Item 1A.
Risk Factors
A description of the risk factors associated with our business is set forth below. You should carefully consider the following risk
factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in
or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of
these risks and you may lose all or part of your investment.
Our success depends on our ability to develop and bring to market
innovative new technologies and semiconductor products as well as continued growth in consumer and customer demand for these new technologies and semiconductor products. We may not be able to develop and bring to market such technologies
and products in a timely manner because the process of developing high-performance semiconductor products is complex and costly.
Our future growth and success depends on the continued growth in market acceptance and the consumer and customer demand for our mobile technologies and semiconductor products, especially our MHL
enabled products. Growth in the demand for our MHL enabled products accounted for a significant portion of our revenue growth in 2012. If we cannot continue to increase consumer awareness of and demand for MHL enabled products, our
customers’ demand for our MHL enabled semiconductor products may not continue to grow as rapidly as has been the case and may even decrease. This could have a negative impact on our business and results of operations.
Our future growth and success also depends on our ability to continuously develop and bring to market new and innovative semiconductor
products on a timely basis—such as semiconductor products supporting the MHL and WirelessHD standards. There can be no assurance that we will be successful in developing and marketing these new or other future products. Moreover, there is no
assurance that our new or future products will incorporate the innovations, features or functionality at the price points necessary to achieve a desired level of market acceptance in the anticipated timeframes. There is no way to make certain that
any such new or future products will contribute significantly to our revenue. We face significant competition from startups having the resources, flexibility and ability to innovate faster than we can. We also face competition from established
companies with more significant financial resources and greater breadth of product line than we have, providing them with a competitive advantage in the marketplace. If we cannot continue to innovate and to develop and market new products could
negatively affect our business and results of operations could be negatively affected.
The development of new semiconductor
products is highly complex. On several occasions in the past, we have experienced delays, some of which exceeded one year, in the development and introduction of our new semiconductor products. As our products integrate new, more advanced functions
and transition to smaller geometries, they become more complex and increasingly difficult to design, manufacture and debug.
Our ability to successfully develop and introduce new products also depends on a number of factors, including, but not limited to:
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our ability to accurately predict market trends and requirements, the establishment and adoption of new standards in the market and the evolution of
existing standards and connectivity technologies, including enhancements or modifications to existing standards such as HDMI, MHL and WirelessHD;
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our ability to identify customer and consumer market needs where we can apply our innovation and skills to create new standards or areas for product
differentiation that improve our overall competitiveness either in an existing market or in a new market;
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our ability to develop advanced technologies and capabilities and new products and solutions that satisfy customer and consumer market demands;
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how quickly our competitors and customers integrate the innovation and functionality of our new products into their semiconductor products, putting
pressure on us to continue to develop and introduce innovative products with new features and functionality;
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our ability to complete and introduce new product designs on a timely basis, while accurately anticipating the market windows for our products and
bringing them to market within the required time frames;
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our ability to manage product life cycles;
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our ability to transition our product designs to leading-edge foundry processes in response to market demands, while achieving and maintaining of high
manufacturing yields and low testing costs;
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the consumer electronics market’s acceptance of our new technologies, architectures products and other connectivity solutions; and
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consumers’ shifting preferences for how they purchase and consume HD content, which may not be met by our products.
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Accomplishing what we need to do to be successful is extremely challenging, time-consuming, and expensive; and there is no assurance that
we will succeed. We may experience product development delays from unanticipated engineering complexities, commercial deployment of new connectivity standards changing market or competitive product requirements or specifications, difficulties in
overcoming resource constraints, our inability to license third-party technology and other factors. Also our competitors and customers may integrate the innovation and functionality of our products into their own products, thereby reducing demand
for our products. If we are not able to develop and introduce new and innovative products and solutions successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would adversely affect our operating
results. Even if we are successful in our product development efforts, it is possible that failures in our commercialization may result in delays or failure in generating revenue from these new products.
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In addition, we must work with semiconductor foundries and potential customers to complete
new product development and to validate manufacturing methods and processes to support volume production and potential re-work. These steps may involve unanticipated difficulties, which could delay product introductions and reduce market acceptance
of our products. These difficulties and the increasing complexity of our products may further result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with customers and
market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our new products, that we will be able to complete development of these products when anticipated, or that these products can be
manufactured in commercial volumes at acceptable yields, or that any design wins will produce any revenue. Failure to develop and introduce new products, successfully and in a timely manner, may adversely affect our results of operations.
We have made acquisitions of companies and intangible assets in the past and expect to continue to make such acquisitions in the future
as we look to develop and bring to market new and innovative semiconductor and products and technologies on a timely basis. Acquisitions of companies or intangible assets involve numerous risks and uncertainties.
Our growth depends on the growth of the markets we serve and our ability to enter new markets. We are also dependent on our ability to
enhance our existing products and technologies and to introduce new products and technologies for existing and new markets on a timely basis. The acquisition of companies or intangible assets is a strategy we have used in the past and will continue
to use to develop new technologies and products enhance our existing products portfolio and to enter new markets. Acquisitions involve numerous risks, including, but not limited to, the following:
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the inability to find acquisition opportunities that are suitable to our needs available in the time frame necessary for us to take advantage of market
opportunities or available at a price that we can afford;
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the difficulty and increased costs of integrating the operations and employees of the acquired business, including our possible inability to keep and
retain key employees of the acquired business;
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the disruption to our ongoing business of the acquisition process itself and subsequent integration;
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the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;
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the inability to successfully commercialize acquired products and technologies;
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the inability to retain the customers and suppliers of the acquired business;
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the need to take impairment charges or write-downs with respect to acquired assets and technologies; and
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the risk that the future business potential as projected may not be realized and as a result, we that we may be required to take a charge to earnings
that would impact our profitability.
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We cannot assure you that our prior acquisitions or our future
acquisitions, if any, will be successful or provide the anticipated benefits, or that they will not adversely affect our business, operating results or financial condition. Our failure to manage growth effectively and to successfully integrate
acquisitions made by us could materially harm our business and operating results.
In January 2007, for example we completed
the acquisition of Sci-worx, now Silicon Image, GmbH. In 2009, because of our decision to focus on discrete semiconductor products and related intellectual property, we decided to restructure our research and development operations resulting in
the closure of our two sites in Germany.
We have made and continue to make strategic investments in and enter into strategic
partnerships with third parties. The anticipated benefits of these investments and partnerships may never materialize.
We have made and will continue to make strategic investments in and enter into strategic partnerships with third parties with the goal of acquiring or gaining access to new and innovative
semiconductor products and technologies on a timely basis. Negotiating and performing under these arrangements involves significant time and expense, and we cannot assure you that the anticipated benefits of these arrangements will ever
materialize or that the products or technologies involved will ever be commercialized or that, as a result, we will not have write down a portion or all of our investment.
For example, on July 13, 2011, we purchased a 17.5% equity ownership interest in a U.S. based privately-held company for $7.5
million in cash. In July 2012, we invested an additional $2.75 million in the form of convertible secured promissory notes. As of September 30, 2012, we concluded that these investments are impaired, and that such impairment is other than
temporary. In reaching this conclusion, we considered all available evidence, including that (i) the privately-held company had not achieved forecasted revenue or operating results, (ii) the privately-held company had limited liquidity or
capital resources as of September 30, 2012, and (iii) the overall progress the privately-held company has made towards its business objectives, including the acquisition of home theater wireless speaker customers, has not progressed as
previously expected. As a result of our analysis of these factors, we believed that the possibility was remote that we would exercise our call option on the investments or that we would realize any other value from these investments. As a result, we
recorded a non-cash impairment charge of $7.5 million representing the carrying value of the investments in the quarter ended September 30, 2012.
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In 2011, we converted $8.5 million of secured promissory notes from a third-party company
into advances for intellectual properties. In the fourth quarter of 2011 and again subsequent to our year ended December 31, 2011, we assessed our advances for intellectual properties for impairment. We concluded that the intangible assets
related to these advances were fully impaired as of December 31, 2011, and have written them off. This conclusion was based on our determination that certain of the technologies was no longer aligned with our product roadmap due to a
change in strategic focus and therefore, would not be used. The remaining technologies were impaired due to an adverse change in the extent and manner in which the technology was expected to be utilized by a strategic customer, as well as the
competitive environment in which the technology was intended for use. In connection with this assessment, we recognized an impairment charge of $8.5 million in our 2011 consolidated statement of operations.
Negotiation and integration of acquisitions or strategic investments could divert management’s attention and other company
resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products and sell our products and ultimately could harm our growth or financial results:
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difficulty in combining the technology, products, operations or workforce of the acquired business with our business;
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difficulties in entering into new markets in which we have limited or no experience and where competitors have stronger positions;
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loss of, or impairment of relationships with, any of our key employees, vendors or customers;
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difficulty in operating in new and potentially disperse locations;
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disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire;
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failure to realize the potential financial or strategic benefits of the transaction;
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difficulty integrating the accounting, management information, human resources and other administrative systems of the acquired business;
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disruption of or delays in ongoing research and development efforts and release of new products to market;
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diversion of capital and other resources;
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assumption of liabilities;
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issuance of equity securities that may be dilutive to our existing stockholders;
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diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;
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failure of the due diligence processes to identify significant issues with product quality, technology and development, or legal and financial issues,
among other things;
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incurring one-time charges, increased contingent liabilities, adverse tax consequences, depreciation or deferred compensation charges, amortization of
intangible assets or impairment of goodwill, which could harm our results of operations; and
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potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings or those of the acquired business.
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Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors
outside of our control and no assurance can be given that our previous or future acquisitions will be successful, will deliver the intended benefits of such acquisition, and will not materially harm our business, operating results or financial
condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.
Our
annual and quarterly operating results are highly dependent upon how well we manage our business.
Our annual and
quarterly operating results are highly dependent upon and may fluctuate based on how well we manage our business, including without limitation:
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our ability to manage product introductions and transitions, develop necessary sales and marketing channels and manage our entry into new market
segments;
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our ability to manage sales into multiple markets such as mobile, CE and PC, which may involve additional research and development, marketing or other
costs and expenses;
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our ability to enter into licensing transactions when expected and make timely deliverables and milestones on which recognition of revenue often
depends;
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our ability to develop customer solutions that adhere to industry standards in a timely and cost-effective manner;
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our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;
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our ability to manage joint ventures and projects, design services and our supply chain partners;
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our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;
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our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;
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the success of the distribution and partner channels through which we choose to sell our products and our ability to manage expenses and inventory
levels;
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our ability to successfully maintain certain structural and various compliance activities in support of our global structure which is designed to
result in certain operational benefits as well as an overall lower tax rate and which, if not maintained, may result in us losing these operational and tax benefits; and
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Our ability to effectively manage our business.
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Our annual and quarterly operating results may fluctuate significantly and are difficult to predict, particularly given adverse domestic and global economic conditions.
Our annual and quarterly operating results are likely to fluctuate significantly in the future based on a number of factors many of which
we have little or no control over. These factors include, but are not limited to:
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the growth, evolution and rate of adoption of industry standards in our key markets, including mobile, CE and PCs;
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the completion of a few key licensing transactions in any given period on which our anticipated licensing revenue and profits are highly dependent, and
the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected and we depend on a few licensees in any period for substantial portions of our anticipated licensing revenue and
profits;
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our licensing revenue has been uneven and unpredictable over time and is expected to continue to be uneven and unpredictable in the future, resulting
in considerable fluctuation in the amount of revenue recognized in a particular quarter;
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the impact on our operating results of the results of the royalty compliance audits which we regularly perform;
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competitive pressures, such as the ability of our competitors to offer or introduce products that are more cost-effective or that offer greater
functionality than our products;
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average selling prices and gross margins of our products, which are influenced by competition and technological advancements, among other factors;
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government regulations impacting the industry standards in our key markets or our products;
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the availability or continued viability of other semiconductors or key components required for a customer solution where we supply one or more of the
necessary components;
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the cost to manufacture our products, including the cost of gold, and prices charged by the third parties who manufacture, assemble and test our
products; and
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fluctuations in market demand, one-time sales opportunities and sales goals, which sometimes result in heightened sales efforts during a given period
that may adversely affect our sales in future periods.
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Because we have little or no control over these
factors and/or their magnitude, our operating results are difficult to predict. Any substantial adverse change in any of these factors could negatively affect our business and results of operations. For example, in January 2013, we announced a
reduction in our revenue guidance for the fourth quarter of 2012 as a result of the rescheduling of certain orders by a large customer.
Our business has in the past and may in the future be significantly impacted by a deterioration in worldwide economic conditions and any
uncertainty in the outlook for the global economy could make it more likely that our actual results will differ materially from expectations.
Global credit and financial markets have experienced disruptions, and may experience disruptions in the future, including national debt and fiscal concerns, diminished liquidity and credit availability,
declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult
to accurately forecast and plan our future business activities. Any tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and
future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. Our mobile and CE product revenue, which
comprised approximately 76.2% and 70.5% of total revenue for the three months ended March 31, 2013 and 2012, respectively, is dependent on continued demand for consumer electronics, including but not limited to, DTVs, STBs, AV receivers,
tablets, digital still cameras, and smartphones. Demand for consumer electronics is a function of the health of the economies in the United States, Japan and around the world. As a result, the demand for our mobile, CE and PC products and our
operating results have in the past and may in the future be adversely affected as well. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery, worldwide, in the United States, in our industry,
or in the consumer electronics market. These and other economic factors have had and may in the future have a material adverse effect on demand for our mobile, CE and PC products and on our financial condition and operating results.
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Investments in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise 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. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Any adverse
events in the global economy and in the credit markets could negatively impact our return on investment for these debt securities and thereby reduce the amount of cash and cash equivalents and investments on our balance sheet.
The licensing component of our business strategy increases our business risk and market volatility.
Our business strategy includes licensing our IP to companies that incorporate it into their respective technologies that address markets
in which we do not directly participate or compete and we license into markets where we do participate and to compete. There can be no assurance that these customers will continue to be interested in licensing our technology on commercially
favorable terms or at all. Our licensing revenue can be impacted by the introduction of new technologies by customers in place of the technologies used by them based on our IP. There also can be no assurance that our licensing customers will
introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property or
will maintain the confidentiality of our proprietary information. Our IP licensing agreements are complex and depend upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of
these require significant judgments.
Our licensing revenue fluctuates, sometimes significantly, from period to period because
it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin, the licensing revenue portion of our overall revenue can
have a disproportionate impact on gross profit and profitability. Generating revenue from IP licenses is a lengthy and complex process that may last beyond the period in which our efforts begin and, once an agreement is in place, the timing of
revenue recognition may be dependent on the customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology and other factors. The
accounting rules governing the recognition of revenue from IP licensing transactions are increasingly complex and subject to interpretation. As a result, the amount of license revenue recognized in any period may differ significantly from our
expectations.
We face intense competition in our markets, which may lead to reduced revenue and gross margins from sales of our
products and losses.
The markets in which we operate are intensely competitive and characterized by rapid
technological change, evolving standards, short product life cycles and declining selling prices. We expect competition to increase, as industry standards become more widely adopted, new industry standards are introduced, competitors reduce prices
and offer products with greater levels of integration, and new competitors enter the markets we serve.
Our products face
competition from companies selling similar discrete products and from companies selling products such as chipsets and system-on-a-chip (SoC) solutions with integrated functionality. Our competitors include semiconductor companies that focus on the
mobile, CE and PC markets, as well as major diversified semiconductor companies and we expect that new competitors will enter our markets.
Some of our current or potential customers, including our own licensees, have their own internal semiconductor capabilities or other semiconductor suppliers or relationships, and may also develop
solutions integrating the innovations, features and functionality of our products for use in their own products rather than purchasing products from us. Some of our competitors have already established supplier or joint development
relationships with some of our current or potential customers and may be able to leverage these relationships to discourage these customers from purchasing products from us or to persuade them to replace our products with theirs. Many of our
competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other
resources than we do and therefore may be able to adapt more quickly to new or emerging technologies and customer requirements, or to devote greater resources to the promotion and sale of their products. Our competitors in the CE market include
Analog Devices, Analogix Semiconductor, Parade Technologies, Explore, Broadcom, Intel, MediaTek, Mstar, Sigma and Marvell and our competitors in the Mobile market include Analogix, Parade, Explore, Broadcom, Intel, Qualcomm, Texas Instrument,
NVIDIA, Marvell and MediaTek. Mergers and acquisitions are very common in our industry and some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively
address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in and is likely to continue to result in price reductions
and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.
We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.
The markets in which we compete are characterized by rapid technological change, evolving customer needs and frequent introductions of new
products, technologies and standards. As we adjust to evolving customer requirements and technological advances, we may be required to further reposition our existing offerings and to introduce new products and services. We may not be successful in
developing and marketing such new offerings, or we may experience difficulties that could delay or prevent the development and marketing of new products. In addition, new standards that compete with standards that we promote have been and
likely will continue to be introduced, which could impact our success. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and challenges,
our results of operations could be negatively affected.
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We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries. This requires us to change the manufacturing processes for our products and to
redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies
to reduce our costs. Currently most of our products are manufactured in 180 nanometer, 130 nanometer, 65 nanometer and 55 nanometer geometry processes. We are now designing new products in 40 nanometer process technologies. In the past, we have
experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, resulting in reduced manufacturing yields, delays in product deliveries and increased expenses. The transition to 40 nanometer
geometry process technologies has and will continue to result in significantly higher mask and prototyping costs, as well as additional expenditures for engineering design tools and related computer hardware. We may face similar difficulties, delays
and expenses as we continue to transition our products to smaller geometry processes.
We are dependent on our relationship
with our foundry to transition to smaller geometry processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition in a timely manner, or at all, or that we will be able to maintain our
existing foundry relationships or develop new ones. If any of our foundry subcontractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.
We will have difficulty selling our products if customers do not design our products into their product offerings or if our customers’ products are not commercially successful.
Our products are generally incorporated into our customers’ products at the customers’ design stage. We rely
on OEMs in the markets we serve to select our products to be designed into their products. Without having our products designed into our customers’ products (we refer to such design integration as “design wins”), it is very difficult
to sell our products. We often incur significant expenditures on the development of a new product under the hope for such “design wins” without any assurance that a manufacturer will select our product for design into its own product.
Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. Some of these third parties may be competitors and, accordingly, may not supply this information to us on a
timely basis, if at all. Once a manufacturer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost,
time, effort and risk for the customer. Furthermore, even if a manufacturer designs one of our products into its product offering, we cannot be assured that its product will be commercially successful or that we will receive any revenue from sales
of that product. Sales of our products largely depend on the commercial success of our customers’ products. Our customers generally can choose at any time to stop using our products if their own products are not commercially successful or for
any other reason. We cannot assure you that we will continue to achieve design wins or that our customers’ products incorporating our products will ever be commercially successful.
Our products typically have lengthy sales cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales. In addition, our average product life
cycles tend to be short and, as a result, we may hold excess or obsolete inventory that could adversely affect our operating results.
Our customers typically test and evaluate our products prior to deciding to design our product into their own products. This evaluation period generally lasts from three to over six months to test,
followed by an additional three to over nine months to begin volume production of products incorporating our products. This lengthy sales cycle may cause us to experience significant delays and to incur additional inventory costs until we generate
revenue from our products. It is possible that we may never generate any revenue from products after incurring significant expenditures. Even if we achieve a design win with a customer, there is no assurance that the customer will successfully
market and sell its products with our integrated components. The length of our sales cycle increases the risk that a customer will decide to cancel or change its product plans, which would cause us to lose sales that we had anticipated. In addition,
anticipated sales could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products. Further, the combination of our lengthy
sales cycles coupled with worldwide economic conditions could have a compounding negative impact on the results of our operations.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, from time to time,
our product sales and marketing efforts may not generate sufficient revenue requiring that we write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to
recover or otherwise compensate for our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher-cost products in our inventory, our operating
results would be harmed.
Our customers may not purchase anticipated levels of products, which can result in excess inventories.
We generally do not obtain firm, long-term purchase commitments from our customers and, in order to accommodate the
requirements of certain customers, we may from time to time build inventory that is specific to that customer in advance of receiving firm purchase orders. The short-term nature of our customers’ commitments and the rapid changes in demand for
their products reduce our ability to accurately estimate the future requirements of those customers. Should the customer’s need shift so that they no longer require such inventory, we may be left with excessive inventories, which could
adversely affect our operating results.
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We depend on a few key customers and the loss of any of them could significantly reduce our revenue
and gross margins and adversely affect our results of operations.
Historically, a relatively small number of customers
and distributors have generated a significant portion of our revenue and we may not be able to diversify our customer and/or distributor base. For the three months ended March 31, 2013, revenue from Samsung Electronics and our distributors
Weikeng and Edom Technology accounted for 40.8%, 8.0% and 6.8% of our total revenue, respectively. For the three months ended March 31, 2012, revenue from Samsung Electronics and our distributors Edom Technology and Weikeng accounted
for 34.3%, 8.9% and 7.3% of our total revenue, respectively. In addition, an OEM customer of ours may buy our products through multiple distributors, contract manufacturers and /or directly from us, which could mean an even greater
concentration of revenue in such a customer. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products or products
incorporating our products and generate revenue for us. As a result of this concentration of revenue in few customers, our results of operations could be adversely affected if any of the following occurs:
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one or more of our customers or distributors becomes insolvent or goes out of business;
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one or more of our key customers or distributors significantly reduces, delays or cancels orders; and/or
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one or more significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.
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While our participation in multiple markets has broadened our customer base, we remain dependent on a small
number of customers or, in some cases, a single customer for a significant portion of our revenue in any given quarter, the loss of which could adversely affect our operating results.
We sell our products through distributors, which limits our direct interaction with our end customers, therefore reducing our ability to forecast sales and increasing the complexity of our business.
Many OEMs rely on third-party manufacturers or distributors to provide inventory management and purchasing
functions. Distributors generated 30.2% of our total revenue for both the three months ended March 31, 2013 and 2012. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business,
requiring us to:
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manage a more complex supply chain;
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monitor the level of inventory of our products at each distributor;
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estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
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monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States and not publicly
traded.
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Since we have limited ability to forecast inventory levels at our end customers, it is possible
that there may be significant build-up of inventories in the distributor channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or requests to move out
planned shipments. This could adversely impact our revenues and profits. Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.
We are dependent upon suppliers for a portion of raw materials used in the manufacturing of our products and new regulations related to conflict
free minerals could require us to incur additional expenses in connection with procuring these raw materials.
The
Securities and Exchange Commission has recently adopted additional disclosure requirements related to certain minerals, so called “conflict minerals”, sourced from the Democratic Republic of Congo and adjoining countries for which such
conflict minerals are necessary to the functionality of a product manufactured, or contracted to be manufactured. These regulations also require a reporting company to disclose efforts to prevent the use of such minerals.
In our industry, such conflict minerals are most commonly found in metals. Some of our products use certain metals, such as gold,
silicon and copper, as part of the manufacturing process. Although we have not yet determined whether the gold, silicon or copper used in the manufacture of our products would be considered conflict minerals, if such a determination is made, we
may not be able to obtain alternative supplies for such metals due to the limited number of sources of non conflict metals. If we are required to use alternative supplies, the price we pay for such metals may increase. Additionally, our
reputation with our customers could be harmed if we cannot certify that our products do not contain conflict metals.
Governmental
action against companies located in offshore jurisdictions may lead to a reduction in the demand for our common shares.
Federal and state legislation have been proposed in the past, and similar legislation may be proposed in the future which, if enacted,
could have an adverse tax impact on both us and our stockholders. For example, the ability to defer taxes as a result of permanent investments offshore could be limited, thus raising our effective tax rate.
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The cyclical nature of the semiconductor industry may create constraints in our foundry, test and
assembly capacities and strain our management and resources.
The semiconductor industry is characterized by
significant downturns and wide fluctuations in supply and demand. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third-party suppliers. During periods of increased demand and
constraints in manufacturing capacity, production capacity for our semiconductors may be subject to allocation, in which case not all of our production requirements may be met. This may impact our ability to meet demand and could also increase our
production costs and inventory levels. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions. Our financial
performance has been and may in the future be, negatively impacted by downturns in the semiconductor industry. In a downturn situation, we may incur substantial losses if there is excess production capacity or excess inventory levels in the
distribution channel.
The cyclicality of the semiconductor industry may also strain our management and resources. To manage
these industry cycles effectively, we must:
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improve operational and financial systems;
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train and manage our employee base;
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successfully integrate operations and employees of businesses we acquire or have acquired;
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attract, develop, motivate and retain qualified personnel with relevant experience; and
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adjust spending levels according to prevailing market conditions.
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If we cannot manage industry cycles effectively, our business could be seriously harmed.
We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our products, which reduce our control over the production
process.
We do not own or operate a semiconductor fabrication facility. We rely on one third party semiconductor
foundry overseas to produce substantially all of our semiconductor products. We also rely on outside assembly and test services to test all of our semiconductor products. Our reliance on an independent foundry and assembly and test facilities
involves a number of significant risks, including, but not limited to:
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reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
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lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels; and
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lack of availability of, or delayed access to, next-generation or key process technologies.
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For example, in the fourth quarter of fiscal 2012, we recorded the write down of certain unsalable inventory amounting to $6.2 million
due to defects in the material used by one of our assembly vendors in the packaging process.
We do not have a long-term
supply agreement with our third party semiconductor foundry or many of our other subcontractors and instead obtain these services on a purchase order basis. Our outside sub-contractors have no obligation to manufacture our products or supply
products to us for any specific period of time, in any specific quantity or at any specific price, except as set forth in a particular purchase order or multi month quote. Our requirements represent a small portion of the total production capacity
of our outside foundry, assembly and test facilities and our sub-contractors may reallocate capacity on short notice to other customers who may be larger and better financed than we are, or who have long-term agreements with our sub-contractors,
even during periods of high demand for our products. We may elect to have our suppliers move or expand production of our products to different facilities under their control, even in different locations, which may be time consuming, costly and
difficult, have an adverse effect on quality, yields and costs and require us and/or our customers to re-qualify our products, which could open up design wins to competition and result in the loss of design wins. If our subcontractors are unable or
unwilling to continue manufacturing, assembling or testing our products in the required volumes, at acceptable quality, yields and costs and in a timely manner, our business will be substantially harmed. In this event, we would have to identify
and qualify substitute sub-contractors, which would be time-consuming, costly and difficult; and we cannot guarantee that we would be able to identify and qualify such substitute sub-contractors on a timely basis or obtain commercially reasonable
terms from them. This qualification process may also require significant effort by our customers and may lead to re-qualification of parts, opening up design wins to competition and loss of design wins. Any of these circumstances could substantially
harm our business. In addition, if competition for foundry, assembly and test capacity increases, our product costs may increase and we may be required to pay significant amounts or make significant purchase commitments to secure access to
production services.
The complex nature of our production process can reduce yields and prevent identification of problems until well
into the production cycle or, in some cases, until after the product has been shipped.
The manufacture of
semiconductors is a complex process and it is often difficult for semiconductor foundries to achieve acceptable product yields. Product yields depend on both our product design and the manufacturing process technology unique to the semiconductor
foundry. Since low yields may result from either design or process difficulties, identifying problems can often only occur well into the production cycle, when an actual product exists that can be analyzed and tested.
Further, we only test our products after they are assembled, as their high-speed nature makes earlier testing difficult and expensive. As
a result, defects often are not discovered until after assembly. This could result in a substantial number of defective products being assembled and tested or shipped, thus lowering our yields and increasing our costs. These risks could result in
product shortages or increased costs of assembling, testing or even replacing our products.
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Although we test our products before shipment, they are complex and may contain defects and
errors. For example, in January 2013, we announced that we took a charge to reflect the write down of certain unsalable inventory due to defects in the material used by one of our assembly vendors in the packaging process. In the past we have
encountered defects and errors in our products. Because our products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability,
quality or compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical
resources, delayed product shipments and replacement costs, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these circumstances could substantially harm our business.
We face foreign business, political and economic risks because a majority of our products and our customers’ products are
manufactured and sold outside of the United States and because we have employees in research and development centers and sales offices throughout the world.
A substantial portion of our business is conducted outside of the United States and we have a significant portion of our workforce in research and development centers and sales offices throughout the
world. As a result, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia. For the three months ended March 31, 2013 and 2012, approximately 51.9% and 61.2%
of our total revenue respectively, was generated from customers and distributors located outside of North America, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our
revenue in future periods.
In addition to our headquarters in Sunnyvale, California, we maintain research and development
centers in Shanghai, China, and Hyderabad, India, and undertake sales and marketing activities through regional offices in several other countries. As we grow, we intend to continue to expand our international business activities.
Accordingly, we are subject to a variety of risks associated with the conduct of business outside the United States. These risks
include, but are not limited to:
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political, social and economic instability;
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the operational challenges of conducting our business in several geographic regions around the world, especially in the face of different business
practices, social norms and legal standards that differ from those to which we are accustomed and held to as a publicly traded company in the United States, particularly with respect to the protection and enforcement of intellectual property rights
and the conduct of business generally;
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policies, laws, regulations and social pressures in foreign countries that favor and promote their own local, domestic companies over non-domestic
companies, and additional trade and travel restrictions;
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natural disasters and public health emergencies;
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nationalization of business and blocking of cash flows;
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changing raw material, energy and shipping costs;
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the imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions of the United States and each other country in which we operate;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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changes in taxation and tariffs, including potentially adverse tax consequences;
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difficulties in staffing and managing international operations;
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fluctuations in currency exchange rates;
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cultural and language differences;
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difficulties in collecting receivables from foreign entities or delayed revenue recognition;
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expense and difficulties in protecting our intellectual property in foreign jurisdictions;
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exposure to possible litigation or claims in foreign jurisdictions; and
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potentially adverse tax consequences.
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Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales or conduct our business generally.
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Also OEMs that design our semiconductors into their products sell them outside of the United
States. This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the United States dollar will increase the foreign currency price equivalent
of our products, which could lead to a change in their competitiveness in the marketplace. This in turn could lead to a reduction in our sales and profits.
Our success depends on our investment of significant amount of resources in research and development. We may have to invest more resources in research and development than anticipated, which
could increase our operating expenses and negatively impact our operating results.
Our success depends on us investing
significant amounts of resources into research and development. Our research and development expenses as a percent of our total revenue were 29.9% and 39.5% for the three months ended March 31, 2013 and 2012, respectively. We expect
to have to continue to invest heavily in research and development in the future in order to continue to innovate and come to market with new products in a timely manner and increase our revenue and profitability. If we have to invest more
resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and
development resources, we could see adverse effects on our business, financial condition and operating results.
In addition,
if new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our
operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and
development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our
financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the
increased complexity and the greater number of products under development.
The success of our business depends upon our ability to
adequately protect our intellectual property.
We rely on a combination of patent, copyright, trademark, mask work and
trade secret laws, as well as nondisclosure agreements and other methods, to protect our confidential and proprietary technologies and information. Our success depends on our ability to adequately protect such intellectual property. With
respect to our patents, we have been issued patents and have a number of pending patent applications. However, we cannot assume that any pending patents applications will be issued or, if issued, that any claims allowed will protect our technology.
Recent and proposed changes to U.S. patent laws and rules may also affect our ability to protect and enforce our intellectual property rights. For example, the recently passed Leahy-Smith America Invents Act would transition the manner in which
patents are issued and change the way in which issued patents are challenged. The long-term impact of these changes are unknown, but this law could cause a certain degree of uncertainty surrounding the enforcement and defense of our issued patents,
as well as greater costs concerning new and existing patent applications. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. Furthermore, it is possible that our
existing or future patents may be challenged, invalidated or circumvented.
With respect to our copyright and trademark
intellectual property, it may be possible for a third-party, including our licensees, to misappropriate such proprietary technology. It is possible that copyright, trademark and trade secret protection and enforcement effective in the US may be
unavailable or limited in foreign countries. Additionally, with respect to all of our intellectual property, it may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete
against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive and the outcome often is not predictable.
Despite our efforts and expenses, for the foregoing reasons and others, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our
business. In addition, practicality also limits our assertion of intellectual property rights. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights
and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers and key business partners
risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer
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We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other
proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Also, current or former employees may seek employment with our
business partners, customers or competitors, and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, current, departing or former employees or
third parties could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage
networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and processes may be misappropriated, particularly in
countries where laws may not protect our proprietary rights as fully as in the United States.
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Our products may contain technology provided to us by other parties such as contractors,
suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the
event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. In addition, we may have little or no ability to
correct errors in the technology provided by such contractors, suppliers and licensors, or to continue to develop new generations of such technology. Accordingly, we may be dependent on their ability and willingness to do so. In the event of a
problem with such technology, or in the event that our rights to use such technology become impaired, we may be unable to ship our products containing such technology, and may be unable to replace the technology with a suitable alternative within
the time frame needed by our customers.
Our participation in consortiums for the development and promotion of industry standards in our
target markets, including the HDMI, MHL and WirelessHD standards, requires us to license some of our intellectual property for free or under specified terms and conditions, which makes it easier for others to compete with us in such markets.
A key element of our business strategy includes participating in consortiums to establish industry standards in our
target markets, promoting and enhancing specifications and developing and marketing products based on such specifications and future enhancements. We have in the past and will continue to participate in consortiums that develop and promote
the HDMI, MHL and WirelessHD specifications. In connection with our participation in these consortiums, we make certain commitments regarding our intellectual property, in each case with the effect of making our intellectual property available to
others, including our competitors, desiring to implement the specification in question. For example, as a founder of the HDMI Consortium, we must license specific elements of our intellectual property to others for use in implementing the HDMI
specification, including enhancements thereof, as long as we remain part of the consortium. Also, as a promoter of the MHL specification, we must agree not to assert certain necessary patent claims against other members of the MHL Consortium,
even if such members may infringed upon such claims in implementing the MHL specification.
Accordingly, certain companies
that implement these specifications in their products can use specific elements of our intellectual property to compete with us. Although in the case of the HDMI and MHL Consortiums, there are annual fees and royalties associated with the
adopters’ use of the technology, there can be no assurance that our shares of such annual fees and royalties will adequately compensate us for having to license or refrain from asserting our intellectual property.
Through our wholly-owned subsidiary, HDMI Licensing, LLC, we act as agent of the HDMI specification and are responsible for promoting and
administering the specification. We receive all the license fees paid by adopters of the HDMI specification to cover the costs we incur to promote and administer the HDMI specification. There can be no assurance that, going forward, we
will continue to act as agent of the HDMI specification and/or receive or to continue to oversee the management of all the license fees paid by HDMI adopters. After an initial period during which we received all of the royalties paid by HDMI
adopters, in 2007, the HDMI founders reallocated the royalties to reflect each founder’s relative contribution of intellectual property to the HDMI specification, and following this reallocation, our portion of HDMI royalties was reduced to
approximately 62%. In 2010, HDMI founders again reviewed the allocation of HDMI royalties and agreed on an allocation formula that reduced the portion of HDMI royalties received by us in 2012 to approximately 40% to 50%. We expect the HDMI
founders to continue to review the allocation of HDMI royalties from time to time and we cannot provide any assurance regarding the portion of HDMI royalties received by us in the future.
Through our wholly-owned subsidiary, MHL, LLC, we act as agent of the MHL specification and are responsible for promoting and
administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us for the costs we incur to promote and administer the specification. Given the limited
number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to
reimburse us the cost we incur as agent of the specification.
We intend to promote and continue to be involved and actively
participate in other standard setting initiatives. For example, through our acquisition of SiBEAM, Inc. in May 2011, we achieved SiBEAM’s prior position as founder and chair of the WirelessHD Consortium. Accordingly, we may likely license
additional elements of our intellectual property to others for use in implementing, developing, promoting or adopting standards in our target markets, in certain circumstances at little or no cost. This may make it easier for others to compete with
us in such markets. In addition, even if we receive license fees and/or royalties in connection with the licensing of our intellectual property, there can be no assurance that such license fees and/or royalties will compensate us adequately.
Our business may be adversely impacted as a result of the adoption of competing standards and technologies by the broader market.
The success of our business to date has depended on our participation in standard setting organizations, such as the
HDMI and MHL Consortiums, and the widespread adoption and success of those standards. From time to time, competing standards have been established which negatively impact the success of existing standards or jeopardize the creation of new standards.
DisplayPort is an example of a competing standard on a different technology base which has been created as an alternative high definition connectivity solution in the PC space. The DisplayPort standard has been adopted by many large PC
manufacturers. While currently not as widely recognized as the HDMI standard, DisplayPort does represent a viable alternative to the HDMI or MHL technologies. If DisplayPort should gain broader adoption, especially with non-PC consumer electronics,
our HDMI or MHL businesses could be negatively impacted and our revenues could be reduced. WiGig is an example of a competing 60GHz standard which has been created as an alternative high-bandwidth wireless connectivity solution for the PC industry.
While the WiGig standard has not been in the market as long as the WirelessHD standard, it does represent a viable alternative to WirelessHD for 60GHz connectivity. If WiGig should gain broader adoption before WirelessHD is adopted, it could
negatively impact us.
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Our current and future business is dependent on the continued adoption and widespread implementation
of the HDMI and MHL specifications and the new implementation and adoption of the WirelessHD specifications.
Our
future success is largely dependent upon the continued adoption and widespread implementation of the HDMI, MHL and WirelessHD specifications. For the three months ended March 31, 2013, more than 90% of our total revenue was derived from the
sale of HDMI and MHL enabled products and the licensing of our HDMI and MHL technology. Our leadership in the market for HDMI and MHL-enabled products and intellectual property has been based on our ability to introduce first-to-market semiconductor
and IP solutions to our customers and to continue to innovate within the standard. Therefore, our inability to be first to market with our HDMI and MHL-enabled products and intellectual property or to continue to drive innovation in the HDMI and MHL
specifications could have an adverse impact on our business going forward.
With our acquisition of SiBEAM, Inc. in May 2011,
we acquired 60GHz wireless technology that we hope will be made widely available and adopted by the marketplace through the efforts of the WirelessHD Consortium and incorporated into certain of our future products. As was and is the case with
our HDMI and MHL products and intellectual property, our success with this technology will depend on our ability to introduce first-to-market, WirelessHD-enabled semiconductor and IP solutions to our customers and to continue to innovate within the
WirelessHD standard. There can be no guarantee that this wireless technology will be adopted by the marketplace and our inability to do this could have an adverse impact on our business going forward.
Additionally, if competing digital interconnect technologies are developed, our ability to sell our products and license our intellectual
property could be adversely affected and our revenues could decrease.
As the agent for the HDMI specification, we derive
revenue from the license fees paid by adopters, and as a founder we derive revenue from the royalties paid by the adopters of the HDMI technology. Any development that has the effect of lowering the number of adopters of the HDMI standard will
negatively impact these license fees and royalties. The allocation of license fees and royalty revenue among the HDMI founders is reviewed and discussed by the founders from time to time. There can be no assurance that going forward we will continue
to act as agent of the HDMI specification or to receive the share of HDMI license fees and royalties that we currently receive. If our share of these license fees and royalties is reduced, this decision will have a negative impact on our
revenues. Refer to the previously discussed risk factor above which also discusses the sharing of HDMI royalty revenues among various founders.
We act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL
specification sufficient to reimburse us the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to
reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.
We have granted Intel Corporation certain rights with respect to our intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value of our
intellectual property.
We entered into a patent cross-license agreement with Intel in which each of us granted the
other a license to use the patents filed by the grantor prior to a specified date, except for identified types of products. We believe that the scope of our license to Intel excludes our current products and anticipated future products. Intel could,
however, exercise its rights under this agreement to use our patents to develop and market other products that compete with ours, without payment to us. Additionally, Intel’s rights to our patents could reduce the value of our patents to any
third-party who otherwise might be interested in acquiring rights to use our patents in such products. Finally, Intel could endorse competing products, including a competing digital interface, or develop its own proprietary digital interface. Any of
these actions could substantially harm our business and results of operations.
New Releases of Microsoft Windows
®
, Apple Mac OS
®
, Apple iOS and Google Android operating systems may render our chips inoperable.
ICs targeted to PC or mobile designs, laptop, or notebook designs often require device driver software to operate. This software is difficult to produce and may require various certifications such as
Microsoft’s Windows Hardware Quality Labs (WHQL) before being released. Each new revision of an operating system may require a new software driver and associated testing/certification. Failure to produce this software can have a
negative impact on our relation with OS providers and may damage our reputation as a quality supplier of products in the eyes of end consumers.
We may become engaged in intellectual property litigation that could be time-consuming, may be expensive to prosecute or defend and could adversely
affect our ability to sell our product.
In recent years, there has been significant litigation in the United States
and in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring
infringement claims. In addition, in recent years, there has been an increase in the filing of so-called “nuisance suits,” alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in response to
claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits, regardless of merit. In addition, as is common in the
semiconductor industry, from time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, result in costly
litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that
settlements will
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occur or that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or
selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to a third-party and we fail to develop or license a substitute technology, our business, results of operations or financial
condition could be materially adversely affected.
Any potential intellectual property litigation against us or in which we
become involved may be expensive and time-consuming and may divert our resources and the attention of our executives. It could also force us to do one or more of the following:
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stop selling products or using technology that contains the allegedly infringing intellectual property;
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attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and
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attempt to redesign products that contain the allegedly infringing intellectual property.
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If we take any of these actions, we may be unable to manufacture and sell our products. We may be exposed to liability for monetary
damages, the extent of which would be very difficult to accurately predict. In addition, we may be exposed to customer claims, for potential indemnity obligations and to customer dissatisfaction and a discontinuance of purchases of our products
while the litigation is pending. Any of these consequences could substantially harm our business and results of operations.
We have
entered into and may again be required to enter into, patent or other intellectual property cross-licenses.
Many
companies have significant patent portfolios or key specific patents, or other intellectual property in areas in which we compete. Many of these companies appear to have policies of imposing cross-licenses on other participants in their markets,
which may include areas in which we compete. As a result, we have been required, either under pressure of litigation or by significant vendors or customers, to enter into cross licenses or non-assertion agreements relating to patents or other
intellectual property. This permits the cross-licensee, or beneficiary of a non-assertion agreement, to use certain or all of our patents and/or certain other intellectual property for free to compete with us. Our results of operations could be
adversely affected by the use of cross-license or beneficiary of a non-assertion agreement of all our patents and/or certain other intellectual property.
We indemnify certain of our customers against infringement.
We
indemnify certain of our customers for any expenses or liabilities resulting from third-party claims of infringements of patent, trademark, trade secret, or copyright rights by the technology we license. Certain of these indemnification provisions
are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim.
In the event that we were required to defend any lawsuits with respect to our indemnification obligations, or to pay any claim, our results of operations could be materially adversely affected.
We must attract and retain qualified personnel to be successful and competition for qualified personnel is increasing in our market.
Our success depends to a significant extent upon the continued contributions of our key management, technical and
sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. We generally do not have employment contracts with our key employees. Our success also depends on our ability to
identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our locations throughout the world. This makes it difficult
to retain our key personnel and to recruit highly qualified personnel. We have experienced and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates
with appropriate qualifications and retain our key executives and employees. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.
The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and
prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm
our business. New regulations could make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our
business.
We have experienced transitions in our management team and our board of directors in the past and we may continue to do so in
the future, which could result in disruptions in our operations and require additional costs.
We have experienced a
number of transitions with respect to our board of directors and executive officers in the past and we may experience additional transitions in our board of directors and management in the future. Any such future transitions could result in
disruptions in our operations and require additional costs.
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If our internal control over financial reporting or disclosure controls and procedures are not
effective, there may be errors in our financial statements that could require restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock
price. While we have not identified any material weaknesses in the past three years, we cannot assure you that a material weakness will not be identified in the future.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial
reporting as of the end of each year and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered
public accounting firm to report on, our internal control over financial reporting.
Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to
their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration
in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting
will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail
to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports
regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could
result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading
to a decline in our stock price.
We have been and may continue to become the target of securities class action suits and derivative
suits which could result in substantial costs and divert management attention and resources.
Securities class action
suits and derivative suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial
costs to us and could divert the attention of our management.
Our operations and the operations of our significant customers,
third-party wafer foundry and third-party assembly and test subcontractors are located in areas susceptible to natural disasters, the occurrence of which could adversely impact our supply of product, revenues, gross margins and results of
operations.
Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes.
TSMC, our outside foundry that manufactures almost all of our semiconductor products, is located in Taiwan. Siliconware Precision Industries Co. Ltd., or SPIL, Advanced Semiconductor Engineering, or ASE, and Amkor Taiwan are subcontractors
located in Taiwan that assemble and test our semiconductor products.
In addition, the operations of certain of our
significant customers are located in Japan and Taiwan. For the three months ended March 31, 2013 and 2012 customers and distributors located in Japan generated 13.3% and 17.2% of our total revenue, respectively, and customers and distributors
located in Taiwan generated 15.5% and 22.1% of our total revenue, respectively.
Taiwan and Japan are susceptible to
earthquakes, typhoons and other natural disasters.
Our supply of product and our revenues, gross margins and results of
operations generally would be adversely affected if any of the following were to occur:
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an earthquake or other disaster in the San Francisco Bay area were to damage our facilities or disrupt the supply of water or electricity to
our headquarters;
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an earthquake, typhoon or other natural disaster in Taiwan were to damage the facilities or equipment of TSMC, SPIL, ASE or Amkor or were to result in
shortages of water, electricity or transportation, which occurrences would limit the production capacity of our outside foundry and/or the ability of our third party contractors to provide assembly and test services;
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an earthquake, typhoon or other natural disaster in Taiwan or Japan were to damage the facilities or equipment of our customers or distributors or were
to result in shortages of water, electricity or transportation, which occurrences would result in reduced purchases of our products, adversely affecting our revenues, gross margins and results of operations; or
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an earthquake, typhoon or other disaster in Taiwan or Japan were to disrupt the operations of suppliers to our Taiwanese or Japanese customers, outside
foundries or our third party contractors providing assembly and test services, which in turn disrupted the operations of these customers, foundries or third party contractors, resulting in reduced purchases of our products or shortages in our
product supply.
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In March 2011, Japan experienced a 9.0-magnitude earthquake which triggered extremely
destructive tsunami waves. The earthquake and tsunami significantly impacted the Japanese people and the overall economy of Japan resulting to reduced consumer spending in Japan and supply chain issues, which adversely affected our
revenues and results of operations in 2011.
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Terrorist attacks or war could lead to economic instability and adversely affect our operations,
results of operations and stock price.
The United States has taken and continues to take, military action against
terrorism and currently has troops in Afghanistan. In addition, the current tensions regarding nuclear arms in North Korea and Iran could escalate into armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or result in
instability in the general economy and financial markets and in consumer demand for the OEM’s products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the
operations of our customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in financial markets could adversely
affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would adversely affect our research and development capabilities and ability to timely
develop and introduce new products and product improvements.
Changes in environmental rules and regulations could increase our costs
and reduce our revenue.
Several jurisdictions have implemented rules that would require that certain products,
including semiconductors, be made “green,” which means that the products need to be lead free and be free of certain banned substances. All of our products are available to customers in a green format. While we believe that we are
generally in compliance with existing regulations, such environmental regulations are subject to change and the jurisdictions may impose additional regulations which could require us to incur additional costs to develop replacement products. These
changes will require us to incur cost or may take time or may not always be economically or technically feasible, or may require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously sold products would
require us to incur the costs of setting up and implementing such a program.
Provisions of our charter documents and Delaware law could
prevent or delay a change in control and may reduce the market price of our common stock.
Provisions of our
certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:
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authorizing the issuance of preferred stock without stockholder approval;
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providing for a classified board of directors with staggered, three-year terms;
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requiring advance notice of stockholder nominations for the board of directors;
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providing the board of directors the opportunity to expand the number of directors without notice to stockholders;
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prohibiting cumulative voting in the election of directors;
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limiting the persons who may call special meetings of stockholders; and
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prohibiting stockholder actions by written consent.
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Provisions of Delaware law also may discourage delay or prevent someone from acquiring or merging with us.
The price of our stock fluctuates substantially and may continue to do so.
The stock market has experienced extreme price and volume fluctuations that have affected the market valuation of many technology companies, including Silicon Image. These factors, as well as general
economic and political conditions, may materially and adversely affect the market price of our common stock in the future. The market price of our common stock has fluctuated significantly and may continue to fluctuate in response to a number of
factors, including, but not limited to:
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actual or anticipated changes in our operating results;
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changes in expectations of our future financial performance;
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changes in market valuations of comparable companies in our markets;
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changes in market valuations or expectations of future financial performance of our vendors or customers;
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changes in our key executives and technical personnel; and
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announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.
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Due to these factors, the price of our stock may decline. In addition, the stock market experiences
volatility that is often unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.
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