AMBARELLA, INC. 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. 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™. 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. 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 computer vision-based technologies are allowing us to address
a broader range of markets and applications requiring AI video features,
including IP security cameras, automotive cameras, consumer cameras, and
industrial and robotic markets and applications. We anticipate that our CV
technology will also enable us to capture more content per electronic system.
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, OEM automotive advanced driver assistance systems, or ADAS,
applications, and industrial and robotics markets. We expect our research and
development expenditures to increase in comparison to prior periods as we devote
additional resources to the development of innovative video and image processing
solutions with increased functionality, such as AI and CV capabilities, and as
we target new markets.
We sell our SoC solutions to leading original design manufacturers, or ODMs, and
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.
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Fiscal Year 2021 Financial Highlights and Trends
• We recorded revenue of
2.5% as compared to fiscal year 2020. The decrease in revenue was
primarily attributable to lower revenue from the professional IP security
camera and automotive markets. In the professional IP security camera
market, despite continued growth in the
fiscal year 2021, lower demand from our two largest
together with less demand from the
significant revenue decrease in this market. The decreased revenue in the
automotive markets was primarily due to an overall slowdown in the
automotive industry. The decreased revenue was partially offset by
increased revenue in the home IP security camera and consumer device
markets, including drone and wearable camera markets. In the home IP
security camera market, revenue growth continued to be led by the North
America region. Incorporation of our solutions into newly launched
products from
resulted in a ramp of SoC shipments in the third quarter of fiscal year
2021.
• We recorded an operating loss of
compared to an operating loss of
increased operating loss was primarily due to increased operating expenses
that more than offset an increase in gross profit. The increased operating
expenses, mainly in support of new applications for the automotive markets
as well as the development of computer vision-based solutions, related
primarily to increased engineering headcount, chip tape-out and
stock-based compensation expenses. The headcount-related expense increases
were partially due to the termination of research and development grants
from a foreign government at the end of fiscal year 2020. In addition, due
to the timing, complexity and number of chips in development in fiscal
year 2021, chip tape-out fees and related engineering costs increased from
the prior year.
• We generated cash flows from operating activities of
fiscal year 2021, as compared to $39.4 million in fiscal year 2020. The
decreased cash flows from operating activities were primarily due to a
higher net loss and increases in accounts receivable and inventorybalances partially offset by increases in accounts payable and accrued
liabilities due to our suppliers.
• On
shares for approximately
of Directors approved an extension of the repurchase program for an
additional twelve months ending June 30, 2021 . As of January 31, 2021 ,
there was approximately
Factors Affecting Our Performance
Spread of COVID-19 Could Adversely Affect our Business in aMaterial Way . 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. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, if the remote or work from home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, we are experiencing longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers' demand for our solutions and negatively impact our revenue. Moreover, if there is a significant 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. While we cannot quantify specific impacts of the COVID-19 pandemic or actions taken by governments and businesses in response thereto, our results of operations and financial condition may be negatively affected if we encounter significant supply chain problems, reductions in demand due to our customers or end customers having problems, or other unexpected COVID-19 ramifications. 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. 49 -------------------------------------------------------------------------------- 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, 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.
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, 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 have added wireless
communication functionality into our solutions for wearable, IP security, drone
and automotive video recorder cameras. The combination of our compression
technology with wireless connectivity enables wireless video streaming and
uploading of videos and images to the Internet. Our solutions enable IP security
camera systems to stream video content to either cloud infrastructure or
connected mobile devices, and our solutions for wearable and drone cameras allow
consumers to quickly stream or upload video and images to social media
platforms.
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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.
Results of Operations
The following table sets forth our historical operating results for the periods
indicated:
Year Ended January 31,
2021 2020 2019
(dollars in thousands)
Revenue $ 222,990 $ 228,732 $ 227,768
Cost of revenue 87,417 96,023 89,624
Gross profit 135,573 132,709 138,144
Operating expenses:
Research and development 140,759 129,724 128,084
Selling, general and administrative 55,980 52,634 50,480
Total operating expenses 196,739 182,358 178,564
Loss from operations (61,166 ) (49,649 ) (40,420 )
Other income, net 3,863 8,021 5,868
Loss before income taxes (57,303 ) (41,628 ) (34,552 )
Provision (benefit) for income taxes 2,483 3,164 (4,105 )
Net loss $ (59,786 ) $ (44,792 ) $ (30,447 ) The following table sets forth our historical operating results as a percentage of revenue of each line item for the periods indicated:
Year Ended January 31,
2021 2020 2019
Revenue 100 % 100 % 100 %
Cost of revenue 39 42 39
Gross profit 61 58 61
Operating expenses:
Research and development 63 57 56
Selling, general and administrative 25 23 22
Total operating expenses 88 80 78
Loss from operations (27 ) (22 ) (17 )
Other income, net 2 4 2
Loss before income taxes (25 ) (18 ) (15 )
Provision (benefit) for income taxes 2 2 (2 )
Net loss (27)% (20)% (13)%
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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 automotive or Tier-1 automotive suppliers, 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 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 Wintech, and directly to one of our ODM customers, Chicony Electronics Co., Ltd., or Chicony. We have historically experienced seasonal fluctuations in our quarterly revenue with our third fiscal quarter normally being the highest revenue quarter. This fluctuation has been driven primarily by increased sales in IP security and consumer camera markets as our customers build inventories in preparation for the holiday shopping season. 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 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. 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 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 of licensing intellectual property from third parties for product development, costs of development for software and hardware tools, cost of fabrication of mask sets for prototype products, and allocated depreciation and facility expenses, 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 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.
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--------------------------------------------------------------------------------Other Income, Net
Other income, net, consists primarily of interest and other income from debt security investments and cash deposits with financial institutions.
Provision (Benefit) for Income Taxes
We are incorporated and domiciled in theCayman Islands and also conduct business in several countries such asthe United States ,China ,Taiwan ,Hong Kong ,Italy ,South Korea andJapan , and we are subject to taxation in those jurisdictions. Our worldwide operating income is subject to varying tax rates, and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. It is also subject to fluctuation from changes in the valuation of our deferred tax assets and liabilities; tax benefits from excess stock-based compensation deductions; transfer pricing adjustments and the tax effects of nondeductible compensation. We have historically had lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure was 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. 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 Fiscal Years Ended
Revenue
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Revenue $ 222,990 $ 228,732 $ 227,768 $ (5,742 ) (2.5 )% $ 964 0.4 %
Revenue decreased for fiscal year 2021, as compared to fiscal year 2020,
primarily due to lower revenue from the professional IP security camera and
automotive markets. In the professional IP security camera market, despite
continued growth in the North America and Asia regions in fiscal year 2021,
lower demand from our two largest China customers caused by higher inventory
build-up in fiscal year 2020 and escalated trade tensions between the United
States and China , together with less demand from the Europe region, resulted in
a significant revenue decrease in this market. The decreased revenue in the
automotive markets was primarily due to an overall slowdown in the automotive
industry. The decreased revenue was partially offset by increased revenue in the
consumer IP security camera and consumer markets, including drone and wearable
camera markets. In the consumer IP security camera market, revenue growth
continued to be led by the home security and monitoring market in the North
America region. In the consumer markets, incorporation of our solutions into
newly launched products from DJI resulted in a ramp of SoC shipments in the
third quarter of fiscal year 2021, partially offset by decreased revenue in the
sports camera market.
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-------------------------------------------------------------------------------- Revenue increased for fiscal year 2020, as compared to fiscal year 2019, primarily attributable to higher revenue from consumer IP security camera and sports camera markets. In the consumer IP security camera market, growth was led by the home security and monitoring market in theNorth America region, together with shipment penetration intoAsia andEurope regions. In the sports camera market, incorporation of our solutions into newly launched action camera products resulted in higher demand from DJI in fiscal year 2020. The increased revenue was partially offset by decreased revenue in the automotive, professional IP security camera and other consumer markets, including non-sports wearable camera, virtual reality and drone markets. Lower revenue from automotive markets, including the automotive aftermarket and OEM video recorder market, was caused by a significant slowdown in the automotive industry in the first half of fiscal year 2020 and promotional activity in fiscal year 2019 from a large automotive customer that did not recur in the current fiscal year. In the professional IP security camera market, despite significant growth in theAsia region and increased adoption of our computer vision-based solutions, lower demand from one of our largestChina customers and customers in other regions resulted in a net revenue decrease in fiscal year 2020.
Cost of Revenue and Gross Margin
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Cost of revenue $ 87,417 $ 96,023 $ 89,624 $ (8,606 ) (9.0 )% $ 6,399 7.1 %
Gross profit 135,573 132,709 138,144 2,864 2.2 % (5,435 ) (3.9 )%
Gross margin 60.8 % 58.0 % 60.7 % - 2.8 % - (2.7 )%
Cost of revenue decreased for fiscal year 2021, as compared to fiscal year 2020,
primarily due to lower volumes of SoC shipments in the professional IP security
camera and automotive markets offset by higher volumes in the consumer IP
security camera, drone and wearable markets.
Cost of revenue increased for fiscal year 2020, as compared to fiscal year 2019, primarily due to higher volumes of SoC shipments in the IP security camera, sports camera and drone markets.
Gross margin increased in fiscal year 2021, as compared to fiscal year 2020, primarily due to a lower percentage of our total revenue coming from the professional IP security camera market at lower average selling prices.
Gross margin decreased in fiscal year 2020, as compared to fiscal year 2019,
primarily due to a higher percentage of our total revenue coming from the
professional IP security camera market at lower average selling prices than we
obtained in the prior fiscal year.
Research and Development
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Research and development $ 140,759 $ 129,724 $ 128,084 $ 11,035 8.5 % $ 1,640 1.3 %
Research and development expense increased for fiscal year 2021, compared to
fiscal year 2020, primarily due to a $6.2 million increase in SOC development
costs as our projects move to the 5nm process node and approximately $4.3
million of research and development grants from a foreign government that ended
in fiscal year 2020. Our engineering headcount also increased to 582 at January
31, 2021 compared to 563 at January 31, 2020 , which resulted in an increase in
salary-related expenses of approximately $2.8 million in fiscal year 2021. The
increased research and development expense was also attributable to additional
stock-based compensation expense of approximately $1.2 million in fiscal year
2021, as a result of the issuance of stock to newly hired employees, our annual
evergreen stock program for existing employees, and our annual bonus program.
The increases were partially offset by approximately $3.4 million lower travel,
facility and professional service related expenses.
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Research and development expense increased for fiscal year 2020, as compared to
fiscal year 2019, primarily due to increases in engineering headcount associated
with computer vision technology development for our current markets, as well as
new markets such as the automotive OEM and robotics markets. Our engineering
headcount increased to 563 at January 31, 2020 compared to 554 at January 31,
2019 , which resulted in an increase in salary-related expenses of approximately
$3.1 million in fiscal year 2020. The increased research and development expense
was also attributable to additional stock-based compensation expense of
approximately $4.4 million in fiscal year 2020, as a result of the issuance of
stock to newly hired employees, our annual evergreen stock program for existing
employees, the performance stock program for executives and our annual employee
bonus program. The increases were partially offset by approximately $4.3 million
of research and development grants from a foreign government in fiscal year
2020. SoC development costs also decreased by approximately $1.4 million for the
twelve months ended January 31, 2020 , as compared to the same period in the
prior fiscal year, due to project timing and the number of chips in development.
Selling, General and Administrative
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Selling, general and
administrative $ 55,980 $ 52,634 $ 50,480 $ 3,346 6.4 % $ 2,154 4.3 %
Selling, general and administrative expense increased for fiscal year 2021, as
compared to fiscal year 2020, primarily due to additional stock-based
compensation expense of approximately $2.1 million as a result of the issuance
of stock to newly hired employees, our annual evergreen stock program for
existing employees, and our annual bonus program. The increase was also
attributable to increased headcount to support our business development in IP
security, automotive OEM and robotics markets, which resulted in an increase in
salary-related expenses of approximately $1.1 million in fiscal year 2021.
Increases of approximately $2.0 million for facility and professional service
expenses were largely offset by $1.9 million lower spending for travel and trade
show related expenses.
Selling, general and administrative expense increased for fiscal year 2020, as
compared to fiscal year 2019, primarily due to increased headcount to support
our business development in IP security, automotive OEM and robotics markets,
which resulted in an increase in salary-related expenses of approximately $1.1
million in fiscal year 2020. The increase was also attributable to additional
stock-based compensation expense of approximately $1.8 million as a result of
the issuance of stock to newly hired employees, our annual evergreen stock
program for existing employees, the performance stock program for executives and
our annual employee bonus program. The increase was partially offset by
approximately $0.6 million less expenditures on professional services.
Other Income, Net
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Other income, net
The decrease in other income, net, for fiscal year 2021, as compared to fiscal
year 2020, was primarily due to lower interest and other income from our
deposits and debt security investments. The decrease is primarily the result of
lower yields on reinvested balances as investments matured throughout the year.
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-------------------------------------------------------------------------------- The increase in other income, net, for fiscal year 2020, as compared to fiscal year 2019, was primarily due to an aggregate of approximately$3.4 million of additional interest and other income from our deposits and debt security investments. The increase is primarily the result of larger invested balances and debt securities purchased at discounts. The increase was partially offset by approximately$1.8 million related to a grant from a foreign government associated with research and development activities that was recognized as other income in fiscal year 2019. This ongoing grant is classified in research and development expense in fiscal year 2020 based on how the grant proceeds were utilized.
Provision (Benefit) for Income Taxes
Change
Year Ended January 31, 2021 2020
2021 2020 2019 Amount % Amount %
(dollars in thousands)
Provision (benefit) for
income taxes $ 2,483 $ 3,164 $ (4,105 ) $ (681 ) (21.5 )% $ 7,269 (177.1 )%
Effective tax rate (4)% (8)% 12 % - 4% - (20)%
Income tax expense decreased in fiscal 2021, as compared to fiscal year 2020,
primarily due to a decrease in the proportion of profits generated in higher tax
jurisdictions, as well as an increase in the U.S. federal research tax credit,
partially offset by an increase in non-deductible stock-based compensation.
Income tax expense increased in fiscal 2020, as compared to fiscal year 2019,
primarily due to the 2019 release of $8.0 million of valuation allowance related
to prior year federal research and development credit carryforwards in fiscal
year 2019, as well as a decrease in the proportion of profits generated in lower
tax jurisdictions, partially offset by an increase in tax benefits from excess
stock based compensation deductions.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended January 31,
2021 2020 2019
(in thousands)
Net cash provided by operating activities
$ 24,472 Net cash used in investing activities (31,324 ) (8,576 ) (79,142 ) Net cash provided by (used in) financing activities 10,396 6,516 (97,953 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ 9,872 $ 37,354 $ (152,623 )
Net Cash Provided by Operating Activities
Fiscal year 2021 compared to fiscal year 2020: Cash provided by operating
activities decreased primarily due to decreased net income as a result of lower
revenue and increased operating expenses as well as lower interest income. The
decreased cash flows from operating activities were partially offset by
increased liabilities associated with SoC development projects and the timing of
payments to suppliers.
Fiscal year 2020 compared to fiscal year 2019: Cash provided by operating
activities increased primarily due to increased cash receipts associated with
the timing of payments from customers and increased liabilities associated with
the timing of payments to suppliers. The increased cash flows from operating
activities were partially offset by increased inventory purchases associated
with higher volumes of SoC shipments in fiscal year 2020.
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--------------------------------------------------------------------------------Fiscal year 2021 compared to fiscal year 2020: Net cash used in investing activities increased primarily due to$25.9 million lower cash receipts from the sale and maturity of debt securities and additional payments of approximately$3.0 million in fiscal year 2021 for intangible assets purchase, which was partially offset by approximately$6.2 million lower investments in debt securities.
Fiscal year 2020 compared to fiscal year 2019: Net cash used in investing
activities decreased primarily due to an additional
Net Cash Provided by (Used in) Financing Activities
Fiscal year 2021 compared to fiscal year 2020: Net cash provided by financing activities increased primarily due to approximately$4.5 million of additional cash proceeds from option exercises and employee stock purchase withholding and$0.4 million lower payments for intangible assets. The increase was partially offset by$1.0 million of cash used for repurchasing our ordinary shares under the stock repurchase program. Fiscal year 2020 compared to fiscal year 2019: Net cash provided by financing activities increased primarily due to$99.9 million of cash used for repurchasing our ordinary shares under the stock repurchase program in fiscal year 2019 while there were no repurchases in fiscal year 2020. The increase was also attributable to approximately$5.3 million of additional cash proceeds from option exercises and employee stock purchase withholding. The increase was partially offset by additional payments of approximately$0.7 million in fiscal year 2020 for intangible assets purchases.
Stock Repurchase Program
OnMarch 16, 2020 , we repurchased a total of 25,719 of our ordinary shares for approximately$1.0 million in cash. OnMay 29, 2020 , our Board of Directors approved an extension of the repurchase program for an additional twelve months endingJune 30, 2021 . Since the inception of the repurchase programs inJune 2016 , a total of$275.0 million has been authorized, and we have repurchased a total of 4,011,595 shares for approximately$175.8 million in cash. As ofJanuary 31, 2021 , there was approximately$49.0 million available for repurchases throughJune 30, 2021 . Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at the company's discretion. Repurchases are funded using working capital and any repurchased shares are recorded as authorized but unissued shares. Sources of Liquidity As ofJanuary 31, 2021 and 2020, we had cash, cash equivalents and marketable debt securities of approximately$440.7 million and$404.7 million , respectively. As ofJanuary 31, 2021 , our marketable debt securities had a fair value of approximately$214.8 million with net unrealized gains of approximately$1.2 million caused by fluctuations in market value. We hold these investments as available-for-sale securities and mark them to market.
Operating and Capital Expenditure Requirements
As ofJanuary 31, 2021 , we had cash, cash equivalents and marketable debt securities of approximately$440.7 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, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all. 57
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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 emergence of competing or complementary technologies or products;
• 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
The following table summarizes our outstanding contractual obligations as ofJanuary 31, 2021 : Payment Due by
Period as of
(in thousands)
Less than More than All
Total 1 Year 1-3 Years 3-5 Years 5 Years Other
Contractual Obligations
Technology licenses (1) 12,266 9,910 2,356 - - -
Purchase obligations (2) 48,238 48,238 - - - -
Unrecognized tax benefits,
including interest (3) 8,966 - - - - 8,966
Total $ 69,470 $ 58,148 $ 2,356 $ - $ - $ 8,966 (1) Technology license obligations represent future cash payments for
noncancelable internal-use software licenses which are used in product
design.
(2) Purchase obligations consist primarily of inventory purchase obligations with
our independent contract manufacturers.
(3) Unrecognized tax benefits, including interest, represent our liabilities for
uncertain tax positions as of
estimate the timing of payments in individual years due to uncertainties in
the timing of the effective settlement of tax positions.
Stock Options and Restricted Stock Units
Grants of stock-based awards are key components of the compensation packages we provide to attract and retain certain employees to align their interests with the interests of existing shareholders. We recognize that these stock-based awards will dilute existing shareholders and have sought to limit the number of shares granted while providing competitive compensation packages. As ofJanuary 31, 2021 , we had a total of 3.6 million ordinary shares subject to outstanding stock options and unvested restricted stock units, which will potentially dilute our earnings per share. This potential dilution will only result if outstanding options vest and are exercised and restricted stock units vest and are settled.
Off-Balance Sheet Arrangements
As ofJanuary 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 Accounting Pronouncements
See Note 1, "Organization and Summary of Significant Accounting Policies-Recent
Accounting Pronouncements" of the Notes to the Consolidated Financial
Statements, included in Part IV, Item 15 of this report, for a full description
of recent accounting standards, including the respective dates of adoption and
effects on our consolidated financial position, results of operations and cash
flows.
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Critical Accounting Policies and Significant Management Estimates
The preparation of audited consolidated financial statements in conformity withU.S. generally accepted accounting principles, or GAAP, requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. On an ongoing basis, we evaluate our estimates and assumptions, including those related to (i) write down of excess and obsolete inventories;(ii) the estimated useful lives of long-lived assets;(iii) the valuation of stock-based compensation awards and financial instruments; (iv) the probability of performance objectives achievement; (v) the realization of tax assets and estimates of tax liabilities, including reserves for uncertain tax positions. These estimates and assumptions are based on historical experience and on various other factors which we believe to be reasonable under the circumstances. We may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgment and estimates:
Revenue Recognition
Under ASC 606 we recognize revenue when control of goods and services is transferred to our customers. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. The sale of semiconductor products accounts for the substantial majority of our consolidated revenue. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty, supply and other rights. We consider an accepted customer purchase order, governed by sales agreement, to be the contract with the customer. For each contract, we consider the promise to transfer tangible products to be the identified performance obligation. Product sales contracts may include volume-based tiered pricing or rebates that are fulfilled in cash or product. In determining the transaction price, we account for the right of returns, cash rebates, commissions and other pricing adjustments as variable consideration and estimate these amounts based on the expected amount to be provided to customers and reduce the revenue recognized. We estimate sales returns and rebates based on our historical patterns of return and pricing credits. As our standard payment terms are 30 days to 60 days, the contracts have no financing component. Under ASC 606, we estimate the total consideration to be received by using the expected value method for each contract, compute weighted average selling price for each unit shipped in cases where there is a material right due to the presence of volume-based tiered pricing, allocate the total consideration between the identified performance obligations, and recognize revenue when control of our goods and services is transferred to our customers. We consider product control to be transferred at a point in time upon shipment or delivery because we have a present right to payment at that time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset. We also enter into fixed-price engineering service agreements with certain customers. These agreements may include multiple performance obligations, such as software development services, licensing of intellectual property and post-contract customer support, or PCS. These multiple performance obligations are highly interdependent, highly interrelated, are typically not sold separately and do not have standalone selling prices. They are all inputs to generate one combined output which is incorporating our SoC into the customer's product. Accordingly, we determine that they are not separately identifiable and shall be treated as a single performance obligation. Customers usually pay based on milestones achieved. Because payments received do not correspond directly with the value of our performance to date, for fixed-price engineering services arrangements, revenue is recognized using the time-based straight line method, which best depicts our performance toward complete satisfaction of the performance obligation based on the nature of such professional services. Revenues from engineering service agreements were not material for the fiscal years endedJanuary 31, 2021 , 2020 and 2019. 59 -------------------------------------------------------------------------------- Timing of revenue recognition may differ from the timing of invoicing to our customers. We record contract assets when revenue is recognized prior to invoicing. The contract assets are primarily related to satisfied but unbilled performance obligations associated with our engineering service agreements at the reporting date. As ofJanuary 31, 2021 and 2020, the contract assets for these unbilled receivables were not material. Contract liabilities consist of deferred revenue. Our deferred revenue is primarily related to the portion of a transaction price that exceeds the weighted average selling price for products sold to date under tiered-pricing contracts which contain material rights. This deferred revenue is expected to be recognized over the course of the contract when products are delivered for future pricing below the weighted average selling price of the contract. For the year endedJanuary 31, 2021 and 2020, we did not recognize any material revenue adjustment related to performance obligations satisfied in prior periods released from this deferred revenue. As ofJanuary 31, 2021 and 2020, the respective deferred revenues were not material. Additionally, the transaction price allocated to unsatisfied, or partially unsatisfied, purchase orders for contracts that are greater than a year was not material as ofJanuary 31, 2021 and 2020, respectively. We also elect not to disclose the value of unsatisfied or partially unsatisfied performance obligations due to original expected contract duration of one year or less and elect to exclude amounts collected from customers for all sales taxes from the transaction price.
We consider all highly liquid debt security investments with original maturities of less than three months at the time of purchase to be cash equivalents. Debt security investments that are highly liquid with original maturities at the time of purchase greater than three months are considered marketable debt securities. We classify the marketable securities as "available-for-sale" securities and record them at fair value based on quoted market prices of similar assets. OnFebruary 1, 2020 , the Company adopted ASU No. 2016-13 (ASU 2016-13), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Under this new guidance, the Company recognizes credit losses based on a forward-looking current expected credit losses (CECL) model instead of the previous incurred loss model for financial instruments. The Company estimates the expected losses whenever a security's fair value is below its amortized cost basis. The expected loss is computed at an individual security level using the discounted cash flow method with the effective interest rate on the purchase date. In the determination of credit-related losses, the Company excludes securities with zero loss expectations such as assets backed by government agencies. There are various factors considered in its assessment of credit-related losses, including the extent to which the fair value is less than the amortized cost basis, adverse conditions related to an industry or an underlying loan obligator, the payment structure of the security, changes to the rating of the security and other factors that may affect the security credit. The credit-related portion of the loss is recognized in other income (loss), net in the consolidated income statement but is limited to the difference between the fair value and the amortized cost basis of the security, adjusted for accrued interest. The non-credit-related portion of the loss is recognized in the accumulated other comprehensive income (loss) in the consolidated balance sheet. The cumulative effect adjustment upon the adoption onFebruary 1, 2020 was immaterial and the credit-related losses from the Company's financial instruments were not material as ofJanuary 31, 2021 . We measure the fair value of money market funds using quoted prices in active markets for identical assets and classifies them within Level 1. The fair value of the Company's investments in other debt securities are obtained based on quoted prices for similar asserts in active markets, or model driven valuations using significant inputs derived from or corroborated by observable market data and are classified within Level 2. So far, the Company has no debt securities with unobservable inputs and classified within Level 3.
Inventory Valuation
We record inventories at the lower of cost or net realizable value. The cost includes materials and other production costs and is computed using standard cost on a first-in, first-out basis. Inventory reserves are recorded for estimated obsolescence or unmarketable inventories based on forecast of future demand and market conditions. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Once inventory is written down, a new accounting cost basis is established and, accordingly, any associated reserve is not released until the inventory is sold or scrapped. There were no material inventory losses recognized for the fiscal years endedJanuary 31, 2021 , 2020 and 2019, respectively.
Noncancelable Software License
We account for a noncancelable on premise internal-use software license as the
acquisition of an intangible asset and the incurrence of a liability to the
extent that all or a portion of the software licensing fees are not paid on or
before the license acquisition date. The intangible asset and related liability
are recorded at net present value and interest expense is recorded over the
payment term.
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--------------------------------------------------------------------------------Goodwill and in-process research and development ("IPR&D") are required to be tested for impairment at least annually in the fourth fiscal quarter or sooner whenever events or changes in circumstances indicate that the assets may be impaired. We have a single reporting unit for goodwill impairment test purposes based on our business and reporting structure. We do not amortize goodwill. Acquired IPR&D is capitalized at fair value as an intangible asset and amortization commences upon completion of the underlying projects. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life.
Leases
EffectiveFebruary 1, 2019 , we adopted Accounting Standards Codification ("ASC") Topic 842, Leases, using the alternative transition method with an adjustment to the opening balance in the period of adoption without adjustment of comparative period financial statements. Under this new guidance, we recognize leases as operating lease right-of-use ("ROU") assets and corresponding lease liabilities at the lease commencement date based on the present value of future lease payments, while recognizing lease expenses under the straight-line method through the lease term. We also elected the other available practical expedients, and have elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases. We do not combine lease components with non-lease components, and as a result, the non-lease components are accounted for separately. In determining the present value of lease payments, we use the implicit interest rate if readily determinable. When the implicit rate is not readily determinable, we use our incremental borrowing rate based on the information available at the lease commencement date. Our leases mainly include our worldwide office facilities which are classified as operating leases. Certain leases include renewal options that are under our discretion. The renewal options are included in the ROU assets and liability calculation if it is reasonably certain that we will exercise the option. Our short-term leases and finance leases are immaterial as ofJanuary 31, 2021 andFebruary 1, 2020 , respectively. As ofJanuary 31, 2021 , there were approximately$9.7 million of ROU assets, net of amortization expense,$2.9 million of short-term lease liabilities, and$7.5 million of long-term lease liabilities related to the leases recorded in the consolidated balance sheets.
Stock-Based Compensation
We measure stock-based compensation for equity awards granted to employees and directors based on the estimated fair value on the grant date, and recognize that compensation as expense using the straight-line attribution method for service condition awards or using the graded-vesting attribution method for awards with performance conditions over the requisite service period, which is typically the vesting period of each award. We determine the fair value of restricted stock and restricted stock units with service or performance conditions based on the fair market value of our ordinary shares on the grant date. We use the Black-Scholes option pricing model to determine the fair value of stock options. Determining the fair value of stock options on the grant date requires the input of various assumptions, including stock price of the underlying ordinary share, the exercise price of the stock option, expected volatility, expected term, risk-free interest rate and dividend rate. We calculate expected volatility based on our own historical stock price for a period commensurate with the expected term, which is computed based on our own historical exercise behavior. The risk-free interest rate is derived from an average of theU.S. Treasury constant maturity rates for the respective periods most closely commensurate with the expected term. The expected dividend yield is zero because we have not historically paid dividends and have no present intention to pay dividends. We use the Lattice pricing model and perform Monte Carlo Simulation to evaluate the fair value of awards with market conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term. we elect to account for forfeitures as they occur.
Net Income (Loss) Per Ordinary Share
Basic earnings (losses) per share is computed by dividing net income (loss)
available to ordinary shareholders by the weighted-average number of ordinary
shares outstanding during the period. Diluted earnings (losses) per share is
computed by dividing net income (loss) available to ordinary shareholders by the
weighted-average number of ordinary shares outstanding during the period
increased to include the number of additional ordinary shares that would have
been outstanding if the potentially dilutive securities had been issued.
Potentially dilutive securities include outstanding stock options, shares to be
purchased under the Company's employee stock purchase plan, unvested restricted
stock and restricted stock units. The dilutive effect of potentially dilutive
securities is reflected in diluted earnings (losses) per share by application of
the treasury stock method.
Income Taxes
We record income taxes using the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, generally all expected
future events other than enactments or changes in the tax law or rates are
considered. Valuation allowances are provided when necessary to reduce deferred
tax assets to the amount expected to be realized.
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We apply authoritative guidance for the accounting for uncertainty in income taxes. The guidance requires that tax effects of a position be recognized only if it is "more likely than not" to be sustained based solely on its technical merits as of the reporting date. Upon estimating our tax positions and tax benefits, we consider and evaluate numerous factors, which may require periodic adjustments and which may not reflect the final tax liabilities. We adjust our financial statements to reflect only those tax positions that are more likely than not to be sustained under examination. As part of the process of preparing consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets, which are included in the consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion or all of deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from estimates, the amount of valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the consolidated income statement for the periods in which the adjustment is determined to be required.
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