SIMG (MM)

Silicon Image, Inc. (NASDAQ: SIMG), a leading provider of multimedia connectivity solutions and services, today reported financial results for its second quarter ended June 30, 2014.

Revenue for the second quarter of 2014 was $59.5 million, compared with $61.6 million in the first quarter of 2014 and $73.7 million in the second quarter of 2013. As previously disclosed, revenue for the second quarter excludes HDMI royalties, the recognition of which have been deferred.

“We saw additional growth in our CE business with first half 2014 performance up 38 percent over the same period last year,” said Camillo Martino, chief executive officer of Silicon Image, Inc. “Strength in our CE business partially offset the headwinds in our mobile business. We are also pleased with the increased momentum and market acceptance of the worldwide standards in which we participate. In particular, this quarter, the MHL ecosystem showed continued growth with tier one manufacturers shipping MHL 3.0-enabled TVs and the addition of another 4K Ultra HD MHL 3.0 phone.”

GAAP net income for the second quarter of 2014 was $1.1 million, or $0.01 per diluted share, compared with a GAAP net loss of $0.1 million, or $0.00 per share, for the first quarter of 2014 and a GAAP net income of $4.2 million, or $0.05 per diluted share, for the second quarter of 2013.

Non-GAAP net income for the second quarter of 2014 was $3.4 million, or $0.04 per diluted share, compared with a non-GAAP net income of $4.3 million, or $0.05 per diluted share, for the first quarter of 2014, and a non-GAAP net income of $6.5 million, or $0.08 per diluted share, for the second quarter of 2013. Non-GAAP net income for these periods excludes stock-based compensation expense, amortization of intangible assets, business acquisition related expenses, gain from business acquisition, other than temporary impairment of a privately held company investment, other income from prepaid royalty settlement, proceeds from legal settlement and restructuring charges.

A reconciliation of GAAP and non-GAAP items is provided in a table following the Condensed Consolidated Statements of Operations.

The following are Silicon Image’s financial performance estimates for the third quarter of 2014, which exclude deferred HDMI royalties for the three quarters ended September 30, 2014:

     

Revenue:

$70 million to $75 million Gross Margin: approximately 58% GAAP operating expenses: approximately $38 million Non-GAAP operating expenses: approximately $34 million Diluted shares outstanding: approximately 80.9 million Non-GAAP tax rate: approximately 30% of non-GAAP pre-tax income  

Full year 2014 guidance, which includes deferred HDMI royalties, is as follows:

Revenue       down 4% to 8% as compared to 2013 Gross Margin: approximately 60% Non-GAAP operating expenses: $127 million to $130 million Non-GAAP tax rate: approximately 30%

Full year guidance is dependent upon certain key customers maintaining their forecasted shipping patterns.

Use of Non-GAAP Financial Information

Silicon Image presents and discusses gross margin, operating expenses, net income (loss) and basic and diluted net income (loss) per share in accordance with Generally Accepted Accounting Principles (GAAP), and on a non-GAAP basis for informational purposes only. Silicon Image believes that non-GAAP reporting, giving effect to the adjustments shown in the attached reconciliation, provides meaningful information and therefore uses non-GAAP reporting to supplement its GAAP reporting and internally in evaluating operations, managing and monitoring performance, and determining bonus compensation. Further, Silicon Image uses non-GAAP information as certain non-cash charges such as stock-based compensation expense, amortization of intangible assets, business acquisition related expenses, gain from business acquisition, other than temporary impairment of a privately held company investment, other income from prepaid royalty settlement, proceeds from legal settlement and restructuring charges do not reflect the cash operating results of the business. Silicon Image has chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of its operating results and to illustrate the results of operations giving effect to such non-GAAP adjustments. The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

Conference Call

Silicon Image will host an investor conference call today to discuss its second quarter of 2014 results at 2:00 p.m. Pacific Time and will webcast the event. To access the conference call, dial 888-455-2260 or 719-325-2454 and enter passcode 8015090. The webcast and replay will be accessible on Silicon Image's investor relations website at http://www.SiliconImage.com. A replay of the conference call will be available within two hours of the conclusion of the conference call through August 13, 2014. To access the replay, please dial 888-203-1112 or 719-457-0820 and enter passcode 8015090.

About Silicon Image, Inc.

Silicon Image (NASDAQ: SIMG) is a leading provider of multimedia connectivity solutions and services for mobile, consumer electronics and PC markets. Silicon Image’s semiconductor and intellectual property products feature wireless and wired technologies that deliver connectivity across a wide array of devices in the home, office and on the go. Silicon Image has driven the creation of the industry standards HDMI®, DVI™, MHL® and WirelessHD®, and offers manufacturers comprehensive standards interoperability and compliance testing services via its wholly-owned subsidiary, Simplay Labs. For more information, visit http://www.siliconimage.com/.

Silicon Image and the Silicon Image logo are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and/or other countries. All other trademarks and registered trademarks are the property of their respective owners in the United States and/or other countries.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements include, but are not limited to, statements related to Silicon Image's future operating results, including revenue, gross margin, operating expenses, tax rates, company growth, progress and stock repurchases. These forward-looking statements involve risks and uncertainties, including the risks of uncertain economic conditions, competition in our markets, Silicon Image's ability to deliver financial performance in-line with its stated goals and other risks and uncertainties described from time to time in Silicon Image's filings with the U.S. Securities and Exchange Commission (SEC). These risks and uncertainties could cause the actual results to differ materially from those anticipated by these forward-looking statements. In addition, see the Risk Factors section of the most recent Form 10-K and 10-Q filed by Silicon Image with the SEC. These forward-looking statements are made on the date of this press release, and Silicon Image assumes no obligation to update any such forward-looking information.

                              SILICON IMAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Unaudited     Three Months Ended Six Months Ended

June 30,2014

     

March 31,2014

     

June 30,2013

 

 

June 30,2014

     

June 30,2013

Revenue: Product $ 50,938 $ 46,766 $ 63,681 $ 97,704 $ 114,022 Licensing   8,598         14,795           9,998     23,393         21,696   Total revenue   59,536      

 

61,561           73,679     121,097         135,718   Cost of revenue and operating expenses: Cost of product revenue (1)(2) 24,814 24,795 31,023 49,609 56,821 Cost of licensing revenue - 20 162 20 429 Research and development (3) 17,416 16,957 20,225 34,373 38,783 Selling, general and administrative (4) 15,166 16,865 16,097 32,031 32,499 Amortization of acquisition-related intangible assets 510 208 230 718 481

Restructuring expense (recoveries) (5)

  113         129           -     242         (7 ) Total cost of revenue and operating expenses   58,019         58,974           67,737     116,993         129,006   Income from operations 1,517 2,587 5,942 4,104 6,712 Proceeds from legal settlement - - 1,275 - 1,275 Other than temporary impairment of a privately held company investment - - (1,500 ) - (1,500 ) Interest income and other, net   1,043         18           500     1,061         891   Income before provision for income taxes and equity in net loss of an unconsolidated affiliate 2,560 2,605 6,217 5,165 7,378 Income tax expense 1,487 2,554 1,888 4,041 3,630 Equity in net loss of an unconsolidated affiliate   -         150           136     150         259   Net income (loss) $ 1,073       $ (99 )       $ 4,193   $ 974       $ 3,489     Net income (loss) per share – basic $ 0.01 $ (0.00 ) $ 0.05 $ 0.01 $ 0.05 Net income (loss) per share – diluted $ 0.01 $ (0.00 ) $ 0.05 $ 0.01 $ 0.04 Weighted average shares – basic 78,150 77,858 77,245 78,261 76,934 Weighted average shares – diluted 79,988 77,858 78,713 80,367 78,353   (1) Includes amortization of acquisition-related intangible assets $ 225 $ 225 $ 250 $ 450 $ 500 (2) Includes stock-based compensation expense $ 148 $ 173 $ 153 $ 321 $ 288 (3) Includes stock-based compensation expense $ 792 $ 913 $ 827 $ 1,705 $ 1,845 (4) Includes stock-based compensation expense $ 1,344 $ 1,951 $ 1,438 $ 3,295 $ 3,209 (5) Includes stock-based compensation expense $ 44 $ 30 $ - $ 74 $ -                             SILICON IMAGE, INC. GAAP NET INCOME (LOSS) TO NON-GAAP NET INCOME RECONCILIATION (In thousands, except per share amounts) Unaudited     Three Months Ended Six Months Ended

June 30,2014

   

March 31,2014

   

June 30,2013

 

June 30,2014

   

June 30,2013

GAAP net income (loss) $ 1,073 $ (99 ) $ 4,193 $ 974 $ 3,489 Non-GAAP adjustments: Stock-based compensation expense (1) 2,328 3,067 2,418 5,395 5,342 Amortization of intangible assets (2) 735 433 480 1,168 981 Amortization of intangible assets of an unconsolidated affiliate (2) - 40 41 40 76 Strategic initiative and acquisition related expenses (2) 138 - - 138 - Gain from business acquisition (2) (361 ) - - (361 ) -

Restructuring expense (recoveries) (3)

69 99 - 168 (7 ) Other than temporary impairment of a privately held company investment (3) - - 1,500 - 1,500 Other income from prepaid royalty settlement (3) (639 ) - - (639 ) - Proceeds from legal settlement (3)   -         -         (1,275 )   -         (1,275 ) Non-GAAP net income before tax adjustments 3,343 3,540 7,357 6,883 10,106 Tax adjustments (4)   38         726         (886 )   764         (491 ) Non-GAAP net income $ 3,381       $ 4,266       $ 6,472   $ 7,647       $ 9,615     Non-GAAP net income per share — basic $ 0.04 $ 0.05 $ 0.08 $ 0.10 $ 0.12 Non-GAAP net income per share — diluted $ 0.04 $ 0.05 $ 0.08 $ 0.10 $ 0.12 Weighted average shares — basic 78,150 77,858 77,245 78,261 76,934 Weighted average shares — diluted 79,988 80,100 78,713 80,367 78,353   Stock-based compensation expense is composed of the following: Cost of revenue $ 148 $ 173 $ 153 $ 321 $ 288 Research and development 792 913 827 1,705 1,845 Selling, general and administrative 1,344 1,951 1,438 3,295 3,209 Restructuring expense   44         30         -       74         -   Total $ 2,328       $ 3,067       $ 2,418   $ 5,395       $ 5,342    

Discussion of Non-GAAP Financial Measures

(1)  

Stock-Based Compensation Related Items: Stock-based compensation expense relates primarily to equity awards, such as stock options and restricted stock units. Stock-based compensation is a non-cash expense that varies in amount from period to period and is dependent on market forces that are often beyond our control. As such, management excludes this item from our internal operating forecasts and models. Management believes that non-GAAP measures adjusted for stock-based compensation provide investors with a basis to measure our core performance against the performance of other companies without the variability created by stock-based compensation as a result of the variety of equity awards used by companies and the varying methodologies and subjective assumptions used in determining such non-cash expense.

  (2)

Strategic Initiatives and Acquisition Related Items: We exclude certain expense items resulting from our strategic initiatives and acquisitions including the following, when applicable: (i) amortization of purchased intangible assets associated with our acquisitions or relating to our unconsolidated affiliates, (ii) strategic initiatives and acquisition-related charges, and (iii) gain from business acquisition. The amortization of purchased intangible assets associated with our acquisitions results in our recording expenses in our GAAP financial statements that were already expensed by the acquired company before the acquisition and for which we have not expended cash. Moreover, had we internally developed the products acquired, the amortization of intangible assets, and the expenses of uncompleted research and development would have been expensed in prior periods. Accordingly, we analyze the performance of our operations in each period without regard to such expenses. In addition, our strategic initiatives and acquisitions result in non-continuing operating expenses, which would not otherwise have been incurred by us in the normal course of our business operations. In the second quarter of fiscal 2014, we finalized the acquisition of the remaining ownership interest in UpdateLogic, Inc., resulting in acquisition-related charges and gain from business acquisition. We do not expect expenses of similar nature to be paid or gain of similar nature to be received in our normal course of business and consider it infrequent and non-recurring. We believe that providing non-GAAP information for strategic initiatives and acquisition-related expense items and gain from business acquisition in addition to the corresponding GAAP information allows the users of our financial statements to better review and understand the historic and current results of our continuing operations, and also facilitates comparisons to less acquisitive peer companies.

  (3)

Other Items: We exclude certain other items that are the result of either unique or unplanned events including the following, when applicable: (i) other than temporary impairment of a privately held company investment, (ii) other income from prepaid royalty settlement, (iii) proceeds from legal settlement and (iv) restructuring and related costs. It is difficult to estimate the amount or timing of these items in advance. Other than temporary impairment of a privately held company investment was recorded due to the conclusion that the possibility is remote that we will exercise our warrants to purchase the entity’s preferred stock or that we will realize any other value from these investments. Other income from prepaid royalty settlement relates to the termination of an HDMI rebate agreement with one of the HDMI adopters. Proceeds from legal settlement relates to our acquisition of SiBEAM, Inc. on May 16, 2011. We do not expect other income or proceeds of similar nature to be recognized or received in our normal course of business and consider it infrequent and non-recurring. Restructuring charges result from events which arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. Although these events are reflected in our GAAP financials, these unique transactions may limit the comparability of our on-going operations with prior and future periods. As such, we believe that these expenses do not accurately reflect the underlying performance of our continuing operations for the period in which they are incurred. We assess our operating performance both with these amounts included and excluded, and by providing this information, we believe the users of our financial statements are better able to understand the financial results of what we consider our continuing operations.

  (4)

Tax adjustments: For the three and six months ended June 30, 2014 and June 30, 2013 and the three months ended March 31, 2014, our non-GAAP tax rate was approximately 30% of non-GAAP pre-tax income. Non-GAAP tax rate is primarily based on net expected cash flow for income taxes.

    SILICON IMAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Unaudited                 June 30, 2014 December 31, 2013 ASSETS Current Assets: Cash and cash equivalents $ 93,348 $ 82,220 Short-term investments 47,367 56,003 Accounts receivable, net 25,963 34,729 Inventories 23,710 11,727 Prepaid expenses and other current assets 5,775 7,733 Deferred income taxes   631   191 Total current assets 196,794 192,603 Property and equipment, net 14,369 14,676 Deferred income taxes, non-current - 4,368 Intangible assets, net 18,250 10,348 Goodwill 30,458 21,646 Other assets   6,354   8,498 Total assets $ 266,225 $ 252,139   LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 16,580 $ 12,894 Accrued and other current liabilities 26,828 20,622 Deferred margin on sales to distributors 11,086 9,634 Deferred license revenue   1,889   2,742 Total current liabilities 56,383 45,892 Other long-term liabilities   13,650   16,522 Total liabilities 70,033 62,414 Stockholders’ equity   196,192   189,725 Total liabilities and stockholders’ equity $ 266,225 $ 252,139                 SILICON IMAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Unaudited   Six Months Ended June 30, 2014       2013 Cash flows from operating activities: Net income $ 974 $ 3,489

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation 3,106 3,127 Stock-based compensation expense 5,395 5,342 Amortization of investment premium 487 578 Tax benefits from employee stock-based transactions 76 182 Other than temporary impairment of a privately held company investment - 1,500 Amortization of intangible assets 1,798 1,384 Non-operating proceeds from legal settlement - (1,275 ) Gain from business acquisition (361 ) - Deferred income taxes (440 ) - Excess tax benefits from employee stock-based transactions (76 ) (182 ) Realized gain on sale of short-term investments - (143 ) Equity in net loss of unconsolidated affiliate 150 259 Others (21 ) 283 Changes in assets and liabilities: Accounts receivable 9,108 10,421 Inventories (11,983 ) (4,734 ) Prepaid expenses and other assets 1,927 1,418 Accounts payable 3,823 4,536 Accrued and other liabilities 5,673 (2,316 ) Deferred margin on sales to distributors 1,452 3,067 Deferred license revenue   (1,958 )         41   Cash provided by operating activities   19,130           26,977   Cash flows from investing activities: Proceeds from sales of short-term investments 13,796 48,330 Purchases of short-term investments (5,798 ) (26,588 ) Cash used in business acquisition, net of cash acquired (13,464 ) - Purchases of property and equipment (2,797 ) (2,466 ) Proceeds from legal settlement - 1,275 Investment in privately-held companies - (500 ) Cash paid for assets purchased from a privately-held company - (300 ) Purchase of intellectual properties   -           (1,513 ) Cash provided by (used in) investing activities   (8,263 )         18,238   Cash flows from financing activities: Proceeds from employee stock program 3,453 3,090 Excess tax benefits from employee stock-based transactions 76 182 Repurchase of restricted stock units for income tax withholding (974 ) (1,332 ) Payment to acquire treasure shares (2,377 ) - Cash paid to settle contingent consideration liabilities   (18 )         (45 ) Cash provided by financing activities   160           1,895   Effect of exchange rate changes on cash and cash equivalents   101           (233 ) Net increase in cash and cash equivalents 11,128 46,877 Cash and cash equivalents — beginning of period   82,220           29,069   Cash and cash equivalents — end of period $ 93,348         $ 75,946   Supplemental cash flow information: Cash payment for income taxes $ (3,710 ) $ (2,705 ) Restricted stock units vested $ 2,936 $ 3,902 Property and equipment and other assets purchased but not paid for $ 603 $ 688 Unrealized gain (loss) on short-term investments $ 13 $ (435 )  

MEDIA CONTACT:Silicon Image, Inc.Sherrie Gutierrez, 408-616-4017Sherrie.Gutierrez@siliconimage.comorINVESTOR RELATIONS CONTACT:Silicon Image, Inc.Alex Chervet, 408-616-4153Alex.Chervet@siliconimage.com