UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 20172020
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: 001-35667
AMBARELLA, INC.
(Exact name of registrant as specified in its charter)
Cayman Islands |
| 98-0459628 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
| |
3101 Jay Street Santa Clara, California |
| 95054 |
(Address of principal executive offices) |
| (Zip Code) |
(408) 734-8888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Ordinary Shares, $0.00045 Par Value Per Share | AMBA | The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☒ |
| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company |
| ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of ordinary shares $0.00045 par value, of the Registrant outstanding as of December 1, 20172, 2020 was 33,306,50835,172,037 shares.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Item 1. |
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| Unaudited Condensed Consolidated Balance Sheets at October 31, |
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| 7 | |
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Notes to Unaudited Condensed Consolidated Financial Statements | 8 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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2
PARTPART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
|
| As of |
| |||||||||||||
|
| October 31, |
|
| January 31, |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| 2020 |
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| 2020 |
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ASSETS |
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Current assets: |
|
|
|
|
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|
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|
|
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|
|
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Cash and cash equivalents |
| $ | 320,933 |
|
| $ | 322,872 |
|
| $ | 225,508 |
|
| $ | 231,403 |
|
Marketable securities |
|
| 93,085 |
|
|
| 82,522 |
| ||||||||
Marketable debt securities |
|
| 198,129 |
|
|
| 173,345 |
| ||||||||
Accounts receivable, net |
|
| 47,197 |
|
|
| 38,596 |
|
|
| 24,111 |
|
|
| 18,487 |
|
Inventories |
|
| 21,097 |
|
|
| 20,145 |
|
|
| 23,712 |
|
|
| 22,971 |
|
Restricted cash |
|
| 9 |
|
|
| 8 |
|
|
| 10 |
|
|
| 9 |
|
Prepaid expenses and other current assets |
|
| 4,008 |
|
|
| 4,392 |
|
|
| 4,777 |
|
|
| 4,975 |
|
Total current assets |
|
| 486,329 |
|
|
| 468,535 |
|
|
| 476,247 |
|
|
| 451,190 |
|
Property and equipment, net |
|
| 5,666 |
|
|
| 4,988 |
|
|
| 5,131 |
|
|
| 5,614 |
|
Deferred tax assets, non-current |
|
| 6,536 |
|
|
| 5,774 |
|
|
| 10,463 |
|
|
| 10,400 |
|
Intangible assets, net |
|
| 15,241 |
|
|
| 4,149 |
|
|
| 17,352 |
|
|
| 17,826 |
|
Operating lease right-of-use assets, net |
|
| 8,734 |
|
|
| 9,935 |
| ||||||||
Goodwill |
|
| 26,601 |
|
|
| 26,601 |
|
|
| 26,601 |
|
|
| 26,601 |
|
Other non-current assets |
|
| 2,214 |
|
|
| 2,224 |
|
|
| 5,027 |
|
|
| 5,710 |
|
Total assets |
| $ | 542,587 |
|
| $ | 512,271 |
|
| $ | 549,555 |
|
| $ | 527,276 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
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Current liabilities: |
|
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Accounts payable |
|
| 26,208 |
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| 19,955 |
|
|
| 14,613 |
|
|
| 14,910 |
|
Accrued and other current liabilities |
|
| 26,578 |
|
|
| 26,448 |
|
|
| 41,922 |
|
|
| 34,970 |
|
Operating lease liabilities, current |
|
| 2,809 |
|
|
| 2,181 |
| ||||||||
Income taxes payable |
|
| 2,447 |
|
|
| 568 |
|
|
| 1,711 |
|
|
| 691 |
|
Deferred revenue |
|
| 5,219 |
|
|
| 7,425 |
| ||||||||
Deferred revenue, current |
|
| 1,178 |
|
|
| 701 |
| ||||||||
Total current liabilities |
|
| 60,452 |
|
|
| 54,396 |
|
|
| 62,233 |
|
|
| 53,453 |
|
Operating lease liabilities, non-current |
|
| 6,662 |
|
|
| 7,975 |
| ||||||||
Other long-term liabilities |
|
| 13,071 |
|
|
| 3,241 |
|
|
| 18,007 |
|
|
| 17,776 |
|
Total liabilities |
|
| 73,523 |
|
|
| 57,637 |
|
|
| 86,902 |
|
|
| 79,204 |
|
Commitments and contingencies (Note 14) |
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Commitments and contingencies (Note 13) |
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Shareholders' equity: |
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Preference shares, $0.00045 par value per share, 20,000,000 shares authorized and no shares issued and outstanding at October 31, 2017 and January 31, 2017, respectively |
|
| — |
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| — |
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Ordinary shares, $0.00045 par value per share, 200,000,000 shares authorized at October 31, 2017 and January 31, 2017, respectively; 33,296,091 shares issued and outstanding at October 31, 2017; 33,369,032 shares issued and outstanding at January 31, 2017 |
|
| 15 |
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| 15 |
| ||||||||
Preference shares, $0.00045 par value per share, 20,000,000 shares authorized and 0 shares issued and outstanding at October 31, 2020 and January 31, 2020, respectively |
|
| 0 |
|
|
| 0 |
| ||||||||
Ordinary shares, $0.00045 par value per share, 200,000,000 shares authorized at October 31, 2020 and January 31, 2020, respectively; 35,072,089 shares issued and outstanding at October 31, 2020; 33,805,609 shares issued and outstanding at January 31, 2020 |
|
| 16 |
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|
| 15 |
| ||||||||
Additional paid-in capital |
|
| 209,161 |
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| 212,276 |
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| 322,502 |
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| 261,220 |
|
Accumulated other comprehensive loss |
|
| (116 | ) |
|
| (70 | ) | ||||||||
Accumulated other comprehensive income |
|
| 1,363 |
|
|
| 768 |
| ||||||||
Retained earnings |
|
| 260,004 |
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| 242,413 |
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| 138,772 |
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| 186,069 |
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Total shareholders’ equity |
|
| 469,064 |
|
|
| 454,634 |
|
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| 462,653 |
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|
| 448,072 |
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Total liabilities and shareholders' equity |
| $ | 542,587 |
|
| $ | 512,271 |
|
| $ | 549,555 |
|
| $ | 527,276 |
|
See accompanying notes to condensed consolidated financial statements.
3
AMBARELLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
|
| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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Revenue |
| $ | 89,062 |
|
| $ | 100,490 |
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| $ | 224,827 |
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| $ | 222,789 |
|
| $ | 56,090 |
|
| $ | 67,922 |
|
| $ | 160,848 |
|
| $ | 171,520 |
|
Cost of revenue |
|
| 32,448 |
|
|
| 34,167 |
|
|
| 82,445 |
|
|
| 76,289 |
|
|
| 21,298 |
|
|
| 28,819 |
|
|
| 63,078 |
|
|
| 72,127 |
|
Gross profit |
|
| 56,614 |
|
|
| 66,323 |
|
|
| 142,382 |
|
|
| 146,500 |
|
|
| 34,792 |
|
|
| 39,103 |
|
|
| 97,770 |
|
|
| 99,393 |
|
Operating expenses: |
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Research and development |
|
| 29,796 |
|
|
| 25,967 |
|
|
| 83,936 |
|
|
| 74,076 |
|
|
| 36,573 |
|
|
| 32,480 |
|
|
| 103,575 |
|
|
| 95,917 |
|
Selling, general and administrative |
|
| 11,700 |
|
|
| 10,686 |
|
|
| 35,406 |
|
|
| 32,144 |
|
|
| 14,468 |
|
|
| 13,791 |
|
|
| 41,348 |
|
|
| 39,293 |
|
Total operating expenses |
|
| 41,496 |
|
|
| 36,653 |
|
|
| 119,342 |
|
|
| 106,220 |
|
|
| 51,041 |
|
|
| 46,271 |
|
|
| 144,923 |
|
|
| 135,210 |
|
Income from operations |
|
| 15,118 |
|
|
| 29,670 |
|
|
| 23,040 |
|
|
| 40,280 |
| ||||||||||||||||
Loss from operations |
|
| (16,249 | ) |
|
| (7,168 | ) |
|
| (47,153 | ) |
|
| (35,817 | ) | ||||||||||||||||
Other income, net |
|
| 319 |
|
|
| 132 |
|
|
| 696 |
|
|
| 330 |
|
|
| 673 |
|
|
| 1,917 |
|
|
| 3,231 |
|
|
| 6,308 |
|
Income before income taxes |
|
| 15,437 |
|
|
| 29,802 |
|
|
| 23,736 |
|
|
| 40,610 |
| ||||||||||||||||
Provision for income taxes |
|
| 3,713 |
|
|
| 757 |
|
|
| 6,145 |
|
|
| 1,150 |
| ||||||||||||||||
Net income |
| $ | 11,724 |
|
| $ | 29,045 |
|
| $ | 17,591 |
|
| $ | 39,460 |
| ||||||||||||||||
Net income per share attributable to ordinary shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||||||||||||
Loss before income taxes |
|
| (15,576 | ) |
|
| (5,251 | ) |
|
| (43,922 | ) |
|
| (29,509 | ) | ||||||||||||||||
Provision (benefit) for income taxes |
|
| 1,502 |
|
|
| (942 | ) |
|
| 3,375 |
|
|
| 2,302 |
| ||||||||||||||||
Net loss |
| $ | (17,078 | ) |
| $ | (4,309 | ) |
| $ | (47,297 | ) |
| $ | (31,811 | ) | ||||||||||||||||
Net loss per share attributable to ordinary shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
| $ | 0.35 |
|
| $ | 0.89 |
|
| $ | 0.53 |
|
| $ | 1.21 |
|
| $ | (0.49 | ) |
| $ | (0.13 | ) |
| $ | (1.37 | ) |
| $ | (0.97 | ) |
Diluted |
| $ | 0.34 |
|
| $ | 0.84 |
|
| $ | 0.51 |
|
| $ | 1.15 |
|
| $ | (0.49 | ) |
| $ | (0.13 | ) |
| $ | (1.37 | ) |
| $ | (0.97 | ) |
Weighted-average shares used to compute net income per share attributable to ordinary shareholders: |
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|
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|
|
|
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|
|
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Weighted-average shares used to compute net loss per share attributable to ordinary shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
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| ||||||||||||||||
Basic |
|
| 33,128,761 |
|
|
| 32,670,784 |
|
|
| 33,203,432 |
|
|
| 32,552,077 |
|
|
| 34,819,880 |
|
|
| 33,304,171 |
|
|
| 34,460,172 |
|
|
| 32,885,729 |
|
Diluted |
|
| 34,358,893 |
|
|
| 34,599,992 |
|
|
| 34,538,968 |
|
|
| 34,242,065 |
|
|
| 34,819,880 |
|
|
| 33,304,171 |
|
|
| 34,460,172 |
|
|
| 32,885,729 |
|
See accompanying notes to condensed consolidated financial statements.
4
AMBARELLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(unaudited, in thousands)
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net income |
| $ | 11,724 |
|
| $ | 29,045 |
|
| $ | 17,591 |
|
| $ | 39,460 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investments |
|
| (34 | ) |
|
| (51 | ) |
|
| (46 | ) |
|
| (11 | ) |
Other comprehensive loss, net of tax |
|
| (34 | ) |
|
| (51 | ) |
|
| (46 | ) |
|
| (11 | ) |
Comprehensive income |
| $ | 11,690 |
|
| $ | 28,994 |
|
| $ | 17,545 |
|
| $ | 39,449 |
|
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net loss |
| $ | (17,078 | ) |
| $ | (4,309 | ) |
| $ | (47,297 | ) |
| $ | (31,811 | ) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investments |
|
| (224 | ) |
|
| 140 |
|
|
| 595 |
|
|
| 588 |
|
Other comprehensive income (loss), net of tax |
|
| (224 | ) |
|
| 140 |
|
|
| 595 |
|
|
| 588 |
|
Comprehensive loss |
| $ | (17,302 | ) |
| $ | (4,169 | ) |
| $ | (46,702 | ) |
| $ | (31,223 | ) |
See accompanying notes to condensed consolidated financial statements.
5
AMBARELLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
|
|
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|
|
|
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|
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| Accumulated |
|
|
|
|
|
|
|
|
| |
|
| Outstanding |
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
| |||||||
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| Ordinary Shares |
|
| Paid-in |
|
| Comprehensive |
|
| Retained |
|
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Earnings |
|
| Total |
| ||||||
Balance--January 31, 2020 |
|
| 33,805,609 |
|
| $ | 15 |
|
| $ | 261,220 |
|
| $ | 768 |
|
| $ | 186,069 |
|
| $ | 448,072 |
|
Issuance of shares through employee equity incentive plan |
|
| 478,643 |
|
|
| 0 |
|
|
| 6,463 |
|
|
| 0 |
|
|
| 0 |
|
|
| 6,463 |
|
Issuance of shares through employee stock purchase plan |
|
| 83,564 |
|
|
| 0 |
|
|
| 2,660 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,660 |
|
Stock repurchase |
|
| (25,719 | ) |
|
| 0 |
|
|
| (1,000 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (1,000 | ) |
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 15,214 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15,214 |
|
Net unrealized losses on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (363 | ) |
|
| 0 |
|
|
| (363 | ) |
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (15,463 | ) |
|
| (15,463 | ) |
Balance--April 30, 2020 |
|
| 34,342,097 |
|
|
| 15 |
|
|
| 284,557 |
|
|
| 405 |
|
|
| 170,606 |
|
|
| 455,583 |
|
Issuance of shares through employee equity incentive plan |
|
| 268,739 |
|
|
| 0 |
|
|
| 344 |
|
|
| 0 |
|
|
| 0 |
|
|
| 344 |
|
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 16,294 |
|
|
| 0 |
|
|
| 0 |
|
|
| 16,294 |
|
Net unrealized gains on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,182 |
|
|
| 0 |
|
|
| 1,182 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (14,756 | ) |
|
| (14,756 | ) |
Balance--July 31, 2020 |
|
| 34,610,836 |
|
|
| 15 |
|
|
| 301,195 |
|
|
| 1,587 |
|
|
| 155,850 |
|
|
| 458,647 |
|
Issuance of shares through employee equity incentive plan |
|
| 361,886 |
|
|
| 1 |
|
|
| 1,102 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,103 |
|
Issuance of shares through employee stock purchase plan |
|
| 99,367 |
|
|
| 0 |
|
|
| 3,164 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,164 |
|
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 17,041 |
|
|
| 0 |
|
|
| 0 |
|
|
| 17,041 |
|
Net unrealized losses on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (224 | ) |
|
| 0 |
|
|
| (224 | ) |
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (17,078 | ) |
|
| (17,078 | ) |
Balance--October 31, 2020 |
|
| 35,072,089 |
|
| $ | 16 |
|
| $ | 322,502 |
|
| $ | 1,363 |
|
| $ | 138,772 |
|
| $ | 462,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
| Outstanding |
|
| Additional |
|
| Other |
|
|
|
|
|
|
|
|
| |||||||
|
| Ordinary Shares |
|
| Paid-in |
|
| Comprehensive |
|
| Retained |
|
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Earnings |
|
| Total |
| ||||||
Balance--January 31, 2019 |
|
| 32,303,540 |
|
| $ | 15 |
|
| $ | 188,516 |
|
| $ | 97 |
|
| $ | 230,861 |
|
| $ | 419,489 |
|
Issuance of shares through employee equity incentive plan |
|
| 335,301 |
|
|
| 0 |
|
|
| 1,520 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,520 |
|
Issuance of shares through employee stock purchase plan |
|
| 99,759 |
|
|
| 0 |
|
|
| 3,063 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,063 |
|
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 15,423 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15,423 |
|
Net unrealized gains on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 254 |
|
|
| 0 |
|
|
| 254 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (17,311 | ) |
|
| (17,311 | ) |
Balance--April 30, 2019 |
|
| 32,738,600 |
|
|
| 15 |
|
|
| 208,522 |
|
|
| 351 |
|
|
| 213,550 |
|
|
| 422,438 |
|
Issuance of shares through employee equity incentive plan |
|
| 295,019 |
|
|
| 0 |
|
|
| 988 |
|
|
| 0 |
|
|
| 0 |
|
|
| 988 |
|
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 15,032 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15,032 |
|
Net unrealized gains on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 194 |
|
|
| 0 |
|
|
| 194 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (10,191 | ) |
|
| (10,191 | ) |
Balance--July 31, 2019 |
|
| 33,033,619 |
|
|
| 15 |
|
|
| 224,542 |
|
|
| 545 |
|
|
| 203,359 |
|
|
| 428,461 |
|
Issuance of shares through employee equity incentive plan |
|
| 428,600 |
|
|
| 0 |
|
|
| 2,711 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,711 |
|
Issuance of shares through employee stock purchase plan |
|
| 78,105 |
|
|
| 0 |
|
|
| 2,904 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,904 |
|
Stock-based compensation expense related to stock awards granted to employees and consultants |
|
| 0 |
|
|
| 0 |
|
|
| 15,333 |
|
|
| 0 |
|
|
| 0 |
|
|
| 15,333 |
|
Net unrealized gains on investments - net of tax |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 140 |
|
|
| 0 |
|
|
| 140 |
|
Net loss |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (4,309 | ) |
|
| (4,309 | ) |
Balance--October 31, 2019 |
|
| 33,540,324 |
|
| $ | 15 |
|
| $ | 245,490 |
|
| $ | 685 |
|
| $ | 199,050 |
|
| $ | 445,240 |
|
See accompanying notes to condensed consolidated financial statements.
6
AMBARELLA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
| Nine Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 17,591 |
|
| $ | 39,460 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation of property and equipment |
|
| 1,306 |
|
|
| 1,170 |
| ||||||||
Amortization of intangible assets |
|
| 2,018 |
|
|
| 36 |
| ||||||||
Amortization/accretion of marketable securities |
|
| 152 |
|
|
| 172 |
| ||||||||
Net loss |
| $ | (47,297 | ) |
| $ | (31,811 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 8,868 |
|
|
| 8,231 |
| ||||||||
Amortization (accretion) of premium (discount) on marketable debt securities, net |
|
| 348 |
|
|
| (879 | ) | ||||||||
Stock-based compensation |
|
| 42,075 |
|
|
| 35,474 |
|
|
| 51,407 |
|
|
| 49,968 |
|
Deferred income taxes |
|
| (63 | ) |
|
| 267 |
| ||||||||
Other non-cash items, net |
|
| 92 |
|
|
| 57 |
|
|
| (94 | ) |
|
| 87 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (8,601 | ) |
|
| (1,986 | ) |
|
| (5,624 | ) |
|
| 4,603 |
|
Inventories |
|
| (952 | ) |
|
| (5,173 | ) |
|
| (741 | ) |
|
| (1,593 | ) |
Prepaid expenses and other current assets |
|
| 380 |
|
|
| (581 | ) |
|
| 238 |
|
|
| 857 |
|
Deferred tax assets |
|
| (762 | ) |
|
| 604 |
| ||||||||
Other assets |
|
| 10 |
|
|
| (45 | ) |
|
| 683 |
|
|
| (2,974 | ) |
Accounts payable |
|
| 6,253 |
|
|
| 14,189 |
|
|
| (297 | ) |
|
| 5,896 |
|
Accrued liabilities |
|
| (2,460 | ) |
|
| 825 |
| ||||||||
Accrued and other current liabilities |
|
| 9,887 |
|
|
| 3,658 |
| ||||||||
Income taxes payable |
|
| 1,879 |
|
|
| 572 |
|
|
| 1,020 |
|
|
| (38 | ) |
Deferred tax liabilities |
|
| — |
|
|
| (58 | ) | ||||||||
Deferred revenue |
|
| (2,206 | ) |
|
| (3,192 | ) |
|
| 477 |
|
|
| 16 |
|
Lease Liabilities |
|
| (1,656 | ) |
|
| (2,238 | ) | ||||||||
Other long-term liabilities |
|
| 3,518 |
|
|
| (476 | ) |
|
| 1,160 |
|
|
| 1,234 |
|
Net cash provided by operating activities |
|
| 60,293 |
|
|
| 81,048 |
|
|
| 18,316 |
|
|
| 35,284 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
| (53,786 | ) |
|
| (72,950 | ) |
|
| (175,265 | ) |
|
| (160,988 | ) |
Sales of investments |
|
| 8,500 |
|
|
| 28,368 |
|
|
| 57,936 |
|
|
| 72,773 |
|
Maturities of investments |
|
| 34,460 |
|
|
| 25,560 |
|
|
| 92,897 |
|
|
| 105,995 |
|
Purchase of property and equipment |
|
| (2,402 | ) |
|
| (2,070 | ) |
|
| (1,529 | ) |
|
| (1,425 | ) |
Net cash used in investing activities |
|
| (13,228 | ) |
|
| (21,092 | ) | ||||||||
Net cash provided by (used in) investing activities |
|
| (25,961 | ) |
|
| 16,355 |
| ||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchase |
|
| (51,505 | ) |
|
| (20,183 | ) |
|
| (1,000 | ) |
|
| — |
|
Proceeds from exercise of stock options and employee stock purchase plan |
|
| 4,961 |
|
|
| 5,626 |
|
|
| 6,504 |
|
|
| 9,552 |
|
Payment for software license liabilities |
|
| (2,460 | ) |
|
| — |
| ||||||||
Net cash used in financing activities |
|
| (49,004 | ) |
|
| (14,557 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| (1,939 | ) |
|
| 45,399 |
| ||||||||
Cash and cash equivalents at beginning of period |
|
| 322,872 |
|
|
| 268,056 |
| ||||||||
Cash and cash equivalents at end of period |
| $ | 320,933 |
|
| $ | 313,455 |
| ||||||||
Payment for intangible asset |
|
| (3,753 | ) |
|
| (2,930 | ) | ||||||||
Net cash provided by financing activities |
|
| 1,751 |
|
|
| 6,622 |
| ||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| (5,894 | ) |
|
| 58,261 |
| ||||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 231,412 |
|
|
| 194,058 |
| ||||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 225,518 |
|
| $ | 252,319 |
| ||||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 762 |
|
| $ | 914 |
|
| $ | 937 |
|
| $ | 1,664 |
|
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in liabilities related to intangible and fixed asset purchases |
| $ | 10,731 |
|
| $ | 34 |
| ||||||||
Unpaid liabilities related to intangible and fixed assets additions |
| $ | 3,656 |
|
| $ | 618 |
|
See accompanying notes to condensed consolidated financial statements.
67
AMBARELLA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
Ambarella, Inc. (the “Company”) was incorporated in the Cayman Islands on January 15, 2004. The Company is a leading developer of low-power semiconductor solutions offering high-definition (HD) and Ultra HD compression, image processing, solutions for video that enable high-definition video capture, sharing, analysis and display.deep neural network processing. The Company combines its processor design capabilities with its expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. The Company’s system-on-a-chip, (“SoC”)or SoC, designs fully integrate high-definition video processing, image processing, analysis,artificial intelligence (AI) computer vision algorithms, audio processing and system functions onto a single chip, delivering exceptional video and image quality, differentiated functionality and low power consumption. The Company is currently addressing a broad range of human and computer vision applications, including professional and consumer security cameras, automotive cameras such as advanced driver assistance systems (ADAS), electronic mirrors, drive recorders, driver/cabin monitoring systems, autonomous driving, and industrial and robotic applications.
The Company sells its solutions to leading original design manufacturers, (“ODMs”)or ODMs, and original equipment manufacturers, (“OEMs”)or OEMs, globally.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and notes normally provided in audited financial statements. The accounting policies are described in the “Notes to Consolidated Financial Statements” in the Annual Report on Form 10-K for the 20172020 fiscal year filed with the SEC on March 30, 201727, 2020 (the “Form 10-K”) and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement have been included. The results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for any other interim period or for a full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Form 10-K.
Basis of Consolidation
The Company’s fiscal year ends on January 31. The condensed consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with U.S. GAAP. All intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. Actual results could differ from those estimates.
On an ongoing basis, management evaluates its estimates and assumptions, including those related to (i) the collectibilitycollectability of accounts receivable; (ii) write down of excess and obsolete inventories; (iii) intangible assets and goodwill; (iv) the estimated useful lives of long-lived assets; (v) impairment of long-lived assets and financial instruments; (vi) warranty obligations; (vii) the valuation of stock-based compensation awards and financial instruments; (viii) the probability of performance objectives achievement; (ix) the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions; and (x) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and assetsstock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances.circumstances and such differences could be material.
78
The Company also assessed the impacts of COVID-19 on the above accounting matters as of October 31, 2020 and through the date of this report. While it is difficult to quantify the impact of COVID-19, the future magnitude and duration of COVID-19, as well as other associated factors, could result in material negative impacts to the Company’s condensed consolidated financial statements in future reporting periods.
Concentration of Risk
The Company’s products are manufactured, assembled and tested by third-party contractors located primarily in Asia. The Company does not have long-term agreements with these contractors. A significant disruption in the operations of one or more of these contractors would impact the production of the Company’s products which could have a material adverse effect on its business, financial condition and results of operations.
A substantial portion of the Company’s revenue is derived from sales through one of its logistics provider,distributors, Wintech Microelectronics Co., Ltd., or Wintech, which serves as its non-exclusive sales representative and logistics provider in Asia other than Japan.Japan, and directly to one ODM customer, Chicony Electronics Co., Ltd., or Chicony. Termination of the relationshiprelationships with Wintechthese customers could result in a temporary or permanent loss of revenue and result in an obligation to repurchase unsold product. Any Wintechrevenue. Furthermore, any credit issueissues from these customers could impair its abilitytheir abilities to make timely payment to the Company. See Note 1514 for additional information regarding revenue and credit concentration with this customer.these customers.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable debt securities and accounts receivable. The Company maintains its cash primarily in checking accounts with reputable financial institutions. Cash deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any material losses on deposits of its cash. In order to limit the exposure of each investment, the cash equivalents and marketable debt securities consist primarily of money market funds, asset-backed securities, commercial paper, U.S. government securities and debt securities of corporations which management assesses to be highly liquid. The Company does not hold or issue financial instruments for trading purposes.
The Company performs ongoing credit evaluations of each of its customers and adjusts credit limits based upon payment history and the customers’ credit worthiness. The Company regularly monitors collections and payments from its customers.
Cash EquivalentsFinancial Instruments
On February 1, 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Under this new guidance, the Company recognizes credit losses based on a forward-looking current expected credit losses (CECL) model instead of the previous incurred loss model for financial instruments, including accounts receivable. The Company’s accounts receivable are recorded at invoiced amount less an allowance for any potentially uncollectible amounts. Accordingly, the Company makes estimates of expected credit losses for the allowance for doubtful accounts based upon its assessment of various factors, including historical collection experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and Marketable Securitiessupportable forecasts of future economic conditions, and other factors that may affect its ability to collect from customers.
The Company considers all highly liquid debt security investments with original maturities of less than three months at the time of purchase to be cash equivalents. InvestmentsDebt security investments that are highly liquid with original maturities at the time of purchase greater than three months are considered marketable debt securities.
The Company classifies these investments as “available-for-sale” securities carried at(AFS) securities. Instead of the previous "other than temporary" impairment model, the Company now estimates the expected losses whenever a security’s fair value based on quoted market prices of similar assets,is below its amortized cost basis. The expected loss is computed at an individual security level using the discounted cash flow method with the unrealized gains oreffective interest rate on the purchase date. In the determination of credit-related losses, reported, net of tax, as a separate component of shareholders’ equity and included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. The amortization of premiums and accretion of discounts and the realized gains and losses are both recorded in other income (loss), net in the condensed consolidated statements of operations. The Company reviews its investments for possible other-than-temporary impairments on a regular basis. If any loss on investment is believed to be other-than-temporary, a charge will be recorded and a new cost basis in the investment will be established. In evaluating whether a loss on a security is other-than-temporary, the Company considersexcludes securities with zero loss expectation such as assets backed by government agencies. There are various factors considered in its assessment of credit-related losses, including the following factors: 1) general market conditions, 2) the duration and extent to which the fair value is less than the amortized cost 3)basis, adverse conditions related to an industry or an underlying loan obligator, the Company’s intentpayment structure of the security, changes to the rating of the security and abilityother factors that may affect the security credit. The credit-related portion of the loss is recognized in other income, net in the condensed consolidated statements of operations but is limited to hold the investment.
For securities in an unrealized loss position which is deemed to be other-than-temporary, the difference between the security’s then-currentfair value and the amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amountsecurity, adjusted for accrued interest. The non-credit-related portion of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non-credit loss component is recognized in accumulated other comprehensive income (loss). Duein the condensed consolidated balance sheets.
The cumulative effect adjustment upon the adoption on February 1, 2020 was immaterial. The credit-related losses and associated allowance amount from the Company’s financial instruments were not material as of October 31, 2020, respectively.
9
Restricted Cash
Amounts included in restricted cash represent those required to be set aside to secure certain transactions in a foreign entity. As of both October 31, 2020 and January 31, 2020, restricted cash was immaterial. The following table presents cash, cash equivalents and restricted cash reported on the relative short term naturecondensed consolidated balance sheets, and the sums are presented on the condensed consolidated statements of the investments, there have been no other-than-temporary impairments recorded to date.cash flows:
|
| As of |
| |||||||||||||
|
| October 31, 2020 |
|
| January 31, 2020 |
|
| October 31, 2019 |
|
| January 31, 2019 |
| ||||
|
| (in thousands) |
| |||||||||||||
Cash and cash equivalents |
| $ | 225,508 |
|
| $ | 231,403 |
|
| $ | 252,310 |
|
| $ | 194,047 |
|
Restricted cash |
|
| 10 |
|
|
| 9 |
|
|
| 9 |
|
|
| 11 |
|
Total as presented in the consolidated statements of cash flows |
| $ | 225,518 |
|
| $ | 231,412 |
|
| $ | 252,319 |
|
| $ | 194,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
The Company records inventories at the lower of cost or net realizable value. The cost includes materials and other production costs and is computed using standard cost on a first-in, first-out basis. Inventory reserves are recorded for estimated obsolescence or unmarketable inventories based on forecast of future demand and market conditions. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not released until the inventory is sold or scrapped. There were no0 material inventory losses recognized for the three and nine months ended October 31, 20172020 and 2016,2019, respectively.
8
Noncancelable Internal-Use Software License
The Company accounts for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term.
Business Combinations and Intangible Assets
Leases
The Company allocatesadopted Accounting Standards Codification (“ASC”) Topic 842, Leases in fiscal year 2020. As a result, the fairCompany recognizes leases as operating lease right-of-use (“ROU”) assets and corresponding lease liabilities at the lease commencement date based on the present value of purchase price tofuture lease payments, while recognizing lease expenses under straight-line method through the assets acquired and liabilities assumed based on their estimated fair values.lease term. The excess ofCompany also elected the fair value of purchase price over the fair values of these identifiablepractical expedient that does not recognize ROU assets and lease liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, especiallythat arise from short-term (12 months or less) leases. The Company does not combine lease components with respect to intangible assets, management makes significant estimates and assumptions.
Critical estimates in valuing certain intangible assets include, but are not limited to, replacement cost. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictablenon-lease components, and as a result, actual results may differ from estimates.
Goodwill and In-Process Research and Development
Goodwill and in-process research and development (“IPR&D”)the non-lease components are required to be testedaccounted for impairmentseparately. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable. When the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at least annuallythe lease commencement date. The Company's leases mainly include its worldwide office facilities which are all classified as operating leases. Certain leases include renewal options that are under the Company's discretion. The renewal options are included in the fourth fiscal quarter or sooner whenever events or changes in circumstances indicateROU and liability calculation if it is reasonably certain that the assets may be impaired.Company will exercise the option. The Company has a single reporting unit for goodwill impairment test purposes based on its businessCompany's finance leases were immaterial as of October 31, 2020 and reporting structure.
The Company does not amortize goodwill. Acquired IPR&D is capitalized at fair value as an intangible asset and amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life.January 31, 2020, respectively.
Revenue Recognition
The Company generatesadopted ASC 606, Revenue from Contracts with Customers in fiscal year 2019. As a result, the Company recognizes revenue from the saleswhen control of its SoCsgoods and services is transferred to OEMsits customers. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or ODMs, either directlycontracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or through logistics providers. Revenue fromas a performance obligation is satisfied.
10
The sale of semiconductor products accounts for the substantial majority of the Company’s consolidated revenue. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty, supply and other rights. The Company considers an accepted customer purchase order, governed by sales directlyagreement, to OEMsbe the contract with the customer. For each contract, the Company considers the promise to transfer tangible products to be the identified performance obligation. Product sales contracts may include volume-based tiered pricing or rebates that are fulfilled in cash or product. In determining the transaction price, the Company accounts for the right of returns, cash rebates, commissions and ODMsother pricing adjustments as variable consideration, estimates these amounts based on the expected amount to be provided to customers and reduces the revenue recognized. The Company estimates sales returns and rebates based on the Company’s historical patterns of return and pricing credits. As the Company’s standard payment terms are 30 days to 60 days, the contracts have no financing component. Under ASC 606, the Company estimates the total consideration to be received by using the expected value method for each contract, computes weighted average selling price for each unit shipped in cases where there is recognizeda material right due to the presence of volume-based tiered pricing, allocates the total consideration between the identified performance obligations, and recognizes revenue when control of its goods and services is transferred to its customers. The Company considers product control to be transferred at a point in time upon shipment providedor delivery because the Company has a present right to payment at that persuasive evidence of an arrangement exists,time, the customer has legal title to the products and risk of ownership have transferred, the fee is fixed or determinable, and collection of the resulting receivable is reasonably assured. The Company provides its logistics providers with the rights to return excess levels of inventory and to future price adjustments. Given the inability to reasonably estimate these price changes and returns, revenue and costs related to shipments to logistics providers are deferred untilasset, the Company has received notification from its logistics providers that they have sold the Company’s products. Information reported by the Company’s logistics providers includes product resale price, quantity and end customer shipment information as well as remaining inventory on hand. At the time of shipment to a logistics provider, the Company records a trade receivable as there is a legally enforceable right to receive payment, reduces inventory for the value of goods shipped as legal title has passed to the logistics provider and defers the related margin as deferred revenue in the condensed consolidated balance sheets. Any price adjustments are recorded as a change to deferred revenue at the time the adjustments are agreed upon.
Arrangements with certain OEM customers provide for pricing that is dependent upon the end products into which the Company’s SoCs are used. These arrangements may also entitle the Company to a sharetransferred physical possession of the product margin ultimately realized byasset, and the OEM. The minimum guaranteed amountcustomer has significant risk and rewards of revenue related to the sale of products subject to these arrangements is recognized when all other elements of revenue recognition are met. Any amounts at the date of shipment invoiced in excessownership of the minimum guaranteed contract price are deferred until the additional amounts the Company is entitled to are fixed or determinable. Additional amounts earned by the Company resulting from margin sharing arrangements and determination of the end products into which the products are ultimately incorporated are recognized when end customer sales volume is reported to the Company. Revenues from margin sharing arrangements were not material for the three and nine months ended October 31, 2017 and 2016, respectively.asset.
The Company also enters into fixed-price engineering service agreements with certain customers. These agreements may include multiple deliverables,performance obligations, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. The Company doesThese multiple performance obligations are highly interdependent, highly interrelated, are typically not sellsold separately any of these components and doesdo not have Vendor Specific Objective Evidence, or VSOE,standalone selling prices. They are all inputs to generate one combined output which is incorporating the Company’s SoC into the customer’s product. Accordingly, the Company determines that they are not separately identifiable and shall be treated as a single performance obligation. Customers usually pay based on milestones achieved. Because payments received do not correspond directly with the value of the Company’s performance to date, for fixed-price engineering services arrangements, revenue is recognized using the deliverables. Accordingly, revenues from these agreements are deferred for any amounts billed until deliverytime-based straight line method, which best depicts the Company’s performance toward complete satisfaction of all the elements. Ifperformance obligation based on the agreements include PCS, the revenues are recognized ratably over the estimated supporting periods.nature of such professional services. Revenues from engineering service agreements were not material for the three and nine months ended October 31, 20172020 and 2016,2019, respectively.
Timing of revenue recognition may differ from the timing of invoicing to the Company’s customers. The Company records contract assets when revenue is recognized prior to invoicing. The Company’s contract assets are primarily related to satisfied but unbilled performance obligations associated with its engineering service agreements at the reporting date. As of October 31, 2020 and January 31, 2020, the contract assets for these unbilled receivables were not material. The Company’s contract liabilities consist of deferred revenue. The deferred revenue is primarily related to the portion of a transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts which contain material rights. This deferred revenue is expected to be recognized over the course of the contract when products are delivered for future pricing below the weighted average selling price of the contract. For the three and nine months ended October 31, 2020 and 2019, the Company did not recognize any material revenue adjustment, respectively, related to performance obligations satisfied in prior periods released from this deferred revenue. As of October 31, 2020 and January 31, 2020, the respective deferred revenues were not material. Additionally, the transaction price allocated to unsatisfied, or partially unsatisfied, purchase orders for contracts that are greater than a year was not material as of October 31, 2020 and January 31, 2020, respectively. The Company also elects not to disclose the value of unsatisfied or partially unsatisfied performance obligations due to an original expected contract duration of one year or less and elects to exclude amounts collected from customers for all sales taxes from the transaction price.
9
Cost of Revenue
Cost of revenue includes cost of materials, cost associated with packaging and assembly, testing and shipping, cost of personnel, stock-based compensation, logistics and quality assurance, warranty cost, royalty expense, write-downs of inventories and allocation of overhead.
Research and Development
Research and development costs are expensed as incurred and consist primarily of personnel costs, product development costs, which include engineering services, development software and hardware tools, license fees, costs of fabrication of masks for prototype products, other development materials costs, depreciation of equipment and tools and allocation of facility costs, net of any research and development grants. As of October 31, 2020, there was approximately $1.3 million of grants recorded in prepaid expenses and other current assets and approximately $2.4 million of grants recorded in other non-current assets in the condensed consolidated balance sheets.
11
Income Taxes
The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company applies authoritative guidance for the accounting for uncertainty in income taxes. The guidance requires that tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting date. InUpon estimating the Company’sits tax positions and tax benefits, the Company considers and evaluates numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. The Company adjusts its financial statements to reflect only those tax positions that are more likely than not to be sustained under examination.
As part of the process of preparing condensed consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in the condensed consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the condensed consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized.
In assessing whether deferred tax assets may be realized, managementthe Company considers whether it is more likely than not that some portion or all of deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
The Company makes estimates and judgments about its future taxable income based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the condensed consolidated income statement for the periods in which the adjustment is determined to be required.
Net Income (Loss) Per Ordinary Share
Basic earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (losses) per share is computed by dividing net income (loss) available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan, unvested restricted stock and restricted stock units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings (losses) per share by application of the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) includes unrealized gains or losses from available-for-sale securities that are excluded from net income.income (loss).
10
Recent Accounting Pronouncements
In May 2014,December 2019, the FinancialFASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“for Income Taxes. The amendments in this ASU 2014-09”).simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new guidance clarifies the principlesamendments also improve consistent application of and develops a common revenue recognition guidancesimplify GAAP for U.S. GAAPother areas of Topic 740 by clarifying and International Financial Reporting Standards (“IFRS”). Under the new guidance, an entity is required to recognize an amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new revenue standard isamending existing guidance. The amendments are effective for fiscal years, and interim periods within thosepublic entities in fiscal years beginning after December 15, 2017. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). Accordingly, the Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”) in its first quarter of2020, including interim periods within those fiscal year 2019. The new revenue guidance may be adopted by full retrospective method, which applies retrospectively to each prior period presented, or by modified retrospective method with the cumulative effect adjustment recognized in the beginning of retained earnings as of the date of adoption.years. Early adoption is permitted. The Company currently anticipates adoptingdid not early adopt and believes the new guidance using the modified retrospective method. Under this transition method, the Company will elect to applyadoption of this new guidance only to contracts that arewill not completed at the adoption date. For contracts that were modified before the adoption date, the Company will elect to reflect the aggregate effect of all modifications that occur before the adoption date when identifying performance obligations, determining the transaction price,have a material impact on its consolidated financial statements and allocating the transaction price to performance obligations. The Company will also elect to exclude amounts collected from customers for all sales taxes from the transaction price. The new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and considerations arising from customer contracts, including significant judgments and estimates. While the Company is continuing to evaluate all potential impacts of the guidance, the Company expects the most significant impacts will relate to the determination of transaction price and the timing of revenue recognition for transactions with its logistics providers. Furthermore, the Company is making investments in system design, changing processes and designing operational and internal control structures in order to meet the new standard requirements.disclosures.
In February 2016,January 2020, the FASB issued ASU 2016-02, Leases2020-01 - Investments - Equity securities (Topic 842). This standard requires entities that lease assets to recognize321), Investments - Equity method and joint ventures (Topic 323), and Derivatives and hedging (Topic 815) - Clarifying the interactions between Topic 321, Topic 323, and Topic 815. The amendments in this Update improve the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and clarify the scope considerations for forward contracts and purchased options on the balance sheet the assets and liabilities for the rights and obligations created by those leases.certain securities. The standard isamendments are effective for fiscal years and the interim periods within thosepublic entities in fiscal years beginning after December 15, 2018.2020, including interim periods within those fiscal years. Early adoption is permitted. The Company did not early adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements and disclosures.
12
In October 2020, the FASB issued ASU 2020-08 – Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. The amendments in this Update clarify that for each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (that is, the premium) shall be amortized to the next call date. The amendments also clarify that securities within the amendments shall have explicit, noncontingent call options that are callable at fixed prices and on preset dates at prices less than the amortized cost basis of the security. The amendments are effective for public entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is required to be applied byapply the modified retrospective transition approach.new guidance on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debit securities. Early adoption is not permitted. The Company is currently assessingevaluating the impact of the adoption of this new guidance on its consolidated financial position, results of operationsstatements and disclosures.
In June 2016,October 2020, the FASB issued ASU 2016-13, Financial Instruments2020-10 – Credit Losses (Topic 326),Codification Improvements. The amendments in this Update contain improvements to introduce a new impairment modelthe Codification by including disclosure guidance in appropriate disclosure and ensuring that all guidance that requires or provides an option for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (“ECL”). Under the new model, an entity to provide information in the notes to financial statements is required to estimate ECL on available-for-sale (AFS) debt securities only whencodified in the fair value is below the amortized costDisclosure Section of the asset and is no longer based on an impairment being “other-than-temporary”.Codification. The new model also requires the impairment calculation on an individual security level and requires an entity use present value of cash flows when estimating the ECL. The credit-related lossesamendments are required to be recognized through earnings and non-credit related losses are reported in other comprehensive income. The ASU will be effective for public entities in fiscal years beginning after December 15, 2019,2020, including interim periods within those fiscal years. The new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective.Early adoption is permitted. The Company doesdid not believeearly adopt and believes the adoption of this new guidance will not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The new guidance should also be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operationsstatements and disclosures.
11
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), to require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted cash and restricted cash equivalent balances. The new guidance will be effective for fiscal years beginning after December 15, 2017, including the interim periods within those years and is applied retrospectively. The Company does not believe the adoption of this new guidance will have a material impact on its consolidated statement of cash flows and disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment, to eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This new guidance will be applied prospectively and is effective for annual and interim periods beginning after December 15, 2019. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization On Purchased Callable Debt Securities, to shorten the amortization period for the premium to the earliest call date instead of the contractual life of the instrument. This new guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will be required to apply the new guidance using the modified retrospective method with a cumulative-effect adjustment to retained earnings upon the adoption date. The Company does not believe the adoption of this new guidance will have a material impact on its financial position, results of operations and disclosures.
2. Financial Instruments and Fair Value
The Company invests a portion of its cash in debt securities that are denominated in U.S.United States dollars. The investment portfolio consists of money market funds, asset-backed securities, commercial paper, U.S. government securities, and debt securities of corporations. All of the investments are classified as available-for-sale securities and reported at fair value in the condensed consolidated balance sheets as follows:
|
| As of October 31, 2017 |
| |||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Money market funds |
| $ | 8,215 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,215 |
|
Commercial paper |
|
| 3,499 |
|
|
| — |
|
|
| — |
|
|
| 3,499 |
|
Corporate bonds |
|
| 52,554 |
|
|
|
|
|
|
| (76 | ) |
|
| 52,478 |
|
Asset-backed securities |
|
| 10,708 |
|
|
| — |
|
|
| (10 | ) |
|
| 10,698 |
|
U.S. government securities |
|
| 26,690 |
|
|
| — |
|
|
| (30 | ) |
|
| 26,660 |
|
Total cash equivalents and marketable securities |
| $ | 101,666 |
|
| $ | — |
|
| $ | (116 | ) |
| $ | 101,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of January 31, 2017 |
| |||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Money market funds |
| $ | 8,328 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,328 |
|
Demand deposits |
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
Commercial paper |
|
| 4,784 |
|
|
| — |
|
|
| — |
|
|
| 4,784 |
|
Corporate bonds |
|
| 42,713 |
|
|
| 6 |
|
|
| (41 | ) |
|
| 42,678 |
|
Asset-backed securities |
|
| 11,686 |
|
|
| 1 |
|
|
| (12 | ) |
|
| 11,675 |
|
U.S. government securities |
|
| 23,409 |
|
|
| 6 |
|
|
| (30 | ) |
|
| 23,385 |
|
Total cash equivalents and marketable securities |
| $ | 100,920 |
|
| $ | 13 |
|
| $ | (83 | ) |
| $ | 100,850 |
|
|
| As of |
| |||||
|
| October 31, 2017 |
|
| January 31, 2017 |
| ||
|
| (in thousands) |
| |||||
Included in cash equivalents |
| $ | 8,465 |
|
| $ | 18,328 |
|
Included in marketable securities |
|
| 93,085 |
|
|
| 82,522 |
|
Total cash equivalents and marketable securities |
| $ | 101,550 |
|
| $ | 100,850 |
|
|
| As of October 31, 2020 |
| |||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Money market funds |
| $ | 2,384 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 2,384 |
|
Commercial paper |
|
| 66,744 |
|
|
| 0 |
|
|
| 0 |
|
|
| 66,744 |
|
Corporate bonds |
|
| 101,102 |
|
|
| 1,093 |
|
|
| (21 | ) |
|
| 102,174 |
|
Asset-backed securities |
|
| 16,391 |
|
|
| 212 |
|
|
| 0 |
|
|
| 16,603 |
|
U.S. government securities |
|
| 26,426 |
|
|
| 79 |
|
|
| 0 |
|
|
| 26,505 |
|
Total cash equivalents and marketable debt securities |
| $ | 213,047 |
|
| $ | 1,384 |
|
| $ | (21 | ) |
| $ | 214,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of January 31, 2020 |
| |||||||||||||
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
|
| (in thousands) |
| |||||||||||||
Money market funds |
| $ | 8,284 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 8,284 |
|
Commercial paper |
|
| 63,390 |
|
|
| 0 |
|
|
| 0 |
|
|
| 63,390 |
|
Corporate bonds |
|
| 95,053 |
|
|
| 653 |
|
|
| 0 |
|
|
| 95,706 |
|
Asset-backed securities |
|
| 23,062 |
|
|
| 69 |
|
|
| (2 | ) |
|
| 23,129 |
|
U.S. government securities |
|
| 20,524 |
|
|
| 48 |
|
|
| 0 |
|
|
| 20,572 |
|
Total cash equivalents and marketable debt securities |
| $ | 210,313 |
|
| $ | 770 |
|
| $ | (2 | ) |
| $ | 211,081 |
|
12 As of October 31, 2020, there were 0 debt securities with unrealized losses for more than twelve months.
|
| As of |
| |||||
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||
|
| (in thousands) |
| |||||
Included in cash equivalents |
| $ | 16,281 |
|
| $ | 37,736 |
|
Included in marketable debt securities |
|
| 198,129 |
|
|
| 173,345 |
|
Total cash equivalents and marketable debt securities |
| $ | 214,410 |
|
| $ | 211,081 |
|
13
The contractual maturities of the investments at October 31, 20172020 and January 31, 20172020 were as follows:
|
| As of |
| |||||
|
| October 31, 2017 |
|
| January 31, 2017 |
| ||
|
| (in thousands) |
| |||||
Due within one year |
| $ | 69,581 |
|
| $ | 76,992 |
|
Due within one to two years |
|
| 31,969 |
|
|
| 23,858 |
|
Total cash equivalents and marketable securities |
| $ | 101,550 |
|
| $ | 100,850 |
|
|
| As of |
| |||||
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||
|
| (in thousands) |
| |||||
Due within one year |
| $ | 143,012 |
|
| $ | 146,267 |
|
Due within one to three years |
|
| 71,398 |
|
|
| 64,814 |
|
Total cash equivalents and marketable debt securities |
| $ | 214,410 |
|
| $ | 211,081 |
|
The unrealized losses on the available-for-sale securities were primarily caused by fluctuations in market value and interest rates as a result of the economic environment. As the decline in market value was attributable to changes in market conditions and not credit quality, and becauseUpon adoption of ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company neither intendedestimates the expected losses at an individual security level whenever a security’s fair value is below its amortized cost basis using the discounted cash flow method. The credit-related portion of the loss is recognized in other income, net in the condensed consolidated statements of operations but is limited to sell nor was it more likely thanthe difference between the fair value and the amortized cost basis of the security, adjusted for accrued interest. The non-credit-related portion of the loss is recognized in accumulated other comprehensive income in the condensed consolidated balance sheets. The credit-related losses of the Company’s financial instruments were not that it would be required to sell these investments prior to a recovery of par value,material for the Company did not consider these investments to be other-than temporarily impaired as ofthree and nine months ended October 31, 2017 and January 31, 2017,2020, respectively.
The following fair value hierarchy is applied for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
The Company measures the fair value of money market funds and demand deposits using quoted prices in active markets for identical assets and classifies them within Level 1. The fair value of the Company’s investments in other debt securities are obtained based on quoted prices for similar assets in active markets and are classified within Level 2.
The following table presentstables present the fair value of the financial instruments measured on a recurring basis as of October 31, 20172020 and January 31, 2017:
2020, respectively:
|
| As of October 31, 2017 |
|
| As of October 31, 2020 |
| ||||||||||||||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Money market funds |
| $ | 8,215 |
|
| $ | 8,215 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,384 |
|
| $ | 2,384 |
|
| $ | 0 |
|
| $ | 0 |
|
Commercial paper |
|
| 3,499 |
|
|
| — |
|
|
| 3,499 |
|
|
| — |
|
| $ | 66,744 |
|
|
| 0 |
|
|
| 66,744 |
|
|
| 0 |
|
Corporate bonds |
|
| 52,478 |
|
|
| — |
|
|
| 52,478 |
|
|
| — |
|
| $ | 102,174 |
|
|
| 0 |
|
|
| 102,174 |
|
|
| 0 |
|
Asset-backed securities |
|
| 10,698 |
|
|
| — |
|
|
| 10,698 |
|
|
| — |
|
| $ | 16,603 |
|
|
| 0 |
|
|
| 16,603 |
|
|
| 0 |
|
U.S. government securities |
|
| 26,660 |
|
|
| — |
|
|
| 26,660 |
|
|
| — |
|
| $ | 26,505 |
|
|
| 0 |
|
|
| 26,505 |
|
|
| 0 |
|
Total cash equivalents and marketable securities |
| $ | 101,550 |
|
| $ | 8,215 |
|
| $ | 93,335 |
|
| $ | — |
| ||||||||||||||||
Total cash equivalents and marketable debt securities |
| $ | 214,410 |
|
| $ | 2,384 |
|
| $ | 212,026 |
|
| $ | 0 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of January 31, 2017 |
|
| As of January 31, 2020 |
| ||||||||||||||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Money market funds |
| $ | 8,328 |
|
| $ | 8,328 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,284 |
|
| $ | 8,284 |
|
| $ | 0 |
|
| $ | 0 |
|
Demand deposits |
|
| 10,000 |
|
|
| 10,000 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Commercial paper |
|
| 4,784 |
|
|
| — |
|
|
| 4,784 |
|
|
| — |
|
|
| 63,390 |
|
|
| 0 |
|
|
| 63,390 |
|
|
| 0 |
|
Corporate bonds |
|
| 42,678 |
|
|
| — |
|
|
| 42,678 |
|
|
| — |
|
|
| 95,706 |
|
|
| 0 |
|
|
| 95,706 |
|
|
| 0 |
|
Asset-backed securities |
|
| 11,675 |
|
|
| — |
|
|
| 11,675 |
|
|
| — |
|
|
| 23,129 |
|
|
| 0 |
|
|
| 23,129 |
|
|
| 0 |
|
U.S. government securities |
|
| 23,385 |
|
|
| — |
|
|
| 23,385 |
|
|
| — |
|
|
| 20,572 |
|
|
| 0 |
|
|
| 20,572 |
|
|
| 0 |
|
Total cash equivalents and marketable securities |
| $ | 100,850 |
|
| $ | 18,328 |
|
| $ | 82,522 |
|
| $ | — |
| ||||||||||||||||
Total cash equivalents and marketable debt securities |
| $ | 211,081 |
|
| $ | 8,284 |
|
| $ | 202,797 |
|
| $ | 0 |
|
1314
3. Inventories
InventoryInventories at October 31, 20172020 and January 31, 20172020 consisted of the following:
|
| As of |
|
| As of |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Work-in-progress |
| $ | 13,630 |
|
| $ | 10,105 |
|
| $ | 14,133 |
|
| $ | 10,133 |
|
Finished goods |
|
| 7,467 |
|
|
| 10,040 |
|
|
| 9,579 |
|
|
| 12,838 |
|
Total |
| $ | 21,097 |
|
| $ | 20,145 |
|
| $ | 23,712 |
|
| $ | 22,971 |
|
4. Property and Equipment, Net
Depreciation expense was approximately $0.4$0.6 million and $0.7 million for the three months ended October 31, 20172020 and 2016,2019, respectively. Depreciation expense was approximately $1.3$1.9 million and $1.2$2.1 million for the nine months ended October 31, 20172020 and 2016,2019, respectively. Property and equipment at October 31, 20172020 and January 31, 20172020 consisted of the following:
|
| As of |
|
| As of |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Computer equipment and software |
| $ | 7,563 |
|
| $ | 6,798 |
|
| $ | 11,425 |
|
| $ | 10,282 |
|
Machinery and equipment |
|
| 3,631 |
|
|
| 3,405 |
|
|
| 6,415 |
|
|
| 6,317 |
|
Furniture and fixtures |
|
| 829 |
|
|
| 797 |
|
|
| 969 |
|
|
| 969 |
|
Leasehold improvements |
|
| 1,757 |
|
|
| 1,672 |
|
|
| 2,223 |
|
|
| 2,356 |
|
Construction in progress |
|
| 1,465 |
|
|
| 755 |
|
|
| 217 |
|
|
| 63 |
|
|
|
| 15,245 |
|
|
| 13,427 |
|
|
| 21,249 |
|
|
| 19,987 |
|
Less: accumulated depreciation and amortization |
|
| (9,579 | ) |
|
| (8,439 | ) |
|
| (16,118 | ) |
|
| (14,373 | ) |
Total property and equipment, net |
| $ | 5,666 |
|
| $ | 4,988 |
|
| $ | 5,131 |
|
| $ | 5,614 |
|
5. Intangible Assets, Net
The intangible assets primarily consist of $4.1 million of in-process research and development (“IPR&D&D”) from the acquisition of VisLab S.r.l., or VisLab, in June 2015 and $11.1$13.3 million of noncancelable software licenses, net of amortization expense. Acquired IPR&D is capitalized at fair value and the amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D isOnce research and development efforts are completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. As of October 31, 2017,2020, there was no0 IPR&D amortized. The Company will determine the project incorporating the VisLab IPR&D to be completed when a related chip begins mass production to address the level 3 and above advanced driving assistance systems markets.
During the nine months ended October 31, 2017, theThe Company enteredenters into certain internal-use noncancelable software license agreements in which the Company committed to pay an aggregate amount of $13.7 million through January 2020.with third parties from time-to-time. The licenses have been capitalized as intangible assets, and the corresponding future payments have been recorded as liabilities at net present value. As of October 31, 2017, $4.32020, $5.8 million was recorded in accrued and other current liabilities and $6.3$7.2 million was recorded in other long-term liabilities in the condensed consolidated balance sheets. For
The carrying amounts of intangible assets as of October 31, 2020 and January 31, 2020 were as follows:
|
| As of October 31, 2020 |
|
| As of January 31, 2020 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
| ||||||
|
| (in thousands) |
| |||||||||||||||||||||
In-process research and development |
| $ | 4,100 |
|
| $ | 0 |
|
| $ | 4,100 |
|
| $ | 4,100 |
|
| $ | 0 |
|
| $ | 4,100 |
|
Internal-use software licenses |
|
| 21,333 |
|
|
| (8,081 | ) |
|
| 13,252 |
|
|
| 27,203 |
|
|
| (13,477 | ) |
|
| 13,726 |
|
Total acquired intangible assets |
| $ | 25,433 |
|
| $ | (8,081 | ) |
| $ | 17,352 |
|
| $ | 31,303 |
|
| $ | (13,477 | ) |
| $ | 17,826 |
|
15
During the three and nine months ended October 31, 2017,2020, there was $0.9approximately $10.1 million of fully amortized software licenses retired. The amortization expense related to software licenses was approximately $1.7 million and $2.0$1.3 million offor the three months ended October 31, 2020 and 2019, respectively. The amortization expense recordedrelated to software licenses was approximately $4.8 million and $3.9 million for the nine months ended October 31, 2020 and 2019, respectively. The estimated future amortization expense of these software licenses as of October 31, 2020 is as follows:
|
| As of |
| |
|
| October 31, 2020 |
| |
Fiscal Year |
| (in thousands) |
| |
2021 (3 months remaining) |
| $ | 1,725 |
|
2022 |
|
| 5,941 |
|
2023 |
|
| 4,674 |
|
2024 |
|
| 912 |
|
2025 |
|
| 0 |
|
Thereafter |
|
| 0 |
|
Total future amortization expenses: |
| $ | 13,252 |
|
IPR&D is required to be tested for impairment at least annually in the condensed consolidated statements of operations, respectively.
fourth fiscal quarter or sooner whenever events or changes in circumstances indicate that the assets may be impaired. There were no0 intangible asset impairments for the three and nine months ended October 31, 20172020 and 2016,2019, respectively.
6. Goodwill
On June 25, 2015, the Company completed the acquisition of VisLab, a privately-held Italian company that develops computer vision and intelligent control systems for automotive and other commercial applications, including advanced driver assistance systems and several generations of autonomous vehicle driving systems, for $30.0 million in cash. As a result, there was $25.3 million attributed to goodwill, $4.1 million attributed to intangible assets and $0.6 million attributed to net assets acquired. A deferred tax liability of $1.3 million related to the intangible assets was recorded to account for the difference between financial reporting and tax basis at the acquisition date, with an addition to goodwill. The Company does not amortize goodwill. There were no goodwill impairments for the three and nine months ended October 31, 2017 and 2016, respectively.
14
7. Accrued and Other Current Liabilities
Accrued and other current liabilities at October 31, 20172020 and January 31, 20172020 consisted of the following:
|
| As of |
|
| As of |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Accrued employee compensation |
| $ | 12,655 |
|
| $ | 14,685 |
|
| $ | 15,724 |
|
| $ | 16,874 |
|
Accrued warranty |
|
| 1,100 |
|
|
| 500 |
| ||||||||
Accrued rebates |
|
| 1,267 |
|
|
| 972 |
|
|
| 311 |
|
|
| 54 |
|
Accrued product development costs |
|
| 4,609 |
|
|
| 7,605 |
|
|
| 17,227 |
|
|
| 10,885 |
|
Software license liabilities, current |
|
| 4,311 |
|
|
| — |
|
|
| 5,831 |
|
|
| 4,388 |
|
Other accrued liabilities |
|
| 2,636 |
|
|
| 2,686 |
|
|
| 2,829 |
|
|
| 2,769 |
|
Total accrued and other current liabilities |
| $ | 26,578 |
|
| $ | 26,448 |
|
| $ | 41,922 |
|
| $ | 34,970 |
|
The timing of SoC development progress and payments to outside foundries resulted in fluctuation of the accrued product development costs.
7. Leases
The Company has entered into various operating leases for its worldwide office facilities. The operating lease expense was approximately $0.8 million and $0.7 million for the three months ended October 31, 2020 and 2019, respectively. The operating lease expense was approximately $2.2 million and $2.2 million for the nine months ended October 31, 2020 and 2019, respectively. The Company's short-term leases and finance leases were not material as of October 31, 2020 and January 31, 2020, respectively.
Supplemental cash flow information related to leases is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
|
| October 31, 2020 |
|
| October 31, 2020 |
| ||
|
| (in thousands) |
| |||||
Cash paid for operating leases included in operating cash flows |
| $ | 625 |
|
| $ | 1,656 |
|
Supplemental non-cash information related to lease liabilities arising from obtaining right-of-use assets |
| $ | 85 |
|
| $ | 261 |
|
16
As of October 31, 2020, the weighted average remaining lease term is 4.41 years, and the weighted average discount rate is 4.43 percent. Future minimum lease payments for the lease liabilities are as follows:
|
| As of |
| |
|
| October 31, 2020 |
| |
Fiscal Year |
| (in thousands) |
| |
2021 (3 months remaining) |
| $ | 811 |
|
2022 |
|
| 2,814 |
|
2023 |
|
| 1,927 |
|
2024 |
|
| 1,702 |
|
2025 |
|
| 1,749 |
|
Thereafter |
|
| 1,234 |
|
Total future annual minimum lease payments |
|
| 10,237 |
|
Less: interest |
|
| (766 | ) |
Total lease liabilities |
| $ | 9,471 |
|
8. Deferred Revenue and Deferred Cost
Deferred revenue and related cost at October 31, 2017 and January 31, 2017 consisted of the following:
|
| As of |
| |||||
|
| October 31, 2017 |
|
| January 31, 2017 |
| ||
|
| (in thousands) |
| |||||
Deferred revenue from product shipments |
| $ | 6,643 |
|
| $ | 7,725 |
|
Deferred revenue from services |
|
| 836 |
|
|
| 1,748 |
|
Deferred cost of revenue from product shipments |
|
| (2,260 | ) |
|
| (2,048 | ) |
Total deferred revenue, net |
| $ | 5,219 |
|
| $ | 7,425 |
|
9. Other Long-Term Liabilities
Other long-term liabilities at October 31, 20172020 and January 31, 20172020 consisted of the following:
|
| As of |
|
| As of |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Unrecognized tax benefits, including interest |
| $ | 5,420 |
|
| $ | 1,905 |
|
| $ | 8,953 |
|
| $ | 8,261 |
|
Deferred tax liabilities, non-current |
|
| 1,333 |
|
|
| 1,333 |
|
|
| 1,287 |
|
|
| 1,288 |
|
Software license liabilities, non-current |
|
| 6,313 |
|
|
| — |
|
|
| 7,230 |
|
|
| 8,159 |
|
Other long-term liabilities |
|
| 5 |
|
|
| 3 |
|
|
| 537 |
|
|
| 68 |
|
Total other long-term liabilities |
| $ | 13,071 |
|
| $ | 3,241 |
|
| $ | 18,007 |
|
| $ | 17,776 |
|
10.9. Capital Stock
Preference shares
After completion of the Company’s initial public offering in 2012, a total of 20,000,000 preference shares, with a $0.00045 par value per share, were authorized. There were no0 preference shares issued and outstanding as of October 31, 20172020 and January 31, 2017,2020, respectively.
Ordinary shares
As of October 31, 20172020 and January 31, 2017,2020, a total of 200,000,000 ordinary shares were authorized.
15
On March 30, 2017,February 1, 2020, the Company added 1,501,6061,521,252 ordinary shares to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the 2012 Equity Incentive Plan, (“EIP”).or EIP. Pursuant to such provision, on February 1st offor each fiscal year, the number of ordinary shares reserved for issuance under the EIP is automatically increased by a number equal to the lesser of (i) 3,500,000 ordinary shares, (ii) four and one half percent (4.5%) of the aggregate number of ordinary shares outstanding on January 31st of the preceding fiscal year, or (iii) a lesser number of shares that may be determined by the Company’s Board of Directors.
On March 30, 2017,February 1, 2020, the Company added 417,112422,570 ordinary shares to the ordinary shares reserved for issuance, pursuant to an “evergreen” provision contained in the Amended and Restated 2012 Employee Stock Purchase Plan, (“ESPP”).or ESPP. Pursuant to such provision, on February 1st offor each fiscal year, the number of ordinary shares reserved for issuance under the ESPP is automatically increased by a number equal to the lesser of (i) 1,500,000 ordinary shares, (ii) one and one quarter percent (1.25%) of the aggregate number of ordinary shares outstanding on such date, or (iii) an amount determined by the Company’s Board of Directors or a duly authorized committee of the Board of Directors.
17
As of October 31, 20172020 and January 31, 2017,2020, the following ordinary shares were reserved for future issuance under the EIP and ESPP:
|
| As of |
|
| As of |
| ||||||||||
|
| October 31, 2017 |
|
| January 31, 2017 |
|
| October 31, 2020 |
|
| January 31, 2020 |
| ||||
Shares reserved for options, restricted stock and restricted stock units under EIP |
|
| 5,821,923 |
|
|
| 5,167,688 |
|
|
| 6,457,092 |
|
|
| 6,045,108 |
|
Shares reserved for ESPP |
|
| 1,561,841 |
|
|
| 1,252,465 |
|
|
| 2,299,143 |
|
|
| 2,059,504 |
|
Shares repurchased
On May 31, 2016,29, 2019, the Company’s Board of Directors authorized thea program to repurchase of up to $75.0$50.0 million of the Company’s ordinary shares through June 30, 2017.2020. On March 16, 2020, the Company repurchased a total of 25,719 shares for approximately $1.0 million in cash. On May 31, 2017,29, 2020, the Company’s Board approved an extension of Directors authorizedthis program for an additional twelve months ending June 30, 2021. Since the additional repurchase of up to $50.0 millioninception of the Company’s ordinaryrepurchase programs in June 2016, a total of $275.0 million has been authorized, and a total of 4,011,595 shares over a twelve-month period commencing July 1, 2017.have been repurchased for approximately $175.8 million in cash. Repurchases may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and it may be suspended at any time at the Company’s discretion. The repurchase program is funded using the Company’s working capital and any repurchased shares are recorded as authorized but unissued shares. There were 1,028,048 shares repurchased during the nine months ended October 31, 2017 for approximately $51.5 million in cash. As of October 31, 2017, a total of 1,433,137 shares have been repurchased for approximately $71.7 million in cash and recorded as a reduction to equity. As of October 31, 2017,2020, there was approximately $35.0$49.0 million available for repurchases under the repurchase program through June 30, 2018.2021.
11.10. Stock-based Compensation
The following table presents the classification of stock-based compensation for the periods indicated:
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
| $ | 343 |
|
| $ | 282 |
|
| $ | 978 |
|
| $ | 773 |
|
| $ | 368 |
|
| $ | 335 |
|
| $ | 981 |
|
| $ | 922 |
|
Research and development |
|
| 8,906 |
|
|
| 7,804 |
|
|
| 25,532 |
|
|
| 21,396 |
|
|
| 11,496 |
|
|
| 10,601 |
|
|
| 31,402 |
|
|
| 31,306 |
|
Selling, general and administrative |
|
| 5,419 |
|
|
| 4,621 |
|
|
| 15,565 |
|
|
| 13,305 |
|
|
| 7,113 |
|
|
| 6,372 |
|
|
| 19,024 |
|
|
| 17,740 |
|
Total stock-based compensation |
| $ | 14,668 |
|
| $ | 12,707 |
|
| $ | 42,075 |
|
| $ | 35,474 |
|
| $ | 18,977 |
|
| $ | 17,308 |
|
| $ | 51,407 |
|
| $ | 49,968 |
|
During the three and nine months ended October 31, 2020, approximately $1.9 million and $2.8 million of stock-based compensation expense was accrued in the accrued and other current liabilities in the condensed consolidated balance sheets, respectively. As of October 31, 2017,2020, total unrecognized compensation cost related to unvested stock options was $6.5$3.1 million and is expected to be recognized over a weighted-average period of 2.052.37 years. Total unrecognized compensation cost related to unvested restricted stock units was $110.6$137.3 million and is expected to be recognized over a weighted-average period of 2.882.54 years. Total unrecognized compensation cost related to unvested restricted stock awards was $4.0 million and is expected to be recognized over a weighted-average period of 1.25 years.
16
The following table sets forth the weighted-average assumptions used to estimate the fair value of stock options and employee stock purchase plan awards for the periods indicated:
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
| 53 | % |
|
| 39 | % |
|
| 53 | % |
|
| 38 | % |
|
| 52 | % |
|
| 52 | % |
|
| 52 | % |
|
| 52 | % |
Risk-free interest rate |
| 1.78 | % |
|
| 1.27 | % |
|
| 2.02 | % |
|
| 1.51 | % |
|
| 0.40 | % |
|
| 1.39 | % |
|
| 0.52 | % |
|
| 1.84 | % |
Expected term (years) | 6.08 |
|
|
| 6.08 |
|
| 6.07 |
|
|
| 5.98 |
|
| 5.81 |
|
| 6.09 |
|
| 5.84 |
|
| 6.02 |
| ||||||
Dividend yield |
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
Employee stock purchase plan awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
| 50 | % |
|
| 41 | % |
|
| 45 | % |
|
| 54 | % |
|
| 58 | % |
|
| 46 | % |
|
| 59 | % |
|
| 47 | % |
Risk-free interest rate |
| 1.17 | % |
|
| 0.49 | % |
|
| 1.03 | % |
|
| 0.51 | % |
|
| 0.12 | % |
|
| 1.93 | % |
|
| 0.21 | % |
|
| 2.23 | % |
Expected term (years) |
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
| 0.5 |
|
| 0.5 |
|
| 0.5 |
|
| 0.5 |
| ||||
Dividend yield |
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
The Company calculates expected volatility for stock options based on the weighted average of historical volatilities of its own stock price and the share prices of similar companies that are publicly available for a period commensurate with the expected term. The Company calculates expected volatility for ESPP based on its own historical stock price for a period commensurate with the offering period.
18
The following table summarizes stock option activityactivities for the nine months ended October 31, 2017:period indicated:
|
| Options Outstanding |
|
| Option Outstanding |
| ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Intrinsic |
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Intrinsic |
|
| Average |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| Weighted- |
|
| Value Of |
|
| Remaining |
|
| Aggregate |
|
|
|
|
|
|
|
|
|
| Weighted- |
|
| Value Of |
|
| Remaining |
|
| Aggregate |
| ||||||||
|
|
|
|
|
| Weighted- |
|
| Average |
|
| Options |
|
| Contractual |
|
| Intrinsic |
|
|
|
|
|
| Weighted- |
|
| Average |
|
| Options |
|
| Contractual |
|
| Intrinsic |
| ||||||||||
|
|
|
|
|
| Average |
|
| Grant-date |
|
| Exercised |
|
| Term |
|
| Value |
|
|
|
|
|
| Average |
|
| Grant-date |
|
| Exercised |
|
| Term |
|
| Value |
| ||||||||||
|
| Shares |
|
| Exercise Price |
|
| Fair Value |
|
| (in thousands) |
|
| (in years) |
|
| (in thousands) |
|
| Shares |
|
| Exercise Price |
|
| Fair Value |
|
| (in thousands) |
|
| (in years) |
|
| (in thousands) |
| ||||||||||||
Outstanding at January 31, 2017 |
|
| 1,703,524 |
|
| $ | 21.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Outstanding at January 31, 2020 |
|
| 1,124,646 |
|
| $ | 32.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Granted |
|
| 91,300 |
|
|
| 52.57 |
|
| $ | 27.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36,700 |
|
|
| 53.05 |
|
| $ | 25.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
| (135,180 | ) |
|
| 12.34 |
|
|
|
|
|
| $ | 5,569 |
|
|
|
|
|
|
|
|
|
|
| (207,876 | ) |
|
| 12.31 |
|
|
|
|
|
| $ | 9,224 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (21,057 | ) |
|
| 56.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11,301 | ) |
|
| 46.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
| (18,045 | ) |
|
| 30.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (21,422 | ) |
|
| 75.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2017 |
|
| 1,620,542 |
|
|
| 23.62 |
|
|
|
|
|
|
|
|
|
| 4.74 |
|
| $ | 55,763 |
| |||||||||||||||||||||||||
Exercisable at October 31, 2017 |
|
| 1,351,300 |
|
| $ | 17.95 |
|
|
|
|
|
|
|
|
|
|
| 4.06 |
|
| $ | 53,559 |
| ||||||||||||||||||||||||
Outstanding at October 31, 2020 |
|
| 920,747 |
|
|
| 37.23 |
|
|
|
|
|
|
|
|
|
| 4.42 |
|
| $ | 18,266 |
| |||||||||||||||||||||||||
Exercisable at October 31, 2020 |
|
| 790,911 |
|
| $ | 35.19 |
|
|
|
|
|
|
|
|
|
|
| 3.75 |
|
| $ | 17,504 |
|
The intrinsic value of options outstanding and options exercisable is calculated based on the difference between the fair market value of the Company’s ordinary shares on the reporting date and the exercise price. The closing price of the Company’s ordinary shares on October 31, 20172020 was $56.44,$54.67, as reported by The NASDAQ Global Market. The intrinsic value of exercised options is calculated based on the difference between the fair market value of the Company’s ordinary shares on the exercise date and the exercise price.
The following table summarizes restricted stock andthe restricted stock units activities for the period indicated:
|
|
|
|
|
| Weighted- |
|
|
|
|
|
| Weighted- |
| ||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
|
|
|
|
|
| Grant-Date |
|
|
|
|
|
| Grant-Date |
| ||
|
| Shares |
|
| Fair Value |
|
| Shares |
|
| Fair Value |
| ||||
Unvested at January 31, 2017 |
|
| 2,175,673 |
|
| $ | 56.76 |
| ||||||||
Unvested at January 31, 2020 |
|
| 2,617,266 |
|
| $ | 50.30 |
| ||||||||
Granted |
|
| 1,001,785 |
|
|
| 46.50 |
|
|
| 1,445,544 |
|
|
| 52.61 |
|
Vested |
|
| (767,449 | ) |
|
| 45.84 |
|
|
| (901,392 | ) |
|
| 51.17 |
|
Forfeited |
|
| (99,863 | ) |
|
| 54.66 |
|
|
| (74,109 | ) |
|
| 54.87 |
|
Unvested at October 31, 2017 |
|
| 2,310,146 |
|
| $ | 56.03 |
| ||||||||
Unvested at October 31, 2020 |
|
| 3,087,309 |
|
| $ | 51.02 |
|
As of October 31, 2017,2020, the aggregate intrinsic value of unvested restricted stock and restricted stock units was $130.4$168.8 million.
12.11. Net IncomeLoss Per Ordinary Share
The following table sets forth the computation of basic and diluted net incomeloss per ordinary share for the periods indicated:
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
|
| (in thousands, except share and per share data) |
|
| (in thousands, except share and per share data) |
| ||||||||||||||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 11,724 |
|
| $ | 29,045 |
|
| $ | 17,591 |
|
| $ | 39,460 |
| ||||||||||||||||
Net loss |
| $ | (17,078 | ) |
| $ | (4,309 | ) |
| $ | (47,297 | ) |
| $ | (31,811 | ) | ||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares - basic |
|
| 33,128,761 |
|
|
| 32,670,784 |
|
|
| 33,203,432 |
|
|
| 32,552,077 |
|
|
| 34,819,880 |
|
|
| 33,304,171 |
|
|
| 34,460,172 |
|
|
| 32,885,729 |
|
Effect of potentially dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Employee stock options |
|
| 913,496 |
|
|
| 1,159,739 |
|
|
| 967,903 |
|
|
| 1,094,786 |
| ||||||||||||||||
Restricted stock and restricted stock units |
|
| 311,430 |
|
|
| 753,178 |
|
|
| 363,476 |
|
|
| 583,144 |
| ||||||||||||||||
Employee stock purchase plan |
|
| 5,206 |
|
|
| 16,291 |
|
|
| 4,157 |
|
|
| 12,058 |
| ||||||||||||||||
Weighted-average ordinary shares - diluted |
|
| 34,358,893 |
|
|
| 34,599,992 |
|
|
| 34,538,968 |
|
|
| 34,242,065 |
|
|
| 34,819,880 |
|
|
| 33,304,171 |
|
|
| 34,460,172 |
|
|
| 32,885,729 |
|
Net income per ordinary share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net loss per ordinary share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
| $ | 0.35 |
|
| $ | 0.89 |
|
| $ | 0.53 |
|
| $ | 1.21 |
|
| $ | (0.49 | ) |
| $ | (0.13 | ) |
| $ | (1.37 | ) |
| $ | (0.97 | ) |
Diluted |
| $ | 0.34 |
|
| $ | 0.84 |
|
| $ | 0.51 |
|
| $ | 1.15 |
|
| $ | (0.49 | ) |
| $ | (0.13 | ) |
| $ | (1.37 | ) |
| $ | (0.97 | ) |
19
The following weighted-average potentially dilutive securities were excluded from the computation of diluted net incomeloss per ordinary share as their effect would have been antidilutive:
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Options to purchase ordinary shares |
| 290,648 |
|
|
| 189,147 |
|
|
| 274,629 |
|
|
| 380,460 |
|
|
| 701,113 |
|
|
| 873,515 |
|
|
| 734,506 |
|
|
| 948,283 |
|
Restricted stock and restricted stock units |
| 1,224,115 |
|
|
| 606,843 |
|
|
| 977,904 |
|
|
| 900,701 |
|
|
| 1,233,679 |
|
|
| 1,675,570 |
|
|
| 1,316,682 |
|
|
| 1,195,320 |
|
Employee stock purchase plan |
| 36,076 |
|
|
| 24,221 |
|
|
| 20,675 |
|
|
| 19,534 |
|
|
| 23,144 |
|
|
| 13,672 |
|
|
| 26,494 |
|
|
| 11,204 |
|
|
| 1,550,839 |
|
|
| 820,211 |
|
|
| 1,273,208 |
|
|
| 1,300,695 |
|
|
| 1,957,936 |
|
|
| 2,562,757 |
|
|
| 2,077,682 |
|
|
| 2,154,807 |
|
13.12. Income Taxes
The following table provides details of income taxes for the periods indicated:
| Three Months Ended October 31, |
|
|
| Nine Months Ended October 31, |
|
| ||||||||||
| 2017 |
|
| 2016 |
|
|
| 2017 |
|
| 2016 |
|
| ||||
| (in thousands) |
|
| ||||||||||||||
Income before income taxes | $ | 15,437 |
|
| $ | 29,802 |
|
|
| $ | 23,736 |
|
| $ | 40,610 |
|
|
Provision for income taxes |
| 3,713 |
|
| 757 |
|
|
|
| 6,145 |
|
|
| 1,150 |
|
| |
Effective tax rate | 24.1 |
| % | 2.5 |
| % |
| 25.9 |
| % | 2.8 |
| % |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (in thousands) |
| |||||||||||||
Loss before income taxes |
| $ | (15,576 | ) |
| $ | (5,251 | ) |
| $ | (43,922 | ) |
| $ | (29,509 | ) |
Provision (benefit) for income taxes |
|
| 1,502 |
|
|
| (942 | ) |
|
| 3,375 |
|
|
| 2,302 |
|
Effective tax rate |
| (9.6)% |
|
| 17.9% |
|
| (7.7)% |
|
| (7.8)% |
|
The effectiveincome tax rateexpense increased for the three and nine months ended October 31, 20172020, as compared to the same periods in the prior fiscal year, primarily due to a decrease in the proportion of profits generated in lower tax jurisdictions andas well as an increase in non-deductible stock-based compensation expense, partially offset by the benefit attributed to the utilization of R&D credits.compensation.
18On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), P.L. 116-136, was passed into law, amending portions of certain relevant US tax laws. The CARES Act includes a number of federal income tax law changes, including, but not limited to: 1) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, 2) accelerating alternative minimum tax credit refunds, 3) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and 4) providing a technical correction for depreciation related to qualified improvement property. The CARES Act also provides for an Employee Retention Credit, a fully refundable payroll tax credit for certain eligible employers, and the ability for all eligible employers to defer payment of the employer share of payroll taxes owed on wages paid for the period ending December 31, 2020. The Company has preliminarily evaluated the impact of the CARES Act and does not expect it will have a material impact on the Company’s condensed consolidated financial statements.
The Company files federal and state income tax returns in the United States and in various foreign jurisdictions. The Internal Revenue Service is currently examining the Company’s U.S. federal income tax return for the fiscal year ended January 31, 2017. The tax years 2013 to 20172019 remain open to examination by U.S. federal tax authorities. The tax years 20072009 to 20172019 remain open to examination by U.S. state tax authorities. The tax years 20112014 to 20172019 remain open to examination by foreign tax authorities. Fiscal years outside of the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those earlier years, which have been carried forward and may be audited in subsequent years when utilized.
The Company regularly assesses the likelihood of adverse outcomes resulting from potential tax examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of October 31, 2017,2020, the gross amount of unrecognized tax benefits decreased by $16.1 million to $27.0 million. The decrease was approximately $43.9 million.primarily due to changes to our uncertain tax positions from adjustments arising from tax return filings. If the estimates of income tax liabilities prove to be less than the ultimate assessment, then a further charge to expense could be required. If events occur, and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities could result in tax benefits being recognized in the period in which the Company determines the liabilities are no longer necessary. The existing tax positions of the Company continue to generate an increase in the liability for uncertain tax positions. As of October 31, 2017 and January 31, 2017, the Company’s unrecognized tax benefits recorded in other long-term liabilities, including interest, were approximately $5.4 million and $1.9 million, respectively. The Company does not anticipate materialsignificant changes to its uncertain tax positions during the next twelve months.
On July 27, 2015, the United States Tax Court issued a decision (“Tax Court Decision”) in Altera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (“Ninth Circuit”). On June 7, 2019, the Ninth Circuit issued an opinion that reversed the Tax Court Decision. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. On February 10, 2020, the taxpayer filed a petition to appeal the decision with the Supreme Court of the United States which was denied on June 22, 2020. The denial of the request by the Supreme Court did not have a material impact to the Company’s provision for income taxes.
14.20
13. Commitments and Contingencies
The Company leases its principal facilities under operating lease agreements and leases time-based software licenses from time to time. Net operating lease expense for the three months ended October 31, 2017 and 2016 was approximately $1.2 million and $2.0 million, respectively. Net operating lease expense for the nine months ended October 31, 2017 and 2016 was approximately $4.1 million and $5.6 million, respectively. Future annual minimum payments under these operating leases with initial lease terms in excess of one year are as follows:
|
| As of |
| |
|
| October 31, 2017 |
| |
Fiscal Year |
| (in thousands) |
| |
2018 |
| $ | 664 |
|
2019 |
|
| 2,926 |
|
2020 |
|
| 2,354 |
|
2021 |
|
| 812 |
|
2022 |
|
| 247 |
|
Total future annual minimum lease payments |
| $ | 7,003 |
|
Contract Manufacturer Commitments
The Company’s components and products are procured and built by independent contract manufacturers based on sales forecasts. These forecasts include estimates of future demand, historical trends, analysis of sales and marketing activities, and adjustment of overall market conditions. The Company regularly issues purchase orders to independent contract manufacturers which are cancelable only upon agreement between the Company and the third-party manufacturers. As of October 31, 20172020 and January 31, 2017,2020, total manufacturing purchase commitments were approximately $25.7$37.1 million and $23.9$35.9 million, respectively, as a result of seasonal fluctuations.respectively.
Indemnification
The Company, from time to time, in the normal course of business, indemnifies certain vendors with whom it enters into contractual relationships. The Company has agreed to hold the other party harmless against third-party claims in connection with the Company’s future products. The Company also indemnifies certain customers against third-party claims related to certain intellectual property and product liability matters. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. The Company has not0t made payments under these obligations, and no0 liabilities have been recorded for these obligations in the condensed consolidated balance sheets as of October 31, 20172020 and January 31, 2017,2020, respectively.
19
15.14. Segment Reporting
The Company operates in one1 reportable segment related to the development and sales of low-power, high-definition (HD), Ultra HD video products.compression, image processing and computer vision solutions. The Chief Executive Officer of the Company has been identified as the Chief Operating Decision Maker (the “CODM”) and manages the Company’s operations as a whole. For the purpose of evaluating financial performance and allocating resources, the CODM reviews financial information presented on a consolidated basis accompanied by information by customer and geographic region.
Geographic Revenue
The following table sets forth the Company’s revenue by geographic region based on bill-to location for the periods indicated. Prior period revenue amounts by geographic region have been reclassified to conform to the fiscal year 2018 presentation. These reclassifications did not impact total revenues in the prior periods.indicated:
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||||||||||
Taiwan |
| $ | 45,026 |
|
| $ | 53,932 |
|
| $ | 139,494 |
|
| $ | 142,837 |
|
| $ | 35,073 |
|
| $ | 42,986 |
|
| $ | 96,846 |
|
| $ | 101,567 |
|
Asia Pacific |
|
| 19,000 |
|
|
| 11,286 |
|
|
| 43,050 |
|
|
| 30,449 |
|
|
| 14,642 |
|
|
| 18,011 |
|
|
| 43,635 |
|
|
| 49,745 |
|
Europe |
|
| 20,908 |
|
|
| 32,314 |
|
|
| 29,252 |
|
|
| 40,948 |
|
|
| 1,970 |
|
|
| 2,264 |
|
|
| 6,856 |
|
|
| 9,848 |
|
North America other than United States |
|
| 2,582 |
|
|
| 1,261 |
|
|
| 7,566 |
|
|
| 2,626 |
|
|
| 2,433 |
|
|
| 2,804 |
|
|
| 8,449 |
|
|
| 6,688 |
|
United States |
|
| 1,546 |
|
|
| 1,697 |
|
|
| 5,465 |
|
|
| 5,929 |
|
|
| 1,972 |
|
|
| 1,857 |
|
|
| 5,062 |
|
|
| 3,672 |
|
Total revenue |
| $ | 89,062 |
|
| $ | 100,490 |
|
| $ | 224,827 |
|
| $ | 222,789 |
|
| $ | 56,090 |
|
| $ | 67,922 |
|
| $ | 160,848 |
|
| $ | 171,520 |
|
As of October 31, 2017,2020, substantially all of the Company’s property and equipment, net, was located in the United States, and Asia Pacific regionsregion and Europe with approximate net amounts of $2.4$1.6 million, $2.5 million and $2.3$1.0 million, respectively.
Major Customers
For the three months ended October 31, 2017, the customers representing 10% or more of revenue and accounts receivable were Wintech, the Company’s logistics provider, GoPro, Inc. (“GoPro”), a direct OEM customer, and Chicony Electronics Co., Ltd. (“Chicony”), a direct ODM customer, which combined accounted for approximately 83% of total revenue. For the nine months ended October 31, 2017, the only customer representing 10% or more of revenue and accounts receivable was Wintech, which accounted for approximately 62% of total revenue. For the three and nine months ended October 31, 2016, theThe customers representing 10% or more of revenue and accounts receivable were Wintech and GoPro,Chicony, which combined accounted for approximately 84%62.3% and 78%17.6% of total revenue respectively. Accounts receivable with Wintech, GoPro and Chicony combined accounted for approximately $39.7 million as of October 31, 2017. Accounts receivable with Wintech and GoPro combined accounted for approximately $30.6 million as of January 31, 2017.
16. Related-Party Transactions
The Company considers an entity to be a related party if it owns more than 10% of the Company’s total voting stock at the end of each reporting period or if an officer or employee of an entity also serves on the Company’s board of directors or if it is a significant shareholder and has material business transactions with the Company.
The Company enters into software license agreements with Cadence Design Systems, Inc. (“Cadence”) from time to time. The Chief Executive Officer of Cadence, who is also the President and a Director of Cadence, was a member of the Company’s Board of Directors until June 7, 2017. In March 2017, the Company entered into a noncancelable software license agreement with Cadence. Under this agreement, the Company committed to pay an aggregate amount of $10.3 million through January 2020. The Company paid $1.7 million and $0.8 million to Cadence for the three months ended October 31, 20172020, respectively, and 2016, respectively. The Company paid $2.7 millionaccounted for approximately 60.4% and $2.1 million to Cadence17.4% of total revenue for the nine months ended October 31, 20172020, respectively. The customers representing 10% or more of revenue and 2016, respectively. License expenses related to these agreements includedaccounts receivable in researchfiscal year 2020 were Wintech and development expense wereChicony, which accounted for approximately $0.8 million63.2% and 15.7% of total revenue for the three months ended October 31, 20172019, respectively, and 2016, respectively. License expenses related to these agreements included in researchaccounted for approximately 59.2% and development expense were approximately $2.4 million and $2.2 million17.8% of total revenue for the nine months ended October 31, 20172019, respectively. Accounts receivable with Wintech and 2016,Chicony were approximately $11.2 million and $9.9 million as of October 31, 2020, respectively.
2021
ITEMITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto for the fiscal year ended January 31, 20172020 and management’s discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K for the 20172020 fiscal year filed with the Securities and Exchange Commission, or SEC, on March 30, 2017.27, 2020.
This Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “outlook,” “if,” “future,” “intend,” “plan,” “estimate,” “predict,” “potential,” “target,” “seek,” “project,” “forecast,” “continue” or “foreseeable” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. Such statements include, but are not limited to, statements concerning our market opportunity and our ability to compete in such markets, our product strategy, our ability to develop and introduce new solutions, our future financial and operating performance, our sales and marketing strategy, our investment strategy, research and development, our customer and supplier relationships and inventory levels, industry trends, our cash needs and capital requirements, our repurchase programs, our expectations about seasonality, taxes and operating expenses, the availability of third-party components and economic and political conditions. These statements reflect our current views with respect to future events and our potential financial performance, and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to: risks associated with revenue being generated from new customers or design wins, neither of which is assured; our ability to retain and expand customer relationships and to achieve design wins; the ongoing and potential impact of the COVID-19 pandemic on our operations or the operations of our supply chain or our customers; risks associated with the overall economy, including escalating trade tensions between the U.S. and China; the commercial success of our customers’ products; our growth strategy; fluctuations in our operating results; our ability to anticipate future market demands and future needs and preferences of our customers; our ability to introduce new and enhanced solutions; the expansion of our current markets and our ability to successfully enter new markets; anticipated trends and challenges, including competition, in the markets in which we operate or seek to operate; our expectations regarding computer vision; our ability to effectively sustaingenerate and manage growth; our ability to retain key employees; the potential for intellectual property disputes or other litigation; the risks described under Item 1A of Part II — “Risk Factors,” and Item 2 of Part I — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the risks described elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.
Overview
We are a leading developer of semiconductor processing solutions for video that enable high-definition, or HD, video capture, analysis, sharing and display. A device that capturesIn the last ten years, we have primarily focused on providing video includes four primary components:and image processors for professional and consumer camera devices, such as internet protocol, or IP, security cameras, wearable sports cameras, drones and aftermarket automotive video recorders. Over the last several years, our development efforts focused on creating advanced artificial intelligence, or AI, computer vision, or CV, algorithms and high-performance, low-power hardware platforms to enhance processing acceleration, which we refer to as our CVflow™ architecture. The CVflow architecture supports a lens, an image sensor, a video processor and storage memory. The video processor converts raw video input into a format that can be stored, analyzed and distributed efficiently and, in some cases, analyzes the video data to automate processes. We combine our processor design capabilities with our expertise in video, image processing andvariety of computer vision algorithms, including stereovision, object identification and softwaremotion detection, obstacle detection and avoidance, terrain mapping technology, and face recognition, and allows customers to provide a technology platform that is designeddifferentiate their products by porting their own algorithms and neural networks to be easily scalable across multiple applications and enable rapid and efficient product development.our CVflow-based chips. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, and analysis,AI, computer vision functionality, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption. These computer vision-based technologies are allowing us to address a broader range of markets and applications requiring AI video features, including IP security cameras, automotive cameras, consumer cameras, and industrial and robotic markets and applications.
22
Our revenue over the last three years has been generated primarily from sales of our SoC solutions for incorporation into specialized video and image capture devices such as wearable sports cameras, automotive aftermarket cameras, IP security cameras and cameras incorporated into drones. Our revenue from several of these markets, however, has recently experienced significant declines. As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as AI-enabled security cameras, AI-based driving applications, including auto-parking, driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, OEM automotive advanced driver assistance systems, or ADAS, applications, and industrial and robotics markets. We expect our research and development expenditures to increase in comparison to prior periods as we devote additional resources to the development of innovative video and image processing solutions with increased functionality, such as AI and CV capabilities, and as we target new markets.
We sell our SoC solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs globally.globally, and in the automotive market, we also sell to Tier-1 suppliers. We refer to ODMs and Tier-1 automotive suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. In the camera market, our solutions enable the creation of high-quality video content in wearable cameras, automotive cameras, Internet Protocol, or IP, security cameras, for both professional use and home security and monitoring, unmanned aerial vehicle cameras, also referred to as UAVs, drones or flying cameras, and virtual reality cameras, also referred to as 360° cameras. In the infrastructure market, our solutions efficiently manage IP video traffic, broadcast encoding, transcoding and IP video delivery applications. We also intend to develop solutions to address emerging markets, such as OEM automotive advanced driving assistance systems and robotics markets.
21
Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers’ system designers and management along withand our sales personnel and software engineers. If successful, this process culminates in a customer’s decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM.
Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence. Once one of our solutions hashave been incorporated into a customer’s design, we believe that our solution isthey are likely to remain a componentbe used for the life cycle of the customer’s product for its life cycle because of the time and expense associated with redesigning a product or substituting an alternative solution.product. Conversely, a design loss to a competitor will likely preclude any opportunity for us to generate future revenue from such customer’s product. Even if we obtain a design win and our SoC remains a component through the life cycle of a customer’s product, the volume and timing of actual sales of our SoCs to the customer depend upon the production, release and market acceptance of that product, none of which are within our control. A portable consumer device typically has a product life cycle of six to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product lifecycles will typically be longer than 24 months in the OEM automotive and industrial and robotics markets, as new product introductions occur less frequently in these markets.
23
Financial Highlights and Trends
• | We recorded revenue of $56.1 million and $160.8 million for the three and nine months ended October 31, 2020, respectively. This represented a decrease of 17.4% and 6.2% for the three and nine months ended October 31, 2020, respectively, as compared to the same periods in the prior fiscal year. The decreases in revenue were primarily attributable to lower revenue from the professional IP security camera and automotive markets. In the professional IP security camera market, despite continued growth in the North America and Asia regions in fiscal year 2021, lower demand from our two largest China customers caused by higher inventory build-up in fiscal year 2020 and escalated trade tensions between the United States and China, together with less demand from the Europe region, resulted in a significant revenue decrease in this market. The decreased revenue in the automotive markets was primarily due to an overall slowdown in the automotive industry. The decreased revenue was partially offset by increased revenue in the consumer IP security camera and consumer markets, including drone and wearable camera markets. In the consumer IP security camera market, revenue growth continued to be led by the home security and monitoring market in the North America region. In the consumer markets, incorporation of our solutions into newly launched products from Dajiang Innovation Technology Inc., or DJI, resulted in a ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue in the sports camera market. While revenue declined in the three and nine months ended October 31, 2020, respectively, we experienced sustained demand for our new CV-based solutions in the professional IP security camera market, generated revenue from CV-based solutions in the automotive OEM sensing market and made initial shipments of our CV-based solutions into the consumer IP security camera and automotive aftermarket in fiscal year 2021. |
• | We recorded operating losses of $16.2 million and $47.2 million for the three and nine months ended October 31, 2020, respectively, as compared to operating losses of $7.2 million and $35.8 million for the three and nine months ended October 31, 2019, respectively. In addition to the declines in revenue, the increased operating losses were also attributable to increased operating expenses, partially offset by increased gross margin. The increase in expenses primarily related to increased employee benefit expense, SoC development cost as well as research and development grants from a foreign government in fiscal year 2020 that did not recur in fiscal year 2021. The increased expenses were partially offset by decreased travel expense, consulting services and a COVID-19-related foreign subsidy granted in the second quarter of fiscal year 2021. |
• | We generated cash flows from operating activities of $18.3 million for the nine months ended October 31, 2020, as compared to $35.3 million for the nine months ended October 31, 2019. The decreased cash flows from operating activities were primarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customers. The decreased cash flows from operating activities were partially offset by decreased cash payments for other operating asset purchases and increased liabilities associated with the timing of payments to suppliers and authorities. |
• | On March 16, 2020, we repurchased a total of 25,719 of our ordinary shares for approximately $1.0 million in cash. On May 29, 2020, our Board of Directors approved an extension of the repurchase program for an additional twelve months ending June 30, 2021. There were no shares repurchased for the three months ended October 31, 2020. As of October 31, 2020, there was approximately $49.0 million available for repurchases through June 30, 2021. |
Factors Affecting Our Performance
COVID-19 Could Adversely Affect our Business in a Material Way. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of $89.1 millionthe virus, including, among others, restrictions on travel and $224.8 millionthe imposition of remote or work-from-home conditions in many of the locations where we have offices. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, if the remote or work-from-home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the threeCOVID-19 pandemic, we are experiencing longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers’ demand for our solutions and nine months ended October 31, 2017, respectively. This representednegatively impact our revenue. Moreover, if there is a decrease of 11.4%significant outbreak that impacts Samsung Electronic Corporation’s ability to manufacture our SoCs or our third-party contractors’ ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers. The pandemic may also impact our customers’ ability to manufacture their products, support their customers or reduce or delay demand for the three months ended October 31, 2017 and an increase of 0.9%their products, which could, in turn, reduce such customers’ demand for our solutions. For example, in the nine months ended October 31, 2017, respectively, as compared2020, we saw an overall slowdown in the automotive industry which negatively impacted our revenue related to our computer vision-based solutions in the same periodsOEM video recorder market. While we cannot quantify specific impacts of the COVID-19 pandemic or actions taken by governments and businesses in fiscal year 2017. The decreaseresponse thereto, our results of operations and financial condition may be negatively affected if we encounter significant supply chain problems, reductions in revenue for the three months ended October 31, 2017 was primarilydemand due to our major customercustomers or end customers having problems, or other unexpected COVID-19 ramifications.
24
Political and Trade Relations Between the United States and China Could Adversely Affect our Business in a Material Way. Trade tensions between the sports camera market incorporating a competing solution into one of its recently released mainstream camera models that significantly reducedUnited States and China have been escalating, which has, in our revenue in the third quarter as compared to the same quarter of last fiscal year. We believe our revenue from this customerview, created and will continue to decline overcreate an uncertain business environment. If additional tariffs or trade restrictions are imposed on our SoC solutions or the foreseeable future. A smaller portionproducts of the decrease was attributableour customers, or trade restrictions are imposed on our ability to conduct business with certain customers, there could be a decline in revenues in the current quarter from a major customer in the drone market due to such customer’s launch of a non-Ambarella based drone, as well as continued weakness from smaller consumer drone customers. The decrease was partially offset by strong growth in the IP security, automotivenegative impact on our operations and non-sports wearable camera markets. Growth in the IP security camera market was primarily due to solid performance in the home security and monitoring camera market in the United States. In the automotive camera market, an increase in shipments for OEM automotive video recorders plus growth in shipments for the automotive aftermarket resulted in strong revenue growth for the three months ended October 31, 2017.financial performance. For instance, during the nine months ended October 31, 2017,2020, lower demand from our two largest China customers resulted in our revenue was relatively flat compared to the same period in fiscal year 2017 as a result of strong revenue growthsdecreasing in the IP security and automotive camera markets offset by revenue declines in the sports camera and consumer drone markets.
We recorded operating income of $15.1 million and $23.0 million for the three and nine months ended October 31, 2017, respectively, as compared to $29.7 million and $40.3 million for the three and nine months ended October 31, 2016, respectively. The decrease for the three months ended October 31, 2017 was primarily due to decreased gross profit as a result of a decline in revenue and increased operating expenses while the decrease for the nine months ended October 31, 2017 was primarily the result of increased operating expenses. The decline in gross profit was primarily the result of the increase in the percentage of our total revenue derived from the lower gross marginprofessional IP security camera market combinedmarket. Even in the absence of new tariffs or trade restrictions, it is possible that China customers or potential customers could take actions to reduce dependence on the supply of components subject to United States trade laws, including our solutions. There are also risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. In addition, the declineescalating social and political tensions in revenue fromHong Kong could, in the higher gross margin sports camera market.future, impact the operation of our warehouse facility in Hong Kong, through which a substantial majority of our finished SoCs are shipped to customers or logistic partners. Continued deterioration in political, social or economic conditions in Hong Kong or future actions by the Chinese or U.S. governments, could possibly result in business interruptions, substantially delayed or lost sales, loss of inventory, or increased expenses. The increasematerialization of these risks could have a material adverse effect on our business.
Ability to Capitalize on Computer Vision Trends. We expect that computer vision functionality will become an increasingly important requirement in operating expenses was primarily attributable to increased stock-based compensation expense, as well as increased researchmany of our current and development cost asfuture markets, including IP security, automotive, and industrial and robotics, and certain consumer markets. As a result, of increased headcount in support ofwe believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions, will be critical to our future success. Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive, and other markets.
We generated cash flows from operating activities of $60.3 million for the nine months ended October 31, 2017, as comparedindustrial and robotics markets, is vital to $81.0 million for the nine months ended October 31, 2016. The decreased cash flows from operating activities were primarily dueour ability to decreased net income for the nine months ended October 31, 2017 as compared to the same period in fiscal year 2017. The decreased cash flows from operating activities were also attributable to decreased cash receipts associated with the timing of payments from customers and decreased liabilities associated with the timing of payments to suppliers. The decrease was partially offset by decreased inventory purchases.
22
Our Board of Directors previously authorized a program to repurchase up to $75.0 million of our ordinary shares through June 30, 2017. On May 31, 2017, our Board of Directors authorized the repurchase of up to an additional $50.0 million of our ordinary shares over a twelve-month period commencing July 1, 2017. For the three months ended October 31, 2017,generate revenue growth. As such, we repurchased 269,540 shares for approximately $12.8 million in cash. For the nine months ended October 31, 2017, we repurchased 1,028,048 shares for approximately $51.5 million in cash. As of October 31, 2017, we had repurchased a total of 1,433,137 shares for approximately $71.7 million in cash. Repurchases are funded using working capital and any repurchased shares are recorded as authorized but unissued shares. As of October 31, 2017, approximately $35.0 million remained available for repurchases under the repurchase program through June 30, 2018.
Factors Affecting Our Performance
Design Wins. We closely monitor design wins by customer and end market. We consider design wins to be critical to our future success, althoughHowever, a design win may not successfully materialize into revenue, and even if it resultsdoes result in revenue, the amount generated by each design win can vary significantly. Our long-term sales
Ability to Develop and Introduce New or Enhanced Solutions. We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions with increased levels of performance and functionality that meet the expectations are based on forecastsof our customers. As such, we continuously invest in our research and development projects, especially CV technologies. However, failure to anticipate or timely develop new or enhanced solutions in response to technology shifts and trends could result in decreased revenue and our competitors achieving design wins we sought. Moreover, any reliability or quality problems with our solutions could harm our reputation, increase additional development and replacement costs, and prevent us from retaining existing customers and internal estimations of customer demand factoring in the expected time to market for end customer products incorporating our solutions and associated revenue potential. Our ability to accurately forecast demand, however, can be adversely affected by a number of factors, including inaccurate forecasting by our customers, miscalculations by our customers of their inventory requirements, changes in market conditions, adverse changes in our product order mix, and fluctuating demand for our customers’ products.attracting new customers.
Pricing, Product Cost and Margin. Our pricing and margins depend on the volumes and features of the solutions we provide to our customers. Additionally, we make significant investments in new solutions for both cost improvements and new features that we expect to drive revenue and maintain margins. In general, solutions incorporated into more complex configurations, such as those used in high-performance camera applications or, infrastructure applications,in the future, advanced driver assistance systems, have higher prices and higher gross margins as compared to solutions sold into lower performing,lower-performing, more competitive camera applications. Our average selling price can vary by market and application due to market-specific supply and demand, the maturation of products launched in previous years and the launch of new products.products by us or our competitors.
We continually monitor the cost of our solutions. As we rely on third-party manufacturers for the productionmanufacture of our products, we maintain a close relationship with these suppliers to continually monitor production yields, component costs and design efficiencies.
Shifting Consumer Preferences. Our revenue is also subject to consumer preferences, regarding form factor and functionality, and how those preferences impact the video and image capture electronics that we support. For example, improved smartphone video capture capabilities led to the decline of video cameras aimed at the video and image capture market. The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable, IP security, drone and automotive cameras. This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue. In the future, we expect further changes will continue to impact our business performance in those markets.
25
Continued Concentration of Revenue by End Market. Historically, our revenue has been significantly concentrated in a small number of end markets. In fiscal year 2010, the majority of our revenue came from the pocket video, camcordermarkets and infrastructure markets. Since that time, we have developed technologies to provide solutions for new markets as they emerged, such as the wearable,sports camera, IP security, drone and automotive video recorder camera markets. We believe these markets can continue to facilitate revenue growthSince fiscal year 2018, the professional and customer diversification. Theconsumer IP security wearable sports, dronecamera markets and automotive camera markets, areincluding the OEM and aftermarket video recorder market, have been our largest end markets and sales into these markets collectively have generated the majority of our revenue. We believe, however, that continued expansion into new markets is required to facilitate revenue growth and customer diversification. We have recently introduced solutions to address emerging applications and markets, such as the incorporation of CV functionalities for AI-enabled security cameras, AI-based driving applications and industrial and robotics markets. While we will continue to seek to expand our end market exposure, such as to non-sports wearable and automotive OEM markets, and to expand our computer vision technology in all our markets, we anticipate that sales to a limited number of end markets will continue to account for a significant percentage of our total revenue for the foreseeable future. In addition, several of these markets are characterized by high concentration among one or a few dominant OEMs. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of products that our SoCs are designed into our ability to achieve design wins with such dominant OEMs, as well as the overall growth or decline in the video capture markets in which we compete. In addition, we derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers.
Shifting Consumer Preferences. Our revenue is subject to consumer preferences, regarding form factor and functionality, and how those preferences impact the video and image capture electronics that we support. For example, improved smartphone video capture capabilities, and the rapid adoption of smartphones by consumers, led to the decline of pocket video cameras aimed at the video and image capture market. The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable, IP security, UAV and automotive cameras. This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue. In the future, we expect further changes in the market to continue to impact our business performance.
23
Ability to Capitalize on Connectivity Trends. Mobile connected devices are ubiquitous today and play an increasingly prominent role in consumers’ lives. The constant connectivity provided by these devices has created a demand for connected electronic peripherals such as video and image capture devices. Our ability to capitalize on these trends by supporting our end customers in the development of connected peripherals that seamlessly cooperate with other connected devices and allow consumers to distribute and share video and images with online media platforms is critical for our success. We have added wireless communication functionality into our solutions for wearable, IP security, drone and automotive video recorder cameras. The combination of our compression technology with wireless connectivity enables wireless video streaming and uploading of videos and images to the Internet. Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable and UAVdrone cameras allow consumers to quickly stream or upload video and images to social media platforms.
Ability to Capitalize on Computer Vision Trends. We expect that computer vision functionality will become an increasingly important requirement in many of our current and future markets, including automotive, IP security, UAV, wearable camera markets, and potentially robotics applications. As a result, we believe that our ability to develop advanced computer vision technology, enable and support customer product development in emerging applications such as advanced driver-assistance systems, object detection, people recognition and machine learning, and gain customer acceptance of our technology platform and solutions, will be critical to our future success.
Sales Volume. A typical camera design win that successfully launches into the marketplace can generate a wide range of sales volumes for our solutions, depending on the end market demand for our customers’ products. ThisOur ability to accurately forecast demand can depend on severalbe adversely affected by a number of factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses, and our end customers’ ability to sell their products, miscalculations by our customers of their inventory requirements, changes in market conditions, adverse changes in our product order mix and fluctuating demand for our customers’ products. In certain cases, we may provide volume discounts on sales of our solutions, which may be offset by lower manufacturing costs related to higher volumes. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle.
Customer Product Life Cycle. We estimate our customers’ product life cycles based on the customer, type of product and end market. In general, products launched in the camera market have shorter life cycles than those sold into the infrastructure market. We typically commence commercial shipments from six to 18 months following a design win,win; however, in some markets, lengthier product and development cycles are possible, depending on the scope and nature of the project.project, such as in the automotive OEM market. A portable consumer device typically has a product life cycle of six to 18 months. In the infrastructure market, themonths, and an IP security camera typically has a product life cycle can range fromof 12 to 24 to 60 months. We anticipate that product development and product life cycles will typically be longer than 24 months in the OEM automotive, Tier-1 automotive suppliers and robotics markets, as new product introductions typically occur less frequently in these markets.
26
Results of Operations
The following table sets forth a summary of our statement of operations for the periods indicated:
| Three Months Ended October 31, |
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| Nine Months Ended October 31, |
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| Three Months Ended October 31, |
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| Nine Months Ended October 31, |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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| (dollars in thousands) |
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| (dollars in thousands) |
| ||||||||||||||||||||||||||
Revenue | $ | 89,062 |
|
| $ | 100,490 |
|
| $ | 224,827 |
|
| $ | 222,789 |
|
| $ | 56,090 |
|
| $ | 67,922 |
|
| $ | 160,848 |
|
| $ | 171,520 |
|
Cost of revenue |
| 32,448 |
|
|
| 34,167 |
|
|
| 82,445 |
|
|
| 76,289 |
|
|
| 21,298 |
|
|
| 28,819 |
|
|
| 63,078 |
|
|
| 72,127 |
|
Gross profit |
| 56,614 |
|
|
| 66,323 |
|
|
| 142,382 |
|
|
| 146,500 |
|
|
| 34,792 |
|
|
| 39,103 |
|
|
| 97,770 |
|
|
| 99,393 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
| 29,796 |
|
|
| 25,967 |
|
|
| 83,936 |
|
|
| 74,076 |
|
|
| 36,573 |
|
|
| 32,480 |
|
|
| 103,575 |
|
|
| 95,917 |
|
Selling, general and administrative |
| 11,700 |
|
|
| 10,686 |
|
|
| 35,406 |
|
|
| 32,144 |
|
|
| 14,468 |
|
|
| 13,791 |
|
|
| 41,348 |
|
|
| 39,293 |
|
Total operating expenses |
| 41,496 |
|
|
| 36,653 |
|
|
| 119,342 |
|
|
| 106,220 |
|
|
| 51,041 |
|
|
| 46,271 |
|
|
| 144,923 |
|
|
| 135,210 |
|
Income from operations |
| 15,118 |
|
|
| 29,670 |
|
|
| 23,040 |
|
|
| 40,280 |
| ||||||||||||||||
Loss from operations |
|
| (16,249 | ) |
|
| (7,168 | ) |
|
| (47,153 | ) |
|
| (35,817 | ) | |||||||||||||||
Other income, net |
| 319 |
|
|
| 132 |
|
|
| 696 |
|
|
| 330 |
|
|
| 673 |
|
|
| 1,917 |
|
|
| 3,231 |
|
|
| 6,308 |
|
Income before income taxes |
| 15,437 |
|
|
| 29,802 |
|
|
| 23,736 |
|
|
| 40,610 |
| ||||||||||||||||
Provision for income taxes |
| 3,713 |
|
|
| 757 |
|
|
| 6,145 |
|
|
| 1,150 |
| ||||||||||||||||
Net income | $ | 11,724 |
|
| $ | 29,045 |
|
| $ | 17,591 |
|
| $ | 39,460 |
| ||||||||||||||||
Loss before income taxes |
|
| (15,576 | ) |
|
| (5,251 | ) |
|
| (43,922 | ) |
|
| (29,509 | ) | |||||||||||||||
Provision (benefit) for income taxes |
|
| 1,502 |
|
|
| (942 | ) |
|
| 3,375 |
|
|
| 2,302 |
| |||||||||||||||
Net loss |
| $ | (17,078 | ) |
| $ | (4,309 | ) |
| $ | (47,297 | ) |
| $ | (31,811 | ) |
24
The following table sets forth operating results as a percentage of revenue of each line item for the periods indicated:
| Three Months Ended October 31, |
|
| Nine Months Ended October 31, |
|
| Three Months Ended October 31, |
|
|
| Nine Months Ended October 31, |
|
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
|
|
| 2020 |
|
| 2019 |
|
| ||||||||
Revenue |
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
| 100 |
| % | 100 |
| % |
| 100 |
| % | 100 |
| % | ||||
Cost of revenue |
| 36 |
|
|
| 34 |
|
|
| 37 |
|
|
| 34 |
|
|
| 38 |
|
|
| 42 |
|
|
|
| 39 |
|
|
| 42 |
|
|
Gross profit |
| 64 |
|
|
| 66 |
|
|
| 63 |
|
|
| 66 |
|
|
| 62 |
|
|
| 58 |
|
|
|
| 61 |
|
|
| 58 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
| 33 |
|
|
| 26 |
|
|
| 37 |
|
|
| 33 |
|
|
| 65 |
|
|
| 48 |
|
|
|
| 64 |
|
|
| 56 |
|
|
Selling, general and administrative |
| 13 |
|
|
| 11 |
|
|
| 16 |
|
|
| 14 |
|
|
| 26 |
|
|
| 20 |
|
|
|
| 26 |
|
|
| 23 |
|
|
Total operating expenses |
| 46 |
|
|
| 37 |
|
|
| 53 |
|
|
| 47 |
|
|
| 91 |
|
|
| 68 |
|
|
|
| 90 |
|
|
| 79 |
|
|
Income from operations |
| 18 |
|
|
| 29 |
|
|
| 10 |
|
|
| 19 |
| ||||||||||||||||||
Loss from operations |
|
| (29 | ) |
|
| (10 | ) |
|
|
| (29 | ) |
|
| (21 | ) |
| |||||||||||||||
Other income, net | — |
|
| — |
|
| — |
|
| — |
|
|
| 1 |
|
|
| 3 |
|
|
|
| 2 |
|
|
| 4 |
|
| ||||
Income before income taxes |
| 18 |
|
|
| 29 |
|
|
| 10 |
|
|
| 19 |
| ||||||||||||||||||
Provision for income taxes |
| 4 |
|
|
| — |
|
|
| 3 |
|
|
| 1 |
| ||||||||||||||||||
Net income |
| 14 | % |
|
| 29 | % |
|
| 7 | % |
|
| 18 | % | ||||||||||||||||||
Loss before income taxes |
|
| (28 | ) |
|
| (7 | ) |
|
|
| (27 | ) |
|
| (17 | ) |
| |||||||||||||||
Provision (benefit) for income taxes |
|
| 3 |
|
|
| (1 | ) |
|
|
| 2 |
|
|
| 2 |
|
| |||||||||||||||
Net loss |
|
| (31 | ) | % |
| (6 | ) | % |
|
| (29 | ) | % |
| (19 | ) | % |
Revenue
We derive substantially all of our revenue from the sale of HD and Ultra HD video and image processing SoC solutions to IP security camera OEMs, andIP security camera ODMs, OEM automotive or Tier-1 automotive suppliers, either directly or through our logistics providers. Ourdistributors. In recent years, our SoC solutions have been primarily used in the camera markets, such as IP security, automotive video recorder, drone and infrastructure markets, althoughwearable cameras. Although we expect these camera markets, in particular the camera market will be the primary market for our solutionsIP security and automotive video recorder markets, to continue to generate revenue for the foreseeable future, aswe have recently introduced new SoCs targeting emerging CV applications in the infrastructure market continues to decline due to delays in investments in network upgradesIP security camera, OEM automotive and the trend among consumers transitioning away from traditional broadcast television.industrial and robotics markets. We derive a substantial portion of our revenue from sales made indirectly through one of our logistics provider,distributors, Wintech Microelectronics Co., Ltd., or Wintech.Wintech, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony.
We typically experiencehave historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the highest revenue quarter. This fluctuation has been driven primarily by increased sales in IP security and consumer camera markets as our customers build inventories in preparation for the holiday shopping season. More generally, ourOur average selling prices fluctuate based on the mix of our solutions sold in a period which reflects the impact of both changes in unit sales of existing solutions as well as the introduction and sales of new solutions. Our solutions are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, higher volumes and average selling prices that are lower than initial levels.
27
The end markets into which we sell our products have seen significant changes as consumer preferences have evolved in response to new technologies. As a result, the composition and timing of our revenue may differ meaningfully during periods of technology or consumer preference changes. We expect shifts in consumer use of video capture to continue to change over time, as moreAI and CV specialized use cases emerge and video capture continues to proliferate.
Cost of Revenue and Gross Margin
Cost of revenue includes the cost of materials such as wafers processed by third-party foundries, costs associated with packaging, assembly and testing, and our manufacturing support operations, such as logistics, planning and quality assurance. Cost of revenue also includes indirect costs, such as warranty, inventory valuation reserves and other general overhead costs.
We expect that our gross margin may fluctuate from period to period as a result of changes in customer mix, average selling price, product mix and the introduction of new products by us or our competitors. In general, solutions incorporated into more complex configurations, such as those used in high-performance cameras, and in future advanced automotive OEM applications, have had or infrastructure applications,are expected to have higher prices and higher gross margins, as compared to solutions sold into the lower performance,lower-performance, more competitive camera applications. As semiconductor products mature and unit volumes sold to customers increase, their average selling prices typically decline. These declines may be paired with improvements in manufacturing yields and lower wafer, packaging and test costs, which offset some of the margin reduction that could result from lower selling prices. We believe that our gross margin will decline in the future as we continue to penetrate the highly competitive camera market.
25
Research and Development
Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our engineering personnel.benefits. The expense also includes costs of development incurred in connection with our collaborations with our foundry vendors, costs of licensing intellectual property from third parties for product development, costs of development for software and hardware tools, cost of fabrication of mask sets for prototype products, and allocated depreciation and facility expenses.expenses, net of any research and development grants. All research and development costs are expensed as incurred. We expect our research and development expense to increase in absolute dollars as we continue to enhance and expand our product features and offerings and increase headcount in support offor new SoC development especially inand development of computer vision technology, especially for the OEM automotive and other markets.market.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our sales, marketing, finance, human resources, information technology and administrative personnel. The expense also includes professional service costs related to accounting, tax, legal services, and allocated depreciation and facility expenses. We expect our selling, general and administrative expense to increase in absolute dollars as we continue to maintain the infrastructure and expand the size of our sales and marketing organization to support our anticipated business growth.strategy of addressing new opportunities with our computer vision technology.
Other Income, Net
Other income, net, consists primarily of interest and other income from debt security investments net of interest expense incurred for intangible assets purchased.and cash deposits with financial institutions.
Provision (Benefit) for Income Taxes
We are incorporated and domiciled in the Cayman Islands and also conduct business in several countries such as the United States, China, Taiwan, Hong Kong, Italy, South Korea and Japan, and we are subject to taxation in those jurisdictions. Our worldwide operating income is subject to varying tax rates, and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. It is also subject to fluctuation from changes in the valuation of our deferred tax assets and liabilities; tax benefits from excess stock-based compensation deductions; transfer pricing adjustments and the tax effects of nondeductible compensation. We have historically had lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure werewas to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected.
28
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical provision for income taxes and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Comparison of the Three and Nine Months Ended October 31, 20172020 and 20162019
Revenue
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Revenue |
| $ | 89,062 |
|
| $ | 100,490 |
|
| $ | (11,428 | ) |
|
| (11.4 | )% |
| $ | 224,827 |
|
| $ | 222,789 |
|
| $ | 2,038 |
|
|
| 0.9 | % |
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Revenue |
| $ | 56,090 |
|
| $ | 67,922 |
|
| $ | (11,832 | ) |
|
| (17.4 | )% |
| $ | 160,848 |
|
| $ | 171,520 |
|
| $ | (10,672 | ) |
|
| (6.2 | )% |
26
The decrease indecreased revenue for the three and nine months ended October 31, 2017 was primarily due to our major customer in the sports camera market incorporating a competing solution into one of its recently released mainstream camera models that significantly reduced our revenue in the third quarter2020, as compared to the same quarter of lastperiods in the prior fiscal year. We believe ouryear, was primarily attributable to lower revenue from this customer will continue to decline over the foreseeable future. A smaller portion ofprofessional IP security camera and automotive markets. In the decrease was attributable to a decline in revenuesprofessional IP security camera market, despite continued growth in the current quarterNorth America and Asia regions in fiscal year 2021, lower demand from our two largest China customers caused by higher inventory build-up in fiscal year 2020 and escalated trade tensions between the United States and China, together with less demand from the Europe region, resulted in a major customersignificant revenue decrease in this market. The decreased revenue in the drone marketautomotive markets was primarily due to such customer’s launch of a non-Ambarella based drone, as well as continued weakness from smaller consumer drone customers.an overall slowdown in the automotive industry. The decreasedecreased revenue was partially offset by strong growthincreased revenue in the consumer IP security automotivecamera and non-sportsconsumer markets, including drone and wearable camera markets. Growth inIn the consumer IP security camera market, was primarily duerevenue growth continued to solid performance inbe led by the home security and monitoring camera market in the United States.North America region. In the automotive camera market, an increase in shipments for OEM automotive video recorders plus growth in shipments for the automotive aftermarketconsumer markets, incorporation of our solutions into newly launched products from DJI resulted in stronga ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue growth forin the sports camera market. While revenue declined in the three months ended October 31, 2017. For theand nine months ended October 31, 2017,2020, respectively, we experienced sustained demand for our new CV-based solutions in the professional IP security camera market, generated revenue was relatively flat compared tofrom CV-based solutions in the same periodautomotive OEM sensing market and made initial shipments of our CV-based solutions into the consumer IP security camera and automotive aftermarket in fiscal year 2017 as a result of strong revenue growths in the IP security and automotive camera markets offset by revenue declines in the sports camera and consumer drone markets.
2021.
Cost of Revenue and Gross Margin
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
| ||||||||||||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue |
| $ | 32,448 |
|
| $ | 34,167 |
|
| $ | (1,719 | ) |
|
| (5.0 | )% |
| $ | 82,445 |
|
| $ | 76,289 |
|
| $ | 6,156 |
|
|
| 8.1 | % |
| $ | 21,298 |
|
| $ | 28,819 |
|
| $ | (7,521 | ) |
|
| (26.1 | )% |
| $ | 63,078 |
|
| $ | 72,127 |
|
| $ | (9,049 | ) |
|
| (12.5 | )% |
Gross profit |
|
| 56,614 |
|
|
| 66,323 |
|
|
| (9,709 | ) |
|
| (14.6 | )% |
|
| 142,382 |
|
|
| 146,500 |
|
|
| (4,118 | ) |
|
| (2.8 | )% |
|
| 34,792 |
|
|
| 39,103 |
|
|
| (4,311 | ) |
|
| (11.0 | )% |
|
| 97,770 |
|
|
| 99,393 |
|
|
| (1,623 | ) |
|
| (1.6 | )% |
Gross margin |
|
| 63.6 | % |
|
| 66.0 | % |
|
| — |
|
|
| (2.4 | )% |
|
| 63.3 | % |
|
| 65.8 | % |
|
| — |
|
|
| (2.5 | )% |
|
| 62.0 | % |
|
| 57.6 | % |
|
| — |
|
|
| 4.4 | % |
|
| 60.8 | % |
|
| 57.9 | % |
|
| — |
|
|
| 2.9 | % |
Cost of revenue decreased for the three months ended October 31, 2017 primarily due to decreased revenue compared to the same period in the prior fiscal year. The decrease was partially offset by approximately $1.1 million of cost benefit received from the recovery and sale of inventory previously written down for the three months ended October 31, 2016 that did not recur in the corresponding period in the current fiscal year.
Cost of revenue increased for the nine months ended October 31, 2017 primarily due to higher volume shipments in fiscal year 2018, as well as approximately $2.1 million of cost benefit received from the recovery and sale of inventory previously written down for the nine months ended October 31, 2016 that did not recur in the corresponding period in the current fiscal year.
Gross margin decreased for the three and nine months ended October 31, 20172020, as compared to the same periods in the prior fiscal year, primarily due to an increaselower SoC shipments in the percentage of our total revenue that was derived from the lower gross marginprofessional IP security camera market, combined withpartially offset by increased shipments in the declineconsumer IP security camera and consumer markets.
Gross margin increased for the three and nine months ended October 31, 2020, as compared to the same periods in revenuethe prior fiscal year, primarily due to gross margin improvement in the professional IP security camera market as a result of customer concentration shift from the higher gross margin sports camera market.China region to the North America and Asia regions other than China.
29
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Research and development |
| $ | 29,796 |
|
| $ | 25,967 |
|
| $ | 3,829 |
|
|
| 14.7 | % |
| $ | 83,936 |
|
| $ | 74,076 |
|
| $ | 9,860 |
|
|
| 13.3 | % |
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Research and development |
| $ | 36,573 |
|
| $ | 32,480 |
|
| $ | 4,093 |
|
|
| 12.6 | % |
| $ | 103,575 |
|
| $ | 95,917 |
|
| $ | 7,658 |
|
|
| 8.0 | % |
Research and development expense increased for the three and nine months ended October 31, 20172020, as compared to the same periods in the prior fiscal year, primarily due to increased employee benefit expense and SoC development cost. For the three and nine months ended October 31, 2020, employee benefit expense increased by approximately $1.3 million and $1.9 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount. Our engineering headcount associated with new SoC hardware and software development, principally in support of our computer vision technology for our current markets as well as new markets such as the automotive OEM market and robotics applications. Our research and development engineering headcount increased to 503was 568 at October 31, 20172020 compared to 477560 at October 31, 2016. The2019. SoC development cost increased engineering headcount resulted in increases in salary related expenses of approximately $1.2by $2.7 million and $3.8$4.2 million for the three and nine months ended October 31, 2017, respectively.2020, respectively, due to project timing and the number of chips in development. The increased research and development expense was also attributable to additional stock-based compensation of approximately $1.1$0.5 million and $4.1$3.7 million forof research and development grants from a foreign government during the three and nine months ended October 31, 2017,2019, respectively, as a result ofthat did not recur in the issuance of optionscurrent fiscal year. The increased expense was partially offset by decreased travel expense and restricted stock units for newly hired employees and our annual evergreen stock program for existing employees. SoC development related costs increasedcontractor services caused by approximately $1.1 million and $1.3 million forCOVID-19 pandemic restrictions. For the three and nine months ended October 31, 2017,2020, travel expense and contractor services decreased by an aggregate of $0.4 million and $1.4 million, respectively due to. For the timing and numbernine months ended October 31, 2020, approximately $0.7 million of chips in development.a COVID-19-related subsidy was granted by a foreign government.
27
Selling, General and Administrative
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
|
| 2017 |
|
| 2016 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Selling, general and administrative |
| $ | 11,700 |
|
| $ | 10,686 |
|
| $ | 1,014 |
|
|
| 9.5 | % |
| $ | 35,406 |
|
| $ | 32,144 |
|
| $ | 3,262 |
|
|
| 10.1 | % |
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| Amount |
|
| % |
|
| 2020 |
|
| 2019 |
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| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Selling, general and administrative |
| $ | 14,468 |
|
| $ | 13,791 |
|
| $ | 677 |
|
|
| 4.9 | % |
| $ | 41,348 |
|
| $ | 39,293 |
|
| $ | 2,055 |
|
|
| 5.2 | % |
Selling, general and administrative expense increased for the three and nine months ended October 31, 20172020, as compared to the same periods in the prior fiscal year, primarily due to increased stock-based compensation expense of approximately $0.8$1.0 million and $2.3$1.6 million of additional employee benefit expense, respectively, as a result of the issuance of optionsstock awards and restricted stock units for newly hired employees and our annual evergreen stock program for existing employees. The increases wereemployee benefit programs. For the nine months ended October 31, 2020, the increase was also attributable to approximately $0.5 million and $0.9$1.6 million of additional professional services and facility related cost. The increased expense was partially offset by approximately $0.4 million and $1.2 million of less expenditures on outside professional services travel and marketing activities for the three and nine months ended October 31, 2017,2020, respectively, to support our business.caused by COVID-19 pandemic restrictions.
Other Income, Net
|
| Three Months Ended October 31, |
|
| Change |
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| Nine Months Ended October 31, |
|
| Change |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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|
| % |
| ||||||||
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| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Other income, net |
| $ | 319 |
|
| $ | 132 |
|
| $ | 187 |
|
|
| 141.7 | % |
| $ | 696 |
|
| $ | 330 |
|
| $ | 366 |
|
|
| 110.9 | % |
|
| Three Months Ended October 31, |
|
| Change |
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| Nine Months Ended October 31, |
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| Change |
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| 2020 |
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| 2019 |
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|
| 2020 |
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| 2019 |
|
| Amount |
|
| % |
| ||||||||
|
| (dollars in thousands) |
| |||||||||||||||||||||||||||||
Other income, net |
| $ | 673 |
|
| $ | 1,917 |
|
| $ | (1,244 | ) |
|
| (64.9 | )% |
| $ | 3,231 |
|
| $ | 6,308 |
|
| $ | (3,077 | ) |
|
| (48.8 | )% |
OtherThe decrease in other income, net, consistedfor the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily due to decreases of approximately $1.3 million and $3.2 million, respectively, in interest and other income from our deposits and debt security investments netas a result of lower interest expense incurred for intangible assets purchased. rates and a higher number of debt securities purchased at a premium in the current fiscal year.
Provision (Benefit) for Income Taxes
|
| Three Months Ended October 31, |
|
| Change |
|
| Nine Months Ended October 31, |
|
| Change |
|
| Three Months Ended October 31, |
|
| Change |
| Nine Months Ended October 31, |
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| Change | ||||||||||||||||||||||||||||||||||||||||
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| 2017 |
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| 2016 |
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| Amount |
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| % |
|
| 2017 |
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| 2016 |
|
| Amount |
|
| % |
|
| 2020 |
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| 2019 |
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| Amount |
|
| % |
| 2020 |
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| 2019 |
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| Amount |
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|
| (dollars in thousands) |
|
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes |
| $ | 3,713 |
|
| $ | 757 |
|
| $ | 2,956 |
|
|
| 390.5 | % |
| $ | 6,145 |
|
| $ | 1,150 |
|
| $ | 4,995 |
|
|
| 434.3 | % | ||||||||||||||||||||||||||||||
Provision (benefit) for income taxes |
| $ | 1,502 |
|
| $ | (942 | ) |
| $ | 2,444 |
|
| 259.4 | % |
| $ | 3,375 |
|
| $ | 2,302 |
|
| $ | 1,073 |
|
| 46.6 | % | ||||||||||||||||||||||||||||||||
Effective tax rate |
|
| 24.1 | % |
| 2.5% |
|
| — |
|
|
| 21.6 | % |
|
| 25.9 | % |
| 2.8% |
|
| — |
|
|
| 23.1 | % |
| (9.6) |
| % | 17.9 |
| % | — |
|
| (27.5) | % |
| (7.7) |
| % | (7.8) |
| % | — |
|
| 0.1 | % |
The quarterly provision for income taxes is based onreflect an estimationestimate of the corresponding fiscal year’s annual effective tax rate and includes,include, when applicable, adjustments from discrete tax items arising in thethat quarter.
The effectiveincrease in income tax rate increasedexpense for the three and nine months ended October 31, 20172020, as compared to the same periods in the prior fiscal year, was primarily due to a decrease in the proportion of profits generated in lower tax jurisdictions; andjurisdictions, as well as an increase in non-deductible stock-based compensation expense, partially offset by the benefit attributed to the utilization of R&D credits.compensation.
Liquidity and Capital Resources
As of October 31, 20172020 and January 31, 2017,2020, we had cash, cash equivalents and marketable debt securities of approximately $414.0$423.6 million and $405.4$404.7 million, respectively. We invest in highly liquid, short-term marketable debt securities and hold these investments as available-for-sale securities. As of October 31, 2017,2020, these securities had a fair value of approximately $101.6$214.4 million with insignificantimmaterial unrealized losses caused by fluctuations in market value and interest rates.fluctuations.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
| Nine Months Ended October 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (in thousands) |
| |||||
Net cash provided by operating activities |
| $ | 60,293 |
|
| $ | 81,048 |
|
Net cash used in investing activities |
|
| (13,228 | ) |
|
| (21,092 | ) |
Net cash used in financing activities |
|
| (49,004 | ) |
|
| (14,557 | ) |
Net increase (decrease) in cash and cash equivalents |
| $ | (1,939 | ) |
| $ | 45,399 |
|
|
| Nine Months Ended October 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (in thousands) |
| |||||
Net cash provided by operating activities |
| $ | 18,316 |
|
| $ | 35,284 |
|
Net cash provided by (used in) investing activities |
|
| (25,961 | ) |
|
| 16,355 |
|
Net cash provided by financing activities |
|
| 1,751 |
|
|
| 6,622 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
| $ | (5,894 | ) |
| $ | 58,261 |
|
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Net Cash Provided by Operating Activities
Net cash provided by operating activities decreased primarily due to decreased net income for the nine months ended October 31, 20172020, as compared to the same period in the prior fiscal year, 2017. The decreased cash flows from operating activities were also attributableprimarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customerscustomers. The decreased cash flows from operating activities were partially offset by decreased cash payments for other operating asset purchases and decreasedincreased liabilities associated with the timing of payments to suppliers. The decrease was partially offset by decreased inventory purchases.suppliers and authorities.
Net Cash Used inProvided by (Used in) Investing Activities
Net cash used in investing activities increased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to approximately $14.3 million of additional investments in debt securities, as well as approximately $27.9 million less cash receipts from the sale and maturity of debt securities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities decreased for the nine months ended October 31, 2017 primarily due to a reduction of approximately $19.2 million of investments in debt securities2020, as compared to the same period in the prior fiscal year. The decreased investment expenditure was partially offset by approximately $11.0 million of fewer cash receipts from the sale and maturity of debt securities for the nine months ended October 31, 2017 compared to the same period in the prior fiscal year.
Net Cash Used in Financing Activities
Net cash used in financing activities increasedyear, primarily due to additional paymentsapproximately $3.0 million of $31.3less cash proceeds from option exercises and employee stock purchase withholdings, $1.0 million inof cash used for the repurchaserepurchasing of our ordinary shares under ourthe stock repurchase program, as well as an additional payments$0.8 million of $2.5 million in cashpayment for intangible assets purchased for the nine months ended October 31, 2017 compared to the same period in the prior fiscal year.asset purchases.
Stock Repurchase Program
Our BoardSince the inception of Directors previouslythe stock repurchase programs in June 2016, a total of $275.0 million has been authorized for repurchase, and to date, we have repurchased a program to repurchase up to $75.0total of 4,011,595 shares for approximately $175.8 million of our ordinary shares through June 30, 2017. On May 31, 2017, our Board of Directors authorizedin cash under the repurchase of up to an additional $50.0 million of our ordinary shares over a twelve-month period commencing July 1, 2017.programs. As of October 31, 2017, we had repurchased a total of 1,433,137 shares for approximately $71.7 million in cash, and approximately $35.02020, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2018.2021. Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at the company's discretion. Repurchases are funded using working capital and any repurchased shares are recorded as authorized but unissued shares.
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Operating and Capital Expenditure Requirements
We have generated net income annually since fiscal year 2010,As of October 31, 2020, we had cash, cash equivalents and we have generated cash from operations annually since fiscal year 2009.marketable debt securities of approximately $423.6 million. We believe that our anticipated cash generated from operations and our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities, and implement and enhance our information technology platforms. As we expand our operations, we may require more working capital. If our available cash balances are insufficient to satisfy our future liquidity requirements, we may seek to sell equity or convertible debt securities or borrow funds commercially. The sale of equity and convertible debt securities may result in dilution to our shareholders, and those securities may have rights senior to those of our ordinary shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all.
Our short- term and long-term capital requirements will depend on many factors, including the following:
our ability to generate cash from operations;
• | our ability to generate cash from operations; |
our ability to control our costs;
• | our ability to control our costs; |
the emergence of competing or complementary technologies or products;
• | the expansion of our research and development of new technologies and products to address new markets and applications; |
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities; and
• | the magnitude and duration of COVID-19 impact; |
• | the emergence of competing or complementary technologies or products; |
our acquisition of complementary businesses, products and technologies.
• | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities; and |
• | our acquisition of complementary businesses, products and technologies. |
Contractual Obligations, Commitments and Contingencies
Noncancelable Internal-Use Software Licenses
29
During the nine months ended October 31, 2017, we entered into certain noncancelable software license agreements and committed to pay an aggregate amount of $13.7 million through January 2020. As of October 31, 2017, the future minimum payments, including imputed interest expense, under these noncancelable software license agreements were approximately $11.1 million, of which $10.6 million had been recorded as liabilities in the condensed consolidated balance sheet. These software licenses will be used for our research and development activities.
Manufacturing Purchase Obligations
As of October 31, 2017,2020, we had purchase obligations with our independent contract manufacturers of $25.7$37.1 million.
Except as described above with respect to the noncancelable internal-use software licenses and manufacturing purchase obligations, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.2020. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations, Commitments and Contingencies” in our Annual Report on Form 10-K for the fiscal year ended January 31, 20172020 for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As of October 31, 2017,2020, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of Notes to our unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Critical Accounting Policies and Significant Management Estimates
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the 20172020 fiscal year filed with the SEC on March 30, 2017, 27, 2020, except with respectfor the recently adopted accounting guidance on measurement of credit losses on financial instruments as discussed in Notes 1 and 2 of Notes to noncancelable internal-use software license. Condensed Consolidated Financial Statements.
Noncancelable Internal-Use Software License
We account for a noncancelable on premise internal-use software license as the acquisition of an intangible asset and the incurrence of a liability to the extent that all or a portion of the software licensing fees are not paid on or before the license acquisition date. The intangible asset and related liability are recorded at net present value and interest expense is recorded over the payment term.
32
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As of October 31, 20172020 and January 31, 2017,2020, we had cash, cash equivalents and marketable debt securities and restricted cash totaling $414.0$423.6 million and $405.4$404.7 million, respectively. Our cash and restricted cash consist of depositsis deposited in standard bankchecking accounts and certificates of deposit.with reputable financial institutions. The cash equivalents and marketable debt securities consist primarily of investments in money market funds, asset-backed securities, commercial paper, U.S. government securities, and debt securities.securities of corporations. Our cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes.
Interest Rate Fluctuation Risk
The primary objectives of our investment activities are to preserve principal,capital, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may causeaffect the principal amountinterest income on our cash, cash equivalents and marketable debt securities, and the market value of the investment to fluctuate.those securities. To minimize this risk, we maintain our portfolio of short-term investments in a variety of debt securities with high liquidity.liquidity and low credit risk. We do not enter into investments for trading or speculative purposes. A 10% change in interest rates will not have a material impact on our future interest income or investment fair value. The liquidity risk and the risk associated with fluctuating interest rates isare limited to our investment portfolio.
30
Foreign Currency Risk
To date, all of our product sales and inventory purchases have been denominated in U.S. dollars. We therefore have not had any foreign currency risk associated with these two activities. The functional currency of all of our entities is the U.S. dollar. Our operations outside of the United States incur operating expenses and hold assets and liabilities denominated in foreign currencies, principally the New Taiwan Dollar and the Chinese Yuan Renminbi. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly the exchange rates between the Chinese Yuan Renminbi andwith respect to a strengthening of the U.S. dollar and between the New Taiwan Dollar and the U.S. dollar. Given that the operating expenses that we incur in currencies other than U.S. dollars have not been a significant percentage of our total revenue, we believe that the exposure to foreign currency fluctuation risk from operating expenses is not material at this time. As we grow our operations, our exposure to foreign currency risk could become more significant. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures” (as defined in Rules 13a- 15(e) and 15d- 15(e)) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2017,2020, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the Company’s fiscal quarter ended October 31, 20172020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
33
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.
We are not engaged in any material legal proceedings at this time.
31
ITEM 1A. Risk Factors
Certain factors may have a material adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our ordinary shares could decline, and you could lose part or all of your investment.
Summary of Risk Factors
Our business and our industry is subject to numerous risks and uncertainties, including those described in the following Risk Factors. These risks include, but are not limited to, the following:
• | The COVID-19 pandemic could adversely affect our business in a material way. |
• | If our customers do not design our solutions into their product offerings, or if our customers’ product offerings are not commercially successful, our business would suffer. |
• | If we fail to penetrate new markets, our revenue and financial condition could be harmed. |
• | Our ability to sell our products to several China customers has been restricted. In addition, we are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets, including China. |
• | Global economic and political conditions, including possible trade tariffs and trade restrictions, may have an impact on our business and financial condition in ways that we currently cannot predict. Our primary inventory warehouse is located in Hong Kong and may be affected by recent political, social and economic conditions in Hong Kong. |
• | Our target markets may not grow or develop as we currently expect and are subject to market risks, any of which could harm our business, revenue and operating results. |
• | If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed. |
• | Achieving design wins is subject to lengthy competitive selection processes that require us to incur significant costs. Even if we begin a product design, a customer may decide to cancel or change its product plans, resulting in no revenue from such expenditures. |
• | Our customers may cancel their orders, change production quantities or delay production. If we fail to accurately forecast demand for our solutions, revenue shortfalls and/or excess, obsolete or insufficient inventory could result. |
• | We depend on a limited number of customers and end customers for a significant portion of our revenue. If we fail to retain or expand our customer relationships, our revenue could decline. |
34
• | We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets. |
• | We do not have long-term supply contracts with our third-party manufacturing vendors, and they may not allocate sufficient capacity to us at reasonable prices to meet future demands for our solutions. |
• | We expect competition to increase in the future, which could have an adverse effect on our revenue and market share. |
• | Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline. |
• | While we intend to continue to invest in research and development, we may be unable to make the substantial investments that are required to remain competitive in our business. |
• | The average selling prices of video and image processing solutions in our target markets have historically decreased over time and will likely do so in the future, which could harm our revenue and gross margins. |
• | If we do not generate revenue growth, we may not be able to execute our business plan and our operating results could suffer. |
• | We are subject to the cyclical nature of the semiconductor industry. We may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses. |
• | A substantial portion of our revenue is processed through a single distributor and the loss of this distributor, or our inability to collect from them, may cause disruptions in our shipments, which may adversely affect our operations and financial condition. |
• | We are subject to risks associated with our distributors' product inventories. |
• | Deterioration of the financial conditions of our customers could adversely affect our operating results. |
• | We rely on highly skilled personnel and, if we are unable to hire, retain or motivate key personnel, we may not be able to grow effectively. Similarly, the loss of any of our key personnel could seriously harm our business. |
• | The complexity of our solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software which could reduce the market adoption of our new solutions, damage our reputation with current or prospective customers and adversely affect our operating costs. |
• | Camera manufacturers incorporate components supplied by multiple third parties, and a supply shortage or delay in delivery of these components could delay orders for our solutions by our customers. |
• | We outsource our wafer fabrication, assembly and testing operations to third parties, and if these parties fail to produce and deliver our products according to requested demands in specification, quantity, cost and time, our reputation, customer relationships and operating results could suffer. |
• | We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs. |
• | Third parties’ assertions of infringement of their intellectual property rights could result in our having to incur significant costs and cause our operating results to suffer. Any potential dispute involving our patents or other intellectual property could affect our customers, which could trigger our indemnification obligations to them and result in substantial expense to us. |
• | We are subject to warranty and product liability claims and to product recalls which could adversely affect our business. |
• | Some of our operations and a significant portion of our customers and our subcontractors are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability. |
35
• | Unfavorable tax law changes, an unfavorable governmental review of our tax returns, changes in our geographical earnings mix or imposition of withholding taxes on repatriated earnings could adversely affect our effective tax rate and our operating results. |
• | We are subject to numerous regulatory compliance requirements, which are costly to comply with, and our failure to comply with these requirements could harm our business and operating results. |
Risks Related to Our Business and Our Industry
The COVID-19 pandemic could adversely affect our business in a material way.
The global COVID-19 pandemic has significantly affected the populations of the United States, Italy, China and many other countries. The outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, shelter in place orders and restrictions on travel, manufacturing and the movement of employees in many regions of the world, as well as responsive measures from businesses. We have had to impose remote or work from home conditions in many of our offices, including the United States, Italy, Japan and South Korea. If remote or work-from-home conditions in any of our offices continue for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. The majority of our SoCs are manufactured in South Korea and assembled and tested by third parties in Taiwan. In addition, certain of our logistics and shipping operations are in Taiwan and Hong Kong. If any of our third-party manufacturing, assembly and testing partners or our logistics and shipping operations are unable to operate efficiently or at all due to responsive measures to COVID-19, we may experience delays in our supply chain and be unable to meet our customers’ expectations and requirements. While we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, we are experiencing longer manufacturing times due to shortages of materials used to assemble our products caused in part by COVID-19 that, if such conditions persist or worsen, could impact our ability to meet our customers’ demand for our solutions and negatively impact our revenue. Similarly, our customers and potential customers may also experience delays in the development of their products, reduced sales activity, decreased ability to support their customers, closures of their manufacturing facilities or inability to obtain other components, as a result of measures implemented to control the spread of COVID-19. Such impacts were experienced in the automotive market, and to a lesser degree in the home security and monitoring camera market, in the first and second quarters of 2020 and could occur again. COVID-19 has negatively impacted the overall global economy and, as a result, may negatively impact demand for our customers’ products and, in turn, impact demand for our solutions. If COVID-19 continues to progress in ways that further disrupt the manufacturing, shipment and buying patterns of our products or the products of our customers, or further deteriorates the global economy, it may materially negatively impact our operating results for the fourth quarter of fiscal year 2021 and subsequent periods, including revenue, gross margins, operating margins, cash flows and other operating results and our overall business.
If our customers do not design our solutions into their product offerings, or if our customers’ product offerings are not commercially successful, our business would suffer.
We sell our video and image processing system-on-a-chip, or SoC, solutions to original equipment manufacturers, or OEMs, who include our SoCs in their products, and to original design manufacturers, or ODMs, who include our SoCs in the products that they supply to OEMs. We generally refer to ODMs as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our video and image processing SoCs are generally incorporated into our customers’ products at the design stage, which is referred to as a design win. As a result, we rely on OEMs to design our solutions into the products that they design and sell. Without these design wins, our business would be significantly harmed. We often incur significant expenditures developing a new SoC solution without any assurance that anany OEM will select our solution for design into its own product. Once an OEM designs a competitor’s device into its product, it becomes significantly more difficult for us to sell our SoC solutions to that OEM because changing suppliers involves significant cost, time, effort and risk for the OEM. We anticipate that it will take longer and require more resources and greater expenditures to achieve design wins, and likely take longer to generate revenue from such design wins in the new markets we are targeting, such as the OEM automotive and robotics markets, than our legacy camera markets. In addition, trade tensions between the United States and China and potential new export restrictions, as discussed in subsequent risk factors, may make it more difficult to secure future design wins with China customers.
Even if an OEM designs one of our SoC solutions into its product, we cannot be assured that the OEM’s product will be commercially successful over time or at all. For example, in the past we have secured design wins for camera products that were never commercially released by our customer or did not sell in volumes initially forecast by the customer, as a result of factors beyond our control. Similarly, higher than normal customer inventory levels at GoPro, Inc., or GoPro, significantly impacted our revenue in the fiscal quarter ended January 31, 2016 and in the first half of fiscal years 2017 and 2018. Higher than normal customer inventory levels can occur in the future. If other products or other product categories incorporating our SoC solutions are not commercially successful or experience rapid decline, our revenue and business will suffer.
Similarly, even if an OEM designs one of our SoC solutions into its product, we are not assured that we will receive or continue to receive new design wins from that OEM.OEM, which could negatively impact our business.
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If we fail to penetrate new markets, our revenue and financial condition could be harmed.
Years ago, a substantial portion of our revenue was generated from sales of our SoCs to OEMs and ODMs of HD video cameras, including IP security cameras, wearable cameras and drones. Our revenue from several of these markets, however, has experienced significant declines. As a result, we believe that our future revenue growth, if any, will significantly depend on our ability to expand within the camera markets with our new artificial intelligence, or AI, computer vision SoC solutions, particularly in emerging markets such as the OEM automotive, robotics and industrial markets, as well as the existing professional IP security and home security and monitoring camera markets. Each of these markets presents distinct and substantial risks and, in many cases, requires us to develop new functionality or software to address the particular requirements of that market. We anticipate that as we continue to move into new markets, such as the OEM automotive, robotics and industrial markets, we will likely face competition from larger competitors with greater resources and more history in these markets. If any of these markets do not develop as we currently anticipate, or if the development of such markets is delayed or impacted by factors outside of our control, such as the COVID-19 pandemic, or if we are unable to penetrate them successfully with our solutions, our revenue could decline, and our financial condition would be negatively impacted. Some of these markets are primarily served by only a few large, multinational OEMs with substantial negotiating power relative to us and, in some instances, with internal solutions that are competitive to our products. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of our time and resources and we cannot assure you that we will secure design wins from these or other companies or that we will achieve meaningful revenue from the sales of our solutions into these markets. If we fail to penetrate these or other new markets we are targeting, our financial condition would likely suffer. Moreover, if we are successful in achieving design wins in these new markets, it will likely take longer to generate revenue from such design wins than in our current markets.
Our ability to sell our products to several China customers has been restricted.
On October 9, 2019, our security camera customers Hangzhou Hikvision Digital Technology Co., Ltd, or Hikvision, and Zhejiang Dahua Technology Co., Ltd., or Dahua, were added to the Entity List of the Bureau of Industry and Security, or BIS, of the U.S. Department of Commerce, or Commerce, which imposes limitations on the supply of certain U.S. items to the listed entities. While the addition of Hikvision and Dahua to the Entity List negatively impacts our ability to ship items subject to BIS regulations, including US-produced SoC solutions, to these entities, we have determined that that we are able to ship some foreign-produced SoC products to the listed entities in compliance with applicable law. Notwithstanding our ability to continue to supply some SoC products to the listed entities, these customers may seek to obtain similar or substitute products from our competitors that are not subject to these limitations, or to develop similar or substitute products themselves. We also cannot be certain what additional actions the U.S. government may take with respect to Hikvision and Dahua, or our other China customers, including changes to the Entity List restrictions, export regulations, tariffs or other trade restrictions, or whether the Chinese government may take any actions in response to U.S. government action that may adversely affect our ability to do business with our China customers. Even in the absence of new restrictions, tariffs or trade actions imposed by the U.S. or Chinese government, our China customers may take actions to reduce dependence on the supply of components subject to U.S. trade regulations, including our SoC solutions, which could have a material adverse effect on our operating results. We are unable to predict the duration of the restrictions imposed by the U.S. government in October 2019 or of any additional governmental actions, any of which could have a long-term adverse effect on our business, operating results and financial condition.
Global economic and political conditions, including possible trade tariffs and trade restrictions, may have an impact on our business and financial condition in ways that we currently cannot predict.
Beyond the BIS actions relating to Hikvision and Dahua, general trade tensions between the United States and China have been escalating, which has, in our view, created and will continue to create an uncertain business environment. For example, GoPro, our largest OEM customer in fiscal year 2017,BIS has used a competing solution inadded over 150 entities related to Huawei Technologies Co., Ltd. to the Entity List and created new controls on foreign-produced items when one of its recently introduced mainstream cameras, which will havethese entities is a significantparty to the transaction. If additional tariffs or trade restrictions are imposed on our SoC solutions or the products of our customers, or trade restrictions are imposed on our ability to conduct business with certain customers, there could be a negative impact on our revenueoperations and financial performance. For example, H.R. 5515 - John S. McCain National Defense Authorization Act for Fiscal Year 2019 negatively impacts Hikvision and Dahua’s ability to sell products into the U.S. security camera market and could decrease their demand for our solutions. Similarly, changes in export classification requirements, such as those proposed by U.S. Congress, could impact our ability to supply our solutions to certain companies or in certain countries. Even in the current fiscal yearabsence of new restrictions, tariffs or changes in export classifications, it is possible that foreign customers could take actions to reduce dependence on the supply of components, including our solutions, that could be subject to new export classifications or trade restrictions. There are also risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and beyond. In fiscal year 2017,provide incentives to government-backed local customers to buy from local suppliers. The materialization of these risks could have a material adverse effect on our business and financial condition.
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We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the revenuesimport or export of certain products, technologies and software. We must export our products in compliance with U.S. export controls, including the Commerce’s Export Administration Regulations. We may not always be successful in obtaining necessary export licenses, and our failure to obtain required import or export approval for direct shipmentsour products or limitations on our ability to GoPro accounted for approximately 19%export or sell our products imposed by these laws may harm both our international and domestic sales and adversely affect our revenue. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.
Compliance with export and import regulations have not had a significant impact on our business to date, but changes in our products or changes in export, import and economic sanctions laws and regulations may delay our introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our total revenue. We estimated thatproducts to or from certain countries altogether. Any change in export or import regulations or legislation, shift or change in enforcement, or change in the revenues for shipments to GoPro’s various ODMs represented an additional approximately 5%countries, persons or technologies targeted by these regulations, could result in decreased use of our total revenueproducts by, or in fiscal year 2017. our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected.
We anticipate that revenuedo not have long-term supply contracts with our third-party manufacturing vendors, and they may not allocate sufficient capacity to us at reasonable prices to meet future demands for our solutions.
The semiconductor industry is subject to intense competitive pricing pressure from GoPro will represent a significantly smaller percentagecustomers and competitors. Accordingly, any increase in the cost of our total revenue in the current fiscal yearsolutions, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and beyond.
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operating profit. We depend on a limited number of customers and end customers for a significant portioncurrently do not have long-term supply contracts with most of our revenue. Ifprimary third-party vendors, and we fail to retain or expandnegotiate pricing with our customer relationships, our revenue could decline.
We derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. We anticipate that this customer concentration will continue for the foreseeable future. In fiscal years 2017, 2016 and 2015, sales directly and through our logistics providers to our five largest ODM and OEM customers collectively accounted for approximately 56%, 56% and 64% of our total revenue, respectively. In fiscal years 2017, 2016 and 2015, sales to our ten largest ODM and OEM customers collectively accounted for approximately 68%, 69% and 74% of our total revenue, respectively. For the nine months ended October 31, 2017, sales directly and through our logistics providers to our five largest ODM and OEM customers accounted for approximately 50% of our total revenue, and sales to our ten largest ODM and OEM customers accounted for approximately 63% of our total revenue. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers and end-customers. In the future, these customers may decide not to purchase our SoC solutions at all, may purchase fewer solutions than they did in the past or may alter their purchasing patterns. As substantially all of our sales to date have been mademain vendors on a purchase order-by-purchase order basis, these customersbasis. Therefore, they are not obligated to perform services or supply product to us for any specific period, in any specific quantities, or at any specific price, except as may cancel, change be provided in a particular purchase order. The ability of our foundry vendors to provide us with a product, which is solely sourced at each foundry, is limited by their available capacity, existing obligations and technological capabilities. Foundry capacity may not be available when we need it or at reasonable prices. None of our third-party foundry or assembly and test vendors have provided contractual assurances to us that adequate capacity will be available to us to meet our anticipated future demand for our solutions. Moreover, availability of foundry capacity at our primary foundry vendor has tightened recently, which could limit the volume of products we can produce and/or delay product purchase commitments with little or no notice to usproduction of new products, both of which would negatively impact our business and without penalty and may make our revenue volatile from period to period. For example, GoPro, our largest OEM customer in fiscal year 2017, has used a competing solution in one of its recently introduced mainstream cameras, which will have a significant negative impact on our revenue in the current fiscal year and beyond.operations. Similarly, our customer DJIassembly vendors have recently introducedexperienced shortages of certain substrates necessary for the production of our solutions due in part to COVID-19, which has negatively impacted the production time of our devices. If these conditions continue for a UAV incorporating a competing solution that we expect will negatively impact DJI’ssubstantial period or worsen, our ability to meet our anticipated demand for our solutions could be impacted which, in future periods. The lossturn, could negatively impact our operations and financial results.
Our foundry and assembly and test vendors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice. In particular, other companies that are larger and better financed than we are or that have long-term agreements with our foundry or assembly and test vendors may cause our foundry or assembly and test vendors to reallocate capacity to them, decreasing the capacity available to us. Converting or transferring manufacturing from a significant customer,primary location or substantial reduction in purchases bysupplier to a significant customer,backup provider could happen again at any timebe expensive and without notice, and such loss would likely harmtake at least two or more quarters. There are only a few foundries, including Samsung and Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, that are currently available for certain advanced process technologies that we utilize or may utilize, such as 10 or 5 nanometer, or nm. Accordingly, as we continue to develop solutions in advanced process nodes, we will be increasingly dependent upon such foundries. The unavailability of one or both of these foundries could significantly impact our ability to produce our new products or delay production, which would negatively impact our business.
If, in the future, we enter into arrangements with suppliers that include additional fees to expedite delivery, nonrefundable deposits or loans in exchange for capacity commitments or commitments to purchase specified quantities over extended periods, such arrangements may be costly, reduce our financial conditionflexibility and resultsbe on terms unfavorable to us, if we are able to secure such arrangements at all. To date, we have not entered into any such arrangements with our suppliers. If we need additional foundry or assembly and test subcontractors because of operations. Moreover, because several ofincreased demand or the inability to obtain timely and adequate deliveries from our largest OEM customers have a dominant position in their markets, a loss of a significant customercurrent vendors, we may not be easily replacedable to do so cost-effectively, if at all.
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Our primary inventory warehouse is located in Hong Kong and may be affected by recent political, social and economic conditions in Hong Kong.
We operate a warehouse facility in Hong Kong through saleswhich the substantial majority of our finished SoCs are shipped to other customers in that market.
In addition, our relationships with some customers may deter other potential customers who compete with these customers from buying our solutions. To attract new customers or retain existinglogistic partners. BIS has imposed additional restrictions on exports and reexports of U.S.-controlled items to Hong Kong by removing preferential treatment that Hong Kong used to receive and imposing more stringent licensing requirements similar to those applicable to China. Hong Kong has recently experienced, and continues to experience, significant political unrest and social strife, including protests that resulted in the closing of the Hong Kong international airport on August 12, 2019 for two days. Recently, in response to national security legislation adopted by the Chinese government, the U.S. Secretary of State certified to the U.S. Congress on May 27, 2020 that Hong Kong no longer maintains a sufficient degree of autonomy from China to warrant special treatment by the U.S. While such certification, and subsequent statements made by the U.S. President relating to Hong Kong’s status, do not have an immediate impact on Hong Kong for trade or other purposes, these recent actions represent an escalation in political and trade tensions involving the U.S, China and Hong Kong. It is possible that the U.S. government may take future measures to impose stricter export controls or duties on shipments made to Hong Kong, add additional parties to the Entity List, or reduce preferential treatment currently accorded to Hong Kong, which could harm our business, increase the cost of conducting our operations in Hong Kong or result in retaliatory actions against U.S. interests. While we have not been materially impacted by these problems to date, continued deterioration in political, social or economic conditions in Hong Kong or future unforeseen problems, including health pandemics, could affect deliveries of our SoCs to our customers or logistic partners, possibly resulting in business interruptions, substantially delayed or lost sales, loss of inventory, or increased expenses that cannot be passed on to customers, any of which could ultimately have a material adverse effect on our business and financial results. In such an eventuality, we could be forced to relocate our warehouse operations, either temporarily or permanently, to another potentially costlier location or find alternative potentially costlier methods of shipping our finished SoCs to customers and logistic partners. While we are taking measures to attempt to maintain the continuity of our product delivery operations notwithstanding the impact on the use of our Hong Kong facility of the continued or deteriorating conditions in Hong Kong or other future unforeseen problems there, we cannot ensure that these measures will be successful in eliminating disruptions in our business.
Our target markets may not grow or develop as we currently expect and are subject to market risks, any of which could harm our business, revenue and operating results.
We are focusing our development resources on addressing computer vision applications, primarily in the professional IP security and home security and monitoring camera markets, the OEM automotive and robotics markets, with our computer vision solutions. The application of computer vision functionality in these markets is relatively new, and we may havebe unable to offerpredict the timing or development of these customers favorable pricesmarkets with accuracy. For example, a slower than expected adoption rate for computer vision technology in the IP security camera market could slow the demand for our new solutions. Similarly, a slower than anticipated adoption of electronic mirrors, advanced driving assistance systems and autonomous driving functionality could reduce demand for our new computer vision solutions. The COVID-19 pandemic has had a negative impact on the global economy and may decrease or delay development of new markets and new programs in emerging markets. If our solutions. Inkey target markets, such as automotive cameras, IP security cameras and cameras for robotic applications, do not grow, grow slower, or do not develop in ways that event,we currently expect, demand for our average selling pricesvideo and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer orimage processing SoCs may not materialize as expected, and our inability to attract new customersbusiness and operating results could seriously impact our revenue and harm our results of operations.suffer.
Our customers may cancel their orders, change production quantities or delay production. If we fail to accurately forecast demand for our solutions, revenue shortfalls or excess, obsolete or insufficient inventory could result.
Our customers typically do not provide us with firm, long-term purchase commitments. Substantially allA substantial majority of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay their product purchase commitments with little or no notice to us and often without penalty to them. Because production lead times often exceed the amount of time required by our customers to fill their orders, we often must build SoCs in advance of receiving orders from customers, relying on an imperfect demand forecast to project volumes and product mix.
Our SoCs are incorporated into products manufactured by or for our end customers, and as a result, demand for our solutions is influenced by the demand for our customers’ products. Our ability to accurately forecast demand can be adversely affected by a number of factors, including inaccurate forecasting by our customers, miscalculations by our customers of their inventory requirements, changes in market conditions including reductions in market activity due to the COVID-19 pandemic, adverse changes in our product order mix and fluctuating demand for our customers’ products. For example, higher than normal customer inventory levels at GoPro significantly impacted our revenue in the fiscal quarter ended January 31, 2016 and in the first half of fiscal years 2017 and 2018. Higher than normal customer inventory levels can occur in the future. Even after an order is received, our customers may cancel these orders, request a decrease in production quantities or request a delay in the delivery of our solutions. Any such cancellation, decrease or delay subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory that we may be unable to sell to other customers.
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Alternatively, if we are unable to project customer requirements accurately, we may not build enough SoCs, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers significantly increase their requested production quantities with little or no advance notice. If we do not fulfill customer demands in a timely manner, our customers may cancel their orders and we may be subject to customer claims for cost of replacement. In addition, the rapid pace of innovation in our industry could render portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial condition. In addition, any significant future cancellations or deferrals of product orders could harm our margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.
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Our target markets may not growWe depend on a limited number of customers and end customers for a significant portion of our revenue. If we fail to retain or develop as we currently expect and are subject to market risks, any of which could harmexpand our business, revenue and operating results.
To date,customer relationships, our revenue has been attributablecould decline.
We derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to demandwhom we ship directly. We anticipate that this customer concentration will continue for the foreseeable future. In fiscal year 2020, the customers representing 10% or more of our videorevenue were Wintech Microelectronics Co., Ltd., or Wintech, the Company’s distributor, and image processing SoCsChicony Electronics Co., Ltd., or Chicony, a direct ODM customer, which accounted for approximately 60% and 18% of total revenue, respectively. For the nine months ended October 31, 2020, the customers representing 10% or more of revenue were Wintech and Chicony which accounted for approximately 60% and 17% of total revenue, respectively. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers and end customers. In the future, these customers may decide not to purchase our SoC solutions at all, may purchase fewer solutions than they did in the camera and infrastructure markets and the growth of these overall markets. We initially focused on the infrastructure market, and then leveraged our knowledge and experience to design solutions for the camera market. We now derivepast or may alter their purchasing patterns. As substantially all of our sales to date have been made on a purchase order basis, these customers may cancel, change or delay product purchase commitments with little or no notice to us and often without penalty and may make our revenue volatile from period to period, which has happened in the past. The loss of a significant customer, or substantial reduction in purchases by a significant customer, could happen again at any time and without notice, and such loss would likely harm our financial condition and results of operations. Moreover, because several of our largest OEM customers have a dominant position in their markets, a loss of a significant customer may not be easily replaced.
If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions that provide increasingly higher levels of performance and functionality and that meet the cost expectations of our customers. Our existing or future solutions could be rendered obsolete by the introduction of new products by our competitors; convergence of other markets with or into the camera market; the market adoption of products based on new or alternative technologies; the emergence of new industry standards for video compression; or the requirement of additional functionality included in video processors, such as artificial intelligence functionality. In addition, the markets for our solutions are characterized by frequent introduction of next-generation and new products, short product life cycles, increasing demand for added functionality and significant price competition. As we develop and introduce new solutions, we face the risk that customers may not value or be willing to bear the cost of incorporating these newer solutions into their products, particularly if they believe their customers are satisfied with current solutions. Regardless of the improved features or superior performance of the newer solutions, customers may be unwilling to adopt our new solutions due to design or pricing constraints. If we or our customers are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations would suffer.
Our failure to anticipate or timely develop new or enhanced solutions in response to technological shifts could result in decreased revenue and our competitors achieving design wins that we sought. In particular, we may experience difficulties with product design, development of new software, manufacturing, marketing or qualification that could delay or prevent our development, introduction or marketing of new or enhanced solutions. In addition, for some markets, such as the automotive OEM market, we expect that we will need to establish relationships with third-party suppliers or software providers in order to effectively market our solutions to end-customers. Failure to establish these relationships could harm our ability to achieve design wins. Delays in product development could impair our relationships with our customers and negatively impact sales of our solutions under development. If we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share, and our operating results are increasingly affected by trends in the camera market. These trends include demand for higher resolution, increasing functionality, longer battery life, greater storage, connectivity requirements and computer vision technology, while accommodating more sophisticated standards for video compression. We maywill be unable to predict the timing or development of these markets with accuracy. For example, the proliferation of smartphones having the ability to capture high-quality video and still images has significantly impacted the camera market in a relatively short period of time and continues to impact this market. In the Internet Protocol, or IP, security camera market, a slower than expected adoption rate for digital technology in place of analog solutions could slow the demand for our solutions. If our target markets, such as wearable cameras, automotive cameras, IP security cameras, and unmanned aerial vehicle cameras, also referred to as UAVs, drones or flying cameras, do not grow or develop in ways that we currently expect, demand for our video and image processing SoCs may not materialize as expected and our business and operating results could suffer.adversely affected.
Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.
Our revenue and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future. In particular, our business tends to be seasonal with higher revenue in our third quarter as our customers typically increase their production to meet holiday shopping season or year-end demand for their products. We also may experience seasonally lower demand in our first quarter in the Asia-based portion of the IP security camera market as a result of industry seasonality and the impact of ODM and OEM factory closures associated with the Chinese New Year holiday. As a result, you should not rely on period-to-period comparisons of our operating results as an indication of our future performance. In future periods, our revenue and results of operations may be below the expectations of analysts and investors, which could cause the market price of our ordinary shares to decline.
Factors that may affect our operating results include:
fluctuations in demand, sales cycles, product mix, and prices for our products;
the forecasting, scheduling, rescheduling or cancellation of orders by our customers;
shifts in consumer preferences and any resultant change in demand for video and image capture devices into which our solutions are incorporated;
changes in the competitive dynamics of our markets, including new entrants or pricing pressures;
delays in our customers’ ability to manufacture and ship products that incorporate our solutions caused by internal and external factors beyond our control;
our ability to successfully define, design and release new solutions in a timely manner that meet our customers’ needs;
changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability;
timely availability of adequate manufacturing capacity from our manufacturing subcontractors;
the timing of product announcements by our competitors or by us;
incurrence of research and development and related new products expenditures;
write-downs of inventory for excess quantities and technological obsolescence;
future accounting pronouncements and changes in accounting policies;
volatility in our share price, which may lead to higher stock-based compensation expense;
volatility in our effective tax rate;
general socioeconomic and political conditions in the countries where we operate or where our products are sold or used; and
costs associated with litigation, especially related to intellectual property.
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Moreover, the semiconductor industry has historically been cyclical in nature, reflecting overall economic conditions as well as budgeting and buying patterns of consumers. We expect these cyclical conditions to continue. As a result, our quarterly operating results are difficult to predict, even in the near term. Our expense levels are relatively fixed in the short term and are based, in part, on our expectations of future revenue. If revenue levels are below our expectations, we may experience material impacts on our business, including declines in margins and profitability, or incur losses. For example, in the first half of fiscal year 2017, our revenue declined 21% compared to the same period of the prior fiscal year, resulting in a substantial decline in profit and cash flows from operating activities. We may experience similar declines in the future, which would harm our operating results.
Achieving design wins is subject to lengthy competitive selection processes that require us to incur significant costs. Even if we begin a product design, a customer may decide to cancel or change its product plans, resulting in no revenue from such expenditures.
We are focused on selling our video and image processing solutions to ODMs and OEMs for incorporation into their products at the design stage. These efforts to achieve design wins typically are lengthy, especially in emerging markets we intend to address such as the OEM automotive market, and in any case can require us to both incur design and development costs and dedicate scarce engineering resources in pursuit of a single customer opportunity. We may not prevail in the competitive selection process, and even when we do achieve a design win, we may never generate any revenue despite incurring development expenditures. For example, in the past we had achieved certain design wins and projected substantial future revenue as a result of such design wins. Subsequently, based on factors outside of our control, the applicable end customers abruptly cancelled the projects, with no notice to us, resulting in a loss of projected revenue. In addition, even if an OEM designs one of our SoC solutions into one of its products, we cannot be assured that we will secure new design wins from that OEM for future products. For example, GoPro, our largest OEM customer in fiscal year 2017, has used a competing solution in one of its recently introduced mainstream cameras, which will have a significant negative impact on our revenue in the current fiscal year and beyond.
These risks are exacerbated by the fact that some of our end customers’ products, particularly in the camera market, likely will have short life cycles. Further, even after securing a design win, we have experienced and may again experience delays in generating revenue from our solutions as a result of the lengthy product development cycle typically required, if we generate any revenue at all as a result of any such design win.
Our customers generally take a considerable amount of time to evaluate our solutions. The typical time from early engagement by our sales force to actual product introduction runs from nine to 12 months, for the camera market, and 12 to 24 months for the infrastructure market, though it maywill likely take significantly longer in new markets we intend to address such as the OEM automotive market.and robotics markets. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could harm our financial results, as we may have incurred significant expense and generated no revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our SoC solutions and harm our business, financial condition and results of operations. If we were unable to generate revenue after incurring substantial expenses to develop any of our solutions, our business would suffer.
We expect competition to increase in the future, which could have an adverse effect on our revenue and market share.
The global semiconductor market in general, and the video and image processing markets in particular, are highly competitive. We compete in different target markets to various degrees on the basis of a number of competitive factors, including our solutions’ performance, features, energy efficiency, size, ease with which our solution may be integrated into our customers’ products, customer support, reliability and price, as well as on the basis of our reputation. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets and as existing competitors improve or expand their product offerings. We also expect that the trend among large OEMs to seek to develop their own semiconductor solutions will continue and expand, particularly in camera markets experiencing consolidation, such as the IP security market. In addition, in our newer markets, such as the OEM automotive and robotics markets, we will face competition from larger competitors with longer histories in these markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could harm our business, revenue and operating results.
Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. In the IP security camera market, our primary competitors include AMLogic Inc., Fullhan Microelectronics Co., Ltd., Geo Semiconductor, Inc., HiSilicon Technologies Co., Ltd., or HiSilicon, which is owned by Huawei Technologies Co., Ingenic Semiconductor Co., Ltd., Intel Corporation, or Intel, Movidius Ltd., a subsidiary of Intel, Novatek Microelectronics Corp., or Novatek, OmniVision Technologies, Inc., or OmniVision, Qualcomm Incorporated, or Qualcomm, Realtek Semiconductor Corp., SigmaStar Technology Corp., or SigmaStar, Socionext Inc., or Socionext, an entity created from the merger of the system LSI businesses of Fujitsu Ltd. and Panasonic Corporation, or Panasonic, and Texas Instruments Incorporated, or Texas Instruments, as well as vertically integrated divisions of IP Security camera device OEMs, including Axis Communications AB, Hanwha Techwin, and Sony Corporation, or Sony. In the automotive camera market, we currently compete against Allwinner Technology Co., Ltd., Alpha Imaging Technology Corp., Core Logic, Inc., Mobileye, an Intel company, Novatek, NXP Semiconductors N.V., OmniVision, Qualcomm, Renesas Electronics Corporation, SigmaStar, Sunplus Technology Co. Ltd., Texas Instruments and Xilinx Inc. In the wearable sports camera market, our primary competitors are vertically integrated divisions of camera device OEMs, including Sony, Panasonic, HiSilicon and Socionext. Our primary competitors in the drone camera market include HiSilicon, Intel, NVIDIA Corporation and Qualcomm.
Certain of our customers and suppliers also have divisions that produce products competitive with ours and other customers may seek to vertically integrate competitive solutions in the future. In addition, certain third-party developers of technology competitive to our solutions have licensed their technology, including image signal processing and computer vision IP, which potentially enables a greater number of competitors to offer competitive solutions.
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Our ability to compete successfully depends on elements both within and outside of our control. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, are more established than we are and have significantly better brand recognition and broader product offerings than us, which may enable them to develop and enable new technology into product solutions better or faster than us and to better withstand adverse economic or market conditions in the future. Our ability to compete will depend on a number of factors, including:
• | our ability to anticipate market and technology trends and successfully develop solutions that meet market needs; |
• | our success in identifying and penetrating new markets, applications and customers; |
• | our ability to understand the price points and performance metrics of competing products in the marketplace; |
• | our solutions’ performance and cost-effectiveness relative to that of competing products; |
• | our ability to gain access to leading design tools and product specifications at the same time as our competitors; |
• | our ability to develop and maintain relationships with key OEMs and ODMs; |
• | our products’ effective implementation of video processing standards; |
• | our ability to protect our intellectual property; |
• | our ability to expand international operations in a timely and cost-efficient manner; |
• | our ability to deliver products in volume on a timely basis at competitive prices; |
• | our ability to support our customers’ incorporation of our solutions into their products; and |
• | our ability to recruit design and application engineers with expertise in image video and image processing technologies and sales and marketing personnel. |
Our competitors may also establish cooperative relationships among themselves or with third parties or acquire companies that provide similar products to ours. As a result, new competitors or alliances may emerge that could acquire significant market share. Any of these factors, alone or in combination with others, could harm our business and result in a loss of market share and an increase in pricing pressure.
Fluctuations in our operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.
Our revenue and operating results have fluctuated significantly from period to period in the past and are likely to do so in the future. In particular, our business has tended to be seasonal with higher revenue in our third quarter as our customers typically increase their production to meet holiday shopping season or year-end demand for their products. We also may experience seasonally lower demand in our first quarter as a result of industry seasonality and the impact of ODM and OEM factory closures associated with the Chinese New Year holiday. As a result, you should not rely on period-to-period comparisons of our operating results as an indication of our future performance. In future periods, our revenue and results of operations may be below the expectations of analysts and investors, which could cause the market price of our ordinary shares to decline.
Factors that may affect our operating results include:
• | fluctuations in demand, sales cycles, product mix, and prices for our products; |
• | the forecasting, scheduling, rescheduling or cancellation of orders by our customers; |
• | shifts in consumer or manufacturer preferences and any resultant change in demand for video and image capture devices into which our solutions are incorporated; |
• | changes in the competitive dynamics of our markets, including new entrants or pricing pressures; |
• | delays in our customers’ ability to manufacture and ship products that incorporate our solutions caused by internal and external factors beyond our control; |
• | our ability to successfully define, design and release new solutions in a timely manner that meet our customers’ needs; |
• | changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability; |
• | timely availability of adequate manufacturing capacity from our manufacturing subcontractors; |
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• | the timing of product announcements by our competitors or by us; |
• | incurrence of research and development and related new products expenditures; |
• | write-downs of inventory for excess quantities and technological obsolescence; |
• | impairment of investment or other asset values; |
• | future accounting pronouncements and changes in accounting policies; |
• | volatility in our share price, which may lead to higher stock-based compensation expense; |
• | volatility in our effective tax rate; |
• | general socioeconomic and political conditions in the countries where we operate or where our products are sold or used, including the COVID-19 pandemic, U.S.-China relations and the conditions in Hong Kong; and |
• | costs associated with litigation, especially related to intellectual property. |
Moreover, the semiconductor industry has historically been cyclical in nature, reflecting overall economic conditions as well as budgeting and buying patterns of consumers. We expect these cyclical conditions to continue. As a result, our quarterly operating results are difficult to predict, even in the near term. Our expense levels are relatively fixed in the short term and are based, in part, on our expectations of future revenue. If revenue levels are below our expectations, we may experience material adverse impacts on our business, including declines in margins and profitability, or incur losses. For example, our revenue declined 23% in fiscal year 2019 compared to fiscal year 2018, and we incurred our first annual net losses since our initial public offering, or IPO, in 2012. For the twelve months ended January 31, 2020, our revenue increased by 0.4% compared to the same period in fiscal year 2019, and we incurred a net loss of $44.8 million. For the nine months ended October 31, 2020, our revenue declined 6.2% compared to the same period in fiscal year 2020, and we incurred a net loss of $47.3 million. We may experience similar fluctuations or declines in revenue or net losses in the future, which would harm our operating results.
While we intend to continue to invest in research and development, we may be unable to make the substantial investments that are required to remain competitive in our business.
The semiconductor industry requires substantial investment in research and development in order to bring to market new and enhanced solutions. Our research and development expense was $129.7 million, $128.1 million and $115.5 million in fiscal years 2020, 2019 and 2018, respectively. For the nine months ended October 31, 2020, our research and development expense was $103.6 million. We expect to increase our research and development expenditures as compared to prior periods as part of our strategy of focusing on the development of innovative video and image processing solutions with increased functionality, such as computer vision capabilities, and as we target new markets, such as the automotive OEM and robotics markets. We are unable to predict whether we will have sufficient resources to achieve the level of investment in research and development required to remain competitive. For example, development in the latest process nodes, such as 10nm and 5nm, can cost significantly more than required to develop in larger process nodes, such as 28nm or 14nm. This added cost could prevent us from being able to maintain a technology advantage over larger competitors that have significantly more resources to invest in research and development. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful or generate any revenue.
The average selling prices of video and image processing solutions in our target markets have historically decreased over time and will likely do so in the future, which could harm our revenue and gross margins.
Average selling prices of semiconductor products in the markets we serve have historically decreased over time, and we expect such declines to continue to occur for our solutions over time. Our gross margins and financial results will suffer if we are unable to offset reductions in our average selling prices by reducing our costs, developing new or enhanced SoC solutions on a timely basis with higher selling prices or gross margins, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our gross margins. In the past, we have reduced the prices of our SoC solutions in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. Recently, we have experienced competitive pricing pressures at the low ends of the automotive aftermarket camera market and China-based IP security camera market. We expect that we will have to address pricing pressures again in the future, particularly in markets experiencing consolidation, which could require us to reduce the prices of our SoC solutions and harm our operating results.
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We expect competitionIf we do not generate revenue growth, we may not be able to increase in the future, whichexecute our business plan and our operating results could have an adverse effectsuffer.
You should not rely on our revenue, gross margins or operating results for any prior quarterly or annual periods as an indication of our future operating performance. In years past, we experienced significant growth in a short period of time. Our revenue increased from $21.5 million in fiscal year 2008 to $316.4 million in fiscal year 2016. Recently, however, we have not sustained this growth rate. Our revenue decreased to $295.4 million in fiscal year 2018 and market share.to $227.8 million in fiscal year 2019, resulting in the first annual net losses since our IPO in 2012. In fiscal year 2020, our revenue increased by 0.4% compared to fiscal year 2019. For the nine months ended October 31, 2020, our revenue declined 6.2% compared to the same period in fiscal year 2020, and we incurred a net loss of $47.3 million. We continue to invest in the development of new technology and solutions and expect our research and development expenditures to increase compared to prior periods. Accordingly, if we are unable to generate or maintain adequate revenue growth, our financial results could suffer and our stock price could decline.
The global semiconductor marketIf we are unable to manage any future growth, we may not be able to execute our business plan and our operating results could suffer.
Our business has grown rapidly in general,the past. Our future operating results depend to a large extent on our ability to successfully manage any expansion and growth, including the challenges of managing a company with an executive management team in the United States and the videomajority of its employees in Asia. We are increasing our investment in research and image processing markets in particular, are highly competitive. We compete in different target marketsdevelopment and other functions to various degrees on the basis of a number of competitive factors, includinggrow our solutions’ performance, features, functionality, energy efficiency, size, ease with which our solution may be integrated into our customers’ products, customer support, reliabilitybusiness and price, as well as on the basis of our reputation. We expect competition to increase and intensify as more and larger semiconductor companies enter our markets and as large OEMs grow their internal resources and potentially develop their own semiconductor solutions. In addition, as we move intoaddress new markets, such as the OEM automotive and robotics markets,markets. To manage our growth successfully and handle the responsibilities of being a public company, we will face competition from larger competitorsbelieve we must effectively, among other things:
• | recruit, hire, train and manage additional qualified engineers for our research and development activities, particularly in our offices in Asia and especially for the positions of semiconductor design and systems, applications engineering and computer vision development; |
• | add additional sales and business development personnel; |
• | add additional finance and accounting personnel; |
• | maintain and improve our administrative, financial and operational systems, procedures and controls; and |
• | enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use. |
• | be able to secure sufficient manufacturing capacity. |
We are likely to incur the costs associated with longer histories in these markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could harm our business, revenue and operating results.
Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. In the wearable sports camera market, our primary competitors are vertically integrated divisions of camera device OEMs, including Sony Corporation, or Sony, and Panasonic Corporation, as well as HiSilicon Technologies Co., Ltd., or HiSilicon, and Socionext Inc., or Socionext, an entity created from the mergerincreased investments earlier than some of the system LSI businesses of Fujitsu Ltd.anticipated benefits, and Panasonic Corporation. In the IP security camera market, our primary competitors include Fullhan Microelectronics Co., Ltd., Geo Semiconductor, Inc., Grain Media, Inc., which was recently acquired by Novatek Microelectronics Corp., or Novatek, HiSilicon, Intel Corporation, or Intel, Movidius Ltd., which was recently acquired by Intel, OmniVision Technologies, Inc., or OmniVision, Qualcomm Incorporated, or Qualcomm, Realtek Semiconductor Corp., Socionext, and Texas Instruments Incorporated, or Texas Instruments, as well as vertically integrated divisions of IP Security camera device OEMs, including Axis Communications AB and Sony. In the automotive camera market, we compete against Allwinner Technology Co., Ltd., Alpha Imaging Technology Corp., Core Logic, Inc., Novatek Microelectronics Corp., NXP Semiconductors N.V., OmniVision, Qualcomm, Renesas Electronics Corporation, Sunplus Technology Co. Ltd., and Texas Instruments. Our primary competitors in the UAV camera market include HiSilicon, Intel, NVIDIA Corporation and Qualcomm. Our primary competitors in the infrastructure market include GigPeak, Inc., Intel, and Texas Instruments. Certain of our customers and suppliers also have divisions that produce products competitive with ours. We expect competition in our current markets to increase in the future as existing competitors improve or expand their product offerings and as potential new competitors enterreturn on these markets.
Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. Many of our competitors are substantially larger, have greater financial, technical, marketing, distribution, customer support and other resources, areinvestments, if any, may be lower, may develop more establishedslowly than we are and have significantly better brand recognition and broader product offerings whichexpect or may enable them to develop and enable new technology into product solutions better or faster than us and to better withstand adverse economic or market conditions in the future. Our ability to compete will depend on a number of factors, including:
our ability to anticipate market and technology trends and successfully develop solutions that meet market needs;
our success in identifying and penetrating new markets, applications and customers;
our ability to understand the price points and performance metrics of competing products in the marketplace;
our solutions’ performance and cost-effectiveness relative to that of competing products;
our ability to gain access to leading design tools and product specifications at the same time as our competitors;
our ability to develop and maintain relationships with key OEMs and ODMs;
our products’ effective implementation of video processing standards;
our ability to protect our intellectual property;
our ability to expand international operations in a timely and cost-efficient manner;
our ability to deliver products in volume on a timely basis at competitive prices;
our ability to support our customers’ incorporation of our solutions into their products; and
our ability to recruit design and application engineers with expertise in image video and image processing technologies and sales and marketing personnel.
Our competitors may also establish cooperative relationships among themselves or with third parties or acquire companies that provide similar products to ours. As a result, new competitors or alliances may emerge that could acquire significant market share. Any of these factors, alone or in combination with others, could harm our business and result in a loss of market share and an increase in pricing pressure.
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We are dependent on sales of a limited number of video and image processing solutions, and a decline in market adoption of these solutions could harm our business.
From inception through October 31, 2017, our revenue has been generated primarily from the sale of a limited number of high-definition, or HD, video and image processing SoC solutions in the camera and infrastructure markets. Moreover, we currently derive substantially all of our revenue from the sale of our SoCs for use in the camera market and we expect to do so for the next several years. As a result, continued market adoption of our SoC solutions in the camera market is critical to our future success. If demand for our SoC solutions were to decline, or demand for products incorporating our solutions declines, does not continue to grow or does not grow as expected, our revenue would decline and our business would be harmed.
If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions that provide increasingly higher levels of performance and functionality and that meet the cost expectations of our customers. Our existing or future solutions could be rendered obsolete by the introduction of new products by our competitors; convergence of other markets, such as smartphones, with or into the camera market; the market adoption of products based on new or alternative technologies; the emergence of new industry standards for video compression; or the requirement of additional functionality included in our products, such as analytics or computer vision functionality.materialize. In addition, the markets for our solutions are characterized by frequent introduction of next-generation and new products, short product life cycles, increasing demand for added functionality and significant price competition. If we or our customers are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations would suffer.
Our failure to anticipate or timely develop new or enhanced solutions in response to technological shifts could result in decreased revenue and our competitors achieving design wins that we sought. In particular, we may experience difficulties with product design, development of new software, manufacturing, marketing or qualification that could delay or prevent our development, introduction or marketing of new or enhanced solutions. In addition, delays in development could impair our relationships with our customers and negatively impact sales of our solutions under development. Moreover, it is possible that our customers may develop their own product or adopt a competitor’s solution for products that they currently buy from us. If we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.
If we fail to penetrate new markets, our revenue and financial condition could be harmed.
In the past several years, substantially all of our revenue was generated from sales of our products to OEMs and ODMs of HD video cameras. Our future revenue growth, if any, will depend in part on our ability to expand within the camera markets with our video and image processing SoC solutions, particularly in the professional IP security and home security and monitoring camera markets, the automotive camera market, and the UAV market, as well as emerging markets such as the virtual reality camera, automotive OEM and robotics markets. Each of these markets presents distinct and substantial risks and, in many cases, requires us to develop new functionality or software to address the particular requirements of that market. For example, we expect that computer vision functionality will become an increasingly important requirement in many of our current and future markets, including automotive, IP security, UAV, wearable camera and robotics markets. As a result, we believe that our ability to develop advanced computer vision technology, and gain customer acceptance of our technology, will be critical to our future success. Development of products to address newemerging markets, such as the OEM automotive market,and robotics markets, could negatively impact our ability to develop new products for our current markets, which may harm our financial condition, particularly in the near term. In addition, we anticipate that as we move into new markets, such as the OEM automotive market, we will face competition from significantly larger competitors with longer histories in these markets.
If any of these markets do not develop as we currently anticipate or if we are unable to penetrate them successfully with our solutions, our revenue could decline.
Some of these markets are primarily served by only a few large, multinational OEMs with substantial negotiating power relative to us and, in some instances, with internal solutions that are competitive to our products. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of our time and resources. We cannot assure you that we will secure design wins from these or other companies or that we will achieve meaningful revenue from the sales of our solutions into these markets.
If we fail to penetrate these or other new markets we are targeting, our revenue likely will decrease over time and our financial condition would likely suffer.
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We do not have long-term supply contracts with our third-party manufacturing vendors, and they may not allocate sufficient capacity to us at reasonable prices to meet future demands for our solutions.
The semiconductor industry is subject to intense competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our solutions, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. We currently do not have long-term supply contracts with most of our primary third-party vendors, and we negotiate pricing with our main vendors on a purchase order-by-purchase order basis. Therefore, they are not obligated to perform services or supply product to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. Availability of foundry capacity has in the recent past been limited due to strong demand. The ability of our foundry vendors to provide us with a product, which is sole sourced at each foundry, is limited by their available capacity, existing obligations and technological capabilities. Foundry capacity may not be available when we need it or at reasonable prices. None of our third-party foundry or assembly and test vendors has provided contractual assurances to us that adequate capacity will be available to us to meet our anticipated future demand for our solutions. Our foundry and assembly and test vendors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice. In particular, other companies that are larger and better financed than we are or that have long-term agreements with our foundry or assembly and test vendors may cause our foundry or assembly and test vendors to reallocate capacity to them, decreasing the capacity available to us. Converting or transferring manufacturing from a primary location or supplier to a backup foundry vendor could be expensive and would likely take at least two or more quarters. There are only a few foundries, including Samsung and Taiwan Semiconductor Manufacturing Co., Ltd., or TSMC, that are currently available for certain advanced process technologies that we utilize or may utilize, such as 14 or 10 nanometer. As we continue to develop solutions in advanced process nodes we will be increasingly dependent upon such foundries.
If, in the future, we enter into arrangements with suppliers that include additional fees to expedite delivery, nonrefundable deposits or loans in exchange for capacity commitments or commitments to purchase specified quantities over extended periods, such arrangements may be costly, reduce our financial flexibility and be on terms unfavorable to us, if we are able to secure such arrangements at all. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties could harm our financial results. To date, we have not entered into any such arrangements with our suppliers. If we need additional foundry or assembly and test subcontractors because of increased demand or the inability to obtain timely and adequate deliveries from our current vendors,manage growth effectively, we may not be able to do so cost-effectively,take advantage of market opportunities or develop new solutions, and we may fail to satisfy customer product or support requirements, maintain product quality, execute our business plan or respond to competitive pressures.
We may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses.
The rapidly evolving nature of the markets in which we sell our solutions, combined with substantial uncertainty concerning how these markets may develop, the considerable amount of time our customers generally take to evaluate our solutions, and other factors beyond our control, limits our ability to accurately forecast quarterly or annual revenue. We continue to expand our staffing and increase our expenditures in anticipation of future revenue growth. If our revenue does not increase as anticipated, we could incur significant losses due to our higher expense levels if we are not able to decrease our expenses in a timely manner to offset any shortfall in future revenue. Continued or persistent losses may require us to obtain additional capital that may not be available at all.reasonable terms.
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A substantial portion of our revenue is processed through a single logistics providerdistributor and the loss of this logistics providerdistributor may cause disruptions in our shipments, which may adversely affect our operations and financial condition.
We sell a significant percentage of our solutions through a single logistics provider,distributor, Wintech Microelectronics Co., Ltd., or Wintech, which serves as our non-exclusive sales representative in Asia, other than Japan. Approximately 60%, 67%58% and 57%59% of our revenue was derived from sales through Wintech for the fiscal years ended January 31, 2017, 20162020, 2019 and 2015, respectively. Approximately 51%2018, respectively, and 62%approximately 60% of our revenue was derived from sales through Wintech for the three and nine months ended October 31, 2017, respectively.2020. We anticipate that a significant portion of our revenue will continue to be derived from sales through Wintech in the foreseeable future. In November 2019, WPG Holdings Co., or WPG, a Taiwan distributor, announced an unsolicited bid to acquire up to 30% of Wintech. While the outcome of WPG’s bid is unknown at this time, an acquisition of Wintech by WPG could have an adverse impact on our relationship with Wintech. Our current agreement with Wintech is effective until September 2018,2022, unless it is terminated earlier by either party for any or no reason with 9060 days written notice or by failure of the breaching party to cure a material breach within 30 days following written notice of such material breach by the non-breaching party. Our agreement with Wintech will automatically renew for additional successive 12-month terms unless at least 60 days before the end of the then-current term either party provides written notice to the other party that it elects not to renew the agreement. Termination of the relationship with Wintech, either by us or by Wintech, could result in a temporary or permanent loss of revenue. We may not be successful in finding suitable alternative logistics providersdistributors on satisfactory terms, or at all, and this could adversely affect our ability to effectively sell our solutions in certain geographical locations or to certain end customers. Additionally, if we terminate our relationship with Wintech, we may be obligated to repurchase unsold product, which could be difficult or impossible to sell to other end customers. Furthermore, Wintech, or any successor or other logistics providersdistributors we do business with, may face issues obtaining credit, which could impair their ability to make timely payments to us.
We are subject to risks associated with our distributors' product inventories.
We sell many of our products to customers through distributors who maintain their own inventory of our products for sale to ODMs and end customers. We allow limited price adjustments on sales to distributors. Price adjustments may be effected by way of credits for future product or by cash payments to the distributor, either in arrears or in advance, using estimates based on historical transactions. Upon the adoption of ASC 606 on February 1, 2018, we recognize revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition) based on the amount of consideration expected to be received. To the extent that the actual consideration received is materially different from estimated variable consideration recognized, we may be required to adjust revenue in subsequent periods.
If our distributors are unable to sell an adequate amount of their inventory of our products in a given quarter to ODMs and end customers, or if they decide to decrease their inventories for any reason, such as adverse global economic conditions or a downturn in technology spending, our sales to these distributors and our revenues may decline. We also face the risk that our distributors may purchase, or for other reasons accumulate, inventory levels of our products in any particular quarter in excess of future anticipated sales to end customers. If such sales do not occur in the time frame anticipated by these distributors for any reason, these distributors may substantially decrease the amount of product they order from us in subsequent periods until their inventory levels realign with end-customer demand, which would harm our business and could adversely affect our revenues in such subsequent periods. Our reserve estimates associated with products stocked by our distributors are based largely on reports that our distributors provide to us on a weekly or monthly basis. To date, we believe this resale and channel inventory data have been generally accurate. To the extent that these data are inaccurate or not received in a timely manner, we may not be able to make reserve estimates for future periods accurately or at all.
Deterioration of the financial conditions of our customers could adversely affect our operating results.
Deterioration of the financial condition of our logistics providersdistributors or customers could adversely impact our collection of accounts receivable. For the nine months ended October 31, 2020, the customers representing 10% or more of revenue and accounts receivable were Wintech and Chicony, which accounted for approximately 60.4% and 17.4% of total revenue, respectively. As of October 31, 2020, accounts receivable with Wintech and Chicony were approximately $11.2 million and $9.9 million, respectively. We regularly review the collectibilitycollectability and creditworthiness of our logistics providersdistributors and customers to determine an appropriate allowance for doubtful receivables. Based on our review of our logistics providersdistributors and customers, we currently have only immaterial reserves for uncollectible accounts. If our uncollectible accounts, however, were to exceed our current or future allowance for doubtful receivables, our operating results would be negatively impacted.
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The loss of any of our key personnel could seriously harm our business.
We believe our future success depends in large part upon the continuing services of the members of our senior management team and various engineering and other technical personnel. If we do not sustainone or more of our growth rate,senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to executereplace them easily or at all, our business planmay be disrupted, and our financial condition and results of operations may be materially and adversely affected. In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may experience material disruption of our operations and development plans and lose customers, know-how and key professionals and staff members, and we may incur increased operating results could suffer.expenses as the attention of other senior executives is diverted to recruit replacements for key personnel.
We have experienced significant growth in a short period of time. Our revenue increased from $21.5 million in fiscal year 2008 to $316.4 million in fiscal year 2016, but decreased to $310.3 million in fiscal year 2017. We may not achieve similar growth rates in future periods. For example, we currently anticipate that our revenue growth rate will be slightly down in fiscal year 2018 compared to the fiscal year 2017. You should not rely on our revenue growth, gross margins or operating results for any prior quarterly or annual periods as an indication of our future operating performance. We continue to invest in the development of new technologyhighly skilled personnel and, solutions and expect our research and development expenditures to increase compared to prior periods. Accordingly, if we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.
If we are unable to manage any future growth,hire, retain or motivate key personnel, we may not be able to executegrow effectively.
Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Our industry is characterized by high demand and intense competition for talent. The pool of qualified candidates is limited, particularly in Silicon Valley and parts of Asia for very-large-scale integration, or VLSI, and artificial intelligence and computer vision engineers, and certain of our competitors and potential competitors with greater resources have directly targeted our employees. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively, and to grow our business, plan and our operating results could suffer.
Our business has grown rapidly. Our future operating results depend to a large extentdepends on our ability to successfully manage any expansionattract new employees and growth, including the challenges of managing a company with headquarters in the United Statesto retain and the majority of its employees in Asia. We are increasingmotivate our investment in research and development and other functions to grow our business and address emerging markets, such as the OEM automotive market. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things:existing employees.
recruit, hire, train and manage additional qualified engineers for our research and development activities, particularly in our offices in Asia and especially for the positions of semiconductor design and systems and applications engineering and computer vision development;
add additional sales and business development personnel;
add additional finance and accounting personnel;
maintain and improve our administrative, financial and operational systems, procedures and controls; and
enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.
We are likelysubject to incur the costs associated with these increased investments earlier than somecyclical nature of the anticipated benefits, and the return on these investments, if any, may be lower, may develop more slowly than we expect or may not materialize. In addition, development of products to address emerging markets, such as the OEM automotive market, could negatively impact our ability to develop new products for our current markets, which may harm our financial condition, particularly in the near term.
If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions, and we may fail to satisfy customer product or support requirements, maintain product quality, execute our business plan or respond to competitive pressures.
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While we intend to continue to invest in research and development, we may be unable to make the substantial investments that are required to remain competitive in our business.semiconductor industry.
The semiconductor industry requires substantial investmentis highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles and wide fluctuations in researchproduct supply and developmentdemand. The industry experienced a significant downturn during the 2008-2009 global recession and the economic impact of the COVID-19 pandemic could lead to a similar downturn in orderfuture periods. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could harm our business and operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to bringthird-party foundry and assembly capacity. We are dependent on the availability of this capacity to market newmanufacture and enhancedassemble our SoC solutions. Our research and development expense was $101.2 million, $82.9 million and $58.0 million in fiscal years 2017, 2016 and 2015, respectively. Our research and development expense was $29.8 million and $83.9 million for the three and nine months ended October 31, 2017. We expect to increase our research and development expenditures as compared to prior periods as partNone of our strategy of focusing on the development of innovative and sustainable video and image processing solutions with increased functionality, such as analyticsthird-party foundry or computer vision capabilities. We are unableassembly contractors has provided assurances that adequate capacity will be available to predict whether we will have sufficient resources to maintain the level of investment in research and development required to remain competitive. For example, developmentus in the latest process nodes, such as 14 or 10 nm, can cost significantly more than required to develop in larger process nodes, such as 28 nm. This added cost could prevent us from being able to maintain a technology advantage over larger competitors that have significantly more resources to invest in research and development. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful or generate any revenue.
We may have difficulty accurately predicting our future revenue and appropriately budgeting our expenses.
The rapidly evolving nature of the markets in which we sell our solutions, combined with substantial uncertainty concerning how these markets may develop and other factors beyond our control, limits our ability to accurately forecast quarterly or annual revenue. In addition, because we record a significant portion of our revenue from sales when we have received notification from our logistics providers that they have sold our products, some of the revenue we record in a quarter may be derived from sales of products shipped to our logistics providers during previous quarters. This revenue recognition methodology limits our ability to forecast quarterly or annual revenue accurately. We are currently expanding our staffing and increasing our expenditures in anticipation of future revenue growth. If our revenue does not increase as anticipated, we could incur significant losses due to our higher expense levels if we are not able to decrease our expenses in a timely manner to offset any shortfall in future revenue.
We may experience difficulties demonstrating the value to customers of newer, higher priced and higher margin solutions if they believe existing solutions are adequate to meet end customer expectations.
As we develop and introduce new solutions, we face the risk that customers may not value or be willing to bear the cost of incorporating these newer solutions into their products, particularly if they believe their customers are satisfied with current solutions. Regardless of the improved features or superior performance of the newer solutions, customers may be unwilling to adopt our new solutions due to design or pricing constraints. Owing to the extensive time and resources that we invest in developing new solutions, if we are unable to sell customers new generations of our solutions, our revenue could decline and our business, financial condition, operating results and cash flows could be negatively affected.future.
The complexity of our solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software which could reduce the market adoption of our new solutions, damage our reputation with current or prospective customers and adversely affect our operating costs.
Highly complex SoC solutions such as ours frequently contain defects, errors and bugs when they are first introduced or as new versions are released. We have in the past and may in the future experience these defects, errors and bugs. If any of our solutions have reliability, quality or compatibility problems, we may not be able to successfully correct these problems in a timely manner or at all. In addition, if any of our proprietary features contain defects, errors or bugs when first introduced or as new versions of our solutions are released, we may be unable to timely correct these problems. Consequently, our reputation may be damaged and customers may be reluctant to buy our solutions, which could harm our ability to retain existing customers and attract new customers, and could adversely affect our financial results. In addition, these defects, errors or bugs could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new product, we may incur significant additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others.
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The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain qualified management, engineering, sales and marketing talent could impair our ability to grow our business.
We believe our future success depends in large part upon the continuing services of the members of our senior management team and various engineering and other technical personnel. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our business may be disrupted, and our financial condition and results of operations may be materially and adversely affected. In addition, if any member of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may experience material disruption of our operations and development plans and lose customers, know-how and key professionals and staff members, and we may incur increased operating expenses as the attention of other senior executives is diverted to recruit replacements for key personnel. Our industry is characterized by high demand and intense competition for talent, and the pool of qualified candidates is very limited. While we plan to continue to recruit software and system engineers with expertise in video processing technologies, primarily in Taiwan and China, we may not be successful in attracting, retaining and motivating sufficient numbers of technical and engineering personnel to support our anticipated growth. The competition for qualified engineering personnel in our industry, and particularly in Asia, is very intense. If we are unable to hire, train and retain qualified engineering personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing engineering personnel, our ability to maintain or grow our revenue will be adversely affected.
Camera manufacturers incorporate components supplied by multiple third parties, and a supply shortage or delay in delivery of these components could delay orders for our solutions by our customers.
Our customers purchase components used in the manufacture of their cameras from various sources of supply, often involving several specialized components, including lenses, sensors, and memory chips. Any supply shortage or delay in delivery by third-party component suppliers, or a third-party supplier’s cessation or shut down of its business, may prevent or delay production of our customers’ products. In addition, replacement or substitute components may not be available on commercially reasonable terms, or at all. As a result of delays in delivery or supply shortages of third-party components, orders for our solutions may be delayed or canceled and our business may be harmed. For example, a disruption in the availability of image sensors from Sony Corporation as a result of the April 14, 2016 Kumamoto, Japan earthquake impacted our customers’ ability to build or launch cameras and, as a result, negatively impacted the timing and scope of demand for our SoCs in the second and third quarters of fiscal year 2017. Similarly, errorsour ability to generate design wins in some markets, such as the automotive OEM market, requires us to collaborate with third-party software suppliers in order to offer a complete solution to customers. Our inability to successfully collaborate with such third-party suppliers, or such suppliers’ inability to develop and deliver software, could harm our ability to achieve design wins and harm our business. Errors or defects within a camera system or in the manner in which the various components interact could prevent or delay production of our customers’ products, which could harm our business.
We outsource our wafer fabrication, assembly and testing operations to third parties, and if these parties fail to produce and deliver our products according to requested demands in specification, quantity, cost and time, our reputation, customer relationships and operating results could suffer.
We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly and testing. Currently, the majority of our SoCs are supplied by Samsung in facilities located in Austin, Texas and South Korea, from whom we have the option to purchase both fully assembled and tested products as well as tested die in wafer form for assembly. Samsung subcontracts the assembly and initial testing of the assembled chips it supplies to us to Signetics Corporation and STATS ChipPAC Ltd. In the case of purchases of tested die from Samsung, we contract the assembly to Advanced Semiconductor Engineering, Inc., or ASE. We also have products supplied by Global UniChip Corporation, or GUC, in Taiwan, from whom we purchase fully assembled and tested products. The wafers used by GUC in the assembly of our products are manufactured by TSMC in Taiwan. The assembly is done by GUC subcontracted assembly suppliers ASE, and Powertech Technology Inc, or PTI. Final testing of all of our products is handled by King Yuan Electronics Co., Ltd. or Sigurd Corporation under the supervision of our engineers. We depend on these third parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. Availability of capacity within our supply chain has tightened recently, which could limit the volume of products we can produce and negatively impact our business and operations. We do not have any long-term supply agreements with any of our manufacturing suppliers. If one or more of these vendors terminates its relationship with us, or if we encounter any problems with our manufacturing supply chain, including available capacity constraints, our ability to ship our solutions to our customers on time and in the quantity required would be adversely affected, which in turn could cause an unanticipated decline in our sales and damage our customer relationships.
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If our foundry vendors do not achieve satisfactory yields or quality, our reputation and customer relationships could be harmed.
The fabrication of our video and image processing SoC solutions is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. Our foundry vendors, from time to time, experience manufacturing defects and reduced manufacturing yields, including in the fabrication of our SoCs. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendors could result in lower than anticipated manufacturing yields or unacceptable performance of our SoCs. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundry vendors, or defects, integration issues or other performance problems in our solutions, could cause us significant customer relations and business reputation problems, harm our financial results and give rise to financial or other damages to our customers. Our customers might consequently seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.
Each of our SoC solutions is manufactured at a single location. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a new location or supplier. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and could take two or more quarters. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that could be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause production delays, result in a decline in our sales and damage our customer relationships.
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We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased costs.
We aim to use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we periodically evaluate the benefits of migrating our solutions to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. These ongoing efforts require us from time to time to modify the manufacturing processes for our products and to redesign some products, which in turn may result in delays in product deliveries. We may face difficulties, delays and increased expense as we transition our products to new processes, such as 14nm or 10nmthe 5nm process nodes,node, and potentially to new foundries. We depend on Samsung and TSMC, as the principal foundries for our products, to transition to new processes successfully. We cannot assure you that Samsung or TSMC will be able to effectively manage such transitions or that we will be able to maintain our relationship with Samsung or TSMC or develop relationships with new foundries. Moreover, as we utilize more advanced process nodes beyond 14nm,10nm, we are increasingly dependent upon Samsung and TSMC, who are two of the fewonly foundries currently available for certain advanced process technologies. If we or our foundry vendors experience significant delays in transitioning to smaller geometries or fail to efficiently implement transitions, we could experience reduced manufacturing yields, delays in product deliveries and increased costs, all of which could harm our relationships with our customers and our operating results. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as more end-customer and third-party intellectual property, into our solutions. We may not be able to achieve higher levels of design integration or deliver new integrated solutions on a timely basis.
We rely on third-party vendors to supply software development tools to us for the development of our new products, and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our solutions may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins, either of which could result in a loss of market share or negatively impact our operating results.
Because of the importance of software development tools to the development and enhancement of our solutions, our relationships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc., Mentor Graphics Corporation and Synopsys, Inc., are critical to us. We have invested significant resources to develop relationships with these industry leaders. We believe that utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the video compression market, and develop solutions that utilize leading-edge technology on a rapid basis. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
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Our failure to adequately protect our intellectual property rights could impair our ability to compete effectively or defend ourselves from litigation, which could harm our business, financial condition and results of operations.
Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other contractual protections, to protect our proprietary technologies and know-how, all of which offer only limited protection. The steps we have taken to protect our intellectual property rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies, which would harm our business. For example, our patents and patent applications could be opposed, contested, circumvented, designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. For example, the legal environment relating to intellectual property protection in Chinacertain emerging market countries where we operate is relatively weak,weaker, often making it difficult to create and enforce such rights. We may not be able to effectively protect our intellectual property rights in Chinathese emerging markets or elsewhere. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our solutions at competitive prices may be adversely affected and our business, financial condition, operating results and cash flows could be materially and adversely affected.
The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and evolving. We cannot assure you that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated or circumvented by others.
Unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which could harm our business. Monitoring unauthorized use of our intellectual property is difficult and costly. Although we are not aware of any unauthorized use of our intellectual property in the past, it is possible that unauthorized use of our intellectual property may have occurred or may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations.
We may in the future need to initiate infringement claims or litigation in order to try to protect our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and management, which could harm our business, whether or not such litigation results in a determination favorable to us. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.
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Third parties’ assertions of infringement of their intellectual property rights could result in our having to incur significant costs and cause our operating results to suffer.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. Certain of our customers have received, and we expect, particularly to the extent we gain greater market visibility, that in the future we may receive, communications from others alleging our infringement of their patents, trade secrets or other intellectual property rights. In addition, certain of our end customers have been the subject of lawsuits alleging infringement of intellectual property rights by products incorporating our solutions, including the assertion that the alleged infringement may be attributable, at least in part, to our technology. Lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights, though this has not occurred to date. Any potential intellectual property litigation also could force us to do one or more of the following:
stop selling products or using technology that contain the allegedly infringing intellectual property;
• | stop selling products or using technology that contain the allegedly infringing intellectual property; |
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;
• | incur significant legal expenses; |
incur significant legal expenses;
• | pay substantial damages to the party whose intellectual property rights we may be found to be infringing; |
pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
• | redesign those products that contain the allegedly infringing intellectual property; |
redesign those products that contain the allegedly infringing intellectual property; or
• | attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all; or |
attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
• | lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others. |
Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete.
Any potential dispute involving our patents or other intellectual property could affect our customers, which could trigger our indemnification obligations to them and result in substantial expense to us.
In any potential dispute involving our patents or other intellectual property, our customers could also become the target of litigation. Certain of our customers have received notices from third parties claiming to have patent rights in certain technology and inviting our customers to license this technology, and certain of our end customers have been the subject of lawsuits alleging infringement of patents by products incorporating our solutions, including the assertion that the alleged infringement may be attributable, at least in part, to our technology. Because we generally indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations under some of our license agreements, which could result in substantial expense to us. Although we have not incurred significant indemnity expenses related to intellectual property claims to date, we anticipate that we will receive requests for indemnity in the future pursuant to our license agreements with our customers. In addition, other customers or end customers with whom we do not have formal agreements requiring us to indemnify them may ask us to indemnify them if a claim is made as a condition to awarding future design wins to us. Because some of our ODMs and OEMs are larger than we are and have greater resources than we do, they may be more likely to be the target of an infringement claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit. Although we have not yet been subject to such claims, ifIf any such claims were to succeed, we might be forced to pay damages on behalf of our ODMs or OEMs that could increase our expenses, disrupt our ability to sell our solutions and reduce our revenue. In addition to the time and expense required for us to supply support or indemnification to our customers, any such litigation could severely disrupt or shut down the business of our customers, which in turn could hurt our relations with our customers and cause the sale of our products to decrease.
We are subject to warranty and product liability claims and to product recalls.
44From time to time, we are subject to warranty claims that may require us to make significant expenditures to defend these claims or pay damage awards. In the future, we may also be subject to product liability claims resulting from failure of our solutions or if products we design, manufacture, or sell, cause personal injury or property damage, even where the cause is unrelated to product defects. These risks will likely increase as our products are introduced into new devices, markets, or applications, including autonomous and semi-autonomous automotive, drone and robotic applications. In the event of a warranty claim, we may also incur costs if we compensate the affected customer. We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that our insurance will be available or adequate to protect against all claims. We also may incur costs and expenses relating to a recall of one of our customers’ products containing one of our devices. The process of identifying a recalled product in consumer devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could harm our financial condition and results of operations, as well as harm our reputation and cause the market value of our ordinary shares to decline.
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A breach of our security systems may have a material adverse effect on our business.
Our security systems are designed to maintain the physical security of our facilities and information systems and protect our customers’, suppliers’ and employees’ confidential information. Accidental or willful security breaches or other unauthorized access by third parties to our facilities or our information systems or the existence of computer viruses in our data or software could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Security breaches, computer malware and computer hacking attacks have become more prevalent and sophisticated. Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our confidential information or that of third parties or create system disruptions. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our information systems and cause disruptions of our business. Data security breaches may also result from non-technical means, for example, actions by an employee. Any theft or misuse of this information could result in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have a material adverse effect on our business, financial condition, our reputation, and our relationships with our customers and partners. We also rely on a number of third-party “cloud-based” service providers of corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Any security breaches or other unauthorized access by third parties to the systems of our cloud-based service providers or the existence of computer viruses in their data or software could expose us to a risk of information loss and misappropriation of confidential information. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
We rely on third parties to provide services and technology necessary for the operation of our business. Any failure of one or more of our vendors, suppliers or licensors to provide such services or technology could harm our business.
We rely on third-party vendors to provide critical services, including, among other things, services related to accounting, human resources, information technology and network monitoring that we cannot or do not create or provide ourselves. We depend on these vendors to ensure that our corporate infrastructure will consistently meet our business requirements. The ability of these third-party vendors to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control. While we may be entitled to damages if our vendors fail to perform under their agreements with us, our agreements with these vendors limit the amount of damages we may receive. In addition, we do not know whether we will be able to collect on any award of damages or that these damages would be sufficient to cover the actual costs we would incur as a result of any vendor’s failure to perform under its agreement with us. Upon expiration or termination of any of our agreements with third-party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.
Additionally, we incorporate third-party technology into someWe are subject to governmental laws, regulations and other legal obligations related to privacy and data protection.
The legislative and regulatory framework for privacy and data protection issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. We collect personally identifiable information, or PII, and other data as part of our products,business processes and activities. This data is subject to a variety of U.S. and international laws and regulations, including oversight by various regulatory or other governmental bodies. Many foreign countries and governmental bodies, including the European Union and other relevant jurisdictions where we may do so in future products. The operationconduct business, have laws and regulations concerning the collection and use of our products could be impaired if errors occurPII and other data obtained from their residents or by businesses operating within their jurisdictions that are currently more restrictive than those in the third-party technology we use. It may beU.S. For example, effective May 2018, the European Union adopted the General Data Protection Regulation that imposed more difficultstringent data protection requirements and provided for usgreater penalties for noncompliance. Any inability, or perceived inability, to correct any errorsadequately address privacy and data protection concerns, even if unfounded, or to comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations, could result in a timely manner, if at all, because the developmentadditional cost and maintenance of the technology is not within our control. We cannot assure you that these third parties will continue to make their technology, or improvements to the technology, availableliability to us, or that they will continue to supportdamage our reputation and maintain their technology. Further, due to the limited number of vendors of some types of technology, it may be difficult to obtain new licenses or replace existing technology. Any impairment of the technology of or our relationship with these third parties could harmadversely affect our business.
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Failure to comply with the U.S. Foreign Corrupt Practices Act, or FCPA, and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.
We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit improper payments or offers of payment to foreign governments and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. Although we implemented an FCPA compliance program, we cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-corruption laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have a material and adverse effect on our reputation, business, financial condition, operating results and cash flows.
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We, our customers and third-party contractors are subject to increasingly complex environmental regulations and compliance with these regulations may delay or interrupt our operations and adversely affect our business.
We face increasing complexity in our procurement, design, and research and development operations as a result of requirements relating to the materials composition of our products, including the European Union’s, or EU’s, Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, directive, which restricts the content of lead and certain other hazardous substances in specified electronic products put on the market in the EU and similar Chinese legislation relating to marking of electronic products which became effective in March 2007. Failure to comply with these and similar laws and regulations could subject us to fines, penalties, civil or criminal sanctions, contract damage claims, and take-back of non-compliant products, which could harm our business, reputation and operating results. The passage of similar requirements in additional jurisdictions or the tightening of these standards in jurisdictions where our products are already subject to such requirements could cause us to incur significant expenditures to make our products compliant with new requirements, or could limit the markets into which we may sell our products.
Some of our operations, as well as the operations of our contract manufacturers and foundry vendors and other suppliers, are also regulated under various other federal, state, local, foreign and international environmental laws and requirements, including those governing, among other matters, the management, disposal, handling, use, labeling of, and exposure to hazardous substances, and the discharge of pollutants into the air and water. Liability under environmental laws can be joint and several and without regard to comparative fault. We cannot assure you that violations of these laws will not occur in the future, as a result of human error, accident, equipment failure or other causes. Environmental laws and regulations have increasingly become more stringent over time. We expect that our products and operations will be affected by new environmental requirements on an ongoing basis, which will likely result in additional costs, which could adversely affect our business.
Our failure to comply with present and future environmental, health and safety laws could cause us to incur substantial costs, result in civil or criminal fines and penalties and decreased revenue, which could adversely affect our operating results. Failure by our foundry vendors or other suppliers to comply with applicable environmental laws and requirements could cause disruptions and delays in our product shipments, which could adversely affect our relations with our ODMs and OEMs and adversely affect our business and results of operations.
New regulationsRegulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission, or the SEC, has adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of the Congo and adjoining countries. These requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. While these requirements continue to be subject to administrative uncertainty, we have incurred, and willmay continue to incur, additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
We are subject to warranty and product liability claims and to product recalls.
From time to time, we are subject to warranty claims that may require us to make significant expenditures to defend these claims or pay damage awards. In the future, we may also be subject to product liability claims resulting from failure of our solutions. In the event of a warranty claim, we may also incur costs if we compensate the affected customer. We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that our insurance will be available or adequate to protect against all claims. We also may incur costs and expenses relating to a recall of one of our customers’ products containing one of our devices. The process of identifying a recalled product in consumer devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could harm our financial condition and results of operations.
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Rapidly changing industry standards could make our video and image processing solutions obsolete, which would cause our operating results to suffer.
We design our video and image processing solutions to conform to video compression standards, including MPEG-2, H.264 Advanced Video Coding (AVC) and H.265 High Efficiency Video Coding (HEVC), set by industry standards setting bodies such as ITU-T Video Coding Experts Group and the ISO/IEC Moving Picture Experts Group. Generally, our solutions comprise only a part of a camera or broadcast infrastructure equipment device. All components of these devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or by consumers. If our customers or the suppliers that provide other device components adopt new or competing industry standards with which our solutions are not compatible, or if the industry groups fail to adopt standards with which our solutions are compatible, our existing solutions would become less desirable to our customers. As a result, our sales would suffer, and we could be required to make significant expenditures to develop new SoC solutions. For example, if the new H.265 video compression standard is not broadly adopted by our customers or potential customers, sales of our H.265 compliant solutions would suffer and we may be required to expend substantial resources to comply with an alternative video compression standard. In addition, existing standards may be challenged as infringing upon the intellectual property rights of other companies or may be superseded by new innovations or standards.
Products for communications applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards, including any new video compression standards. The emergence of new industry standards could render our solutions incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our solutions to ensure compliance with relevant standards. If our solutions are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins, which could harm our business.
We are subject As a result, our sales would suffer, and we could be required to the cyclical nature of the semiconductor industry.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry experienced amake significant downturn during the recent global recession. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could harm our business and operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for accessexpenditures to third-party foundry and assembly capacity. We are dependent on the availability of this capacitydevelop new SoC solutions to manufacture and assemble our SoC solutions. None of our third-party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the future.ensure compliance with relevant standards.
The use of open source software in our products, processes and technology may expose us to additional risks and compromise our proprietary intellectual property.
Our products, processes and technology sometimes utilize and incorporate software that is subject to an open source license. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses, such as the GNU General Public License, require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on terms unfavorable to us or at no cost. This can subject previously proprietary software to open source license terms.
While we monitor the use of open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product, processes or technology when we do not wish to do so, such use could inadvertently occur. Additionally, if a third-party software provider has incorporated certain types of open source software into software we license from such third-party for our products, processes or technology, we could, under certain circumstances, be required to disclose the source code to our products, processes or technology. This could harm our intellectual property position and our business, results of operations and financial condition.
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Some of our operations and a significant portion of our customers and our subcontractors are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.
We have research and development design centers and business development offices in China, Japan, Italy, South Korea and Taiwan, and we expect to continue to conduct business with companies that are located outside the United States, particularly in Asia. We purchase wafers from foreign foundries, have our solutions assembled and tested by subcontractors located in Asia, and supply our solutions to customers located outside of the United States. Even customers of ours that are based in the United States often use contract manufacturers based in Asia to manufacture their products, and these contract manufacturers typically purchase products directly from us. As a result of our international focus, we face numerous challenges and risks, including:
increased complexity and costs of managing international operations;
• | increased complexity and costs of managing international operations; |
longer and more difficult collection of receivables;
• | longer and more difficult collection of receivables; |
difficulties in enforcing contracts generally;
• | difficulties in enforcing contracts generally; |
regional economic instability;
• | regional economic instability; |
geopolitical instability and military conflicts;
• | geopolitical instability and military conflicts; |
limited protection of our intellectual property and other assets;
• | limited protection of our intellectual property and other assets; |
compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;
• | compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations; |
trade and foreign exchange restrictions and higher tariffs;
• | trade and foreign exchange restrictions and higher tariffs; |
travel restrictions;
• | travel restrictions; |
• | timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements; |
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timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;
• | foreign currency exchange fluctuations relating to our international operating activities; |
foreign currency exchange fluctuations relating to our international operating activities;
• | restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts; |
restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts;
• | transportation delays and other consequences of limited local infrastructure, and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers; |
transportation delays and other consequences of limited local infrastructure, and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;
• | heightened risk of terrorist acts; |
difficulties in staffing international operations;
• | local business and cultural factors that differ from standards and practices in the U.S.; |
heightened risk of terrorist acts;
• | differing employment practices and labor relations; |
local business and cultural factors that differ from our normal standards and practices;
• | regional health issues, pandemics, and natural disasters; and |
differing employment practices and labor relations;
regional health issues and natural disasters; and
work stoppages.
• | work stoppages. |
Our third-party contractors and their suppliers are concentrated in South Korea, Taiwan and Japan, a region subject to earthquakes and other natural disasters. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our products.
The majority of our products are manufactured by or receive components from third-party contractors located in South Korea, Taiwan and Japan. The risk of an earthquake or tsunami in South Korea, Taiwan, Japan and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines. For example, in December 2006 a major earthquake occurred in Taiwan and in March 2011 a major earthquake and tsunami occurred in Japan. Although we are not aware of any significant damage suffered by our third-party contractors as a result of those natural disasters, the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry vendor or assembly and test capacity. Most recently, aA disruption in the availability of image sensors from Sony Corporation as a result of the April 14, 2016 Kumamoto, Japan earthquake impacted our customers’ ability to build or launch cameras and, as a result, negatively impacted the timing and scope of demand for our SoCs in the second and third quarters of fiscal year 2017. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not be able to obtain alternate capacity on favorable terms, or at all.
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If our operations are interrupted, our business and reputation could suffer.
Our operations and those of our manufacturers are vulnerable to interruption caused by technical breakdowns, computer hardware and software malfunctions, software viruses, infrastructure failures, regional health issues and pandemics, fires, earthquakes, floods, power losses, telecommunications failures, terrorist attacks, wars, Internet failures and other events beyond our control. Any disruption in our services or operations could result in a reduction in revenue or a claim for substantial damages against us, regardless of whether we are responsible for that failure. The outbreak of COVID-19 has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel, manufacturing and the movement of employees in many regions of the world, and the imposition of remote or work from home conditions in many of our offices, including the United States and Italy. If the remote or work from home conditions continue for an extended period of time, or similar restrictions and measures are implemented in more of the locations where we have offices, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. We rely on our computer equipment, database storage facilities and other office equipment, which are located primarily in the seismically active San Francisco Bay Area and Taiwan. If we suffer a significant database or network facility outage, our business could experience disruption until we fully implement our back-up systems.
We are subject to regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002, which are costly to comply with, and our failure to comply with these requirements could harm our business and operating results.
We are subject to disclosure and compliance requirements associated with being a public company, including but not limited to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on, and our independent auditors attest to, the effectiveness of our internal control structure and procedures for financial reporting. Compliance with Section 404 requires a significant amount of time, expenses and diversion of internal resources. If we or our auditors discover a material weakness in our internal controls, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, if we fail to maintain effective controls over financial reporting, we could be subject to sanctions or investigations by The NASDAQ Stock Market, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our ordinary shares. Any inability to provide reliable financial reports or prevent fraud could harm our business. We may not be able to effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. We cannot assure you that in the future we will be able to continue to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our auditors will conclude that our internal controls are effective in future periods. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our ordinary shares.
53
Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.
We prepare our consolidated financial statements to conform to generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in those accounting rules including the new revenue recognition guidance and the associated adoption efforts, which are currently underway, could have a significant effect on our financial results, require significant resources, pose challenges in forecasting revenue and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements.
We are incorporated in the Cayman Islands and our operations are subject to income and transaction taxes in the United States, China, Hong Kong, Japan, Italy, South Korea, Taiwan and other jurisdictions in which we do business. Due to the complexity associated with the calculation of our tax provision, we have hired independent tax advisors to assist us. If we or our independent tax advisors fail to resolve or fully understand certain issues, there may be errors that could result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations or have a negative impact on the trading price of our ordinary shares.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
Our future effective tax rates could be adversely affected if our earnings are lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, tax effects of share-based compensation, or by changes in tax laws, regulations, accounting principles or interpretations thereof. For example, changes in tax laws, including the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or Tax Act, as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates and otherwise adversely affect our tax positions and/or our tax liabilities.
The Tax Act requires complex computations not previously provided in U.S. tax law. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. While we have completed our accounting for the effects of the Tax Act, additional regulatory guidance may still be issued by the applicable taxing authorities which could materially affect our tax obligations and effective tax rate.
In addition, our income tax returns are subject to continuous examination by the Internal Revenue Service, or IRS, and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We cannot assure you that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.
4954
Unfavorable tax law changes, an unfavorable governmental review of our tax returns, changes in our geographical earnings mix or imposition of withholding taxes on repatriated earnings could adversely affect our effective tax rate and our operating results.
Our operations are subject to certain taxes, such as income and transaction taxes, in the Cayman Islands, the United States, China, Hong Kong, Japan, Italy, South Korea, Taiwan and other jurisdictions in which we do business. A change in the tax laws in the jurisdictions in which we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, possibly with retroactive effect, could result in a material increase in the amount of taxes we incur. In particular, past proposals have been made to change certain U.S. tax laws relating to foreign entities with U.S. connections, which may include us. For example, previously proposed legislation has considered treating certain foreign corporations as U.S. domestic corporations (and therefore taxable on all of their worldwide income) if the management and control of the foreign corporation occurs, directly or indirectly, primarily within the United States. If such legislation were enacted, we could, depending on the precise form, be subject to U.S. taxation notwithstanding our domicile outside the United States. In addition, on October 5, 2015 the Organization for Economic Co-operation and Development, (the “OECD”),or OECD, which represents a coalition of member countries, released its final reports from the BEPS Action Plans. The final reports include recommendations covering a number of issues, including country-by-country reporting, permanent establishment rules, transfer pricing rules and tax treaties. These changes, which have been or are in the process of being adopted by numerous countries, could increase uncertainties and may adversely affect our provision for income taxes. The U.S. government has proposed various otherIn December 2018, the Cayman Islands passed the International Tax Co-Operation (Economic Substance) Law, 2018. Effective as of January 1, 2019, the new legislation requires Cayman Islands companies carrying one or more relevant activity to maintain a substantial economic presence in the Cayman Islands. Effective from December 31, 2019, we have structured our activities to comply with the new law. However, the legislation remains subject to further clarification and interpretation and accordingly, there is no guarantee that we will be deemed to be compliant. Furthermore, this legislation may require us to make additional changes to the U.S. international tax system, certain ofactivities we carry on in the Cayman Islands, which could adversely impact foreign-based multinational corporate groups, and increased enforcement of U.S. international tax laws. Although none of these proposed U.S. tax law changes has yet been enacted, and they may never be enacted in their current forms, it is possible that these or other changes in the U.S. tax laws could significantly increase our U.S.cost of operations, and we could be subject to penalties for lack of compliance. As a result, we are not able to determine the impact on our operations and net income tax liability inas of the future.current period.
We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we conduct our activities. Any such audit, examination or review requires management’s time, diverts internal resources and, in the event of an unfavorable outcome, may result in additional tax liabilities or other adjustments to our historical results.
Because we conduct operations in multiple jurisdictions, our effective tax rate is influenced by the amounts of income and expense attributed to each such jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be adversely affected. In addition, we may determine that it is advisable from time to time to repatriate earnings from subsidiaries under circumstances that could give rise to imposition of potentially significant withholding taxes by the jurisdictions in which such amounts were earned, without our receiving the benefit of any offsetting tax credits, which could also adversely impact our effective tax rate.
We may be classified as a passive foreign investment company which could result in adverse U.S. federal income tax consequences for U.S. holders of our ordinary shares.
Based on the current and anticipated valuation of our assets and the composition of our income and assets, we do not expect to be considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our 20182021 fiscal year or the foreseeable future. However, a separate determination must be made at the close of each taxable year as to whether we are a PFIC for that taxable year, and we cannot assure you that we will not be a PFIC for our 20182021 fiscal year or any future taxable year. Under current law, a non-U.S. corporation will be considered a PFIC for any taxable year if either (a) at least 75% of its gross income is passive income or (b) at least 50% of the value of its assets, generally based on an average of the quarterly values of the assets during a taxable year, is attributable to assets that produce or are held for the production of passive income. PFIC status depends on the composition of our assets and income and the value of our assets (which may be based in part on the value of our ordinary shares which may fluctuate), including, among others, a pro rata portion of the income and assets of each subsidiary in which we own, directly or indirectly, at least 25% by value of the subsidiary’s equity interests, from time to time. Because we currently hold, and expect to continue to hold, a substantial amount of cash or cash equivalents, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares which may fluctuate and may fluctuate considerably given that market prices of technology companies historically often have been volatile, we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a U.S. holder held ordinary shares, certain adverse U.S. federal income tax consequences could apply for such U.S. holder.
5055
Changes in our United States federal income tax classification, or that of our subsidiaries, could result in adverse tax consequences to our 10% or greater U.S. shareholders.
The Tax Act may have changed the consequences to U.S. shareholders that own, or are considered to own, as a result of the attribution rules, ten percent or more of the voting power or value of the stock of a non-U.S. corporation (a 10% U.S. shareholder) under the U.S. Federal income tax law applicable to owners of U.S. controlled foreign corporations, or CFCs.
Prior to the Tax Act, we did not believe that we, or any of our non-U.S. subsidiaries, were considered a CFC, which is a determination made daily based on whether the 10% U.S. shareholders together own, or are considered to own under the attribution rules, more than fifty percent of the voting power or value of a non-U.S. corporation. The Tax Act repealed Internal Revenue Code Section 958(b)(4), which, unless clarified in future regulations or other guidance, may result in classification of certain of the Company’s foreign subsidiaries as CFCs with respect to any single 10% U.S. shareholder. This may be the result without regard to whether 10% U.S. shareholders together own, directly or indirectly, more than fifty percent of the voting power or value of the Company as was the case under prior rules. The repeal is effective as of the last taxable year of CFCs beginning before January 1, 2018 and for the taxable year of 10% U.S. shareholders in which the CFCs' taxable year ends.
Fluctuations in exchange rates between and among the currencies of the countries in which we do business may adversely affect our operating results.
Our sales have been historically denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to the currencies of the countries in which our end customers operate could impair the ability of our end customers to cost-effectively integrate our SoCs into their devices which may materially affect the demand for our solutions and cause these end customers to reduce their orders, which would adversely affect our revenue and business. We may experience foreign exchange gains or losses due to the volatility of other currencies compared to the U.S. dollar. A significant portion of our solutions are sold to camera manufacturers located outside the United States, primarily in Asia. Sales to customers in Asia accounted for approximately 73%90%, 91%87% and 91%79% of our total revenue in fiscal years 2017, 20162020, 2019 and 2015, respectively, and approximately 72% and 81% of our total revenue for2018, respectively. For the three and nine months ended October 31, 2107, respectively. Certain prior year revenue amounts have been reclassified by geographic region2020, sales to conform to the fiscal year 2018 presentation. These reclassifications did not impactcustomers in Asia accounted for approximately 87% of our total revenues in each fiscal year.revenue. Because most of our end customers or their ODM manufacturers are located in Asia, we anticipate that a majority of our future revenue will continue to come from sales to that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the products designed by these customers and incorporating our SoCs are then sold to consumers globally. In addition, if in the future we sell products or purchase inventory in currencies other than the U.S. dollar, our exposure to foreign currency risk could become more significant.
A significant number of our employees are located in Asia, principally Taiwan and China. Therefore, a portion of our payroll as well as certain other operating expenses are paid in currencies other than the U.S. dollar, such as the New Taiwan Dollar and the Chinese Yuan Renminbi. Our operating results are denominated in U.S. dollars and the difference in exchange rates in one period compared to another may directly impact period-to-period comparisons of our operating results. Furthermore, currency exchange rates, particularly the exchange rates between the Chinese Yuan Renminbi and the U.S. dollar and between the New Taiwan Dollar and the U.S. dollar, have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict our operating results.
We have not implemented any hedging strategies to mitigate risks related to the impact of fluctuations in currency exchange rates. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts which may vary or which may later prove to have been inaccurate. Failure to hedge successfully or anticipate currency risks accurately could adversely affect our operating results.
We may make acquisitions in the future that could disrupt our business, cause dilution to our shareholders, reduce our financial resources and harm our business.
In the future, we may acquire other businesses, products or technologies. Other than our acquisition of VisLab S.r.l., or VisLab, in June 2015, we have not made any acquisitions to date and do not have any agreements or commitments for any specific acquisition at this time. Our ability to make and successfully integrate acquisitions is unproven. Our acquisition of VisLab and any future acquisitions may not strengthen our competitive position and may be viewed negatively by our customers, financial markets or investors, and we may not achieve our goals in a timely manner, or at all. In addition, any acquisitions we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses and adversely impact our business, operating results, financial condition and cash flows. Acquisitions may also reduce our cash available for operations and other uses, and could also result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.
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We cannot predict our future capital needs, and we may not be able to obtain additional financing to fund our operations.
We may need to raise additional funds in the future. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our ordinary shares. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and would also require us to incur interest expense. If additional financing is not available when required or is not available on acceptable terms, we may have to scale back our operations or limit our production activities, and we may not be able to expand our business, develop or enhance our products, take advantage of business opportunities or respond to competitive pressures which could result in lower revenue and reduce the competitiveness of our products.
51
Our marketable securities portfolio could experience a decline in market value, which could materially and adversely affect our financial results.
As of October 31, 2017,2020, we had approximately $101.6$214.4 million in securitiesdebt security investments. TheThese investments consisted primarily of money market funds, commercial paper, asset-backed securities, U.S. government securities and debt securities of corporations which are focused on the preservation of our capital.corporations. We currently do not use derivative financial instruments to adjust our investment portfolio risk or income profile.
These investments, as well as any cash deposited in bank accounts, are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by unusual events, such as the COVID-19 pandemic, the Eurozone crisis and the U.S. debt ceiling crisis, which affected various sectors of the financial markets and led to global credit and liquidity issues. If the global credit market continues to experience volatility or deteriorates, our investment portfolio may be impacted and some or all of our investments may experience other-than-temporary impairment which could adversely impact our financial results and position.
Risks Related to Ownership of Our Ordinary Shares
The market price of our ordinary shares may be volatile, which could cause the value of your investment to decline.
Since our initial public offering in October 2012, the market price of our ordinary shares has been highly volatile. The trading price of our ordinary shares is likely to remain volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:
changes in financial estimates, including our ability to meet our future revenue and operating profit or loss projections;
• | changes in financial estimates, including our ability to meet our future revenue and operating profit or loss projections; |
fluctuations in our operating results or those of other semiconductor or comparable companies;
• | fluctuations in our operating results or those of other semiconductor or comparable companies; |
fluctuations in the economic performance or market valuations of companies perceived by investors to be comparable to us;
• | fluctuations in the economic performance or market valuations of companies perceived by investors to be comparable to us; |
economic developments in the semiconductor industry as a whole;
• | economic developments in the semiconductor industry as a whole; |
general economic conditions and slow or negative growth of related markets;
• | general economic conditions, including conditions caused by pandemics, and slow or negative growth of related markets; |
announcements by us or our competitors of acquisitions, new products, significant contracts or orders, commercial relationships or capital commitments;
• | trade and other geopolitical activities affecting markets we address; |
our ability to develop and market new and enhanced solutions on a timely basis;
• | announcements by us or our competitors of acquisitions, new products, significant contracts or orders, commercial relationships or capital commitments; |
changes in the demand for our customers’ products;
• | our ability to develop and market new and enhanced solutions on a timely basis; |
commencement of or our involvement in litigation;
• | changes in the demand for our customers’ products; |
disruption to our operations;
• | commencement of or our involvement in litigation; |
any major change in our board of directors or management;
• | disruption to our operations; |
political or social conditions in the markets where we sell our products;
• | any major change in our board of directors or management; |
changes in governmental regulations; and
• | political or social conditions in the markets where we sell our products; |
• | changes in governmental regulations; and |
changes in earnings estimates or recommendations by securities analysts.
• | changes in earnings estimates or recommendations by securities analysts. |
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In addition, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may cause the market price of our ordinary shares to decrease, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our ordinary shares as a means to make acquisitions or to use options to purchase our ordinary shares to attract and retain employees. If the market price of our ordinary shares declines, you may not realize any return on your investment in us and may lose some or all of your investment. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
52
If securities analysts or industry analysts downgrade our ordinary shares, publish negative research or reports or fail to publish reports about our business, our stock price and trading volume could decline.
The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely changes their recommendation regarding our stock or our competitors’ stock, our stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our stock price or trading volume to decline.
Our actual operating results may differ significantly fromnot meet or exceed our guidance and investor expectations, which would likely cause our stock price to decline.
From time to time, we may release guidance in our earnings releases, earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. With or without our guidance, analysts and other investors may publish expectations regarding our business, financial performance and results of operations. We do not accept any responsibility for any projections or reports published by any such third persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or investor expectations, the trading price of our ordinary shares is likely to decline.
The price of our ordinary shares could decrease as a result of shares being sold in the market.
Sales of a substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline. Certain holders of our ordinary shares are entitled to rights with respect to registration of such shares under the Securities Act of 1933, as amended, or the Securities Act, pursuant to a registration rights agreement between such holders and us. If such holders, by exercising their registration rights, sell a large number of shares, the market price for our ordinary shares could be adversely affected. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired.
We filed registration statements on Form S-8 under the Securities Act to register shares for issuance under our 2004 Stock Plan, 2012 Equity Incentive Plan and the Amended and Restated 2012 Employee Stock Purchase Plan. Our 2012 Equity Incentive Plan and the Amended and Restated 2012 Employee Stock Purchase Plan provide for automatic increases in the shares reserved for issuance under these plans which could result in additional dilution to our shareholders. These shares can be freely sold in the public market upon issuance and vesting, subject to restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders.
We may also issue ordinary shares or securities convertible into ordinary shares from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and cause the trading price of our stock to decline.
We do not intend to pay dividends on our ordinary shares and, consequently, a shareholder’s ability to achieve a return on its investment will depend on appreciation in the price of our ordinary shares.
We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, shareholders are not likely to receive any dividends on their ordinary shares for the foreseeable future and the success of an investment in our ordinary shares will depend upon any future appreciation in their value. There is no guarantee that our ordinary shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. Investors seeking cash dividends should not purchase our ordinary shares.
5358
Provisions of our memorandum and articles of association and Cayman Islands corporate law may discourage or prevent an acquisition of us which could adversely affect the value of our ordinary shares.
Provisions of our memorandum and articles of association and Cayman Islands law may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
the division of our board of directors into three classes;
• | the division of our board of directors into three classes; |
the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or due to the resignation or departure of an existing board member;
• | the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or due to the resignation or departure of an existing board member; |
prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of shareholders to elect director candidates;
• | prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of shareholders to elect director candidates; |
the requirement for the advance notice of nominations for election to our board of directors or for proposing matters that can be acted upon at a shareholders’ meeting;
• | the requirement for the advance notice of nominations for election to our board of directors or for proposing matters that can be acted upon at a shareholders’ meeting; |
the ability of our board of directors to issue, without shareholder approval, such amounts of preference shares as the board of directors deems necessary and appropriate with terms set by our board of directors, which rights could be senior to those of our ordinary shares;
• | the ability of our board of directors to issue, without shareholder approval, such amounts of preference shares as the board of directors deems necessary and appropriate with terms set by our board of directors, which rights could be senior to those of our ordinary shares; |
the elimination of the rights of shareholders to call a special meeting of shareholders and to take action by written consent in lieu of a meeting; and
• | the elimination of the rights of shareholders to call a special meeting of shareholders and to take action by written consent in lieu of a meeting; and |
the required approval of a special resolution of the shareholders, being a two-thirds vote of shares held by shareholders present and voting at a shareholder meeting, to alter or amend the provisions of our post-offering memorandum and articles of association.
• | the required approval of a special resolution of the shareholders, being a two-thirds vote of shares held by shareholders present and voting at a shareholder meeting, to alter or amend the provisions of our post-offering memorandum and articles of association. |
Holders of our ordinary shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.
Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (as the same may be supplemented or amended from time to time) of the Cayman Islands and by the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. There is no legislation specifically dedicated to the rights of investors in securities and thus no statutorily defined private cause of action specific to investors such as those provided under the Securities Act or the Securities Exchange Act of 1934, as amended. In addition, shareholders of Cayman Islands companies may not have standing to initiate shareholder derivative actions in U.S. federal courts. Therefore, you may have more difficulty in protecting your interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States due to the comparatively less developed nature of Cayman Islands law in this area.
Shareholders of Cayman Islands exempted companies, such as our company, have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of the company. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors.
5459
Holders of our ordinary shares may have difficulty obtaining or enforcing a judgment against us because we are incorporated under the laws of the Cayman Islands.
It may be difficult or impossible for you to bring an action against us in the Cayman Islands if you believe your rights have been infringed under U.S. securities laws. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. While there is no binding authority on this point, this is likely to include, in certain circumstances, a non-penal judgment of a United States court imposing a monetary award based on the civil liability provisions of the U.S. federal securities laws. The Grand Court of the Cayman Islands may stay proceedings if concurrent proceedings are being brought elsewhere. There is uncertainty as to whether the Grand Court of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us predicated upon the civil liability provisions of the securities laws of the United States or any state thereof and whether the Grand Court of the Cayman Islands would hear original actions brought in the Cayman Islands against us predicated upon the securities laws of the United States or any state thereof.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
ITEM 6. Exhibits
The following table displays information with respect to repurchasesexhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of the Company’s ordinary shares during the three months ended October 31, 2017:this Quarterly Report.
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| Approximate |
| |
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|
|
| Total Number |
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| Dollar Value Of |
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|
|
|
|
|
|
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| Of Shares |
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| Shares That May |
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|
|
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|
|
|
|
| Purchased As |
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| Yet Be Purchased |
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|
|
|
|
| Part of Publicly |
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| Under The Plans |
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|
| Total Number |
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| Average Price |
|
| Announced |
|
| Or Programs |
| ||||
|
| Of Shares |
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| Paid Per Share |
|
| Plans Or |
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| (in millions) |
| ||||
Period |
| Purchased (i) |
|
| (ii) |
|
| Programs (i) |
|
| (i) |
| ||||
August 1, 2017 to August 31, 2017 |
|
| 34,577 |
|
| $ | 49.59 |
|
|
| 34,577 |
|
|
|
|
|
September 1, 2017 to September 30, 2017 |
|
| 109,364 |
|
|
| 44.64 |
|
|
| 109,364 |
|
|
|
|
|
October 1, 2017 to October 31, 2017 |
|
| 125,599 |
|
|
| 49.23 |
|
|
| 125,599 |
|
|
|
|
|
Total |
|
| 269,540 |
|
| $ | 47.41 |
|
|
| 269,540 |
|
| $ | 35.0 |
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|
|
|
55
60
EXHIBIT INDEX
Exhibit Number | Description | ||
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3.1(1) |
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31.1 |
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31.2 |
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32.1± |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document | |
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| ||
101.SCH |
| Inline XBRL Taxonomy Schema Linkbase Document | |
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| ||
101.CAL |
| Inline XBRL Taxonomy Calculation Linkbase Document | |
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| ||
101.DEF |
| Inline XBRL Taxonomy Definition Linkbase Document | |
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| ||
101.LAB |
| Inline XBRL Taxonomy Labels Linkbase Document | |
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| ||
101.PRE |
| Inline XBRL Taxonomy Presentation Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2020, has been formatted in Inline XBRL and included in Exhibit 101. |
(1) | Incorporated by reference to the Registrant’s registration statement on Form S-1 (No. 333-174838) Amendment No. 3 as filed with the Securities and Exchange Commission on September 12, 2012. |
± | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
5661
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.
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| AMBARELLA, INC. | ||
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Date: December |
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| By: |
| /s/ Feng-Ming Wang |
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| Feng-Ming Wang |
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| President and Chief Executive Officer |
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Date: December |
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| By: |
| /s/ |
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| Chief Financial Officer |
62
57