n10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2009
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Transition Period from
to
Commission
File Number: 000-50838
NETLOGIC
MICROSYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
77-0455244
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1875
Charleston Rd.
Mountain
View, CA 94043
(650)
961-6676
(Address
and telephone number of principal executive offices)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuance 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 x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
|
|
Outstanding
at April 30, 2009
|
|
Common
Stock, $0.01 par value per share
|
|
21,956,196
shares
|
NETLOGIC
MICROSYSTEMS, INC.
FORM
10-Q
TABLE
OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
|
|
|
|
|
Item 1.
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Item 2.
|
|
|
|
19
|
|
|
|
|
|
Item 3.
|
|
|
|
27
|
|
|
|
|
|
Item 4.
|
|
|
|
27
|
|
|
|
|
|
|
28
|
|
|
|
|
|
Item 1A.
|
|
|
|
28
|
|
|
|
|
|
Item 6.
|
|
|
|
29
|
|
|
|
|
|
|
30
|
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
69,134 |
|
|
$ |
83,474 |
|
|
Short-term
investments
|
|
|
19,741 |
|
|
|
13,067 |
|
|
Accounts
receivables, net
|
|
|
8,283 |
|
|
|
8,382 |
|
|
Inventories
|
|
|
10,900 |
|
|
|
13,707 |
|
|
Deferred
income taxes
|
|
|
2,908 |
|
|
|
3,217 |
|
|
Prepaid
expenses and other current assets
|
|
|
3,890 |
|
|
|
1,937 |
|
|
Total
current assets
|
|
|
114,856 |
|
|
|
123,784 |
|
|
Property
and equipment, net
|
|
|
4,826 |
|
|
|
5,513 |
|
|
Goodwill
|
|
|
68,712 |
|
|
|
68,712 |
|
|
Intangible
asset, net
|
|
|
36,213 |
|
|
|
39,538 |
|
|
Other
assets
|
|
|
5,197 |
|
|
|
8,224 |
|
|
Total
assets
|
|
$ |
229,804 |
|
|
$ |
245,771 |
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
8,297 |
|
|
$ |
7,618 |
|
|
Accrued
liabilities
|
|
|
10,141 |
|
|
|
25,920 |
|
|
Deferred
margin
|
|
|
625 |
|
|
|
1,638 |
|
|
Software
licenses and other obligations, current
|
|
|
774 |
|
|
|
755 |
|
|
Total
current liabilities
|
|
|
19,837 |
|
|
|
35,931 |
|
|
Software
licenses and other obligations, long-term
|
|
|
41 |
|
|
|
464 |
|
|
Other
liabilities
|
|
|
9,433 |
|
|
|
9,109 |
|
|
Total
liabilities
|
|
|
29,311 |
|
|
|
45,504 |
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
219 |
|
|
|
219 |
|
|
Additional
paid-in capital
|
|
|
280,161 |
|
|
|
276,042 |
|
|
Accumulated
other comprehensive income (loss)
|
|
|
11 |
|
|
|
(13 |
) |
|
Accumulated
deficit
|
|
|
(79,898 |
) |
|
|
(75,981 |
) |
|
Total
stockholders' equity
|
|
|
200,493 |
|
|
|
200,267 |
|
|
Total
liabilities and stockholders' equity
|
|
$ |
229,804 |
|
|
$ |
245,771 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$ |
30,366 |
|
|
$ |
34,180 |
|
|
Cost
of revenue
|
|
|
13,544 |
|
|
|
15,383 |
|
|
Gross
profit
|
|
|
16,822 |
|
|
|
18,797 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
12,198 |
|
|
|
12,206 |
|
|
Selling,
general and administrative
|
|
|
6,814 |
|
|
|
6,464 |
|
|
Total
operating expenses
|
|
|
19,012 |
|
|
|
18,670 |
|
|
Income
(loss) from operations
|
|
|
(2,190 |
) |
|
|
127 |
|
|
Interest
and other income, net
|
|
|
173 |
|
|
|
487 |
|
|
Income
(loss) before income taxes
|
|
|
(2,017 |
) |
|
|
614 |
|
|
Provision
for (benefit from) income taxes
|
|
|
1,900 |
|
|
|
(513 |
) |
|
Net
income (loss)
|
|
$ |
(3,917 |
) |
|
$ |
1,127 |
|
|
Net
income (loss) per share-basic
|
|
$ |
(0.18 |
) |
|
$ |
0.05 |
|
|
Net
income (loss) per share-diluted
|
|
$ |
(0.18 |
) |
|
$ |
0.05 |
|
|
Shares
used in calculation-basic
|
|
|
21,838 |
|
|
|
21,239 |
|
|
Shares
used in calculation-diluted
|
|
|
21,838 |
|
|
|
22,064 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(3,917 |
) |
|
$ |
1,127 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,285 |
|
|
|
4,260 |
|
|
Accretion
of discount relating to debt securities
|
|
|
(20 |
) |
|
|
- |
|
|
Stock-based
compensation
|
|
|
4,300 |
|
|
|
3,701 |
|
|
Provision
for (recovery of) doubtful accounts
|
|
|
(14 |
) |
|
|
- |
|
|
Provision
for inventory reserves
|
|
|
286 |
|
|
|
493 |
|
|
Deferred
income taxes, net
|
|
|
3,335 |
|
|
|
- |
|
|
Changes
in current assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
113 |
|
|
|
(4,920 |
) |
|
Inventories
|
|
|
2,498 |
|
|
|
(2,390 |
) |
|
Prepaid
expenses and other assets
|
|
|
(1,980 |
) |
|
|
(197 |
) |
|
Accounts
payable
|
|
|
679 |
|
|
|
5,228 |
|
|
Accrued
liabilities
|
|
|
(225 |
) |
|
|
(2,127 |
) |
|
Deferred
margin
|
|
|
(1,013 |
) |
|
|
175 |
|
|
Other
long-term liabilities
|
|
|
324 |
|
|
|
222 |
|
|
Net
cash provided by operating activities
|
|
|
8,651 |
|
|
|
5,572 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(273 |
) |
|
|
(365 |
) |
|
Purchase
of short-term investments
|
|
|
(14,633 |
) |
|
|
- |
|
|
Sales
and maturities of short-term investments
|
|
|
7,950 |
|
|
|
- |
|
|
Cash
paid for acquisitions
|
|
|
(15,501 |
) |
|
|
- |
|
|
Net
cash used in investing activities
|
|
|
(22,457 |
) |
|
|
(365 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments
of software license and other obligations
|
|
|
(404 |
) |
|
|
(455 |
) |
|
Proceeds
from issuance of Common Stock
|
|
|
218 |
|
|
|
1,046 |
|
|
Payments
for retirement of Common Stock
|
|
|
(348 |
) |
|
|
(652 |
) |
|
Net
cash used by financing activities
|
|
|
(534 |
) |
|
|
(61 |
) |
|
Effects
of exchange rate on cash and cash equivalents
|
|
|
- |
|
|
|
(10 |
) |
|
Net
increase (decrease) in cash and cash eqivalents
|
|
|
(14,340 |
) |
|
|
5,136 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
83,474 |
|
|
|
50,689 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
69,134 |
|
|
$ |
55,825 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NetLogic
Microsystems, Inc.
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of NetLogic
Microsystems, Inc. (“we,” “our” and the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and with the instructions for Form 10-Q and Regulation S-X statements.
Accordingly, they do not include all of the information and notes required for
complete financial statements. In the opinion of management, all adjustments,
consisting of only normal recurring items, considered necessary for a fair
statement of the results of operations for the periods are shown.
These
unaudited financial statements should be read in conjunction with the audited
financial statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 2008. Operating results for the
three months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2009.
Critical
Accounting Policies and Estimates
The
preparation of our unaudited condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We based these estimates and assumptions
on historical experience and evaluate them on an on-going basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. During the three months ended March 31, 2009,
there were no significant changes to the critical accounting policies and
estimates discussed in our 2008 annual report on Form 10-K with the exception of
those discussed below.
Foreign
Currency
Effective
January 1, 2009, the functional currency for all of our foreign subsidiaries
became the United States dollar. Assets and liabilities denominated
in non-U.S. dollars are remeasured into U.S. dollars at end-of-period exchange
rates for monetary assets and liabilities, and historical exchange rates for
nonmonetary assets and liabilities. Revenue and expenses are remeasured at
average exchange rates in effect during the period, except for those revenue and
expenses related to the nonmonetary assets and liabilities, which are measured
at historical exchange rates. The gains or losses from foreign
currency remeasurement are included in interest and other income,
net. Such gains or losses have not been material for the three months
ended March 31, 2009. The impact of this change was not material
to all prior periods presented.
Recently
Issued Accounting Pronouncements
In
April 2009, the FASB issued three related Staff Positions: (i) FSP
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, or FSP 157-4, (ii) SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or FSP 115-2 and FSP 124-2, and
(iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, or FSP 107 and APB 28-1, which will be
effective for interim and annual periods ending after June 15, 2009. FSP
157-4 provides guidance on how to determine the fair value of assets and
liabilities under SFAS 157 in the current economic environment and reemphasizes
that the objective of a fair value measurement remains an exit price. If we were
to conclude that there has been a significant decrease in the volume and level
of activity of the asset or liability in relation to normal market activities,
quoted market values may not be representative of fair value and we may conclude
that a change in valuation technique or the use of multiple valuation techniques
may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for
recognizing other-than-temporarily impaired debt securities and revise the
existing impairment model for such securities, by modifying the current intent and ability indicator
in determining whether a debt security is other-than-temporarily impaired. FSP
107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS
157 for both interim and annual periods. We are currently evaluating these Staff
Positions.
In
April 2009, the FASB issued FSP No. 141R-1 Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies,
or FSP 141R-1. FSP 141R-1 amends the provisions in Statement 141R for the
initial recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. The FSP eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria in Statement 141R and instead carries forward most of the provisions in
SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent
assets and contingent liabilities acquired in business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We will apply the
provisions of SFAS141(R) if and when a future acquisition
occurs.
2.
Basic and Diluted Net Income Per Share
We
compute net income per share in accordance with SFAS 128, “Earnings per Share.”
Basic net income per share is computed by dividing net income attributable to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted net income per share gives
effect to all dilutive potential common shares outstanding during the period
including stock options and warrants using the treasury stock
method.
The
following is a reconciliation of the weighted average number of common shares
used to calculate basic net income per share to the weighted average common and
potential common shares used to calculate diluted net income per share for the
three months ended March 31, 2009 and 2008 (in thousands, except per share
data):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
(loss) income: basic and diluted
|
|
$ |
(3,917 |
) |
|
$ |
1,127 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Add:
common shares outstanding
|
|
|
21,871 |
|
|
|
21,272 |
|
|
Less:
unvested common shares subject to repurchase
|
|
|
(33 |
) |
|
|
(33 |
) |
|
Total
shares: basic
|
|
|
21,838 |
|
|
|
21,239 |
|
|
Add:
stock options and warrants outstanding, if dilutive
|
|
|
- |
|
|
|
792 |
|
|
Add:
shares subject to repurchase, if dilutive
|
|
|
- |
|
|
|
33 |
|
|
Total
shares: diluted
|
|
|
21,838 |
|
|
|
22,064 |
|
|
Basic
earnings per share
|
|
$ |
(0.18 |
) |
|
$ |
0.05 |
|
|
Diluted
earnings per share
|
|
$ |
(0.18 |
) |
|
$ |
0.05 |
|
For the
three months ended March 31, 2009 and 2008, employee stock options to
purchase the following number of shares of common stock were excluded from the
computation of diluted net income per share as their effect would be
anti-dilutive (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
3,475 |
|
|
|
3,041 |
|
3.
Stock-Based Compensation
We have
adopted stock plans that provide for grants to employees of equity-based awards,
which include stock options and restricted stock. In addition, we have an
Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase our
common stock at a discount through payroll deductions. The estimated fair value
of our equity-based awards, less expected forfeitures, is amortized over the
awards’ service period. We also grant stock options and restricted stock to new
employees in accordance with Nasdaq Marketplace rule 4350(i)(1)(A)(iv) as an
inducement material to the new employee’s entering into employment with the
Company.
The
following table summarizes stock-based compensation expense recorded for the
periods presented (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$ |
175 |
|
|
$ |
280 |
|
|
Research
and development
|
|
|
2,151 |
|
|
|
2,018 |
|
|
Selling,
general and administrative
|
|
|
1,974 |
|
|
|
1,403 |
|
|
Total
stock-based compensation expense
|
|
$ |
4,300 |
|
|
$ |
3,701 |
|
In
addition, we capitalized approximately $0.2 million and $0.2 million of
stock-based compensation in inventory as of March 31, 2009 and December 31,
2008, respectively, which represented indirect manufacturing costs related to
our inventory.
Stock
Options
The
exercise price of each stock option generally equals the market price of our
common stock on the date of grant. Most options vest over four years and expire
no later than ten years from the grant date. During the three months ended
March 31, 2009 and 2008, we granted stock options to purchase approximately
258,000 and 205,000 shares of common stock, respectively. The weighted average
grant date fair value of options granted during the three months ended
March 31, 2009 and 2008 was $12.29 and $14.83, respectively. As of
March 31, 2009 there was approximately $23.6 million of total unrecognized
compensation cost related to unvested stock options granted and outstanding with
a weighted average remaining vesting period of 2.3 years.
Restricted
Stock
During
the three months ended March 31, 2009 and 2008, we granted restricted stock
units representing the future right to acquire approximately 123,000 and 163,000
shares of common stock, respectively. These awards vest over the requisite
service period, which ranges from two to four years. The fair value of the
restricted stock was determined using the fair value of our common stock on the
date of the grant. The fair value of the restricted stock is being amortized on
a straight-line basis over the service period, and is reduced for estimated
forfeitures. As of March 31, 2009, there was approximately $16.6 million of
total unrecognized compensation cost related to unvested restricted stock
granted which is expected to be recognized over a weighted average period of 2.7
years.
Employee
Stock Purchase Plan
Our ESPP
provides that eligible employees may purchase up to $25,000 worth of our common
stock annually over the course of two six-month offering periods. The purchase
price to be paid by participants is 85% of the price per share of our common
stock either at the beginning or the end of each six-month offering period,
whichever is less.
Valuation
Assumptions
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. This model was developed for use in
estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. Our employee stock options have
characteristics significantly different from those of publicly traded options as
they have vesting requirements and are not fully transferable. The weighted
average assumptions used in the model are outlined in the following
table:
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans:
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.87 |
% |
|
|
3.09 |
% |
|
Expected
life of options (in years)
|
|
|
5.90 |
|
|
|
5.18 |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Volatility
|
|
|
60 |
% |
|
|
60 |
% |
|
Weighted
average fair value
|
|
$ |
12.29 |
|
|
$ |
14.83 |
|
|
Employee
Sotck Purchase Plan:
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
0.27 |
% |
|
|
3.32 |
% |
|
Expected
life of options (in years)
|
|
|
0.49 |
|
|
|
0.50 |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Volatility
|
|
|
55 |
% |
|
|
60 |
% |
|
Weighted
average fair value
|
|
$ |
6.67 |
|
|
$ |
9.99 |
|
The
computation of the expected volatility assumption used in the Black-Scholes
calculations for new grants is based on a combination of historical and implied
volatilities. When establishing the expected life assumption, we review on a
semi-annual basis the historical employee exercise behavior with respect to
option grants with similar vesting periods.
4.
Income Taxes
At
January 1, 2009 and March 31, 2009, we had $15.2 million and $15.5 million
of unrecognized tax benefits. Approximately $13.3 million of the
balance as of March 31, 2009 would affect our effective tax rate if recognized.
This was partially offset by 2009 unrecognized tax benefits recorded during the
period.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of March 31, 2009, we had $737,000 of accrued interest and zero
penalties related to uncertain tax positions.
The tax
years 1997-2008 remain open to examination by one or more of the major taxing
jurisdictions in which we are subject to taxation on our taxable income. We do
not anticipate that total unrecognized tax benefits will significantly change
due to the settlement of audits and the expiration of statue of limitations
prior to March 31, 2010.
In
February 2009, the California 2009-2010 budget legislature was enacted into law,
allowing companies to elect, for income tax purposes, to apply a single sales
factor apportionment for years beginning after January 1, 2011. Based
on our anticipated election, we determined a need to establish a valuation
allowance on certain deferred tax assets, totaling $3.0 million during the
three months ended March 31, 2009.
5.
Business Combination
Aeluros,
Inc.
In
October 2007, we acquired all outstanding equity securities of Aeluros,
Inc. (“Aeluros”) a privately-held, fabless provider of industry-leading
10-Gigabit Ethernet physical layer products (“PLPs”). The PLP family extended
our product offerings to the physical layer, or Layer 1, of the Open Systems
Interconnection (“OSI”) reference model, which is a layered abstract description
for communications and computer network protocol design developed as part of the
Open Systems Interconnection initiative. The physical layer provides the
physical and electrical means for transmitting data between different nodes on a
network. We paid $57.1 million in cash. During the fourth quarter of fiscal
2008, we became obligated to pay an additional $15.5 million in cash to the
former Aeluros stockholders due to our attainment of post-acquisition revenue
milestones, subject to certain adjustments as provided in the Aeluros
acquisition agreement. The additional consideration was included in goodwill and
accrued liabilities at December 31, 2008, and was paid to the former Aeluros
stockholders in February 2009. The results of operations relating to Aeluros
have been included in our results of operations since the acquisition
date.
6.
Goodwill and Intangible Assets
The
following table summarizes the components of goodwill, other intangible assets
and related accumulated amortization balances, which were recorded as a result
of prior business combinations (in thousands):
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Goodwill
|
|
$ |
68,712 |
|
|
$ |
- |
|
|
$ |
68,712 |
|
|
$ |
68,712 |
|
|
$ |
- |
|
|
$ |
68,712 |
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
$ |
34,180 |
|
|
$ |
(13,665 |
) |
|
$ |
20,515 |
|
|
$ |
34,180 |
|
|
$ |
(11,668 |
) |
|
$ |
22,512 |
|
|
Composite
intangible asset
|
|
|
11,246 |
|
|
|
(4,452 |
) |
|
|
6,794 |
|
|
|
11,246 |
|
|
|
(3,749 |
) |
|
|
7,497 |
|
|
Patents
and core technology
|
|
|
5,590 |
|
|
|
(1,605 |
) |
|
|
3,985 |
|
|
|
5,590 |
|
|
|
(1,325 |
) |
|
|
4,265 |
|
|
Customer
relationships
|
|
|
6,900 |
|
|
|
(1,981 |
) |
|
|
4,919 |
|
|
|
6,900 |
|
|
|
(1,636 |
) |
|
|
5,264 |
|
|
Backlog
|
|
|
2,106 |
|
|
|
(2,106 |
) |
|
|
- |
|
|
|
2,106 |
|
|
|
(2,106 |
) |
|
|
- |
|
|
Total
|
|
$ |
60,022 |
|
|
$ |
(23,809 |
) |
|
$ |
36,213 |
|
|
$ |
60,022 |
|
|
$ |
(20,484 |
) |
|
$ |
39,538 |
|
As of
March 31, 2009 and December 31, 2008, goodwill represented approximately 30% and
28%, respectively, of our total assets.
For the
three months ended March 31, 2009 and 2008, amortization expense related to
intangible assets was $3.3 million and $3.3 million,
respectively. The amortization expense related to intangible assets
is included in cost of sales because it related to products sold during such
periods, except for the amortization of the customer relationships of $0.3
million and $0.3 million for the three months ended March 31, 2009 and 2008,
respectively, which was included in selling, general and administrative
expenses.
As of
March 31, 2009, the estimated future amortization expense of intangible
assets in the table above is as follows (in thousands):
|
Fiscal
Year Ending
|
|
Estimated
Amortization
|
|
|
2009
(remaining 9 months)
|
|
$ |
9,974 |
|
|
|
|
|
13,299 |
|
|
|
|
|
10,154 |
|
|
|
|
|
2,786 |
|
|
Total
|
|
$ |
36,213 |
|
7.
Cash, Cash Equivalents and Short-Term Investments
The
following is a summary of available-for-sale investments as of March 31, 2009
and December 31, 2008 (in thousands):
|
|
|
March
31, 2009
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair
Value
|
|
|
U.S.
government agency securities
|
|
$ |
19,730 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
19,741 |
|
|
Money
market funds
|
|
|
46,498 |
|
|
|
- |
|
|
|
- |
|
|
|
46,498 |
|
|
Total
|
|
$ |
66,228 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
66,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
46,498 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
46,498 |
|
|
Short-term
investments
|
|
|
19,730 |
|
|
|
11 |
|
|
|
- |
|
|
|
19,741 |
|
|
Total
|
|
$ |
66,228 |
|
|
$ |
11 |
|
|
$ |
- |
|
|
$ |
66,239 |
|
|
|
|
December
31, 2008
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair
Value
|
|
|
U.S.
government agency securities
|
|
$ |
16,413 |
|
|
$ |
40 |
|
|
$ |
- |
|
|
$ |
16,453 |
|
|
Corporate
commercial paper
|
|
|
2,944 |
|
|
|
4 |
|
|
|
- |
|
|
|
2,948 |
|
|
Money
market funds
|
|
|
61,717 |
|
|
|
- |
|
|
|
- |
|
|
|
61,717 |
|
|
Total
|
|
$ |
81,074 |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
81,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
68,047 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
68,051 |
|
|
Short-term
investments
|
|
|
13,027 |
|
|
|
40 |
|
|
|
- |
|
|
|
13,067 |
|
|
Total
|
|
$ |
81,074 |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
81,118 |
|
The fair
value of the Company’s investments at March 31, 2009 and December 31, 2008,
by contractual maturity, was as follows:
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Due
in 1 year or less
|
|
$ |
19,741 |
|
|
$ |
19,401 |
|
|
Total
|
|
$ |
19,741 |
|
|
$ |
19,401 |
|
Net
unrealized holding gains and losses on available-for-sale investments are
included as a separate component of stockholders’ equity at March 31, 2009 and
December 31, 2008.
8.
Fair Value Measurements
SFAS
No. 157 defines fair value as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which the Company would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance.
Fair
Value Hierarchy
SFAS
No. 157 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument’s categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. SFAS No. 157 establishes three
levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in
active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs
to the valuation methodology that are significant to the measurement of fair
value of assets or liabilities.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
Company measures its financial assets, specifically its cash equivalents and
short-term investments, at fair value on a recurring basis. The Company does not
have any financial liabilities that are measured at fair value on a recurring
basis. The fair value of these financial assets was determined using the
following inputs as of March 31, 2009 and December 31, 2008 (in
thousands):
|
|
|
|
|
|
Fair
Value Measurements at March 31, 2009 Using
|
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
|
Money
market funds (1)
|
|
$ |
46,498 |
|
|
$ |
46,498 |
|
|
$ |
- |
|
|
$ |
- |
|
|
U.S.
government agency securities (2)
|
|
|
19,741 |
|
|
|
- |
|
|
|
19,741 |
|
|
|
- |
|
|
Total
|
|
$ |
66,239 |
|
|
$ |
46,498 |
|
|
$ |
19,741 |
|
|
$ |
- |
|
|
(1)
|
Included
in cash and cash equivalents on the Company’s condensed consolidated
balance sheet.
|
|
(2)
|
$19.7
million of which is included in short-term investments on the Company’s
condensed consolidated balance
sheet.
|
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
|
Money
market funds (3)
|
|
$ |
61,717 |
|
|
$ |
61,717 |
|
|
$ |
- |
|
|
$ |
- |
|
|
U.S.
government agency securities (4)
|
|
|
16,453 |
|
|
|
- |
|
|
|
16,453 |
|
|
|
- |
|
|
Corporate
commercial paper (5)
|
|
|
2,948 |
|
|
|
- |
|
|
|
2,948 |
|
|
|
- |
|
|
Total
|
|
$ |
81,118 |
|
|
$ |
61,717 |
|
|
$ |
19,401 |
|
|
$ |
- |
|
|
(3)
|
Included
in cash and cash equivalents on the Company’s condensed consolidated
balance sheet.
|
|
(4)
|
$6.3
million of which is included in cash and cash equivalents and $10.1
million of which is included in short-term investments on the Company’s
condensed consolidated balance
sheet.
|
|
(5)
|
Included
in short-term investments on the Company’s condensed consolidated balance
sheet.
|
9.
Balance Sheet Components
The
components of our inventory at March 31, 2009 and December 31, 2008
were as follows (in thousands):
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Inventories:
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
6,060 |
|
|
$ |
8,170 |
|
|
Work-in-progress
|
|
|
4,840 |
|
|
|
5,537 |
|
|
|
|
$ |
10,900 |
|
|
$ |
13,707 |
|
The
components of our accrued liabilities at March 31, 2009 and
December 31, 2008 were as follows (in thousands):
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Accrued
Liabilities:
|
|
|
|
|
|
|
|
Acrrued
payroll and related expenses
|
|
$ |
4,753 |
|
|
$ |
4,784 |
|
|
Accrued
accounts payable
|
|
|
137 |
|
|
|
131 |
|
|
Accrued
inventory purchases
|
|
|
559 |
|
|
|
729 |
|
|
Accrued
warranty
|
|
|
1,415 |
|
|
|
1,445 |
|
|
Accrual
for Aeluros earn-out based on post-acquisition revenue
milestone
|
|
|
- |
|
|
|
15,501 |
|
|
Other
accrued expenses
|
|
|
3,277 |
|
|
|
3,330 |
|
|
|
|
$ |
10,141 |
|
|
$ |
25,920 |
|
10.
Product Warranties
We
provide a limited product warranty from one to three years from the date of
sale. We provide for the estimated future costs of repair or replacement upon
shipment of the product. Our warranty accrual is estimated based on actual and
historical claims compared to historical revenue and assumes that we have to
replace products subject to a claim. The following table summarizes activity
related to product warranty liability during the three months ended
March 31, 2009 and 2008 (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Warranty
accrual:
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,445 |
|
|
$ |
1,512 |
|
|
Provision
for warranty
|
|
|
23 |
|
|
|
192 |
|
|
Settlements
made during the period
|
|
|
(53 |
) |
|
|
(338 |
) |
|
Ending
balance
|
|
$ |
1,415 |
|
|
$ |
1,366 |
|
During
the first two quarters of 2006, we provided an additional warranty reserve of
$0.9 million to address a warranty issue related to specific devices sold to one
of our international customers. The devices were tested by both us and the
customer and passed quality assurance inspection at the time they were sold. The
customer subsequently identified malfunctioning systems that included our
devices. No specific warranty reserve was provided for additional units shipped
subsequent to September 30, 2006 as the customer modified the software
associated with its products to remedy the observed malfunction. As of
March 31, 2009, we maintained $0.7 million of warranty reserves for
anticipated replacement costs of the parts sold to this customer.
We
entered into a master purchase agreement with Cisco in November 2005 under which
we provided Cisco and its contract manufacturers a warranty period of as much as
five years (in the case of epidemic failure). The extended warranty period in
the master purchase agreement with Cisco has not had a material impact on our
results of operations or financial condition based on our warranty analysis,
which included an evaluation of our historical warranty cost information and
experience.
11.
Commitments and Contingencies
The
Company leases its facilities under non-cancelable operating leases, which
contain renewal options and escalation clauses, and expires through
2011. The Company also acquires certain assets under software
licenses.
Future
minimum lease commitments under non-cancelable software licenses and operating
leases agreements, which include common area maintenance charges as of March 31,
2009, were as follows (in thousands):
|
|
|
Software
licenses
and
other
obligations
|
|
|
Operating
Leases
|
|
|
Total
|
|
|
|
|
$ |
365 |
|
|
$ |
752 |
|
|
$ |
1,117 |
|
|
|
|
|
483 |
|
|
|
1,021 |
|
|
|
1,504 |
|
|
|
|
|
- |
|
|
|
517 |
|
|
|
517 |
|
|
2012
and thereafter
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
848 |
|
|
$ |
2,290 |
|
|
$ |
3,138 |
|
|
Less:
Interest component
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
Present
value of minimum lease payment
|
|
|
815 |
|
|
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(774 |
) |
|
|
|
|
|
|
|
|
|
Long-term
portion of obligations
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
Purchase
Commitments
At
March 31, 2009, we had approximately $4.6 million in firm, non-cancelable
and unconditional purchase commitments with suppliers.
Contingencies
From time
to time we are party to claims and litigation proceedings arising in the normal
course of business. Currently, we do not believe that there are any claims or
litigation proceeds involving matters will result in the payment of monetary
damages, net of any applicable insurance proceeds, that, in the aggregate, would
be material in relation to our business, financial position, results of
operations or cash flows. There can be no assurance, however, that any such
matters will be resolved without costly litigation, in a manner that is not
adverse to our business, financial position, results of operations or cash
flows, or without requiring royalty payments in the future that may adversely
impact gross margins.
Indemnities,
Commitments and Guarantees
In the normal course of business, we
have made certain indemnities, commitments and guarantees under which we may be
required to make payments in relation to certain transactions. These include
agreements to indemnify our customers with respect to liabilities associated
with the infringement of other parties’ technology based upon our products,
obligation to indemnify our lessors under facility lease agreements, and
obligation to indemnify our directors and officers to the maximum extent
permitted under the laws of the state of Delaware. The duration of such
indemnification obligations, commitments and guarantees varies and, in certain
cases, is indefinite. We have not recorded any liability for any such
indemnification obligations, commitments and guarantees in the accompanying
balance sheets. We do, however, accrue for losses for any known contingent
liability, including those that may arise from indemnification provisions, when
future payment is estimable and probable.
Under
master purchase agreements signed with Cisco in November 2005, we have agreed to
indemnify Cisco for costs incurred in rectifying epidemic failures, up to the
greater of (on a per claim basis) 25% of all amounts paid to us by Cisco during
the preceding 12 months (approximately $12.4 million at March 31, 2009) or $9.0
million, plus replacement costs. If we are required to make payments under the
indemnity, our operating results may be adversely affected.
12.
Comprehensive Income
Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The components of comprehensive income are as follows (in
thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(3,917 |
) |
|
$ |
1,127 |
|
|
Currency
translation adjustments
|
|
|
(53 |
) |
|
|
(10 |
) |
|
Unrealized
gain/(loss) on short term investments
|
|
|
29 |
|
|
|
- |
|
|
Comprehensive
income (loss)
|
|
$ |
(3,941 |
) |
|
$ |
1,117 |
|
13.
Related Party Transactions
We lease
our headquarters facility in Mountain View, California from an affiliate of
Berg & Berg Enterprises, LLC, which holds shares of our common stock.
During the three months ended March 31, 2009 and 2008, we made lease
payments of approximately $247,000 and $242,000, respectively, under this lease
arrangement.
14.
Operating Segments and Geographic Information
We operate as one operating and
reportable segment and sell our products directly to customers in North America,
Asia and Europe. Sales for the geographic regions reported below are based upon
the customer headquarter locations. Following is a summary of the geographic
information related to revenues for the three months ended March 31, 2009 and
2008 (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
United
States
|
|
|
34 |
% |
|
|
42 |
% |
|
Malaysia
|
|
|
29 |
% |
|
|
27 |
% |
|
China
|
|
|
21 |
% |
|
|
19 |
% |
|
Other
|
|
|
16 |
% |
|
|
12 |
% |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
The
following table summarizes customers comprising 10% or more of our gross account
receivable for the periods indicated:
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Huawei
Technologies Corporation
|
|
|
29 |
% |
|
|
* |
|
|
Wintec
Industries Inc
|
|
|
22 |
% |
|
|
48 |
% |
|
Celestica
Corporation
|
|
|
* |
|
|
|
15 |
% |
|
Sanmina
Corporation
|
|
|
19 |
% |
|
|
12 |
% |
|
Jabil
Circuit Incorporated
|
|
|
* |
|
|
|
11 |
% |
|
*
|
Less
than 10% of gross account
receivable
|
15.
Subsequent Events
On April 30,
2009, we entered into a purchase agreement with Integrated Device Technology,
Inc. (“IDT”), pursuant to which we agreed to acquire certain assets and
intellectual property relating to IDT’s network search engines, route and search
accelerator products and inventory for those products. Under the purchase
agreement, we will pay IDT $90 million plus the cost of inventory on hand at the
closing date. At closing, we may, at our option, choose to pay the entire
purchase price in cash or pay $60 million plus the cost of inventory in cash,
and issue a secured promissory note for $30 million payable in two installments
of $15 million each on the first and second anniversaries of the closing
date.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-looking
Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, which include, without
limitation, statements about the market for our technology, our strategy and
competition. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements
of historical fact may be deemed forward-looking statements. For example, the
words “believes”, “anticipates”, “plans”, “expects”, “intends” and similar
expressions are intended to identify forward-looking statements. In addition,
all the information under Item 3 below constitutes a forward-looking
statement. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a discrepancy include, but are not limited to,
those discussed in “Business”, “Risk Factors”, “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” and “Qualitative and
Quantitative Disclosures About Market Risk” in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 4, 2009 and
under “Management’s discussion and Analysis of Financial Condition and Results
of Operations” and “Risk Factors” below. All forward-looking statements in this
document are based on information available to us as of the date of this report
and we assume no obligation to update any such forward-looking statements. The
following discussion should be read in conjunction with our condensed financial
statements and the accompanying notes contained in this quarterly report, except
as required by law. Unless expressly stated or the context otherwise requires,
the terms “we”, “our”, “us” and “NetLogic Microsystems” refer to NetLogic
Microsystems, Inc.
Overview
We are a semiconductor company that designs, develops and sells
proprietary high-performance processors and high-speed integrated circuits that
are used by original equipment manufacturers (OEMs) in routers, switches,
wireless infrastructure equipment, network security appliances, datacenter
servers, network access equipment and network storage devices to accelerate the
delivery of voice, video, data and multimedia content for advanced enterprise,
datacenter, communications and mobile wireless networks. Our knowledge-based
processors, PLPs, and network search engine products are incorporated in systems
used throughout multiple types of networks that comprise the global Internet
infrastructure, including the enterprise, metro, access, edge and core
networking markets, and are designed into systems offered by leading networking
OEMs such as AlaxalA Networks Corporation, Alcatel-Lucent, ARRIS Group, Inc.,
Brocade Communication Systems, Inc., Cisco Systems, Inc., Huawei Technologies
Co., Ltd., and Juniper Networks, Inc.
The
products and technologies we have developed and acquired are targeted to enable
our customers to develop systems that support the increasing speeds and
complexity of the Internet infrastructure. We believe there is a growing need to
include knowledge-based processors and high speed integrated circuits in a
larger number of such systems as networks transition to all Internet Protocol
(IP) packet processing at increasing speeds.
The
equipment and systems that use our products are technically complex. As a
result, the time from our initial customer engagement design activity to volume
production can be lengthy and may require considerable support from our design
engineering, research and development, sales, and marketing personnel in order
to secure the engagement and commence product sales to the customer. Once the
customer’s equipment is in volume production, however, it generally has a life
cycle of three to five years and requires less ongoing support.
In
general, we recognize revenue from sales of our products upon shipment to our
customers or our international stocking sales representatives. Usually, we sell
the initial shipments of a product for a new design engagement directly to the
OEM customer. Once the design enters volume production, the OEM frequently
outsources its manufacturing to contract manufacturers who purchase the products
directly from us.
As a
fabless semiconductor company, our business is less capital intensive than
others because we rely on third parties to manufacture, assemble, and test our
products. In general, we do not anticipate making significant capital
expenditures aside from business acquisitions that we might make from time to
time. In the future, as we launch new products or expand our operations,
however, we may require additional funds to procure product mask sets, order
elevated quantities of wafers from our foundry partners, perform qualification
testing and assemble and test those products.
Because
we purchase all wafers from suppliers with fabrication facilities and outsource
the assembly and testing to third party vendors, a significant portion of our
costs of revenue consists of payments to third party vendors. We do not have
long-term agreements with any of our suppliers and rely upon them to fulfill our
orders.
On
October 24, 2007, we completed the acquisition of Aeluros, Inc (the
“Aeluros Acquisition”). The acquisition was accounted for as a business
combination during the fourth quarter of fiscal 2007. We paid $57.0 million in
cash upon the closing of the transaction in exchange for all of the outstanding
equity securities of Aeluros. We reserved 104,770 shares of common stock for
future issuance upon the exercise of unvested employee stock options of Aeluros
that we assumed and are subject to continued employment vesting requirements. In
addition, under the terms of the definitive agreement, we paid $15.5 million
cash in February 2009 based on the attainment of revenue performance milestones
for the acquired business over the one year period following the close of the
transaction.
Some of
our challenges in fiscal 2009 include improving operating efficiencies in the
light of continued challenging macroeconomic conditions, diversifying our
product offerings and inventory management. We experienced two consecutive
quarter-over-quarter declines in revenue from $38.3 million for our third fiscal
quarter in 2008 to $30.9 million for our fourth fiscal quarter in 2008 to $30.4
million for our first fiscal quarter in 2009. We believe the decrease in demand
was primarily due to macroeconomic conditions that decreased customer demand for
our products. In response, we have focused on operating efficiencies and lowered
our operating expenses from $20.8 million for the third quarter of fiscal 2008
to $20.1 million for the fourth fiscal quarter in 2008 to $19.0 million for the
first quarter in 2009. We expect to remain focused on maintaining our operating
expenses at an appropriate level relative to our revenue during this period of
macroeconomic weakness.
During
the three months ended March 31, 2009 and 2008, our top five customers accounted
for approximately 75% and 69%, respectively, of total product revenue,
respectively. Favorable market trends, such as the increasing number of 10
Gigabit ports as enterprises and datacenters upgrade their legacy networks to
better accommodate the proliferation of video and virtualization applications,
growth in the cable infrastructure area of our business, and the growing mobile
wireless infrastructure and IPTV markets, have enabled us to broaden our
customer base and increase demand for our knowledge-based processors and network
search engines. Additionally, we have further diversified our customer and
product revenues by expanding our product portfolio to address Layer 7
content processing with our NETL7™
processor family, the Layer 1 physical layer with our 10 Gigabit Ethernet
products, and entry level equipment with our NETLite™ processors.
As an
integral part of our efforts to diversify our product and customer base, as well
as strengthen our competitive positioning, and broaden our technology portfolio
and research and development capabilities, we have entered into strategic
acquisitions of products and technology, including the acquisition of the TCAM2
products and Sahasra algorithmic technology from Cypress and the acquisition of
Aeluros and its PLP products.
Cisco and
its contract manufacturers have accounted for a large percentage of our
historical revenue, although the percentage of our overall revenue attributable
to Cisco and its contract manufacturers declined for 2008. At Cisco’s request,
in 2007, we transitioned into a just-in-time inventory arrangement covering
substantially all of our product shipments to Cisco and its contract
manufacturers. Pursuant to this arrangement we deliver products to Wintec
Industries (“Wintec”) based on orders they place with us, but we do not
recognize product revenue unless and until Wintec reports that it has delivered
the product to Cisco or its contract manufacturer to incorporate into its end
products. Given this arrangement, unless Cisco or its contract manufacturers
take possession of our products from Wintec in accordance with the schedules
provided to us, our predicted future revenue stream could vary substantially
from our forecasts, and our results of operations could be materially and
adversely affected. Additionally, because we own the inventory physically
located at Wintec until it is shipped to Cisco and its contract manufacturers,
our ability to effectively manage inventory levels may be impaired, causing our
total inventory levels to increase. This, in turn, could increase our
expenses associated with excess and obsolete product and negatively impact our
cash flows. During the three months ended March 31, 2009 and 2008, our revenues
from Cisco and Cisco’s contract manufactures were $9.7 million and $12.7
million, or approximately 32% and 37% of total revenue.
Critical
Accounting Policies and Estimates
The
preparation of our condensed unaudited financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base these estimates and assumptions
on historical experience and evaluate them on an on-going basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. There were no changes to our critical accounting
policies and estimates discussed in our 2008 Annual Report on Form
10-K.
Foreign
Currency
Effective
January 1, 2009, the functional currency for all of our foreign subsidiaries
became the United States dollar. Assets and liabilities denominated
in non-U.S. dollars are remeasured into U.S. dollars at end-of-period exchange
rates for monetary assets and liabilities, and historical exchange rates for
nonmonetary assets and liabilities. Revenue and expenses are remeasured at
average exchange rates in effect during the period, except for those revenue and
expenses related to the nonmonetary assets and liabilities, which are measured
at historical exchange rates. The gains or losses from foreign
currency remeasurement are included in interest and other income,
net. Such gains or losses have not been material for the three months
ended March 31, 2009. The impact of this change was not material
to all prior periods presented.
Results
of Operations
Comparison
of Three Months Ended March 31, 2009 with Three Months Ended March 31,
2008
Revenue,
cost of revenue and gross profit
The table
below sets forth data concerning the fluctuations in our revenue, cost of
revenue and gross profit data for the three months ended March 31, 2009 and
the three months ended March 31, 2008 (in thousands, except percentage
data):
|
|
|
Three
Months
ended
March
31,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
March
31,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
|
Revenue
|
|
$ |
30,366 |
|
|
|
100.0 |
% |
|
$ |
34,180 |
|
|
|
100.0 |
% |
|
$ |
(3,814 |
) |
|
|
-11.2 |
% |
|
Cost
of revenue
|
|
|
13,544 |
|
|
|
44.6 |
% |
|
|
15,383 |
|
|
|
45.0 |
% |
|
|
(1,839 |
) |
|
|
-12.0 |
% |
|
Gross
profits
|
|
$ |
16,822 |
|
|
|
55.4 |
% |
|
$ |
18,797 |
|
|
|
55.0 |
% |
|
$ |
(1,975 |
) |
|
|
-10.5 |
% |
Revenue. Revenue for the
three months ended March 31, 2009 decreased by $3.8 million compared with
the three months ended March 31, 2008. Revenue from sales to Wintec, Cisco
and Cisco’s contract manufacturers (collectively “Cisco”) represented $9.7
million of our total revenue for the three months ended March 31, 2009,
compared with $12.7 million during the three months ended March 31, 2008.
The decrease in sales to Cisco was primarily due to a decrease of $4.7 million
in revenue from sales of our NL5000 and network search engine products, although
this decline was largely offset by increased revenue of our new products to
Cisco, including NL7000 and NL8000 products which increased $1.8 million.
Revenue from non-Cisco customers represented $20.7 million of total revenue for
the three months ended March 31, 2009 compared with $21.5 million in the same
quarter of the prior year. During the three months ended March 31, 2009 and
2008, Alcatel Lucent and Huawei accounted for 16% and 11%, and 13% and 6%,
respectively, of our total revenue. Notwithstanding these increases,
in the first quarter of 2009, we recorded an overall decrease in sales to other
non-Cisco customers, reflecting an overall softening of customer demand in light
of recently deteriorating macroeconomic conditions.
Cost of Revenue/Gross Profit/Gross
Margin. Cost of revenue for the three months ended March 31, 2009
decreased by $1.8 million compared with that of the three months ended
March 31, 2008. Cost of revenue decreased primarily due to a decrease in
product sales. Cost of revenue for the three months ended March 31, 2009 and
2008 included $3.0 million and $3.0 million, respectively, of amortization of
intangible assets expense, and $0.2 million and $0.4 million of a provision for
excess and obsolete inventory.
Operating
expenses
The table
below sets forth operating expense data for the three months ended
March 31, 2009 and the three months ended March 31, 2008 (in
thousands, except percentage data):
|
|
|
Three
Months
ended
March
31,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
March
31,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
12,198 |
|
|
|
40.2 |
% |
|
$ |
12,206 |
|
|
|
35.7 |
% |
|
$ |
(8 |
) |
|
|
-0.1 |
% |
|
Selling,
general and administrative
|
|
|
6,814 |
|
|
|
22.4 |
% |
|
|
6,464 |
|
|
|
18.9 |
% |
|
|
350 |
|
|
|
5.4 |
% |
|
Total
operating expenses
|
|
$ |
19,012 |
|
|
|
62.6 |
% |
|
$ |
18,670 |
|
|
|
54.6 |
% |
|
$ |
342 |
|
|
|
1.8 |
% |
Research and Development
Expenses. Research and development expenses increased for the three
months ended March 31, 2009, compared with the same period in 2008
primarily due to increases in payroll and payroll related expenses of $0.8
million, software licenses expenses of $0.4 million, and stock-based
compensation expenses of $0.1 million, offset by decreases in product
development and qualification expenses of $0.7 million, travel expenses of $0.3
million and consulting and outside vendor expenses of $0.2 million. The increase
in payroll and payroll related expenses was primarily due to increases in
engineering headcount to support our new product development efforts. The
increase in software license expenses was primarily due to amortization expense
for our software licenses used for our internal research and development
projects. The decrease in product development and qualification expense was
primarily due to the production qualification and characterization of our
processors. Product development and qualifications costs vary from period to
period depending on the timing of development and tape-out of various products.
The remainder of the increase in research and development expenses was caused by
individually minor items.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $0.4
million during the three months ended March 31, 2009, compared with the
same period in 2008, primarily due to increases in payroll and payroll related
expenses of $0.3 million, and stock-based compensation of $0.6 million, offset
by decreases in commission expenses of $0.2 million, other professional service
expenses of $0.1 million and consulting and outside vendor expenses of $0.1
million. The increase in payroll and payroll related expenses and stock-based
compensation expenses resulted primarily from increased headcount to support our
growing operations in the sales and marketing areas. The decrease in commission
expense was primarily a result of our decrease in revenue. Selling,
general and administrative expenses also included $0.3 million of amortization
expense for the customer relationship intangible asset in the three months ended
March 31, 2009 and 2008. The remainder of the fluctuation in selling, general
and administrative expenses was caused by individually minor items.
Other
items
The table
below sets forth other data for the three months ended March 31, 2009 and
the three months ended March 31, 2008 (in thousands, except percentage
data):
|
|
|
Three
Months
ended
March
31,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
March
31,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
|
Other
income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
181 |
|
|
|
0.6 |
% |
|
$ |
483 |
|
|
|
1.4 |
% |
|
$ |
(302 |
) |
|
|
-62.5 |
% |
|
Other
income (expense), net
|
|
|
(8 |
) |
|
|
0.0 |
% |
|
|
4 |
|
|
|
0.0 |
% |
|
|
(12 |
) |
|
|
-300.0 |
% |
|
Total
interest and other income, net
|
|
$ |
173 |
|
|
|
0.6 |
% |
|
$ |
487 |
|
|
|
1.4 |
% |
|
$ |
(314 |
) |
|
|
-64.5 |
% |
Interest and Other Income
(Expenses), Net. Interest and other net income decreased by $0.3
million for the three months ended March 31, 2009, compared with the three
months ended March 31, 2008 primarily due to lower market yields for our
investments. Our cash, cash equivalents and short-term investments balance
increased from $55.8 million at March 31, 2008 to $88.9 million at
March 31, 2009.
|
|
|
Three
Months
ended
March
31,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
ended
March
31,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
|
Provision
for (benefit from) income taxes
|
|
$ |
1,900 |
|
|
|
6.3 |
% |
|
$ |
(513 |
) |
|
|
1.4 |
% |
|
$ |
2,413 |
|
|
|
-470.4 |
% |
Provision for Income
Taxes. During the three months ended March 31, 2009, we
recorded an income tax provision of $1.9 million. We established a
valuation allowance of $3.0 million for tax credits that are unlikely to be
utilized in California in light of a legislative change enacted in February 2009
which affected the rules on state income apportionment for tax years beginning
in 2011. Excluding the aforementioned, our effective tax rate for the three
months ended March 31, 2009 was primarily driven by a rate differential for
book income generated in foreign jurisdictions and book losses generated in the
United States.
Liquidity
and Capital Resources: Changes in Financial Condition
At
March 31, 2009, our principal sources of liquidity were our cash, cash
equivalents, and short-term investments which totaled $88.9 million. In
February 2009, we paid $15.5 million to the former Aeluros stockholders due to
attainment of post-acquisition revenue milestones, subject to certain
adjustments as provided in the Aeluros acquisition agreement
The
Company’s cash, cash equivalents and short-term investments are invested with
financial institutions in deposits that, at times, may exceed federally insured
limits. The Company had not experienced any losses on its deposits of cash and
cash equivalents as of March 31, 2009. However, we believe that the
capital and credit markets have been experiencing unprecedented levels of
volatility and disruption and that recent U.S. sub-prime mortgage defaults have
had a significant impact across various sectors of the financial markets,
causing global credit and liquidity issues. We can provide no assurance
that our cash, cash equivalents, and short-term investments will not be
adversely affected by these matters in the future.
The table
below sets forth the key components of cash flow for the three months ended
March 31, 2009 and 2008 (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
8,651 |
|
|
$ |
5,572 |
|
|
Net
cash used in investing activities
|
|
$ |
(22,457 |
) |
|
$ |
(365 |
) |
|
Net
cash used in financing activities
|
|
$ |
(534 |
) |
|
$ |
(61 |
) |
Cash
Flows during the Three Months Ended March 31, 2009
Our net
cash provided by operating activities was $8.7 million for the three months
ended March 31, 2009, which primarily consisted of $3.9 million of net
loss, $12.2 million of non-cash operating expenses and $0.4 million in changes
in operating assets and liabilities. Non-cash operating expenses for
the three months ended March 31, 2009, included stock-based compensation of $4.3
million, depreciation and amortization of $4.3 million, deferred income taxes,
net of $3.3 million, and provision for inventory reserve of $0.3
million. Changes in operating assets and liabilities were primarily
driven by a decrease in deferred margin of $1.0 million, inventory of $2.5
million, and accrued liabilities of $0.2 million due a decrease in product
sales, offset by an increase in prepaid and other current assets of $2.0
million, accounts payable of $0.7 million and other long-term liabilities of
$0.3 million.
Our net
cash used in investing activities was $22.5 million for the three months
ended March 31, 2009, of which we used $15.5 million for the payment of
Aeluros post-acquisition revenue milestone, $14.6 million for the purchase of
short-term investments, and $0.3 million to purchase property and equipment,
offset by $7.9 million of sales and maturities of short-term
investments. We expect to make capital expenditures of approximately
$2.5 million primarily for design tools during the remainder of 2009, to
support product development activities. We will use our cash and cash
equivalents to fund these expenditures.
Our net
cash used in financing activities was $0.5 million for the three months ended
March 31, 2009, primarily for prepayments of software licenses and other
obligations of $0.4 million and payments for retirement of common stock of $0.3
million, offset from proceeds of stock option
exercises of $0.2 million.
Cash
Flows during the Three Months Ended March 31, 2008
Our net
cash provided by operating activities was $5.6 million for the three months
ended March 31, 2008, which resulted primarily from net income of $1.1
million adjusted for non-cash reconciling items of approximately $8.5 million,
related to depreciation and amortization expenses of $4.3 million, stock-based
compensation expenses of $3.7 million, and a provision for inventory reserves of
$0.5 million. Net cash provided by operating activities was negatively impacted
by net changes in assets and liabilities of $4.0 million. Net changes in assets
and liabilities primarily consisted of increases in accounts receivables of $4.9
million and inventory of $2.4 million on higher product sales, and an increase
in accounts payable and accrued liabilities of $3.1 million.
Our net
cash used in investing activities was $0.4 million for the three months
ended March 31, 2008. We used $0.4 million to purchase computer equipment
and research and development design tools to support our on-going R&D
projects. We expect to make capital expenditures of approximately
$3.1 million primarily for design tools during the remainder of 2008, to
support product development activities. We will use our cash and cash
equivalents to fund these expenditures.
Our net
cash used in financing activities was $0.1 million for the three months ended
March 31, 2008, as, $0.4 million of proceeds of stock option exercises were
offset by $0.5 million of prepayments of software licenses and other
obligations.
Capital
Resources
We
believe that our existing cash, cash equivalents and short-term investment
balance of $88.9 million will be sufficient to meet our anticipated cash needs
for at least the next 12 months. On April 30, 2009, we entered into a
purchase agreement with Integrated Device Technology, Inc (“IDT”), pursuant to
which we agreed to acquire certain assets and intellectual property relating
IDT’s network search engines, route and search accelerator products and
inventory for those products. Under the purchase agreement, we will
pay IDT $90 million plus the cost of inventory on hand at the closing
date. At closing, we may, at our option, choose to pay the entire
purchase price in cash or pay $60 million plus the cost of inventory in cash,
and issue a secured promissory note for $30 million payable in two installments
of $15 million each on the first and second anniversaries of the closing
date.
Our
future cash needs will depend on many factors, including the amount of revenue
we generate, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of
introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products,
and any future business acquisitions that we might undertake. We may
seek additional funding through public or private equity or debt
financing. However, additional funds may not be available on terms
acceptable to us or at all. We also might decide to raise additional
capital at such times and upon such terms as management considers favorable and
in the interests of the Company, including, but not limited to, from the sale of
our debt and/or equity securities (before reductions for expenses, underwriting
discounts and commissions) under our shelf registration
statement.
Contractual
Obligations
Our
principal commitments as of March 31, 2009 consisted of operating lease
obligation payments, wafer purchases, and payments on software licenses and
other obligations, which are summarized below (in thousands):
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1
- 3
years
|
|
|
4
-5
years
|
|
|
After
5
years
|
|
|
Operating
lease obligations
|
|
$ |
2,290 |
|
|
$ |
1,005 |
|
|
$ |
1,285 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Software
license obligations
|
|
|
815 |
|
|
|
774 |
|
|
|
41 |
|
|
|
- |
|
|
|
- |
|
|
Wafer
purchases
|
|
|
4,571 |
|
|
|
4,571 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
7,676 |
|
|
$ |
6,350 |
|
|
$ |
1,326 |
|
|
$ |
- |
|
|
$ |
- |
|
In
addition to the enforceable and legally binding obligations quantified in the
table above, we have other obligations for goods and services entered into in
the normal course of business. These obligations, however, are either not
enforceable or legally binding, or are subject to change based on our business
decisions.
|
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
The
primary objective of our investment activities is to preserve principal while
maximizing the income we receive from our investments without significantly
increasing the risk of loss. Some of the investable securities permitted under
our cash management policy may be subject to market risk for changes in interest
rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalent
and short-term investments in a variety of securities which may include
investment grade commercial paper, money market funds, government debt issued by
the United States of America, state debt, certificates of deposit and investment
grade corporate debt. Presently, we are exposed to minimal market risks
associated with interest rate changes. We manage the sensitivity of our results
of operations to these risks by maintaining investment grade short-term
investments. Our cash management policy does not allow us to purchase or hold
derivative or commodity instruments or other financial instruments for trading
purposes. Additionally, our policy stipulates that we periodically monitor our
investments for adverse material holdings related to the underlying financial
solvency of the issuer. As of March 31, 2009, our investments consisted
primarily of money market funds and U.S. government securities. Our results of
operations and financial condition would not be significantly impacted by either
a 10% increase or decrease in interest rates due mainly to the short-term nature
of our investment portfolio.
Our sales
outside the United States are transacted in U.S. dollars; accordingly our
sales are not generally impacted by foreign currency rate changes. Our operating
expenses are denominated primarily in U.S. Dollars, except for expenses incurred
by our wholly owned subsidiaries, which are denominated in the local currency.
To date, fluctuations in foreign currency exchange rates have not had a material
impact on our results of operations.
The
change in our internal controls over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting consisted of the implementation of a new enterprise
resource planning system and related control processes.
Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of March 31, 2009. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2009 to ensure that
information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is (i) recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
We
face many significant risks in our business, some of which are unknown to us and
not presently foreseen. These risks could have a material adverse impact on our
business, financial condition and results of operations in the future. We have
disclosed a number of material risks under Item 1A of our annual report on
Form 10-K for the year ended December 31, 2008, which we filed with the
Securities and Exchange Commission on March 4, 2009. The following
discussion is of material changes to risk factors disclosed in that
report.
Because
we rely on a small number of customers for a significant portion of our total
revenue, the loss of, or a significant reduction in, orders for our products
from these customers would negatively affect our total revenue and
business.
To date,
we have been dependent upon orders for sales of knowledge-based processors to a
limited number of customers, and, in particular, Cisco, for most of our total
revenue. During the three months ended March 31, 2009 and 2008, Cisco and
its contract manufacturers accounted for 32% and 37% of our total revenue,
respectively. We expect that our future financial performance will continue to
depend in large part upon our relationship with Cisco and several other
networking OEMs.
We cannot
assure you that existing or potential customers will not develop their own
solutions, purchase competitive products or acquire companies that use
alternative methods in their systems. We do not have long-term purchase
commitments from any of our OEM customers or their contract manufacturers.
Although we entered into master purchase agreements with Cisco, one of Cisco’s
foreign affiliates and a Cisco purchasing agent, these agreements do not include
any long-term purchase commitments. Cisco and our other customers do business
with us currently only on the basis of short term purchase orders (subject, in
the case of Cisco, to the terms of the master purchase agreements), which often
are cancelable prior to shipment. The loss of orders for our knowledge-based
processors for Cisco products or products of other major users of our
knowledge-based processors would have a significant negative impact on our
business.
An
Exhibit Index has been attached as part of this quarterly report and is
incorporated herein by reference.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NETLOGIC
MICROSYSTEMS, INC.
|
|
|
|
|
|
|
Dated: May
5, 2009
|
|
|
|
By:
|
|
/s/
RONALD JANKOV
|
|
|
|
|
|
|
|
|
|
Ronald
Jankov
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: May
5, 2009
|
|
|
|
By:
|
|
/s/
MICHAEL TATE
|
|
|
|
|
|
|
|
|
|
Michael
Tate
Vice
President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
31.1
|
|
Rule
13a-14 certification
|
|
|
|
|
31.2
|
|
Rule
13a-14 certification
|
|
|
|
|
32.1
|
|
Section
1350 certification
|
|
|
|
|
32.2
|
|
Section
1350 certification
|