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| TUNE > SEC Filings for TUNE > Form 10-Q on 23-Apr-2009 | All Recent SEC Filings |
23-Apr-2009
Quarterly Report
Caution Regarding Forward-Looking Statements
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us as of the date of this report and are therefore subject to change. In some cases, you can identify these statements by words such as "if," "may," "might," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and other similar terms. These forward-looking statements include, but are not limited to, projections of our future financial performance and our anticipated growth, our accounting estimates, assumptions and judgments, the demand for our products, descriptions of our strategies, our product and market development plans, the trends we anticipate in our business and the markets in which we operate, the competitive nature and anticipated growth of those markets, our dependence on a few key customers for a substantial portion of our net revenue, our ability to continue to successfully partner with strategic demodulator partners and our ability to successfully address new markets where competition is intense.
We caution readers that the forward-looking statements in this report are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially and adversely from those expressed or implied by any forward-looking statements as a result of various factors. We caution readers not to rely on these forward-looking statements, which reflect management's analysis only as of the date of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statement for any reason, except as otherwise required by law.
NOTE: For a more complete understanding of our financial condition and results of operations, and the risks that could affect our future results, see "Risk Factors" in Part II, Item 1A. below which describes some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the United States Securities and Exchange Commission (SEC), before deciding to make an investment in our stock. You should also read "Quantitative and Qualitative Disclosures About Market Risk" in Part I, Item 3. below.
You should also read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and related Notes in Part I, Item 1., "Financial Statements."
OVERVIEW
Microtune, Inc. was incorporated in 1996. We design and market radio frequency (RF) integrated circuits (ICs) and subsystem module solutions for the cable, automotive entertainment electronics and digital television (DTV) markets. Our tuner, amplifier and upconverter products permit the delivery, reception and exchange of broadband video, audio and data using terrestrial (off-air) and/or cable communications systems. Our tuner products shipped into the cable and DTV markets are in the form of ICs while our tuner products shipped into the automotive entertainment electronics market are principally in the form of subsystem modules, but are expected to be increasingly in the form of ICs in the near future. Our amplifier products are principally in the form of both ICs and subsystem modules and our upconverter products are principally in the form of subsystem modules, but also contain our ICs.
Our products enable or target various consumer electronics, broadband communications and automotive entertainment electronics applications or devices, including cable television set-top boxes; DOCSIS®-based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including high-definition televisions (HDTV); personal computer television (PC/TV) multimedia products; and mobile television receivers. We sell our products to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) who sell devices, subsystems and applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. We operate Microtune as a single business unit or reportable operating segment serving our target markets. We record our operating expenses by functional area and account type, but we do not record or analyze our operating expenses by market, product type or product. We attempt to analyze our net revenue by market, but in some cases we sell our products to resellers or distributors serving multiple end markets, giving us limited ability to determine market composition of our net revenue from these customers. In addition, certain of our OEM customers purchase products from us for applications in multiple end-markets, also limiting our ability to determine our net revenue contribution from each market.
The cable, automotive entertainment electronics and DTV markets are intensely competitive and historically have seen rapid changes in demand. Certain applications, such as PC/TV, within our target markets can be characterized as having short product life cycles due to rapid technological changes, relatively simple application designs and aggressive competitive pricing. These factors can result in rapidly decreasing average selling prices, which we attempt to mitigate with our product cost reduction efforts and higher levels of integration and functionality. The volatility of demand within our target markets makes it difficult for us to identify and discuss business trends or to predict future results.
Today, our products are marketed principally to OEMs and ODMs in the following markets:
• Cable
Products targeting this market send and/or receive cable broadband signals. These products include tuners used in consumer premise equipment (CPE), including high-speed voice and data cable modems, digital cable set-top boxes and hybrid analog/digital cable set-top boxes; upconverter modules and chipsets used in headend modulators; and RF amplifiers used to send and receive signals between the cable headend and CPE. In some cases, the same tuners may be used to receive digital terrestrial signals. In this market, performance, the ability to support industry standards and overall solution cost are key factors in competing for design wins. Design cycles in the cable market can range from a few months to more than one year.
• Automotive Entertainment Electronics
This market includes products targeting mobile automotive and, to a lesser extent, commercial aircraft environments. Our automotive entertainment electronics products range from components for traditional AM/FM radios (including tuners and antenna amplifiers) to components for emerging entertainment applications, including in-car television; in-flight video; digital radio, such as digital audio broadcast (DAB); and HD radio™. Both performance and overall solution cost are key competitive factors in this market. Design cycles in the automotive entertainment electronics market are generally very long, in some cases, two to three years.
• Digital Television
Products targeting this market receive digital terrestrial signals or digital and analog terrestrial signals. These products are designed for use in consumer electronics devices such as mobile televisions; integrated digital television (iDTV) sets; digital terrestrial set-top converter boxes; satellite and IP set-top boxes that include one or more terrestrial tuners used to receive local high-definition television broadcasts; portable DVD players; digital video recorders (DVRs); DVD recorders; and PC/TV multimedia products, including both USB and PCI or PCI Express OEM and add-on devices. Products targeting these applications require both high performance and competitive overall solution cost. The design cycles for PC/TV are relatively shorter and require very low overall solution cost and low power consumption. Design cycles in the DTV market can range from a few months to more than one year for peripheral devices and from a few months to several months for PC/TV applications.
We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:
• Net Revenue: Our net revenue is generated principally by sales of our ICs and subsystem module products directly to OEMs and ODMs who sell devices or applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. The devices or applications that our customers produce include cable television set-top boxes; DOCSIS®-based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including HDTVs; PC/TV multimedia products; and mobile television receivers. We also market and sell to third-party manufacturers and to distributors who sell directly to the OEMs and ODMs. The majority of our net revenue is generated through the efforts of our sales organization. However, we generated approximately 8% and 10% of our net revenue from sales made to distributors in the first quarter of 2009 and 2008, respectively. Our net revenue varies based upon economic and market conditions in the semiconductor industry and our target markets; the timing, rescheduling or cancellation of customer orders; our ability, as well as the ability of our customers, to manage inventory; seasonality in the demand for consumer products into which our products are incorporated; and large orders placed by our key customers. These factors may cause our quarterly and yearly net revenue to fluctuate significantly, which makes it difficult for us to discuss revenue trends or to predict future results. We expect these fluctuations will continue in the future. We analyze trends in total net revenue and we attempt to analyze total net revenue trends by market, which is limited due to our lack of visibility into customers and/or applications, as described above. We also analyze revenue from key customers, focusing on our ten-percent customers, and aggregate net revenue from our top ten customers.
• Operating Expenses: Operating expenses are substantially driven by personnel-related expenses, including cash and stock-based compensation expense, lab supplies, training and prototype materials, professional fees and insurance expenses. We record stock-based compensation expense in operating expenses in accordance with SFAS No. 123(R), which has resulted in a material charge each period as the majority of our employees are classified in this category. We analyze trends in the absolute dollar value and percentage of net revenue for research and development and selling, general and administrative expenses. We also analyze the underlying expense inputs of significant operating expenses.
• Other Income and Expense: We analyze the individual components of other income and expense. We also analyze interest income and the rate of return earned on our cash and cash equivalents and short-term investments.
• Liquidity and Cash Flows: Our cash flows are primarily driven by our cash operating results and sales and purchases of investments. The primary source of our liquidity is our cash and cash equivalents and short-term investments. From period to period, we experience fluctuations in various items, including our working capital accounts, capital expenditures and proceeds from the exercise of employee stock options and shares purchased under our employee stock purchase program.
• Balance Sheet: We view cash and cash equivalents, short-term investments, accounts receivable, days sales outstanding, inventory, inventory turns, and working capital as important indicators of our financial health.
RESULTS OF OPERATIONS
The following table shows certain data from our consolidated statements of
operations expressed as a percentage of net revenue:
Three Months Ended
March 31,
2009 2008
Net revenue 100 % 100 %
Cost of revenue 53 52
Gross margin 47 48
Operating expenses:
Research and development 37 24
Selling, general and administrative 31 23
Total operating expenses 68 47
Income (loss) from operations (21 ) 1
Other income (expense) 1 3
Income (loss) before income taxes (20 ) 4
Income tax expense - 1
Net income (loss) (20 )% 3 %
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Net Revenue
The following table presents net revenue from each of our product types for the
first quarter of 2009 as compared to the first quarter of 2008 (in thousands):
Three Months Ended March 31,
2009 2008 Change % Change
Silicon $ 14,598 $ 19,340 $ (4,742 ) (25 )%
Modules 3,297 6,113 (2,816 ) (46 )
Other - 10 (10 ) (100 )
Total $ 17,895 $ 25,463 $ (7,568 ) (30 )
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The decrease in net revenue in the first quarter of 2009 as compared to the first quarter of 2008 was primarily the result of decreased shipments of silicon tuner products for the cable market, module products for the automotive entertainment electronics market, silicon tuner products for the DTV market and slightly lower average selling prices of silicon tuner products for the cable market. Silicon tuner unit shipments decreased by approximately 21% in the first quarter 2009 as compared to the first quarter of 2008, primarily relating to the cable and DTV markets. Module unit shipments for the automotive entertainment electronics market decreased by approximately 45% in the first quarter of 2009 as compared to the first quarter of 2008, primarily relating to car television applications. We believe these decreased shipments were primarily driven by the challenging economic environment and do not relate to the loss of market share.
We expect net revenues to decline significantly in 2009 as compared to 2008, primarily due to the impact of the economic slowdown, and to a lesser extent, the expected decrease in car television revenue as described above.
Net revenue from customers, including their respective manufacturing subcontractors, exceeding 10% of total net revenue was as follows:
Three Months Ended
March 31,
2009 2008
Cisco 36 % 27 %
Unihan (1)(2) 14 % 18 %
Panasonic 10 % 12 %
Samsung * 10 %
Ten largest customers 88 % 86 %
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(1) Primarily for the benefit of ARRIS Group, Inc.
(2) A wholly-owned subsidiary of Asustek Computer
* Less than 10% of total net revenue
Cost of Revenue and Gross Margin
The following table presents cost of revenue and gross margin for the first
quarter of 2009 as compared to the first quarter of 2008 (in thousands):
Three Months Ended
March 31,
2009 2008 Change % Change
Cost of revenue $ 9,464 $ 13,222 $ (3,758 ) (28 )%
Gross margin 8,431 12,241 (3,810 ) (31 )
Gross margin % 47.1 % 48.1 % (1.0 )pts.
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Gross margin decreased in the first quarter of 2009 as compared to the first quarter of 2008 primarily due to an approximate $7.6 million decrease in net revenue and a 1.0 point decrease in gross margin percentage. Gross margin percentage in the first quarter of 2009 as compared to the first quarter of 2008 was negatively impacted by an increase in the inventory valuation allowance,
particularly for cable set-top box silicon products and car television module products and slightly lower average selling prices of silicon tuner products for the cable market, partially offset by an increase in gross margin percentage for the cable modem market segment and a decrease in net revenue for the automotive entertainment electronics market as a percentage of total net revenue, which had a lower gross margin percentage as compared to other markets.
We expect our gross margin percentage for the year 2009 to be similar to the year 2008 and fall within our target range of 49% to 50%, although the gross margin percentage for any particular quarter may fall outside our target range.
Our cost of revenue for the first quarter of 2009 and 2008 benefited from the sale of inventory which had previously been identified as excess to expected demand and expensed in prior periods. The total value of these inventories for the first quarter of 2009 and 2008 was $0.2 million and $0.2 million, respectively. The net impact of changes in the inventory valuation allowance for the first quarter of 2009 and 2008 was a charge (benefit) of $0.8 million and $(0.1) million, respectively.
Stock-Based Compensation
The following table summarizes the allocation of stock-based compensation
expense under SFAS No. 123(R) (in thousands):
Three Months Ended
March 31,
2009 2008
Cost of revenue $ (2 ) $ 5
Research and development 467 358
Selling, general and administrative 655 691
Total stock-based compensation expense included in operating
expenses $ 1,122 $ 1,049
Total stock-based compensation expense $ 1,120 $ 1,054
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Operating Expenses
The following table presents operating expenses for the first quarter of 2009 as
compared to first quarter of 2008 (in thousands):
Three Months Ended
March 31,
2009 2008 Change % Change
Research and development $ 6,599 $ 6,017 $ 582 10 %
Selling, general and administrative 5,685 5,959 (274 ) (5 )
Total $ 12,284 $ 11,976 $ 308 3
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Research and Development Expenses
Our research and development expenses consist primarily of personnel-related expenses, engineering software, prototype materials, lab supplies and training. To date, we have expensed all of our research and development costs in the period incurred as our process for developing our products has been essentially completed concurrently with the establishment of technological feasibility. Research and development efforts currently are focused primarily on development of our next generation of products and designing more highly-integrated products that leverage next-generation technology.
The increase in research and development expenses in the first quarter of 2009 as compared to the first quarter of 2008 was primarily the result of an increase in personnel-related expenses resulting from an average headcount increase of approximately 8%, an increase in compensation expense incurred in conjunction with our regular annual base compensation adjustments, the effects of a benefit of $0.3 million for the reversal of taxes and interest accrued in excess of amounts paid to the IRS upon completion of its examination of our payroll tax returns for 2003 through 2006 recognized during the first quarter of 2008 and an increase in expenditures to design our silicon products, including license and maintenance fees for engineering software, partially offset by a decrease in prototyping expenses for new and existing silicon projects. Stock-based compensation expense related to research and development was $0.5 million and $0.4 million in the first quarter of 2009 and 2008, respectively.
We expect research and development expenses to increase in 2009 between 7% and 12% as compared to 2008 due to the full year impact of expenses that ramped throughout 2008 and minor incremental spending in 2009, as we have increased the number of RF and technical personnel and as we increase spending on new product development.
We remain committed to significant research and development efforts to support our technology leadership in the markets in which we operate. Currently, we hold 83 issued United States utility patents and have 28 additional United States patent applications pending. Our issued United States patents begin to expire in 2015. Our patents generally cover various aspects of our RF and analog technologies at the broad architectural, circuit and building-block levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include our personnel-related expenses for our administrative, finance, human resources, sales and marketing, information technology and legal departments, and include expenditures related to professional fees for accounting and legal, public relations and financial advisors. These expenses also include promotional and marketing costs, sales commissions and provisions for doubtful accounts.
The decrease in selling, general and administrative expenses in the first quarter of 2009 as compared to the first quarter of 2008 was due to a decrease in professional fees expensed in connection with general legal and accounting matters and audit-related expenses and a decrease in incentive compensation charges related to the 2008 Bonus Program compared to the fiscal year 2007 Bonus Program, partially offset by an increase in professional fees expensed in connection with the SEC litigation against two of our former officers and the effects of a benefit of $0.1 million for the reversal of taxes and interest accrued in excess of amounts paid to the IRS upon completion of its examination of our payroll tax returns for 2003 through 2006 recognized during the first quarter of 2008. The results in the first quarter of 2009 included net charges of $0.6 million related to professional fees of our legal firms expensed in connection with the SEC litigation against two of our former officers and excluded $2.1 million of professional fees of our former officers' legal firms recorded as a receivable for amounts expected to be reimbursed by our directors' and officers' liability insurance carrier related to this matter. See Part II., Item 1. "Legal Proceedings."
We are currently unable to estimate selling, general and administrative expenses in 2009 due to the difficulty predicting potential future professional fees of our legal firms related to the ongoing SEC litigation against two of our former officers.
Other Income and Expense
Other income consists primarily of interest income from our cash balances, net
foreign currency gains and other non-operating income.
The following table presents a comparison of other income for the first quarter
of 2009 and 2008 (in thousands):
Three Months Ended
March 31,
2009 2008 Change % Change
Interest income $ 418 $ 526 $ (108 ) (21 )%
Foreign currency gains (losses), net (214 ) 140 (354 ) (253 )
Other, net 40 2 38 1,900
Total $ 244 $ 668 $ (424 ) (63 )
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