The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto for the fiscal year endedJanuary 31, 2022 and management's discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K for the 2022 fiscal year filed with theSecurities and Exchange Commission , orSEC , onApril 1, 2022 . This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations", includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would," "could," "will," "may," "expect," "believe," "should," "anticipate," "outlook," "if," "future," "intend," "plan," "estimate," "predict," "potential," "target," "seek," "project," "forecast," "continue" or "foreseeable" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. Such statements include, but are not limited to, statements concerning our market opportunity and our ability to compete in such markets, our product strategy, our ability to develop and introduce new solutions, our future financial and operating performance, our sales and marketing strategy, our investment strategy, research and development, our customer and supplier relationships and inventory levels, industry trends, our cash needs and capital requirements, our repurchase programs, our expectations about taxes, operating expenses, and cost recognition, the availability of third-party components and economic and political conditions. These statements reflect our current views with respect to future events and our potential financial performance, and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to: risks associated with revenue being generated from new customers or design wins, neither of which is assured; our ability to retain and expand customer relationships and to achieve design wins; the ongoing and potential impact of the COVID-19 pandemic on our operations or the operations of our supply chain or our customers; risks associated with the overall economy, including escalating trade tensions between theU.S. andChina ; the commercial success of our customers' products; our growth strategy; fluctuations in our operating results; our ability to anticipate future market demands and future needs and preferences of our customers; our ability to introduce new and enhanced solutions; the expansion of our current markets and our ability to successfully enter new markets; anticipated trends and challenges, including competition, in the markets in which we operate or seek to operate; our expectations regarding computer vision; our ability to effectively generate and manage growth; our ability to retain key employees; the potential for intellectual property disputes or other litigation; the risks described under Item 1A of Part II - "Risk Factors," and Item 2 of Part I - "Management's Discussion and Analysis of Financial Condition and Results of Operations"; the risks described elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with theSEC . We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.
Overview
We are a leading developer of low-power system-on-a-chip, or SoC, semiconductors providing powerful artificial intelligence, or AI, processing, advanced image signal processing and high-resolution video compression. Since inception, we have primarily served human viewing applications with video and image processors for enterprise, public infrastructure and home applications, such as internet protocol, or IP, security cameras, sports cameras, wearables, aerial drones, and aftermarket automotive video recorders. Our recent 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 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. CVflow can process other sensor modalities including lidar and radar, and allows customers to differentiate their products by porting their own, or third party, neural networks and/or classical CV algorithms to our CVflow-based SoCs. Our SoC designs fully integrate AI, computer vision functionality, HD video processing, image processing, audio processing, and system functions onto a single chip, delivering exceptional video and image quality at high compression rates, differentiated functionality and low power consumption. These CV-based technologies are allowing us to address a broader range of markets and applications requiring AI video features, including IP security cameras, a variety of automotive cameras, consumer cameras, and industrial and robotic markets and applications. We anticipate that our CV technology will also enable us to capture more content per electronic system and increase our average selling price. 18 -------------------------------------------------------------------------------- Our development efforts are focused on SoCs that provide both human viewing and computer vision functionality. As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets with our AI and computer vision technology, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as AI-enabled security cameras, AI-based driving applications, including driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, automotive advanced driver assistance systems, or ADAS, applications, and industrial and robotics markets. We expect our research and development expenditures to increase in comparison to prior periods as we devote additional resources to the development of innovative video and image processing solutions with increased functionality, such as AI and CV capabilities, and as we target new markets. We sell our SoC solutions to leading original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally, and in the automotive market, we also sell to Tier-1 suppliers. We refer to ODMs and Tier-1 automotive suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers' system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer's decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM. Volume production may begin within 9 to 18 months after a design win, depending on the complexity of our customer's product and other factors upon which we may have little or no influence. In general, design cycles will be longer in the OEM automotive and industrial and robotics markets than in the IP security and consumer device markets. Once our solutions have been incorporated into a customer's design, they are likely to be used for the life cycle of the customer's product. Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer's product. Even if we obtain a design win and our SoC remains a component through the life cycle of a customer's product, the volume and timing of actual sales of our SoCs to the customer depend upon the production, release and market acceptance of that product, none of which are within our control. A portable consumer device typically has a product life cycle of 6 to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product lifecycles will typically be longer than 24 months in the OEM automotive and industrial and robotics markets, as new product introductions occur less frequently in these markets.
Financial Highlights
• We recorded revenue of
and six months endedJuly 31, 2022 , respectively. This
represented
increases of 2.0% and 14.5%, respectively, as compared to the same periods in the prior fiscal year. Despite lower product unit shipments affected by supply chain disruptions in the semiconductor industry, continued adoption of our CV-based solutions as well as increased revenue from nonrecurring engineering (NRE) project services resulted in higher revenue in the automotive camera, professional IP security camera and consumer markets, especially in theNorth America andAsia regions other thanChina . For the three months endedJuly 31, 2022 , the increase in revenue was partially offset by decreased
revenue from
our two largestChina customers in the professional IP security camera market due to lower demand affected by pandemic lockdowns inChina .
• We recorded operating losses of
the three and six months endedJuly 31, 2022 , respectively, as compared to operating losses of$6.0 million and$16.1 million
for the
three and six months endedJuly 31, 2021 , respectively. The
increased
operating losses were primarily due to increased operating
expenses,
partially offset by increased revenue and gross profit. The
increased
operating expenses primarily related to higher personnel costs associated with headcount growth and benefit programs,
increased chip
tape-out costs due to the timing and number of chips in
development,
as well as increased engineering-related expenses for
supporting
automotive, robotic and industrial applications of our CV-based solutions.
• We generated cash flows from operating activities of
the six months endedJuly 31, 2022 , as compared to$9.9 million for the six months endedJuly 31, 2021 . The increased cash flows from operating activities were primarily due to higher collection from accounts receivable associated with the timing of sales and lower inventory purchases due to supply chain disruptions in the semiconductor industry, partially offset by decreased
liabilities
associated with employee benefit payments and the timing of payments to our suppliers.
• As of
market funds and debt securities of corporations. All of the investments are denominated inUnited States dollars and
reported at
fair value as available-for-sale securities in our condensed consolidated balance sheets. 19
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Factors Affecting Our Performance
Impact of COVID-19 on our Business. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel and the imposition of remote or work from home conditions in many of the locations where we have offices, including ourShanghai office in April and May of 2022. We have experienced a significant disruption of orders and logistics throughout theAsia supply chain as a result of the COVID-19 pandemic, and if the remote or work from home conditions in any of our locations continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. We are also experiencing significantly longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers' demand for our solutions and negatively impact our revenue. As a result of these factors, we have reduced our inventory purchases in the near term. Moreover, if there is a significant COVID-19 outbreak that impactsSamsung Electronic Corporation's ability to manufacture our SoCs or our third-party contractors' ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers. The pandemic may also impact our customers' ability to manufacture their products, support their customers or reduce or delay demand for their products, which could, in turn, reduce such demand for our solutions. The Global supply shortages, and the uncertainty in customer demand as well as the worldwide economy, in general, have continued as a result of the COVID-19 pandemic, and may be further exacerbated by the impacts of high inflation. We may experience increased volatility in our sales and revenues in the near future. Recently, some customers have indicated they are reducing their inventory levels, which may reduce such customers' demand for our products. The magnitude and duration of such volatility is uncertain and thus its impact on our business cannot be reasonably estimated at this time. Ability to Capitalize on AI and Computer Vision Trends. We expect that AI and computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, industrial and robotics, and certain consumer markets. As a result, we believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, classification and tracking, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions will be critical to our future success. Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive, industrial and robotics markets, is vital to our ability to generate revenue growth. As such, we closely monitor design wins by customer and end market. However, a design win may not successfully materialize into revenue, and even if it does result in revenue, the amount generated by each design win can vary significantly. Ability to Develop and Introduce New or Enhanced Solutions. We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions with increased levels of performance and functionality that meet the expectations of our customers. As such, we continuously invest in our research and development projects, especially AI and computer vision technologies. However, failure to anticipate or timely develop new or enhanced solutions in response to technology shifts and trends could result in decreased revenue and our competitors achieving design wins we sought. Moreover, any reliability or quality problems with our solutions could harm our reputation, increase additional development and replacement costs, and prevent us from retaining existing customers and attracting new customers. Pricing, Product Cost and Margin. Our pricing and margins depend on the volumes and features of the solutions we provide to our customers. Additionally, we make significant investments in new solutions for both cost improvements and new features that we expect to drive revenue and maintain margins. In general, solutions incorporated into more complex configurations, such as those used in high-performance camera applications or, in the future, advanced driver assistance systems, have higher prices and higher gross margins as compared to solutions sold into lower-performing, more competitive camera applications. Our average selling price can vary by market and application due to market-specific supply and demand, the maturation of products launched in previous years and the launch of new products by us or our competitors.
We continually monitor the cost of our solutions. As we rely on third-party manufacturers for the manufacture of our products, we maintain a close relationship with these suppliers to continually monitor production yields, component costs and design efficiencies.
Shifting Consumer Preferences. Our revenue is also subject to consumer preferences, regarding form factor and functionality, and how those preferences impact the video and image capture electronics that we support. For example, improved smartphone video capture capabilities led to the decline of video cameras aimed at the video and image capture market. The current video and image capture market is now characterized by a greater volume of more specialized video and image capture devices that are less likely to be replaced with smartphones, such as wearable, IP security, aerial drone and automotive cameras. This increasing specialization of video capture devices has changed our customer base and end markets and has impacted our revenue. In the future, we expect further changes will continue to impact our business performance in those markets. 20 -------------------------------------------------------------------------------- Continued Concentration of Revenue by End Market. Historically, our revenue has been significantly concentrated in a small number of end markets and we developed technologies to provide solutions for new markets as they emerged, such as the sports camera, IP security, aerial drone and automotive video recorder camera markets. Since fiscal year 2018, the professional and consumer IP security camera markets and automotive markets, including the OEM and aftermarket video recorder market, have been our largest end markets and sales into these markets collectively generated the majority of our revenue. We believe, however, that continued expansion into new markets is required to facilitate revenue growth and customer diversification. We have recently introduced solutions to address emerging applications and markets, such as the incorporation of AI and computer vision functionalities for AI-enabled security cameras, AI-based driving applications and industrial and robotics markets. While we will continue to seek to expand our end market exposure, we anticipate that sales to a limited number of end markets will continue to account for a significant percentage of our total revenue for the foreseeable future. Our end market concentration may cause our financial performance to fluctuate significantly from period to period based on the success or failure of products that our SoCs are designed into as well as the overall growth or decline in the video capture markets in which we compete. In addition, we derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. We believe that our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers. Ability to Capitalize on Connectivity Trends. Mobile connected devices are ubiquitous today and play an increasingly prominent role in consumers' lives. The constant connectivity provided by these devices has created a demand for connected electronic peripherals such as video and image capture devices. Our ability to capitalize on these trends by supporting our end customers in the development of connected peripherals that seamlessly cooperate with other connected devices and allow consumers to distribute and share video and images with online media platforms is critical for our success. We incorporate wireless communication functionality into our solutions for wearable, IP security, aerial drone and automotive video recorder cameras. The combination of our compression technology with wireless connectivity enables wireless video streaming and uploading of videos and images to the Internet. Our solutions enable IP security camera systems to stream video content to either cloud infrastructure or connected mobile devices, and our solutions for wearable and aerial drone cameras allow consumers to quickly stream or upload video and images to social media platforms. Sales Volume. A typical design win that successfully launches into the marketplace can generate a wide range of sales volumes for our solutions, depending on the end market demand for our customers' products. Our ability to accurately forecast demand can be adversely affected by a number of factors, including the reputation of the end customer, market penetration, product capabilities, size of the end market that the product addresses, our end customers' ability to sell their products, miscalculations by our customers of their inventory requirements, changes in market conditions, adverse changes in our product order mix and fluctuating demand for our customers' products. In certain cases, we may provide volume discounts on sales of our solutions, which may be offset by lower manufacturing costs related to higher volumes. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. Customer Product Life Cycle. We estimate our customers' product life cycles based on the customer, type of product and end market. We typically commence commercial shipments from 9 to 18 months following a design win; however, in some markets, lengthier product and development cycles are possible, depending on the scope and nature of the project, such as in the automotive OEM market. A portable consumer device typically has a product life cycle of 6 to 18 months, and an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product development and product life cycles will typically be longer than 24 months in the OEM automotive, Tier-1 automotive suppliers and robotics markets, as new product introductions typically occur less frequently in these markets. 21
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Results of Operations
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, 2022 2021 2022 2021 (dollars in thousands) Revenue$ 80,884 $ 79,327 $ 171,189 $ 149,460 Cost of revenue 29,820 29,908 63,578 56,276 Gross profit 51,064 49,419 107,611 93,184 Operating expenses: Research and development 52,338 39,558 99,028 77,432 Selling, general and administrative 18,914 15,821 39,269 31,848 Total operating expenses 71,252 55,379 138,297 109,280 Loss from operations (20,188 ) (5,960 ) (30,686 ) (16,096 ) Other income (expense), net (26 ) 218 60 811 Loss before income taxes (20,214 ) (5,742 ) (30,626 ) (15,285 ) Provision for income taxes 3,436 1,414 3,846 2,689 Net loss$ (23,650 ) $ (7,156 ) $ (34,472 ) $ (17,974 )
The following table sets forth operating results as a percentage of revenue of each line item for the periods indicated:
Three Months EndedJuly 31 ,
Six Months Ended
2022 2021 2022 2021 Revenue 100 % 100 % 100 % 100 % Cost of revenue 37 38 37 38 Gross profit 63 62 63 62 Operating expenses: Research and development 65 50 58 52 Selling, general and administrative 23 20 23 21 Total operating expenses 88 70 81 73 Loss from operations (25 ) (8 ) (18 ) (11 ) Other income (expense), net - - - 1 Loss before income taxes (25 ) (8 ) (18 ) (10 ) Provision for income taxes 4 1 2 2 Net loss (29 ) % (9 ) % (20 ) % (12 ) % Revenue We derive substantially all of our revenue from the sale of HD and Ultra HD video and image processing SoC solutions to IP security camera OEMs, IP security camera ODMs, OEM or Tier-1 automotive suppliers, and consumer camera OEMs, either directly or through our distributors. In recent years, our SoC solutions have been primarily used in camera markets, such as IP security, automotive video recorder, drone and wearable cameras. Although we expect these human viewing camera markets, in particular the IP security and automotive video recorder markets, to continue to generate revenue for the foreseeable future, we have recently introduced new SoCs targeting emerging AI and computer vision applications in the IP security camera, OEM automotive, industrial and robotics markets. We derive a substantial portion of our revenue from sales made indirectly through one of our distributors, WT Microelectronics Co., Ltd., formerlyWintech Microelectronics Co., Ltd. , or WT, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony. The continued effects of the COVID-19 pandemic and persistent supply chain challenges may negatively affect our business performance and revenues this year. 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. Our CV-based solutions generally have higher selling prices than our traditional video and image processing SoC solutions that do not enable CV functionality. Our solutions are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, higher volumes and average selling prices that are lower than initial levels. 22
-------------------------------------------------------------------------------- The end markets into which we sell our products have seen significant changes as consumer preferences have evolved in response to new technologies. As a result, the composition and timing of our revenue may differ meaningfully during periods of technology or consumer preference changes. We expect shifts in consumer use of video capture to continue to change over time, as AI and computer vision specialized use cases emerge and video capture continues to proliferate.
Cost of Revenue and Gross Margin
Cost of revenue includes the cost of materials, such as wafers processed by third-party foundries, costs associated with packaging, assembly and testing, and our manufacturing support operations, such as logistics, planning and quality assurance. Cost of revenue also includes indirect costs, such as warranty, inventory valuation reserves, amortization of developed technology and other general overhead costs. We expect that our gross margin may fluctuate from period to period as a result of changes in customer mix, average selling price, product mix and the introduction of new products by us or our competitors. In general, solutions incorporated into more complex configurations, such as those used in high-performance cameras, and in future advanced automotive OEM applications, have had or are expected to have higher prices and higher gross margins, as compared to solutions sold into the lower-performance, more competitive camera applications. As semiconductor products mature and unit volumes sold to customers increase, their average selling prices typically decline. These declines may be paired with improvements in manufacturing yields and lower wafer, packaging and test costs, which offset some of the margin reduction that could result from lower selling prices.
Research and Development
Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits. The expense also includes costs of development incurred in connection with our collaborations with our foundry vendors, costs and amortization of licensing intellectual properties from third parties for product development, costs of development for software and hardware tools, costs of fabrication of mask sets for prototype products, equipment expenses, outside services and allocated depreciation and facility expenses, net of any research and development grants. All research and development costs are expensed as incurred. We expect our research and development expense to increase in absolute dollars as we continue to enhance and expand our product features and offerings and increase headcount for new SoC development and development of computer vision technology, especially for the OEM automotive market.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our sales, marketing, finance, human resources, information technology and administrative personnel. The expense also includes amortization of trade name and customer relationships, professional service costs related to accounting, tax, legal services, and allocated depreciation and facility expenses. We expect our selling, general and administrative expense to increase in absolute dollars as we continue to maintain the infrastructure and expand the size of our sales and marketing organization to support our business strategy of addressing new opportunities with our computer vision technology.
Other Income (Expense), Net
Other income, net, consists primarily of interests and yields from debt security investments and cash deposits with financial institutions, as well as miscellaneous subsidies granted from a foreign government.
Provision for Income Taxes
We are incorporated and domiciled in theCayman Islands and our operations are subject to income taxes inthe United States ,China ,Hong Kong ,Germany ,Italy ,Japan ,South Korea ,Taiwan and other jurisdictions in which we do business. Our worldwide operating income is subject to varying tax rates, and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. It is also subject to fluctuation from changes in the valuation of our deferred tax assets and liabilities; tax benefits from excess stock-based compensation deductions; transfer pricing adjustments and the tax effects of nondeductible compensation. We have historically had lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure were to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. 23
-------------------------------------------------------------------------------- Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical provision for income taxes and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate, as well as the related net interest and penalties. Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Comparison of the Three and Six Months Ended
Revenue
Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Revenue$ 80,884 $ 79,327 $ 1,557 2.0 %$ 171,189 $ 149,460 $ 21,729 14.5 % Revenue increased for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year. Despite lower product unit shipments affected by supply chain disruptions in the semiconductor industry, continued adoption of our CV-based solutions as well as increased revenue from nonrecurring engineering (NRE) project services resulted in higher revenue in the automotive camera, professional IP security camera and consumer markets, especially in theNorth America andAsia regions other thanChina . For the three months endedJuly 31, 2022 , the increase in revenue was partially offset by decreased revenue from our two largestChina customers in the professional IP security camera market due to lower demand affected by pandemic lockdowns inChina .
Cost of Revenue and Gross Margin
Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Cost of revenue$ 29,820 $ 29,908 $ (88 ) (0.3 )%$ 63,578 $ 56,276 $ 7,302 13.0 % Gross profit 51,064 49,419 1,645
3.3 % 107,611 93,184 14,427 15.5 % Gross margin 63.1 % 62.3 % - 0.8 % 62.9 % 62.3 % - 0.6 % The changes in cost of revenue for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, were primarily due to higher manufacturing cost for CV-based solutions and an approximately$1.9 million adverse purchase order commitment recognized in the second quarter of fiscal year 2023, partially offset by lower volume of product unit shipments in the three and six months endedJuly 31, 2022 affected by supply chain disruptions in the semiconductor industry. Gross margin increased for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, primarily due to an increase in the percentage of our total revenue derived from higher gross margin CV-based solutions and increased sales into automotive markets, as well as higher margin NRE revenue contracts. A customer concentration shift from theChina region to theNorth America andAsia regions outside ofChina in the professional IP security camera market also contributed to an improvement in the gross margin. Research and Development Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Research and development$ 52,338 $ 39,558 $ 12,780 32.3 %$ 99,028 $ 77,432 $ 21,596 27.9 % 24
-------------------------------------------------------------------------------- Research and development expense increased for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, primarily due to increased personnel costs, engineering-related expenses and SoC development cost. Personnel costs increased by approximately$8.4 million and$17.0 million for the three and six months endedJuly 31, 2022 , respectively, as a result of higher stock-based compensation expense and an increase of 68 employees, including 44 engineering headcount added from our acquisition ofOculii Corp , or Oculii, in the fourth quarter of fiscal year 2022. Engineering-related expenses, including costs and depreciation of equipment and tools, amortization of licensed intellectual property, outside services and facility related expenses in support of new SoCs and related applications, increased by approximately$2.9 million and$4.2 million , respectively. The increases in research and development expense were also attributable to increased SoC development cost due to the timing and number of chips in development. During the three and six months endedJuly 31, 2022 , SoC development cost increased by approximately$1.5 million and$0.3 million , respectively.
Selling, General and Administrative
Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Selling, general and administrative$ 18,914 $ 15,821 $ 3,093 19.5 %$ 39,269 $ 31,848 $ 7,421 23.3 % Selling, general and administrative expense increased for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, primarily due to increased personnel costs, professional services and increased facility-related expenses. Personnel costs increased by approximately$2.2 million and$5.7 million , respectively, as a result of higher stock-based compensation expense and an increase of 31 employees. The increases were also attributable to approximately$0.7 million and$1.6 million , respectively, of additional professional services and facility-related expenses to support our business development in the IP security, automotive and robotics markets.
Other Income (Expense), Net
Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Other income (expense), net $ (26 ) $ 218$ (244 ) (111.9 )%$ 60 $ 811$ (751 ) (92.6 )% The decreases in other income (expense), net, for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, were primarily due to the full liquidation of our debt security investments in fiscal year 2022 to finance the acquisition of Oculii, resulting in reduced interests and yields from investments. InJuly 2022 , we resumed our investment in debt securities with$100.0 million of investments in money market funds and debt securities of corporations. Provision for Income Taxes Three Months Ended July 31, Change Six Months Ended July 31, Change 2022 2021 Amount % 2022 2021 Amount % (dollars in thousands) Provision for income taxes$ 3,436 $ 1,414 $ 2,022 143.0 %$ 3,846 $ 2,689 $ 1,157 43.0 % Effective tax rate (17.0) % (24.6) % - 7.6 % (12.6) % (17.6) % - 5.0 %
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 increases in income tax expense for the three and six months endedJuly 31, 2022 , as compared to the same periods in the prior fiscal year, were primarily due to a decrease in theU.S. federal research tax credit, a decrease in tax benefits from excess stock-based compensation deductions as well as an increase in non-deductible stock-based compensation, partially offset by a decrease in the proportion of profits generated in higher tax jurisdictions. 25
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Liquidity and Capital Resources
As ofJuly 31, 2022 andJanuary 31, 2022 , we had cash, cash equivalents and marketable debt securities of approximately$197.9 million and$171.0 million , respectively. We invest in highly-liquid, short-term marketable debt securities and hold these investments as available-for-sale securities. As ofJuly 31, 2022 , these securities had a fair value of approximately$100.0 million with immaterial unrealized losses caused by market fluctuations.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months EndedJuly 31, 2022 2021 (in thousands)
Net cash provided by operating activities
9,890
Net cash provided by (used in) investing activities (10,311 )
2,911
Net cash provided by financing activities 1,209
4,327
Net increase in cash, cash equivalents and restricted cash$ 23,901 $
17,128
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased for the six months endedJuly 31, 2022 , as compared to the same period in the prior fiscal year, primarily due to higher collection from accounts receivable associated with the timing of sales and lower inventory purchases due to supply chain disruptions in the semiconductor industry, partially offset by decreased liabilities associated with employee benefit payments and the timing of payments to our suppliers.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities increased for the six months endedJuly 31, 2022 , as compared to net cash provided by investing activities for the same period in the prior fiscal year, primarily due to approximately$9.6 million less net cash receipts from debt security investments after a full liquidation of investments in fiscal year 2022 and approximately$4.3 million higher cash payments for purchase of tangible and intangible assets, partially offset by an approximately$0.7 million claim from an escrow account associated with the acquisition of Oculii.
Net Cash Provided by Financing Activities
Net cash provided by financing activities decreased for the six months endedJuly 31, 2022 , as compared to the same period in the prior fiscal year, primarily due to approximately$3.1 million less cash proceeds from option exercises and employee stock purchase withholdings as a result of lower average stock price in the current fiscal year.
Stock Repurchase Program
No ordinary shares were repurchased during the six months endedJuly 31, 2022 . OnMay 27, 2022 , our Board of Directors approved an extension of the current share repurchase program for an additional twelve months endingJune 30, 2023 . The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at our discretion. As ofJuly 31, 2022 , there was approximately$49.0 million remaining available for repurchases under the repurchase program throughJune 30, 2023 .
Operating and Capital Expenditure Requirements
As ofJuly 31, 2022 , we had cash, cash equivalents and marketable debt securities of approximately$197.9 million . We believe that our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities, and implement and enhance our information technology platforms. As we expand our operations, we may require more working capital. If our available cash balances are insufficient to satisfy our future liquidity requirements, we may seek to sell equity or convertible debt securities or borrow funds commercially. The sale of equity and convertible debt securities may result in dilution to our shareholders, and those securities may have rights senior to those of our ordinary shares. If we raise additional funds through the issuance of convertible debt securities or borrowing funds commercially, we may become subject to covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all. 26
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Our short- term and long-term capital requirements will depend on many factors, including the following:
• our ability to generate cash from operations; • our ability to control our costs;
• the expansion of our research and development of new technologies and
products to address new markets and applications;
• the magnitude and duration of COVID-19 impact, as well as measures
implemented to control the spread of the virus; • the emergence of competing or complementary technologies or products; • global economic and political conditions; • the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities; and
• our acquisition of complementary businesses, products and technologies.
Contractual Obligations, Commitments and Contingencies
Manufacturing Purchase Obligations
As of
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 endedJanuary 31, 2022 . 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 endedJanuary 31, 2022 for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As ofJuly 31, 2022 , we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of Notes to Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Critical Accounting Policies and Significant Management Estimates
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the 2022 fiscal year filed with
the
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