10-K 1 simg-20141231x10k.htm 10-K SIMG-2014.12.31-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________________________________________________________ 
Form 10-K
____________________________________________________________________  
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-26887
______________________________________________________________________________ 
SILICON IMAGE, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________ 
 
Delaware
 
77-0396307
(State or other jurisdiction of
incorporation of organization)
 
(I.R.S. Employer
Identification Number)
1140 East Arques Avenue
Sunnyvale, CA 94085
(Address of principal executive offices)
(Zip Code)
(408) 616-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Common Stock, $0.001 par value per share
Securities registered pursuant to section 12(g) of the Act: None
______________________________________________________________________________ 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
þ
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately $391,559,298 as of the last business day of Registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the Nasdaq National Market reported on such date.
As of February 18, 2015, there were 78,206,823 shares of the Registrant’s Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference in Part III of this Form 10-K.
 



TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
Item 15
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Annual Report on Form 10-K entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”, “can”, “should”, “could”, “estimate”, based on”, “intended”, “would”, “projected”, “forecasted” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any updates or revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the Securities and Exchange Commission (SEC). Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.


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PART I
 
Item 1.
Business
Our Company
 
Silicon Image, Inc. (including our subsidiaries, referred to collectively in this Report as “Silicon Image”, “we”, “our” and “us”) is a leading provider of wired and wireless video, audio and data connectivity solutions for the mobile, consumer electronics (CE) and personal computer (PC) markets.
 
On January 26, 2015, Silicon Image, Lattice Semiconductor Corporation ("Lattice") and Cayabyab Merger Company, a wholly owned subsidiary of Parent (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, and on the terms and conditions contained in the Merger Agreement. Merger Sub commenced a cash tender offer on February 9, 2015 to acquire all of the shares of Silicon Image’s common stock (the "Offer") for a purchase price of $7.30 per share (the “Offer Price”), without interest and subject to any applicable withholding taxes. The consummation of the Offer is conditioned on (i) at least a majority of all shares of Silicon Image’s outstanding common stock having been validly tendered into (and not withdrawn from) the Offer prior to the expiration date of the Offer, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the United States and (iii) other customary conditions. The Offer is not subject to a financing condition. Following the consummation of the Offer, subject to customary conditions, Merger Sub will be merged with and into Silicon Image (the “Merger”) and Silicon Image will become a wholly owned subsidiary of Lattice Semiconductor Corporation, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals. In the Merger, each outstanding share of our common stock (other than shares owned by Lattice, Merger Sub or Silicon Image, or any of their respective wholly owned subsidiaries, or shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Offer Price, without interest.

We are recognized for working in cooperation with some of the biggest names in consumer electronics to create industry standards that are at the forefront of emerging trends and innovation. We have driven the creation of the High-Definition Multimedia Interface (HDMI®) and Mobile High-Definition Link (MHL®); and our CE and mobile products are recognized as providing best-in-class implementations of HDMI® and MHL®.

We believe our active participation as a founder in these standards allows us to be in the forefront of emerging trends and innovations leading to new ideas and enhanced product designs that will ultimately benefit consumers.

To date, our go-to-market strategy has been to build a coalition of industry partner in support of incorporating our core technologies and latest innovations into industry standards. This process interconnects multiple markets and industries which we monetize through our offerings, which include semiconductors, intellectual property (IP) and related service offerings. Our CE and mobile products are deployed by the world’s leading electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video (A/V) receivers, digital cameras, set-top-boxes, as well as desktop and notebook PCs.
In December 2014 we announced the establishment of our subsidiary, Qterics for our software-as-a-services offerings, and the purchase by Qualcomm, Inc. of seven percent interest in Qterics. Qterics offers cloud based architecture for authenticating, provisioning, and managing Internet of Things (IoT) connected devices, including products to support remote firmware upgrades and remote screen access. Qterics products offer manufacturers and retailers solutions for remotely managing products “after the sale”, enabling them to reduce the number and length of service calls and product returns.
In January 2015 we re-launched our wholly-owned subsidiary, SiBEAM® for our wireless millimeter-wave product offerings, including our millimeter-wave wireless fiber technology for backhaul and access, WiGig 802.11ad and WirelessHD products and future products incorporating our Snap wireless connector technology. Our Snap, WiGig 802.11ad and WirelessHD products are primarily targeted at PC, mobile and CE markets. Our wireless fiber products are targeted at infrastructure applications such as 4G LTE and campus and wireless broadband backhaul and provide cost effective radio frequency (RF) on complementary metal oxide semiconductor (CMOS) solutions for medium distance communication.
We were incorporated in the State of Delaware, USA in June 1999 and are headquartered in Sunnyvale, California, USA. We also have operations and/or sales offices around the world, including in China, India, Japan, South Korea and Taiwan.

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Connectivity Development
Many of our wired solutions are based on Transition-minimized Differential Signaling (TMDS), a wired technology that was originally developed to address the need to transfer high-definition video from a PC to a monitor.  We then extended TMDS to support audio and High Definition Content Protection (HDCP) for the CE market.  Most recently, we have applied TMDS to mobile devices and other consumer electronic devices in the form of MHL.  In each generation, our TMDS technology has been enhanced to address demands for increased video resolutions and data rates while adding functionality and reducing power consumption and cost.
Our wireless products are based on 60GHz millimeter-wave wireless technology that enables the distribution of very high bandwidth video and data. Our portfolio of millimeter-wave products offer solutions for video, data, access and backhaul, and we continue to develop differentiating capabilities, such as our advanced beam forming capabilities, to meet emerging needs.
Industry Standards and “Standards Plus” Development
To date, we have promoted our technologies by working with industry leaders to incorporate our core technologies and latest innovations into newly developed standards. The broad adoption of an industry standard can result in the rapid proliferation of our technologies. By seeking input from major product companies such as Sony, Samsung, Toshiba, Phillips, Technicolor, Panasonic and others, in the standard creation process we increase the likelihood that major companies will choose to adopt the standard in their product and in doing so, motivate other companies in the market to also adopt the standard.
To differentiate our products, we have taken a “standards-plus” approach to product development.  For example, our integrated circuits (ICs) implement a given standard, but may also include unique features not available from other manufacturers.
Monetization
We monetize our technology through the sale of semiconductor devices, licensing of technology cores (referred to as intellectual property licenses) and patents, and through our service offerings. Where system level cost pressures demand the integration of semiconductor technology into system-on-a-chip devices, we continue to benefit through the licensing of IP cores which our customers integrate into their ICs. Additionally, we have an extensive portfolio of patents and have developed programs that optimize the utilization and profitability of these valuable assets.
Core Markets
We currently sell our IC products primarily into three markets: Mobile, CE and PC. During 2014, our mobile business was approximately 39% of our total revenue, compared to 54% in 2013. The CE and PC markets comprised 33% and 5% of total revenue in 2014, respectively.
Total revenues for 2014 and 2013 are presented below:

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Mobile Market - As the capability of the smartphone has increased, the requirements for the external communications interface have evolved from PC synchronization to include HD and now 4K video output, data exchange and user interface integration. Many smartphones have adopted MHL as a solution to address these needs. The categories of devices to which MHL-enabled smartphones can connect have grown to include TVs, A/V receivers, PC monitors, portable displays, projectors, automotive head-units, and adapters/docks. We are the leading supplier of MHL products, with over 500 million ICs shipped for integration into smartphones, tablets and adaptors since 2011. Even though many MHL-enabled smartphones have been shipped, the use of MHL by consumers is not yet pervasive. We are subject to the risk that increasing cost pressures on OEM customers in the mobile device market, coupled with risks regarding the market adoption of our MHL products, will adversely affect demand for our MHL technology or lead manufacturers to eliminate the technology in some of their products. On December 17, 2014, one of our largest customers informed us that it had decided not to include our MHL functionality in certain designs in order to reduce costs, and as a result of this decision, on December 18, 2014, we announced that we expected a year-over-year revenue decline in 2015 of approximately 10%. Please refer to the Risk Factors section under item 1A of this report for a discussion of risks associated with our dependence on our key customers, and risks of declines in our mobile revenue.
CE Market - Within the CE market, we primarily serve the television and home theater categories. DisplaySearch estimated the television market in 2014 to be approximately 229 million units. HDMI is the de-facto worldwide standard for connecting home entertainment devices, with close to 100% adoption rate in high-definition televisions, A/V receivers, Blu-Ray players, and service operator set-top boxes.
Certain manufacturers of television and home theater devices have chosen to add MHL support for the connection of mobile devices and Smart TV peripheral devices. We provide dual-mode HDMI-MHL receiver and port processor products for DTV and Home Theater customers.
Both the HDMI and MHL specifications were advanced in 2013 to address the transmission of 4K content. In 2014 the price of some name brand 50”4K Ultra HD televisions dropped below US $1,000, increasing the unit volume shipment of 4K Ultra HD televisions. Also in 2014, manufacturers such as Sony, Samsung and ZTE released smartphones capable of recording 4K Ultra HD video and then transmitting that video over MHL to 4K displays.
The availability of 4K content, coupled with the prospect of new in-home viewing options such as live events and early window movie releases, is driving the implementation of the HDCP 2.2 enhanced link protection technology (available on both HDMI and MHL connections). Our newest products support the latest version of the HDMI and MHL specifications enabling the transmission of 4K content over an HDCP 2.2 link.

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PC Market - In January 2015, IDC reported that PC shipments totaled approximately 309 million units in 2014, down 2.1% from the prior year. Silicon Image’s storage and HDMI Tx products targeted to the PC market will continue to decline due to the general decline in the PC business overall and lack of investment in these product lines.
New Markets
We are known as a provider of HDMI and MHL semiconductor (IC) products for the markets discussed above; however, we have recently expanded our offerings to include 60GHz millimeter-wave wireless products under the SiBEAM brand and cloud-based software and service products under the Qterics brand.
We provide 60GHz millimeter-wave wireless connectivity solutions through our SiBEAM subsidiary. Millimeter-wave wireless products include:

WirelessHD solutions which offer the highest quality wireless video connection to the display and are ideal for gaming and other interactive video applications because of the lower latency they provide.

Anticipated Snap Wireless Connector solutions targeted at applications where there is a desire to replace a USB 3, USB 2, DisplayPort, or HDMI connector in favor of a very short distance, high throughput wireless link.

Upcoming Wireless Fiber products targeted to medium distance backhaul and access applications.

Through Qterics, we offer a cloud based architecture for authenticating, provisioning, and managing connected IoT devices, including products to support remote firmware upgrades and remote screen access. Today, Qterics’ products are deployed primarily in consumer electronics such as televisions, Blu-ray players and tablets. However the Qterics cloud architecture is scalable and applicable to other connected IoT products as well. Qterics services are monetized using multiple fee models including per-unit software license fees, non-recurring engineering fees and pay-per-use fees.
The automotive market is increasingly receptive to the integration of personal electronics with in-vehicle infotainment systems. In 2013, MHL-enabled after-market head units were introduced by JVC, Kenwood and Pioneer. We saw continued adoption of MHL in the aftermarket head-units in 2014 from JVC, Pioneer, Kenwood, Alpine and Clarion brands.

Products
Mobile

Mobile MHL Transmitters. Our Mobile MHL transmitters convert digital video, audio and data into the MHL format supporting resolutions up to 4K with multi-channel audio over a low pin count, connector agnostic interface. These transmitters enable devices, such as smartphones and tablets to connect to televisions, PC monitors, automobile infotainment systems, projectors, A/V receivers and other devices with MHL inputs or with HDMI inputs using an MHL-to-HDMI adapter. Our MHL transmitter products are optimized for small size and low power consumption.
The smartphone market is characterized by a limited set of integrated circuit platform suppliers. We work closely with these suppliers to ensure efficient integration of our products. We work with companies such as Qualcomm and MediaTek to supply reference designs and development kits using our MHL transmitters. Our MHL 3.0 transmitter has been designed to work with the latest generation of 4K Ultra HD capable mobile application processors. We also provide a high-performance MHL 3.0 multimedia switch. This switch is co-located with our MHL 3.0 transmitter and supports switching between an MHL 3.0 port and two USB ports.
MHL-to-HDMI Bridges. Our MHL-to-HDMI bridge products are designed to connect MHL enabled mobile products with HDMI-enabled platforms. We provide multiple bridge ICs and reference designs enabling the conversion of MHL to HDMI. These bridge products enable original equipment manufacturers (OEMs) to quickly develop new accessories such as multimedia audio/video docking stations and adapters that deliver MHL transmitted content to HDMI, DVI, and analog VGA monitors and displays.
SiBEAM SnapTM Technology. Our SiBEAM Snap wireless connector technology is based on the same production-proven 60GHz on CMOS technology shipping in multiple generations of SiBEAM products. The wireless technology delivers up to 12 Gb/s of bi-directional bandwidth that provides high speed data channel for data and video transfer. The single chip solution can wirelessly replace USB, HDMI, or DisplayPort connectors.

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60GHz WirelessHD Transmitters. Our UltraGig™ 6400 60GHz WirelessHD (the “UltraGig 6400”) transmitter product is designed to provide near-zero latency for HD video between mobile devices, such as smartphones and tablets, and a display. The UltraGig 6400 is optimized for size and low power consumption and includes the 60GHz WirelessHD baseband processor, RF, antennas, and an MHL transmitter in a small 10x7mm package. It is also optimized for low power consumption.
CE (DTV & Home Theater)
Dual Mode Port Processors. Our dual mode port processors featuring MHL and HDMI functionality are designed for CE products, such as televisions, A/V receivers, sound bars and Home-Theater-in-a-Box devices. Our port processors support the latest versions of the MHL and HDMI specifications and provide the ability to interface to HDMI source devices as well as MHL-enabled devices such as smartphones, tablets and Smart TV streaming sticks. In addition, our port processors provide advanced "Standard-Plus" features such as a live picture-in-picture video preview of each HDMI / MHL input with our InstaPrevue™ technology. This feature makes televisions and A/V receivers easier to use by taking the guesswork out of switching between multiple HDMI sources. Another feature offered by our port processors is InstaPort™ technology, which allows for fast switching between up to six HDMI / MHL inputs. In 2014, we introduced new port processors that support the MHL 3.0 and HDMI 2.0 standards as well as the latest HDCP 2.2 link protection required for premium content transmission. All of our port processors are backward compatible with previous versions of the HDMI and MHL standards, thus assuring customers that their products will have a high degree of compatibility and interoperability.
HDMI Transmitters. Our HDMI transmitter products are designed for products such as Blu-Ray players, high-definition set-top boxes, A/V receivers and sound bars. HDMI transmitters convert digital video and audio into the HDMI format. In 2014 we introduced new transmitter products compliant with the HDMI 2.0 specification and with integrated support for HDCP 2.2 link protection.
60GHz WirelessHD Transmitters and Receivers. Our WirelessHD transmitter and receiver products are used in WirelessHD receiver adapters, HDMI extenders, home theater projectors and wireless video accessory devices, such as personal video display glasses.
Wireless Fiber
60GHz RF Transceivers. Our RF transceiver products are designed for use in 4G LTE small cells and Metro Wi-Fi and fixed wireless broadband point-to-point links. In February 2014, we introduced two RF transceiver products intended to address medium distance urban applications and short distance enterprise and campus applications respectively. Our beam-steering technology reduces the size and weight of the antenna and eliminates the need for fine manual alignment during and after installation. The low power consumption and high level of integration allows the size and power consumption of the system electronics to be reduced.
PC
We continue to provide legacy SATA, PATA and DVI integrated circuits servicing legacy PC designs, industrial PCs, and digital video recorders for the security industry.  We are no longer making any investments in these legacy products.
Simplay Labs, LLC
We believe our wholly-owned subsidiary Simplay Labs LLC (“Simplay”) has further enhanced our reputation for quality, reliable products and leadership in the CE and mobile markets. The Simplay HD™ interoperability program offers manufacturers one of the most robust and comprehensive testing engagements for device interoperability. Devices that pass Simplay’s Authorized Testing Centers (ATCs) and enhanced interoperability testing requirements are verified to meet HDMI and MHL technology interface compliance specifications and have also demonstrated interoperability through empirical testing against “peer” devices maintained by Simplay. Simplay has service centers operating in the United States, South Korea and China, providing compliance, interoperability and performance testing. Simplay Labs is set up to test products ranging from receiving devices like televisions, A/V receivers and sound bars to transmitting devices like Blu-ray Disc™ players, set-top boxes, A/V receivers, gaming consoles, media hubs and other electronic devices.
Simplay also develops and sells test tools to manufacturers to support their efforts to quickly bring high quality and standards compliant products to market. The Simplay test tools include the Simplay Explorer HDMI-CEC test system (CEC Explorer), Universal Test System (UTS) and protocol analyzer. The Simplay CEC Explorer was the first R&D tool of its kind for CE manufacturers. The Simplay UTS is a new generation test system that utilizes an industry standard shelf-based

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modular slot approach to support many HD standards, interfaces and function within a single chassis. The UTS is the first test system of its kind to offer both HDMI and MHL system test capabilities within a single platform.
DVDO
Our wholly-owned subsidiary DVDO, Inc. (“DVDO”) delivers video connectivity solutions in the form of finished end products for professional installers and end users. DVDO’s video switchers, wireless adapters and video processors feature advanced technologies to provide professional-quality video from multiple sources across a wide range of displays.
Research and Development
Our research and development efforts continue to focus on innovative technology standards, services and IC products featuring, among other things, higher bandwidth and lower power links, efficient algorithms, architectures and new features. By utilizing our patented technologies and optimized architectures, we believe our semiconductor products can scale with advances in semiconductor manufacturing process technology, simplify system design and provide innovative solutions for our customers.
We have extensive experience in the areas of high-speed interconnect architecture, circuit design, logic design/verification, firmware/software, digital audio/video systems, wireless baseband, and radio frequency (RF) technology and architecture. We have invested and expect that we will continue to invest, significant funds for research and development activities, and may face challenges in funding the increasing costs of product development.
Manufacturing
Wafer Fabrication
Our semiconductor products are designed using standard CMOS processes, which permit us to use independent wafer foundries for fabrication. We utilize what is known as a fabless manufacturing strategy for all of our products by employing world-class suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and packaging. This strategy uses the expertise of these suppliers that are certified by the International Standards Organization (ISO) in such areas as fabrication, assembly, quality control and assurance, reliability and testing. In addition, this strategy allows us to avoid the significant costs and risks associated with owning and operating manufacturing operations. Outsourcing our manufacturing also gives us direct and timely access to various advanced process technologies. Our suppliers are also responsible for procurement of most of the raw materials used in the production of our products. As a result, we can focus our resources on standard creation, product design, additional quality assurance, marketing and customer support.
We utilize industry-leading suppliers, such as Taiwan Semiconductor Manufacturing Company Limited, to produce our semiconductor wafers. Our in-house engineering staff designs our products with standard cells from foundries or third-party library providers, and provides the designs to foundries for manufacturing. We periodically work with foundries to review pricing, capacity, cycle time and other terms. We also work closely with foundries in order to achieve high manufacturing yields during the wafer fabrication process, which is an important aspect of our cost-reduction efforts.
Our semiconductor products are currently fabricated using 0.35, 0.25, 0.18, 0.13, 0.065, 0.055 and 0.040 micron processes. For our IP customers, we develop IP at all these nodes and additionally at 0.028 micron. For these customers we also use other foundries such as Semiconductor Manufacturing International Corporation, Fujitsu, and others. We continuously evaluate the benefits, primarily the improved performance, costs and feasibility, of migrating our products to smaller geometry process technologies. Because of the cyclical nature of the semiconductor industry, available capacity can change quickly and significantly. We discuss the risks related to our sole sourcing of the manufacturing of our products in the section titled “Risk Factors” in this report.
Assembly and Test
Once our semiconductors have been manufactured, they are packaged and tested. We have developed our own automatic testing program for semiconductors and outsource all of our assembly and testing requirements to other sub-contractors. We utilize independent subcontractors, such as Advanced Semiconductor Engineering, Inc., Siliconware Precision Industries Company Ltd. and Amkor Technology to perform assembly, testing and packaging of most of our products.

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Our semiconductor products are designed to use low-cost standard packages and to be tested with widely available semiconductor test equipment. We outsource all of our packaging and our test requirements. This enables us to take advantage of economies of scale and supply flexibility and gives us direct and timely access to advanced packaging and test technologies. Since the fabrication yields of our products have historically been high and the costs of our packaging have historically been low, we test our products after they are assembled and do not, in general, do wafer level testing. This testing method has not caused us to experience unacceptable failures or yields. However, lack of testing prior to assembly could have adverse effects if there are significant problems with wafer processing. For our more recent products in the wireless market, the die sizes are relatively larger and we do perform wafer level testing before assembly. Additionally, for newer wired products and products for which yield rates have not stabilized, we may conduct bench testing using our personnel and equipment, which is more expensive than fully automated testing. RF testing of our 60 GHz wireless products also requires customized test equipment and fixtures which are challenging to build and maintain in a production test environment. Our operations personnel closely review the process and control and monitor information provided to us by our foundries. To ensure quality, we have established firm guidelines for rejecting wafers that we consider unacceptable.
Quality Assurance
We focus on product quality through all stages of the design and manufacturing process. Our designs are subjected to in depth circuit simulation at temperature, voltage and processing extremes before being fabricated. We also subject pre-production parts to extensive characterization and reliability testing. We also sample early production parts to ensure we are getting the same results as we did during pre-production. We pre-qualify each of our subcontractors through an audit and analysis of the subcontractor’s quality system and manufacturing capability. For our highest volume parts we have an ongoing monitoring process that samples product and subjects it to rigorous testing to determine if there is any weakness or marginality in performance. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing data from our wafer foundries and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yields. Our independent foundries and our assembly and test subcontractors have achieved ISO 9001 certification.
Sales and marketing
Our worldwide sales and marketing strategy is critical to our objective of becoming the leading supplier of high-performance video, audio and data connectivity products. Our sales and marketing teams work closely with each industry’s respective OEMs and original design manufacturers, or ODMs, to define product features, performance, price and the timing of new products. Members of our sales team have a high level of technical expertise, product and industry knowledge to support the competitive and complex design win process. We also employ a highly skilled team of application engineers to assist in designing, testing and qualifying designs that incorporate our products. We believe that the depth and quality of our design support greatly improves our time-to-market, maintain a high level of customer satisfaction and fosters relationships that encourage customers to use our products through multiple iterations of their products. Our sales strategy for all products is to achieve design wins with key industry companies in order to grow the existing markets in which we participate as well as develop new and emerging markets. Our sales strategy also promotes and accelerates the adoption of industry standards that we support or are developing.
We sell our products using direct sales support and marketing field offices located in North America, Europe, Taiwan, China, Japan, South Korea and India. We also sell our products using an extensive network of distributors located throughout the Americas, Asia and Europe with the additional support of independent Sales Representative companies in the Americas and Europe. Our sales cycle typically begins with the receipt of an initial request from a customer and ends when our customer executes a purchase order for production quantities. The length of our sales cycles varies substantially, typically from four months to nine months for CE and mobile products and longer for wireless fiber products. The length depends on a number of factors, including the technical capabilities of our customer, the customer’s need for customization and the customer’s qualification process.
Other marketing activities we engage in include public relations, advertising, web-marketing, participation in technical conferences and trade shows, competitive analyses, industry intelligence and other marketing programs. Our Corporate Marketing department provides company information regarding our products, strategies and technology to the press, industry analysts, and the general public on our Internet site and through other media.
Customer Concentration


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We focus our sales and marketing efforts on achieving design wins with OEMs of mobile and CE products and wireless infrastructure providers. A small number of customers and distributors have generated and are expected to continue to generate a significant portion of our total revenue. Our top five customers, which include distributors, generated 57.9%, 67.1% and 64.4%, of our total revenue in 2014, 2013 and 2012, respectively. For the year ended December 31, 2014, total revenue from Samsung Electronics accounted for 28.7% of our total revenue. No other customer generated revenues which account for more than 10% of our total revenue for the year ended December 31, 2014. For the year ended December 31, 2013, total revenue from Samsung Electronics accounted for 40.2% of our total revenue. No other customer generated revenues which account for more than 10% of our total revenue for the year ended December 31, 2013. For the year ended December 31, 2012, total revenue from Samsung Electronics and our distributor Edom Technology accounted for 35.0% and 10.3% of our total revenue, respectively. Our dependence on sales to a relatively small number of large customers subjects us to the risk that one or more large customers loses market share, reduces their purchases of our products, or does not select our products for inclusion in their future products. In December 2014, we were notified by one of our largest customers of a reduction in a mobile design win which we anticipate will lead to a year over year revenue decline in 2015 of approximately 10%.
A significant percentage of our revenue was generated through distributors. Our revenue generated through distributors was 32.3% of our total revenue in 2014, compared to 32.2% and 38.4% of our total revenue in 2013 and 2012, respectively. Please refer to the Risk Factors section under item 1A of this report for a discussion of risks associated with the sell-through arrangement with our distributors.
A substantial portion of our business is conducted outside the United States; therefore, we are subject to foreign business, political and economic risks. For the years ended December 31, 2014, 2013 and 2012, approximately 61.2%, 52.7% and 57.4% of our total revenue, respectively, was generated from customers and distributors located outside of North America, primarily in Asia.
Backlog
Our sales are primarily made through standard purchase orders for delivery of products. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. In light of industry practice and experience, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant. Given this practice, we do not believe that backlog is a reliable indicator of future revenue levels. In addition, a portion of our revenue is related to inventory pulled by customers from vendor managed inventory locations. As such, this revenue would not be included in the backlog. Our backlog also includes orders from distributors for which revenue is not recognized until the products are sold to end customers.
Seasonality
We are affected by the seasonality and design cycles of our varied customer base which are mainly in the CE and mobile markets. Historically, we have seen stronger revenue in the second half of our fiscal year than in the first half of our fiscal year, primarily due to manufacturers preparing for the major holiday selling season.
Competition
The markets in which we participate are intensely competitive and are characterized by rapid technological change, evolving standards and short product life cycles. Key factors affecting competition in our markets are levels of product integration, compliance with industry standards, time-to-market, cost, product capabilities, system design costs, intellectual property, customer support, quality and reputation. Our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver those features in consistent volumes of our products at acceptable levels of quality and at competitive prices.
In general, our current semiconductor competition for HDMI and MHL products includes:
Discrete HDMI and MHL products offered by companies such as Analog Devices, Analogix, Parade, Panasonic and Explore.
Companies integrating HDMI or MHL functionality into system-on-a-chip (SoCs), such as Broadcom, Qualcomm, Marvell, MStar, and MediaTek.
In-house semiconductor solutions designed by large consumer electronics OEMs.

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Our products also compete against alternative HD connectivity technologies, such as Mobility DisplayPort (MYDP), DisplayPort, and MiraCast (or Wi-Fi Display). MYDP was released in 2012 and is positioned as an alternative to MHL primarily for mobile phones. MiraCast is a wireless video technology based on existing WiFi standards that is positioned against WirelessHD and MHL as a wireless alternative to transmit video from a mobile device to a large screen. DisplayPort is primarily found in PCs, but could potentially provide video connectivity between CE devices such as Blu-ray players and HD-TVs as an alternative to HDMI.
WiGig 802.11ad is a 60GHz wireless standard offered as an alternative to wired connectivity and to WirelessHD, and while we have announced that we are in development of WiGig 802.11ad products, our products may not be able to compete on features or price against much larger potential competitors such as Qualcomm, Broadcom and Intel.
Proprietary technologies such as Apple’s AirPlay and Google’s Chromecast are also positioned against MHL and WirelessHD as a means to transmit audio and video from mobile devices to A/V receivers, sound bars, and HD-TVs.
Although we believe that we will be able to successfully compete with existing and new competitors, some competitors have longer operating histories, greater name recognition, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sale of their products than we can. Our current or future competitors could develop and introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance than our products. In addition, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when our ability to do so may be limited.
Competitors have in the past and may in the future establish financial and strategic relationships among themselves, or other third parties to increase the ability of their products to address the needs of the market.  Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share, which could harm our business.
Many of our current and potential customers have substantial technological capabilities and financial resources. Some customers have already developed, or in the future may develop, technologies that could compete directly with our products. We may also face competition from suppliers of products based on new or emerging technologies.
Intellectual Property
Our success and future revenue growth depend in large part on our ability to protect our intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions and licenses to protect our intellectual property. We are also exploring means to obtain further consideration from our patent portfolio beyond the existing standards-based licensing and defensive use. We enter into confidentiality agreements with our employees, consultants, suppliers and customers and seek to control access to and distribution of, our documentation and other proprietary information. In addition, we often incorporate the intellectual property of other companies into our designs and we have certain obligations with respect to the non-use and non-disclosure of their intellectual property.
As of December 31, 2014, we own 648 issued United States and International patents and had 544 United States and International patent applications pending. Our U.S. issued patents have expiration dates which range from 2017 to 2033 subject to our payment of periodic maintenance fees. Our policy is to seek to protect our intellectual property rights throughout the world by filing patent applications in select foreign jurisdictions. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products and technology without authorization, independently develop similar technology or design around our patents. In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction. See “Risk Factors” under Item 1A of this report for further discussion of the risks associated with patents and intellectual property.
Employees
As of December 31, 2014, we had a total of 671 full-time employees. None of our employees are represented by a collective bargaining agreement. We have never experienced any work stoppages. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and senior management personnel and our ability to attract and retain additional qualified personnel. We are subject to the risk that we may not be able to retain key employees, given the intense competition for talent in the geographic regions in which we operate and the financial challenges facing us, which required that we reduce our operating expenses in order to bring them in line with our financial outlook. In addition, we are subject to the risk of transitions in our management team.

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Financial Information About Geographic Areas
Refer to note 14 in our consolidated financial statements included under item 15 for financial information about our geographic areas.
Available Information
Our internet address is www.siliconimage.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on the investor relation’s section of our website at http://ir.siliconimage.com when such reports are available on the SEC’s website. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We are not including the information contained on our website as a part of, or incorporating it by reference into our annual report on Form 10-K.
 
Item 1A. Risk Factors
   
A description of the risk factors associated with our business is set forth below. You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment.

Mobile revenue decline may be more severe than anticipated

On December 18, 2014, we announced that we expected a year-over-year revenue decline for 2015 of approximately 10% as compared to 2014 due to a reduction in mobile design wins at one of our largest customers. There can be no guarantee that the actual revenue decline in 2015 will not be more severe than the estimated 10% reduction. If other manufacturers who have included MHL in their designs decide that MHL is no longer necessary or cost-effective as a product feature, they too could choose to omit the MHL functionality (and our product) from their designs. Such decisions would have adversely affect our revenues.  Similarly, if the large customer mentioned in our December 18, 2014 announcement decides to remove MHL from other products, our revenue would be adversely affected.

Our proposed merger with Lattice may not be completed within the expected timeframe, or at all, and the failure to complete the merger could adversely affect our business and the market price of our common stock.

On January 26, 2015, we, Lattice and Merger Sub entered into the Merger Agreement pursuant to which, and on the terms and conditions contained in the Merger Agreement. Merger Sub commenced the Offer. The consummation of the Offer is conditioned on (i) at least a majority of all shares of Silicon Image’s outstanding common stock having been validly tendered into (and not withdrawn from) the Offer prior to the expiration date of the Offer, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the United States and (iii) other customary conditions. The Offer is not subject to a financing condition. Following the consummation of the Offer, subject to customary conditions, Merger Sub will be merged with and into us (the “Merger”) and we will become a wholly owned subsidiary of Lattice. If any of the conditions to the Offer are not satisfied (or waived by the other party), the Offer (and the merger) might not be completed. In addition, the Merger Agreement may be terminated under specified circumstances. Failure to complete the Offer and the Merger could adversely affect our business and the market price of our common stock in a number of ways, including:

if the Merger is not completed, and no other party is willing and able to acquire us at a price of $7.30 per share or higher, on terms acceptable to us, the share price of our common stock is likely to decline;
we have incurred, and continue to incur, significant expenses for professional services in connection with the proposed Merger, for which we will have received little or no benefit if the merger is not completed. Many of these fees and costs

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will be payable even if the merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger;
a failed Merger may result in negative publicity and/or give a negative impression of us in the investment community or business community generally , and could have an adverse effect on our on-going operations including, but not limited to, retaining and attracting employees, and reduced ability to attract design wins and to sell our products; and
if the Merger Agreement is terminated under specified circumstances, we may be required to pay Lattice a termination fee.

The announcement and pendency of our proposed merger with Lattice could adversely affect our business, financial condition, and results of operations.

The announcement and pendency of our proposed merger with Lattice could disrupt our business and create uncertainty about it, which could have an adverse effect on our business, financial condition, and results of operations, regardless of whether the merger is completed. These risks to our business, all of which could be exacerbated by a delay in the completion of the merger, include:

diversion of significant management time and resources towards the completion of the merger;
impairment of our ability to attract and retain key personnel;
difficulties maintaining relationship with employees, customers and other business partners;
restriction on the conduct of our business prior to the completion of the merger, which prevent us from taking specified actions without the prior consent of Lattice, which we might otherwise take in the absence of the Merger Agreement; and
litigation relating to the merger and the related cost.

We depend on a few key customers and the loss of any of them could significantly reduce our revenue and gross margins and adversely affect our results of operations.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue and we may not be able to diversify our customer and/or distributor base. For the year ended December 31, 2014, revenue from Samsung Electronics accounted for 28.7% of our total revenue. No other customer generated revenues for more than 10% of our total revenue for the year ended December 31, 2014. For the year ended December 31, 2013, total revenue from Samsung Electronics accounted for 40.2% of our total revenue. No other customer generated revenues which account for more than 10% of our total revenue for the year ended December 31, 2013. For the year ended December 31, 2012, total revenue from Samsung Electronics and our distributor Edom Technology accounted for 35.0% and 10.3% of our total revenue, respectively. In addition, an OEM customer of ours may buy our products through multiple distributors, contract manufacturers and/or directly from us, which could mean an even greater concentration of revenue in such a customer. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products or products incorporating our products and generate revenue for us. As a result of this concentration of revenue in few customers, our results of operations could be adversely affected if any of the following occurs:

one or more of our customers or distributors becomes insolvent or goes out of business;
one or more of our key customers or distributors significantly reduces, delays or cancels orders; and/or
one or more of our significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.

For example, for the year ended December 31, 2014, our mobile product revenue decreased as compared to the same period in 2013 as a result of a significant production slowdown by one of our key customers. This had an adverse effect on our financial results for the year ended December 31, 2014 when compared to the same period in 2013. Similarly, on December 17, 2014, one of our largest customers informed us that it had decided not to include our MHL functionality in certain designs in order to reduce costs, and as a result of this decision, on December 18, 2014, we announced that we expected a year-over-year revenue decline in 2015.

While our participation in multiple markets has broadened our customer base, we remain dependent on a small number of customers or, in some cases, a single customer for a significant portion of our revenue in any given quarter, the loss of which could adversely affect our operating results.
Our success depends on our ability to develop and bring to market innovative new technologies and products as well as continued growth in consumer and customer demand for these new technologies and products. We may not be able to

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develop and bring to market such technologies and products in a timely manner because the process of developing high-performance semiconductor and software products is complex and costly.
Our future growth and success depends on the continued growth in the market acceptance of and consumer and customer demand for our mobile technologies and semiconductor products, especially our MHL-enabled and wireless mobile products. Sales of our MHL-enabled products has accounted for a significant portion of our revenue growth in the recent past. If we cannot continue to increase consumer awareness of and demand for MHL-enabled and wireless products, our customers’ demand for our products may not continue to grow as rapidly as has been the case and may even decrease. For the year ended December 31, 2014, our mobile product revenue decreased as compared to the same period in 2013 as a result of a significant production slowdown by one of our key customers. This had an adverse effect on our financial results for the year ended December 31, 2014. Even though our mobile product revenue still represents a majority of our product revenue and our MHL-enabled products still represent a majority of our mobile product revenue, there can be no assurance that our mobile product revenue, especially our MHL-enabled product revenue, will continue to grow at rates in line with the recent past or at all, that we will not continue to experience further declines in our mobile product revenue or that we will not experience the loss of one or more mobile product customers. Any of these developments would have a negative impact on our business and results of operations.

We are subject to the risk that increasing cost pressures on OEM customers in the mobile device market, coupled with risks regarding the market adoption of our MHL products, will adversely affect demand for our MHL technology or lead manufacturers to eliminate the technology in some of their products. On December 17, 2014, one of our largest customers informed us that it had decided not to include our MHL functionality in certain designs in order to reduce costs, and as a result of this decision, on December 18, 2014, we announced that we expected a year-over-year revenue decline in 2015.
Our future growth and success also depends on the growth in the market acceptance of and consumer and customer demand for our 60GHz wireless products. There can be no assurance that the market will ever accept or that there will ever be consumer or customer demand for our wireless products or that we will be successful in developing and marketing these new or other future products. Moreover, there is no assurance that our current, new or future products will ever incorporate the innovations, features or functionality at the price points necessary to achieve a desired level of market acceptance and/or penetration in the anticipated timeframes. For example, we have not yet seen the growth in the demand for and revenue from the sale of our 60GHz wireless products that we anticipated when we undertook development of the product. There is no way to make certain that any such current, new or future products will contribute significantly to our revenue in the future. We face significant competition from startups having the resources, flexibility and ability to innovate faster than we can. We also face competition from established companies with more significant financial resources and greater breadth of product line than we have, providing them with a competitive advantage in the marketplace. For example, in July 2014, Qualcomm, Inc. acquired Wilocity Ltd, a developer and licensor of wireless WiGig semiconductor technology. We expect that the combination of these two companies will represent a significant competitive threat to our wireless products. If we cannot continue to innovate our ability to develop and market new products could negatively affect our business and results of operations.
The development of new semiconductor and software products is highly complex. On several occasions in the past, we have experienced delays, some of which exceeded one year, in the development and introduction of our new semiconductor products. As our products integrate new, more advanced functions and transition to smaller geometries, they become more complex and increasingly difficult to design, manufacture and debug.
Our ability to successfully develop and introduce new products also depends on a number of factors, including, but not limited to:
our ability to accurately predict market trends and requirements, the establishment and adoption of new standards in the market and the evolution of existing standards and connectivity technologies, including enhancements or modifications to existing standards such as HDMI and MHL;
our ability to identify customer and consumer market needs where we can apply our innovation and skills to create new standards or areas for product differentiation that improve our overall competitiveness either in an existing market or in a new market;
our ability to develop advanced technologies and capabilities and new products and solutions that satisfy customer and consumer market demands;
how quickly our competitors and customers integrate the innovation and functionality of our new products into their semiconductor products, putting pressure on us to continue to develop and introduce innovative products with new features and functionality;
our ability to complete and introduce new product designs on a timely basis, while accurately anticipating the market windows for our products and bringing them to market within the required time frames;
our ability to manage product life cycles;

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our ability to transition our product designs to leading-edge foundry processes in response to market demands, while achieving and maintaining of high manufacturing yields and low testing costs;
our ability to create cost efficient designs that can be profitably sold at prices the market can bear;
the consumer electronics market’s acceptance of our new technologies, architectures products and other connectivity solutions; and
consumers’ shifting preferences for how they purchase and consume content, which may not be met by our products.
Accomplishing what we need to do to be successful is extremely challenging, time-consuming, and expensive; and there is no assurance that we will succeed. We may experience product development delays from unanticipated engineering complexities, commercial deployment of new connectivity standards changing market or competitive product requirements or specifications, difficulties in overcoming resource constraints, our inability to license third-party technology and other factors. Also other companies, including our competitors and our customers may integrate the innovation and functionality of our products into their own products, thereby reducing demand for our products. If we are not able to develop and introduce new and innovative products and solutions successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would adversely affect our operating results. Even if we are successful in our product development efforts, it is possible that failures in our commercialization may result in delays or failure in generating revenue from these new products.
In addition, we must work with semiconductor foundries along with current and potential customers to complete new product development and to validate manufacturing methods and processes to support volume production and potential re-work. These steps may involve unanticipated obstacles, which could delay or cancel product introductions and reduce market acceptance of our products. These difficulties and the increasing complexity of our products may result in the increased number of products containing defects or not performing as expected, which would harm our relationships with customers and market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our new products, that we will be able to complete development of these products when anticipated, or that these products can be manufactured in commercial volumes at acceptable yields, or that any design wins will produce any revenue. Failure to develop and introduce new products successfully and in a timely manner, may adversely affect our results of operations.
We have made acquisitions of companies and intangible assets. Acquisitions of companies or intangible assets involve numerous risks and uncertainties.

Our growth depends on the growth of the markets we serve and our ability to enter new markets. We are also dependent on our ability to enhance our existing products and technologies and to introduce new products and technologies for existing and new markets on a timely basis. The acquisition of companies or intangible assets is a strategy we have used in the past to develop new technologies and products that enhance our existing products portfolio and to enter new markets. Negotiation and integration of acquisitions could divert management’s attention and other company resources. Any of the following risks associated with acquisitions or investments could impair our ability to grow our business, develop new products and sell our products and ultimately could harm our growth or financial results:

the inability to find acquisition opportunities that are suitable to our needs available in the time frame necessary for us to take advantage of market opportunities or available at a price that we can afford;
the difficulty and increased costs of integrating the operations and employees of the acquired business, including our possible inability to keep and retain key employees of the acquired business;
the disruption to our ongoing business of the acquisition process itself and subsequent integration;
the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;
the inability to successfully commercialize acquired products and technologies;
the inability to retain the customers and suppliers of the acquired business;
difficulty in operating in new and potentially disperse locations;
assumptions of liabilities;
issuance of equity securities that may be dilutive to our existing stockholders;
diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;
failure of the due diligence processes to identify significant issues with product quality, technology and development, or legal and financial issues, among other things;
incurring one-time charges, increased contingent liabilities, adverse tax consequences, depreciation or deferred compensation charges, amortization of intangible assets or impairment of goodwill, which could harm our results of operations;

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potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings or those of the acquired business;
the need to take impairment charges or write-downs with respect to acquired assets and technologies; and
the risk that the future business potential as projected may not be realized and as a result, we that we may be required to take a charge to earnings that would impact our profitability.
Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our previous or future acquisitions will be successful, will deliver the intended benefits of such acquisition, and will not materially harm our business, operating results or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.
We have made strategic investments in and enter into strategic partnerships with third parties. The anticipated benefits of these investments and partnerships may never materialize.
We have made strategic investments in and enter into strategic partnerships with third parties with the goal of acquiring or gaining access to new and innovative semiconductor products and technologies on a timely basis. Negotiating and performing under these arrangements involves significant time and expense, and we cannot assure you that the anticipated benefits of these arrangements will ever materialize or that the products or technologies involved will ever be commercialized or that, as a result, we will not have write down a portion or all of our investment.
Our success depends on our ability to enter new markets and diversify our product portfolio, and our inability to do so successfully could adversely affect our business.

In order for the Company to grow, we must expand in the markets we currently serve and enter into new markets. To do so, we will need to develop and introduce new products in a timely and cost effective manner to appeal to these markets. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration and smaller process geometries, all of which present significant challenges. In addition, the development of new semiconductor products is highly complex, and due to supply chain cross-dependencies and other issues, we may experience delays in completing the development, production and introduction of our new products. In addition, entering into new markets and expanding the markets we serve can raise significant additional challenges for the Company, including the following:

we will be required to develop new products for these markets;
we may need to expand our current sales force and cultivate new relationships with customers;
we may need to adopt new business models, business processes and systems;
the cultural obstacles we encounter in the markets we enter may be difficult to overcome;
we will likely face new competitors, many with more significant resources;
we may face additional governmental regulation; and
there may be differing rates of profitability and growth in the new markets we enter and new products we develop.

Our annual and quarterly operating results are highly dependent upon how well we manage our business.

Our annual and quarterly operating results are highly dependent upon and may fluctuate based on how well we manage our business, including without limitation:

our ability to manage product introductions and transitions, develop necessary sales and marketing channels and manage our entry into new market;
our ability to attract and retain engineering, marketing and sales personnel specialized in hardware and software development and sales within our markets;
our ability to manage sales into multiple markets such as mobile, CE and PC, which may involve additional research and development, marketing or other costs and expenses;
our ability to enter into licensing transactions when expected and make timely deliverables and milestones on which recognition of revenue often depends;
our ability to develop customer solutions that adhere to industry standards in a timely and cost-effective manner;
our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;
our ability to manage joint ventures and projects, design services and our supply chain partners;

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our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;
our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;
the success of the distribution and partner channels through which we choose to sell our products and our ability to manage expenses and inventory levels;
our ability to successfully maintain certain structural and various compliance activities in support of our global structure which is designed to result in certain operational benefits as well as an overall lower tax rate and which, if not maintained, may result in us losing these operational and tax benefits; and
Our ability to effectively manage our business.

Our annual and quarterly operating results may fluctuate significantly and are difficult to predict, particularly given adverse domestic and global economic conditions.

Our annual and quarterly operating results are likely to fluctuate significantly in the future based on a number of factors over many of which we have little or no control. These factors include, but are not limited to:

changes in the market demand for or acceptance of our customers' products;
the growth, evolution and rate of adoption of industry standards in our key markets, including mobile, CE and PCs;
the completion of a few key licensing transactions in any given period on which our anticipated licensing revenue and profits are highly dependent, and the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected;
our licensing revenue has been uneven and unpredictable over time and is expected to continue to be uneven and unpredictable in the future;
the impact on our operating results of the results of the royalty compliance audits which we regularly perform;
competitive pressures, such as the ability of our competitors to offer or introduce products that are more cost-effective or that offer greater functionality than our products;
average selling prices and gross margins of our products, which are influenced by competition and technological advancements, among other factors;
government regulations or regulatory actions involving or impacting the industry standards in which we participate or our products;
the availability or continued viability of other semiconductors or key components required for a customer solution where we supply one or more of the necessary components;
the cost to manufacture our products, including the cost of gold, and prices charged by the third parties who manufacture, assemble and test our products;
negative yield impacts due to manufacturing or engineering flaws; and
fluctuations in market demand, one-time sales opportunities and sales goals, which sometimes result in heightened sales efforts during a given period that may adversely affect our sales in future periods.
Because we have little or no control over many of these factors and/or their magnitude, our operating results are difficult to predict and the outcome of any of these factors, including any substantial adverse change in any of these factors could negatively affect our business and results of operations including our annual and quarterly operating results. For example, for the year ended December 31, 2014, our mobile product revenue decreased as compared to the same period in 2013 as a result of a significant production slowdown by one of our key customers. This had a material adverse effect on our financial results for the year ended December 31, 2014.
   
Our business has in the past and may in the future be significantly impacted by deterioration in worldwide economic conditions and any uncertainty in the outlook for the global economy could make it more likely that our actual results will differ materially from expectations.
Global credit and financial markets have experienced in the past and may experience in the future certain disruptions, including national debt and fiscal concerns, diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. Any tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. Our mobile and CE product revenue, which comprised approximately 71.8%, 77.5% and 73.5% of total revenue for the years ended December 31, 2014, 2013 and 2012, respectively, is dependent on continued demand

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for consumer electronics devices, including but not limited to, DTVs, STBs, AV receivers, tablets, digital still cameras, and smartphones. Demand for consumer electronics devices is a function of the health of the economies in the United States, Japan and around the world. As a result, the demand for our mobile, CE and PC products and our operating results have in the past and may in the future be adversely affected as well. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery, worldwide, in the United States, in our industry, or in the consumer electronics market. These and other economic factors have had and may in the future have a material adverse effect on demand for our mobile, CE and PC products and on our financial condition and operating results.

The IP Core licensing component of our business strategy increases our business risk and market volatility.
Our business strategy includes licensing our IP to companies that incorporate it into their respective technologies that address markets in which we do not directly participate or compete. We also license our IP into markets where we do participate and compete. There can be no assurance that these customers will continue to be interested in licensing our technology on commercially favorable terms or at all. Our licensing revenue can be impacted by the introduction of new technologies by customers in place of the technologies used by them based on our IP. There also can be no assurance that our licensing customers will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property or will maintain the confidentiality of our proprietary information. Our IP licensing agreements are complex and depend upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these require significant judgments.
Our licensing revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin, the licensing revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. Generating revenue from IP licenses is a lengthy and complex process that may last beyond the period in which our efforts begin and, once an agreement is in place, the timing of revenue recognition may be dependent on the customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology and other factors. The accounting rules governing the recognition of revenue from IP licensing transactions are increasingly complex and subject to interpretation. As a result, the amount of license revenue recognized in any period may differ significantly from our expectations.

We face intense competition in our markets, which may lead to reduced revenue and gross margins from sales of our products and losses.
The markets in which we operate are intensely competitive and characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. We expect competition to increase, as industry standards become more widely adopted, new industry standards are introduced, competitors reduce prices and offer products with greater levels of integration, new competitors enter the markets we serve and as we enter new markets.
Our products face competition from companies selling similar discrete products and to companies selling products such as chipsets and system-on-a-chip (SoC) solutions with integrated functionality. Our competitors include semiconductor companies that focus on the mobile, CE and PC markets, as well as major diversified semiconductor companies. In addition, we expect that new competitors will enter our markets.
Some of our current or potential customers, including our own licensees, have their own internal semiconductor capabilities or other semiconductor suppliers or relationships, and may also develop solutions integrating the innovations, features and functionality of our products for use in their own products rather than purchasing products from us. Some of our competitors have already established supplier or joint development relationships with some of our current or potential customers and may be able to leverage these relationships to discourage these customers from purchasing products from us or to persuade them to replace our products with theirs. Many of our competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do and therefore may be able to adapt more quickly to new or emerging technologies and customer requirements, or to devote greater resources to the promotion and sale of their products. Our competitors in the CE market include Analog Devices, Analogix Semiconductor, Parade Technologies, Explore, Broadcom, Intel, MediaTek, MStar, Sigma and Marvell and our competitors in the Mobile market include Analogix, Parade, Explore, Broadcom, Intel, Qualcomm, Texas Instrument, NVIDIA, Marvell and MediaTek. Mergers and acquisitions are very common in our industry and some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has

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resulted in and is likely to continue to result in price reductions and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.
   
We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.
The markets in which we compete are characterized by rapid technological change, evolving customer needs and frequent introductions of new products, technologies and standards. As we adjust to evolving customer requirements and technological advances, we may be required to further reposition our existing offerings and to introduce new products and services. We may not be successful in developing and marketing such new offerings, or we may experience difficulties that could delay or prevent the development and marketing of new products. In addition, new standards that compete with standards that we promote have been and likely will continue to be introduced, which could impact our success. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and challenges, our results of operations could be negatively affected.
   
We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries. This requires us to change the manufacturing processes for our products and to redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. Currently a majority of our products are manufactured in geometries that are 130 nanometers or higher. We are now designing more of our new products in 65 nanometers or lower and expect this trend to continue as we respond to market needs for higher speeds and bandwidths. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, resulting in reduced manufacturing yields, delays in product deliveries and increased expenses. The transition to lower nanometer geometry process technologies has and will continue to result in significantly higher mask and prototyping costs, as well as additional expenditures for engineering design tools and related computer hardware. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.
We are dependent on our relationship with our foundry to transition to smaller geometry processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition in a timely manner, or at all, or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry subcontractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.
   
We will have difficulty selling our products if customers do not design our products into their product offerings or if our customers’ products are not commercially successful.
Our products are generally incorporated into our customers’ products at the customers’ design stage. We rely on OEMs in the markets we serve to select our products to be designed into their products. Without having our products designed into our customers’ products (we refer to such design integration as “design wins”), it is very difficult to sell our products. We often incur significant expenditures on the development of a new product under the hope for such “design wins” without any assurance that a manufacturer will select our product for design into its own product. Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. Some of these third parties may be competitors and, accordingly, may not supply this information to us on a timely basis, if at all. Once a manufacturer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Furthermore, even if a manufacturer designs one of our products into its product offering, we cannot be assured that its product will be commercially successful or that we will receive any revenue from sales of that product. Sales of our products largely depend on the commercial success of our customers’ products. Our customers generally can choose at any time to stop using our products if their own products are not commercially successful or for any other reason. We cannot assure you that we will continue to achieve design wins or that our customers’ products incorporating our products will ever be commercially successful.
   
Our products typically have lengthy sales cycles. Customers may decide to cancel or change their product plans, which could cause us to lose anticipated sales. In addition, our average product life cycles tend to be short and, as a result, we may hold excess or obsolete inventory that could adversely affect our operating results.

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Our customers typically test and evaluate our products prior to deciding to design our product into their own products. This evaluation period generally lasts from three to over six months to test, followed by an additional three to over nine months to begin volume production of products incorporating our products. This lengthy sales cycle may cause us to experience significant delays and to incur additional inventory costs until we generate revenue from our products. It is possible that we may never generate any revenue from products after incurring significant expenditures. Even if we achieve a design win with a customer, there is no assurance that the customer will successfully market and sell its products with our integrated components. The length of our sales cycle increases the risk that a customer will decide to cancel or change its product plans, which would cause us to lose sales that we had anticipated. In addition, anticipated sales could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products. Further, the combination of our lengthy sales cycles coupled with worldwide economic conditions could have a compounding negative impact on the results of our operations.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, from time to time, our product sales and marketing efforts may not generate sufficient revenue requiring that we write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover or otherwise compensate for our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher-cost products in our inventory, our operating results would be harmed.
   
Our customers may not purchase anticipated levels of products, which can result in excess inventories.
We generally do not obtain firm, long-term purchase commitments from our customers and, in order to accommodate the requirements of certain customers, we may from time to time build inventory that is specific to that customer in advance of receiving firm purchase orders. The short-term nature of our customers’ commitments and the rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. Should the customer’s need shift so that they no longer require such inventory, we may be left with excessive inventories, which could adversely affect our operating results.
Our continued success selling MHL-enabled ICs into the mobile device market is ultimately dependent on the number of end users who actually use the functionality provided by our IC and the market demand for mobile devices incorporating them.

Currently our mobile device customers implement a “mirroring” use case with our MHL-enabled ICs.  They mirror whatever is displayed on the hand set and on the TV such that both the hand set and TV display the same video image.  If our customers decide that this use case is no longer required as part of the base functionality of their mobile devices due to low end user usage or other reasons, our customers may choose to remove our MHL IC from their design to reduce their system cost.

We and our customers depend on the availability of certain functions and capabilities within mobile and PC operating systems over which we may have no control.  New releases of these operating systems may render our chips inoperable. New releases of these operating systems may require significant engineering effort to create new device driver software.

Our mobile business operates within a market that is dominated by a few key OEMs (Samsung, Apple and Sony). These key players can be a significant driver to the growth of our business or could prevent our growth through deliberate or non-deliberate action.  We do not have a presence in the iOS or Windows eco-systems or in all Android devices.  Our success and ability to grow is dependent upon our ability to continue to be successful within the Android eco-system and/or gain significant traction within the iOS eco-system and/or Windows eco-system.  Failure to maintain and grow our traction in these key eco-systems could materially affect IC unit volumes.

Further, many of our ICs depend on certain functionality being available in the device operating system, typically Android, Linux, Windows or iOS.  Certain operating system primitives are needed to support video output (or in the case of legacy ICs, access to the storage subsystem). We have no control over these operating systems or the companies that produce them. Updates to these operating systems that, for example, change the way video is output or remove the ability to output video could materially affect sales of MHL and HDMI ICs. 

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Android, Windows and iOS are managed and controlled by Google, Microsoft and Apple respectively.  Each of these companies is substantially larger than Silicon Image and it is unlikely that we could influence any internal decision they make to limit video output or make any other change that has a negative impact on our ICs and their function.
ICs targeted to PC or mobile designs, laptop, or notebook designs often require device driver software to operate. This software is difficult to produce and may require various certifications such as Microsoft’s Windows Hardware Quality Labs (WHQL) before being released. Each new revision of an operating system may require a new software driver and associated testing/certification. Failure to produce this software can have a negative impact on our relation with OS providers and may damage our reputation as a quality supplier of products in the eyes of end consumers.
   
A single large customer may be in a position to demand certain functionality, pricing or timing requirements that we would otherwise devote to normal business activities. If this were to happen, it is possible that delays in our normal development schedules could occur, causing our products to miss market windows, thus greatly reducing the total number of units sold of a particular product.
The products we develop are complex and require significant planning and resources. The nature of the consumer electronics market is that new products are introduced early in the year, often at the Consumer Electronics Show (CES) in January, or Mobile World Congress (MWC) in late February or early March. In order to meet these show deadlines our customers must complete their product development by year end which usually means that they require us to ship sample parts in the early spring. If we cannot ship sample parts in early spring, customers may be forced to remove the feature provided by our part, use a competitor’s part, or use an alternate technology in order to meet their timelines.
We plan our product development with these market windows in mind. If we receive requests to deploy resources on a specific problem for a specific customer, it is possible that delays would be injected into the normal development path which would cause us to miss sample deadlines.
Our customers may be forced to halt production of their products due to supply shortages of devices not provided by Silicon Image. This production line halt would reduce the number of our parts that we deliver to the customer.
Our products are but one component used in our customer’s larger consumer electronic product. Our customer’s products depend on many parts supplied from multiple vendors (of which we are only one). Supply shortages of any of several components used in a TV, for example, might cause our customer’s TV production line to stop until the supply shortage can be resolved. During this time, customers would not require our parts and thus we would see a reduction in volume. We have no control over our customer’s design choices or over other supplier’s ability to produce their product.
   
We sell our products through distributors, which limits our direct interaction with our end customers, therefore reducing our ability to forecast sales and increasing the complexity of our business.

Many OEMs rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 32.3%, 32.2% and 38.4% of our total revenue for the years ended December 31, 2014, 2013 and 2012, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

manage a more complex supply chain;
monitor the level of inventory of our products at each distributor;
estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States and not publicly traded.
Since we have limited ability to forecast inventory levels at our end customers, it is possible that there may be significant build-up of inventories in the distributor channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. This could adversely impact our revenues and profits. Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.
   
We are dependent upon suppliers for a portion of the raw materials used in the manufacturing of our products and new regulations related to conflict free minerals could require us to incur additional expenses in connection with procuring these raw materials.

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The Securities and Exchange Commission requires disclosure by reporting companies of certain minerals, so called “conflict minerals”, sourced from the Democratic Republic of Congo and adjoining countries (Covered Countries) for which such conflict minerals are necessary to the functionality of a product manufactured, or contracted to be manufactured. These regulations also require a reporting company to disclose efforts to prevent the use of such minerals.
In our industry, such conflict minerals are most commonly found in metals. Some of our products use certain metals, such as gold, silicon and copper, as part of the manufacturing process. We have determined that our products contain conflict minerals that are necessary to the functionality or production of such products. However, we are unable to determine whether our products contain conflict minerals that originated in the Covered Countries.
If we determine that our products do contain conflict minerals that are not sourced responsibly, it may be difficult to obtain conflict minerals that are sourced responsibly. If we are required to use alternative supplies, the price we pay for such metals may increase. Additionally, our reputation with our customers could be harmed if we cannot certify that our products do not contain conflict metals that originated in the Covered Countries.

Governmental action against companies located in offshore jurisdictions may lead to a reduction in the demand for our common shares.
Federal and state legislation have been proposed in the past, and similar legislation may be proposed in the future which, if enacted, could have an adverse tax impact on both us and our stockholders. For example, the ability to defer taxes as a result of permanent investments offshore could be limited, thus raising our effective tax rate.
   
The cyclical nature of the semiconductor industry may create constraints in our foundry, test and assembly capacities and strain our management and resources.
The semiconductor industry is characterized by significant downturns and wide fluctuations in supply and demand. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third-party suppliers. During periods of increased demand and constraints in manufacturing capacity, production capacity for our semiconductors may be subject to allocation, in which case not all of our production requirements may be met. This may impact our ability to meet demand and could also increase our production costs and inventory levels. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions. Our financial performance has been and may in the future be, negatively impacted by downturns in the semiconductor industry. In a downturn situation, we may incur substantial losses if there is excess production capacity or excess inventory levels in the distribution channel.

The cyclicality of the semiconductor industry may also strain our management and resources. To manage these industry cycles effectively, we must:

improve operational and financial systems;
train and manage our employee base;
successfully integrate operations and employees of businesses we acquire or have acquired;
attract, develop, motivate and retain qualified personnel with relevant experience; and
adjust spending levels according to prevailing market conditions.
If we cannot manage industry cycles effectively, our business could be seriously harmed.
   
We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our semiconductor products, which reduce our control over the production process.

We do not own or operate a semiconductor fabrication facility. Instead, we rely on one third-party semiconductor foundry overseas to produce substantially all of our semiconductor products. We also rely on third-party assembly and test services to test all of our semiconductor products. Our reliance on an independent foundry and assembly and test facilities involves a number of significant risks, including, but not limited to:

reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels; and
lack of availability of, or delayed access to, next-generation or key process technologies.

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We do not have a long-term supply agreement with our third-party semiconductor foundry or many of our other subcontractors and instead obtain these services on a purchase order basis. Our outside sub-contractors have no obligation to manufacture our products or supply products to us for any specific period of time, in any specific quantity or at any specific price, except as set forth in a particular purchase order or multi month quote. Our requirements represent a small portion of the total production capacity of our outside foundry, assembly and test facilities and our sub-contractors may reallocate capacity on short notice to other customers who may be larger and better financed than we are, or who have long-term agreements with our sub-contractors, even during periods of high demand for our products. We may elect to have our suppliers move or expand production of our products to different facilities under their control, even in different locations, which may be time consuming, costly and difficult, have an adverse effect on quality, yields and costs and require us and/or our customers to re-qualify our products, which could open up design wins to competition and result in the loss of design wins. If our subcontractors are unable or unwilling to continue manufacturing, assembling or testing our products in the required volumes, at acceptable quality, yields and costs and in a timely manner, our business will be substantially harmed. In this event, we would have to identify and qualify substitute sub-contractors, which would be time-consuming, costly and difficult; and we cannot guarantee that we would be able to identify and qualify such substitute sub-contractors on a timely basis or obtain commercially reasonable terms from them. This qualification process may also require significant effort by our customers and may lead to re-qualification of parts, opening up design wins to competition and loss of design wins. Any of these circumstances could substantially harm our business. In addition, if competition for foundry, assembly and test capacity increases, our product costs may increase and we may be required to pay significant amounts or make significant purchase commitments to secure access to production services.
The complex nature of our production process can reduce yields and prevent identification of problems until well into the production cycle or, in some cases, until after the product has been shipped.
The manufacture of semiconductors is a complex process and it is often difficult for semiconductor foundries to achieve acceptable product yields. Product yields depend on both our product design and the manufacturing process technology unique to the semiconductor foundry. Since low yields may result from either design or process difficulties, identifying problems can often only occur well into the production cycle, when an actual product exists that can be analyzed and tested.
Further, we only test our products after they are assembled, as their high-speed nature makes earlier testing difficult and expensive. As a result, defects often are not discovered until after assembly. This could result in a substantial number of defective products being assembled and tested or shipped, thus lowering our yields and increasing our costs. These risks could result in product shortages or increased costs of assembling, testing or even replacing our products.
Although we test our products before shipment, they are complex and may contain defects and errors. For example, in January 2013, we announced that we took a charge in the fourth quarter of 2012 to reflect the write down of certain unsalable inventory due to defects in the material used by one of our assembly vendors in the packaging process. In the past we have encountered defects and errors in our products. Because our products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability, quality or compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments and replacement costs, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these circumstances could substantially harm our business.
   
We face foreign business, political and economic risks because a majority of our products and our customers’ products are manufactured and sold outside of the United States and because we have employees in research and development centers and sales offices throughout the world.
A substantial portion of our business is conducted outside of the United States and we have a significant portion of our workforce in research and development centers and sales offices throughout the world. As a result, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia. For the years ended December 31, 2014, 2013 and 2012, approximately 61.2%, 52.7% and 57.4% of our total revenue based on billing location, respectively, was generated from customers and distributors located outside of North America, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenue in future periods.
In addition to our headquarters in Sunnyvale, California, we maintain research and development centers in Shanghai, China, and Hyderabad, India, and undertake sales and marketing activities through regional offices in several other countries. As we grow, we intend to continue to expand our international business activities.


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Accordingly, we are subject to a variety of risks associated with the conduct of business outside the United States. These risks include, but are not limited to:

political, social and economic instability;
the operational challenges of conducting our business in several geographic regions around the world, especially in the face of different business practices, social norms and legal standards that differ from those to which we are accustomed and held to as a publicly traded company in the United States, particularly with respect to the protection and enforcement of intellectual property rights and the conduct of business generally;
governmental policies, laws and regulations and social pressures in foreign countries that favor and promote their own local, domestic companies over non-domestic companies, and additional trade and travel restrictions;
natural disasters and public health emergencies;
nationalization of business and blocking of cash flows;
changing raw material, energy and shipping costs;
the imposition of governmental controls and restrictions;
burdens of complying with a variety of foreign laws;
import and export license requirements and restrictions of the United States and each other country in which we operate;
unexpected changes in regulatory requirements;
foreign technical standards;
changes in taxation and tariffs, including potentially adverse tax consequences;
difficulties in staffing and managing international operations;
fluctuations in currency exchange rates;
cultural and language differences;
difficulties in collecting receivables from foreign entities or delayed revenue recognition;
expense and difficulties in protecting our intellectual property in foreign jurisdictions;
exposure to possible litigation or claims in foreign jurisdictions; and
potentially adverse tax consequences.
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales or conduct our business generally.
Also OEMs that design our semiconductors into their products sell them outside of the United States. This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the United States dollar will increase the foreign currency price equivalent of our products, which could lead to a change in their competitiveness in the marketplace. This in turn could lead to a reduction in our sales and profits.
   
Our success depends on our investment of a significant amount of resources in research and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
Our success depends on us investing significant amounts of resources into research and development. Our research and development expenses as a percent of our total revenue were 27.9%, 27.9% and 30.7% for the years ended December 31, 2014, 2013 and 2012, respectively. We expect to have to continue to invest heavily in research and development in the future in order to continue to innovate and come to market with new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see adverse effects on our business, financial condition and operating results.
In addition, if we are required to invest significantly greater resources than anticipated in our research and development efforts because of changes in our competitive landscape or our entry into new markets, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.
   

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The success of our business depends upon our ability to adequately protect our intellectual property.
We rely on a combination of patent, copyright, trademark, mask work and trade secret laws, as well as nondisclosure agreements and other methods, to protect our confidential and proprietary technologies and information. Our success depends on our ability to adequately protect such intellectual property. With respect to our patents, we have been issued patents and have a number of pending patent applications. However, we cannot assume that any pending patents applications will be issued or, if issued, that any claims allowed will protect our technology. Recent and proposed changes to U.S. patent laws and rules may also affect our ability to protect and enforce our intellectual property rights. For example, the Leahy-Smith America Invents Act, which took effect March 16, 2013, includes a number of changes to U.S. patent law, including the manner in which U.S. patents are issued and the way in which issued U.S. patents are challenged. The long-term impact of these changes are unknown, but this law could cause a certain degree of uncertainty surrounding the enforcement and defense of our issued patents, as well as greater costs concerning new and existing patent applications. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. Furthermore, it is possible that our existing or future patents may be challenged, invalidated or circumvented.
With respect to our copyright and trademark intellectual property, it may be possible for a third-party, including our licensees, to misappropriate such proprietary technology. It is possible that copyright, trademark and trade secret protection and enforcement effective in the US may be unavailable or limited in foreign countries. Additionally, with respect to all of our intellectual property, it may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive and the outcome often is not predictable.
Despite our efforts and expenses, for the foregoing reasons and others, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business. In addition, practicality also limits our assertion of intellectual property rights. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.
We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Also, current or former employees may seek employment with our business partners, customers or competitors, and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, current, departing or former employees or third parties could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and processes may be misappropriated, particularly in countries where laws may not protect our proprietary rights as fully as in the United States.
Our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. In addition, we may have little or no ability to correct errors in the technology provided by such contractors, suppliers and licensors, or to continue to develop new generations of such technology. Accordingly, we may be dependent on their ability and willingness to do so. In the event of a problem with such technology, or in the event that our rights to use such technology become impaired, we may be unable to ship our products containing such technology, and may be unable to replace the technology with a suitable alternative within the time frame needed by our customers.
A material change in the agreements governing encryption keys we use could place additional restrictions on us, our distributors or contract manufacturers; restricting parts shipment or significantly increase the cost to track parts throughout the distribution chain.

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Many of the components in our products contain encryption keys used in connection with High Definition Content Protection (HDCP).  The regulation and distribution of these encryption keys are controlled through license agreements with DCP, a wholly owned subsidiary of Intel.  These license agreements have been modified by DCP from time to time, and such changes could impact us, our distributors and our customers. An important element of both HDMI and MHL is the ability to implement link protection for High Definition, and more recently, 4K UltraHD content.  This HDCP link protection has been approved by major content providers for use with HD and UltraHD content.   We implement various aspects of the HDCP link protection within many of the parts that we sell.  We also, for the benefit of our customers, include the necessary HDCP encryption keys in parts that we ship to customers.  These encryption keys are provided to us from DCP.  We have a specific process for tracking and handling these encryption keys.  In the event that DCP changes any of the tracking or handling requirements associated with HDCP encryption keys it could cause us to change our manufacturing and distribution processes and could have a material impact on our manufacturing and distribution costs. In the event we cannot satisfy new requirements for the handling and tracking of encryption keys, then we may have to cease shipping or manufacturing certain products.
Failures of our privacy and security procedures could cause damage to our reputation and harm our business.

Our business interactions with customers and suppliers expose us to certain confidential information of such parties. Although we have systems in place to protect this information, including proven applications designed for data security, failures in these procedures, policies and systems could expose this sensitive information, thereby having a material adverse impact on our reputation as well as our business position and results of operations. If we are unable to protect this information, or if our customers and suppliers lack the confidence in our ability to protect their privacy, our growth could be materially adversely affected. A breach of our privacy and security procedures could impact us in the following ways:

causing our customers and suppliers to lack confidence in their working relationships with us;
harming our reputation with customers, suppliers and end-consumers;
exposing us to additional financial liability;
causing greater scrutiny of our business by governmental authorities; and
increasing operating costs to correct damage caused by the breach.
   
Our participation in consortiums for the development and promotion of industry standards in our target markets, including the HDMI, MHL and WirelessHD standards, requires us to license some of our intellectual property for free or under specified terms and conditions, which makes it easier for others to compete with us in such markets.
A key element of our business strategy includes participating in consortiums to establish industry standards in our target markets, promoting and enhancing specifications and developing and marketing products based on such specifications and future enhancements. We have in the past and will continue to participate in consortiums that develop and promote the HDMI, MHL and WirelessHD specifications. In connection with our participation in these consortiums, we make certain commitments regarding our intellectual property, in each case with the effect of making our intellectual property available to others, including our competitors, desiring to implement the specification in question. For example, as a founder of the HDMI Consortium, we must license specific elements of our intellectual property to others for use in implementing the HDMI specification, including enhancements thereof, as long as we remain part of the consortium. Also, as a promoter of the MHL specification, we must agree not to assert certain necessary patent claims against other members of the MHL Consortium, even if such members may have infringed upon such claims in implementing the MHL specification.
Accordingly, certain companies that implement these specifications in their products can use specific elements of our intellectual property to compete with us. Although in the case of the HDMI and MHL Consortiums, there are annual fees and royalties associated with the adopters’ use of the technology, there can be no assurance that our shares of such annual fees and royalties will adequately compensate us for having to license or refrain from asserting our intellectual property.
Our participation in HDMI and MHL includes our acting as agent for these consortiums.  This role requires us to administer and promote the respective standards, the cost of which is offset through the receipt of adopter fees.  There is no guarantee that we will continue to act as agent for either or both of these standards, in which event, the loss of adopter fees may have an adverse effect on our financial results. We are currently in discussions with the other Founders of HDMI regarding the potential restructuring of our role as agent of the consortium.  While not concluded, we believe these discussions may result in a narrowing of our agent functions, resulting in a lowering of the adopter fees received by us.  We do not believe that any such reduction of HDMI adopter fees will have a material adverse effect on our financial results.

Through our wholly-owned subsidiary, HDMI Licensing, LLC, we act as agent of the HDMI specification and are responsible for promoting and administering the specification. We receive all the adopter fees paid by adopters of the HDMI

24


specification in connection as our role as agent. We are currently in discussions with the other Founders of HDMI regarding a restructuring of our role as agent.  While not concluded, we believe these discussions will result in a narrowing of our agent functions, resulting in a lowering of the adopter fees received by us.  We do not believe that any reduction of HDMI adopter fees in connection with the narrowing of our agent will have a material adverse effect on our financial results.

Through our wholly-owned subsidiary, MHL, LLC, we act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us for the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.

With respect to royalties, after an initial period during which we received all of the royalties paid by HDMI adopters, in 2007, the HDMI founders reallocated the royalties to reflect each founder’s relative contribution of intellectual property to the HDMI specification. Following this reallocation, our portion of HDMI royalties was reduced to approximately 62%. In 2010, HDMI founders again reviewed the allocation of HDMI royalties and agreed on an allocation formula that further reduced the portion of HDMI royalties received by us. In 2013, we received between 35% to 39% of the royalty allocation.

The HDMI founders have agreed to review the allocation of HDMI royalties every three yearsWith the expiration of the most recent royalty sharing agreement on December 31, 2013, the HDMI Founders have agreed on a new royalty sharing formula for the period January 1, 2014 through December 31, 2016. In 2014, we received between 30% to 31% of the royalty allocation. Should the level of our royalty allocation continue to be reduced, our financial performance could be materially adversely affected.

We currently intend to promote and continue to be involved and actively participate in other standard setting initiatives. For example, through our acquisition of SiBEAM, Inc. in May 2011, we achieved SiBEAM’s prior position as founder and chair of the WirelessHD Consortium. Accordingly, we may likely license additional elements of our intellectual property to others for use in implementing, developing, promoting or adopting standards in our target markets, in certain circumstances at little or no cost. This may make it easier for others to compete with us in such markets. In addition, even if we receive license fees and/or royalties in connection with the licensing of our intellectual property, there can be no assurance that such license fees and/or royalties will compensate us adequately.
   
Our business may be adversely impacted as a result of the adoption of competing standards and technologies by the broader market.
   
The success of our business to date has depended on our participation in standard setting organizations, such as the HDMI and MHL Consortiums, and the widespread adoption and success of those standards. From time to time, competing standards have been established which negatively impact the success of existing standards or jeopardize the creation of new standards. DisplayPort is an example of a competing standard on a different technology base which has been created as an alternative high definition connectivity solution in the PC space. The DisplayPort standard has been adopted by many large PC manufacturers. While currently not as widely recognized as the HDMI standard, DisplayPort does represent a viable alternative to the HDMI or MHL technologies. If DisplayPort should gain broader adoption, especially with non-PC consumer electronics, our HDMI or MHL businesses could be negatively impacted and our revenues could be reduced. WiGig is an example of a competing 60GHz standard which has been created as an alternative high-bandwidth wireless connectivity solution for the PC industry. While the WiGig standard has not been in the market as long as the WirelessHD standard, it does represent a viable alternative to WirelessHD for 60GHz connectivity. If WiGig should gain broader adoption before WirelessHD is adopted, it could negatively impact the adoption of WirelessHD.
   
Our current and future business is dependent on the continued adoption and widespread implementation of the HDMI and MHL specifications and the new implementation and adoption of the WirelessHD specifications.
   
Our future success is largely dependent upon the continued adoption and widespread implementation of the HDMI, MHL and WirelessHD specifications. For the year ended December 31, 2014, more than 85% of our total revenue was derived from the sale of HDMI and MHL-enabled products and the licensing of our HDMI and MHL technology. Our leadership in the market for HDMI and MHL-enabled products and intellectual property has been based on our ability to introduce first-to-market semiconductor and IP solutions to our customers and to continue to innovate within the standard.

25


Therefore, our inability to be first to market with our HDMI and MHL-enabled products and intellectual property or to continue to drive innovation in the HDMI and MHL specifications could have an adverse impact on our business going forward.
With our acquisition of SiBEAM, Inc. in May 2011, we acquired 60GHz wireless technology that we hope will be made widely available and adopted by the marketplace through the efforts of the WirelessHD Consortium and incorporated into certain of our future products. As was and is the case with our HDMI and MHL products and intellectual property, our success with this technology will depend on our ability to introduce first-to-market, WirelessHD-enabled semiconductor and IP solutions to our customers and to continue to innovate within the WirelessHD standard. There can be no guarantee that this wireless technology will be adopted by the marketplace and our inability to do this could have an adverse impact on our business going forward.
   
Additionally, if competing digital interconnect technologies are developed, our ability to sell our products and license our intellectual property could be adversely affected and our revenues could decrease.
   
As the agent for the HDMI specification, we derive revenue from the license fees paid by adopters, and as a founder we derive revenue from the royalties paid by the adopters of the HDMI technology. Any development that has the effect of lowering the number of adopters of the HDMI standard will negatively impact these license fees and royalties. The allocation of license fees and royalty revenue among the HDMI founders is reviewed and discussed by the founders from time to time. There can be no assurance that going forward we will continue to act as agent of the HDMI specification or to receive the share of HDMI license fees and royalties that we currently receive. If our share of these license fees and royalties is reduced, this decision will have a negative impact on our revenues. Refer to the previously discussed risk factor above which also discusses the sharing of HDMI royalty revenues among various founders.
   
We act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.
   
We have granted Intel Corporation certain rights with respect to our intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value of our intellectual property.
   
We entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the patents filed by the grantor prior to a specified date, except for identified types of products. We believe that the scope of our license to Intel excludes our current products and anticipated future products. Intel could, however, exercise its rights under this agreement to use our patents to develop and market other products that compete with ours, without payment to us. Additionally, Intel’s rights to our patents could reduce the value of our patents to any third-party who otherwise might be interested in acquiring rights to use our patents in such products. Finally, Intel could endorse competing products, including a competing digital interface, or develop its own proprietary digital interface. Any of these actions could substantially harm our business and results of operations.   
   
We may become engaged in intellectual property litigation that could be time-consuming, may be expensive to prosecute or defend and could adversely affect our ability to sell our product.
   
In recent years, there has been significant litigation in the United States and in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In addition, in recent years, there has been an increase in the filing of so-called “nuisance suits,” alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits, regardless of merit. In addition, as is common in the semiconductor industry, from time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to a

26


third-party and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.
   
Any potential intellectual property litigation against us or in which we become involved may be expensive and time-consuming and may divert our resources and the attention of our executives. It could also force us to do one or more of the following:
   
stop selling products or using technology that contains the allegedly infringing intellectual property;
attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and
attempt to redesign products that contain the allegedly infringing intellectual property.

If we take any of these actions, we may be unable to manufacture and sell our products. We may be exposed to liability for monetary damages, the extent of which would be very difficult to accurately predict. In addition, we may be exposed to customer claims, for potential indemnity obligations and to customer dissatisfaction and a discontinuance of purchases of our products while the litigation is pending. Any of these consequences could substantially harm our business and results of operations.
   
We have entered into and may again be required to enter into, patent or other intellectual property cross-licenses.
   
Many companies have significant patent portfolios or key specific patents, or other intellectual property in areas in which we compete. Many of these companies appear to have policies of imposing cross-licenses on other participants in their markets, which may include areas in which we compete. As a result, we have been required, either under pressure of litigation or by significant vendors or customers, to enter into cross licenses or non-assertion agreements relating to patents or other intellectual property. This permits the cross-licensee, or beneficiary of a non-assertion agreement, to use certain or all of our patents and/or certain other intellectual property for free to compete with us. Our results of operations could be adversely affected by the use of cross-license or beneficiary of a non-assertion agreement of all our patents and/or certain other intellectual property.
   
We indemnify certain of our customers against infringement.
   
We indemnify certain of our customers for any expenses or liabilities resulting from third-party claims of infringements of patent, trademark, trade secret, or copyright rights by the technology we license. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim. In the event that we were required to defend any lawsuits with respect to our indemnification obligations, or to pay any claim, our results of operations could be materially adversely affected.
   
We must attract and retain qualified personnel to be successful and competition for qualified personnel is increasing in our market.
   
Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. We generally do not have employment contracts with our key employees. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our locations throughout the world. This risk is heightened by the financial challenges facing us, which required that we reduce our operating expenses in order to bring them in line with our financial outlook. This makes it difficult to retain our key personnel and to recruit highly qualified personnel. We have experienced and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.
   
The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. New regulations could make it more difficult or expensive to grant options to employees, we may incur

27


increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.
We have experienced transitions in our management team and our board of directors in the past and we may continue to do so in the future, which could result in disruptions in our operations and require additional costs.
   
We have experienced a number of transitions with respect to our board of directors and executive officers in the past and we may experience additional transitions in our board of directors and management in the future. Any such future transitions could result in disruptions in our operations and require additional costs.
We rely heavily on certain third-party software applications and platforms for our business and the failure or discontinuation of such applications or platforms could hamper or impede our ability to do business.
The Company is dependent on third party software systems, both on premise and cloud based, to conduct daily business. We have little control over the operation of any of these third-party providers. If these systems are discontinued or the vendor exits the business we may incur significant expense in reconstructing equivalent systems and transferring critical business date to those new systems. Our providers may be vulnerable to damage or interruption, or may choose to change the manner in which they provide services to us. If we lose the services of one or more of these providers for any reason, we could experience disruption in our services or we may be required to retain the services of a replacement provider. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenues, cause us to issue credits to customers or cause customers to terminate their relationships with us. In addition, our business would be harmed if any events of this nature caused our customers and potential customers to believe our services are unreliable.
   
If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price. While we have not identified any material weaknesses in the past three years, we cannot assure you that a material weakness will not be identified in the future.
   
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to report on, our internal control over financial reporting.
   
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
   
As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
   
We have been and may continue to become the target of securities class action suits and derivative suits which could result in substantial costs and divert management attention and resources.
   

28


Securities class action suits and derivative suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management.
   
Our operations and the operations of our significant customers, third-party wafer foundry and third-party assembly and test subcontractors are located in areas susceptible to natural disasters, the occurrence of which could adversely impact our supply of product, revenues, gross margins and results of operations.
   
Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes. TSMC, our outside foundry that manufactures almost all of our semiconductor products, is located in Taiwan. Siliconware Precision Industries Co. Ltd., or SPIL, Advanced Semiconductor Engineering, or ASE, and Amkor Taiwan are subcontractors located in Taiwan that assemble and test our semiconductor products.
   
In addition, the operations of certain of our significant customers are located in Japan and Taiwan. For the years ended December 31, 2014, 2013 and 2012, customers and distributors located in Japan generated 14.4%, 13.3% and 14.5% of our total revenue based on billing location, respectively, and customers and distributors located in Taiwan generated 18.0%, 14.5% and 22.3% of our total revenue based on billing location, respectively. 
Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.
   
Our supply of product and our revenues, gross margins and results of operations generally would be adversely affected if any of the following were to occur:
   
an earthquake or other disaster in the San Francisco Bay area were to damage our facilities or disrupt the supply of water or electricity to our headquarters;
an earthquake, typhoon or other natural disaster in Taiwan were to damage the facilities or equipment of TSMC, SPIL, ASE or Amkor or were to result in shortages of water, electricity or transportation, which occurrences would limit the production capacity of our outside foundry and/or the ability of our third party contractors to provide assembly and test services;
an earthquake, typhoon or other natural disaster in Taiwan or Japan were to damage the facilities or equipment of our customers or distributors or were to result in shortages of water, electricity or transportation, which occurrences would result in reduced purchases of our products, adversely affecting our revenues, gross margins and results of operations; or
an earthquake, typhoon or other disaster in Taiwan or Japan were to disrupt the operations of suppliers to our Taiwanese or Japanese customers, outside foundries or our third party contractors providing assembly and test services, which in turn disrupted the operations of these customers, foundries or third party contractors, resulting in reduced purchases of our products or shortages in our product supply.

In March 2011, Japan experienced a 9.0-magnitude earthquake which triggered extremely destructive tsunami waves. The earthquake and tsunami significantly impacted the Japanese people and the overall economy of Japan resulting to reduced consumer spending in Japan and supply chain issues, which adversely affected our revenues and results of operations in 2011.
   
Terrorist attacks or war could lead to economic instability and adversely affect our operations, results of operations and stock price.
   
The United States has taken and continues to take, military action against terrorism and currently has troops in Afghanistan. In addition, the tensions regarding nuclear arms in North Korea and Iran could escalate into armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or result in instability in the general economy and financial markets and in consumer demand for the OEM’s products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the operations of our customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in financial markets could adversely affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would adversely affect our research and development capabilities and ability to timely develop and introduce new products and product improvements.
   
Changes in environmental rules and regulations could increase our costs and reduce our revenue.
   

29


Several jurisdictions have implemented rules that would require that certain products, including semiconductors, be made “green,” which means that the products need to be lead free and be free of certain banned substances. All of our products are available to customers in a green format. While we believe that we are generally in compliance with existing regulations, such environmental regulations are subject to change and the jurisdictions may impose additional regulations which could require us to incur additional costs to develop replacement products. These changes will require us to incur cost or may take time or may not always be economically or technically feasible, or may require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously sold products would require us to incur the costs of setting up and implementing such a program.
Provisions of our charter documents and Delaware law could prevent or delay a change in control and may reduce the market price of our common stock.
   
Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:
   
authorizing the issuance of preferred stock without stockholder approval;
providing for a classified board of directors with staggered, three-year terms;
requiring advance notice of stockholder nominations for the board of directors;
providing the board of directors the opportunity to expand the number of directors without notice to stockholders;
prohibiting cumulative voting in the election of directors;
limiting the persons who may call special meetings of stockholders; and
prohibiting stockholder actions by written consent.

Provisions of Delaware law also may discourage delay or prevent someone from acquiring or merging with us.
   
The price of our stock fluctuates substantially and may continue to do so.
   
The stock market has experienced extreme price and volume fluctuations that have affected the market valuation of many technology companies, including Silicon Image. These factors, as well as general economic and political conditions, may materially and adversely affect the market price of our common stock in the future. The market price of our common stock has fluctuated significantly and may continue to fluctuate in response to a number of factors, including, but not limited to:
   
actual or anticipated changes in our operating results;
changes in expectations of our future financial performance;
changes in market valuations of comparable companies in our markets;
changes in market valuations or expectations of future financial performance of our vendors or customers;
changes in our key executives and technical personnel; and
announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

Due to these factors, the price of our stock may decline. In addition, the stock market experiences volatility that is often unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.

Item 1B.
Unresolved Staff Comments
None.
 
Item 2.
Properties
Our current headquarters are located in Sunnyvale, California, consisting of approximately 128,154 square feet of space, which we lease through June 30, 2018. We lease 40,789 square feet of office space in Shanghai, China, which is being leased through June 30, 2015. These facilities house our corporate offices, the majority of our engineering team, as well as a portion of our sales, marketing, operations and corporate services organizations.
In addition, we also lease facilities in Japan, Korea, Taiwan, India and an additional facility in China. We believe that our existing properties are in good condition and suitable for the conduct of our business.

30


 
Item 3.
Legal Proceedings
Information with respect to this item may be found in Note 9 in our notes to the consolidated financial statements included in Item 15(a) of this report.
 
Item 4.
Mine Safety Disclosures
Not applicable.

31


PART II
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are traded on the NASDAQ Stock Market under the symbol “SIMG”. The following table summarizes the high and low closing prices for our common shares as reported by the NASDAQ Stock Market:
 
 
High
 
Low
Year Ended December 31, 2014
 
 
 
Fourth Quarter
$
7.32

 
$
4.22

Third Quarter
5.32

 
4.68

Second Quarter
6.96

 
5.01

First Quarter
7.14

 
5.50

Year Ended December 31, 2013
 
 
 
Fourth Quarter
$
6.15

 
$
5.02

Third Quarter
6.02

 
5.25

Second Quarter
6.15

 
4.64

First Quarter
5.16

 
4.52

As of February 18, 2015, we had approximately 65 holders of record of our common stock and the closing price of our common stock was $7.25. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, for our common stock, the NASDAQ Composite Stock Market Index (US) and the S&P Information Technology Index. The graph assumes that $100 was invested in our common stock, the NASDAQ Composite Stock Market (US) and the S&P Information Technology Index from December 31, 2009 through December 31, 2014. No cash dividends have been declared on our common stock. Note that historic stock price performance is not necessarily indicative of future stock price performance.

32


*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All right reserved

Dividend Policy
We have never declared or paid cash dividends on shares of our capital stock. We intend to retain any future earnings to finance growth and do not anticipate paying cash dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders.
Unregistered Securities Sold During the Year Ended December 31, 2014
We did not sell any unregistered securities during the year ended December 31, 2014.
Issuer Purchases of Equity Securities
In April 2012, our Board of Directors authorized a $50.0 million stock repurchase program. The repurchases may occur from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchase of shares will be determined by our management, based on its evaluation of market conditions, cash on hand and other factors and may be made under a stock repurchase plan. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The program does not obligate us to acquire any particular amount of stock and purchases under the program may be commenced or suspended at any time, or from time to time, without prior notice. Further, the stock repurchase program may be modified, extended or terminated by the Board at any time. In July 2013, our Board of Directors authorized a new share repurchase plan as a follow-on to our current plan, wherein the Board authorized us to repurchase our common stock up to an additional $50.0 million.

33


We repurchased a total of 2,099,083 shares of our common stock on the open market at a total cost of $10.8 million with an average price per share of $5.16 during the year ended December 31, 2014.
The table below summarizes information about our purchases of equity securities registered pursuant to Section 12 of the Exchange Act during the three months ended December 31, 2014.
 
Period
 
 
 
Total Number of
Shares Purchased
 
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as Part
of Publicly Announced Plans
or Programs
 
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs
October 1, 2014 to October 31, 2014
 
446,950

 
$
4.66

 
446,950

 
$
49,467,385

November 1, 2014 to November 30, 2014
 
426,589

 
5.41

 
426,589

 
47,159,956

December 1, 2014 to December 31, 2014
 
105,000

 
6.16

 
105,000

 
46,512,653

Total
 
978,539

 
5.15

 
978,539

 
 
For securities authorized for issuance under equity compensation plans, please see Note 12 in our notes to consolidated financial statements included in Item 15(a) of this report.


34


Item 6.
Selected Financial Data
The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Historical results of operations are not necessarily indicative of future results.
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(In thousands, except employees and per share data)
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue
$
258,052

 
$
276,406

 
$
252,364

 
$
221,009

 
$
191,347

Cost of revenue (1)(2)(3)
100,492

 
113,821

 
110,441

 
90,829

 
77,749

Gross margin
157,560

 
162,585

 
141,923

 
130,180

 
113,598

% of revenue
61.1
%
 
58.8
%
 
56.2
%
 
58.9
%
 
59.4
%
Research and development (4)
$
72,012

 
$
76,994

 
$
77,372

 
$
66,533

 
$
55,313

% of revenue
27.9
%
 
27.9
%
 
30.7
%
 
30.1
%
 
28.9
%
Selling, general and administrative (5)
$
63,666

 
$
64,736

 
$
57,446

 
$
55,277

 
$
46,710

% of revenue
24.7
%
 
23.4
%
 
22.8
%
 
25.0
%
 
24.4
%
Restructuring and impairment expense (6)(7)
$
3,481

 
$
1,783

 
$
110

 
$
2,269

 
$
3,259

% of revenue
1.3
%
 
0.6
%
 
%
 
1.0
%
 
1.7
%
Amortization of acquisition-related intangible assets
$
2,016

 
$
941

 
$
599

 
$
1,585

 
$
149

% of revenue
0.8
%
 
0.3
%
 
0.2
%
 
0.7
%
 
0.1
%
Impairment of intangible assets
$
476

 
$
175

 
$

 
$
8,500

 
$

% of revenue
0.2
%
 
0.1
%
 
%
 
3.8
%
 
%
Income (loss) from operations
$
15,909

 
$
17,956

 
$
6,396

 
$
(3,984
)
 
$
8,167

Net income (loss)
$
42,106

 
$
11,490

 
$
(11,192
)
 
$
(11,643
)
 
$
8,182

Net income (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.15

 
$
(0.14
)
 
$
(0.14
)
 
$
0.11

Diluted
$
0.53

 
$
0.15

 
$
(0.14
)
 
$
(0.14
)
 
$
0.10

Weighted average shares - basic
77,967

 
77,399

 
81,872

 
80,603

 
76,957

Weighted average shares - diluted
79,571

 
79,065

 
81,872

 
80,603

 
78,277

Consolidated Balance Sheet and Other Data as of Year End:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
116,219

 
$
82,220

 
$
29,069

 
$
37,125

 
$
29,942

Short-term investments
$
48,116

 
$
56,003

 
$
78,398

 
$
124,301

 
$
160,538

Working capital
$
164,330

 
$
146,711

 
$
122,802

 
$
161,923

 
$
184,746

Total assets
$
305,288

 
$
252,139

 
$
226,742

 
$
266,073

 
$
250,619

Other long-term liabilities
$
13,905

 
$
16,522

 
$
16,827

 
$
14,815

 
$
13,356

Total stockholders' equity
$
234,532

 
$
189,725

 
$
167,100

 
$
204,516

 
$
191,196

Full-time employees
671

 
640

 
623

 
521

 
432

(1) Includes restructuring expense
$
343

 
$
284

 
$

 
$

 
$

(2) Includes amortization of acquisition-related intangible assets
$
900

 
$
975

 
$
425

 
$

 
$

(3) Includes stock-based compensation expense
$
634

 
$
603

 
$
523

 
$
670

 
$
558

(4) Includes stock-based compensation expense
$
3,357

 
$
3,576

 
$
3,585

 
$
3,774

 
$
2,631

(5) Includes stock-based compensation expense
$
5,822

 
$
6,336

 
$
5,096

 
$
5,076

 
$
4,152

(6) Includes stock-based compensation expense
$
193

 
$

 
$

 
$

 
$

(7) Includes impairment of intangible assets
$
467

 
$

 
$

 
$

 
$



35


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8, “Financial Statements and Supplementary Data” in this annual report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Item 1A, “Risk Factors” and elsewhere in this annual report. Please see the discussion of forward-looking statements at the beginning of this annual report under “Special Note Regarding Forward-Looking Statements.
Overview
Silicon Image is a leading provider of video, audio and data connectivity solutions for the mobile, consumer electronics (CE), personal computer (PC) and enterprise markets. Our offerings include semiconductor, intellectual property (IP) and related service offerings which enable consumers to reliably connect their devices in home, office and mobile environments. Our products are deployed by the world’s leading electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video receivers, digital cameras, set-top-boxes, as well as desktop and notebook PCs. In February 2014, we launched our 60GHz wireless backhaul solutions for 4G LTE small cells designed for the small cell wireless backhaul market and other markets requiring wireless point to point solutions. On May 1, 2014, we finalized the acquisition of UpdateLogic, Inc. (ULI) and extended our connectivity portfolio to include IP connectivity solutions for over-the-top applications including Digital Rights Management provisioning, software management and update, and remote support.

Silicon Image was founded in 1995. We are a Delaware corporation headquartered in Sunnyvale, California, with regional engineering and sales offices in China, India, Japan, Korea and Taiwan. Our Internet website address is www.siliconimage.com.

Our customers are product manufacturers in each of our target markets. Our revenue is generated principally by sales of our semiconductor products, with other revenues derived from IP core/design licensing and royalty and adopter fees from our standards licensing activities.

On January 26, 2015, we, Lattice and Merger Sub entered into the Merger Agreement pursuant to which, and on the terms and conditions contained in the Merger Agreement. Merger Sub commenced the Offer for a purchase price of $7.30 per share (the “Offer Price”), without interest and subject to any applicable withholding taxes. The consummation of the Offer is conditioned on (i) at least a majority of all shares of our outstanding common stock having been validly tendered into (and not withdrawn from) the Offer prior to the expiration date of the Offer, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the United States and (iii) other customary conditions. The Offer is not subject to a financing condition. Following the consummation of the Offer, subject to customary conditions, Merger Sub will be merged with and into us (the “Merger”) and we will become a wholly owned subsidiary of Lattice Semiconductor Corporation, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals. In the Merger, each outstanding share of our common stock (other than shares owned by Lattice, Merger Sub or Silicon Image, or any of their respective wholly owned subsidiaries, or shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Offer Price, without interest.

Key Performance Indicators
Below is a summary of some of the quantitative performance indicators (as defined below) that are evaluated by management to assess our financial performance.
 

36


 
Year Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in thousands)
Product Gross Profit as a Percentage of Total Product Revenue
49.3
%
 
50.3
%
 
46.0
%
Licensing and Services Gross Profit as a Percentage of Total Licensing and Services Revenue
99.9
%
 
98.2
%
 
98.7
%
Gross Profit as a Percentage of Total Revenue
61.1
%
 
58.8
%
 
56.2
%
Research and Development Expenses as a Percentage of Total Revenue
27.9
%
 
27.9
%
 
30.7
%
Net Cash Provided by Operating Activities
$
40,565

 
$
39,192

 
$
4,676

Days Sales Outstanding In Receivables
34

 
46

 
55

Inventory Turns
5.9

 
9.7

 
9.8

Capital Spending as a Percentage of Total Revenue
3.0
%
 
2.1
%
 
3.5
%
Gross Profit as a Percentage of Total Revenue
Gross profit as a percentage of total revenue (“gross profit percentage”) is calculated as gross profit for the period divided by total revenue for the period. For a description of the reasons for changes in gross profit refer to the “Results of Operations” section below. Management considers gross profit percentage to be an important indicator of the Company demonstrating its ability to bring value to the market.
Research and Development as a Percentage of Total Revenue
Research and development as a percentage of total revenue (“R&D percentage”) is calculated as research and development expense for the period divided by total revenue for the period. Management considers R&D percentage to be an important indicator in managing our business as investing in new technologies is a key to future growth. For a description of the reasons for changes in R&D spending refer to the “Results of Operations” section below.
Net Cash Provided by Operating Activities
Net cash provided by operating activities shown on our Consolidated Statements of Cash Flows primarily represents the excess of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory purchases to run our business. We believe that cash flows from operations are an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. For a description of the reasons for changes in Net Cash Provided by Operating Activities refer to the “Liquidity and Capital Resources” section below.
Days Sales Outstanding in Receivables
We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the year divided by total revenue during the year and then multiplied by the number of days in the year, using 365 days for years. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in higher working capital availability. The more money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. DSO in receivables decreased year over year from 2012 to 2014 primarily due to a lower concentration of sales in the last month of the fiscal year.
Inventory Turns
We calculate inventory turns as cost of sales during the year divided by net inventories at the end of the year. This indicates how well we are managing our inventory levels, with higher inventory turns resulting in more working capital availability and a higher return on our investments in inventory. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Inventory turns decreased from 2013 to 2014 primarily due to the impact of decreased sales volumes compared to increase in inventory levels.
Capital Spending as a Percentage of Total Revenue

37


Capital spending as a percentage of total revenue (“capital spending percentage”) is calculated as capital expenditures for the period divided by total revenue for the period. Capital spending percentage indicates the extent to which we are expanding or improving our operations, including investments in technology and equipment. Management monitors capital spending levels as this assists management in measuring our cash flows, net of capital expenditures. The fiscal 2014 increase was primarily due to purchases of research and development assets, computers and software to support operations. The fiscal 2013 decrease was primarily due to fewer purchases of research & development assets and computers.
Annual Results of Operations
Consolidated Summary
The following table sets forth, for the years indicated, the percentage of total revenue represented by the line items reflected in our consolidated statement of operations:
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Product
76.8
 %
 
82.2
 %
 
80.6
 %
Licensing and services
23.2
 %
 
17.8
 %
 
19.4
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue and operating expenses:
 

 
 

 
 

Cost of product revenue
38.9
 %
 
40.9
 %
 
43.5
 %
Cost of licensing and services revenue
 %
 
0.3
 %
 
0.3
 %
Research and development
27.9
 %
 
27.9
 %
 
30.7
 %
Selling, general and administrative
24.7
 %
 
23.4
 %
 
22.8
 %
Restructuring and impairment expense
1.4
 %
 
0.6
 %
 
 %
Amortization of acquisition-related intangible assets
0.8
 %
 
0.3
 %
 
0.2
 %
Impairment of intangible asset
0.1
 %
 
0.1
 %
 
 %
Total cost of revenue and operating expenses
93.8
 %
 
93.5
 %
 
97.5
 %
Income from operations
6.2
 %
 
6.5
 %
 
2.5
 %
Gain from sale of a privately held company investment
1.6
 %
 
 %
 
 %
Proceeds from legal settlement
 %
 
0.5
 %
 
 %
Other than temporary impairment of a privately-held company investment
 %
 
(0.5
)%
 
(3.0
)%
Interest income and other, net
0.4
 %
 
0.4
 %
 
0.7
 %
Income before provision for income taxes and equity in net loss of an unconsolidated affiliate
8.2
 %
 
6.9
 %
 
0.2
 %
Income tax  expense (benefit)
(8.1
)%
 
2.5
 %
 
3.9
 %
Equity in net loss of an unconsolidated affiliate
0.1
 %
 
0.2
 %
 
0.7
 %
Net income (loss)
16.2
 %
 
4.2
 %
 
(4.4
)%
Less: Net loss attributable to noncontrolling interests
 %
 
 %
 
 %
Net income (loss) attributable to common stockholders
16.2
 %
 
4.2
 %
 
(4.4
)%
NET REVENUE
Revenue by our primary markets was as follows:
 

38


 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Mobile
$
99,733

 
(33.1
)%
 
$
149,148

 
23.3
 %
 
$
120,936

Consumer Electronics
85,665

 
31.6
 %
 
65,101

 
0.8
 %
 
64,566

Personal Computers
12,730

 
(2.5
)%
 
13,059

 
(27.4
)%
 
17,985

Total product revenue
$
198,128

 
(12.8
)%
 
$
227,308

 
11.7
 %
 
$
203,487

Percentage of total revenue
76.8
%
 
 

 
82.2
%
 
 

 
80.6
%
Licensing and services revenue
$
59,924

 
22.0
 %
 
$
49,098

 
0.5
 %
 
$
48,877

Percentage of total revenue
23.2
%
 
 

 
17.8
%
 
 

 
19.4
%
Total revenue
$
258,052

 
(6.6
)%
 
$
276,406

 
9.5
 %
 
$
252,364

Product Revenue
The decrease in product revenue from 2013 to 2014 was primarily due to a decrease in our mobile product revenue as a result of a significant production slowdown of one of our key customers. Our MHL-enabled products still represent the majority of our mobile product revenue. CE revenue increased by 32% from 2013 to 2014 primarily due to the introduction of our HDMI 2.0/MHL 3.0 ICs that support High-Definition Content Protection (HDCP) 2.2 for use in 4K Ultra HD products and the continued penetration of discrete MHL ICs in TV and Home Theatre markets. We are one of the leading providers of ICs that support HDMI 2.0 with HDCP 2.2 and currently the only provider of ICs that support both HDMI 2.0 and MHL 3.0 (which also support HDCP 2.2). Our PC revenue was flat as we are no longer making investments in these legacy products; however, our MHL and HDMI technologies are applicable for PC devices, and we also believe that our millimeter wave wireless technology could increase PC revenues in the coming years. However, we expect our PC revenues, and our mobile product revenues, to decline in 2015. On December 17, 2014, one of our largest customers informed us that it had decided not to include our MHL functionality in certain designs in order to reduce costs, and as a result of this decision, on December 18, 2014, we announced that we expected a year-over-year revenue decline in 2015 of approximately 10% due to a reduction in mobile design wins at one of our largest customers. There can be no guarantee that the actual revenue decline in 2015 will not be more severe than the estimated 10% reduction. 
The increase in our mobile products from 2012 to 2013 was primarily due to the continued success of our MHL product line with the continued adoption and incorporation of our MHL-enabled solutions in high and mid-range devices by many of the world’s leading smartphone OEMs. CE revenue increased from 2012 to 2013 primarily as a result of more customers purchasing our wireless ICs and MHL related ICs incorporated into displays. Our PC revenue continued to decline as we are no longer making any investments in these legacy products. However, our MHL and HDMI technologies are applied in various PC devices, and we believe that our millimeter wave wireless technology may contribute to PC revenues in the coming years.
Licensing and Services Revenue
Our licensing and services revenue is comprised of revenue from our IP core licensing activity, patent monetization activities, device management system and remote support services and royalty and adopter fee revenue from our standards activities. Our IP core licensing, patent monetization, device management system and remote support services and standards activities are complementary to our product sales and help us monetize our intellectual property and accelerate market adoption curves associated with our technology and standards. The increase in licensing and services revenue from 2013 to 2014 was primarily due to higher core IP royalty revenue of $4.1 million, increased revenue from our patent monetization activities of $4.0 million, higher IP core license revenue of $3.5 million and service revenue of $0.9 million offset by lower HDMI royalties of $1.5 million. Service revenue was generated from Qterics (formerly known as UpdateLogic, Inc.), a company that we acquired in May 2014. HDMI royalty revenue is determined by an allocation formula contractually agreed to by the Company and the other HDMI Founders. With the expiration of the most recent royalty sharing agreement on December 31, 2013, the HDMI Founders have agreed on a new royalty sharing formula for the period January 1, 2014 through December 31, 2016. As a result, we have recognized HDMI royalty revenue of approximately $12.2 million in 2014 as compared to $13.7 million in 2013. Included in the $12.2 million recognized in 2014 was $6.8 million that had been deferred in the first three quarters of the year and recognized in the fourth quarter upon agreement of the royalty sharing formula.
The increase in licensing revenue from 2012 to 2013 was primarily due to patent monetization and higher HDMI and MHL adopter revenues of $5.2 million, partially offset by lower revenues from audit settlements of $4.8 million. Our licensing revenue may fluctuate year over year as a result of the timing of completion of IP license arrangements and settlement of royalty audits.

39


COST OF REVENUE AND GROSS MARGIN
 
 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Cost of product revenue (1)
$
100,462

 
(11.0
)%
 
$
112,940

 
2.8
 %
 
$
109,815

Product gross profit
97,666

 
(14.6
)%
 
114,368

 
22.1
 %
 
93,672

Product gross profit margin
49.3
%
 
 

 
50.3
%
 
 

 
46.0
%
(1) Includes stock-based compensation expense
$
634

 
 

 
$
603

 
 

 
$
523

Cost of licensing and services revenue
$
30

 
(96.6
)%
 
$
881

 
40.7
 %
 
$
626

Licensing and services gross profit
59,894

 
24.2
 %
 
48,217

 
(0.1
)%
 
48,251

Licensing and services gross profit margin
99.9
%
 
 

 
98.2
%
 
 

 
98.7
%
Total cost of revenue
$
100,492

 
(11.7
)%
 
$
113,821

 
3.1
 %
 
$
110,441

Total gross profit
157,560

 
(3.1
)%
 
162,585

 
14.6
 %
 
141,923

Total gross profit margin
61.1
%
 
 

 
58.8
%
 
 

 
56.2
%
Cost of Revenue
Cost of product revenue comprises the cost of our semiconductor devices, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services and packaging materials for semiconductor products, as well as royalties and license fees paid to vendors. Also included in cost of product revenue is the amortization of purchased technology and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, provisions for excess and obsolete inventories, and stock-based compensation expense for personnel engaged in manufacturing support.  Cost of licensing revenue consists primarily of costs to license our technology which involves modification, customization or engineering services, as well as other overhead costs relating to the aforementioned costs including stock-based compensation expense. Total cost of revenue decreased from 2013 to 2014 primarily due to lower in revenue volume, partially offset by $0.8 million increase in excess and obsolescence expense and non-recurring recovery in the prior year. Total cost of revenue increased from 2012 to 2013 primarily due to the growth in revenue volume and slightly higher fixed overhead costs, partially offset by $1.8 million recovery received from a vendor related to previously written-down inventory.
Product Gross Profit Margin
Our product gross profit margin decreased from 2013 to 2014 primarily due to $0.8 million increase in excess and obsolescence expense and non-recurring recovery in the prior year, $0.7 million increase in warranty expense and $0.4 million increase related to standard cost change expense.We expect our product gross profit margin to decline in 2015.
Our product gross margin increased from 2012 to 2013 primarily due to recovery from a vendor of $1.8 million for previously written-down inventory, better absorption of fixed and semi-variable overheads as a result of increased revenue and lower depreciation expense of $0.5 million due to fully depreciated testers. The product mix shifted to higher margin products for 2013 compared to 2012.
Licensing and Services Gross Profit Margin
Licensing and services gross profit margin was comparable in 2014, 2013 and 2012. We expect the licensing and services gross profit margin to be in the same range in the coming years.
OPERATING EXPENSES
Research and development (R&D)
Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, including stock-based compensation expense. Development and design costs

40


consist primarily of costs related to engineering design tools, mask and prototyping costs, testing and subcontracting costs. In addition, we incur costs related to facilities and equipment expense, among other items.
The following table presents details of research and development expense:
 
 
 
 
 
 
 
 
2014 vs 2013
 
2013 vs 2012
 
2014
 
2013
 
2012
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Salaries and benefits
$
40,376

 
$
41,119

 
$
39,416

 
$
(743
)
 
(1.8
)%
 
$
1,703

 
4.3
 %
Development and design costs
8,290

 
11,838

 
11,468

 
(3,548
)
 
(30.0
)%
 
370

 
3.2
 %
Software licensing
5,142

 
5,267

 
4,787

 
(125
)
 
(2.4
)%
 
480

 
10.0
 %
Stock-based compensation
3,357

 
3,576

 
3,585

 
(219
)
 
(6.1
)%
 
(9
)
 
(0.3
)%
Other
14,847

 
15,194

 
18,116

 
(347
)
 
(2.3
)%
 
(2,922
)
 
(16.1
)%
Research and development
$
72,012

 
$
76,994

 
$
77,372

 
$
(4,982
)
 
(6.5
)%
 
$
(378
)
 
(0.5
)%
R&D expense decreased from 2013 to 2014 primarily due to lower bonus expense due to a high probability of not achieving specified corporate goals. Additionally, the development and design costs were lower in 2014 as there were less product tape-outs. Our R&D headcount as of December 31, 2014 was 374 employees as compared to 350 employees as of December 31, 2013.
R&D expense decreased from 2012 to 2013 primarily due to a one-time fee of $3.1 million in January 2012 resulting from our decision to hire 75 former engineering-related consultants from a subcontractor in India. This was partially offset by an increase in compensation related expenses as a result of additional incentive accruals in 2013 compared to 2012 of $1.7 million and as a result of annual merit increases. Our R&D headcount as of December 31, 2013 and 2012 was 350 employees.
Selling, general and administrative (SG&A)
Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation expense, marketing and promotional expenses, legal and other professional fees, facilities expenses and communications expenses.
The following table presents details of selling, general and administrative expense:
 
 
 
 
 
 
 
 
2014 vs 2013
 
2013 vs 2012
 
2014
 
2013
 
2012
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Salaries and benefits
$
36,187

 
$
36,981

 
$
34,202

 
$
(794
)
 
(2.1
)%
 
$
2,779

 
8.1
%
Stock-based compensation
5,821

 
6,336

 
5,096

 
(515
)
 
(8.1
)%
 
1,240

 
24.3
%
Legal and accounting fees
5,602

 
5,514

 
4,684

 
88

 
1.6
 %
 
830

 
17.7
%
Selling and marketing expenses
3,367

 
3,505

 
2,876

 
(138
)
 
(3.9
)%
 
629

 
21.9
%
Other
12,689

 
12,400

 
10,588

 
289

 
2.3
 %
 
1,812

 
17.1
%
Selling, general and administrative
$
63,666

 
$
64,736

 
$
57,446

 
$
(1,070
)
 
(1.7
)%
 
$
7,290

 
12.7
%
SG&A expense decreased from 2013 to 2014 primarily due to a decrease in salaries and benefits related expenses driven by lower bonus and commission expense due to the Company's financial performance. Our SG&A headcount as of December 31, 2014 was 227 employees as compared to 216 employees as of December 31, 2013.
The increase in 2013 salaries and benefits was primarily attributable to a $1.1 million increase in employee incentive payments in 2013 compared to 2012 as a result of increased headcount and annual merit increases. The increase in

41


2013 stock-based compensation was also due to annual awards granted to employees and officers. Legal and accounting fees increased in 2013 due to legal fees associated with patents and trademarks. Increase in selling and marketing expenses is due to increased events related expenses amounting to $0.6 million.  Our SG&A headcount as of December 31, 2013 was 216 employees as compared to 198 employees as of December 31, 2012.
Restructuring and impairment
 
 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Restructuring expense
$
3,824

 
85.0
%
 
$
2,067

 
1,779.1
%
 
$
110

Percentage of total revenue
1.5
%
 
 
 
0.7
%
 
 
 
%

The total restructuring expense for the year ended December 31, 2014 consisted primarily of new restructuring expense of $3.9 million, impairment of DVDO trade name of $467,000 offset by a reversal of accrued severance and benefits of $585,000. In December 2014, we initiated a cost-saving restructuring plan in order to more accurately align with anticipated reduction in mobile revenue opportunities in 2015 and focus our resources on key strategic priorities, impacting some full-time positions in our Sunnyvale, California location and some international offices. We expect to complete a significant portion of the restructuring activities in the first quarter of 2015.  We anticipate reducing our sales, general and administration expenses by approximately 14% and the overall operating expenses by approximately 12% in 2015 as compared to 2014. In addition, the plan involves winding down our DVDO product line over a period of twelve to eighteen months. The wind-down of DVDO will not have a material impact on our revenues in 2015. As a result, DVDO trade name was impaired. Total restructuring expense was $3.9 million which includes a partial impairment of DVDO trade name of $467,000. We have classified approximately $343,000 of these charges as a component of cost of sales. 
In December 2013, we implemented a restructuring plan to eliminate redundancies in our worldwide headcount. We expect these restructuring activities will allow for potential savings through reduced employee expenses and lower operating costs in the coming years.
The restructuring expense for the year ended December 31, 2012 primarily related to adjustments to previously established accrual for facility exit costs.
Amortization of acquisition-related intangible assets
 
 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Amortization of acquisition-related intangible assets
$
2,916

 
52.2
%
 
$
1,916

 
87.1
%
 
$
1,024

Percentage of total revenue
1.1
%
 
 
 
0.7
%
 
 
 
0.4
%
The increase in the amortization of intangible assets for the year ended December 31, 2014 as compared to the same period in 2013 was primarily due to additional amortization expenses from new intangible assets acquired through an acquisition which was completed in May 2014.
The increase in the amortization of intangible assets for the year ended December 31, 2013 as compared to the same period in 2012 was primarily due to out of period adjustments of $1.2 million in 2012 resulting in a lower amortization expense in 2012 compared to 2013.
Impairment of intangible assets

In 2014, we determined that certain of our intellectual property, developed technology and trade name assets were impaired because their fair values were less than their carrying values. We recorded an impairment charge of $943,000 in the

42


consolidated statements of operations for the year ended December 31, 2014. We classified approximately $467,000 of these charges as a restructuring charge, see Note 8 to the consolidated financial statements.
In 2013, we determined that one of our developed technologies was impaired because the technology is no longer being used. We recorded an impairment charge of the unamortized balance of $0.2 million.
Gain from sale of a privately held company investment
    
In July 2014, we sold our investment in a privately held company for $7.6 million and recorded a gain of $4.1 million as other income in the consolidated statements of operations for the year ended December 31, 2014.
Proceeds from legal settlement
On May 16, 2011, we completed our acquisition of SiBEAM, Inc. pursuant to an Agreement and Plan of Merger dated April 13, 2011. The total merger consideration was $25.0 million in cash and stock, $3.0 million of which was held in escrow against potential claims for indemnifiable damages. In May 2013, we received $1.3 million from the escrow agent in full satisfaction of any and all claims by Silicon Image Inc.
Other than temporary impairment of a privately held company investment
In 2013 and 2012, we recorded non-cash impairment charges of $1.5 million and $7.5 million, respectively, representing the carrying value of our investment in two different privately-held companies.
Provision (benefit) for income taxes
 
 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Provision (benefit) for income taxes
$
(20,980
)
 
(401.7
)%
 
$
6,955

 
(30.3
)%
 
$
9,979

Percentage of total revenue
(8.1
)%
 
 
 
2.5
%
 
 
 
4.0
%

For the year ended December 31, 2014, we recorded an income tax benefit of $21.0 million, compared to income tax provisions of $7.0 million and $10.0 million in 2013 and 2012, respectively. Our effective income tax rate was (98.8)% compared to 36.7% in 2013 and 1,691% in 2012. In 2014, the primary reconciling items between our effective tax rate and the U.S. statutory tax rate of 35% included approximately $30.1 million tax benefit resulting from the Company’s determination that deferred tax assets previously reserved were more likely that not to be realized resulting in the reversal of the valuation allowance on those deferred tax assets. Also contributing to the difference for the statutory rate was $8.1 million of income tax expense primarily due to foreign withholding taxes and foreign income inclusions.
During the fourth quarter of 2014, we concluded that the valuation allowance for certain U.S. federal and state deferred tax assets, with the exception of the deferred tax assets related to Federal R&D credits, foreign tax credits and California deferred tax assets, is no longer needed primarily due to cumulative income in recent years and the expectation of sustained profitability in future periods. As of December 31, 2014, the cumulative positive evidence outweighed the negative evidence regarding the likelihood that certain deferred tax assets for Silicon Image's U.S. consolidated income tax group will be realized. Accordingly, we recognized a non-recurring, non-cash tax benefit of $30.1 million related to the valuation allowance reversal.
Liquidity and Capital Resources
Cash and Cash Equivalents, Short-term Investments and Working Capital. The table below summarizes our cash and cash equivalents, investments and working capital and the related movements.

43


 
2014
 
Change
 
2013
 
Change
 
2012
 
(Dollars in thousands)
Cash and cash equivalents
$
116,219

 
$
33,999

 
$
82,220

 
$
53,151

 
$
29,069

Short term investments
48,116

 
(7,887
)
 
56,003

 
(22,395
)
 
78,398

Total cash, cash equivalents and short term investments
$
164,335

 
$
26,112

 
$
138,223

 
$
30,756

 
$
107,467

Percentage of total assets
53.8
%
 
 
 
54.8
%
 
 
 
47.4
%
Total current assets
$
214,181

 
$
21,578

 
$
192,603

 
$
26,986

 
$
165,617

Total current liabilities
(49,851
)
 
(3,959
)
 
(45,892
)
 
(3,077
)
 
(42,815
)
Working capital
$
164,330

 
$
17,619

 
$
146,711

 
$
23,909

 
$
122,802

As of December 31, 2014, $14.5 million of the cash and cash equivalents and short term investments was held by foreign subsidiaries. Local government regulations may restrict our ability to move cash balances from our foreign subsidiaries to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We did not have any long-term investments. Additionally, we do not have any outstanding bank loans or credit facilities in place.
Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors” in this Annual Report. We believe that our existing cash and cash equivalents, together with any cash generated from operations, will be sufficient to meet our working capital requirements and anticipated purchases of property and equipment for at least the next 12 months. However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated.
Cash Flows
The following table summarizes our cash flows for the periods presented.
 
 
2014
 
2013
 
2012
Consolidated Statements of Cash Flows Data
(in thousands)
Purchases of property and equipment
$
(7,739
)
 
$
(5,761
)
 
$
(8,885
)
Depreciation and amortization
10,653

 
9,044

 
7,438

Cash provided by operating activities
40,565

 
39,192

 
4,676

Cash provided by (used in) investing activities
(7,618
)
 
13,432

 
24,076

Cash provided by (used in) financing activities
1,093

 
832

 
(36,788
)
Operating Activities
We generated $40.6 million of cash from operating activities during the year ended December 31, 2014, primarily resulting from our net income of $42.1 million, offset by non-cash income of $8.6 million primarily related to stock based compensation, depreciation, amortization and deferred income taxes. In addition, significant changes in our operating assets and liabilities compared to 2013 resulted from the following:
decrease in accounts receivable of $11.2 million due to higher collections over billings as well as lower concentration of sales in the last month of the fiscal year; and
increase in accrued and other liabilities of $4.6 million relating to accrued restructuring and accrued founder royalties.
increase in inventory of $5.4 million primarily due to lower shipments in 2014 as compared to 2013.
 

44


We generated $39.2 million of cash from operating activities during the year ended December 31, 2013, primarily resulting from our net income of $11.5 million, offset by non-cash expense of $22.2 million primarily related to stock based compensation, depreciation and amortization. In addition, significant changes in our operating assets and liabilities compared to 2012 resulted from the following:
decrease in accounts receivable of $2.8 million due to higher collections over billings as well as lower concentration of sales in the last month of the fiscal year; and
increase in accounts payable of $2.2 million relating to increased payables due to our inventory purchases as well as timing of invoices and payments to vendors.
We generated $4.7 million of cash from operating activities during the year ended December 31, 2012, primarily resulting from our net loss of $11.2 million, offset by non-cash expense of $28.5 million related to stock based compensation, depreciation, amortization, impairment of investment in unconsolidated affiliate and equity in net loss of an unconsolidated affiliate. In addition, significant changes in our operating assets and liabilities compared to 2011 resulted from the following:
increase in deferred margin on sales to distributors of $2.5 million mainly due to the increasing activities with our distributors driven by the acceleration of demand for our products;
increase in accounts receivable of $10.5 million due to an increase in billings as well as timing of payments from our customers; and
decrease in accrued and other liabilities of $3.6 million due largely to decreased bonus accruals and product rebates.
Investing Activities
We used $7.6 million of cash in investing activities during the year ended December 31, 2014, primarily for business acquisition of $13.5 million and for capital expenditure of $7.7 million, partially offset by cash received from the sale of our investment in a privately-held company of $7.6 million. During the year ended December 31, 2014, we sold $27.2 million and purchased $20.3 million of short-term investments.
We generated $13.4 million of cash from investing activities during the year ended December 31, 2013, primarily resulting from net proceeds from the sales and maturities of short-term investments of $21.6 million and proceeds from an escrow settlement of $1.3 million, partially offset by $5.8 million used for capital expenditures, $1.8 million used for strategic business investments and $2.0 million used for purchases of intellectual properties. During the year ended December 31, 2013, we sold $62.7 million and purchased $41.1 million of short-term investments.
We generated $24.1 million of cash from investing activities during the year ended December 31, 2012, primarily resulting from net proceeds from the sales and maturities of short-term investments of $44.2 million, partially offset by $8.9 million used for capital expenditures, $10.0 million used for various strategic business investments and $1.2 million used for purchases of intellectual properties. During the year ended December 31, 2012, we sold $104.8 million and purchased $60.6 million of short-term investments.
We are not a capital-intensive business. Our purchases of property and equipment in 2014, 2013 and 2012 related mainly to testing equipment, leasehold improvements and information technology infrastructure.
Financing Activities
We generated approximately $1.1 million of cash from financing activities during the year ended December 31, 2014 primarily due to proceeds from stock option exercises and purchases under our employee stock purchase program of approximately $6.5 million and from selling a redeemable noncontrolling interest in one of our subsidiaries to Qualcomm for $7.0 million, partially offset by the purchased of our common stock in the open market of $10.8 million and $1.6 million used to repurchase restricted stock units for minimum statutory income tax withholding.
We generated $0.8 million of cash from financing activities during the year ended December 31, 2013 primarily due to proceeds from stock option exercises and purchases under our employee stock purchase program of approximately $5.5 million and to the excess tax benefits from employee stock-based transactions of approximately $0.3 million, partially offset by $2.0 million used to repurchase restricted stock units for minimum statutory income tax withholding and $3.0 million used to repurchase our common stock in the open market.

45


We used $36.8 million of cash in financing activities during the year ended December 31, 2012 primarily due to $39.7 million used to repurchase our common stock, $2.2 million used to repurchase restricted stock units for minimum statutory income tax withholding and $1.1 million cash paid to settle contingent consideration liabilities, partially offset by the proceeds from stock option exercises and purchases under our employee stock purchase program of approximately $5.6 million.
Contractual Obligations
Our contractual obligations as of December 31, 2014 were as follows (in thousands):
 
 
Payments Due In
 
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Contractual Obligations:
 
 
 
 
 
 
 
 
 
Operating lease obligations
$
8,532

 
$
2,945

 
$
4,664

 
$
923

 
$

The amounts above exclude liabilities under FASB ASC 740-10, “Income Taxes – Recognition section” amounting to approximately $23.1 million as of December 31, 2014 as we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13, “Income Taxes,” in our notes to consolidated financial statements included in Item 15(a) of this report for further discussion.
Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. We believe the accounting policies discussed below to be most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.
Revenue Recognition
We recognize revenue when the earnings process is complete, as evidenced by an agreement with the customer, delivery or performance has occurred, pricing is fixed or determinable and collectability is reasonably assured.
Product Revenue
We recognize product revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenue when any future performance obligations remain. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents are used to verify product delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectability of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.  We sell our products either directly to the OEMs or through distributors during the following types of transactions.
“Sell-In” or “Direct” – These represent instances where we either ship products directly to the OEMs or to distributors with limited rights to price concessions or return. Revenue is generally recognized in these cases, at the time of shipment. Revenue from products sold to distributors with agreements allowing for stock rotations, but not price protection, is also generally recognized upon shipment.  Reserves for stock rotations are estimated based primarily on historical experience and provided for at the time of shipment, and are not significant.
“Sell-Through” – These represent instances where we ship products to the distributors where they have rights to price concessions and rights of return. Revenue is recognized only when the distributor reports that it has sold the product to its end customer as the sales price is not fixed or determinable at the time of shipment to the distributor. Our recognition of such distributor sell-through is based on point of sale reports received from the distributor which establish a customer, quantity and

46


final price. Price concessions are recorded when incurred, which is generally at the time the distributor sells the product to its customer. Once we receive the point of sale reports from the distributor, our sales price is fixed, as any product returns, stock rotation and price concession rights for that product lapse.
From time to time, at our distributors’ request, we enter into “conversion agreements” to convert certain products, which are designated for a specific end customer, from “sell-through” to “sell-in” products. The effect of these conversions is to eliminate any price protection or return rights on such products. Revenue for such conversions is recorded at the time such conversion agreements are signed, as it is at that point that the distributor ceases to have any price protection or return rights for such products. 
At the time of shipment to distributors for which revenue is recognized on a sell-through basis, we record a trade receivable for the selling price (since there is a legally enforceable right to payment), we relieve inventory for the carrying value of goods shipped (since legal title has passed to the distributor) and, until revenue is recognized, we record the gross margin in “deferred margin on sale to distributors,” a component of current liabilities in our consolidated balance sheet. However, the amount of gross margin we recognize in future periods will be less than the originally recorded deferred margin on sales to distributor as a result of negotiated price concessions. We sell each item in our product price book to all of our “sell-through” distributors worldwide at a relatively uniform list price. However, distributors resell our products to end customers at a very broad range of individually negotiated price points based on customer, product, quantity, geography, competitive pricing and other factors. The majority of our distributors’ resales are priced at a discount from the list price. Often, under these circumstances, we remit back to the distributor a portion of their original purchase price after the resale transaction is completed. Thus, a portion of the “deferred margin on the sale to distributor” balance represents a portion of distributors’ original purchase price that will be remitted back to the distributor in the future. The wide range and variability of negotiated price concessions granted to the distributors does not allow us to accurately estimate the portion of the balance in the deferred margin on the sale to distributors that will be refunded back to the distributors. In addition to the above, we also reduce the deferred margin by anticipated or determinable future price protections based on revised price lists, if any.
Sales Returns, Pricing Adjustments and Allowance for Doubtful Accounts. We record reductions of revenue for estimated product returns and pricing adjustments, such as rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. We reverse the accrual for unclaimed rebate amounts as specific rebate programs contractually end and when we believe unclaimed rebates are no longer subject to payment and will not be paid. Thus the reversal of unclaimed rebates may have a positive impact on our net revenue and net income in subsequent periods. Additional reductions of revenue would result if actual product returns or pricing adjustments exceed our estimates. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.
Licensing Revenue
We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Revenue earned under such agreements is classified as licensing revenue. Our IP licensing agreements generally include multiple elements, which may include one or more off-the-shelf and/or customized IP licenses bundled with support services covering a fixed period of time, usually one year.
For multiple-element arrangements, if the different elements in the arrangement qualify as separate units of accounting we allocate the total arrangement consideration to each element based on relative selling price. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (BESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. BESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For the elements of IP licensing agreements we concluded that VSOE exists only for our support services based on periodic stand-alone renewals. For all other elements in IP licensing agreements, we concluded that no VSOE or TPE exists because these elements are almost never sold on a stand-alone basis by us or our competitors.
Our process for determining BESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. The key factors considered by us in developing the BESPs include prices charged by us for similar offerings, if any, our historical pricing practices, the nature and complexity of different technologies being licensed.

47


Amounts allocated to the delivered off-the-shelf IP licenses are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the support services are deferred and recognized on a straight-line basis over the support period, usually one year.
Certain licensing agreements provide for royalty payments based on agreed upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units shipped by the customer. To determine the number of units shipped, we rely upon actual royalty reports from our customers when available and rely upon estimates in lieu of actual royalty reports when we have a sufficient history of receiving royalties to enable us to make a reliable estimate of the amount of royalties owed to us. These estimates for royalties necessarily involve the application of management judgment. As a result of our use of estimates, period-to-period numbers are “trued-up” in the following period to reflect actual units shipped per the royalty reports ultimately received from the customer. In cases where royalty reports and other information are not available to allow us to estimate royalty revenue, we recognize revenue only when royalty reports are received. We also perform compliance audits for our licenses and any additional royalties as a result of the compliance audits are recorded as revenue in the period when the compliance audits are settled and the customers agree to pay the amounts due.
From time to time, we enter into contracts related to licenses of our technology that involve significant modification, customization or engineering services. Revenues derived from such license contracts are accounted for using the percentage-of-completion method or completed contract method. The completed contract method is used for contracts where there is a risk over final acceptance by the customer or for contracts that are short term in nature. HDMI royalty revenue is determined by an allocation formula contractually agreed to by us and the other HDMI Founders. Evidence of an arrangement is deemed complete when all the Founders agree on the royalty sharing formula.
Stock-based Compensation
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. We measure stock-based compensation expenses for employees at the grant date fair value of the award, and recognize expenses, net of forfeitures, on a straight-line basis over the requisite service period, which is generally the vesting period. We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. We believe that the fair value of stock options is more reliably measured than the fair value of the services received. As such, the fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
We estimate the fair value of stock-based option award using the Black-Scholes option-pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-Scholes option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends. The value of the portion of the award that is ultimately expected to vest is recognized as expense in our consolidated statements of operations. We estimate the expense for restricted stock grants based on grant date fair value and estimate the fair value of market-based performance restricted stock units granted using a Monte Carlo simulation model. Stock-based compensation expenses are classified in the consolidated statement of operations based on the department to which the related employee reports.
Inventories and Inventory Valuation
We record inventories at the lower of actual cost (computed on a first-in, first-out basis), or market value. Market value is based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of market value involves numerous judgments including estimating average selling prices based on recent sales, industry trends, existing customer orders, and seasonal factors. Should actual market conditions differ from our estimates, our future results of operations could be materially affected.
The valuation of inventory also requires us to estimate excess and obsolete inventory. The determination of obsolete or excess inventory is estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months forecasted demand are written down to zero (unless specific facts and circumstances warrant no write-down or a write-down to a different value) and the related provision is recorded as a cost of sales. If actual market conditions are less favorable than

48


those projected by management, additional inventory write-downs may be required, which would have a negative impact on our gross margin. If we ultimately sell inventory that we have previously written down, our gross margins in future periods will be positively impacted.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill
We test long-lived assets, including intangible assets with finite lives for impairment whenever events or circumstances suggest that such assets may not be recoverable or that their useful lives are no longer appropriate. An impairment loss is recognized when the carrying amount of these long-lived assets exceeds their fair value. An impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets is less than the carrying value of the asset we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value. These forecasted undiscounted cash flows include estimates and assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and determination of appropriate market comparable. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Goodwill is tested for impairment on an annual basis (on September 30th), and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Management has determined that we have one reporting unit. If the recorded value of the assets, including goodwill, and liabilities (“net book value”) of the reporting unit exceeds its fair value, an impairment loss may be required to be recognized. Further, to the extent the carrying value of the goodwill is greater than its fair value, all, or a significant portion of goodwill may be considered impaired.
Deferred Tax Assets
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record valuation allowances to reduce any deferred tax assets to the amount that we estimate will more likely than not be realized based on available evidence and management’s judgment. In addition, the calculation of liabilities for uncertain tax positions involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.
During the fourth quarter of 2014, the Company concluded that the valuation allowance for certain U.S. federal and state deferred tax assets, with the exception of the deferred tax assets related to federal research and development credits, foreign tax credits and California deferred tax assets, is no longer needed primarily due to the emergence from cumulative losses in recent years, the return to sustainable U.S. operating profits and the expectation of sustainable profitability in future periods. As of December 31, 2014, the cumulative positive evidence outweighed the negative evidence regarding the likelihood that certain deferred tax assets for the Company’s U.S. consolidated income tax group will be realized. Accordingly, the Company recognized a non-recurring, non-cash tax benefit of $30.1 million related to the valuation allowance reversal.
Restructuring
We have engaged in restructuring actions, which require management to utilize significant estimates related to the timing and amount of severance and other employee separation costs for workforce reduction programs, lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences, and negotiated settlements.
Recent Accounting Pronouncements

49


Refer to note 1 of the notes to the consolidated financial statements for recent accounting pronouncements.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. As of December 31, 2014, a hypothetical 100 basis point increase in interest rates would result in an approximate $0.3 million decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
Foreign Currency Exchange Risk
A majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, certain operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Chinese Yuan, Indian Rupee and Japanese Yen. Additionally, many of our foreign distributors price our products in the local currency of the countries in which they sell. Therefore, significant strengthening or weakening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices or vice versa, for our products, which would negatively affect our operating results. Cash balances held in foreign countries are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States.
As of December 31, 2014, we did not have any derivative transactions.
 
Item 8.
Financial Statements and Supplementary Data
The Financial Statements and Supplemental Data required by this item are set forth at the pages indicated at Item 15(a).
 
Item 9.
Changes in Disagreements with Accountants on Accounting and Financial Disclosure
None.
 
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our periodic controls evaluation. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports filed and submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is designed to provide reasonable

50


assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
Management conducted an assessment of our internal control over financial reporting as of December 31, 2014 based on the framework set forth in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2014, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the fourth quarter of our 2014 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

51


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Silicon Image, Inc.
Sunnyvale, California

We have audited the internal control over financial reporting of Silicon Image, Inc. and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014 and our report dated February 24, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
February 24, 2015
 
Item 9B.
Other Information
Not applicable.

52


PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item is herein incorporated by reference from Silicon Image’s Proxy Statement for its 2015 Annual Meeting of Stockholders.
 
Item 11.
Executive Compensation
The information required by this Item is herein incorporated by reference from Silicon Image’s Proxy Statement for its 2015 Annual Meeting of Stockholders.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is herein incorporated by reference from Silicon Image’s Proxy Statement for its 2015 Annual Meeting of Stockholders.
 
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by this Item is herein incorporated by reference from Silicon Image’s Proxy Statement for its 2015 Annual Meeting of Stockholders.
 
Item 14.
Principal Accountant Fees and Services
The information required by this Item is herein incorporated by reference from Silicon Image’s Proxy Statement for its 2015 Annual Meeting of Stockholders.


53


PART IV
 
Item 15.
Exhibits and Financial Statement Schedules

(a)
The following documents are filed as a part of this Form:
1. Financial Statements:
 
All schedules have been omitted because they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.
2.  Exhibits.
The exhibits listed in the Index to Exhibits are incorporated herein by reference as the list of exhibits required as part of this Annual Report on Form 10-K.


54


SILICON IMAGE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
116,219

 
$
82,220

Short-term investments
48,116

 
56,003

Accounts receivable, net of allowances for doubtful accounts
of $644 at December 31, 2014 and $531 at December 31, 2013
23,693

 
34,729

Inventories
17,146

 
11,727

Prepaid expenses and other current assets
6,912

 
7,733

Deferred income taxes
2,095

 
191

Total current assets
214,181

 
192,603

Property and equipment, net
15,295

 
14,676

Deferred income taxes, non-current
28,106

 
4,368

Intangible assets, net (Note 7)
15,729

 
10,348

Goodwill (Note 7)
30,333

 
21,646

Other assets
1,644

 
8,498

Total assets
$
305,288

 
$
252,139

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
13,461

 
$
12,894

Accrued and other current liabilities
25,473

 
20,622

Deferred margin on sales to distributors
8,663

 
9,634

Deferred license revenue
2,254

 
2,742

Total current liabilities
49,851

 
45,892

Other long-term liabilities
13,905

 
16,522

Total liabilities
63,756

 
62,414

Commitments and contingencies (Notes 9 and 10)


 


Redeemable noncontrolling interest (Note 11)
7,000

 

Stockholders’ Equity:
 

 
 

Convertible preferred stock, par value $0.001; 5,000,000 shares authorized; no shares issued or outstanding

 

Common stock, par value $0.001; 150,000,000 shares authorized; shares issued and outstanding: 77,386,040 shares at December 31, 2014 and 77,418,247 shares at December 31, 2013
107

 
100

Additional paid-in capital
552,324

 
536,935

Treasury stock, 29,719,612 shares at December 31, 2014 and 27,323,067 shares at December 31, 2013
(170,375
)
 
(157,898
)
Accumulated deficit
(147,196
)
 
(189,302
)
Accumulated other comprehensive income (loss)
(328
)
 
(110
)
Total stockholders’ equity
234,532

 
189,725

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
305,288

 
$
252,139

See accompanying Notes to Consolidated Financial Statements.

55


SILICON IMAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Product
$
198,128

 
$
227,308

 
$
203,487

Licensing and services
59,924

 
49,098

 
48,877

Total revenue
258,052

 
276,406

 
252,364

Cost of revenue and operating expenses:
 

 
 

 
 

Cost of product revenue (1)(2)(3)
100,462

 
112,940

 
109,815

Cost of licensing and services revenue
30

 
881

 
626

Research and development (4)
72,012

 
76,994

 
77,372

Selling, general and administrative (5)
63,666

 
64,736

 
57,446

Restructuring and impairment expense (6)(7)
3,481

 
1,783

 
110

Amortization of acquisition-related intangible assets
2,016

 
941

 
599

Impairment of intangible asset
476

 
175

 

Total cost of revenue and operating expenses
242,143

 
258,450

 
245,968

Income from operations
15,909