U.S. and various
foreign subsidiaries, after considering permanent tax differences. During the year ended December 31, 2016, we released a
portion of the federal valuation allowance against deferred tax assets as a result of the consolidation of our deferred tax assets
with ClariPhy’s deferred tax liabilities. We also released the entire Singapore valuation allowance as a result of the full
utilization of the Singapore deferred tax asset during the year primarily due to the gain from the sale of the memory product
business, yielding a deferred tax liability as of December 31, 2016. During the year ended December 31, 2017, we released
a portion of the federal and state valuation allowance against certain deferred tax assets that were deemed more likely than
not to be realized. The valuation allowance release resulted in the recognition of an income tax benefit. During the year ended
December 31, 2018, we released a portion of the federal valuation allowance against deferred tax assets as a result of the
transfer of an acquired in-process research and development to developed technology in 2018, which allowed the related
deferred tax liability to be considered a source of income for realizing deferred tax assets.
In accordance with FASB’s guidance on Accounting for Uncertainty in Income Taxes, we perform a comprehensive
review of uncertain tax positions regularly. The guidance prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. We
determine the tax liability for uncertain tax positions based on a two-step process. The first step is to determine whether it is
more likely than not based on technical merits that each income tax position would be sustained upon examination. The
second step is to measure the tax benefit as the largest amount that has a greater than 50% likelihood of being realized upon
ultimate settlement with a tax authority that has full knowledge of all relevant information. The assessment of each tax
position requires significant judgment and estimates. We believe our tax return positions are fully supported, but tax
authorities could challenge certain positions, which may not be fully sustained. All tax positions are periodically analyzed
and adjusted as a result of events, such as the resolution of tax audits, issuance of new regulations or new case law,
negotiations with tax authorities, and expiration of statutes of limitations.
On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act contains significant changes to
U.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effective January 1,
2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries
in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100%
first-year depreciation deduction for certain capital investments. The effect of the tax law changes must be recognized in the
period of enactment. As a result of the change in tax rate, our deferred tax assets and liabilities are required to be remeasured
to reflect their value at a lower tax rate of 21%. SAB 118 allows for a measurement period of up to one year after the enactment
date of the new tax legislation to finalize the recording of the related tax impacts. In accordance with SAB 118, as of December
31, 2017, we made a provisional estimate of the remeasurement of the federal deferred tax assets and liabilities as of December
31, 2017 to reflect the reduced U.S. statutory corporate tax rate to 21%, the mandatory repatriation income which was fully
absorbed by the U.S. net operating loss, the related valuation allowance offset, and valuation allowance release on deferred
tax assets for the federal AMT credit that was made refundable by the Tax Reform Act. During 2018, we elected to account
for GILTI as a period cost in the year the tax is incurred and made changes to its provisional estimates previously recorded
for the mandatory repatriation upon filing of its 2017 U.S. income tax return. The change in the mandatory repatriation income
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was fully absorbed by the U.S. net operating loss, which is subject to valuation allowance, and resulted in no current tax
liability. This measurement period adjustment had no net tax effect after the offsetting change to the valuation allowance. At
December 31, 2018, we have completed the accounting for all of the enactment-date income tax effects of the Tax Reform
Act.
Results of Operations and Key Operating Metrics
The following describes the line items in the statements of operations, which we consider to be our key operating
metrics.
Revenue. We generate revenue from sales of our semiconductor products to end customers. A portion of our products
is sold indirectly to customers through distributors.
We design and develop high-speed analog and mixed signal semiconductor solutions for the communications and
datacenter markets. Our revenue is driven by various trends in these markets. These trends include the deployment and
broader market adoption of next generation 400G technologies in communications and enterprise networks and the timing of
next generation network.
Our revenue is also impacted by changes in the number and average selling prices of our semiconductor products. Our
products are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed
by broader market adoption, higher volumes, and average selling prices that are lower than initial levels.
We operate in industries characterized by rapidly changing technologies and industry standards as well as technological
obsolescence. Our revenue growth is dependent on our ability to continually develop and introduce new products to meet the
changing technology and performance requirements of our customers, diversify our revenue base and generate new revenue
to replace, or build upon, the success of previously introduced products which may be rapidly maturing. As a result, our
revenue is impacted to a more significant extent by product life cycles for a variety of products and to a much lesser extent,
if any, by any single product. We introduced ColorZ® in 2016 and began to ship in commercial volume in 2017. Sales of
ColorZ® comprised 18% and 17% of our total revenue in 2018 and 2017, respectively. In 2012, we introduced and began to
ship in commercial volume a dual, differential input linear transimpedance/variable-gain amplifier that we identify as product
number IN3250TA-SO2D. Sales of IN3250TA-SO2D product comprised 10% and 25% of our total revenue in 2017 and
2016, respectively. There were no other products that generated more than 10% of our total revenue in 2018, 2017 or 2016.
The following table is based on the geographic location to which our product is initially shipped. In most cases this will
differ from the ultimate location of the end-user of a product containing our technology. For sales to our distributors, their
geographic location may be different from the geographic locations of the ultimate end customer. Sales by geography for the
periods indicated were:
2018
Year Ended December 31,
2017
(in thousands)
2016
China ............................................................................................................ $
United States ................................................................................................
Japan .............................................................................................................
Thailand ........................................................................................................
Other .............................................................................................................
$
113,684 $
87,545
7,492
40,884
44,885
294,490 $
114,168 $
92,620
29,061
45,205
67,147
348,201 $
103,071
29,976
36,308
35,837
61,085
266,277
Cost of revenue. Cost of revenue includes cost of materials such as wafers processed by third-party foundries, costs
associated with packaging and assembly, testing and shipping, cost of personnel, including stock-based compensation, as
well as equipment associated with manufacturing support, logistics and quality assurance, warranty costs, write-down of
inventories, amortization of production mask costs, amortization and impairment of developed technology, amortization of
step-up values of inventory, overhead and other indirect costs, such as allocated occupancy and information technology costs.
As some semiconductor products mature and unit volumes increase, their average selling prices may decline. These
declines are often paired with improvements in manufacturing yields and lower wafer, assembly and test costs, which offset
some of the margin reduction that results from lower prices. However, our gross profit, period over period, may fluctuate as
a result of changes in average selling prices due to new product introductions or existing product transitions into larger scale
commercial volumes, manufacturing costs as well as our product and customer mix.
44
Research and development. Research and development expense includes personnel-related expenses, including
salaries, stock-based compensation and employee benefits. It also includes pre-production engineering mask costs, software
license expenses, prototype wafer, packaging and test costs, design and development costs, testing and evaluation costs, third-
party fees paid to consultants, depreciation expense, impairment of in-process research and development, allocated facilities
costs and other indirect costs. All research and development costs are expensed as incurred. We enter into development
agreements with some of our customers. Recoveries from nonrecurring engineering services related to early stage technology
are recorded as an offset to product development expense incurred in support of this effort and serve as a mechanism to
partially recover development expenditures. These reimbursements are recognized upon completion and acceptance by the
customer of contract deliverables or milestones. We expect research and development expense to increase in absolute dollars
as we continue to invest resources to develop more products and enhance our existing product portfolio.
Sales and marketing. Sales and marketing expense consists primarily of salaries, stock-based compensation, employee
benefits, travel, promotions, trade shows, marketing and customer support, commission payments to employees, depreciation
expense and other indirect costs. We expect sales and marketing expense to increase in absolute dollars to support the growth
of our business and promote our products to current and potential customers.
General and administrative. General and administrative expense consists primarily of salaries, stock-based
compensation, employee benefits and expenses for executive management, legal, and finance. In addition, general and
administrative expenses include fees for professional services and other indirect costs. We expect general and administrative
expense to increase in absolute dollars due to the general growth of our business and the costs associated with continuing to
be a public company for, among other things, SEC reporting and compliance, director fees, insurance, transfer agent fees and
similar expenses.
Provision (benefit) for income taxes. For the year ended December 31, 2016, we recorded an income tax benefit of
$15.1 million, which reflects an effective tax rate of (131%). The effective tax rate of (131%) differs from the statutory rate
of 34% primarily due to change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in
profitability, unrecognized tax benefits, stock-based compensation adjustments, transaction cost adjustments and recognition
of research and development credits. The change in valuation allowance during the year ended December 31, 2016 included
an income tax benefit of $17.8 million from the partial release of federal valuation allowance and full release of Singapore
valuation allowance. The partial release of the federal valuation allowance against deferred tax assets resulted from the
consolidation of our federal deferred tax assets with ClariPhy’s federal deferred tax liabilities. The full release of the
Singapore valuation allowance against deferred tax assets resulted from our full utilization of deferred tax asset during the
year primarily due to the gain from the sale of the memory product business. For the year ended December 31, 2017, we
recorded an income tax benefit of $21.2 million, which reflects an effective tax rate of 22%. The effective tax rate of 22%
differs from the statutory rate of 34% primarily due to the effects of the Tax Reform Act that was enacted on December 22,
2017, change in valuation allowance, foreign income taxes provided at lower rates, geographic mix in profitability,
unrecognized tax benefits, stock-based compensation adjustments, and recognition of research and development credits. The
change in valuation allowance during the year ended December 31, 2017 included an income tax benefit of $1.1 million from
the partial release of valuation allowance against certain federal and state deferred tax assets that were deemed more likely
than not to be realized. For the year ended December 31, 2018, we recorded an income tax benefit of $8.2 million, which
reflects an effective tax rate of 8%. The effective tax rate for the year ended December 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, and windfall
tax benefits from stock-based compensation. In addition, the income tax benefit for the year ended December 31, 2018
included the partial release of federal valuation allowance resulting from the transfer of an acquired in-process research and
development to developed technology in 2018 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, partially offset by
income tax expense for the accrual of unrecognized tax benefit for foreign taxes.
45
The following table sets forth a summary of our statement of operations for the periods indicated:
2018
Year Ended December 31,
2017
(in thousands)
2016
Revenue ................................................................................. $
Cost of revenue ......................................................................
Gross profit ............................................................................
Operating expenses:
Research and development .........................................
Sales and marketing ....................................................
General and administrative .........................................
Total operating expenses .......................................................
Income (loss) from operations ...............................................
Interest expense .....................................................................
Other income .........................................................................
Income (loss) before income taxes from continuing
operations ..........................................................................
Benefit for income taxes ........................................................
Net income (loss) from continuing operations ......................
Discontinued operations:
Gain from sale ................................................................
Loss from discontinued operations.................................
Provision for income taxes .............................................
Net income from discontinued operations .............................
Net income (loss) ........................................................ $
294,490 $
129,345
165,145
167,924
43,080
28,302
239,306
(74,161)
(32,209)
2,408
(103,962)
(8,211)
(95,751)
—
—
—
—
(95,751) $
348,201 $
151,698
196,503
200,539
42,381
23,782
266,702
(70,199)
(29,842)
3,961
(96,080)
(21,176)
(74,904)
—
—
—
—
(74,904) $
266,277
85,581
180,696
108,013
26,534
21,201
155,748
24,948
(17,406)
3,914
11,456
(15,057)
26,513
78,544
(3,802)
(1,799)
72,943
99,456
The following table sets forth a summary of our statement of operations as a percentage of each line item to the revenue:
Revenue ................................................................................
Cost of revenue .....................................................................
Gross profit ...........................................................................
Operating expenses:
Research and development ............................................
Sales and marketing .......................................................
General and administrative ............................................
Total operating expenses ......................................................
Income (loss) from operations ..............................................
Interest expense ....................................................................
Other income ........................................................................
Loss before income taxes from continuing operations .........
Benefit for income taxes .......................................................
Net income (loss) from continuing operations ......................
Discontinued operations:
Gain from sale ...............................................................
Loss from discontinued operations ................................
Provision for income taxes ............................................
Net income from discontinued operations ............................
Net income (loss) .......................................................
2018
Year Ended December 31,
2017
2016
100 %
44
56
100%
44
56
57
14
10
81
(25 )
(11 )
1
(35 )
(3 )
(32 )
—
—
—
—
(32 )%
57
12
7
76
(20)
(9)
1
(28)
(6)
(22)
—
—
—
—
(22)%
100%
32
68
40
10
8
58
10
(7)
1
4
(6)
10
29
(1)
(1)
27
37%
46
Comparison of the Years Ended December 31, 2018, 2017 and 2016
Revenue
Year Ended December 31,
2017
2018
Amount
2016
(dollars in thousands)
266,277 $
Change
2018
2017
%
Amount
%
Revenue ................................ $
294,490 $
348,201 $
(53,711) (15%) $
81,924 31%
Revenue for the year ended December 31, 2018 decreased by $53.7 million mainly due to decrease in number of units
sold, partially offset by increase in average selling price (ASP). Revenue for the year ended December 31, 2018 decreased
by $53.7 million primarily due to decline in revenue from long haul and metro products by $62.5 million and Cortina legacy
and transport products by $23.7 million. The decreases are partially offset by an increase in revenue from data center products
by $32.5 million. The ASP for the year ended December 31, 2018 increased by 55% due to product mix mainly from decrease
in number of units sold of lower ASP products. The decline in revenue from long haul and metro products was partly driven
by China original equipment manufacturers (OEMs) due to an oversupply which peaked in 2017. The remaining decline in
revenue came from North American and European OEMs which also reflected a similar market weakness in communication
products. The decline in revenue from Cortina legacy and transport products was due to end of life programs for certain older
products initiated in 2017, the last shipments of which were made in the first quarter of 2018.
Revenue for the year ended December 31, 2017 increased by $81.9 million mainly due to an increase in the number of
units sold by 69%, partially offset by a decrease in ASP of 22%. The sales volumes were up in particular due to announced
end of life programs on the legacy components. The ASP decreased by 22% primarily due to product mix. Legacy products
contributed to the significant decline in ASP because of larger shipments to customers due to end of life programs we initiated
in 2017. In addition, revenue from high-priced products such as quad linear driver and optical PHY products decreased.
Excluding legacy and ClariPhy products, the ASP of other products generally increased due to product mix, mainly due to
ColorZ®.
Cost of Revenue and Gross Profit
Year Ended December 31,
2018
2018
2017
2016
Amount %
2017
Amount %
Change
Cost of revenue .......................... $ 129,345 $
Gross profit ................................ 165,145
Gross profit as a percentage of
(dollars in thousands)
151,698 $
196,503
85,581 $ (22,353) (15%) $ 66,117 77%
15,807 9%
180,696
(31,358) (16%)
revenue ..................................
56%
56%
68%
— —
— (12%)
Cost of revenue for the year ended December 31, 2018 decreased by $22.4 million due mainly to impairment of certain
developed technology in 2017, amortization of inventory fair value step-up related to acquired ClariPhy inventories sold in
2017 and decrease in revenue. Gross profit as a percentage of revenue for the year ended December 31, 2018 was comparable
to 2017.
Cost of revenue and gross profit for the year ended December 31, 2017 increased by $66.1 million and $15.8 million,
respectively, compared to the prior year primarily due to an increase in revenue from sales of ColorZ®, ClariPhy products
and Cortina legacy components. In addition, we recorded an impairment charge of $10.2 million of certain developed
technology from the ClariPhy acquisition during 2017. Gross profit as a percentage of revenue decreased, due to impairment
charge of $10.2 million of certain developed technology, increase in amortization of inventory fair value step-up related to
acquired ClariPhy inventories sold in 2017 of $8.4 million, increase in amortization of acquired ClariPhy intangible assets of
$16.3 million and product mix.
47
Research and Development
Year Ended December 31,
2018
2017
2016
2018
Amount %
2017
Amount %
(dollars in thousands)
Change
Research and development ................. $
167,924 $ 200,539 $ 108,013 $ (32,615) (16%) $ 92,526 86%
Research and development expenses for the year ended December 31, 2018 decreased by $32.6 million primarily due
to impairment of certain in-process research and development of $36.8 million in 2017. Salary and employee benefits
decreased by $5.7 million due to completion of accrual of retention bonus of employees from the ClariPhy acquisition,
reduction in employee headcount as a result of restructuring and vacation usage. In addition, testing, laboratory supplies, and
consulting expenses decreased by $4.5 million due to cost reduction efforts implemented. These decreases were partially
offset by an increase in equity awards, which resulted in a $8.6 million increase in stock-based compensation expense. In
addition, for the year ended December 31, 2017, we recorded reimbursement from a customer related to research and
development of $3.0 million and none in 2018. Depreciation, information technology (IT) and allocated expenses increased
by $2.8 million due to an increase in equipment, information technology expenses and higher engineering activities of
operations group.
Research and development expense for the year ended December 31, 2017 increased by $92.5 million primarily due
to an increase in research and development headcount, salaries and equity awards, which resulted in increase in personnel
costs and stock-based compensation expense by $15.8 million and $11.5 million, respectively. During 2017, we abandoned
a project related to in-process research and development costs, which resulted in an impairment charge of $36.8 million. CAD
software tool license expense increased by $9.3 million due to an increase in headcount and engineering activities. Testing,
laboratory supplies, packaging and pre-production engineering mask costs increased by $2.6 million. Depreciation, consulting
and allocated expenses increased by $14.3 million due to an increase in equipment and research and development activities.
The increase in research and development expense was primarily driven by the acquisition of ClariPhy and our strategy to
continue to expand our product offerings and enhance our existing product offerings.
Sales and Marketing
Sales and marketing ..................... $
43,080 $
42,381 $
699 2% $
15,847 60%
Year Ended December 31,
2017
2018
Change
2018
2017
%
Amount
%
Amount
2016
(dollars in thousands)
26,534 $
Sales and marketing expenses for the year ended December 31, 2018 increased by $0.7 million primarily due to an
increase in personnel costs, including stock-based compensation expense of $3.2 million due to higher equity awards. The
increase in the year ended December 31, 2018 was partially offset by decrease in commission, supplies, travel and allocated
expenses by $2.0 million, due to lower revenue and cost reduction efforts implemented.
Sales and marketing expense for the year ended December 31, 2017 increased by $15.8 million, primarily due to an
increase in personnel costs, including stock-based compensation expense of $7.1 million due in part to the addition of
ClariPhy employees and to support increasing sales activities from new products. In addition, amortization of intangible
assets related to the ClariPhy acquisition increased by $8.5 million.
General and Administrative
Change
Year Ended December 31,
2017
2018
2016
2018
Amount
(dollars in thousands)
%
2017
Amount
%
General and administrative .......... $
28,302 $
23,782 $
21,201 $
4,520 19% $
2,581 12%
General and administrative expenses for the year ended December 31, 2018 increased by $4.5 million primarily due to
an increase in salaries and stock-based compensation by $4.0 million due mainly to higher equity awards. During the year
ended December 31, 2018, we recorded a bad debt expense of $0.6 million and a loss on a settlement of claims related to the
ClariPhy acquisition of $2.2 million. The increases were partially offset by decrease in professional, consulting fees and
48
public company filing fees by $0.9 million due to higher fees in 2017 in relation to the acquisition of ClariPhy. In addition,
allocated expenses such as facility, human resources and information technology expenses decreased by $0.8 million due to
cost reduction efforts implemented.
General and administrative expenses for the year ended December 31, 2017 increased by $2.6 million, primarily due
to salaries and stock-based compensation of $1.3 million, which resulted from a mix of salary increases and new hires.
Accounting and consulting fees increased by $0.8 million in relation to the acquisition of ClariPhy. Allocated expenses
increased by $1.1 million mainly due to an increase in facility leases and information technology expenses. The increases
were partially offset by a decrease in outside legal fees by $0.9 million due to expenses incurred in 2016 in connection with
the ClariPhy acquisition.
Benefit for Income Taxes
Year Ended December 31,
2018
2017
2016
2018
Amount %
2017
Amount %
(dollars in thousands)
Change
Benefit for income taxes ..................... $
(8,211) $
(21,176) $
(15,057) $
12,965 61 % $
(6,119) (41%)
For the year ended December 31, 2018, we recorded an income tax benefit of $8.2 million, which reflects an effective
tax rate of 8%. The effective tax rate for the year ended December 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, and windfall tax benefits from
stock-based compensation. In addition, the income tax benefit for the year ended December 31, 2018 included the partial
release of federal valuation allowance resulting from the transfer of an acquired in-process research and development to
developed technology in 2018 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, partially offset by income tax expense for the
accrual of unrecognized tax benefit for foreign taxes.
For the year ended December 31, 2017, we recorded an income tax benefit of $21.2 million, which reflects an effective
tax rate of 22%. The effective tax rate of 22% differs from the statutory rate of 34% primarily due to the effects of the Tax
Reform Act that was enacted on December 22, 2017, change in valuation allowance, foreign income taxes provided at lower
rates, geographic mix in profitability, unrecognized tax benefits, stock-based compensation adjustments, and recognition of
research and development credits. The change in valuation allowance during the year ended December 31, 2017, included an
income tax benefit of $1.1 million from the partial release of federal and state valuation allowance.
For the year ended December 31, 2016, we recorded an income tax benefit of $15.1 million, which reflects an effective
tax rate of (131%). The effective tax rate of (131%) differs from the statutory rate of 34% primarily due to the change in
valuation allowance, foreign income taxes provided at lower rates, geographic mix in profitability, unrecognized tax benefits,
stock-based compensation adjustments, transaction cost adjustments, and recognition of research and development credits.
The change in valuation allowance during the year ended December 31, 2016 included an income tax benefit of $17.8 million
from the partial release of federal valuation allowance and full release of the Singapore valuation allowance. The partial
release of the federal valuation allowance against deferred tax assets resulted from the consolidation of our federal deferred
tax assets with ClariPhy’s federal deferred tax liabilities. The full release of the Singapore valuation allowance against
deferred tax assets resulted from our full utilization of deferred tax asset during the year primarily due to the gain from the
sale of the memory product business.
Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes
earned in the United States and in jurisdictions with a tax rate lower than the U.S. statutory rate, as well as a number of other
factors, including excess tax benefits from share-based compensation, settlement of tax contingency items, and the impact of
new legislation.
Liquidity and Capital Resources
As of December 31, 2018, we had cash and cash equivalents and investments in marketable securities of $407.4 million.
Our primary uses of cash are to fund operating expenses, purchase inventory, 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
49
accounts receivable from our revenue. In 2016 and 2015, we issued convertible debt, which resulted in an increase in cash
and cash equivalents. 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 timing
of shipments and payment cycles of our major customers.
The following table summarizes our cash flows for the periods indicated:
2018
Years Ended December 31,
2017
(in thousands)
2016
Net cash provided by operating activities ............................... $
Net cash used in investing activities .......................................
Net cash provided by (used in) financing activities ................
Net increase (decrease) in cash and cash equivalents ............. $
78,159 $
(56,961)
(12,630)
8,568 $
77,308 $
(38,341)
(20,384)
18,583 $
63,073
(448,213)
246,963
(138,177)
Net Cash Provided by Operating Activities
Net cash provided by operating activities in 2018 primarily reflected depreciation and amortization of $82.7 million,
stock-based compensation expense of $63.9 million, impairment of non-marketable equity investment of $7.0 million,
accretion of convertible debt and amortization of issuance expenses of $26.4 million, decrease in accounts receivable of $6.7
million and prepaid expenses and other assets of $0.5 million and increases in accounts payable of $2.0 million and deferred
revenue of $5.0 million, partially offset by a net loss of $95.8 million, deferred income taxes of $8.6 million, net unrealized
gain on equity investments of $2.4 million, increases in inventories of $1.3 million, decreases in accrued expenses of $4.9
million and other liabilities of $1.1 million, and change in income tax payable/receivable of $1.7 million. Our accounts
receivable decreased due mainly to collections. Our prepaid and other assets decreased due to amortization. Our inventories
and accounts payable increased due to an increase in production volume for shipment in the first quarter of 2019. Our deferred
revenue increased due to billing to a customer in which revenue will be recognized in the future. Our accrued expenses
decreased mainly due to the timing of payment of employee-related expenses. Other liabilities decreased due to payment of
liability to a customer related to the ClariPhy acquisition.
Net cash provided by operating activities in 2017 primarily reflected depreciation and amortization of $77.9 million,
stock-based compensation expense of $44.8 million, impairment of intangible assets of $47.0 million, accretion of convertible
debt of $24.6 million, amortization of premiums on marketable securities of $1.0 million, decreases in prepaid expenses and
other assets of $2.3 million, and increase in accounts payable of $1.7 million, partially offset by a net loss of $74.9 million,
deferred income taxes of $22.4 million, a change in income tax payable/receivable of $0.6 million, increase in accounts
receivable of $17.4 million, and decreases in deferred revenue of $3.2 million, accrued expenses of $0.6 million and other
liabilities of $3.0 million. Our prepaid expenses and other assets decreased mainly due to receipt of funds for a claim from
escrow related to the ClariPhy acquisition. Our accounts payable increased due to an increase in production volume and
timing of payments. Our accounts receivable increased due to higher product shipments to customers and longer payment
terms of some customers. Our deferred revenue decreased due to lower inventory in the distributors. Our accrued expenses
and other liabilities decreased mainly due to the timing of payments.
Net cash provided by operating activities in 2016 primarily reflected net income of $99.5 million, depreciation and
amortization of $31.2 million, stock-based compensation of $30.2 million, amortization of deferred tax charge of $0.9 million,
amortization of premiums on marketable securities of $1.5 million, accretion of convertible debt and amortization of issuance
expenses of $14.2 million, a change in income tax payable/receivable of $1.4 million, an increase in accounts payable of $3.5
million and other liabilities by $2.0 million, partially offset by a gain from sale of discontinued operations and cost method
investment of $79.7 million, deferred income taxes of $15.5 million, increases in accounts receivable of $17.0 million,
inventories of $6.4 million, prepaid expenses of $1.4 million and a decrease in deferred revenue of $1.3 million. Our accounts
payable increased due to an increase in production volume. Our other liabilities increased due to amounts payable to Rambus.
Our accounts receivable increased due to higher product shipments to customers and longer credit term. Our inventories
increased as a result of growing production for expected delivery to customers in the first quarter of 2017. Our prepaid
expenses and other assets increased due to additional subscriptions. Our deferred revenue decreased due to the sale of our
memory product business.
Net Cash Used in Investing Activities
Net cash used in investing activities in 2018 primarily consisted of purchases of marketable securities of $248.0 million,
purchases of property and equipment of $31.7 million, purchases of equity investments of $12.8 million, and payment of debt
50
related to purchase of intangible assets of $21.4 million, partially offset by proceeds from maturities and sales of marketable
securities of $254.5 million and proceeds from sale of equity investment of $2.4 million.
Net cash used in investing activities in 2017 consisted of cash used to purchase investment in marketable securities of
$261.2 million, payment of debt related to purchase of intangible assets of $16.1 million, purchases of property and equipment
of $37.4 million, mainly for laboratory, production and computer equipment, and remittance of remaining balance due to
stockholders of ClariPhy of $1.8 million, partially offset by sales and maturities of marketable securities of $267.5 million
and proceeds from the sale of discontinued operations previously held in escrow of $10.7 million.
Net cash used in investing activities in 2016 consisted of cash used to purchase investment in marketable securities of
$330.6 million, the acquisition of ClariPhy for $294.4 million, net of cash acquired, purchases of property and equipment of
$22.3 million, mainly for laboratory, production and computer equipment and leasehold improvements for our offices, and
the purchase of minority interest in an early stage private companies for $8.0 million, partially offset by sales and maturities
of marketable securities of $122.1 million, proceeds from the sale of discontinued operations of $78.8 million and cost method
investment of $6.3 million.
Net Cash Provided by (Used in) Financing Activities
Net cash used in financing activities in 2018 primarily consisted of minimum tax withholding paid on behalf of
employees for restricted stock of $19.1 million and payment of equipment financing obligations of $0.5 million, partially
offset by proceeds from exercise of stock options and employee stock purchase plan of $6.6 million and repayment of long-
term loan provided to a supplier of $0.4 million.
Net cash used by financing activities in 2017 consisted primarily of minimum tax withholding paid on behalf of
employees for restricted stock units of $27.7 million and payment of equipment financing obligations of $1.0 million, partially
offset by proceeds from the exercise of stock options and employee stock purchase plan totaling $8.0 million and repayment
of long-term loan provided to a supplier of $0.3 million.
Net cash provided by financing activities in 2016 consisted primarily of net proceeds from issuance of convertible debt
of $279.5 million and proceeds from the exercise of stock options and employee stock purchase plan of $11.3 million. This
was partially offset by the purchase of capped call options related to convertible debt issued of $22.5 million, minimum tax
withholding paid on behalf of employees for net share settlement of $20.4 million and a loan to a supplier of $0.7 million.
Operating and Capital Expenditure Requirements
Our principal sources of liquidity as of December 31, 2018 consisted of $407.4 million of cash, cash equivalents and
investments in marketable securities. Based on our current operating plan, we believe that our existing cash and cash
equivalents and investments in marketable securities from operations will be sufficient to finance our operational cash needs
through at least the next 12 - 18 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 I, “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 equity or 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.
51
Contractual Obligations, Commitments and Contingencies
The following table summarizes our outstanding contractual obligations as of December 31, 2018:
Payments due by period
Less
Than
1 Year
Total
1-3
Years
(in thousands)
3-5
Years
More
Than
5 Years
Convertible debt ....................................................... $ 517,500
11,644 $
Interest payable on convertible debt .........................
13,758
Operating lease obligations ......................................
32,562
Obligations related to software license intangibles ..
3,032
Obligations under service contract ...........................
958
Obligations under equipment financing ...................
— $
4,744
4,588
23,697
1,501
501
517,500
6,900
4,135 $
8,865
1,531
457
—
—
3,337 $
—
—
—
1,698
—
—
—
As of December 31, 2018, we recorded a liability for our uncertain tax position of $0.7 million. We are unable to
reasonably estimate the timing of payments in individual years due to uncertainties in the timing of the effective settlement
of tax positions.
We depend upon third-party subcontractors to manufacture our wafers. Our subcontractor relationships typically allow
for the cancellation of outstanding purchase orders, but require payment of all expenses incurred through the date of
cancellation. As of December 31, 2018, the total value of open purchase orders for wafers was approximately $8.6 million.
As of December 31, 2018, we have a commitment to pay $0.7 million of mask costs.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, such as the use of structured finance,
special purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of the Notes to our Consolidated Financial Statements for information regarding recently issued accounting
pronouncements.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We had cash and cash equivalents and investments in marketable securities of $407.4 million and $405.2 million at
December 31, 2018 and December 31, 2017, respectively, which was held for working capital purposes. Our exposure to
market interest-rate risk relates primarily to our investment portfolio. We do not use derivative financial instruments to hedge
the market risks of our investments. We manage our total portfolio to encompass a diversified pool of investment-grade
securities to preserve principal and maintain liquidity. We place our investments with high-quality issuers, money market
funds and debt securities. Our investment portfolio as of December 31, 2018 consisted of money market funds, municipal
bonds, corporate bonds, variable rate demand notes, commercial paper and asset-backed securities. Investments in both fixed
rate and floating rate instruments carry a degree of interest rate risk. Fixed rate securities may have their market value
adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes
in interest rates or if the decline in fair value of our publicly traded debt investments is judged to be other-than-temporary.
We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in
interest rates. However, because any debt securities we hold are classified as available-for-sale, no gains or losses are realized
in the income statement due to changes in interest rates unless such securities are sold prior to maturity or unless declines in
value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains
and losses, net of applicable taxes, included in accumulated other comprehensive income (loss), reported in a separate
component of stockholders' equity. Although we currently expect that our ability to access or liquidate these investments as
needed to support our business activities will continue, we cannot ensure that this will not change. We believe that, if market
interest rates were to change immediately and uniformly by 10% from levels at December 31, 2018, the impact on the fair
value of these securities or our cash flows or income would not be material.
In a low interest rate environment, as short-term investments mature, reinvestment can occur at less favorable market
rates. Given the short-term nature of certain investments, the current interest rate environment may negatively impact our
investment income.
As of December 31, 2018, we had outstanding debt of $517.5 million in the form of convertible notes. The fair value of
our convertible notes is subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value
of our convertible notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair
value of our convertible notes will generally increase as our common stock price increases and will generally decrease as our
common stock price declines in value. The interest and market value changes affect the fair value of our convertible notes
but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
Our cash and cash equivalents and investment in marketable securities at December 31, 2018 consisted of $370.2 million
held domestically, with the remaining balance of $37.2 million held by foreign subsidiaries. There may be adverse tax effects
upon repatriation of these funds to the United States. We do not plan to repatriate cash balances from foreign subsidiaries to
fund our operations in the United States.
Foreign Currency Risk
To date, our international customer and vendor agreements have been denominated almost exclusively in United States
dollars. Accordingly, we have limited exposure to foreign currency exchange rates and currently enter into immaterial foreign
currency hedging transactions.
53
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ..............................................................................................
Consolidated Balance Sheets .............................................................................................................................................
Consolidated Statements of Income (Loss) .......................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) .............................................................................................
Consolidated Statements of Stockholders’ Equity ............................................................................................................
Consolidated Statements of Cash Flows ...........................................................................................................................
Notes to Consolidated Financial Statements .....................................................................................................................
55
57
58
59
60
61
62
54
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Inphi Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Inphi Corporation and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss),
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of operations and cash flows for each of the three
years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
revenues from contracts with customers as of January 1, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
55
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 28, 2019
We have served as the Company’s auditor since 2002.
56
Inphi Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents .................................................................................... $
Investments in marketable securities ....................................................................
Accounts receivable, net .......................................................................................
Inventories ............................................................................................................
Prepaid expenses and other current assets ............................................................
Total current assets ....................................................................................
Property and equipment, net ............................................................................................
Goodwill ..........................................................................................................................
Identifiable intangible assets, net ....................................................................................
Other assets, net ...............................................................................................................
Total assets ......................................................................................... $
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable .................................................................................................. $
Deferred revenue ..................................................................................................
Accrued employee expenses .................................................................................
Other accrued expenses ........................................................................................
Other current liabilities .........................................................................................
Total current liabilities ...............................................................................
Convertible debt ..............................................................................................................
Other long-term liabilities ...............................................................................................
Total liabilities ...........................................................................................
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares
issued ................................................................................................................
Common stock, $0.001 par value; 500,000,000 shares authorized; 44,292,722
and 42,780,229 issued and outstanding at December 31, 2018 and 2017,
respectively .......................................................................................................
Additional paid-in capital .....................................................................................
Accumulated deficit ..............................................................................................
Accumulated other comprehensive income ..........................................................
Total stockholders’ equity ..........................................................................
Total liabilities and stockholders’ equity......................................................................... $
December 31,
2018
2017
172,018 $
235,339
61,271
33,052
9,600
511,280
70,740
104,502
180,447
22,904
889,873 $
15,891 $
5,432
11,206
7,595
24,319
64,443
447,825
10,911
523,179
163,450
241,737
67,993
31,721
12,208
517,109
60,344
104,502
222,933
12,618
917,506
14,721
435
15,214
8,290
21,387
60,047
421,431
24,627
506,105
—
—
44
536,157
(169,896)
389
366,694
889,873 $
43
484,934
(74,145)
569
411,401
917,506
The accompanying notes are an integral part of these consolidated financial statements.
57
Inphi Corporation
Consolidated Statements of Income (Loss)
(in thousands, except share and per share amounts)
Year Ended December 31,
2017
2018
2016
Revenue ............................................................................................. $
Cost of revenue ..................................................................................
Gross profit ........................................................................................
Operating expenses:
Research and development ................................................................
Sales and marketing ..........................................................................
General and administrative ................................................................
Total operating expenses ........................................................
Income (loss) from operations ...........................................................
Interest expense .................................................................................
Other income, net ..............................................................................
Income (loss) before income taxes from continuing operations ........
Benefit for income taxes ....................................................................
Net income (loss) from continuing operations ..................................
Discontinued operations:
Gain from sale ...................................................................................
Loss from discontinued operations ....................................................
Provision for income taxes ................................................................
Net income from discontinued operations .........................................
294,490 $
129,345
165,145
348,201 $
151,698
196,503
167,924
43,080
28,302
239,306
(74,161 )
(32,209 )
2,408
(103,962 )
(8,211 )
(95,751 )
—
—
—
—
200,539
42,381
23,782
266,702
(70,199)
(29,842)
3,961
(96,080)
(21,176)
(74,904)
—
—
—
—
Net income (loss) ....................................................................... $
(95,751 ) $
(74,904) $
Earnings per share:
Basic ...........................................................................................
Net income (loss) from continuing operations ........................... $
Net income from discontinued operations ..................................
Basic earnings per share ............................................................. $
Diluted ........................................................................................
Net income (loss) from continuing operations ........................... $
Net income from discontinued operations ..................................
Diluted earnings per share .......................................................... $
Weighted-average shares used in computing earnings per share:
(2.19 ) $
—
(2.19 ) $
(2.19 ) $
—
(2.19 ) $
(1.78) $
—
(1.78) $
(1.78) $
—
(1.78) $
266,277
85,581
180,696
108,013
26,534
21,201
155,748
24,948
(17,406)
3,914
11,456
(15,057)
26,513
78,544
(3,802)
(1,799)
72,943
99,456
0.65
1.80
2.45
0.60
1.65
2.25
Basic ...........................................................................................
Diluted ........................................................................................
43,690,581
43,690,581
42,165,213
42,165,213
40,565,433
44,124,881
The accompanying notes are an integral part of these consolidated financial statements.
58
Inphi Corporation
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income (loss) .............................................................................. $
(95,751) $
(74,904) $
99,456
Year Ended December 31,
2017
2018
2016
Other comprehensive income (loss):
Available for sale investments:
Change in unrealized gain or loss, net of $0, $0, and $0 tax
expense in 2018, 2017 and 2016, respectively .......................
Realized gain reclassified into earnings, net of tax ....................
(179)
(1)
(9)
(1)
Comprehensive income (loss) ........................................................... $
(95,931) $
(74,914) $
(172)
(5)
99,279
The accompanying notes are an integral part of these consolidated financial statements.
59
Inphi Corporation
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Balance at December 31, 2015 ...... 39,389,290 $
Issuance of common stock from
Common Stock
Shares
Amount
39 $
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income
Total
Stock-
holders’
Equity
392,616 $
(102,741) $
756 $
290,670
exercise of stock options ...........
587,229
1
5,786
—
Issuance of common stock from
restricted stock unit grants, net
of shares withheld for tax .......... 1,041,743
Issuance of common stock from
1
(20,478 )
employee stock purchase plan ...
285,101
—
5,518
Stock-based compensation
expense ......................................
Conversion feature of convertible
debt, net of issuance costs .........
Purchase of capped calls ...............
Net income ....................................
Cumulative effect of change in
—
accounting principle ..................
Other comprehensive loss, net ......
—
Balance at December 31, 2016 ...... 41,303,363 $
Issuance of common stock from
—
—
30,192
—
—
—
—
—
—
—
—
41 $
68,834
(22,540 )
—
—
—
459,928 $
—
—
—
—
—
99,456
5,261
—
1,976 $
exercise of stock options ...........
300,982
1
2,174
—
Issuance of common stock from
restricted stock unit grants, net
of shares withheld for tax .......... 1,004,785
Issuance of common stock from
1
(27,776 )
employee stock purchase plan ...
171,099
—
5,776
Stock-based compensation
expense ......................................
—
—
44,832
—
—
—
Cumulative effect of change in
accounting principle ..................
—
—
Net loss .........................................
—
Other comprehensive loss, net ......
Balance at December 31, 2017 ...... 42,780,229 $
Issuance of common stock from
—
—
—
43 $
—
—
—
484,934 $
(1,217)
(74,904)
—
(74,145) $
exercise of stock options ...........
187,742
—
719
—
Issuance of common stock from
restricted stock unit grant, net of
shares withheld for tax .............. 1,041,258
Issuance of common stock from
1
(19,286 )
employee stock purchase plan ...
283,493
—
5,906
—
—
Stock-based compensation
expense ......................................
—
—
Net loss .........................................
—
Other comprehensive loss, net ......
Balance at December 31, 2018 ...... 44,292,722 $
—
—
—
44 $
63,884
—
—
536,157 $
—
(95,751)
—
(169,896) $
—
—
—
—
—
—
—
—
(177)
579 $
—
—
—
—
—
—
(10)
569 $
—
—
—
—
—
(180)
389 $
5,787
(20,477)
5,518
30,192
68,834
(22,540)
99,456
5,261
(177)
462,524
2,175
(27,775)
5,776
44,832
(1,217)
(74,904)
(10)
411,401
719
(19,285)
5,906
63,884
(95,751)
(180)
366,694
The accompanying notes are an integral part of these consolidated financial statements.
60
Inphi Corporation
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income (loss) .................................................................................................... $
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ........................................................................
Stock-based compensation ..............................................................................
Gain from sale of discontinued operations ......................................................
Gain from sale of cost method investment ......................................................
Loss (gain) on disposal and abandonment of property and equipment ............
Net unrealized gain on equity investments ......................................................
Impairment of non-marketable equity investment ...........................................
Impairment of intangible assets .......................................................................
Deferred income taxes .....................................................................................
Amortization of deferred tax charge ................................................................
Accretion of convertible debt and amortization of issuance expenses.............
Amortization of premiums (discount) on marketable securities ......................
Other noncash items ........................................................................................
Changes in assets and liabilities:
Accounts receivable ................................................................................
Inventories ...............................................................................................
Prepaid expenses and other assets ...........................................................
Income tax payable/receivable ................................................................
Accounts payable ....................................................................................
Accrued expenses ....................................................................................
Deferred revenue .....................................................................................
Other liabilities ........................................................................................
Net cash provided by operating activities ........................................
Cash flows from investing activities
Purchases of property and equipment .....................................................................
Proceeds from sale or disposal of property and equipment .....................................
Purchases of marketable securities ..........................................................................
Sales of marketable securities .................................................................................
Maturities of marketable securities .........................................................................
Proceeds from sale of equity investment .................................................................
Proceeds from sale of discontinued operations .......................................................
Acquisition of business, net of cash acquired ..........................................................
Payment related to purchase of software license intangible asset ...........................
Purchases of equity investment in private companies .............................................
Net cash used in investing activities ................................................
Cash flows from financing activities
Proceeds from exercise of stock options .................................................................
Proceeds from employee stock purchase plan .........................................................
Proceeds from issuance of convertible debt, net of issuance costs ..........................
Purchase of capped call options ..............................................................................
Minimum tax withholding paid on behalf of employees for net share settlement ...
Long-term loan ........................................................................................................
Payment of equipment financing obligations ..........................................................
Net cash provided by (used in) financing activities .........................
Net increase (decrease) in cash and cash equivalents ..............................................
Cash and cash equivalents at beginning of year ......................................................
Cash and cash equivalents at end of year ................................................................ $
Supplemental cash flow information .......................................................................
Income taxes paid ............................................................................................ $
Interest paid .....................................................................................................
Supplemental disclosure of non-cash investing and financing activities .................
Year Ended December 31,
2017
2016
2018
(95,751) $
(74,904) $
99,456
82,719
63,884
—
—
331
(2,441)
7,000
—
(8,628)
—
26,394
(583)
2
6,722
(1,331)
549
(1,671)
1,963
(4,902)
4,997
(1,095)
78,159
(31,713)
145
(248,038)
11,654
242,825
2,414
—
—
(21,437)
(12,811)
(56,961)
719
5,906
—
—
(19,118)
405
(542)
(12,630)
8,568
163,450
172,018 $
77,855
44,833
—
—
(174)
—
—
47,014
(22,428)
—
24,574
1,040
(10)
(17,392)
318
2,272
(638)
1,655
(554)
(3,195)
(2,958)
77,308
(37,437)
100
(261,247)
85,163
182,299
—
10,690
(1,800)
(16,109)
—
(38,341)
2,214
5,776
—
—
(27,673)
333
(1,034)
(20,384)
18,583
144,867
163,450 $
31,216
30,192
(78,544)
(1,138)
—
—
—
—
(15,539)
938
14,178
1,496
(5)
(17,028)
(6,384)
(1,389)
1,411
3,523
(45)
(1,280)
2,015
63,073
(22,348)
—
(330,592)
5,504
116,627
6,345
78,750
(294,444)
(55)
(8,000)
(448,213)
5,748
5,518
279,459
(22,540)
(20,477)
(725)
(20)
246,963
(138,177)
283,044
144,867
2,155 $
5,818
2,158 $
5,194
156
2,537
Software license intangible assets acquired .....................................................
20,066
2,888
39,046
The accompanying notes are an integral part of these consolidated financial statements.
61
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
1. Organization and Summary of Significant Accounting Policies
Inphi Corporation (the “Company”), a Delaware corporation, was incorporated in November 2000. The Company is a
fabless provider of high-speed analog and mixed signal semiconductor solutions for the communications and datacenter
markets. The Company’s 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. In addition, the semiconductor 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.
On August 4, 2016, the Company completed the sale of the memory product business to Rambus Inc. (Rambus) for
$90,000. The Company's consolidated financial statements and accompanying notes for 2016 has been retrospectively
reclassified to present the results of operations of the memory product business as discontinued operations. For more
information on discontinued operations, see Note 3.
On December 12, 2016, the Company completed the acquisition of ClariPhy Communications, Inc. (ClariPhy) for
$303,661 in cash. The revenue and expenses of ClariPhy are included in the consolidated statements of income (loss) from
December 12, 2016. For more information on acquisitions, see Note 2.
The Company is subject to certain risks and uncertainties and believes changes in any of the following areas could have
a material adverse effect on the Company’s future financial position or results of operations or cash flows: ability to sustain
profitable operations due to losses incurred and accumulated deficit in prior years, dependence on a limited number of
customers for a substantial portion of revenue, product defects, risks related to intellectual property matters, lengthy sales
cycle and competitive selection process, lengthy and expensive qualification process, ability to develop new or enhanced
products in a timely manner, market development of and demand for the Company’s products, reliance on third parties to
manufacture, assemble and test products and ability to compete.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) and include the accounts of Inphi, ClariPhy and subsidiaries.
All intercompany balances and transactions have been eliminated in consolidation.
Business Combinations
The Company accounts for acquisitions of business using the purchase method of accounting, which requires the
Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair
values. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed
at the acquisition date as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject
to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the
Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed,
whichever comes first, any subsequent adjustments are recorded to the consolidated statements of income (loss).
Accounting for business combinations requires management to make significant estimates and assumptions, especially
at the acquisition date including the Company’s estimates for intangible assets, contractual obligations assumed and pre-
acquisition contingencies where applicable. Although the Company believes the assumptions and estimates made in the past
have been reasonable and appropriate, they are based in part on historical experience and information obtained from the
management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible
assets the Company acquired include future expected cash flows from product sales, customer contracts and acquired
technologies, expected costs to develop in-process research and development (IPR&D) into commercially viable products
and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may
occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
62
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to (i) the collectibility of accounts
receivable and allowance for distributors’ price discounts; (ii) write-down for excess and obsolete inventories; (iii) warranty
obligations; (iv) the value assigned to and estimated useful lives of long-lived assets; (v) the realization of tax assets and
estimates of tax liabilities and tax reserves; (vi) the valuation of equity securities; (vii) amounts recorded in connection with
acquisitions; (viii) recoverability of intangible assets and goodwill; and (ix) the recognition and disclosure of fair value of
convertible debt and contingent liabilities. These estimates are based on historical data and experience, as well as various
other factors that management believes to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The
Company engages third party valuation specialists to assist with estimates related to the valuation of financial instruments
and assets associated with various contractual arrangements, and valuation of assets acquired in connection with acquisitions.
Such estimates often require the selection of appropriate valuation methodologies and models, and significant judgment in
evaluating ranges of assumptions and financial inputs. Actual results may differ from those estimates under different
assumptions or circumstances.
Foreign Currency Translation
The Company and its subsidiaries use the U.S. dollar as its functional currency. Foreign currency assets and liabilities
are remeasured into U.S. dollars at the end-of-period exchange rates except for non-monetary assets and liabilities, which are
remeasured at historical exchange rates. Revenue and expenses are remeasured at the exchange rate in effect during the period
the transaction occurred, except for those expenses related to balance sheet amounts, which are remeasured at historical
exchange rates. Gains or losses from foreign currency transactions are included in the Consolidated Statements of Income
(Loss) as part of “Other income, net”. Foreign currency gain (loss) in 2018, 2017 and 2016 were ($135), $22 and ($434),
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at
the date of purchase to be cash equivalents. The Company maintains its cash and cash equivalents with major financial
institutions and, at times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation
insurance limits. Cash equivalents primarily consist of money market funds.
Fair Market Value of Financial Instruments
The carrying amount reflected in the balance sheet for cash and cash equivalents, accounts receivable, prepaid and
other current assets, accounts payable, accrued expenses and other current liabilities, approximate fair value due to the short-
term nature of these financial instruments.
Investments
Investments in marketable securities consist of available-for-sale securities. These investments are recorded at fair
value with changes in fair value, net of applicable taxes, recorded as unrealized gains (losses) as a component of accumulated
other comprehensive income in stockholders' equity. Realized gains and losses are included in Other income, net. The cost
basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. The
Company periodically evaluates whether declines in fair values of its investments below their book values are other-than-
temporary. When the fair value is lower than the amortized cost, the Company considers whether: (1) it has the intent to sell
the security; (2) it is more likely than not that it will be required to sell the security before recovery; or (3) it expects to recover
the entire amortized cost basis of the security. If the Company intends to sell the security or it is more likely than not that it
will be required to sell the security, the entire difference between the amortized cost and fair value is recognized in Other
income, net. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell
63
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
the security but the security has suffered an impairment related to credit, the credit loss is bifurcated from the total decline in
value and recorded in Other income, net with the remaining portion recorded within accumulated other comprehensive income
in stockholders’ equity. Investments are made based on the Company’s investment policy which restricts the types of
investments that can be made. The Company classified available-for-sale securities as short-term as the investments are
available to be used in current operations.
On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Recognition and Measurement
of Financial Assets and Financial Liabilities, which changed the way the Company accounts for non-marketable equity
investments. The Company adjusts the carrying value of non-marketable equity investments to fair value upon observable
transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative).
All gains and losses on non-marketable equity investments, realized and unrealized, are recognized in Other income, net.
There was no cumulative effect adjustment upon adoption of this guidance.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is computed using standard cost, which
approximates actual cost, on a first-in, first-out basis. Inventories are reduced for write-downs based on periodic reviews for
evidence of slow-moving or obsolete parts. The write-down is based on comparison between inventory on hand and forecasted
customer demand for each specific product. Once written down, inventory write-downs are not reversed until the inventory
is sold or scrapped. Inventory write-downs are also established when conditions indicate that the net realizable value is less
than cost due to physical deterioration, technological obsolescence, changes in price level or other causes. Inventory valuation
reserves were $6,188 and $3,133 as of December 31, 2018 and 2017, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization is provided on property and equipment over the estimated useful lives on a straight-line basis. Leasehold
improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. Repairs
and maintenance are charged to expense as incurred. Useful lives by asset category are as follows:
Asset Category
Office equipment .......................................................................................
Software ....................................................................................................
Leasehold improvements ........................................................................... Shorter of lease term or estimated useful life
Production equipment ...............................................................................
Computer equipment .................................................................................
Lab equipment ...........................................................................................
Furniture and fixtures ................................................................................
2 - 5
5
5
7
Years
3
3
Intangible Assets
Intangible assets represent rights acquired for developed technology, customer relationships, trademark, patents and
IPR&D in connection with the business acquisitions. Intangible assets with finite useful lives are amortized over periods
ranging from one to ten years using a method that reflects the pattern in which the economic benefits of the intangible asset
are consumed, or if that pattern cannot be reliably determined, using a straight-line amortization method. Acquired IPR&D
is capitalized and amortization commences upon completion of the underlying projects. If any of the projects are abandoned,
the Company would be required to impair the related IPR&D asset.
Impairment of Long-lived Assets and Goodwill
Long-lived Assets
The Company assesses the impairment of long-lived assets, which consist primarily of property and equipment and
intangible assets, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying
value may not be recoverable. Events or changes in circumstances that may indicate that an asset is impaired include
significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected
64
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
future results of operations, a change in the extent or manner in which an asset is utilized, significant declines in the estimated
fair value of the overall Company for a sustained period, shifts in technology, loss of key management or personnel, changes
in the Company’s operating model or strategy and competitive forces.
If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the
expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment
loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based on the
present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted
market prices or appraised values, depending on the nature of the assets.
Goodwill
Goodwill is recorded when the consideration paid for a business acquisition exceeds the fair value of net tangible and
intangible assets acquired. Goodwill is measured and tested for impairment on an annual basis during the fourth fiscal quarter
or more frequently if the Company believes indicators of impairment exist.
To review for impairment, the Company first assesses qualitative factors to determine whether events or circumstances
lead to a determination that it is more likely than not that the fair value of any of its reporting unit is less than its carrying
amount. The qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events
or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include:
(i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in
conjunction with restructuring of operations; (iii) current, historical or projected deterioration of its financial performance; or
(iv) a sustained decrease in its market capitalization below its net book value. After assessing the totality of events and
circumstances, if the Company determines that it is not more likely than not that the fair value of any of its reporting unit is
less than its carrying amount, no further assessment is performed. If however, the Company determines that it is more likely
than not that the fair value of any of the reporting unit is less than its carrying amount, the Company calculates the fair value
of that reporting unit and compares the fair value to the reporting unit’s net book value. If the carrying amount of goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. There was
no impairment of goodwill in 2018, 2017 and 2016.
Internal Use Software Costs
Certain external computer software costs acquired for internal use are capitalized. Training costs and maintenance are
expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in
additional functionality. Capitalized costs are included within property and equipment. If a cloud computing arrangement
includes a software license, then the Company accounts for the software license element of the arrangement consistent with
the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the Company
accounts for the arrangement as a service contract.
Revenue Recognition
Prior to January 1, 2018, the Company recognized revenue when there was persuasive evidence of an arrangement,
delivery had occurred, the fee was fixed or determinable, and collection was reasonably assured.
On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contract with
Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of
January 1, 2018. The adoption of this guidance resulted in no cumulative effect adjustment as of January 1, 2018. Starting
January 1, 2018, the Company recognizes revenue on sales to distributors upon shipment and transfer of control (known as
“sell-in” revenue recognition), rather than deferring recognition until distributors report that they have sold the products to
their customers (known as “sell-through” revenue recognition). The impact of the adoption on revenue and cost of revenue
for the year ended December 31, 2018 was an increase of $3,778 and $779, respectively. The deferred revenue and inventories
decreased by $3,778 and $779 as of December 31, 2018, respectively. Results for reporting periods beginning after January
1, 2018 are presented under the new revenue guidance, while prior periods were not retrospectively adjusted and continue to
be reported in accordance with the Company’s historic revenue recognition accounting.
65
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table shows revenue by geography, based on the shipping location of customers:
China ................................................................................................................. $
United States .....................................................................................................
Japan ..................................................................................................................
Thailand .............................................................................................................
Other ..................................................................................................................
$
2018
Year Ended December 31,
2017
(in thousands)
114,168 $
92,620
29,061
45,205
67,147
348,201 $
113,684 $
87,545
7,492
40,884
44,885
294,490 $
2016
103,071
29,976
36,308
35,837
61,085
266,277
The Company recognizes revenue when the control of the promised goods or services is transferred to customers in an
amount that reflects the consideration the Company expects to receive in exchange for such goods or services.
Product Revenue
The Company’s products are fully functional at the time of shipment and do not require additional production,
modification, or customization. The Company recognizes revenue upon transfer of control at a point in time when title
transfers either upon shipment to or receipt by the customer, net of accruals for estimated sales returns and allowances. Sales
and other taxes the Company collects are excluded from revenue. The fee is based on specific products and quantities to be
delivered at specified prices, which is evidenced by a customer purchase order or other persuasive evidence of an
arrangement. Certain distributors may receive a credit for the price discounts associated with the distributors' customers that
purchased those products. The Company estimates the extent of these distributor price discounts at each reporting period to
reduce accounts receivable and revenue. Although the Company accrues an estimate of distributor price discounts, the
Company does not issue these discounts to the distributor until the inventory is sold to the distributors' customers. As of
December 31, 2018, the estimated price discount was $1,634. Payment terms of customers are typically 30 to 60 days after
invoice date. The Company’s products are under warranty against defects in material and workmanship generally for a period
of one or two years. The Company accrues for estimated warranty costs at the time of sale based on anticipated warranty
claims and actual historical warranty claims experience including knowledge of specific product failures that are outside of
the Company’s typical experience.
Other Revenue
Occasionally, the Company enters into license and development agreements with some of its customers and recognizes
revenue from these agreements upon completion and acceptance by the customer of contract deliverables by milestones or as
services are provided, depending on the terms of the arrangement. Revenue is deferred for any amounts billed or received
prior to completion of milestones or delivery of services. The Company believes the milestone method best depicts efforts
expended to transfer services to the customers. Certain contracts may include multiple performance obligations for which the
Company allocates revenues to each performance obligation based on relative stand-alone selling price. The Company
determines stand-alone selling prices based on the adjusted market assessment approach or residual approach, if applicable.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original
expected length of one year or less or (ii) contracts for which the Company recognizes revenue at the amount to which it has
the right to invoice for services performed.
Revenue from non-product sales was approximately 3%, 3% and 1% of total revenue for the years ended December
31, 2018, 2017, and 2016, respectively.
The Company monitors the collectability of accounts receivable primarily through review of the accounts receivable
aging. The Company’s policy is to record an allowance for doubtful accounts based on specific collection issues identified,
aging of underlying receivables and historical experience of uncollectible balances.
66
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Cost of Revenue
Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with
packaging and assembly, testing and shipping, cost of personnel, including stock-based compensation, and equipment
associated with manufacturing support, logistics and quality assurance, warranty cost, amortization and impairment of
developed technology, amortization of step-up values of inventory, write-down of inventories, amortization of production
mask costs, overhead and an allocated portion of occupancy costs.
Warranty
The Company’s products are under warranty against defects in material and workmanship generally for a period of one
or two years. The Company accrues for estimated warranty cost at the time of sale based on anticipated warranty claims and
actual historical warranty claims experience including knowledge of specific product failures that are outside of the
Company’s typical experience. The warranty obligation is determined based on product failure rates, cost of replacement and
failure analysis cost. If actual warranty costs differ significantly from these estimates, adjustments may be required in the
future. As of both December 31, 2018 and 2017, the warranty liability was $110.
Research and Development Expense
Research and development expense consists of costs incurred in performing research and development activities
including salaries, stock-based compensation, employee benefits, occupancy costs, pre-production engineering mask costs,
impairment of in-process research and development, overhead costs and prototype wafer, packaging and test costs. Research
and development costs are expensed as incurred. The Company enters into development agreements with some of the
Company’s customers. Recoveries from nonrecurring engineering services from early stage technology are recorded as an
offset to product development expense incurred in support of this effort and serve as a mechanism to partially recover
development expenditures. These reimbursements are recognized upon completion and acceptance by the customer of
contract deliverables or milestones. The Company recorded approximately $0, $3,000 and $2,400 as offset to research and
development expense for the years ended December 31, 2018, 2017 and 2016, respectively.
Sales and Marketing Expense
Sales and marketing expense consists of salaries, stock-based compensation, employee benefits, travel, trade show
costs, amortization of intangibles and others. The Company expenses sales and marketing costs as incurred. Advertising
expenses for the years ended December 31, 2018, 2017 and 2016 were not material.
General and Administrative Expense
General and administrative expense consists of salaries, stock-based compensation, employee benefits and expenses
for executive management, legal, finance and others. In addition, general and administrative expense includes fees for
professional services and occupancy costs. These costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company recognizes the deferred income tax effects of a change in tax rates in the period of
enactment. The Company must also make judgments in evaluating whether deferred tax assets will be recovered from future
taxable income. To the extent that it believes that recovery is not likely, the Company must establish a valuation allowance.
The carrying value of the Company’s net deferred tax asset is based on whether it is more likely than not that the Company
will generate sufficient future taxable income to realize these deferred tax assets. A valuation allowance is established for
deferred tax assets which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments
regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning
strategies or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation
allowance the Company has established may be increased or decreased, resulting in a material respective increase or decrease
in income tax expense (benefit) and related impact on the Company’s reported net income (loss).
67
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
In accordance with FASB’s guidance on Accounting for Uncertainty in Income Taxes, the Company performs a
comprehensive review of uncertain tax positions regularly. In this regard, an uncertain tax position represents an expected
treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return or claim, which has not
been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the
taxing authorities, the Company does not recognize the tax benefits resulting from such positions and reports the tax effects
as a liability for uncertain tax positions in the consolidated financial statements. The Company recognizes potential interest
and penalties on uncertain tax positions within the provision (benefit) for income taxes on the consolidated statement of
income.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act
contains significant changes to U.S. federal corporate income taxation, including a reduction of the corporate tax rate from
35% to 21% effective January 1, 2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings
and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on dividend distributions from foreign
subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital investments. The effect of the tax law
changes must be recognized in the period of enactment. As a result of the change in tax rate, the deferred tax assets and
liabilities were required to be remeasured to reflect their value at a lower tax rate of 21%. Staff Accounting Bulletin 118
(“SAB 118”) allows for a measurement period of up to one year after the enactment date of the new tax legislation to finalize
the recording of the related tax impacts. In accordance with SAB 118, as of December 31, 2017, the Company made a
provisional estimate of the remeasurement of the federal deferred tax assets and liabilities to reflect the reduced U.S. statutory
corporate tax rate to 21%, the mandatory repatriation income which was fully absorbed by the U.S. net operating loss, the
related valuation allowance offset, and valuation allowance release on deferred tax assets for the federal AMT credit that was
made refundable by the Tax Reform Act. During 2018, the Company elected to account for global intangible low-taxed
income (“GILTI”) as a period cost in the year the tax is incurred and made changes to its provisional estimates previously
recorded for the mandatory repatriation upon filing of its 2017 U.S. income tax return. The change in the mandatory
repatriation income was fully absorbed by the U.S. net operating loss, which is subject to valuation allowance, and resulted
in no current tax liability. This measurement period adjustment had no net tax effect after the offsetting change to the valuation
allowance. At December 31, 2018, the Company completed the accounting for all of the enactment-date income tax effects
of the Tax Reform Act. See Note 11 for additional information.
Stock-Based Compensation
Stock-based compensation for stock option and restricted stock units issued to the Company’s employees is measured
at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is
the vesting period, on a straight-line basis. The fair value of restricted stock units is based on the fair market value of the
Company’s common stock on the date of grant. If the award has a market condition, the Company estimates the fair value
using Monte Carlo simulation model and recognize compensation ratably over the service period.
Historically, the Company granted stock options to employees and the Company uses the Black-Scholes option pricing
model for valuing stock option awards granted to employees and directors at the grant date. Determining the fair value of
stock option awards at the grant date requires the input of various assumptions, including the fair value of the underlying
common stock, expected future share price volatility, expected term, risk-free interest rate and dividend rate. Changes in these
assumptions can materially affect the fair value of the options. The Company based its estimate of expected volatility on the
volatility of similar entities whose share prices are publicly available. The risk-free interest rate is based on the U.S. Treasury
yields in effect at the time of grant for periods corresponding to the expected life of the options. The weighted average
expected life of options was calculated using the simplified method. This decision was based on the lack of relevant historical
data due to the Company’s limited experience. The expected dividend yield is zero because the Company has not historically
paid dividends and has no present intention to pay dividends. The Company establishes the estimated forfeiture rates based
on historical experience. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service period which is equal to the vesting period.
The Company has elected to treat share-based payment awards with graded vesting schedules and time-based service
conditions as single awards and recognizes stock-based compensation expense on a straight-line basis (net of estimated
forfeitures) over the requisite service period.
The Company recognizes non-employee stock-based compensation expense based on the estimated fair value of the
equity instrument determined using the Black-Scholes option pricing model. Management believes that the fair value of the
68
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
underlying stock award is more reliably measured than the fair value of the services received. The fair value of each non-
employee variable stock award is re-measured each period until a commitment date is reached, which is generally the vesting
date.
Earnings per Share
Basic earnings per share is calculated by dividing income allocable to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing the net
income allocable to common stockholders by the weighted average number of common shares outstanding, adjusted for the
effects of potentially dilutive common stock, which are comprised of stock options, restricted stock units, employee share
purchase plan and the shares that could be issued upon conversion of the Company’s convertible debt. The capped call options
in connection with the issuance of the convertible notes are excluded from the calculation of diluted earnings per share as
their impact is always anti-dilutive.
Segment Information
The Company operates in one reportable segment related to the design, development and sale of high-speed analog
connectivity components that operate to maintain, amplify and improve signal integrity at high-speeds in a wide variety of
applications. The Company’s chief operating decision-maker is its Chief Executive Officer, who reviews operating results
on an aggregate basis and manages the Company’s operations as a single operating segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance on “Revenue from Contracts with Customers.” The new revenue recognition
guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The FASB issued several updates to the guidance. The Company adopted the new revenue guidance
effective January 1, 2018, using the modified retrospective transition method applied to those contracts which were not
completed as of that date.
In January 2016, the FASB issued guidance that requires equity investments (except those accounted for under the
equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes
in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily
determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in
orderly transactions for the identical or a similar investment of the same issuer. The guidance simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify
impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment
at fair value. The guidance eliminates the requirement for public business entities to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet, and requires public business entities to use the exit price notion when measuring the fair value of
financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-
specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option
for financial instruments. Separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial
statements is required under this guidance. The guidance further clarifies that an entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax
assets. The Company adopted this guidance starting January 1, 2018 and concluded that there was no cumulative effect
adjustment required. The Company has elected to measure equity investments that do not have readily determinable fair
values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer (referred to as the measurement alternative). See Note 4 for further
details.
In February 2016, the FASB issued guidance that requires companies that lease assets (lessees) to recognize on the
balance sheet the assets and liabilities for the rights and obligations created by the leases with lease terms of more than 12
months. The FASB also issued additional updates. For leases less than twelve months, an entity is permitted to make an
69
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes
this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The
Company intends to make this election, along with other available practical expedients. The guidance requires entities to
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or
allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption. The Company plans to adopt the new standard on the
adoption date with an application date of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance
of accumulated deficit in the period of adoption. Based on the Company’s lease portfolio, which primarily consists of facility
leases, as of January 1, 2019, the preliminary estimate of the impact of adopting the guidance is to increase both its total
assets and total liabilities in the range of $10,000 to $12,000. The Company does not believe this guidance will materially
affect the consolidated results of operations or its liquidity. The Company continues to finalize the implementation of new
processes and the assessment of the impact of this adoption on its consolidated financial statements; therefore, the preliminary
estimated impacts disclosed can change and the final impact will be known once the adoption is completed during the first
quarter of 2019.
In June 2016, the FASB issued guidance which requires the credit losses related to debt securities classified as available-
for sale to be presented as an allowance rather than as a write-down. This guidance is effective for the Company beginning
after December 15, 2019. The Company is currently evaluating the impact that this new guidance will have on its consolidated
financial statements and related disclosures.
In August 2016, the FASB issued guidance related to the classification of certain transactions on the statement of cash
flows. The guidance is effective for calendar year-end public companies in 2018. The adoption of this guidance did not have
a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued guidance on the definition of a business. This guidance clarifies the definition of a
business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. This guidance is effective for calendar year-end public companies in
2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued guidance to simplify the measurement of goodwill by eliminating the Step 2
impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a
reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new
guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early
adoption is permitted. The Company is currently evaluating the impact that this new guidance will have on its consolidated
financial statements and related disclosures.
In May 2017, the FASB issued guidance to clarify when to account for a change to the terms or conditions of a share-
based payment award as a modification. Under the guidance, modification accounting is required only if the fair value, the
vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The guidance
was effective for fiscal years beginning after December 15, 2017. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements and related disclosures.
In February 2018, the FASB issued guidance that allows an option to reclassify from accumulated other comprehensive
income to retained earnings any stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The guidance
will be effective for fiscal years beginning after December 15, 2018, though early adoption is permitted in any interim period
after issuance of the update. The adoption of this guidance is not expected to have a material impact on the Company’s
consolidated financial statements and related disclosures.
In June 2018, the FASB issued guidance to eliminate the separate guidance applicable to share-based payments to
nonemployees. Under the new guidance, equity-classified share-based payment awards issued to nonemployees will be
measured on the grant date, instead of being remeasured through the performance completion date (generally the vesting
date), as required under the current guidance. The new guidance will also require recognition of compensation cost for awards
with performance conditions when achievement of those conditions are probable, rather than upon their achievement. Further,
70
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
the new guidance will eliminate the requirement to reassess the classification of nonemployee awards under the financial
instruments literature upon vesting. The guidance will be effective for fiscal years beginning after December 15, 2018. The
adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and
related disclosures.
In August 2018, the FASB issued guidance that eliminates certain disclosure requirements for fair value measurements
for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The
new guidance will no longer require disclosure of the amount of and reasons for transfers between Level 1 and Level 2 of the
fair value hierarchy, but will require disclosure of the range and weighted average used to develop significant unobservable
inputs for Level 3 fair value measurements. The guidance will be effective for fiscal years beginning after December 15,
2019. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial
statements and related disclosures.
In August 2018, the FASB issued guidance requiring a customer in a cloud computing arrangement that is a service
contract to follow the internal use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which
implementation costs to capitalize as assets. Capitalized implementation costs are expensed over the term of the hosting
arrangement beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance
will be effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that
this new guidance will have on its consolidated financial statements and related disclosures.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and
Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or
superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for
interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented
in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the
beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be
filed. This final rule was effective on November 5, 2018. The Company adopted the rule in the fourth quarter of 2018 and the
impact on its annual consolidated financial statements was not material.
In November 2018, the FASB issued amendments to guidance on “Collaborative Arrangements” and “Revenue from
Contracts with Customers”, that require transactions in collaborative arrangements to be accounted for under “Revenue from
Contracts with Customers” if the counterparty is a customer for a good or service (or bundle of goods and services) that is a
distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a
collaborator that is not a customer together with revenue recognized from contracts with customers. The Company is currently
evaluating the impact that this new guidance will have on its consolidated financial statements and related disclosures.
2. Acquisitions
On December 12, 2016, the Company completed the acquisition of ClariPhy Communications, Inc. for $303,661 in
cash. The Company acquired ClariPhy to provide a complete coherent platform to the Company’s customers in long haul,
metro, and datacenter interconnect applications. Cash of $30,000 was placed in an escrow fund for up to 24 months following
the closing for the satisfaction of certain potential indemnification claims. The consolidated financial statements include the
results of operations of ClariPhy as of the acquisition date.
The acquisition has been accounted for using the purchase method of accounting which requires, among other things,
that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The Company allocated
the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The
fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time
of acquisition. As additional information becomes available, such as finalization of the estimated fair value of tax related
items, the Company may revise the preliminary purchase price allocation during the measurement period (which will not
exceed 12 months from the acquisition date). Any such revisions or changes may be material as the Company finalizes the
fair values of the tangible and intangible assets acquired and liabilities assumed.
71
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes the purchase price allocation:
Preliminary
Allocation
Allocation
Adjustments
Final
Allocation
Cash ............................................................................... $
Receivables ...................................................................
Inventories .....................................................................
Other current assets .......................................................
Property and equipment.................................................
Identifiable intangible assets .........................................
In-process research and development ............................
Other noncurrent assets .................................................
Accounts payable, accrued expenses and other current
liabilities ....................................................................
Deferred tax liabilities, noncurrent ................................
Other liabilities ..............................................................
Total identifiable net assets ...........................................
Goodwill ........................................................................
Net assets acquired ........................................................ $
7,417 $
2,552
13,774
2,739
6,163
138,558
97,340
753
(13,667)
(42,958)
(5,647)
207,024
96,637
303,661 $
— $
602
—
(123)
—
—
—
—
2
94
—
575
(575)
— $
7,417
3,154
13,774
2,616
6,163
138,558
97,340
753
(13,665)
(42,864)
(5,647)
207,599
96,062
303,661
As of the acquisition date, the fair value of receivables, other assets, accounts payable, accrued expenses and other
liabilities approximated the book value acquired.
The following table summarizes the estimated fair value of intangible assets and their estimated useful lives as of the
date of acquisition:
Developed technology ....................................................................................... $
Customer relationships ......................................................................................
Trade name ........................................................................................................
Software ............................................................................................................
In-process research and development ................................................................
$
Estimated
Fair Value
66,450
62,370
1,390
8,348
97,340
235,898
Estimated
Useful Life
(Years)
1 - 6
7
5
1 - 3
—
Developed technology was valued using the multi-period excess earnings method under the income approach. This
method involves discounting the direct cash flow expected to be generated by the technologies over their remaining lives, net
of returns on contributory assets. The estimated useful life was determined based on the technology cycle related to each
product family and its expected contribution to forecasted revenue. Customer relationships were valued using the incremental
cash flow approach which involved discounting management’s estimate of the incremental revenues afforded by having the
existing customer relationships in place as of the acquisition date, net of operating expense, taxes and returns on contributory
assets. The estimated useful life was determined based on the estimated customer product or program ramp-up period required
to develop the similar existing customer revenue base. Trade name was valued based on application of relief-from-royalty
approach under the income approach. This method is based on the application of a royalty rate to forecasted revenue. The
estimated useful life was determined based on the expected life of the trade names, the history of the trade names and the
cash flows anticipated over the forecasted periods. In-process research and development was valued using the multi-period
excess earnings method under the income approach, with the additional inclusion of estimated costs required to complete the
projects.
72
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Company capitalized $97,340 of IPR&D costs related to the ClariPhy acquisition. Upon completion of the
remaining project, the related IPR&D assets will be amortized over their estimated useful lives. If the project is abandoned,
the Company will be required to impair the related IPR&D asset. The following table summarizes the details of the IPR&D:
Description
IPR&D
Percentage of
Completion
Estimated Cost to
Complete
Expected Release
Date
M200 .................... $
60,500
Lightspeed III .......
36,840
67% $
26%
12,064
39,176
2018
2019
Discount rates of 17% to 20% were applied to the projected cash flows to reflect the risk related to these IPR&D
projects.
During the year ended December 31, 2017, the Company abandoned the Lightspeed III project resulting in an
impairment charge of $47,014, of which $10,174 was included in the cost of revenue and $36,840 was included in the research
and development expenses in the consolidated statements of income (loss). The abandonment of the project was primarily
related to change in product roadmap that occurred during the year ended December 31, 2017.
During the year ended December 31, 2018, the Company reclassified $60,500 of acquired in-process research and
development to developed technology as the technology was commercialized.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and is attributable
to the work force of ClariPhy, the Company’s going concern value with the opportunity to leverage its work force to develop
new technologies and the ability of the Company to grow the business faster and more profitable than was possible by
ClariPhy as a stand-alone company. Goodwill is not amortized and is not deductible for tax purposes.
The Company incurred acquisition costs of $1,738 which are included in general and administrative expense in the
consolidated statement of income for the year ended December 31, 2016.
73
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
ClariPhy contributed revenue of $1,128 and pre-tax loss of $2,361 to the Company for the period from December 12,
2016 to December 31, 2016.
Pro Forma Information
The following unaudited pro forma financial information presents a summary of the Company’s consolidated results
of operations for the year ended December 31, 2016, assuming the ClariPhy acquisition had been completed as of January 1,
2015. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property
and equipment acquired, amortization of the purchase accounting effect on inventory acquired from ClariPhy, interest income
for reduction in short-term investments to fund the acquisition and interest expense from assumed debt issued to fund the
acquisition.
Pro Forma
Year Ended
December 31, 2016
(unaudited)
Revenue .............................................................................................................................................. $
Net income ......................................................................................................................................... $
Earnings per share – basic .................................................................................................................. $
Earnings per share – diluted ............................................................................................................... $
304,820
48,481
1.20
1.10
The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based
on the historical financial information of the Company and ClariPhy, reflecting the results of operations for the year ended
December 31, 2016. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s
consolidated results of operations actually would have been had the Company completed the acquisition as of the beginning
of the period presented. In addition, the unaudited pro forma consolidated results do not purport to project the future results
of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the
acquisition.
3. Discontinued Operations
As discussed in Note 1, on August 4, 2016, the Company completed the sale of its memory product business (the
“Business”) to Rambus for $90,000 in cash, $11,250 of which was placed into escrow for a period of the twelve months
following the closing as security for the Company’s indemnification obligations pursuant to the Asset Purchase Agreement
dated June 29, 2016. During the year ended December 31, 2017, the Company received $10,690 from the escrow. The
divestiture of the Business was part of a strategic plan to focus on and increase investments in the Company’s communication
business. The Company recorded a gain of $78,544 in the year ended December 31, 2016. The results of operations of the
Business are shown in net income from discontinued operations. The Company’s consolidated financial statements and the
accompanying notes for current and prior periods have been restated to reflect the discontinued operations presentation.
The components of the gain on sale of the Business were as follows:
Cash proceeds from sale ......................................................................................................................... $
Less book value of assets sold:
Inventories ..........................................................................................................................................
Prepaid expenses .................................................................................................................................
Property and equipment ......................................................................................................................
Goodwill .............................................................................................................................................
Deferred revenue ................................................................................................................................
Liabilities ............................................................................................................................................
Gain on sale ............................................................................................................................................ $
90,000
(5,947)
(250)
(7,051)
(714)
1,757
749
78,544
74
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The results of discontinued operations for the year ended December 31, 2016:
Revenue ............................................................................................................................................... $
Cost of revenue ...................................................................................................................................
Operating expenses .............................................................................................................................
Other income .......................................................................................................................................
Gain on sale .........................................................................................................................................
Provision for income taxes ..................................................................................................................
Net income from discontinued operations ........................................................................................... $
The results of discontinued operations include the following for the year ended December 31, 2016:
Depreciation and amortization ............................................................................................................. $
Stock-based compensation expense .....................................................................................................
Property and equipment expenditures ..................................................................................................
24,418
(13,367)
(15,029)
176
78,544
(1,799)
72,943
1,103
2,194
2,455
In connection with the sale of the Business, the Company entered into a transition service agreement with Rambus
under which the Company provided certain services on an interim, transitional basis, for a period of six months. The total
amount billed to Rambus for the year ended December 31, 2016 was $1,563.
4. Investments
The following table summarizes the investments by investment category:
Available-for-sale securities:
Municipal bonds ...................................................... $
Corporate notes/bonds .............................................
Variable rate demand notes ......................................
Asset-backed securities ............................................
Commercial paper ....................................................
Certificate of deposit ................................................
Total investments ........................................................ $
Available-for-sale securities:
Municipal bonds ...................................................... $
Corporate notes/bonds .............................................
Variable rate demand notes ......................................
Asset-backed securities ............................................
Commercial paper ....................................................
Total investments ........................................................ $
December 31, 2018
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
1 $
14
—
—
—
—
15 $
(19) $
(354)
—
(63)
(6)
—
(442) $
6,733
146,126
8,900
32,923
39,701
956
235,339
December 31, 2017
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
— $
49
—
—
1
50 $
(68) $
(197)
—
(12)
(13)
(290) $
27,657
146,401
3,500
7,185
56,994
241,737
Cost
6,751 $
146,466
8,900
32,986
39,707
956
235,766 $
Cost
27,725 $
146,549
3,500
7,197
57,006
241,977 $
75
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
As of December 31, 2018, the Company had 99 investments that were in an unrealized loss position. The gross
unrealized losses on these investments at December 31, 2018 were primarily due to changes in interest rates and determined
to be temporary in nature.
The realized gain related to the Company’s available-for-sale investment, which was reclassified from accumulated
other comprehensive income, was included in other income in the consolidated statements of income.
The contractual maturities of available-for-sale securities at December 31, 2018 are presented in the following table:
Due in one year or less ..................................................................................... $
Due between one and five years .......................................................................
Due after five years ..........................................................................................
$
147,908 $
75,458
12,400
235,766 $
147,712
75,236
12,391
235,339
Cost
Fair Value
The Company has a marketable equity investment in a company located in Taiwan. The fair value of the investment
and unrealized loss as of December 31, 2018 was $1,387 and $607, respectively. This investment is presented as Other assets,
net on the consolidated balance sheet.
The Company has non-marketable equity investments in privately held companies without readily determinable market
values. Prior to January 1, 2018, the Company accounted for non-marketable equity investments at cost less impairment.
Realized gains and losses on non-marketable equity investments sold or impaired were recognized in Other income, net. On
January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial
Assets and Financial Liabilities, which changed the way the Company accounts for non-marketable equity investments. The
Company adjusts the carrying value of non-marketable equity investments to fair value upon observable transactions for
identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and
losses on non-marketable equity investments, realized and unrealized, are recognized in Other income, net. There was no
cumulative effect adjustment upon adoption of this guidance. As of December 31, 2018, non-marketable equity investments
had a carrying value of approximately $16,866, of which $6,066 was remeasured to fair value based on observable transaction
during the year ended December 31, 2018. These investments are presented as Other assets, net on the consolidated balance
sheet. The unrealized gain recorded in other income, net and included as adjustment to the carrying value of non-marketable
equity investments held as of December 31, 2018 was $3,066 for the year ended December 31, 2018. During the year ended
December 31, 2018, the Company recorded an impairment charge of $7,000 related to a certain investment in a private
company because the investee is currently in receivership and the Company is not expected to recover its cost. The
impairment charge was included in other income, net in the consolidated statements of income (loss).
In July 2016, the Company sold its minority interest in a cost method investment for $8,759, of which $2,414 was
received in 2018. The gain on sale of $1,138 was included in other income in the consolidated statements of income for the
year ended December 31, 2016.
5. Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash
equivalents, investments in marketable securities and trade accounts receivable. The Company extends differing levels of
credit to customers and does not require collateral deposits. As of December 31, 2018 and 2017, the Company has allowance
for doubtful accounts of $1,152 and $155, respectively. As of December 31, 2018 and 2017, the Company has allowance for
distributors’ price discounts of $1,634 and $1,292, respectively.
76
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes the significant customers’ (including distributors) accounts receivable and revenue as
a percentage of total accounts receivable and total revenue, respectively:
Accounts Receivable
Customer A .............................................................................................................
Customer B ..............................................................................................................
Customer C ..............................................................................................................
December 31,
2018
2017
13 %
*
13
Revenue
Customer A ...............................................................
Customer B ...............................................................
Customer C ...............................................................
2018
Year Ended December 31,
2017
2016
18%
11
*
12%
*
12
29%
14
13
*
*
13%
*
Less than 10% of total receivable or total revenue
Customer A is a subcontractor of a direct customer that would be a “Customer D” above. In the aggregate, revenue to
Customer A and Customer D as a percentage of total revenue was approximately 18% and 17% for the year ended December
31, 2018 and 2017, respectively. Customer C is a subcontractor of a direct customer that would be a “Customer E” above. In
the aggregate, revenue to Customer C and Customer E as a percentage of total revenue was approximately 14%, 14% and
16% for the years ended December 31, 2018, 2017 and 2016, respectively. In addition, the Company sells directly and
indirectly through subcontractors to what would be a “Customer F” above. The Company believes in the aggregate, revenue
to Customer F, including its subcontractors as a percentage of total revenue was approximately 11%, 11% and 12% for the
years ended December 31, 2018, 2017 and 2016, respectively. Customer B is a distributor who sells to various end customers.
6. Inventories
Inventories consist of the following:
Raw materials ......................................................................................................... $
Work in process ......................................................................................................
Finished goods........................................................................................................
$
7. Property and Equipment, net
Property and equipment consist of the following:
Laboratory and production equipment ................................................................... $
Office, software and computer equipment .............................................................
Furniture and fixtures .............................................................................................
Leasehold improvements ........................................................................................
Less accumulated depreciation ...............................................................................
$
December 31,
2018
2017
12,435 $
13,602
7,015
33,052 $
12,267
13,800
5,654
31,721
December 31,
2018
2017
121,716 $
30,190
1,558
7,609
161,073
(90,333)
70,740 $
94,609
28,594
1,698
7,250
132,151
(71,807)
60,344
77
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Depreciation and amortization expense for the years ended December 31, 2018, 2017 and 2016 was $20,227, $20,631
and $15,943, respectively.
As of December 31, 2018 and 2017, computer software costs included in property and equipment were $6,879 and
$7,181, respectively. Amortization expense of capitalized computer software costs was $591, $1,038, and $1,152 for the
years ended December 31, 2018, 2017 and 2016, respectively.
Property and equipment not paid as of December 31, 2018 and 2017 was $2,580 and $3,339, respectively.
8. Goodwill and Identifiable Intangible Assets
The following table presents details of identifiable intangible assets:
Gross
Gross
December 31, 2018
Accumulated
Amortization
86,378 $
21,681
1,350
881
31,898
Net
100,422 $
48,859
960
698
29,508
December 31, 2017
Accumulated
Amortization
53,533 $
11,954
888
734
18,226
126,300 $
70,540
2,310
1,579
47,039
Net
72,767
58,586
1,422
845
28,813
Developed technology .................. $ 186,800 $
70,540
Customer relationships .................
2,310
Trade name ...................................
1,579
Patents ..........................................
61,406
Software .......................................
In-process research and
development .............................
—
$ 322,635 $
—
142,188 $
—
180,447 $
60,500
308,268 $
—
85,335 $
60,500
222,933
During the year ended December 31, 2018, the Company reclassified $60,500 of acquired in-process research and
development to developed technology as the technology was commercialized.
During the year ended December 31, 2017, the Company abandoned a project related to certain developed technology
and in-process research and development from the ClariPhy acquisition resulting in an impairment charge of $47,014, of
which $10,174 was included in the cost of revenue and $36,840 was included in the research and development expenses in
the consolidated statement of income (loss). The abandonment of the project was primarily related to the change in product
roadmap that occurred during the year ended December 31, 2017.
The following table presents amortization of intangible assets for the years ended December 31, 2018, 2017 and 2016:
Cost of revenue ...................................................................... $
Research and development ....................................................
Sales and marketing ..............................................................
General and administrative ....................................................
$
2018
Year Ended December 31,
2017
2016
32,845 $
19,311
9,727
609
62,492 $
28,502 $
18,352
9,727
643
57,224 $
12,223
336
1,209
402
14,170
78
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Based on the amount of intangible assets subject to amortization at December 31, 2018, the expected amortization
expense for each of the next five fiscal years and thereafter is as follows:
2019 ........................................................................................................................................................ $
2020 ........................................................................................................................................................
2021 ........................................................................................................................................................
2022 ........................................................................................................................................................
2023 ........................................................................................................................................................
Thereafter ...............................................................................................................................................
$
68,159
38,841
32,887
24,261
15,460
839
180,447
The weighted-average amortization periods remaining by intangible asset category were as follows (in years):
Developed technology ...........................................................................................................................
Customer relationship ...........................................................................................................................
Trade name ............................................................................................................................................
Patents ...................................................................................................................................................
Software ................................................................................................................................................
3.5
5.0
2.6
8.1
1.7
During the year ended December 31, 2017, goodwill decreased by $575, as a result of purchase price allocation
adjustment from the ClariPhy acquisition.
9. Convertible Debt
In December 2015, the Company issued $230,000 of 1.125% convertible senior notes due 2020 (Convertible Notes
2015). The Convertible Notes 2015 will mature December 1, 2020, unless earlier converted or repurchased. Interest on the
Convertible Notes 2015 is payable on June 1 and December 1 of each year, beginning on June 1, 2016. The initial conversion
rate is 24.8988 shares of common stock per $1 principal amount of Convertible Notes 2015, which represents an initial
conversion price of approximately $40.16 per share. The Convertible Notes 2015 will be subject to repurchase at the option
of the holders following certain fundamental corporate changes, at a fundamental change repurchase price equal to 100% of
the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental
change repurchase date. The conversion rate will be subject to adjustment in some events but will not be adjusted for any
accrued and unpaid interest. Certain corporate events that occur prior to the stated maturity date can cause the Company to
increase the conversion rate for a holder.
Prior to the close of business on the business day immediately preceding June 1, 2020, holders may convert all or any
portion of their Convertible Notes 2015 only under the following circumstances: (i) during any calendar quarter commencing
after the calendar quarter ending on March 31, 2016 (and only during such calendar quarter), if the last reported sale price of
the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive
trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of
the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading
day period (the “measurement period”) in which the “trading price” per $1 principal amount of notes, as determined following
a request by a holder of notes in accordance with procedures specified in the indenture governing the Convertible Notes 2015,
for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common
stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after
June 1, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders
may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or
deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the
Company’s election. The Company's current intent is to settle the principal amount of the Convertible Notes 2015 in cash
upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common
stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread).
The Convertible Notes 2015 are not redeemable at the Company’s option prior to maturity.
79
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Convertible Notes 2015 are governed by the terms of an indenture (Indenture 2015). The Indenture 2015 does not
contain any financial or operating covenants, or restrictions on the payments of dividends, the incurrence of indebtedness or
the issuance or repurchase of securities by the Company or any of its subsidiaries. The Indenture 2015 contains customary
terms and covenants in events of default. If an event of default (other than certain events of bankruptcy, insolvency or
reorganization involving the Company) occurs and is continuing, the trustee under the Indenture 2015 by notice to the
Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes 2015 by notice to the
Company and the trustee, may, and the trustee at the request of such holders shall, declare 100% of the principal of and
accrued and unpaid interest, if any, on all the Convertible Notes 2015 to be due and payable. Upon the occurrence of certain
events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid
interest, if any, on all of the Convertible Notes 2015 will become due and payable automatically. Upon such a declaration of
acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Notwithstanding
the foregoing, the Indenture 2015 provides that, to the extent the Company elects, the sole remedy for an event of default
relating to certain failures by the Company to comply with certain reporting covenants in the Indenture 2015 consists
exclusively of the right to receive additional interest on the Convertible Notes 2015. As of December 31, 2018, none of the
conditions allowing holders of the Convertible Notes 2015 to convert had been met.
In accounting for the issuance of the Convertible Notes 2015, the Company separated the Convertible Notes 2015 into
liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated
fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity
component representing the conversion option was determined by deducting the fair value of the liability component from
the face value of the Convertible Notes 2015 as a whole. The excess of the face amount of the liability component over its
carrying amount is amortized to interest expense over the term of the Convertible Notes 2015 using the effective interest
method. The gross proceeds of $230,000 were accordingly allocated between long-term debt of $175,974 and stockholders'
equity of $54,026. Issuance costs of $6,359, of which $6,007 were paid as of December 31, 2015 and the remainder paid in
2016, were allocated between long-term debt ($4,864) and equity ($1,495). The total interest expense recognized for the year
ended December 31, 2018 was $14,396, which consists of $2,587 of contractual interest expense, $10,833 of amortization of
debt discount and $976 of amortization of debt issuance costs. The total interest expense recognized for the year ended
December 31, 2017 was $13,574, which consists of $2,588 of contractual interest expense, $10,079 of amortization of debt
discount and $907 of amortization of debt issuance costs. The total interest expense recognized for the year ended December
31, 2016 was $12,853, which consists of $2,577 of contractual interest expense, $9,427 of amortization of debt discount and
$849 of amortization of debt issuance costs. The issuance costs allocated to long-term debt is presented in the balance sheet
as offset against long-term debt.
In connection with the issuance of the Convertible Notes 2015, the Company entered into capped call transactions
(Capped Call) in private transactions. Under the Capped Call, the Company purchased capped call options that in aggregate
relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes 2015, with a
strike price approximately equal to the conversion price of the Convertible Notes 2015 and with a cap price equal
to $52.06 per share. The capped calls were purchased for $17,802 and recorded as a reduction to additional paid-in-capital in
accordance with ASC 815-40, Contracts in Entity’s Own Equity.
The purchased Capped Call allows the Company to receive shares of its common stock and/or cash from counterparties
equal to the amounts of common stock and/or cash related to the excess of the market price per share of the common stock,
as measured under the terms of the Capped Call over the strike price of the Capped Call during the relevant valuation period.
The purchased Capped Call is intended to reduce the potential dilution to common stock upon future conversion of the
Convertible Notes 2015 by effectively increasing the initial conversion price to $52.06 as well as to offset potential cash
payments the Company is required to make in excess of the principal amount of the Convertible Notes 2015 in applicable
events.
The Capped Call is a separate transaction entered into by the Company with the option counterparties, is not part of the
terms of the Convertible Notes 2015 and will not change the holders' rights under the Convertible Notes 2015.
In September 2016, the Company issued $287,500 of 0.75% convertible senior notes due 2021 (Convertible Notes 2016
and together with the Convertible Notes 2015, the Convertible Notes). The Convertible Notes 2016 will mature September
1, 2021, unless earlier converted or repurchased. Interest on the Convertible Notes 2016 is payable on March 1 and September
1 of each year, beginning on March 1, 2017. The initial conversion rate is 17.7508 shares of common stock per $1 principal
amount of Convertible Notes 2016, which represents an initial conversion price of approximately $56.34 per share. The
80
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Convertible Notes 2016 will be subject to repurchase at the option of the holders following certain fundamental corporate
changes, at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus
accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The conversion rate will be subject
to adjustment in some events but will not be adjusted for any accrued and unpaid interest. Certain corporate events that occur
prior to the stated maturity date can cause the Company to increase the conversion rate for a holder.
Prior to the close of business on the business day immediately preceding March 1, 2021, holders may convert all or any
portion of their Convertible Notes 2016 only under the following circumstances: (i) during any calendar quarter commencing
after the calendar quarter ending on December 31, 2016 (and only during such calendar quarter), if the last reported sale price
of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive
trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of
the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading
day period (the “measurement period”) in which the “trading price” per $1 principal amount of notes, as determined following
a request by a holder of notes in accordance with procedures specified in the indenture governing the Convertible Notes 2016,
for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common
stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after
March 1, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will
pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at
the Company’s election. The Company's current intent is to settle the principal amount of the Convertible Notes 2016 in cash
upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common
stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread).
The Convertible Notes 2016 are not redeemable at the Company’s option prior to maturity.
The Convertible Notes 2016 are governed by the terms of an indenture (Indenture 2016). The Indenture 2016 does not
contain any financial or operating covenants, or restrictions on the payments of dividends, the incurrence of indebtedness or
the issuance or repurchase of securities by the Company or any of its subsidiaries. The Indenture 2016 contains customary
terms and covenants in events of default. If an event of default (other than certain events of bankruptcy, insolvency or
reorganization involving the Company) occurs and is continuing, the trustee under the Indenture 2016 by notice to the
Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes 2016 by notice to the
Company and the trustee under the Indenture 2016, may, and the trustee at the request of such holders shall, declare 100% of
the principal of and accrued and unpaid interest, if any, on all the Convertible Notes 2016 to be due and payable. Upon the
occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of
and accrued and unpaid interest, if any, on all of the Convertible Notes 2016 will become due and payable automatically.
Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable
immediately. Notwithstanding the foregoing, the Indenture 2016 provides that, to the extent the Company elects, the sole
remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the
Indenture 2016 consists exclusively of the right to receive additional interest on the Convertible Notes 2016. As of December
31, 2018, none of the conditions allowing holders of the Convertible Notes 2016 to convert had been met.
In accounting for the issuance of the Convertible Notes 2016, the Company separated the Convertible Notes 2016 into
liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated
fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity
component representing the conversion option was determined by deducting the fair value of the liability component from
the face value of the Convertible Notes 2016 as a whole. The excess of the face amount of the liability component over its
carrying amount is amortized to interest expense over the term of the Convertible Notes 2016 using the effective interest
method. The gross proceeds of $287,500 were accordingly allocated between long-term debt of $216,775 and stockholders'
equity of $70,725. Issuance costs of $7,689, were allocated between long-term debt ($5,798) and equity ($1,891). The total
interest expense recognized for the year ended December 31, 2018 was $16,741, which consists of $2,156 of contractual
interest expense, $13,481 of amortization of debt discount and $1,104 of amortization of debt issuance costs. The total interest
expense recognized for the year ended December 31, 2017 was $15,742, which consists of $2,154 of contractual interest
expense, $12,559 of amortization of debt discount and $1,029 of amortization of debt issuance costs. The total interest
expense recognized for the year ended December 31, 2016 was $4,553, which consists of $651 of contractual interest expense,
$3,607 of amortization of debt discount and $295 of amortization of debt issuance costs. The issuance costs allocated to long-
term debt is presented in the balance sheet as offset against long-term debt.
81
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
In connection with the issuance of the Convertible Notes 2016, the Company entered into capped call transactions
(Capped Call 2016) in private transactions. Under the Capped Call 2016, the Company purchased capped call options that in
aggregate relate to 100% of the total number of shares of the Company's common stock underlying the Convertible Notes
2016, with a strike price approximately equal to the conversion price of the Convertible Notes 2016 and with a cap price
equal to approximately $73.03 per share. The capped calls were purchased for $22,540 and recorded as a reduction to
additional paid-in-capital in accordance with ASC 815-40, Contracts in Entity’s Own Equity.
The purchased Capped Call 2016 allows the Company to receive shares of its common stock and/or cash from
counterparties equal to the amounts of common stock and/or cash related to the excess of the market price per share of the
common stock, as measured under the terms of the Capped Call 2016 over the strike price of the Capped Call 2016 during
the relevant valuation period. The purchased Capped Call 2016 is intended to reduce the potential dilution to common stock
upon future conversion of the Convertible Notes 2016 by effectively increasing the initial conversion price to approximately
$73.03 as well as to offset potential cash payments the Company is required to make in excess of the principal amount of the
Convertible Notes 2016 in applicable events.
The Capped Call 2016 is a separate transaction entered into by the Company with the option counterparties, is not part
of the terms of the Convertible Notes 2016 and will not change the holders' rights under the Convertible Notes 2016.
10. Other Liabilities
Other current liabilities consist of the following:
Software license intangible asset liability .............................................................. $
Others .....................................................................................................................
$
21,945 $
2,374
24,319 $
16,892
4,495
21,387
December 31,
2018
2017
Other long-term liabilities consist of the following:
Deferred rent .......................................................................................................... $
Income tax payable .................................................................................................
Software license intangible asset liability ..............................................................
Deferred tax liabilities ............................................................................................
Others .....................................................................................................................
$
11. Income Taxes
December 31,
2018
2017
1,100 $
706
7,961
—
1,144
10,911 $
1,487
830
14,445
6,146
1,719
24,627
Income (loss) from continuing operations before income taxes consists of the following:
United States .................................................................................... $
Foreign .............................................................................................
Total ................................................................................................. $
(71,978) $
(31,984)
(103,962) $
(77,649) $
(18,431)
(96,080) $
(15,202)
26,658
11,456
Year Ended December 31,
2017
2018
2016
82
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Income tax provision consisted of the following:
Current:
U.S. Federal .............................................................................................. $
U.S. State ..................................................................................................
Foreign .....................................................................................................
Deferred:
U.S. Federal ..............................................................................................
U.S. State ..................................................................................................
Foreign .....................................................................................................
Total ......................................................................................................... $
Year Ended December 31,
2017
2016
2018
— $
42
375
417
(6,734)
—
(1,894)
(8,628)
(8,211) $
96 $
51
1,105
1,252
(11,312)
(613)
(10,503)
(22,428)
(21,176)
938
(22)
35
951
(16,755)
—
747
(16,008)
(15,057)
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate of 21% in 2018
and 34% in 2017 and 2016 to income (loss) before income taxes as a result of the following:
Year Ended December 31,
2017
2016
2018
Expenses (benefit) at statutory rate ......................................................... $
State income taxes ...................................................................................
Research and development credits ..........................................................
Change in valuation allowance ................................................................
Impact of foreign operations ...................................................................
Unrecognized tax benefits .......................................................................
Stock-based compensation ......................................................................
Prior year return to provision adjustment ................................................
Effect of U. S. tax law change .................................................................
Impairment of intangibles .......................................................................
Other ........................................................................................................
$
(21,832) $
594
(13,283)
13,757
5,925
5,340
(381)
1,422
—
—
247
(8,211) $
(32,562) $
(585)
(12,983)
40,028
(1,951)
3,596
(10,248)
1,105
(4,602)
(2,328)
(646)
(21,176) $
3,895
222
(8,566 )
9,768
(13,570 )
3,151
(9,925 )
(524 )
—
—
492
(15,057 )
Significant components of the Company’s net deferred taxes consist of the following:
Deferred tax assets
Net operating loss carry forwards.................................................................................... $
Research and development credits ..................................................................................
Stock-based compensation ..............................................................................................
Accrued expenses and allowances ...................................................................................
Amortization and depreciation ........................................................................................
Other temporary differences ............................................................................................
Foreign tax credit ............................................................................................................
Valuation allowance ........................................................................................................
Total deferred tax assets ..................................................................................................
Deferred tax liabilities
Acquired intangible assets ...............................................................................................
Acquired tangible assets ..................................................................................................
Convertible debt ..............................................................................................................
Other deferred tax liabilities ............................................................................................
Total deferred tax liabilities ............................................................................................
Deferred tax assets (liabilities), net .............................................................................. $
83
December 31,
2018
2017
39,888 $
69,320
9,055
2,334
1,408
6,411
2,338
(92,315)
38,439
(22,593)
—
(11,596)
(603)
(34,792)
3,647 $
34,366
62,118
6,021
2,004
4,910
4,018
2,557
(78,538)
37,456
(26,602)
(255)
(15,213)
(68)
(42,138)
(4,682)
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act contains significant changes to
U.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effective January 1,
2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries
in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100%
first-year depreciation deduction for certain capital investments. In 2017, the Company recorded provisional amounts based
on reasonable estimates for certain enactment-date effects of the Tax Reform Act in accordance with the guidance in SAB
118. In 2017, the Company recorded a net tax benefit related to the enactment-date effects of the Tax Reform Act that included
the remeasurement of the federal deferred tax assets and liabilities, the tax effect of the one-time mandatory repatriation
income, and related valuation allowance adjustments.
During 2018, the Company finalized the calculation of the deemed mandatory repatriation income upon filing its 2017
U.S. income tax return. The change in the mandatory repatriation income was fully absorbed by the U.S. net operating loss,
which is subject to valuation allowance, and resulted in no current tax liability. These measurement period adjustments had
no net tax effect after the offsetting change to valuation allowance.
The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. In January
2018, the FASB released guidance on the accounting for tax on the GILTI inclusion. Entities can make an accounting policy
election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or
account for GILTI as a period cost in the year the tax is incurred. The Company has elected to account for GILTI as a period
cost in the year the tax is incurred. For the year ended December 31, 2018, the Company computed no GILTI inclusion as a
result of current year aggregate loss of the Company’s foreign subsidiaries.
Valuation Allowance
The Company records a valuation allowance to reduce deferred tax assets to the amount that the Company believes is
more likely than not to be realized. The determination of recording or releasing tax valuation allowances is made, in part,
pursuant to an assessment performed by management regarding the likelihood that the Company will generate sufficient
future taxable income against which benefits of the deferred tax assets may or may not be realized. This assessment requires
management to exercise significant judgment and make estimates with respect to the Company’s ability to generate revenue,
gross profits, operating income and taxable income in future periods. Amongst other factors, management must make
assumptions regarding overall current and projected business and semiconductor industry conditions, operating efficiencies,
the Company’s ability to timely develop, introduce and consistently manufacture new products to customers’ specifications,
acceptance of new products, customer concentrations, technological change and the competitive environment which may
impact the Company’s ability to generate taxable income and, in turn, realize the value of the deferred tax assets. The
Company early adopted the guidance on accounting for share-based payments to employees at the beginning of 2016.
At December 31, 2016, a full valuation allowance was recorded on the deferred tax assets of U.S. and certain foreign
subsidiaries. At December 31, 2017 and 2018, the Company has a full valuation allowance recorded against the deferred tax
assets of Canada, United Kingdom, and the U.S., with the exception of the federal refundable AMT credit. The Company has
a partial valuation allowance against the deferred tax assets of Taiwan.
The valuation allowance increased $13,777, $39,907, and $5,064 in the years ended December 31, 2018, 2017 and
2016, respectively.
The net increase of $13,777 in the valuation allowance for the year ended December 31, 2018 is comprised of $20
increase charged to other comprehensive income and $13,757 charged to income tax provision. The net increase of $39,907
in the valuation allowance for the year ended December 31, 2017 is comprised of $134 increase charged to other
comprehensive income, $158 decrease charged to goodwill, and $39,931 increase charged to income tax provision. The
valuation allowance charged to income tax provision included an income tax benefit from the partial release of the federal
and state valuation allowance. The net increase of $5,064 in the valuation allowance for the year ended December 31, 2016
is comprised of $16,044 decrease charged to additional paid-in capital, offset by $305 increase charged to other
comprehensive income, $3,088 increase charged to goodwill, $7,068 increase charged to retained earnings, and $10,647
increase charged to income tax provision.
84
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
General Income Tax Disclosures
The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately
$219,900 and $96,572, respectively at December 31, 2018, that will begin to expire in 2022 for federal income tax purposes
and in 2026 for state income tax purposes. The Company’s federal NOL carryforward of $18,559 that was generated in 2018
does not expire. At December 31, 2018, the Company has NOL carryforwards of $2,848 for its Taiwan subsidiary which
begin to expire in 2020, and NOL carryforwards of $7,631 for the United Kingdom subsidiary, which do not expire. A full
valuation allowance has been provided on U.S. NOL and United Kingdom NOL, and a partial valuation allowance has been
provided on Taiwan NOL.
At December 31, 2018, the Company has federal and state research and development (“R&D”) tax credit carryforwards
of $47,227 and $49,179, respectively. The federal tax credits will begin to expire in 2024. Some state tax credits will begin
to expire in 2021 and some do not expire. At December 31, 2018, the Company has Canadian tax credits and research
expenditure claim carryforwards for its Canadian subsidiary of $6,494 and $3,396, respectively. The tax credits will begin to
expire in 2027, and the research expenditure claim carryforwards do not expire. A full valuation allowance has been provided
on R&D tax credit and research expenditure claim carryforwards.
Pursuant to Internal Revenue Code sections 382 and 383, use of the Company’s NOL and R&D credits generated prior
to June 2004 are subject to an annual limitation due to a cumulative ownership percentage change that occurred in that period.
The Company has had two changes in ownership, one in December 2000 and the second in June 2004, that resulted in an
annual limitation on NOL and R&D credit utilization. The NOL and R&D credit carryover of Cortina, are also subject to
annual limitation under Internal Revenue Code sections 382 and 383. The acquisition of Cortina caused an ownership change
that resulted in an annual limitation, as well as Cortina’s legacy annual limitation amount from ownership changes prior to
acquisition. The NOL and R&D credit carryforward which will expire unused due to annual limitation is not recognized for
financial statement purposes and is not reflected in the above carryover amounts.
The Company’s NOL carryforwards include Cortina’s federal and state pre-acquisition NOL of $49,152 and $3,919,
respectively. These NOL carryforwards will begin to expire in 2024 for federal and 2026 for state. The Company’s NOL
carryforwards also include ClariPhy’s federal and state pre-acquisition NOL of $46,601 and $68,177, respectively. These
NOL carryforwards will begin to expire in 2032 for federal and 2028 for state. The Company’s R&D credit carryforwards
included Cortina’s federal and state pre-acquisition credits of $6,033 and $7,912, respectively. The federal R&D credit
carryforward will begin to expire in 2027. While some state tax credits will begin to expire in 2021, most do not expire. The
utilization of Cortina and ClariPhy’s pre-acquisition tax attributes is subject to certain annual limitations under Internal
Revenue Code sections 382 and 383. No benefit for Cortina’s tax attributes was recorded upon the close of the acquisition,
as the benefit from these tax attributes did not meet the "more-likely-than-not" standard.
The Company operates under tax holiday in Singapore. The Singapore tax holiday allows for a reduced income tax rate
of 5% effective through April 2020, and the Company is currently pursuing a renewal of the reduced tax rate to apply
subsequent to the current holiday period. The Singapore statutory rate is 17%. The tax holiday is conditional upon meeting
certain employment, activities and investment thresholds. As of December 31, 2018, the Company believes it has met all of
the required thresholds. The Company qualified for a tax incentive program in Argentina that reduced the income tax rate to
12%, starting January 1, 2018 through December 31, 2019, with a return to the full statutory rate of 25% for periods thereafter.
As a result of these reduced tax rates, foreign tax expense increased (decreased) by ($2,093) and $7,412 for the years ended
December 31, 2018 and 2017, respectively. The effect of the tax holidays on diluted earnings per share was ($0.05) and $0.18
for the years ended December 31, 2018 and 2017, respectively.
The following table summarizes the changes in gross unrecognized tax benefits:
Balance as of January 1 ............................................................................................. $
Increases based on tax positions related to the current year ......................................
Increases (decreases) based on tax positions of prior year ........................................
Gross increases for acquired unrecognized tax benefits ............................................
Statute of limitation expirations ................................................................................
Balance as of December 31 ....................................................................................... $
47,606 $
5,747
708
—
(118)
53,943 $
56,503 $
4,656
(13,452)
—
(101)
47,606 $
46,453
5,450
(1,766)
6,585
(219)
56,503
Year Ended December 31,
2018
2017
2016
85
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
As of December 31, 2018, the Company had approximately $2,857 of unrecognized tax benefits that if recognized
would affect the effective income tax rate. The Company believes that before the end of next year, it is reasonably possible
that the gross unrecognized tax benefit may decrease by approximately $51 due to statute of limitation expiration in foreign
jurisdictions.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax
expense. The Company recorded $17 and $16 in interest in the years ended December 31, 2018 and 2017, respectively. The
Company had $65, $113, and $222 of interest and penalties accrued as of December 31, 2018, 2017 and 2016, respectively.
The Company files income tax returns in the U.S. federal jurisdiction, various states and certain foreign jurisdictions.
The Company is no longer subject to U.S. federal income tax examinations for tax years ended on or before December 31,
2011 or to California state income tax examinations for tax years ended on or before December 31, 2010. However, to the
extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits
were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward.
The Company does not provide for U.S. income taxes on undistributed earnings of its controlled foreign corporations as
the Company intends to reinvest these earnings indefinitely outside the United States. At December 31, 2018, foreign
subsidiaries had cumulative undistributed earnings of $38,470 that, if repatriated, is expected to result in immaterial U.S.
taxes.
The Company is currently under examination by the Inland Revenue Authority of Singapore (“IRAS”) for the years
2010, 2011 and 2012. The IRAS made an adjustment to the timing of deducting certain intercompany payments, the effect of
which has been reflected in the provision and did not result in a material impact to the consolidated financial statements. As
of the report date, the examination is ongoing.
The Company adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, at the beginning of
2017. As a result of the adoption, the Company reclassified the unamortized deferred tax charge balance to retained earnings.
At the same time, the Company recorded a deferred tax asset on the difference between the tax basis and financial reporting
carrying value in the consolidated financial statements related to the intercompany transfer of an asset in prior years. The
effect of the adoption resulted in a charge of $1,217 on the beginning balance of retained earnings.
12. Earnings Per Share
The following shows the reconciliation of weighted average shares used in the calculation of basic and diluted earnings
per share:
Denominator
Weighted average common stock—basic ...............................
Effect of potentially dilutive securities:
Add options to purchase common stock .............................
Add unvested restricted stock unit ......................................
Add employee stock purchase plan .....................................
Add convertible debt ...........................................................
Weighted average common stock—diluted ............................
2018
Year Ended December 31,
2017
2016
43,690,581
42,165,213
40,565,433
—
—
—
—
43,690,581
—
—
—
—
42,165,213
1,300,649
2,158,260
8,240
92,299
44,124,881
86
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following securities were not included in the computation of diluted earnings per share as inclusion would have
been anti-dilutive:
Common stock options ...........................................................
Unvested restricted stock unit ................................................
Convertible debt .....................................................................
13. Stock-Based Compensation
2018
1,208,643
2,871,135
10,830,038
14,909,816
Year Ended December 31,
2017
1,456,610
2,935,500
10,830,038
15,222,148
2016
—
284,871
5,834,522
6,119,393
In June 2010, the Board of Directors (the “Board”) approved the Company’s 2010 Stock Incentive Plan (the “2010
Plan”), which became effective in November 2010. The 2010 Plan provides for the grants of restricted stock, stock
appreciation rights and stock unit awards to employees, non-employee directors, advisors and consultants. The Compensation
Committee administers the 2010 Plan, including the determination of the recipient of an award, the number of shares subject
to each award, whether an option is to be classified as an incentive stock option or nonstatutory option, and the terms and
conditions of each award, including the exercise and purchase prices and the vesting or duration of the award. Options granted
under the 2010 Plan are exercisable only upon vesting. At December 31, 2018, 4,310,998 shares of common stock have been
reserved for future grants under the 2010 Plan.
Stock Option Awards
The Company did not grant any stock options during the years ended December 31, 2018, 2017 and 2016.
The following table summarizes information regarding options outstanding:
Outstanding at December 31, 2017 ..................................
Exercised .............................................................................
Outstanding at December 31, 2018 ..................................
Vested and Exercisable as of December 31, 2018 ...........
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
11.67
3.83
12.94
12.94
3.26 $
33,578
2.62 $
2.62 $
22,267
22,267
Number of
Shares
1,346,863 $
(187,742)
1,159,121 $
1,159,121 $
The intrinsic value of options outstanding, exercisable and vested and expected to vest is calculated based on the
difference between the exercise price and the fair value of the Company’s common stock as of the respective balance sheet
dates.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $4,553,
$11,312 and $15,390, respectively. The intrinsic value of exercised options is calculated based on the difference between the
exercise price and the fair value of the Company’s common stock as of the exercise date. Cash received from the exercise of
stock options was $719, $2,214 and $5,748, respectively, for the years ended December 31, 2018, 2017 and 2016.
Restricted Stock Units and Awards
The Company granted restricted stock units (“RSUs”) to members of the Board and its employees. Most of the
Company’s outstanding RSUs vest over four years with vesting contingent upon continuous service. The Company estimates
the fair value of RSUs using the market price of the common stock on the date of the grant. The fair value of these awards is
amortized on a straight-line basis over the vesting period.
87
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table summarizes information regarding outstanding restricted stock units:
Outstanding at December 31, 2017 ......................................................................
Granted ....................................................................................................................
Vested ......................................................................................................................
Canceled ..................................................................................................................
Outstanding at December 31, 2018 ......................................................................
Expected to vest in the future as of December 31, 2018 .....................................
Weighted
Average
Grant Date
Fair Value
Per Share
34.48
31.78
29.50
36.53
34.68
Number of
Shares
3,987,552 $
2,283,793
(1,639,367)
(580,293)
4,051,685 $
3,935,781
The RSUs include performance-based stock units subject to achievement of pre-established revenue and earnings per
share goals on non-GAAP basis. Once the goals are met, the performance-based stock units are subject to four years of vesting
from the original grant date, contingent upon continuous service. The total performance-based units that vested for the year
ended December 31, 2018 was 96,580. As of December 31, 2018, the total performance-based units outstanding was 129,609.
Market Value Stock Units
In January 2018, the compensation committee of the Board approved long-term market value stock unit (MVSU)
awards to certain executive officers and employees, subject to certain market and service conditions in the maximum total
amount of 756,000 units. Recipients may earn between 0% to 225% of the target number of shares based on the Company’s
achievement of total shareholder return (TSR) in comparison to the TSR of companies in the S&P 500 Index over a period
of approximately three years in length ending in the first calendar quarter of 2021 after reporting of fiscal year 2020 results.
If the Company’s absolute TSR is negative for the performance period, then the maximum number of shares that may be
earned is the target number of shares. The fair value of the MVSU awards was estimated using Monte Carlo simulation model
and compensation is being recognized ratably over the service period. The expected volatility of the Company’s common
stock was estimated based on the historical average volatility rate over the three-year period. The dividend yield assumption
was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed
interest rates consistent with three-year measurement period. The total amount of compensation to recognize over the service
period, and the assumptions used to value the grants are as follows:
Total target shares ...................................................................................................................................
Fair value per share ................................................................................................................................. $
Total amount to be recognized over the service period ........................................................................... $
Risk free interest rate...............................................................................................................................
Expected volatility ..................................................................................................................................
Dividend yield .........................................................................................................................................
336,000
55.81
18,752
2.29%
47.52%
—
Employee Stock Purchase Plan
In December 2011, the Company adopted the Employee Stock Purchase Plan (“ESPP”). Participants purchase the
Company's stock using payroll deductions, which may not exceed 15% of their total cash compensation. Pursuant to the terms
of the ESPP, the "look-back" period for the stock purchase price is six months. Offering and purchase periods will begin on
February 10 and August 10 of each year. Participants will be granted the right to purchase common stock at a price per share
that is 85% of the lesser of the fair market value of the Company's common shares at the beginning or the end of each six-
month period.
The ESPP imposes certain limitations upon an employee’s right to acquire common stock, including the following: (i)
no employee shall be granted a right to participate if such employee immediately after the election to purchase common stock,
would own stock possessing 5% or more to the total combined voting power or value of all classes of stock of the Company,
and (ii) no employee may be granted rights to purchase more than $25 fair value of common stock for each calendar year.
The maximum aggregate number of shares of common stock available for purchase under the ESPP is 2,750,000. Total
88
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
common stock issued under the ESPP during the years ended December 31, 2018, 2017 and 2016 was 283,493, 171,099 and
285,101, respectively.
The fair value of employee stock purchase plan is estimated at the start of offering period using the Black-Scholes
option pricing model with the following average assumptions for the years ended December 31, 2018, 2017 and 2016:
Risk-free interest rate ...................................................
Expected life (in years) .................................................
Dividend yield ..............................................................
Expected volatility ........................................................
Estimated fair value ...................................................... $
2.01%
0.50
—
46%
$
8.35
0.94%
0.50
—
42%
$
11.03
0.45%
0.50
—
54%
8.99
2018
Year Ended December 31,
2017
2016
Stock-Based Compensation Expense
Stock-based compensation expense is included in the Company’s results of operations as follows:
l
2018
Year Ended December 31,
2017
2016
Cost of revenue ............................................................. $
Research and development ...........................................
Sales and marketing .....................................................
General and administrative ...........................................
Discontinued operations ...............................................
$
2,527 $
37,397
13,470
10,490
—
63,884 $
2,045 $
28,846
8,340
5,602
—
44,833 $
1,796
17,390
4,405
4,407
2,194
30,192
As of December 31, 2018, total unrecognized compensation cost related to unvested stock options and awards prior to
the consideration of expected forfeitures, was approximately $120,678, which is expected to be recognized over a weighted-
average period of 2.46 years.
14. Employee Benefit Plan
The Company has established a 401(k) tax-deferred savings plan (the “Plan”) which permits participants to make
contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. The
Company may, at its discretion, make matching contributions to the Plan. Furthermore, the Company is responsible for
administrative costs of the Plan. The Company accrued $1,800 contribution to the Plan for the year ended December 31,
2018. The Company accrued $1,137 contribution to the Plan for the year ended December 31, 2017. The Company accrued
$2,625 contribution to the Plan for the year ended December 31, 2016.
15. Fair Value Measurements
The guidance on fair value measurements requires fair value measurements to be classified and disclosed in one of the
following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
89
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The Company measures its investments in marketable securities at fair value using the market approach which uses
prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company has cash equivalents which consist of money market funds valued using the amortized cost method, in
accordance with Rule 2a-7 under the 1940 Act which approximates fair value.
The convertible notes are carried on the Consolidated Balance Sheets at their original issuance value including accreted
interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of
each reporting period. As of December 31, 2018 and 2017, the fair value of Convertible Notes was determined on the basis
of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. The fair value of the
Convertible Notes as of December 31, 2018 and 2017 was $512,428 and $555,200, respectively.
The following table presents information about assets required to be carried at fair value on a recurring basis:
December 31, 2018
Assets
Cash equivalents:
Money market funds ............................................... $
Commercial paper ..................................................
Investment in marketable securities:
Municipal bonds .....................................................
Corporate notes/bonds ............................................
Variable rate demand notes ....................................
Asset-backed securities ...........................................
Commercial paper ..................................................
Certificate of deposit ..............................................
$
December 31, 2017
Assets
Cash equivalents:
Money market funds ............................................... $
Municipal bonds .....................................................
Corporate notes/bonds ............................................
Commercial paper ..................................................
Investment in marketable securities:
Municipal bonds .....................................................
Corporate notes/bonds ............................................
Variable rate demand notes ....................................
Asset-backed securities ...........................................
Commercial paper ..................................................
$
Total
Level 1
Level 2
740 $
96,759
6,733
146,126
8,900
32,923
39,701
956
332,838 $
38 $
—
—
—
—
—
—
956
994 $
702
96,759
6,733
146,126
8,900
32,923
39,701
—
331,844
Total
Level 1
Level 2
3,332 $
999
2,608
76,456
27,657
146,401
3,500
7,185
56,994
325,132 $
31 $
—
—
—
—
—
—
—
—
31 $
3,301
999
2,608
76,456
27,657
146,401
3,500
7,185
56,994
325,101
As discussed in Note 4, the Company has a marketable equity investment. The marketable equity investment is
classified as Level 1 in the fair value hierarchy. As discussed in Note 4, the Company has non-marketable equity investments
which are classified within Level 3 in the fair value hierarchy because the Company estimates the value based on valuation
methods using the observable transaction price at the transaction date.
16. Segment and Geographic Information
The Company operates in one reportable segment. Revenue by region is classified based on the locations to which the
product is transported, which may differ from the customer’s principal offices.
90
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
The following table sets forth the Company’s revenue by geographic region:
2018
Year Ended December 31,
2017
(in thousands)
2016
China ......................................................................................... $
United States .............................................................................
Japan ..........................................................................................
Thailand .....................................................................................
Other ..........................................................................................
$
113,684 $
87,545
7,492
40,884
44,885
294,490 $
114,168 $
92,620
29,061
45,205
67,147
348,201 $
103,071
29,976
36,308
35,837
61,085
266,277
As of December 31, 2018, $32,631 of long-lived tangible assets are located outside the United States of which $28,428
are located in Taiwan. As of December 31, 2017, $8,695 of long-lived tangible assets are located outside the United States
of which $4,647 are located in Taiwan.
17. Commitments and Contingencies
Leases
The Company leases its facility under noncancelable lease agreements expiring in various years through 2026. The
Company also licenses certain software used in its research and development activities under a term license subscription and
maintenance arrangement.
Future minimum lease payments under noncancelable operating leases having initial terms in excess of one year are as
follows:
2019 ...................................................................................................................................................... $
2020 ......................................................................................................................................................
2021 ......................................................................................................................................................
2022 ......................................................................................................................................................
2023 ......................................................................................................................................................
2024 and thereafter ...............................................................................................................................
$
December 31, 2018
4,588
2,252
1,883
1,722
1,615
1,698
13,758
For the years ended December 31, 2018, 2017 and 2016, lease operating expense was $5,742, $6,865 and $13,870,
respectively.
Noncancelable Purchase Obligations
The Company depends upon third party subcontractors to manufacture wafers. The Company’s subcontractor
relationships typically allow for the cancellation of outstanding purchase orders, but require payment of all expenses incurred
through the date of cancellation. As of December 31, 2018, the total value of open purchase orders for wafers was
approximately $8,634. As of December 31, 2018, the Company has a commitment to pay mask costs of $665 and $3,032 for
a service contract.
Legal Proceedings
Netlist, Inc. v. Inphi Corporation, Case No. 09-cv-6900 (C.D. Cal.)
On September 22, 2009, Netlist filed suit in the United States District Court, Central District of California( the
“Court”), asserting that the Company infringes U.S. Patent No. 7,532,537. Netlist filed an amended complaint on
December 22, 2009, further asserting that the Company infringes U.S. Patent Nos. 7,619,912 and 7,636,274, collectively with
U.S. Patent No. 7,532,537, the patents-in-suit, and seeking both unspecified monetary damages to be determined and an
91
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
injunction to prevent further infringement. These infringement claims allege that the iMB™ and certain other memory module
components infringe the patents-in-suit. The Company answered the amended complaint on February 11, 2010 and asserted
that the Company does not infringe the patents-in-suit and that the patents-in-suit are invalid. In 2010, the Company filed
inter partes requests for reexamination with the United States Patent and Trademark Office (the “USPTO”), asserting that
the patents-in-suit are invalid. As a result of the proceedings at the USPTO, the Court has stayed the litigation, with the parties
advising the Court on status every 120 days.
As to the proceeding at the USPTO, reexamination has been ordered for all of the patents that were alleged to infringe,
and at present, the USPTO has determined that almost all of the originally filed claims are not valid, with certain amended
claims being determined patentable. The Reexamination Certificate for U.S. Patent No. 7,532,537 was issued on August 2,
2016 based upon amended claims. The Reexamination Certificate for U.S. Patent No. 7,636,274 was issued on November 5,
2018, indicating all claims 1-97 were cancelled. The parties continue to assert their respective positions with respect to the
reexamination proceeding for U.S. Patent No. 7,619,912.
While the Company intends to defend the foregoing USPTO proceedings and lawsuit vigorously, the USPTO
proceedings and litigation, whether or not determined in the Company’s favor or settled, could be costly and time-consuming
and could divert management’s attention and resources, which could adversely affect the Company’s business.
Based on the nature of USPTO proceedings and litigation, the Company is currently unable to predict the final outcome
of this lawsuit and therefore, cannot determine the likelihood of loss nor estimate a range of possible loss. However, because
of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s
business, financial condition, results of operations or cash flows could be materially and adversely affected.
Claims Against ClariPhy
During the year ended December 31, 2018, the Company entered into settlement agreements related to claims by certain
customers of ClariPhy Communications Inc. (ClariPhy) associated with contracts entered prior to the acquisition date under
which the Company paid $8,000 to the customers. The Company also entered into an agreement with former stockholders of
ClariPhy in which the Company recovered $4,875 from the escrow set up as part of the ClariPhy acquisition. The Company
recorded a charge of $2,125, net of amount previously accrued, during the year ended December 31, 2018 included in General
and administrative expenses in the consolidated statements of income (loss).
Certain customers of ClariPhy have made claims associated with matters occurring prior to the acquisition date, including
a demand letter the Company received relating to products purchased by a customer from ClariPhy. The customer alleges
that the products did not meet the specification or workmanship warranties provided in the agreement with ClariPhy, and has
requested reimbursement and damages. The Company is currently reviewing whether these additional claims are valid, and
the Company is unable to reasonably estimate the amount of any potential liability at this time. Amounts payable as a result
of these claims may be recoverable from the escrow set up as part of the ClariPhy acquisition.
Indemnifications
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to
customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters,
including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the
Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive
termination of the underlying agreement and the maximum potential amount of future payments the Company could be
required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company has not
incurred material costs to defend lawsuits or settle claims related to these indemnifications. Accordingly, the Company has
no liabilities recorded for these agreements as of December 31, 2018 and December 31, 2017.
92
Inphi Corporation
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
Supplementary Financial Information (Unaudited)
Quarterly Results of Operations
Year Ended December 31, 2018
Mar. 31,
2018(3)
Jun. 30,
2018
Sept. 30,
2018
Dec. 31,
2018(4)
(in thousands, except per share amounts)
Total revenue ............................................................... $
Gross profit ..................................................................
Net loss ........................................................................
Basic earnings per share ..............................................
Diluted earnings per share ...........................................
60,136 $
32,546
(22,991)
(0.53)
(0.53)
69,814 $
39,611
(28,464)
(0.65)
(0.65)
78,009 $
43,462
(22,665)
(0.52)
(0.52)
86,531
49,526
(21,631)
(0.49)
(0.49)
Year Ended December 31, 2017
Mar. 31,
2017
Jun. 30,
2017
Sept. 30,
2017(1)
Dec. 31,
2017(2)
(in thousands, except per share amounts)
Total revenue ............................................................... $
Gross profit ..................................................................
Net income (loss) ........................................................
Basic earnings per share ..............................................
Diluted earnings per share ...........................................
93,584 $
53,513
(11,273)
(0.27)
(0.27)
84,423 $
47,835
(14,967)
(0.36)
(0.36)
84,511 $
42,071
(48,766)
(1.15)
(1.15)
85,683
53,084
102
—
—
(1) The Company abandoned a project related to certain developed technology and in-process research and development
from the ClariPhy acquisition which resulted to an impairment charge of $47,014.
(2) The benefit for income taxes included revaluation of deferred tax liabilities to the new federal tax rate of 21% and
tax benefit from intercompany transfer of intellectual property rights.
(3) The benefit for income taxes included partial release of federal valuation allowance resulting from the transfer of an
acquired in-process research and development to developed technology in 2018 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.
(4) The Company recorded a charge of $7,000 due to impairment of a non-marketable equity investment.
93
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such
term is defined in Rules 13a-15 (e) and 15d – 15(e) under the Exchange Act, that are designed to provide reasonable assurance
that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is
accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and
Chief Financial Officer (principal financial officer), as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to
provide reasonable, not absolute assurance. Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate. Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this
assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated Framework (2013). Based on the assessment using those criteria, our
management concluded that as of December 31, 2018, our internal control over financial reporting was effective. The
effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included
in Part II “Item 8, Financial Statements and Supplementary Data.”
(c) Changes in Internal Control over Financial Reporting. There has been no change in our “internal control over
financial reporting” as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recent
fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference from the information under the captions “Election
of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” contained in our
proxy statement to be filed with the SEC in connection with the solicitation of proxies for our 2019 Annual Meeting of
Stockholders to be held on May 23, 2019 pursuant to Regulation 14A and no later than 120 days after December 31, 2018
(the Proxy Statement).
94
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information under the captions “Election
of Directors,” “Compensation of Directors,” “Compensation Discussion and Analysis,” “Corporate Governance,”
“Compensation Committee Report” and “Executive Compensation” contained in the Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item with respect to security ownership of certain beneficial owners and
management is incorporated by reference from the information under the captions “Equity Compensation Plan
Information,” “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation”
contained in the Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information under the captions
“Corporate Governance” and “Certain Relationships and Related Person Transactions” contained in the Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information under the captions “Audit
Committee Report” and “Ratification of the Appointment of Independent Registered Public Accountants” contained in the
Proxy Statement.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial Statements. See “Index to Consolidated Financial Statements” under Part II, “Item 8, Financial
Statements and Supplementary Data.”
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Inphi Corporation under Part
II, “Item 8, Financial Statements and Supplementary Data.”
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or not required or
because the information is included elsewhere in the Consolidated Financial Statements or the Notes
thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be
filed has been identified.
(b) Exhibits
The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this
report.
95
Exhibit
Number
2.1*
2.2*
2.3*
3(i)
3(ii)
4.1
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
Description
Agreement and Plan of Merger dated July 30, 2014 by and among the Company, Cortina, Catalina
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company, and the
Stockholder’s Agent (incorporated by reference to exhibit 2.1 of the Registrant’s Current Report on Form 8-
K filed with the SEC on August 1, 2014).
Agreement and Plan of Merger dated July 30, 2014 by and among the Company, Cortina, Catalina
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company, and the
Stockholder’s Agent, as amended by Amendment No. 1 thereto dated September 25, 2014 (incorporated by
reference to exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 6,
2014).
Agreement and Plan of Merger dated November 1, 2016 by and among the Registrant, Clarice Acquisition
Corporation, a Delaware corporation and wholly owned subsidiary of the Registrant, ClariPhy
Communications, Inc., a Delaware corporation, and Fortis Advisors LLC, a Delaware limited liability
company, solely in its capacity as Securityholders’ Agent (incorporated by reference to exhibit 2.1 of the
Registrant’s Current Report on Form 8-K filed with the SEC on November 1, 2016).
Restated Certificate of Incorporation of the Registrant (incorporated by reference to exhibit 3(i) of the
Registrant’s Annual Report on Form 10-K filed with the SEC on March 7, 2011).
Amended and Restated Bylaws of the Registrant (incorporated by reference to exhibit 3.1 of the Registrant’s
Current Report on Form 8-K filed with the SEC on October 20, 2015).
Specimen Common Stock Certificate (incorporated by reference to exhibit 4.1 filed with Registration
Statement on Form S-1 (File No. 333-167564), as amended).
Amended and Restated Investors' Rights Agreement dated August 12, 2010 (incorporated by reference to
exhibit 4.2 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 7, 2011).
Indenture dated December 8, 2015 between the Registrant and Wells Fargo Bank, National Association, as
trustee (including form of Note) (incorporated by reference to exhibit 4.1 of the Registrant’s Current Report
on Form 8-K filed with the SEC on December 8, 2015).
Indenture dated September 12, 2016 between the Registrant and Wells Fargo Bank, National Association, as
trustee (including form of Note) (incorporated by reference to exhibit 4.1 of the Registrant’s Current Report
on Form 8-K filed with the SEC on September 12, 2016).
Inphi Corporation 2000 Stock Option/Stock Issuance Plan (as amended on June 2, 2010) and related form
stock option plan agreements (incorporated by reference to exhibit 10.1 filed with Registration Statement on
Form S-1 (File No. 333-167564), as amended).
Inphi Corporation 2010 Stock Incentive Plan and related form agreements (incorporated by reference to
exhibit 10.2 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 7, 2011).
Form of Indemnification Agreement between the Registrant and its officers and directors (incorporated by
reference to exhibit 10.3 filed with Registration Statement on Form S-1 (File No. 333-167564), as amended).
Offer letter dated December 10, 2007 between John Edmunds and the Registrant, as amended (incorporated
by reference to exhibit 10.6 to filed with Registration Statement on Form S-1 (File No. 333-167564), as
amended).
Change of Control and Severance Agreement dated June 8, 2010 by and between John Edmunds and the
Registrant (incorporated by reference to exhibit 10.7 filed with Registration Statement on Form S-1 (File No.
333-167564), as amended).
Offer letter dated October 3, 2007 between Ron Torten and the Registrant, as amended (incorporated by
reference to exhibit 10.8 filed with Registration Statement on Form S-1 (File No. 333-167564), as amended).
96
10.7+
10.8+
10.9+
10.10
10.11
10.12
10.13+
10.14
10.15
10.16
10.17
10.18*
10.19
10.20
10.21
Offer letter dated February 1, 2012 between Ford Tamer and the Registrant (incorporated by reference to
exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on February 3, 2012).
Severance and Change of Control Agreement dated February 1, 2012 by and between Ford Tamer and the
Registrant (incorporated by reference to exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed
with the SEC on February 3, 2012).
Severance and Change of Control Agreement dated September 4, 2012 by and between Charlie Roach and
the Registrant (incorporated by reference to exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q
for the three months ended September 30, 2012).
Lease Agreement dated June 4, 2010 by and between the Registrant and LBA Realty Fund III—Company
VII, LLC (incorporated by reference to exhibit 10.12 filed with Registration Statement on Form S-1 (File
No. 333-167564), as amended).
Lease Agreement dated September 20, 2012 by and between the Registrant and Bayland Corporation
(incorporated by reference to exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the three
months ended September 30, 2012).
Second Amendment to Lease Agreement dated September 30, 2012 by and between the Registrant and LBA
Realty Fund III—Company VII, LLC (incorporated by reference to exhibit 10.3 of the Registrant’s Quarterly
Report on Form 10-Q for the three months ended September 30, 2012).
Inphi Corporation Amended and Restated Employee Stock Purchase Plan, as amended and restated
effective April 3, 2015 and as further amended and restated effective April 17, 2018 (incorporated by
reference from Annex A to the Registrant’s definitive proxy statement filed on April 25, 2018).
Base Capped Call Confirmation dated December 2, 2015 by and between Registrant and Morgan Stanley &
Co. LLC (incorporated by reference to exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed
with the SEC on December 8, 2015).
Base Capped Call Confirmation dated December 2, 2015 by and between Registrant and JPMorgan Chase
Bank, National Association, London Branch (incorporated by reference to exhibit 10.2 of the Registrant’s
Current Report on Form 8-K filed with the SEC on December 8, 2015).
Additional Capped Call Confirmation dated December 4, 2015 by and between Registrant and Morgan
Stanley & Co. LLC (incorporated by reference to exhibit 10.3 of the Registrant’s Current Report on Form 8-
K filed with the SEC on December 8, 2015).
Additional Capped Call Confirmation dated December 4, 2015 between Registrant and JPMorgan Chase
Bank, National Association, London Branch (incorporated by reference to exhibit 10.4 of the Registrant’s
Current Report on Form 8-K filed with the SEC on December 8, 2015).
Asset Purchase Agreement dated June 29, 2016 by and among Rambus Inc., Bell ID Singapore Ptd Ltd, the
Registrant and Inphi International Pte. Ltd. (incorporated by reference to exhibit 10.1 of the Registrant’s
Quarterly Report on Form 10-Q for the three months ended June 30, 2016).
Base Capped Call Confirmation dated September 6, 2016 between the Registrant and Morgan Stanley & Co.
LLC (incorporated by reference to exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with
the SEC on September 12, 2016).
Base Capped Call Confirmation dated September 6, 2016 between the Registrant and JPMorgan Chase Bank,
National Association, London Branch (incorporated by reference to exhibit 10.2 of the Registrant’s Current
Report on Form 8-K filed with the SEC on September 12, 2016).
Additional Capped Call Confirmation dated September 7, 2016 between the Registrant and Morgan Stanley
& Co. LLC (incorporated by reference to exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed
with the SEC on September 12, 2016).
97
10.22
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
10.29+
10.30+
10.31+
10.32+
10.33+
10.34
10.35
10.36
Additional Capped Call Confirmation dated September 7, 2016 between the Registrant and JPMorgan Chase
Bank, National Association, London Branch (incorporated by reference to exhibit 10.4 of the Registrant’s
Current Report on Form 8-K filed with the SEC on September 12, 2016).
Form of Stock Unit Agreement (U.S. and Non-U.S. Employees and Consultants) under the Inphi Corporation
2010 Stock Incentive Plan (incorporated by reference to exhibit 10.23 of the Registrant's Annual Report on
Form 10-K filed with the SEC on February 28, 2018).
Form of Stock Option Agreement (U.S. and Non-U.S. Employees and Consultants) under the Inphi
Corporation 2010 Stock Incentive Plan (incorporated by reference to exhibit 10.2 of the Registrant’s
Quarterly Report on Form 10-Q for the three months ended September 30, 2016).
Amendment to Severance and Change of Control Agreement between Charlie Roach and the Registrant,
effective as of November 2, 2016 (incorporated by reference to exhibit 10.3 of the Registrant’s Quarterly
Report on Form 10-Q for the three months ended September 30, 2016).
Amendment to Change of Control Severance Agreement between Richard Ogawa and the Registrant,
effective as of November 2, 2016 (incorporated by reference to exhibit 10.4 of the Registrant’s Quarterly
Report on Form 10-Q for the three months ended September 30, 2016).
Change of Control Severance Agreement dated April 22, 2013 between Richard Ogawa and the Registrant
(incorporated by reference to exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the three
months ended September 30, 2016).
Amendment to Change of Control Severance Agreement between Ron Torten and the Registrant, effective
as of November 2, 2016 (incorporated by reference to exhibit 10.6 of the Registrant’s Quarterly Report on
Form 10-Q for the three months ended September 30, 2016).
Change of Control Severance Agreement dated January 22, 2014 between Ron Torten and the Registrant
(incorporated by reference to exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the three
months ended September 30, 2016).
Amendment to Change of Control Severance Agreement between John Edmunds and the Registrant, effective
as of October 19, 2016 (incorporated by reference to exhibit 10.30 of the Registrant’s Annual Report on Form
10-K filed with the SEC on February 28, 2018).
Form of Notice of Stock Unit Award and Stock Unit Agreement (incorporated by reference to exhibit 4.1 of
the Registrant’s Registration Statement on Form S-8 filed with the SEC on January 11, 2017).
Amended and Restated Inphi Corporation 2010 Stock Incentive Plan dated July 19, 2017 (incorporated by
reference to exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the three months ended June
30, 2017).
Inphi Corporation Annual Incentive Plan (incorporated by reference to exhibit 10.1 of the Registrant’s current
report on Form 8-K filed with the SEC on January 22, 2018).
Third Amendment to Lease Agreement dated July 31, 2013 by and between the Registrant and LBA Realty
Fund III—Company VII, LLC (incorporated by reference to exhibit 10.33 of the Registrant’s Annual Report
on Form 10-K filed with the SEC on February 28, 2018).
Fourth Amendment to Lease Agreement dated August 10, 2016 by and between the Registrant and LBA
Realty Fund III—Company VII, LLC (incorporated by reference to exhibit 10.34 of the Registrant’s Annual
Report on Form 10-K filed with the SEC on February 28, 2018).
Fifth Amendment to Lease Agreement dated March 7, 2017 by and between the Registrant and LBA Realty
Fund III—Company VII, LLC (incorporated by reference to exhibit 10.35 of the Registrant’s Annual Report
on Form 10-K filed with the SEC on February 28, 2018).
98
10.37
10.38
21.1
23.1
24.1
31.1
31.2
32.1(1)
32.2(1)
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
First Amendment to Lease Agreement dated May 28, 2014 by and between the Registrant and Bayland
Corporation (incorporated by reference to exhibit 10.36 of the Registrant’s Annual Report on Form 10-K
filed with the SEC on February 28, 2018).
Second Amendment to Lease Agreement dated January 13, 2017 by and between the Registrant and Bayland
Corporation (incorporated by reference to exhibit 10.37 of the Registrant’s Annual Report on Form 10-K
filed with the SEC on February 28, 2018).
List of Subsidiaries (incorporated by reference to exhibit 21.1 of the Registrant’s Annual Report on Form 10-
K filed with the SEC on February 28, 2018).
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Power of Attorney (see the signature page of this report).
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
+
*
Indicates management contract or compensatory plan.
The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit to such agreement
to the SEC upon request.
(1) The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such
filing, except to the extent that the registrant specifically incorporates it by reference.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
99
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INPHI CORPORATION
By: /s/ Ford Tamer
Ford Tamer
Chief Executive Officer
(Principal Executive Officer)
Date: February 28, 2019
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Ford Tamer and John Edmunds, and each of them, his or her true and lawful attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Ford Tamer
Ford Tamer
Chief Executive Officer, President and Director
(Principal Executive Officer)
February 28, 2019
/s/ John Edmunds
John Edmunds
Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer)
February 28, 2019
/s/ Diosdado P. Banatao
Diosdado P. Banatao
/s/ Nicholas Brathwaite
Nicholas Brathwaite
/s/ Chenming C. Hu
Chenming C. Hu
/s/ David Liddle
David Liddle
/s/ Bruce McWilliams
Bruce McWilliams
/s/ Elissa Murphy
Elissa Murphy
/s/ William J. Ruehle
William J. Ruehle
/s/ Sam S. Srinivasan
Sam S. Srinivasan
Chairman of the Board
February 28, 2019
Director
Director
Director
Director
Director
Director
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
Lead Director
February 28, 2019
100
We Move Big Data Fast
Data Manipulation
Data Movement
Inphi Recognized for Excellence
16 New Awards for Quality & Technology in 2017-2019
Processor, GPU, NIC, Switch
Optical, Networking
Digital
Analog, Mixed Signal, DSP
Inside and Between Cloud Data Centers and in Telecom Networks
Cloud Data Centers
Telecom
The Data Center is the ComputerTM
The Cloud is the NetworkTM
√ PAM is a once in a multi-decade
change in data transmission
√ Inside: 30 m - 10 km
√ Between: 10 - 120 km
√ Mostly coherent transmission
√ Metro: 600 km
√ Long Haul: 1,000s km
√ Access: 5G, Cable, 10 - 300 km
Investor Information
Stock Exchange Listing: NYSE
Ticker Symbol: IPHI
Investor Relations (408) 217-7308 investors@inphi.com
American Stock Transfer & Trust Company, LLC Phone: 800-937-5449 www.amstock.com
Huawei
Best Quality
Company
Fujitsu
Technical
Advancement
Innolight
Innovation
FiberHome
Core Partner
2017
2018
2019
2017
2017
2018
2017
2018
Lightwave
Innovation for
COLORZ®, PAM4,
Polaris and Porrima
Hisense
Best Technical
Support
Sumitomo
(SEDI)
Best Delivery
Award
2017
2019
2018
2018
2018
Cisco
Excellence in
Emerging
Technology
2017
ECN
COLORZ
2017
Forward Looking Statements
This Annual Report to Stockholders contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not
limited to, statements regarding our strategy, the anticipated benefits and features of our products, use of our products, market acceptance and market share of our
products, industry and market trends and investments in technology. These statements involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, and reported results should
not be considered as an indication of future performance. More information regarding such risks and uncertainties is contained in our Form 10-K attached hereto, and
in other reports filed by us with the SEC from time-to-time. You are cautioned not to unduly rely on these forward-looking statements, which speak only as of the date
of this Annual Report. Inphi Corporation undertakes no obligation to publicly revise any forward-looking statement to reflect circumstances or event after the date of this
Annual Report or to report the occurrence of unanticipated events.
Inphi Annual Report 2019 R4.indd 2
4/15/2019 3:58:00 PM
The global leader in high-speed
data movement interconnects
2018 Annual Report
World-leading innovations
2953 Bunker Hill Lane, Suite 300
Santa Clara, CA 95054
Phone (408) 217-7300
Fax (408) 217-7350
Sales@inphi.com
Copyright ©2019 Inphi Corporation.
All rights reserved. Inphi is a registered
trademark of Inphi Corporation
Inphi Annual Report 2019 R4.indd 1
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