What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-10 compared with 2021-09-08 · 77 added, 70 removed, 234 unchanged (39% of the section changed)

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In the last several years, our development efforts have focused on creating advanced AI technology that enables edge devices to visually perceive the environment and make decisions based on the data collected from cameras and, most recently, other types of sensors.

This category of AI technology is known as computer vision, or CV, and our CV SoCs integrate our state-of-the-art video processor technology together with our recently developed deep learning neural network processing technology, which we refer to as CVflow™.

This category of AI technology is known as computer vision, or CV, and our CV SoCs integrate our state-of-the-art video processor technology together with our deep learning neural network processing technology, which we refer to as CVflow™.

The CVflow-architecture supports a variety of CV algorithms, including object detection, classification and tracking, semantic and instance segmentation, image processing, stereo object detection, terrain mapping, and face recognition.

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Financial Highlights and Trends

We recorded revenue of $79.3 million and $149.5 million for the three and six months ended July 31, 2021, respectively.

This represented increases of 58.3% and 42.7% for the three and six months ended July 31, 2021, respectively, as compared to the same periods in the prior fiscal year.

The increases in revenue were primarily attributable to higher revenue and continued demand for our CV-based solutions in the IP security and automotive camera markets.

In the professional IP security camera market, continued growth in the Asia region and demand recovery from our two largest China customers, together with continued sales penetration into the North America and Europe regions, resulted in a significant revenue increase in this market.

We recorded revenue of $92.2 million and $241.6 million for the three and nine months ended October 31, 2021, respectively.

This represented increases of 64.3% and 50.2% for the three and nine months ended October 31, 2021, respectively, as compared to the same periods in the prior fiscal year.

The increases in revenue were primarily attributable to continued adoption of our CV-based solutions in the IP security and automotive camera markets.

In the professional IP security camera market, strong growth in the Asia and North America regions, together with continued sales penetration into the Europe region, resulted in a significant revenue increase in this market.

In the home IP security camera market, revenue growth continued to be led by the North America region.

A recovery in the automotive OEM and aftermarket applications in the Asia region, as well as the adoption of our SoCs in the automotive fleet market, contributed an increase in revenue in the automotive markets.

The increased revenues from the IP security and automotive camera markets were partially offset by decreased revenue in the consumer aerial drone market.

We recorded operating losses of $6.0 million and $16.1 million for the three and six months ended July 31, 2021, respectively, as compared to operating losses of $15.3 million and $30.9 million for the three and six months ended July 31, 2020, respectively.

A recovery in the automotive OEM and aftermarket applications in the Asia region, as well as continued adoption of our SoCs in the automotive fleet market, contributed an increase in revenue in the automotive markets.

The increased revenues from the IP security and automotive camera markets were partially offset by decreased revenues in the consumer camera markets.

We recorded operating losses of $1.2 million and $17.3 million for the three and nine months ended October 31, 2021, respectively, as compared to operating losses of $16.2 million and $47.2 million for the three and nine months ended October 31, 2020, respectively .

The decreased operating losses were primarily due to increases in revenue and gross profit, partially offset by increased operating expenses.

The increased operating expenses, mainly in support of development of automotive markets and computer vision-based solutions, related primarily to increased marketing and engineering headcount, increased stock-based compensation expenses, as well as increased engineering related costs.

We generated cash flows from operating activities of $9.9 million for the six months ended July 31, 2021, as compared to $5.2 million for the six months ended July 31, 2020.

The increased cash flows from operating activities were primarily due to decreased net loss and increased liabilities associated with the timing of payments to our suppliers, partially offset by increased inventory purchases associated with longer supply chain lead times and increased accounts receivable associated with the amount and timing of sales.

The increased operating expenses, mainly in support of automotive markets and applications for our computer vision-based solutions, related primarily to increased personnel costs associated with headcount growth and benefit programs as well as increased engineering related costs, partially offset by decreased chip tape-out costs due to the timing, complexity and number of chips in development.

We generated cash flows from operating activities of $18.2 million for the nine months ended October 31, 2021, as compared to $18.3 million for the nine months ended October 31, 2020.

The decreased cash flows from operating activities were primarily due to increased inventory purchases associated with longer supply chain lead times, increased accounts receivable associated with the timing of sales and decreased liabilities associated with the timing of payments to our suppliers.

The decreased cash flows from operating activities were partially offset by a lower net loss for the nine months ended October 31, 2021.

During the three months ended O ctober 31, 2021, we liquidated all of our marketable debt security investments for total cash consideration of $215.1 million to partially finance the acquisition of Oculii Corporation, or Oculii Corp., which was completed on November 5, 2021 .

Factors Affecting Our Performance

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Moreover, if there is a significant COVID-19 outbreak that impacts Samsung Electronic Corporation’s ability to manufacture our SoCs or our third-party contractors’ ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers.

For example, Taiwan recently experienced a significant rise in cases of COVID-19 that, if such conditions persist or worsen, could impact our third-party contractors’ ability to assemble, test and ship our products and negatively impair our operations and financial results.

The pandemic may also impact our customers’ ability to manufacture their products, support their customers or reduce or delay demand for their products, which could, in turn, reduce such demand for our solutions.

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The following table sets forth a summary of our statement of operations for the periods indicated:

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

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Loss before income taxes

Provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

The following table sets forth operating results as a percentage of revenue of each line item for the periods indicated:

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

Cost of revenue

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Loss before income taxes

Provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

We derive substantially all of our revenue from the sale of HD and Ultra HD video and image processing SoC solutions to IP security camera OEMs, IP security camera ODMs, OEM automotive or Tier-1 automotive suppliers, and consumer camera OEMs, either directly or through our distributors.

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We have historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the higher revenue quarter.

As we transition away from consumer markets, seasonal impact has decreased.

This fluctuation has been driven primarily by increased sales in IP security and consumer camera markets as our customers build inventories in preparation for the holiday shopping season.

As we transition away from consumer markets, seasonal impact has decreased.

Our average selling prices fluctuate based on the mix of our solutions sold in a period which reflects the impact of both changes in unit sales of existing solutions as well as the introduction and sales of new solutions.

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In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Comparison of the Three and Six Months Ended July 31, 2021 and 2020

Three Months Ended July 31,

Six Months Ended July 31,

Comparison of the Three and Nine Months Ended October 31, 2021 and 2020

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

The increased revenue for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, was primarily attributable to higher revenue and continued demand for our CV-based solutions in the IP security and automotive camera markets.

The increased revenue for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, was primarily attributable to continued adoption of our CV-based solutions in the IP security and automotive camera markets.

In the home IP security camera market, revenue growth continued to be led by the North America region.

The increased revenues from the IP security and automotive camera markets were partially offset by decreased revenue in the consumer aerial drone market.

The increased revenues from the IP security and automotive camera markets were partially offset by decreased revenues in the consumer camera markets.

Cost of Revenue and Gross Margin

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

Cost of revenue

Cost of revenue increased for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased revenue, partially offset by favorable product mix and sales from previously reserved inventory.

Gross margin increased for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to an increase in the percentage of our total revenue that was derived from the higher gross margin automotive markets.

Customer concentration shift from the China region to the North America and Asia regions other than China in the professional IP security camera market also contributed an improvement to the gross margin for the six months ended July 31, 2021.

Cost of revenue increased for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased revenue, partially offset by favorable product mix.

Gross margin increased for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to an increase in the percentage of our total revenue that was derived from the higher gross margin automotive markets.

Customer concentration shift from the China region to Asia regions other than China and to North America in the professional IP security camera market also contributed an improvement to the gross margin for the three and nine months ended October 31, 2021.

Research and Development

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

Research and development

Research and development expense increased for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased employee benefit expense and engineering related costs.

For the three and six months ended July 31, 2021, employee benefit expense increased by approximately $4.3 million and $8.1 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our engineering headcount was 620 at July 31, 2021 compared to 561 at July 31, 2020.

Engineering related costs, including license fee, equipment expense, outside services and facility related expenses associated with the support of new applications, increased by approximately $2.1 million and $3.1 million for the three and six months ended July 31, 2021, respectively.

SoC development related costs increased by approximately $0.2 million for the three months ended July 31, 2021 while decreased by approximately $0.9 million for the six months ended July 31, 2021 due to the timing, complexity and number of chips in development.

Research and development expense increased for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased personnel costs and engineering related costs.

For the three and nine months ended October 31, 2021, personnel costs increased by approximately $4.8 million and $13.0 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our engineering headcount was 618 at October 31, 2021 compared to 568 at October 31, 2020.

Engineering related costs, including equipment expense, outside service and facility related expenses associated with the support of new SoCs and related software, increased by approximately $2.3 million and $5.5 million for the three and nine months ended October 31, 2021, respectively.

The increase was partially offset by decreased SoC development costs due to the timing, complexity and number of chips in development.

For the three and nine months ended October 31, 2021, SoC development costs decreased by approximately $2.3 million and $3.2 million, respectively.

Selling, General and Administrative

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

Selling, general and administrative

Selling, general and administrative expense increased for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased employee benefit expense.

For the three and six months ended July 31, 2021, employee benefit expense increased by approximately $3.4 million and $6.0 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our selling, general and administrative headcount increased from 176 at July 31, 2020 to 189 at July 31, 2021 in support of business development in the IP security, automotive OEM and robotics markets .

The increase was partially offset by a reduction in facility related expenses of approximately $0.8 million and $1.1 million for the three and six months ended July 31, 2021, respectively, caused by additional facility allocation to engineering in support of new applications for the automotive markets as well as the development of computer vision-based solutions .

Selling, general and administrative expense increased for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, primarily due to increased personnel costs and professional services in support of business development in the IP security, automotive and robotics markets.

For the three and nine months ended October 31, 2021, personnel costs increased by approximately $2.0 million and $8.1 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount.

Our selling, general and administrative headcount increased from 178 at October 31, 2020 to 188 at October 31, 2021.

The increase was also attributable to approximately $1.6 million of additional expense from professional services associated with the acquisition of Oculii Corp., for the three and nine months ended October 31, 2021, respectively.

The increase was partially offset by a reduction in facility related expenses of approximately $0.5 million and $1.5 million for the three and nine months ended October 31, 2021, respectively, caused by additional facility allocation to engineering in support of new SoCs and related software for the automotive markets as well as the development of computer vision-based solutions .

Other Income, Net

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

Other income, net

The decrease in other income, net, for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, was primarily due to lower yields from our debt security investments, lower interest from our cash deposits and losses from foreign currency transactions and remeasurements.

Provision for Income Taxes

Three Months Ended July 31,

Six Months Ended July 31,

The decrease in other income, net, for the three and nine months ended October 31, 2021, as compared to the same periods in the prior fiscal year, was primarily due to lower yields from our debt security investments and losses from foreign currency transactions and remeasurements, partially offset by increased realized gains from the liquidation of our debt security investments.

For the nine months ended October 31, 2021, the decrease was also attributable to lower interest from our cash deposits with financial institutions.

Provision (benefit) for Income Taxes

Three Months Ended October 31,

Nine Months Ended October 31,

(dollars in thousands)

Provision for income taxes

Provision (benefit) for income taxes

Effective tax rate

The quarterly income taxes reflect an estimate of the corresponding fiscal year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items arising in that quarter.

The increase in income tax expense for the three and six months ended July 31, 2021, as compared to the same periods in the prior fiscal year, was primarily due to an increase in the proportion of profits generated in higher-tax jurisdictions, partially offset by an increase in the U.S.

federal research tax credit as well as an increase in tax benefits from excess stock-based compensation deductions.

The Company updates its estimate of the annual effective tax rate each quarter, and if the estimated annual tax rate changes, a cumulative adjustment is made in that quarter.

This could result in a higher or lower effective tax rate during a particular quarter, based on the mix and timing of actual earnings or losses versus annual projections.

The change from an income tax provision to an income tax benefit for the three months ended October 31, 2021, as compared to the same period in the prior fiscal year, was primarily due to changes in the amounts of pre-tax income, changes to the Company’s estimated annual effective tax rate, and an increase in tax benefits from excess stock-based compensation deductions.

The decrease in income tax expense for the nine months ended October 31, 2021, as compared to the same period in the prior fiscal year, was primarily due to an increase in the U.S.

federal research tax credit, and an increase in tax benefits from excess stock-based compensation deductions .

Liquidity and Capital Resources

As of July 31, 2021 and January 31, 2021, we had cash, cash equivalents and marketable debt securities of approximately $449.2 million and $440.7 million, respectively.

We invest in highly liquid, short-term marketable debt securities and hold these investments as available-for-sale securities.

As of July 31, 2021, these securities had a fair value of approximately $215.0 million with immaterial unrealized losses caused by market fluctuations.

As of October 31, 2021 and January 31, 2021, we had cash, cash equivalents and marketable debt securities of approximately $457.8 million and $440.7 million, respectively.

During the three months ended October 31, 2021, we liquidated all of our marketable debt security investments for total cash consideration of $215.1 million in anticipation of our acquisition of Oculii Corp.

The following table summarizes our cash flows for the periods indicated:

Six Months Ended July 31,

Nine Months Ended October 31,

(in thousands)

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Net Cash Provided by Operating Activities

Net cash provided by operating activities increased for the six months ended July 31, 2021, as compared to the same period in the prior fiscal year, primarily due to decreased net loss and increased liabilities associated with the timing of payments to our suppliers, partially offset by increased inventory purchases associated with longer supply chain lead times and increased accounts receivable associated with the amount and timing of sales.

Net cash provided by operating activities decreased for the nine months ended October 31, 2021, as compared to the same period in the prior fiscal year, primarily due to increased inventory purchases associated with longer supply chain lead times, increased accounts receivable due to the timing of sales and decreased liabilities associated with the timing of payments to our suppliers.

The decrease was partially offset by a lower net loss for the nine months ended October 31, 2021.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities increased for the six months ended July 31, 2021, as compared to net cash used in investing activities for the same period in the prior fiscal year, primarily due to approximately $22.6 million of additional cash receipts from our debt security investments, partially offset by approximately $3.1 million of additional payments for tangible and intangible assets purchase.

Net cash provided by investing activities increased for the nine months ended October 31, 2021, as compared to net cash used in investing activities for the same period in the prior fiscal year, primarily due to an additional $165.1 million of cash receipts from sale and maturity of debt securities, as well as $56.5 million of less expenditure on investment of debt securities.

The increase was partially offset by approximately $4.7 million of additional payments for tangible and intangible assets purchase.

Net Cash Provided by Financing Activities

Net cash provided by financing activities increased for the six months ended July 31, 2021, as compared to the same period in the prior fiscal year, primarily due to approximately $3.3 million of additional cash proceeds from option exercises and employee stock purchase withholding and $1.0 million of cash used for repurchasing our ordinary shares under the stock repurchase program in the prior fiscal year that did not recur in the current fiscal period.

The increase was partially offset by approximately $0.5 million of additional payments for intangible assets.

Net cash provided by financing activities increased for the nine months ended October 31, 2021, as compared to the same period in the prior fiscal year, primarily due to approximately $4.6 million of additional cash proceeds from option exercises and employee stock purchase withholding and $1.0 million of cash used for repurchasing our ordinary shares under the stock repurchase program in the prior fiscal year that did not recur in the current fiscal period.

Stock Repurchase Program

No ordinary shares were repurchased in the six months ended July 31, 2021.

No ordinary shares were repurchased in the nine months ended October 31, 2021.

During the second quarter of fiscal year 2022, our Board of Directors approved an extension of the prior $50.0 million repurchase program for an additional twelve months ending June 30, 2022.

As of July 31, 2021, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2022.

As of October 31, 2021, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2022.

Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors.

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Operating and Capital Expenditure Requirements

As of July 31, 2021, we had cash, cash equivalents and marketable debt securities of approximately $449.2 million.

As of October 31, 2021, we had cash and cash equivalents of approximately $457.8 million.

On November 5, 2021, we completed our acquisition of Oculii Corp., for $307.5 million in cash.

We believe that our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.

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Manufacturing Purchase Obligations

As of July 31, 2021, we had purchase obligations with our independent contract manufacturers of $72.3 million.

During the first half of fiscal year 2022, we signed a separate lease for additional space for our Shanghai, China office for a period of 40 months starting from August 1, 2021 through November 30, 2024.

The lease will be recorded as an operating right-of-use asset and corresponding operating lease liability in the balance sheet upon lease commencement on August 1, 2021.

T he total estimated future undiscounted cash payments for this additional lease are approximately $1.7 million.

Except as described above with respect to the manufacturing purchase obligations and Shanghai office lease, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

As of October 31, 2021, we had purchase obligations with our independent contract manufacturers of $66.0 million.

Except as described above with respect to the manufacturing purchase obligations, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations, Commitments and Contingencies” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 for a description of our contractual obligations.

Off-Balance Sheet Arrangements

As of July 31, 2021, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

As of October 31, 2021, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Recent Authoritative Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis