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CEVA INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion together with the unaudited financial
statements and related notes appearing elsewhere in this quarterly report. This
discussion contains forward-looking statements that involve risks and
uncertainties. Any or all of our forward-looking statements in this quarterly
report may turn out to be wrong. These forward-looking statements can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. Factors which could cause actual results to differ
materially include those set forth under in Part II - Item 1A - "Risk Factors,"
as well as those discussed elsewhere in this quarterly report. See
"Forward-Looking Statements."
BUSINESS OVERVIEW
The financial information presented in this quarterly report includes the
results of CEVA, Inc. and its subsidiaries. CEVA is the world's leading licensor
of DSP cores and platform solutions. Our technologies are widely licensed and
power many of the world's leading semiconductor and original equipment
manufacturer (OEM) companies. In 2011, our licensees shipped more than one
billion CEVA-powered chipsets targeted for a wide range of diverse end markets.
To date, more than 4 billion CEVA-powered devices have shipped, illustrating the
strong market deployment of our technology.
During the past six years, our business has shown profitability growth and
market share expansion as a result of the widespread deployment of our DSP cores
with all major handset OEMs, including HTC, Huawei, LG Electronics, Motorola,
Nokia, Samsung, Sony and ZTE. Based on internal data and Strategy Analytics'
worldwide shipment data, CEVA's worldwide market share of cellular baseband
chips that incorporate our technologies was approximately 39% of the worldwide
shipment volume based on preliminary data for second quarter 2012 worldwide
shipments. Revenues derived from the handset and mobile broadband markets
accounted for approximately 77% of our total revenues for 2011 and 78% for the
first nine months of 2012. The mobile broadband space is a category of
wireless-enabled products, among which are tablets, notebooks, electronic books,
machine-to-machine devices, automotive applications and smart grids.
We believe the adoption of our DSP cores and technologies in the handset and
mobile broadband markets continues to progress. Specifically, we believe the
emergence of merchant 3G cellular chips from companies such as Broadcom, Intel
and Spreadtrum, all of whom are our customers, are strong positive drivers for
our future market share expansion. Moreover, Strategy Analytics' latest forecast
estimates that worldwide cellular baseband shipments will grow by 4.87% in 2012
to reach 2.326 billion units. We believe that the majority of this growth will
come from 3G enabled phones in developing countries and the broader adoption of
4G LTE-based advanced smartphones in mature markets. We are well positioned to
capitalize on the growth in these segments, as well as growth from other mobile
connected devices such as tablets, electronic books and other machine-to-machine
devices, as key chip suppliers serving these markets use our technologies
broadly. During the third quarter of 2012, we signed a new agreement for our
CEVA-XC4000 DSP targeting the LTE- Advanced market, building on the more than 20
LTE design wins for our DSPs to date. This is the second design win for our best
of breed CEVA-XC4000 DSP.
Beyond products enabled by our technologies for baseband in handsets and mobile
broadband markets, we continue to strategically target growth in non-baseband
applications, such as audio & voice, imaging, vision and connectivity. Advanced
audio and wideband voice processing requires significantly more DSP performance
than existing solutions used in smartphones, automotive and digital home
applications. Our audio/voice product lines, including the CEVA-TeakLite-III and
new CEVA-TeakLite-4 DSPs, are ideally positioned to address these requirements,
and can enable us to continue to expand our licensing base in these markets.
We believe the following three market trends represent significant growth
drivers for the company:
• The use of cellular networks for devices other than handsets. CEVA is
well positioned to leverage these opportunities with a broad range of
technologies and broad customer base.
• The emergence of 3G connectivity in developing economies and 4G
connectivity in developed countries for devices beyondhandsets such
as tablets, laptops, automotive and surveillance. Our range of
baseband DSPs are ideal for these promising new segments.
• The mass adoption of audio, imaging vision and feature set
enhancements in smartphones. We offer a range of new DSPs and software
technologies to address the needs for advanced imaging, vision audio
and wideband voice. It is an incremental business to our already
strong foothold in the baseband market.
Notwithstanding the various growth opportunities we have outlined above, our
business operates in a highly competitive environment. Competition has
historically increased pricing pressures for our products and decreased our
average selling prices. Royalty payments under our existing license agreements
also could be lower than currently anticipated for a variety of reasons,
including decreased royalty rates triggered by larger volume shipments or lower
royalty rates negotiated with customers due to competitive pressure. Moreover,
some of our competitors have reduced their licensing and royalty fees to attract
customers and
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expand their market share. In order to penetrate new markets and maintain our
market share with our existing products, we may need to offer our products in
the future at lower prices which may result in lower profits. In addition, our
future growth is dependent not only on the continued success of our existing
products but also the successful introduction of new products, which requires
the dedication of resources into research and development which in turn may
increase our operating expenses. Furthermore, since our products are
incorporated into end products of our OEM customers, our business is very
dependent on our OEM customers' ability to achieve market acceptance of their
end products in the handsets and consumer electronic markets, which are
similarly very competitive. In addition, macroeconomic trends may significantly
affect our operating results. For example, consolidation among our customers may
negatively affect our revenue sources and increase our existing customers'
negotiation leverage. Also, since we derive a significant portion of our
revenues from the handsets market, any negative trends in that market would
adversely affect our financial results. According to Gartner Research, in the
second quarter of 2012, sales of handsets to end-users declined 2.3% versus the
second quarter of 2011. This was the second sequential quarter that the handset
market has contracted. This market downturn is mainly due to the economic
weakness in mature markets and slowing demand in the Asia Pacific region as
consumers wait for new smartphone launches. Nonetheless, based on our shipment
data, we managed to buck this global handsets market decline by maintaining the
same shipment volumes as 2011. More significantly, we managed to capture a
greater portion of 3G shipments based on CEVA DSPs, recording a 7%
quarter-over-quarter and a 11% year-over-year growth.
The ever-changing nature of the market also affects our continued business
growth potential. For example, the success of our imaging and audio products is
highly dependent on the market adoption of new use cases (to identify, clarify,
and organize design system requirements) and user interfaces within related
products, such as smartphones, tablets, smart TVs and set-top boxes. The low
cost 2G feature phone market continues to witness fierce competition and
declining demand, putting pressure on the royalty ASP that we receive from these
high volume products. In addition, our business is affected by market conditions
in emerging markets, such as China, India, Latin America and Africa, where the
penetration of handsets, especially low-cost smartphones, could generate future
growth potential for our business. The maintenance of our competitive position
and our future growth also are dependent on our ability to adapt to
ever-changing technologies, short product life cycles, evolving industry
standards, changing customer needs and the trend towards cellular connectivity,
and voice, audio and video convergence in the markets that we operate.
Notwithstanding our belief that we may return to a sequential increase in
royalty revenues for the fourth quarter of 2012 after a few quarters of
sequential revenue declines, we anticipate that our 2012 annual revenues may be
lower than our 2011 annual revenues. We believe a variety of factors negatively
affect our projected financial results; most significantly, the current
uncertain macroeconomic environment, 3G inventory declines ahead of new
smartphone introductions and intense pricing pressure in the 2G feature phone
segment as consumers transition to low cost smartphones.
Furthermore, due to the uncertainty about the sustainability of the market
recovery, it is extremely difficult for our customers, our vendors and us to
accurately forecast and plan future business activities. Therefore, current
economic conditions, and specifically the volatility in the semiconductor and
consumer electronics industries, and consolidation in the semiconductor
industry, could seriously impact our revenue and harm our business, financial
condition and operating results. As a result, our past operating results should
not be relied upon as an indication of future performance.
RESULTS OF OPERATIONS
Total Revenues
Total revenues were $12.0 million and $40.7 million for the third quarter and
first nine months of 2012, respectively, representing a decrease of 19% and 8%,
respectively, as compared to the corresponding periods in 2011. The decrease in
total revenues for the third quarter and first nine months of 2012 reflected
lower licensing, royalty and other revenues. Five largest customers accounted
for 70% and 65% of our total revenues for the third quarter and first nine
months of 2012, respectively, as compared to 78% and 62% for the comparable
periods in 2011. Four customers accounted for 12%, 14%, 24% and 11% of our total
revenues for the third quarter of 2012, as compared to three customers that
accounted for 25%, 17% and 19% of our total revenues for the third quarter of
2011. Three customers accounted for 12%, 12% and 27% of our total revenues for
the first nine months of 2012, as compared to three customers that accounted for
14%, 17% and 15% of our total revenues for the first nine months of 2011.
Because of the nature of our license agreements and the associated large initial
payments due, the identity of major customers generally varies from quarter to
quarter, and we do not believe that we are materially dependent on any one
specific customer or any specific small number of licensees. Our total revenues
derived from the handsets and mobile broadband markets represented 75% and 78%
of our total revenues for the third quarter and first nine months of 2012,
respectively, as compared to 80% for both the comparable periods in 2011.
Prepaid royalties are recognized under our licensing revenue line and accounted
for 12% and 0% of our total revenues for the third quarter of 2012 and 2011,
respectively, and 4% and 0% of our total revenues for the first nine months of
2012 and 2011, respectively.
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Licensing Revenues
Licensing revenues were $4.2 million and $14.7 million for the third quarter and
first nine months of 2012, respectively, a decrease of 19% and 5% from the third
quarter and first nine months of 2011. The decrease in licensing revenues for
the third quarter of 2012, as compared to the corresponding period of 2011,
principally reflected lower revenues from our Bluetooth IP. The decrease in
licensing revenues for the first nine months of 2012, as compared to the
corresponding period of 2011, principally reflected lower revenues from our
CEVA-X DSP core family of products, partially offset by higher revenues from our
CEVA-TeakLite DSP core family of products.
Licensing revenues accounted for 35% and 36% of our total revenues for the third
quarter and first nine months of 2012, respectively, compared to 35% for both
the comparable periods of 2011. During the third quarter of 2012, we concluded
seven new license agreements. Five agreements were for CEVA DSP cores, platforms
and software, one agreement was for CEVA SATA/SAS IP and one agreement was for
CEVA Bluetooth IP. Target applications for customer deployment are 3G and 4G
baseband processors, digital cameras, next-generation vision products,
connectivity and SATA interface chips for enterprise applications.
Geographically, one of the agreements signed was in Europe and six were in Asia
Pacific.
Royalty Revenues
Royalty revenues were $7.0 million and $23.7 million for the third quarter and
first nine months of 2012, respectively, a decrease of 20% and 10% from the
third quarter and first nine months of 2011. Royalty revenues accounted for 59%
and 58% of our total revenues for the third quarter and first nine months of
2012, respectively, compared to 59% for both the comparable periods of 2011. The
decrease in royalty revenues for the third quarter and first nine months of 2012
reflected mainly a decrease in the average per unit royalty rate, lower
quantities of 2G products shipped incorporating our technology, and lower volume
of consumer non-baseband related products shipped incorporating our technology,
partially offset by higher quantities of 3G products shipped incorporating our
technology which also bear higher royalty average selling prices than 2G
products. Our customers reported sales of 254 million chipsets and 779 million
chipsets incorporating our technologies for the third quarter and first nine
months of 2012, respectively, compared to 250 million and 731 million for the
comparable periods of 2011. The five largest royalty-paying customers accounted
for 79% and 82% of our total royalty revenues for the third quarter and first
nine months of 2012, respectively, compared to 82% and 75% for the comparable
periods of 2011.
As of September 30, 2012, 28 licensees were shipping products incorporating our
technologies pursuant to 37 licensing arrangements. As of September 30, 2011, 29
licensees were shipping products incorporating our technologies pursuant to 38
licensing arrangements.
Other Revenues
Other revenues were $0.7 million and $2.3 million for the third quarter and
first nine months of 2012, respectively, a decrease of 13% and 10% from the
third quarter and first nine months of 2011, respectively. The decrease in other
revenues for the third quarter and first nine months of 2012 principally
reflected lower technical support revenues. Other revenues accounted for 6% of
our total revenues for both the third quarter and first nine months of 2012,
compared to 6% for both the comparable periods of 2011. Other revenues include
support and training for licensees and sales of development systems.
Geographic Revenue Analysis
Nine Third
months Nine months Third Quarter Quarter
2012 2011 2012 2011
(in millions, except percentages)
United States $ 8.7 21 % $ 11.4 26 % $2.5 20 % $ 4.8 32 %
Europe and Middle East (1) (2) $ 10.4 26 % $ 15.3 34 % $3.3 28 % $ 4.0 27 %
Asia Pacific (3) (4) (5) $ 21.6 53 % $ 17.6 40 % $6.2 52 % $ 6.0 41 %
(1) Germany $ 5.0 12 % $ 9.9 22 % $1.6 14 % $ 2.2 15 %
(2) Switzerland $ * ) * ) $ 4.5 10 % $ *) * ) $ * ) * )
(3) Taiwan $ * ) * ) $ * ) * ) $ *) * ) $ 1.7 11 %
(4) China $ 13.7 34 % $ 10.0 22 % $4.4 36 % $ 3.6 24 %
(5) Japan $ 4.3 11 % $ * ) * ) $ *) * ) $ * ) * )
*) Less than 10%
Due to the nature of our license agreements and the associated potential large
individual contract amounts, the geographic split of revenues both in absolute
and percentage terms generally varies from quarter to quarter.
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Cost of Revenues
Cost of revenues were $1.0 million and $2.9 million for the third quarter and
first nine months of 2012, respectively, compared to $0.8 million and $2.6
million for the comparable periods of 2011. Cost of revenues accounted for 9%
and 7% of our total revenues for the third quarter and first nine months of
2012, respectively, compared to 5% and 6% for the comparable periods of 2011.
The increase for the third quarter of 2012 principally reflected higher salary
and related costs and higher customization work for our licensees. The increase
for the first nine months of 2012 principally reflected higher salary and
related costs. Included in cost of revenues for the third quarter and first nine
months of 2012 were non-cash equity-based compensation expense of $73,000 and
$177,000, respectively, compared to $61,000 and $171,000 for the comparable
periods of 2011.
Gross Margin
Gross margin for the third quarter and first nine months of 2012 were 91% and
93%, respectively, compared to 95% and 94%, respectively, for the comparable
periods of 2011. Gross margin decreased for the comparable periods mainly due to
lower revenues.
Operating Expenses
Total operating expenses were $8.8 million and $27.8 million for the third
quarter and first nine months of 2012, respectively, compared to $9.3 million
and $28.0 million for the comparable periods of 2011. The decrease in total
operating expenses for the third quarter of 2012 principally reflected lower
salary and related costs, and lower project-related expenses, partially offset
by lower research grants received from the Office of Chief Scientist of Israel.
The decrease in total operating expenses for the first nine months of 2012
principally reflected lower salary and related costs and lower commission
expenses, partially offset by higher travel expenses and lower research grants
received from the Office of Chief Scientist of Israel.
We currently anticipate that our annual operating expenses will be lower in 2012
in comparison to 2011.
Research and Development Expenses, Net
Our research and development expenses, net were $4.6 million and $15.5 million
for the third quarter and first nine months of 2012, respectively, compared to
$5.2 million and $15.8 million for the comparable periods of 2011. The net
decrease for the third quarter and first nine months of 2012 principally
reflected lower salary and related costs and lower project-related expenses,
partially offset by lower research grants received from the Office of Chief
Scientist of Israel. Included in research and development expenses for the third
quarter and first nine months of 2012 were non-cash equity-based compensation
expenses of $468,000 and $1,327,000, respectively, compared to $510,000 and
$1,372,000 for the comparable periods of 2011. Research and development expenses
as a percentage of our total revenues were 39% and 38% for the third quarter and
first nine months of 2012, respectively, compared to 35% and 36% for the
comparable periods of 2011.
The number of research and development personnel was 125 at September 30, 2012,
compared to 131 at September 30, 2011.
Sales and Marketing Expenses
Our sales and marketing expenses were $2.2 million and $6.6 million for the
third quarter and first nine months of 2012, respectively, compared to
$2.1 million and $6.6 for the comparable periods of 2011. The increase for the
third quarter of 2012 principally reflected higher salary and related costs,
mainly due to higher headcount. Sales and marketing expenses for the first nine
months of 2012 principally reflected lower commission expenses, partially offset
by higher salary and related costs, mainly due to higher headcount, higher
marketing and trade show expenses and higher travel expenses. Included in sales
and marketing expenses for the third quarter and first nine months of 2012 were
non-cash equity-based compensation expenses of $284,000 and $723,000,
respectively, compared to $291,000 and $747,000 for the comparable periods of
2011. Sales and marketing expenses as a percentage of our total revenues were
19% and 16%, respectively, for the third quarter and first nine months of 2012,
compared to 14% and 15%, respectively, for the comparable periods of 2011.
The total number of sales and marketing personnel was 27 at September 30, 2012,
compared to 23 at September 30, 2011.
General and Administrative Expenses
Our general and administrative expenses were $1.9 million and $5.7 million for
the third quarter and first nine months of 2012, respectively, compared to $2.1
million and $5.5 million for the comparable periods of 2011. The decrease for
the third quarter of 2012 principally reflected lower salary and related costs.
The increase for the first nine months of 2012 principally reflected higher
non-cash equity-based compensation expenses and higher professional services
cost, partially offset by lower salary and related costs. Included in general
and administrative expenses for the third quarter and first nine months of 2012
were non-cash equity-based compensation expenses of $541,000 and $1,461,000,
respectively, compared to $553,000 and $1,250,000, respectively, for the
comparable periods of 2011. General and administrative expenses as a percentage
of our total revenues were 16% and 14% for the third quarter and first nine
months of 2012, respectively, compared to 14% and 13%, respectively, for the
comparable periods of 2011.
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The number of general and administrative personnel was 25 at September 30, 2012,
compared to 24 at September 30, 2011.
Financial Income, Net (in millions)
Nine months Nine months Third Quarter Third Quarter
2012 2011 2012 2011
Financial income, net of
which: $ 2.65 $ 2.04 $ 0.73 $ 0.78
Interest income and gains
and losses from marketable
securities, net $ 2.64 $ 2.08 $ 0.75 $ 0.73
Foreign exchange gain (loss) $ 0.01 $ (0.04 ) $ (0.02 ) $ 0.05
Financial income, net, consists of interest earned on investments, gains and
losses from marketable securities, amortization of discounts and premiums on
marketable securities and foreign exchange movements.
The increase in interest income and gains and losses from marketable securities,
net, during the third quarter of 2012 principally reflected higher combined
cash, bank deposits and marketable securities balances held. The increase in
interest income and gains and losses from marketable securities, net, during the
first nine months of 2012 principally reflected higher combined cash, bank
deposits and marketable securities balances held and higher yields.
We review our monthly expected non-U.S. dollar denominated expenditures and look
to hold equivalent non-U.S. dollar cash balances to mitigate currency
fluctuations. This has resulted in a foreign exchange loss of $27,000 and a
foreign exchange gain of $7,000 for the third quarter and first nine months of
2012, respectively, and a foreign exchange gain of $49,000 and a foreign
exchange loss of $44,000 for the comparable periods of 2011.
Provision for Income Taxes
Our income tax expenses were $0.3 million and $1.7 million for the third quarter
and first nine months of 2012, compared to $0.6 million and $2.0 million for the
comparable periods of 2011. The decrease for the third quarter of 2012 primarily
reflected less income before taxes on income and the utilization of losses
carried forward in a certain tax jurisdiction. The decrease for the first nine
months of 2012 primarily reflected (1) less income before taxes on income; (2) a
decrease in withholding tax expenses for which we were unable to obtain a refund
from a certain tax authority and (3) the utilization of losses carried forward
in a certain tax jurisdiction, partially offset by a higher tax rate for our
Israeli subsidiary as a result of an increase in the tax rate of one of its
investment programs from a tax exempt status for the first nine months of 2011
to a tax rate of 10% for this investment program beginning in the first nine
months of 2012. We have significant operations in Israel, and a substantial
portion of our taxable income is generated there. Currently, our Israeli and
Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates.
Our Irish subsidiary qualified for a 12.5% tax rate on its trade. Interest
income generated by our Irish subsidiary is taxed at a rate of 25%.
Our Israeli subsidiary is entitled to various tax benefits by virtue of the
"Approved Enterprise" and/or "Benefited Enterprise" status granted to its eight
investment programs, as defined by the Israeli Investment Law. In accordance
with the Investment Law, our Israeli subsidiary's first five investment programs
were subject to corporate tax rate of 25% for the first nine months of 2012, and
our Israeli subsidiary's sixth, seventh and eighth investment programs were
subject to corporate tax rate of 10% for the first nine months of 2012. The tax
benefits under our Israeli subsidiary's active investment programs are scheduled
to gradually expire starting in 2014.
To maintain our Israeli subsidiary's eligibility for the above tax benefits, it
must continue to meet certain conditions under the Investment Law. Should our
Israeli subsidiary fail to meet such conditions in the future, these benefits
would be cancelled and it would be subject to corporate tax in Israel at the
standard corporate rate and could be required to refund tax benefits already
received, with interest and adjustments for inflation based on the Israeli
consumer price index.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.
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We believe that the assumptions and estimates associated with allowance for
doubtful accounts, fair value of financial instruments, share-based compensation
and income taxes have the greatest potential impact on our consolidated
financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.
See our Annual Report on Form 10-K for the year ended December 31, 2011, filed
with the SEC on March 15, 2012, for a discussion of additional critical
accounting policies and estimates. There have been no changes in our critical
accounting policies as compared to what was previously disclosed in the
Form 10-K for the year ended December 31, 2011.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2012, we had approximately $21.7 million in cash and cash
equivalents, $68.0 million in short term bank deposits, $52.0 million in
marketable securities, and $14.1 million in long term bank deposits, totaling
$155.8 million, compared to $164.5 million at December 31, 2011. During the
first nine months of 2012, we invested $67.5 million of cash in bank deposits
and marketable securities with maturities up to 36 months. In addition, during
the same period, bank deposits and marketable securities were sold or redeemed
for cash amounting to $84.8 million. All of our marketable securities are
classified as available-for-sale. The purchase and sale or redemption of
available-for-sale marketable securities are considered part of investing cash
flow. Available-for-sale marketable securities are stated at fair value, with
unrealized gains and losses reported in accumulated other comprehensive income
(loss), a separate component of stockholders' equity, net of taxes. Realized
gains and losses on sales of investments, as determined on a specific
identification basis, are included in the interim condensed consolidated
statements of comprehensive income. We did not recognize any
other-than-temporarily-impaired charges on marketable securities during the
first nine months of 2012. For more information about our marketable securities,
see Notes 3 to the attached Notes to the Interim Condensed Consolidated
Financial Statements for the three and nine months ended September 30, 2012.
Bank deposits are classified as short-term bank deposits and long-term bank
deposits. Short-term bank deposits are deposits with maturities of more than
three months but less than one year, whereas long-term bank deposits are
deposits with maturities of more than one year. Bank deposits are presented at
their cost, including accrued interest, and purchases and sales are considered
part of cash flows from investing activities.
Operating Activities
Cash provided by operating activities for the first nine months of 2012 was
$12.7 million and consisted of net income of $10.9 million, adjustments for
non-cash items of $3.5 million, and changes in operating assets and liabilities
of $1.7 million. Adjustments for non-cash items primarily consisted of $4.1
million of depreciation and equity-based compensation expenses, $0.9 million of
amortization of premiums on available-for-sale marketable securities, and
1.4 million of accrued interest on bank deposits. The decrease in cash from
changes in operating assets and liabilities primarily consisted of an increase
in trade receivables of $0.9 million, an increase in deferred tax assets, net,
of $0.5 million, a decrease in accrued expenses and other payables of $1.6
million, and a classification of excess tax benefit from equity-based
compensation expenses of $0.7 million as financing cash flows, partially offset
by a decrease in prepaid expenses and other accounts receivable of $0.7 million,
an increase in trade payables of $0.4 million and an increase in income taxes
payable of $1.2 million.
Cash provided by operating activities for the first nine months of 2011 was
$18.0 million and consisted of net income of $13.7 million, adjustments for
non-cash items of $4.7 million, and changes in operating assets and liabilities
of $0.4 million. Adjustments for non-cash items primarily consisted of $3.9
million of depreciation and equity-based compensation expenses, $1.6 million of
amortization of premiums on available-for-sale marketable securities, and $0.8
million of accrued interest on bank deposits. The decrease in cash from changes
in operating assets and liabilities primarily consisted of an increase in
deferred tax assets, net, of $1.4 million, a decrease in accrued expenses and
other payables of $1.8 million, and a classification of excess tax benefit from
equity-based compensation expenses of $1.2 million as financing cash flows,
partially offset by a decrease in trade receivable of $1.4 million, a decrease
in prepaid expenses and other accounts receivable of $1.1 million, an increase
in deferred revenues of $0.8 million, and an increase in income taxes payable of
$0.5 million.
Cash flows from operating activities may vary significantly from quarter to
quarter depending on the timing of our receipts and payments. Our ongoing cash
outflows from operating activities principally relate to payroll-related costs
and obligations under our property leases and design tool licenses. Our primary
sources of cash inflows are receipts from our accounts receivable and interest
earned from our cash, bank deposits and marketable securities. The timing of
receipts of accounts receivable from customers is based upon the completion of
agreed milestones or agreed dates as set out in the contracts.
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Investing Activities
Net cash provided by investing activities for the first nine months of 2012 was
$15.5 million, compared to $21.4 million of net cash used in investing
activities for the comparable period of 2011. We had a cash outflow of
$32.9 million and a cash inflow of $50.5 million in respect of investments in
marketable securities during the first nine months of 2012, as compared to cash
outflow of $34.4 million and a cash inflow of $25.5 million in respect of
investments in marketable securities during the first nine months of 2011. For
the first nine months of 2012, we had net investment of $0.3 million in bank
deposits, as compared to a net investment of $12.3 million in bank deposits for
the comparable period of 2011. We had a cash outflow of $1.5 million during the
first nine months of 2012 from minority investments in private companies.
Financing Activities
Net cash used in financing activities for the first nine months of 2012 was
$21.4 million, compared to $8.9 million of net cash provided by financing
activities for the comparable period of 2011.
In January 2012, our Board of Directors reaffirmed its authorization for the
repurchase by the company of 1,966,700 shares of common stock pursuant to
Rule 10b-18 of the Securities Exchange Act of 1934, as amended. During the first
nine months of 2012, we repurchased 1,239,222 shares of common stock pursuant to
our share repurchase program, at an average purchase price of $19.09 per share,
for an aggregate purchase price of $23.7 million. No repurchases were done
during the first nine months of 2011.
During the first nine months of 2012, we received $1.5 million from the issuance
of common stock and treasury stock upon exercises of stock options and purchases
under our employee stock purchase plan, as compared to $7.7 million received
during the first nine months of 2011 from the issuance of common stock upon
exercises of stock options and purchases under our employee stock purchase plan.
During the first nine months of 2012 and 2011, we classified $0.7 million and
$1.2 million, respectively, of excess tax benefit from equity-based compensation
expenses as financing cash flows.
We believe that our current cash on hand, short-term deposits and marketable
securities, along with cash from operations, will provide sufficient capital to
fund our operations for at least the next 12 months. We cannot provide
assurances, however, that the underlying assumed levels of revenues and expenses
will prove to be accurate.
In addition, as part of our business strategy, we occasionally evaluate
potential acquisitions of businesses, products and technologies and minority
equity investments. Accordingly, a portion of our available cash may be used at
any time for the acquisition of complementary products or businesses or minority
equity investments. Such potential transactions may require substantial capital
resources, which may require us to seek additional debt or equity financing. We
cannot assure you that we will be able to successfully identify suitable
acquisition or investment candidates, complete acquisitions or investments,
integrate acquired businesses into our current operations, or expand into new
markets. Furthermore, we cannot provide assurances that additional financing
will be available to us in any required time frame and on commercially
reasonable terms, if at all. See "Risk Factors-We may seek to expand our
business in ways that could result in diversion of resources and extra
expenses." for more detailed information.
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