n10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2008
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Transition Period from
to
Commission
File Number: 000-50838
NETLOGIC
MICROSYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
77-0455244
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1875
Charleston Rd.
Mountain
View, CA 94043
(650)
961-6676
(Address
and telephone number of principal executive offices)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at October 31, 2008
|
Common
Stock, 0.01 par value per share
|
|
21,831,348
shares
|
NETLOGIC
MICROSYSTEMS, INC.
FORM
10-Q
|
|
Page
No.
|
|
3
|
|
|
|
Item
1.
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
Item
2.
|
|
18
|
|
|
|
Item
3.
|
|
24
|
|
|
|
Item
4.
|
|
24
|
|
|
|
|
25
|
|
|
|
Item
1A.
|
|
25
|
|
|
|
Item
6.
|
|
26
|
|
|
|
|
27
|
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
85,929 |
|
|
$ |
50,689 |
|
Accounts
receivables, net
|
|
|
14,728 |
|
|
|
14,838 |
|
Inventories
|
|
|
14,406 |
|
|
|
12,938 |
|
Prepaid
expenses and other current assets
|
|
|
14,545 |
|
|
|
12,702 |
|
Total
current assets
|
|
|
129,608 |
|
|
|
91,167 |
|
Property
and equipment, net
|
|
|
6,298 |
|
|
|
5,745 |
|
Goodwill
|
|
|
53,758 |
|
|
|
55,422 |
|
Intangible
assets, net
|
|
|
42,863 |
|
|
|
52,837 |
|
Other
assets
|
|
|
182 |
|
|
|
112 |
|
Total
assets
|
|
$ |
232,709 |
|
|
$ |
205,283 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
10,847 |
|
|
$ |
7,094 |
|
Accrued
liabilities
|
|
|
11,538 |
|
|
|
13,286 |
|
Deferred
margin
|
|
|
1,802 |
|
|
|
317 |
|
Software
license and other obligations, current
|
|
|
877 |
|
|
|
2,528 |
|
Total
current liabilities
|
|
|
25,064 |
|
|
|
23,225 |
|
Software
license and other obligations, long-term
|
|
|
541 |
|
|
|
- |
|
Other
liabilities
|
|
|
11,558 |
|
|
|
10,170 |
|
Total
liabilities
|
|
|
37,163 |
|
|
|
33,395 |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock and additional paid-in capital
|
|
|
270,437 |
|
|
|
251,454 |
|
Accumulated
other comprehensive loss
|
|
|
(48 |
) |
|
|
(8 |
) |
Accumulated
deficit
|
|
|
(74,843 |
) |
|
|
(79,558 |
) |
Total
stockholders' equity
|
|
|
195,546 |
|
|
|
171,888 |
|
Total
liabilities and stockholders' equity
|
|
$ |
232,709 |
|
|
$ |
205,283 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
$ |
38,311 |
|
|
$ |
27,533 |
|
|
$ |
109,034 |
|
|
$ |
76,778 |
|
Cost
of revenue
|
|
|
16,802 |
|
|
|
9,935 |
|
|
|
48,167 |
|
|
|
28,036 |
|
Gross
profit
|
|
|
21,509 |
|
|
|
17,598 |
|
|
|
60,867 |
|
|
|
48,742 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
13,629 |
|
|
|
10,830 |
|
|
|
38,192 |
|
|
|
31,763 |
|
Selling,
general and administrative
|
|
|
7,195 |
|
|
|
5,112 |
|
|
|
19,904 |
|
|
|
13,633 |
|
Total
operating expenses
|
|
|
20,824 |
|
|
|
15,942 |
|
|
|
58,096 |
|
|
|
45,396 |
|
Income
from operations
|
|
|
685 |
|
|
|
1,656 |
|
|
|
2,771 |
|
|
|
3,346 |
|
Interest
and other income, net
|
|
|
403 |
|
|
|
1,298 |
|
|
|
1,148 |
|
|
|
3,760 |
|
Income
before income taxes
|
|
|
1,088 |
|
|
|
2,954 |
|
|
|
3,919 |
|
|
|
7,106 |
|
Benefit
from income taxes
|
|
|
(168 |
) |
|
|
(504 |
) |
|
|
(796 |
) |
|
|
(326 |
) |
Net
income
|
|
$ |
1,256 |
|
|
$ |
3,458 |
|
|
$ |
4,715 |
|
|
$ |
7,432 |
|
Net
income per share-Basic
|
|
$ |
0.06 |
|
|
$ |
0.17 |
|
|
$ |
0.22 |
|
|
$ |
0.36 |
|
Net
income per share-Diluted
|
|
$ |
0.06 |
|
|
$ |
0.16 |
|
|
$ |
0.21 |
|
|
$ |
0.34 |
|
Shares
used in calculation-Basic
|
|
|
21,630 |
|
|
|
20,860 |
|
|
|
21,360 |
|
|
|
20,650 |
|
Shares
used in calculation-Diluted
|
|
|
22,760 |
|
|
|
21,989 |
|
|
|
22,379 |
|
|
|
21,755 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,715 |
|
|
$ |
7,432 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,853 |
|
|
|
4,279 |
|
Loss
on disposal of property and equipment
|
|
|
106 |
|
|
|
- |
|
Accretion
of discount on debt securities
|
|
|
- |
|
|
|
(805 |
) |
Stock-based
compensation
|
|
|
11,557 |
|
|
|
10,858 |
|
Provision
for (recovery of) allowance for doubtful accounts
|
|
|
39 |
|
|
|
(37 |
) |
Provision
for inventory reserves
|
|
|
1,708 |
|
|
|
673 |
|
Tax
benefit from stock-based awards
|
|
|
- |
|
|
|
(16 |
) |
Net
impact of deferred tax asset valuation allowance release
|
|
|
- |
|
|
|
(504 |
) |
Changes
in assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
236 |
|
|
|
(2,945 |
) |
Inventories
|
|
|
(1,328 |
) |
|
|
1,034 |
|
Prepaid
expenses and other assets
|
|
|
(2,042 |
) |
|
|
(1,224 |
) |
Accounts
payable
|
|
|
3,753 |
|
|
|
1,070 |
|
Accrued
liabilities
|
|
|
(1,748 |
) |
|
|
1,516 |
|
Deferred
margin
|
|
|
1,485 |
|
|
|
678 |
|
Other
liabilities
|
|
|
992 |
|
|
|
(18 |
) |
Net
cash provided by operating activities
|
|
|
32,326 |
|
|
|
21,991 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Maturities
and sales of short-term investments
|
|
|
- |
|
|
|
50,751 |
|
Purchase
of short-term investments
|
|
|
- |
|
|
|
(13,935 |
) |
Purchase
of property and equipment
|
|
|
(1,318 |
) |
|
|
(1,498 |
) |
Cash
paid for acquisition
|
|
|
- |
|
|
|
(14,636 |
) |
Net
cash provided by (used in) investing activities
|
|
|
(1,318 |
) |
|
|
20,682 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
7,444 |
|
|
|
6,022 |
|
Payment
of software license obligations
|
|
|
(3,172 |
) |
|
|
(2,668 |
) |
Tax
benefit from stock-based awards
|
|
|
- |
|
|
|
16 |
|
Net
cash provided by financing activities
|
|
|
4,272 |
|
|
|
3,370 |
|
Effects
of exchange rate on cash and cash equivalents
|
|
|
(40 |
) |
|
|
6 |
|
Net
increase in cash and cash equivalents
|
|
|
35,240 |
|
|
|
46,049 |
|
Cash
and cash equivalents at the beginning of period
|
|
|
50,689 |
|
|
|
50,752 |
|
Cash
and cash equivalents at the end of period
|
|
$ |
85,929 |
|
|
$ |
96,801 |
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Software
license obligations
|
|
$ |
2,219 |
|
|
$ |
1,697 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NetLogic
Microsystems, Inc.
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of NetLogic
Microsystems, Inc. (“we,” “our” and the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and with the instructions for Form 10-Q and Regulation S-X statements.
Accordingly, they do not include all of the information and notes required for
complete financial statements. In the opinion of management, all adjustments,
consisting of only normal recurring items, considered necessary for a fair
statement of the results of operations for the periods are shown.
These
unaudited financial statements should be read in conjunction with the audited
financial statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 2007, and our Form 10-Q for the
three months ended March 31, 2008 and June 30, 2008. Operating results for the
three and nine months ended September 30, 2008 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2008.
Critical
Accounting Policies and Estimates
The
preparation of our unaudited condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We based these estimates and assumptions
on historical experience and evaluate them on an on-going basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. During the nine months ended September 30, 2008,
there were no significant changes to the critical accounting policies and
estimates discussed in our 2007 annual report on Form 10-K with the exception of
those discussed below.
Adoption
of Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 157, Fair Value
Measurement. SFAS No. 157 provides a framework that clarifies the
fair value measurement objective within GAAP and its application under the
various accounting standards where fair value measurement is allowed or
required. Under SFAS No. 157, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing
the asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. The fair value hierarchy
gives the highest priority to quoted prices in active markets and the lowest
priority to unobservable data. SFAS No. 157 requires fair value
measurements to be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. However, in February 2008, FASB Staff Position, or FSP,
No. 157-2 was issued which delayed the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The FSP partially defers the effective date of SFAS
No. 157 to fiscal years beginning after November 15, 2008, including
interim periods within that fiscal year for items within the scope of the FSP.
Effective January 1, 2008, the Company adopted SFAS No. 157 except as
it applies to those nonfinancial assets and nonfinancial liabilities within the
scope of FSP No. 157-2. The partial adoption of SFAS No. 157 did
not have a material impact on the Company’s financial position and results of
operations. The Company is currently assessing the impact of the adoption of
SFAS No. 157 as it relates to nonfinancial assets and nonfinancial
liabilities and has not yet determined the impact that the adoption will have on
its financial position and results of operations. Refer to Note 7, Fair Value Measurements, for
further information.
Recently
Issued Accounting Pronouncements
In
April 2008, the FASB issues FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 removes the
requirement under SFAS No. 142, Goodwill and Other Intangible Assets to consider
whether an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions, and replaces it with a
requirement that an entity consider its own historical experience in renewing
similar arrangements, or a consideration of market participant assumptions in
the absence of historical experience. FSP 142-3 also requires
entities to disclose information that enables the users of financial statements
to assess the extent to which the expected future cash flows associated with the
asset are affected by the entity’s intent and or ability to renew or extend the
arrangement. FSP 142-3 is effective January 1, 2009 on a prospective
basis. We are currently assessing FSP No. FAS 142-3 and have not yet
determined the impact, if any, that the adoption of FSP No. FAS 142-3 will have
on our financial position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(“SFAS 141(R)”), which replaces FAS 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is to be applied prospectively to
business combinations for which the acquisition date is on or after an entity’s
fiscal year that begins after December 15, 2008. We will assess the impact
of SFAS 141(R) if and when a future acquisition occurs.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We are currently
assessing SFAS No. 160 and have not yet determined the impact, if any, that
the adoption of SFAS No. 160 will have on our financial position, results
of operations and cash flows.
2.
Basic and Diluted Net Income Per Share
We
compute net income per share in accordance with SFAS No. 128, “Earnings per
Share.” Basic net income per share is computed by dividing net income
attributable to common stockholders (numerator) by the weighted average number
of common shares outstanding (denominator) during the period. Diluted net income
per share gives effect to all dilutive potential common shares outstanding
during the period including stock options and warrants using the treasury stock
method.
The
following is a reconciliation of the weighted average number of common shares
used to calculate basic net income per share to the weighted average common and
potential common shares used to calculate diluted net income per share for the
three and nine months ended September 30, 2008 and 2007 (in thousands, except
per share data):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,256 |
|
|
$ |
3,458 |
|
|
$ |
4,715 |
|
|
$ |
7,432 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
21,664 |
|
|
|
20,894 |
|
|
|
21,394 |
|
|
|
20,684 |
|
Less:
shares subject to repurchase
|
|
|
(34 |
) |
|
|
(34 |
) |
|
|
(34 |
) |
|
|
(34 |
) |
Shares
used in calculation - basic
|
|
|
21,630 |
|
|
|
20,860 |
|
|
|
21,360 |
|
|
|
20,650 |
|
Stock
options and warrants
|
|
|
1,096 |
|
|
|
1,095 |
|
|
|
985 |
|
|
|
1,071 |
|
Shares
subject to repurchase
|
|
|
34 |
|
|
|
34 |
|
|
|
34 |
|
|
|
34 |
|
Shares
used in caculation - diluted
|
|
|
22,760 |
|
|
|
21,989 |
|
|
|
22,379 |
|
|
|
21,755 |
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.06 |
|
|
$ |
0.17 |
|
|
$ |
0.22 |
|
|
$ |
0.36 |
|
Diluted
|
|
$ |
0.06 |
|
|
$ |
0.16 |
|
|
$ |
0.21 |
|
|
$ |
0.34 |
|
For the
three and nine months ended September 30, 2008 and 2007, employee stock options
to purchase the following number of shares of common stock were excluded from
the computation of diluted net income per share as their effect would be
anti-dilutive (in thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Shares
excluded from the computation of diluted net income per
share
|
|
|
1,828 |
|
|
|
1,733 |
|
|
|
2,215 |
|
|
|
1,608 |
|
3.
Stock-Based Compensation
We have
adopted stock plans that provide for grants to employees of equity-based awards,
which include stock options and restricted stock. In addition, we have an
Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase our
common stock at a discount through payroll deductions. The estimated fair value
of our equity-based awards, less expected forfeitures, is amortized over the
awards’ service period. We also grant stock options and restricted stock to new
employees in accordance with Nasdaq Marketplace rule
4350(i)(1)(A)(iv) as an inducement material to the new employee’s
entering into employment with the Company.
The
following table summarizes stock-based compensation expense recorded for the
periods presented (in thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of revenue
|
|
$ |
231 |
|
|
$ |
185 |
|
|
$ |
837 |
|
|
$ |
519 |
|
Research
and development
|
|
|
2,739 |
|
|
|
2,378 |
|
|
|
6,534 |
|
|
|
6,672 |
|
Selling,
general and administrative
|
|
|
1,612 |
|
|
|
1,480 |
|
|
|
4,186 |
|
|
|
3,667 |
|
Total
stock-based compensation expense
|
|
$ |
4,582 |
|
|
$ |
4,043 |
|
|
$ |
11,557 |
|
|
$ |
10,858 |
|
In addition,
we capitalized approximately $0.3 million and $0.2 million of stock-based
compensation in inventory as of September 30, 2008 and December 31, 2007,
respectively.
Stock
Options
The
exercise price of each stock option generally equals the market price of our
common stock on the date of grant. Most options vest over four years and expire
no later than ten years from the grant date. During the three and nine months
ended September 30, 2008, we granted stock options to purchase approximately
70,000 and 327,000 shares of common stock, respectively. During the three and
nine months ended September 30, 2007, we granted stock options to purchase
approximately 358,000 and 1,372,000 shares of common stock,
respectively. As of September 30, 2008, total unrecognized
compensation cost related to unvested stock options granted and outstanding was
approximately $26.4 million with a weighted average remaining vesting period of
2.5 years.
Restricted
Stock
During
the three and nine months ended September 30, 2008, we granted approximately
177,000 and 425,000 shares of restricted stock, respectively. During the three
and nine months ended September 30, 2007, we granted approximately 96,000 and
131,000 shares of restricted stock, respectively. These awards will vest over
the requisite service period, which ranges from two to four years. The fair
value of the restricted stock was determined using the fair value of our common
stock on the date of the grant. The fair value of the restricted stock is being
amortized on a straight-line basis over the service period and is reduced for
estimated forfeitures. As of September 30, 2008, total unrecognized compensation
cost related to unvested restricted stock granted was approximately $15.5
million, which is expected to be recognized over a weighted average period of
3.0 years.
Employee
Stock Purchase Plan
Our ESPP
provides that eligible employees may purchase up to $25,000 worth of our common
stock annually over the course of two nine-month offering periods. The purchase
price to be paid by participants is 85% of the price per share of our common
stock either at the beginning or the end of each six-month offering period,
whichever is less.
Valuation
Assumptions
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. This model was developed for use in
estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. Our employee stock options have
characteristics significantly different from those of publicly traded options as
they have vesting requirements and are not fully transferable. The weighted
average assumptions used in the model are outlined in the following
table:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Stock
option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.33 |
% |
|
|
4.70 |
% |
|
|
3.15 |
% |
|
|
4.81 |
% |
Expected
life (in years)
|
|
|
5.61 |
|
|
|
4.79 |
|
|
|
5.34 |
|
|
|
4.8 |
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility
|
|
|
55 |
% |
|
|
55 |
% |
|
|
58 |
% |
|
|
56 |
% |
Weighted
average grant date fair value
|
|
$ |
17.29 |
|
|
$ |
16.50 |
|
|
$ |
15.47 |
|
|
$ |
14.74 |
|
Employee
Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.13 |
% |
|
|
5.02 |
% |
|
|
2.75 |
% |
|
|
5.06 |
% |
Expected
life (in years)
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Volatility
|
|
|
51 |
% |
|
|
55 |
% |
|
|
51 |
% |
|
|
57 |
% |
Weighted
average fair value
|
|
$ |
10.22 |
|
|
$ |
10.07 |
|
|
$ |
9.71 |
|
|
$ |
8.38 |
|
The
computation of the expected volatility assumption used in the Black-Scholes
calculations for new grants is based on a combination of historical and implied
volatilities. When establishing the expected life assumption, on a semi-annual
basis we review the historical employee exercise behavior with respect to option
grants with similar vesting periods.
4.
Income Taxes
At
January 1, 2008 and September 30, 2008, we had $14.9 million and $15.5
million of unrecognized tax benefits, substantially all of which would affect
our effective tax rate if recognized.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of September 30, 2008, we had accrued interest of $319,000
related to uncertain tax positions.
The tax
years 1997-2007 remain open to examination by one or more of the major taxing
jurisdictions in which we are subject to taxation on our taxable income. We do
not anticipate that total unrecognized tax benefits will significantly change
due to the settlement of audits and the expiration of statue of limitations
prior to September 30, 2009.
On
October 3, 2008 the Emergency Economic Stabilization Act of 2008 was signed into
law. A provision in this legislation provided for the extension of
the research and development tax credit for qualifying expenditures paid or
incurred from January 1, 2008 through December 31, 2009. As a result
of this new legislation, we expect to generate federal research and development
tax credits for the years ended December 31, 2008 and 2009 resulting in
additional tax credit carryovers. We expect to record a tax benefit
for these credit carryovers in the years ended December 31, 2008 and
2009.
5.
Business Combination and Asset Purchase
Business
Combinations:
Aeluros,
Inc.
In
October 2007, we acquired all outstanding equity securities of Aeluros,
Inc. (“Aeluros”) a privately-held, fabless provider of industry-leading
10-Gigabit Ethernet physical layer products (“PLPs”). The PLP family extended
our product offerings to the physical layer, or Layer 1, of the Open Systems
Interconnection (“OSI”) reference model, which is a layered abstract description
for communications and computer network protocol design developed as part of the
Open Systems Interconnection initiative. The physical layer provides the
physical and electrical means for transmitting data between different nodes on a
network. We paid $57.1 million in cash. As of October 31, 2008, we became
obligated to pay up to an additional $15.5 million in cash to the former Aeluros
stockholders due to our attainment of post-acquisition revenue milestones,
subject to certain adjustments as provided in the Aeluros acquisition agreement.
The estimated additional consideration will be added to the amount of goodwill
calculated below in the fourth quarter of 2008. The results of operations
relating to Aeluros have been included in our results of operations since the
acquisition date.
The
purchase price of Aeluros of $57.1 million was determined as follows (in
thousands):
Cash
|
|
$ |
56,402 |
|
Direct
transaction costs
|
|
|
697 |
|
Total
purchase price
|
|
$ |
57,099 |
|
During
the nine months ended September 30, 2008, we recorded additional purchase price
allocation adjustments. As a result of the recorded purchase price allocation
adjustment, goodwill decreased and the net tangible assets and deferred tax
liabilities increased. Under the purchase method of accounting, the total
purchase price (including the additional purchase price allocation adjustments
recorded during the nine months ended September 30, 2008) was allocated to net
tangible and intangible assets acquired based on their estimated fair values as
follows (in thousands):
Net
tangible assets
|
|
$ |
4,794 |
|
Identifiable
intangible assets:
|
|
|
|
|
Developed
technology
|
|
|
27,680 |
|
Patents
and core technology
|
|
|
5,590 |
|
Customer
relationships
|
|
|
6,900 |
|
Backlog
|
|
|
970 |
|
In-process
research and development
|
|
|
1,610 |
|
Goodwill
|
|
|
16,689 |
|
Deferred
tax asset
|
|
|
9,845 |
|
Deferred
tas liabilities
|
|
|
(16,979 |
) |
Total
estimated purchase price
|
|
$ |
57,099 |
|
Developed
technology consisted of products that have reached technological feasibility and
have shipped in volume to customers. We determined the value of the
developed technology by discounting estimated net future cash flows of the
products. We are amortizing the existing technology for the chip technology
on a straight-line basis over estimated lives of four to five
years.
Patents
and core technology represent a combination of processes, patents and trade
secrets developed though years of experience in design and development of the
products. We determined the value of the patents and core technology by
estimating a benefit from owning the intangible asset rather than paying a
royalty to a third party for the use of the asset. We are amortizing the
core technology on a straight-line basis over an estimated life of five
years.
Customer
relationships relate to our ability to sell existing, in-process and future
versions of the products to the existing customers for the products. We
determined the value of the customer relationships by discounting estimated net
future cash flows from the customer contracts. We are amortizing customer
relationships on a straight-line basis over an estimated life of five
years.
The
backlog intangible asset represents the value of the sales and marketing costs
required to establish the order backlog and was valued using the cost savings
approach. We estimated these orders to be delivered and billed within nine
months, over which the asset was amortized. As of December 31, 2007,
the orders had been delivered and billed and the backlog intangible asset had
been fully amortized.
Of the
total estimated purchase price, approximately $1.6 million has been allocated to
in-process research and development (“IPRD”) based upon management’s estimate of
the fair values of assets acquired and was charged to expense in the three
months ended December 31, 2007. Projects that qualify as IPRD represent
those that have not reached technological feasibility and which have no
alternative use and therefore were written-off immediately.
The value
assigned to IPRD was determined by considering the importance of products under
development to the overall development plan, estimating costs to develop the
purchased IPRD into commercially viable products, estimating the resulting net
cash flows from the projects when completed and discounting the net cash flows
to their present value. The fair value of IPRD was determined using the
income approach, which discounts expected future cash flows to present
value. A discount rate of 24% was used in the present value calculations,
and was derived from a weighted-average cost of capital analysis, adjusted to
reflect additional risks related to the product’s development and success, as
well as the product’s stage of completion. At the time of the acquisition,
we estimated that the aggregate costs to complete the projects would be $0.3
million. As of September 30, 2008, the projects have been
completed.
The
estimates used in valuing in-process research and development were based upon
assumptions believed to be reasonable but which are inherently uncertain and
unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur. Accordingly, actual
results may vary from the projected results.
Of the
total estimated purchase price paid at the time of the acquisition,
approximately $16.7 million has been allocated to goodwill. Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the underlying net tangible and intangible assets, and is not
deductible for tax purposes. Among the factors that contributed to a purchase
price in excess of the fair value of the net tangible and intangible assets was
the acquisition of an assembled workforce of experienced semiconductor
engineers. We expect these experienced engineers to provide the capability of
developing and integrating advanced interface technology into its next
generation products.
TCAM2
Assets Purchase
In
August 2007, we purchased the TCAM2 and TCAM2-CR network search engine
products (collectively, the “TCAM2 Products”) and certain related assets from
Cypress for a total cash purchase price of approximately $14.6 million, which
was determined as follows (in thousands):
Cash
|
|
$ |
14,448 |
|
Direct
transaction costs
|
|
|
188 |
|
Total
purchase price
|
|
$ |
14,636 |
|
The
acquisition was accounted for as an asset purchase transaction and the total
purchase price was allocated to the TCAM2 Products’ net tangible and intangible
assets based on their fair values as of the date of the completion of the
acquisition. Based on management estimates of the fair values, the
estimated purchase price was allocated as follows (in thousands):
Inventory
|
|
$ |
3,090 |
|
Backlog
|
|
|
300 |
|
Composite
intangible asset
|
|
|
11,246 |
|
Total
|
|
$ |
14,636 |
|
The
composite intangible asset consisted of the existing technology related to the
TCAM2 Products and a customer relationship with Cisco, who was and remains the
sole customer for the TCAM2 Products. On the acquisition date, there was no
active research and development in process on the TCAM2 Products and therefore,
so no IPRD was identified. The value assigned to the composite intangible asset
was based upon future discounted cash flows related to the TCAM2 Products’
projected income streams. Factors considered in estimating the discounted cash
flows to be derived from the existing technology included risks related to the
characteristics and applications of the technology, existing and future markets
and an assessment of the age of the technology within its life span. We are
amortizing the composite intangible asset on a straight-line basis over an
estimated life of four years.
The
backlog intangible asset represented the value of the sales and marketing costs
required to establish the order backlog and was valued using the discounted cash
flow method. We estimated those orders would be delivered and billed within four
months from the acquisition date, which is the period over which the asset was
amortized. As of December 31, 2007, the orders had been delivered and billed and
the backlog intangible asset had been fully amortized.
6.
Goodwill and Intangible Assets
The
following table summarizes the components of goodwill, intangible assets and
related accumulated amortization balances, including those which were recorded
as a result of the business combinations described in Note 5 (in
thousands):
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Goodwill
|
|
$ |
53,758 |
|
|
$ |
- |
|
|
$ |
53,758 |
|
|
$ |
55,422 |
|
|
$ |
- |
|
|
$ |
55,422 |
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
$ |
34,180 |
|
|
$ |
(9,670 |
) |
|
$ |
24,510 |
|
|
$ |
34,180 |
|
|
$ |
(3,679 |
) |
|
$ |
30,501 |
|
Composite
intangible asset
|
|
|
11,246 |
|
|
|
(3,046 |
) |
|
|
8,200 |
|
|
|
11,246 |
|
|
|
(937 |
) |
|
|
10,309 |
|
Patents
and core technology
|
|
|
5,590 |
|
|
|
(1,046 |
) |
|
|
4,544 |
|
|
|
5,590 |
|
|
|
(207 |
) |
|
|
5,383 |
|
Customer
relationships
|
|
|
6,900 |
|
|
|
(1,291 |
) |
|
|
5,609 |
|
|
|
6,900 |
|
|
|
(256 |
) |
|
|
6,644 |
|
Total
|
|
$ |
57,916 |
|
|
$ |
(15,053 |
) |
|
$ |
42,863 |
|
|
$ |
57,916 |
|
|
$ |
(5,079 |
) |
|
$ |
52,837 |
|
For the
nine months ended September 30, 2008, goodwill decreased due to additional
purchase price allocation adjustments related to the Aeluros
Acquisition.
At
September 30, 2008 and December 31, 2007, goodwill represented approximately 23%
and 27%, respectively, of our total assets.
In
accordance with the Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets,” goodwill will not be amortized but
instead will be tested for impairment at least annually (more frequently if
certain indicators are present). In the event that management determines
that the value of goodwill has become impaired, we will incur an accounting
charge for the amount of impairment during the fiscal quarter in which the
determination is made. No assurances can be given that future evaluations of
goodwill will not result in charges as a result of future
impairment. During the three and nine months ended September 30, 2008
no impairment charges were recorded.
Amortization
expense related to intangible assets was $3.3 million and $0.6 million for the
three months ended September 30, 2008 and 2007, respectively, and $10.0 million
and $1.3 million for the nine months ended September 30, 2008 and 2007,
respectively. The amortization expense related to intangible assets
is included in cost of sales because it related to products sold during such
periods, except for the amortization of customer relationships of $0.3 million
and zero for the three months ended September 30, 2008 and 2007, respectively,
and $1.0 million and zero for the nine months ended September 30, 2008 and 2007,
respectively, which was included in selling, general and administrative
expenses.
As of
September 30, 2008, the estimated future amortization expense of intangible
assets in the table above is as follows (in thousands):
Fiscal
Year
|
|
Estimated
Amortization
|
|
2008
(remaining 3 months)
|
|
$ |
3,325 |
|
2009
|
|
|
13,299 |
|
2010
|
|
|
13,299 |
|
2011
|
|
|
10,154 |
|
2012
|
|
|
2,786 |
|
Total
|
|
$ |
42,863 |
|
7.
Fair Value Measurements
SFAS
No. 157 defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which the Company would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance.
Fair
Value Hierarchy
SFAS
No. 157 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument’s categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. SFAS No. 157 establishes three
levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in
active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs
to the valuation methodology that are significant to the measurement of fair
value of assets or liabilities.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
Company measures its financial assets, specifically its cash equivalents, at
fair value on a recurring basis. The Company does not have any financial
liabilities that are measured at fair value on a recurring basis. The fair value
of these financial assets was determined using the following inputs as of
September 30, 2008:
|
|
|
|
|
Fair
Value Measurements at September 30, 2008 Using
|
|
|
|
|
|
|
(In
thousands)
|
|
Description
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
Money
market funds (1)
|
|
$ |
47,814 |
|
|
$ |
47,814 |
|
|
$ |
- |
|
|
$ |
- |
|
United
States government agency securities (1)
|
|
|
3,989 |
|
|
|
- |
|
|
|
3,989 |
|
|
|
- |
|
Commercial
paper (1)
|
|
|
14,928 |
|
|
|
- |
|
|
|
14,928 |
|
|
|
- |
|
Total
|
|
$ |
66,731 |
|
|
$ |
47,814 |
|
|
$ |
18,917 |
|
|
$ |
- |
|
(1)
Included in cash and cash equivalents on the Company’s condensed consolidated
balance sheet.
The
Company’s cash and cash equivalents are invested with financial institutions in
deposits that, at times, may exceed federally insured limits. The Company has
not experienced any losses on its deposits of cash and cash equivalents as of
September 30, 2008. However, the capital and credit markets have been
experiencing unprecedented levels of extreme volatility and disruption. Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
We can provide no assurance that our cash and cash equivalents investments
will not be impacted by these matters in the future.
8.
Balance Sheet Components
The
components of our inventory at September 30, 2008 and December 31, 2007
were as follows (in thousands):
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
7,755 |
|
|
$ |
3,363 |
|
Work-in-progress
|
|
|
6,651 |
|
|
|
9,575 |
|
|
|
$ |
14,406 |
|
|
$ |
12,938 |
|
The components of our
accrued liabilities at September 30, 2008 and December 31, 2007 were as
follows (in thousands):
|
|
|
|
|
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
Accrued
payroll and related expenses
|
|
$ |
4,941 |
|
|
$ |
4,295 |
|
Accrued
accounts payable
|
|
|
229 |
|
|
|
2,038 |
|
Accrued
inventory purchases
|
|
|
1,241 |
|
|
|
1,774 |
|
Accrued
warranty
|
|
|
1,462 |
|
|
|
1,512 |
|
Other
accrued expenses
|
|
|
3,665 |
|
|
|
3,667 |
|
|
|
$ |
11,538 |
|
|
$ |
13,286 |
|
9.
Product Warranties
We
provide a limited product warranty from one to three years from the date of
sale. We provide for the estimated future costs of repair or replacement upon
shipment of the product. Our warranty accrual is estimated based on actual and
historical claims compared to historical revenue and assumes that we have to
replace products subject to a claim. The following table summarizes activity
related to product warranty liability during the three and nine months ended
September 30, 2008 and 2007 (in thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine months
ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Warranty
accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,419 |
|
|
$ |
1,369 |
|
|
$ |
1,512 |
|
|
$ |
1,270 |
|
Provision
for warranty
|
|
|
84 |
|
|
|
57 |
|
|
|
712 |
|
|
|
266 |
|
Settlements
and other adjustments made during the period
|
|
|
(41 |
) |
|
|
(15 |
) |
|
|
(762 |
) |
|
|
(125 |
) |
Ending
balance
|
|
$ |
1,462 |
|
|
$ |
1,411 |
|
|
$ |
1,462 |
|
|
$ |
1,411 |
|
During
the first two quarters of 2006, we provided an additional warranty reserve of
$0.9 million to address a warranty issue related to specific devices sold to one
of our international customers. The devices were tested by both us and the
customer and passed quality assurance inspection at the time they were sold. The
customer subsequently identified malfunctioning systems that included our
devices. No specific warranty reserve was provided for additional units shipped
subsequent to September 30, 2006 as the customer modified the software
associated with its products to remedy the observed malfunction. As of September
30, 2008, we maintained $0.7 million of warranty reserves for anticipated
replacement costs of the parts sold to this customer.
We
entered into a master purchase agreement with Cisco in November 2005 under which
we provided Cisco and its contract manufacturers a warranty period of as much as
five years (in the case of epidemic failure). The extended warranty period in
the master purchase agreement with Cisco has not had a material impact on our
results of operations or financial condition based on our warranty analysis,
which included an evaluation of our historical warranty cost information and
experience.
10.
Commitments and Contingencies
The
Company leases its facilities under non-cancelable operating leases, which
contain renewal options and escalation clauses, and expires through September
2011. The Company also acquires certain assets under software
licenses.
Minimum
commitments under non-cancelable software license and operating leases
agreements as of September 30, 2008 were as follows:
|
|
Software
licenses
and
other
obligations
|
|
|
Operating
leases
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Remainder
of 2008
|
|
$ |
243 |
|
|
$ |
247 |
|
|
$ |
490 |
|
2009
|
|
|
802 |
|
|
|
1,000 |
|
|
|
1,802 |
|
2010
|
|
|
437 |
|
|
|
1,021 |
|
|
|
1,458 |
|
2011
|
|
|
- |
|
|
|
516 |
|
|
|
516 |
|
|
|
$ |
1,482 |
|
|
$ |
2,784 |
|
|
$ |
4,266 |
|
Less:
interest component
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Present
value of minimum lease payment
|
|
|
1,418 |
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(877 |
) |
|
|
|
|
|
|
|
|
Long-term
portion of obligations
|
|
$ |
541 |
|
|
|
|
|
|
|
|
|
Purchase
Commitments
At
September 30, 2008, we had approximately $5.6 million in firm, non-cancelable
and unconditional purchase commitments with suppliers.
Contingencies
We may
become party to claims and litigation proceedings arising in the normal course
of business. The legal responsibility and financial impact with respect to
claims and litigation that may arise cannot currently be ascertained. Presently
we do not know of any matters that will result in the payment of monetary
damages, net of any applicable insurance proceeds, which, in the aggregate,
would be material in relation to our business, financial position, and results
of operations or cash flows. There can be no assurance that any such matters
would be resolved without costly litigation, in a manner that is not adverse to
our business, financial position, results of operations or cash flows, or
without requiring royalty payments in the future which might adversely impact
gross margins.
Indemnities,
Commitments and Guarantees
In the
normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to
certain transactions. These include agreements to indemnify our customers with
respect to liabilities associated with the infringement of other parties’
technology based upon our products, obligation to indemnify our lessors under
facility lease agreements, and obligations to indemnify our directors and
officers to the maximum extent permitted under the laws of the state of
Delaware. The duration of such indemnification obligations, commitments and
guarantees varies and, in certain cases, is indefinite. We have not recorded any
liability for any such indemnification obligations, commitments or guarantees in
the accompanying balance sheets. We do, however, accrue for losses for any known
contingent liability, including those that may arise from indemnification
provisions, when future payment is probable.
In
addition, under master purchase agreements signed with Cisco in November 2005,
we have agreed to indemnify Cisco for costs incurred in rectifying epidemic
failures, up to the greater of (on a per claim basis) 25% of all amounts paid to
us by Cisco during the preceding 12 months (approximately $14.7 million at
September 30, 2008) or $9.0 million, plus replacement costs. If we are required
to make payments under the indemnity, our operating results may be adversely
affected.
11.
Comprehensive Income
Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The components of comprehensive income are as
follows:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
1,256 |
|
|
$ |
3,458 |
|
|
$ |
4,715 |
|
|
$ |
7,432 |
|
Currency
transalation adjustments
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(24 |
) |
|
|
(14 |
) |
Unrealized
gain (loss) on short-term investments
|
|
|
(16 |
) |
|
|
21 |
|
|
|
(16 |
) |
|
|
1 |
|
Comprehensive
income
|
|
$ |
1,238 |
|
|
$ |
3,471 |
|
|
$ |
4,675 |
|
|
$ |
7,419 |
|
12.
Related Party Transactions
We lease our
headquarters facility in Mountain View, California from an affiliate of
Berg & Berg Enterprises, LLC (the “Affiliate”), which has held shares
of our common stock. We made lease payments under this lease agreement of
$356,000 and $215,000 for the three months ended September 30, 2008 and 2007,
respectively, and $759,000 and $636,000 for the nine months ended September 30,
2008 and 2007, respectively.
13.
Operating Segments and Geographic Information
We
operate in one business segment. We sell our products directly to customers in
the United States, Asia and Europe. Sales for geographic regions reported below
are based upon the customer headquarter locations. The following is a summary of
geographic information related to revenue for the three and nine months ended
September 30, 2008 and 2007:
|
|
Three
months ended
September
30,
|
|
|
Nine months
ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
28 |
% |
|
|
49 |
% |
|
|
31 |
% |
|
|
47 |
% |
Malaysia
|
|
|
30 |
% |
|
|
22 |
% |
|
|
32 |
% |
|
|
31 |
% |
China
|
|
|
27 |
% |
|
|
17 |
% |
|
|
23 |
% |
|
|
10 |
% |
Other
|
|
|
15 |
% |
|
|
12 |
% |
|
|
14 |
% |
|
|
12 |
% |
Total
Revenue
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The following
table summarizes customers comprising 10% or more of our gross account
receivable for the periods indicated:
|
|
|
|
|
|
|
Wintec
Industries Inc
|
|
|
43 |
% |
|
|
42 |
% |
Celestica
Corporation
|
|
|
15 |
% |
|
|
14 |
% |
Huawei
|
|
|
12 |
% |
|
|
* |
|
|
|
|
|
|
|
|
|
|
*
Less than 10% of gross account receivable
|
|
|
|
|
|
|
|
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-looking
Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, which include, without
limitation, statements about the market for our technology, our strategy and
competition. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements
of historical fact may be deemed forward-looking statements. For example, the
words “believes”, “anticipates”, “plans”, “expects”, “intends” and similar
expressions are intended to identify forward-looking statements. In addition,
all the information under Item 3 below constitutes a forward-looking
statement. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a discrepancy include, but are not limited to,
those discussed in “Business”, “Risk Factors”, “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” and “Qualitative and
Quantitative Disclosures About Market Risk” in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 14, 2008, under
“Management’s discussion and Analysis of Financial Condition and Results of
Operations” and “Risk Factors” in our quarterly reports filed with the
Securities and Exchange Commission on May 7, 2008 and August 6, 2008, and under
“Management’s discussion and Analysis of Financial Condition and Results of
Operations” and “Risk Factors” below. All forward-looking statements in this
document are based on information available to us as of the date of this report
and we assume no obligation to update any such forward-looking statements. The
following discussion should be read in conjunction with our condensed financial
statements and the accompanying notes contained in this quarterly report, except
as required by law. Unless expressly stated or the context otherwise requires,
the terms “we”, “our”, “us” and “NetLogic Microsystems” refer to NetLogic
Microsystems, Inc.
Overview
We are a
semiconductor company that designs, develops and sells proprietary
high-performance processors and high-speed integrated circuits that are used by
original equipment manufacturers (OEMs) in routers, switches, wireless
infrastructure equipment, network security appliances, datacenter servers,
network access equipment and network storage devices to accelerate the delivery
of voice, video, data and multimedia content for advanced enterprise,
datacenter, communications and mobile wireless networks. Our knowledge-based
processors, physical layer products and network search engine products are
incorporated in systems used throughout multiple types of networks that comprise
the global Internet infrastructure, including the enterprise, metro, access,
edge and core networking markets, and are designed into systems offered by
leading networking OEMs such as AlaxalA Networks Corporation, Alcatel-Lucent,
ARRIS Group, Inc., Cisco Systems, Inc., Foundry Networks, Inc., Huawei
Technologies Co., Ltd., and Juniper Networks, Inc.
The
products and technologies we have developed and acquired are targeted to enable
our customers to develop systems that support the increasing speeds and
complexity of the Internet infrastructure. We believe there is a growing need to
include knowledge-based processors and high speed integrated circuits in a
larger number of such systems as networks transition to all Internet Protocol
(IP) packet processing at increasing speeds.
The
equipment and systems that use our products are technically complex. As a
result, the time from our initial customer engagement design activity to volume
production can be lengthy and may require considerable support from our design
engineering, research and development, sales, and marketing personnel in order
to secure the engagement and commence product sales to the customer. Once the
customer’s equipment is in volume production, however, it generally has a life
cycle of three to five years and requires less ongoing support.
In
general, we recognize revenue from sales of our products upon shipment to our
customers or our international stocking sales representatives. Usually, we sell
the initial shipments of a product for a new design engagement directly to the
OEM customer. Once the design enters volume production, the OEM frequently
outsources its manufacturing to contract manufacturers who purchase the products
directly from us.
As a
fabless semiconductor company, our business is less capital intensive than
others because we rely on third parties to manufacture, assemble, and test our
products. In general, we do not anticipate making significant capital
expenditures aside from business acquisitions that we might make from time to
time. In the future, as we launch new products or expand our operations,
however, we may require additional funds to procure product mask sets, order
elevated quantities of wafers from our foundry partners, perform qualification
testing and assemble and test those products.
Because
we purchase all wafers from suppliers with fabrication facilities and outsource
the assembly and testing to third party vendors, a significant portion of our
costs of revenue consists of payments to third party vendors. We do not have
long-term agreements with any of our suppliers and rely upon them to fulfill our
orders.
Some of
our challenges include customer and product diversification and inventory
management. Additionally, current macroeconomic conditions appear to have
lowered demand for our products. As a result, our revenues for the
three months ended December 31, 2008 are expected to decrease. During the three
and nine months ended September 30, 2008 our top five customers accounted for
67% and 69% of our revenues. Favorable market trends, such as the increasing
number of 10 Gigabit ports as enterprises and datacenters upgrade their legacy
networks to better accommodate the proliferation of video and virtualization
applications, growth in the cable infrastructure area of our business, and the
growing mobile wireless infrastructure and IPTV markets, have enabled us to
broaden our customer base and increase demand for our knowledge-based processors
and network search engines. Additionally, we have further diversified our
customer and product revenues by expanding our product portfolio to address
Layer 7 content processing with our NETL7™
processor family, the Layer 1 physical layer with our 10 Gigabit Ethernet
products, and entry level equipment with our NETLite™ processors.
As an
integral part of our efforts to diversify our product and customer base, as well
as strengthen our competitive positioning, and broaden our technology portfolio
and research and development capabilities, we have entered into strategic
acquisitions of products and technology, including:
|
•
|
The
acquisition of the majority of products and assets of the network search
engine business from Cypress Semiconductor Corporation (“Cypress”) in
February 2006, where we obtained the Sahasra™
algorithmic technology that we integrated into our NL9000 knowledge-based
processor which we announced in January
2008;
|
|
•
|
The
acquisition of TCAM2 and TCAM2-CR network search engine products from
Cypress in August 2007 that have resulted in immediate revenue expansion,
as well as extension of our market leadership in the desktop switching
market segment; and
|
|
•
|
The
acquisition of Aeluros Inc., a privately-held, fabless provider of
industry-leading 10-Gigabit Ethernet physical layer products in October
2007, which extends our product offerings to the physical layer, or Layer
1, of the Open Systems Interconnection reference model, and is consistent
with our strategy to target customer systems that are being built to
handle the increasing speeds of network traffic. This acquisition also
increased our analog design capabilities and our ability to integrate
higher speed, lower power I/O functionality into our next generation
knowledge-based processors.
|
Cisco
and its contract manufacturers have accounted for a majority of our historical
revenue. At Cisco’s request, in the third and fourth quarters of 2007, we
transitioned into a just-in-time inventory arrangement covering substantially
all of our product shipments to Cisco and its contract manufacturers. Pursuant
to this arrangement we deliver products to Wintec Industries (“Wintec”) based on
orders they place with us, but we do not recognize product revenue unless and
until Wintec reports that it has delivered the product to Cisco or its contract
manufacturer to incorporate into its end products. Given this arrangement,
unless Cisco or its contract manufacturers take possession of our products from
Wintec in accordance with the schedules provided to us, our predicted future
revenue stream could vary substantially from our forecasts, and our results of
operations could be materially and adversely affected. Additionally, because we
own the inventory physically located at Wintec until it is shipped to Cisco and
its contract manufacturers, our ability to effectively manage inventory levels
may be impaired, causing our total inventory levels to
increase. This, in turn, could increase our expenses associated with
excess and obsolete product and negatively impact our cash flows. During the
three and nine months ended September 30, 2008, our revenues from Cisco and
Cisco’s contract manufacturers were $13.9 million and $42.9 million, or
approximately 36% and 39% of total revenue. Additionally, we expect
our revenues from Cisco and its contract manufacturers to decline during the
three months ended December 31, 2008.
Critical
Accounting Policies and Estimates
The
preparation of our condensed unaudited financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base these estimates and assumptions
on historical experience and evaluate them on an on-going basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. There were no changes to our critical accounting
policies and estimates discussed in our 2007 Annual Report on Form
10-K.
Results
of Operations
Comparison
of Three Months Ended September 30, 2008 with Three Months Ended September 30,
2007
Revenue,
cost of revenue and gross profit
The table
below sets forth data concerning the fluctuations in our revenue, cost of
revenue and gross profit for the three months ended September 30, 2008 and 2007
(in thousands, except percentage data):
|
|
Three
Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
|
|
|
Increase
Percentage
|
|
Revenue
|
|
$ |
38,311 |
|
|
|
100.0 |
% |
|
$ |
27,533 |
|
|
|
100.0 |
% |
|
$ |
10,778 |
|
|
|
39.1 |
% |
Cost
of revenue
|
|
|
16,802 |
|
|
|
43.9 |
% |
|
|
9,935 |
|
|
|
36.1 |
% |
|
|
6,867 |
|
|
|
69.1 |
% |
Gross
profits
|
|
$ |
21,509 |
|
|
|
56.1 |
% |
|
$ |
17,598 |
|
|
|
63.9 |
% |
|
$ |
3,911 |
|
|
|
22.2 |
% |
Revenue. Revenue for the
three months ended September 30, 2008 increased by $10.8 million compared with
the three months ended September 30, 2007. Revenue from sales to Wintec, Cisco
and Cisco’s contract manufacturers (collectively “Cisco”) represented $13.9
million of our total revenue for the three months ended September 30, 2008,
compared with $12.2 million during the three months ended September 30, 2007.
The increase in sales to Cisco was primarily due to increased revenues of our
new and additional products for Cisco, including the NL7000, NL8000 and TCAM2
products which increased $7.4 million, offset by a decrease of $5.3 million from
2007 in revenue from sales of NL5000 products. Revenue from non-Cisco
customers represented $24.4 million of total revenue for the three months ended
September 30, 2008, compared with $15.3 million for the three months ended
September 30, 2007. The increase in sales to non-Cisco customers was
driven primarily by increased demand for our products in several emerging new
markets, such as 10 Gigabit Ethernet, including our acquired PLP products, and
IPTV. During the three months ended September 30, 2008,
Alcatel-Lucent accounted for 10% of our total revenue. Given the
weakness in the macroeconomic environment, we expect our revenues, including
revenues from sales to Cisco, to decline in the three months ended December 31,
2008.
Cost of
Revenue/Gross Profit/Gross Margin. Cost of revenue for the three months
ended September 30, 2008 increased by $6.9 million compared with that of the
three months ended September 30, 2007. Cost of revenue increased primarily due
to an increase in product sales, amortization of intangible assets, and a
provision for excess and obsolete inventory. Cost of revenue for the three
months ended September 30, 2008 and 2007 included $3.0 million and $0.6 million,
respectively, of amortization of intangible assets, and $1.1 million and $0.3
million, respectively, of a provision for excess and obsolete
inventory. The increase in amortization of intangible asset was
primarily attributable to intangible assets recorded in connection with our
acquisitions in the second half of 2007.
Operating
expenses
The table
below sets forth operating expense data for the three months ended September 30,
2008 and 2007 (in thousands, except percentage data):
|
|
Three
Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
|
|
|
Increase
Percentage
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
13,629 |
|
|
|
35.6 |
% |
|
$ |
10,830 |
|
|
|
39.3 |
% |
|
$ |
2,799 |
|
|
|
25.8 |
% |
Selling,
general and administrative
|
|
|
7,195 |
|
|
|
18.8 |
% |
|
|
5,112 |
|
|
|
18.6 |
% |
|
|
2,083 |
|
|
|
40.7 |
% |
Total
operating expenses
|
|
$ |
20,824 |
|
|
|
54.4 |
% |
|
$ |
15,942 |
|
|
|
57.9 |
% |
|
$ |
4,882 |
|
|
|
30.6 |
% |
Research and Development
Expenses. Research and development expenses increased by $2.8 million
during the three months ended September 30, 2008, compared with the same period
in 2007 primarily due to increases in payroll related expenses of $1.1 million,
product development and qualification expenses of $0.7 million, consulting and
outside vendor expenses of $0.8 million, and stock based compensation expenses
of $0.4 million, which were partially offset by a decrease in travel related
expenses of $0.2 million. The increase in payroll-related expenses resulted
primarily from increases in engineering headcount in India to support our new
product development efforts, and in the U.S. as a result of the Aeluros
Acquisition. The increase in product development and qualification expense
related to production qualification and characterization of our newly introduced
knowledge-based processors. The remainder of the increase in research and
development expenses was caused by individually minor items.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $2.1
million during the three months ended September 30, 2008, compared with the same
period in 2007, primarily due to increases in commission expense of $0.5
million, consulting and outside vendor services expense of $0.5 million, payroll
related expenses of $0.4 million, stock-based compensation expense of $0.1
million, and other professional service fees of $0.1 million. The increase in
commission expenses was primarily a result of our increase in revenue. The
increase in payroll related expenses resulted primarily from increased headcount
to support our growing operations in the sales and marketing areas. Selling,
general and administrative expenses also included $0.3 million of amortization
expense for the customer relationship intangible asset related to the Aeluros
Acquisition. The remainder of the fluctuation in selling, general and
administrative expenses was caused by individually minor items.
Other
items
The table
below sets forth other data for the three months ended September 30, 2008 and
2007 (in thousands, except percentage data):
|
|
Three
Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
(Decrease)
|
|
|
Increase
(Decrease)
Percentage
|
|
Other
income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
421 |
|
|
|
1.1 |
% |
|
$ |
1,291 |
|
|
|
4.7 |
% |
|
$ |
(870 |
) |
|
|
-67.4 |
% |
Other
income (expense), net
|
|
|
(18 |
) |
|
|
0.0 |
% |
|
|
7 |
|
|
|
0.0 |
% |
|
|
(25 |
) |
|
|
-357.1 |
% |
Total
interest and other income, net
|
|
$ |
403 |
|
|
|
1.1 |
% |
|
$ |
1,298 |
|
|
|
4.7 |
% |
|
$ |
(895 |
) |
|
|
-69.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
from income taxes
|
|
$ |
(168 |
) |
|
|
-0.4 |
% |
|
$ |
(504 |
) |
|
|
-1.8 |
% |
|
$ |
336 |
|
|
|
-66.7 |
% |
Interest and Other
Income (Expenses), Net. Interest and other net income decreased by
$1.0 million for the three months ended September 30, 2008, compared with the
same period in 2007, primarily due to our lower invested balances after paying
approximately $71.7 million in connection with our acquisitions of the TCAM2
Products from Cypress and the Aeluros Acquisition, and also lower yields on our
investments. Our cash, cash equivalents and short-term investments balance
decreased from $99.8 million at September 30, 2007 to $85.9 million at September
30, 2008.
Benefit from Income
Taxes. During the three months ended September 30, 2008, we recorded
an income tax benefit of $0.2 million. Our effective tax rate for the
three months ended September 30, 2008 was driven primarily by a rate
differential for book income generated in foreign jurisdictions and book losses
generated in the United States.
Comparison
of Nine Months Ended September 30, 2008 with Nine Months Ended September 30,
2007
Revenue,
cost of revenue and gross profit
The table
below sets forth data concerning the fluctuations in our revenue, cost of
revenue and gross profit for the nine months ended September 30, 2008 and 2007
(in thousands, except percentage data):
|
|
Nine Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Nine Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
|
|
|
Increase
Percentage
|
|
Revenue
|
|
$ |
109,034 |
|
|
|
100.0 |
% |
|
$ |
76,778 |
|
|
|
100.0 |
% |
|
$ |
32,256 |
|
|
|
42.0 |
% |
Cost
of revenue
|
|
|
48,167 |
|
|
|
44.2 |
% |
|
|
28,036 |
|
|
|
36.5 |
% |
|
|
20,131 |
|
|
|
71.8 |
% |
Gross
profits
|
|
$ |
60,867 |
|
|
|
55.8 |
% |
|
$ |
48,742 |
|
|
|
63.5 |
% |
|
$ |
12,125 |
|
|
|
24.9 |
% |
Revenue. Revenue for the nine
months ended September 30, 2008 increased by $32.3 million compared with the
nine months ended September 30, 2007. Revenue from sales to Cisco represented
$42.9 million of our total revenue for the nine months ended September 30, 2008,
compared with $39.2 million during the nine months ended September 30, 2007. The
increase in sales to Cisco resulted primarily from increased revenues
of $22.1 million from new and additional products for Cisco, including the
NL7000, NL8000 and TCAM2 products partially, offset by a decrease of $17.5
million from 2007 in revenue from sales of NL5000 products. Revenue
from our non-Cisco customers represented $66.1 million of our total revenue for
the nine months ended September 30, 2008, compared with $37.6 million for the
nine months ended September 30, 2007. The increase in sales to
non-Cisco customers was driven primarily by the increased demand for our
products in several emerging new markets, such as 10 Gigabit Ethernet, including
our PLP products, and IPTV. During the nine months ended September
30, 2008, Alcatel-Lucent accounted for 10% of our total revenue. Given the
weakness in the macroeconomic environment, we expect our revenues, including
revenues from sales to Cisco, to decline in the three months ended December 31,
2008.
Cost of Revenue/Gross Profit/Gross
Margin. Cost of revenue for the nine months ended September 30, 2008
increased by $20.1 million compared with that of the nine months ended September
30, 2007. Cost of revenue increased primarily due to higher product
sales, amortization of intangible assets, and a provision for excess and
obsolete inventory and product scrap charges which were partially offset by a
reversal of previously accrued inventory exposures that were no longer
considered a liability. Cost of revenue for the nine months ended September 30,
2008 and 2007 included $9.0 million and $1.3 million, respectively, of
amortization of intangible assets, and $1.7 million and $0.7 million,
respectively, of a provision for excess and obsolete inventory.
Operating
expenses
The table
below sets forth operating expense data for the nine months ended September 30,
2008 and 2007 (in thousands, except percentage data):
|
|
Nine Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Nine Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
|
|
|
Increase
Percentage
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
38,192 |
|
|
|
35.0 |
% |
|
$ |
31,763 |
|
|
|
41.4 |
% |
|
$ |
6,429 |
|
|
|
20.2 |
% |
Selling,
general and administrative
|
|
|
19,904 |
|
|
|
18.3 |
% |
|
|
13,633 |
|
|
|
17.8 |
% |
|
|
6,271 |
|
|
|
46.0 |
% |
Total
operating expenses
|
|
$ |
58,096 |
|
|
|
53.3 |
% |
|
$ |
45,396 |
|
|
|
59.2 |
% |
|
$ |
12,700 |
|
|
|
28.0 |
% |
Research and Development
Expenses. Research and development expenses increased by $6.4 million
during the nine months ended September 30, 2008, compared with the same period
in 2007, primarily due to increases in payroll related expenses of $3.1 million,
product development and qualification expenses of $2.2 million, consulting and
outside vendor expenses of $1.1 million, which were partially offset by a
decrease of stock-based compensation expense of $0.1 million and travel expenses
of $0.1 million. The increase in payroll-related expenses resulted primarily
from increases in engineering headcount in India to support our new product
development efforts, and in the U.S. as a result of the Aeluros Acquisition. The
increase in product development and qualification expense related to the
production qualification and characterization of our newly introduced
knowledge-based processors. The remainder of the increase in research and
development expenses was caused by individually minor items.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $6.3
million during the nine months ended September 30, 2008, compared with the same
period in 2007, primarily due to increased commission expenses of $1.6 million,
payroll related expenses of $1.3 million, consulting and outside vendor expense
of $0.9 million, other professional services fess of $0.6 million, stock-based
compensation expense of $0.5 million. The increase in commission expenses was
primarily a result of our increase in revenue. The increase in stock-based
compensation expense and payroll related expenses resulted primarily from
increased headcount to support our growing operations in the sales and marketing
areas. Selling, general and administrative expenses also included $1.0 million
of amortization expense for the customer relationship intangible asset related
to the Aeluros Acquisition. The remainder of the fluctuation in selling, general
and administrative expenses was caused by individually minor items.
Other
items
The table
below sets forth other data for the nine months ended September 30, 2008 and
2007 (in thousands, except percentage data):
|
|
Nine Months
ended
September 30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Nine Months
ended
September 30,
2007
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Increase
(Decrease)
|
|
|
Increase
(Decrease)
Percentage
|
|
Other
income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
1,259 |
|
|
|
1.2 |
% |
|
$ |
3,724 |
|
|
|
4.9 |
% |
|
$ |
(2,465 |
) |
|
|
-66.2 |
% |
Other
income (expense), net
|
|
|
(111 |
) |
|
|
-0.1 |
% |
|
|
36 |
|
|
|
0.0 |
% |
|
|
(147 |
) |
|
|
-408.3 |
% |
Total
interest and other income, net
|
|
$ |
1,148 |
|
|
|
1.1 |
% |
|
$ |
3,760 |
|
|
|
4.9 |
% |
|
$ |
(2,612 |
) |
|
|
-69.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
from income taxes
|
|
$ |
(796 |
) |
|
|
-0.7 |
% |
|
$ |
(326 |
) |
|
|
-0.4 |
% |
|
$ |
(470 |
) |
|
|
144.2 |
% |
Interest and Other Income
(Expenses), Net. Interest and other net income decreased by $2.6
million during the nine months ended September 30, 2008, compared with the same
period in 2007, primarily due to our lower invested balances after paying
approximately $71.7 million in connection with our acquisition activities of the
TCAM2 Products from Cypress and the Aeluros Acquisition, and lower yields on our
investments. Our cash, cash equivalents and short-term investments balance
decreased from $99.8 million at September 30, 2007 to $85.9 million at September
30, 2008.
Benefit from Income
Taxes. During the nine months ended September 30, 2008, we recorded
an income tax benefit of $0.8 million. Our effective tax rate for the nine
months ended September 30, 2008 was primarily driven by a rate differential for
book income generated in foreign jurisdictions and book losses generated in the
United States.
Liquidity
and Capital Resources: Changes in Financial Condition
At
September 30, 2008, our principal source of liquidity was cash and cash
equivalents, which totaled $85.9 million. We believe that our current
cash position will be sufficient to meet our expected cash requirements for at
least the next twelve months.
The
Company’s cash and cash equivalents are invested with financial institutions in
deposits that, at times, may exceed federally insured limits. The Company has
not experienced any losses on its deposits of cash and cash equivalents as of
September 30, 2008. However, the capital and credit markets have been
experiencing unprecedented levels of extreme volatility and disruption. Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
We can provide no assurance that our cash and cash equivalents investments
will not be impacted by these matters in the future. The table below sets forth
the key components of cash flow for the nine months ended September 30, 2008 and
2007 (in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
$ |
32,326 |
|
|
$ |
21,991 |
|
Net
cash provided by (used in) investing activities
|
|
$ |
(1,318 |
) |
|
$ |
20,682 |
|
Net
cash provided by financing activities
|
|
$ |
4,272 |
|
|
$ |
3,370 |
|
Cash
Flows during the Nine Months Ended September 30, 2008
Net cash
provided by operating activities was $32.3 million for the nine months ended
September 30, 2008,which primarily consisted of $4.7 million of net income,
$26.3 million of non-cash operating expenses and $1.3 million in changes in
operating assets and liabilities. Non-cash items in the nine months
ended September 30, 2008 included depreciation and amortization expense of $12.9
million, stock-based compensation expense of $11.6 million, and provision for
inventory reserves of $1.7 million. Changes in operating assets and
liabilities were primarily driven by an increase in accounts payable of $3.8
million, deferred margin of $1.5 million, and inventory of $1.3 million on
higher product sales, offset by a decrease in accrued liabilities of $1.7
million.
Net cash
used in financing activities was $1.3 million for the nine months ended
September 30, 2008, which was primarily due to purchases of computer equipment
and research and development design tools to support our on-going R&D
projects. We expect to use our cash on hand for capital expenditures of
approximately $0.7 million primarily for design tools during the remainder
of 2008 to support product development activities.
Net cash
provided by financing activities was $4.3 million for the nine months ended
September 30, 2008, which was primarily due to net proceeds of $7.5 million of
stock option exercises, offset by $3.2 million in principal payments of software
licenses and other obligations.
Cash
Flows during the Nine Months ended September 30, 2007
Net cash
provided by operating activities was $22.0 million. Net cash provided by
operating activities primarily consisted of $7.4 million of net income, $14.5
million on non-cash operating expenses and $0.1 million in changes in operating
assets and liabilities. Non-cash items in the nine months ended
September 30, 2007 included stock-based compensation expense of $10.9 million,
depreciation and amortization expenses of $4.3 million, and provision for excess
and obsolete inventory reserves of $0.6 million, offset by accretion of discount
on debt securities of $0.8 million, and net impact of deferred tax asset
valuation allowance release of $0.5 million. Changes in operating
assets and liabilities were primarily driven by an increase in accounts payable
and accrued liabilities of $2.6 million, deferred margin of $0.7 million,
accounts receivables of $2.9 million on higher sales of our knowledge based
processors during the period, prepaids and other assets of $1.2 million due to
prepayment of directors’ and officers’ insurance premiums, offset by a decrease
in inventory of $1.0 million.
Net cash
used by investing activities was $20.7 million for the nine months ended
September 30, 2007, which was primarily due to $14.6 million to purchase the
TCAM2 and TCAM-CR network search engine products and certain related assets from
Cypress, $14.0 million for the purchase of short-term investments, and $1.5
million to purchase computer equipment and research and development design tools
to support our on-going R&D projects, offset by $50.8 million in proceeds
from maturities of short-term investments.
Net
cash provided by financing activities was $3.4 million for the nine months ended
September 30, 2007, primarily from $6.0 million of net proceeds of stock option
exercises, offset by $2.7 million of repayments of software licenses and other
obligations.
Contractual
Obligations
Our
principal commitments as of September 30, 2008 consisted of operating lease
obligation payments, wafer purchases, and payments on software licenses and
other obligations, which are summarized below (in thousands)
|
|
Total
|
|
|
|
|
|
1
-3
years
|
|
|
4
-5
years
|
|
|
After
5
years
|
|
Operating
lease obligations
|
|
$ |
2,784 |
|
|
$ |
994 |
|
|
$ |
1,790 |
|
|
$ |
- |
|
|
$ |
- |
|
Software
licenses and other obligations
|
|
|
1,418 |
|
|
|
877 |
|
|
|
541 |
|
|
|
- |
|
|
|
- |
|
Wafer
purchases
|
|
|
5,564 |
|
|
|
5,564 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
9,766 |
|
|
$ |
7,435 |
|
|
$ |
2,331 |
|
|
$ |
- |
|
|
$ |
- |
|
In
addition to the enforceable and legally binding obligations quantified in the
table above, we have other obligations for goods and services entered into in
the normal course of business. These obligations, however, are either not
enforceable or legally binding, or are subject to change based on our business
decisions.
As of
October 31, 2008, we became obligated to pay up to an additional $15.5 million
in cash to the former Aeluros stockholders due to our attainment of
post-acquisition revenue milestones, subject to certain adjustments as provided
in the Aeluros acquisition agreement. We expect to make a final determination of
the amount owed and pay it in the first half of 2009.
As of
September 30, 2008, the total amount of our unrecognized tax benefits was $15.5
million and is considered a long-term obligation. We have recognized a net
amount of $8.8 million in other liabilities for unrecognized tax benefits in our
Condensed Consolidated Balance Sheet as of September 30, 2008. We are unable to
make reasonably reliable estimates of the period of cash settlement associated
with these obligations with the respective taxing authority.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
The
primary objective of our investment activities is to preserve principal while
maximizing the income we receive from our investments without significantly
increasing the risk of loss. Some of the investable securities permitted under
our cash management policy may be subject to market risk for changes in interest
rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalent
and short-term investments in a variety of securities which may include
investment grade commercial paper, money market funds, government debt issued by
the United States of America, state debt, certificates of deposit and investment
grade corporate debt. Presently, we are exposed to minimal market risks
associated with interest rate changes. We manage the sensitivity of our results
of operations to these risks by maintaining investment grade short-term
investments. Our cash management policy does not allow us to purchase or hold
derivative or commodity instruments or other financial instruments for trading
purposes. Additionally, our policy stipulates that we periodically monitor our
investments for adverse material holdings related to the underlying financial
solvency of the issuer. As of September 30, 2008, our investments consisted
primarily of money market funds, government agency debt securities, and
commercial paper. Our results of operations and financial condition would not be
significantly impacted by either a 10% increase or decrease in interest rates
due mainly to the short-term nature of our investment portfolio.
Our sales
outside the United States are transacted in U.S. dollars; accordingly our
sales are not generally impacted by foreign currency rate changes. Our operating
expenses are denominated primarily in U.S. Dollars, except for expenses incurred
by our wholly owned subsidiaries, which are denominated in the local currency.
To date, fluctuations in foreign currency exchange rates have not had a material
impact on our results of operations.
During
the period covered by this Quarterly Report on Form 10-Q the implementation of a
new enterprise resource planning system and related control processes
represented a change in our internal controls over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting
Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of September 30, 2008. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of September 30, 2008 to ensure that
information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is (i) recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
We
face many significant risks in our business, some of which are unknown to us and
not presently foreseen. These risks could have a material adverse impact on our
business, financial condition and results of operations in the future. We have
disclosed a number of material risks under Item 1A of our annual report on
Form 10-K for the year ended December 31, 2007, which we filed with the
Securities and Exchange Commission on March 14, 2007 and under
“Management’s discussion and Analysis of Financial Condition and Results of
Operations” and “Risk Factors” in our quarterly report filed with the Securities
and Exchange Commission on May 7, 2008,. The following discussion is of material
changes to risk factors disclosed in that report.
Because
we rely on a small number of customers for a significant portion of our total
revenue, the loss of, or a significant reduction in, orders for our products
from these customers would negatively affect our total revenue and
business.
To date,
we have been dependent upon orders for sales of knowledge-based processors to a
limited number of customers, and, in particular, Cisco, for most of our total
revenue. Cisco and its contract manufacturers accounted for 36% and 44% of our
total revenue, for the three months ended September 30, 2008 and 2007,
respectively, and 39% and 51% for the nine months ended September 30, 2008 and
2007, respectively. We expect that our future financial performance will
continue to depend in large part upon our relationship with Cisco and several
other networking OEMs.
We cannot
assure you that existing or potential customers will not develop their own
solutions, purchase competitive products or acquire companies that use
alternative methods in their systems. We do not have long-term purchase
commitments from any of our OEM customers or their contract manufacturers.
Although we entered into master purchase agreements with Cisco, one of Cisco’s
foreign affiliates and a Cisco purchasing agent, these agreements do not include
any long-term purchase commitments. Cisco and our other customers do business
with us currently only on the basis of short term purchase orders (subject, in
the case of Cisco, to the terms of the master purchase agreements), which often
are cancelable prior to shipment. The loss of orders for our knowledge-based
processors for Cisco products or products of other major users of our
knowledge-based processors would have a significant negative impact on our
business.
A
failure to successfully address the potential difficulties associated with
international business could reduce our growth, increase our operating costs and
negatively impact our business.
We
conduct a significant amount of our business with companies that operate
primarily outside of the United States, and intend to increase sales to
companies operating outside of the United States. For example, our customers
based outside the United States accounted for 69% of our total revenue for the
nine months ended September 30, 2008. The increase is foreign sales is primarily
due to the use of off-shore contract manufacturers by our largest customers. Not
only are many of our customers located abroad, but our two wafer foundries are
based in Taiwan, and we outsource the assembly and some of the testing of our
products to companies based in Taiwan and Hong Kong. We face a variety of
challenges in doing business internationally, including:
|
•
|
foreign
currency exchange fluctuations;
|
|
•
|
unanticipated
changes in local regulations;
|
|
•
|
potentially
adverse tax consequences, such as withholding
taxes;
|
|
•
|
timing
and availability of export and import
licenses;
|
|
•
|
political
and economic instability;
|
|
•
|
reduced
or limited protection of our intellectual
property;
|
|
•
|
protectionist
laws and business practices that favor local competition;
and
|
|
•
|
additional
financial risks, such as potentially longer and more difficult collection
periods.
|
Because
we anticipate that we will continue to rely heavily on foreign companies for our
future growth, the occurrence of any of the circumstances identified above could
significantly increase our operating costs, delay the timing of our revenue and
harm our business and financial condition.
If
the recent credit market conditions worsen, it could have a material adverse
impact on our investment portfolio.
Although
we manage our investment portfolio by purchasing only highly rated securities
and diversifying our investments across various money market funds, investment
types, and underlying issuers, recent volatility in the short-term financial
markets has been unprecedented. In addition, the current credit and liquidity
crisis has substantially reduced both liquidity and asset transparency for many
funds holding investment securities. Further deterioration, in the financial
condition of the funds in which we have invested or of the issuers whose paper
we have purchased remains possible. If such deterioration occurs, the
value of our investments could be materially adversely affected.
An
Exhibit Index has been attached as part of this quarterly report and is
incorporated herein by reference.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
NETLOGIC
MICROSYSTEMS, INC.
|
|
|
|
|
Dated: November
5, 2008
|
|
By:
|
/s/
RONALD JANKOV
|
|
|
|
|
Ronald
Jankov
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: November
5, 2008
|
|
By:
|
/s/
MICHAEL TATE
|
|
|
|
|
Michael
Tate
Vice
President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
|
|
|
|
31.1
|
Rule
13a-14 certification
|
|
|
31.2
|
Rule
13a-14 certification
|
|
|
32.1
|
Section
1350 certification
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32.2
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Section
1350 certification
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