UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý                       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended April 30, 2005

 

or

 

o                      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: 0-30877

 

Marvell Technology Group Ltd.

(Exact name of registrant as specified in its charter)

 

Bermuda		77-0481679
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda

(Address, including Zip Code, of Principal Executive Offices)

 

(441) 296-6395

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. ý Yes o No

 

Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý Yes o No

 

Shares Outstanding of the Registrant’s Common Stock

 

Class		Outstanding at May 31, 2005
Common stock, $0.002 par value		280,291,001

 

 

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets at April 30, 2005 and January 31, 2005
	Unaudited Condensed Consolidated Statements of Operations for the three months ended April 30, 2005 and 2004
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2005 and 2004
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Securities Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures
Exhibit Index

 

2

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

		April 30, 2005			January 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	182,976		$	166,471
Short-term investments		543,795			493,543
Accounts receivable, net of allowances of $2,892 and $3,132		205,143			200,954
Inventories		113,225			128,889
Prepaid expenses and other current assets		51,706			15,144
Deferred income taxes		12,793			12,793
Total current assets		1,109,638			1,017,794
Property and equipment, net		188,548			161,770
Goodwill		1,480,225			1,480,225
Acquired intangible assets		60,652			80,411
Other noncurrent assets		53,679			48,762
Total assets		$	2,892,742		$	2,788,962
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	122,300		$	129,728
Accrued liabilities		20,732			20,604
Accrued employee compensation		31,776			32,136
Income taxes payable		2,418			3,195
Deferred income		18,513			15,938
Current portion of capital lease obligations		16,309			13,204
Total current liabilities		212,048			214,805
Capital lease obligations, net of current portion		24,836			11,590
Non-current income taxes payable		55,511			46,648
Other long-term liabilities		19,124			18,489
Total liabilities		311,519			291,532
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common stock, $0.002 par value; 492,000 shares authorized; 279,553 and 277,602 shares issued and outstanding		559			555
Additional paid-in capital		3,055,315			3,035,200
Deferred stock-based compensation		(2,528		)	(3,400		)
Accumulated other comprehensive loss		(2,537		)	(1,807		)
Accumulated deficit		(469,586		)	(533,118		)
Total shareholders’ equity		2,581,223			2,497,430
Total liabilities and shareholders’ equity		$	2,892,742		$	2,788,962

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

		Three Months Ended April 30,
		2005			2004
Net revenue		$	364,770		$	269,577
Operating costs and expenses:
Cost of goods sold (1)		175,244			127,836
Research and development (1)		71,898			63,272
Selling and marketing (1)		20,989			18,701
General and administrative (1)		6,738			6,837
Amortization of stock-based compensation		871			1,388
Amortization and write-off of acquired intangible assets and other		19,759			33,258
Total operating costs and expenses		295,499			251,292
Operating income		69,271			18,285
Interest and other income, net		3,612			1,672
Income before income taxes		72,883			19,957
Provision for income taxes		9,351			5,460
Net income		$	63,532		$	14,497
Net income per share:
Basic		$	0.23		$	0.05
Diluted		$	0.20		$	0.05
Weighted average shares:
Basic		278,793			264,478
Diluted		310,736			293,174

 

(1)	Excludes amortization of stock-based compensation as follows:
	Cost of goods sold		$	7		$	31
	Research and development		511			820
	Selling and marketing		214			217
	General and administrative		139			320
			$	871		$	1,388

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Three Months Ended April 30,
		2005			2004
Cash flows from operating activities:
Net income		$	63,532		$	14,497
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,431			9,373
Amortization of stock-based compensation		871			1,388
Amortization and write-off of acquired intangible assets		19,759			19,758
Changes in assets and liabilities:
Accounts receivable		(4,189		)	(14,940		)
Inventories		15,664			(16,233		)
Prepaid expenses and other assets		(43,800		)	647
Accounts payable		(7,428		)	(14,759		)
Accrued liabilities and other		763			10,057
Accrued employee compensation		(360		)	4,963
Income taxes payable		8,086			4,826
Deferred income		2,575			8,427
Net cash provided by operating activities		68,904			28,004
Cash flows from investing activities:
Purchases of short-term investments		(99,018		)	(119,185		)
Sales and maturities of short-term investments		48,051			43,284
Purchases of property and equipment		(18,395		)	(7,117		)
Purchases of technology licenses and other		—			(837		)
Net cash used in investing activities		(69,362		)	(83,855		)
Cash flows from financing activities:
Proceeds from the issuance of common stock		20,119			19,349
Principal payments on capital lease obligations		(3,156		)	(2,539		)
Net cash provided by financing activities		16,963			16,810
Net increase (decrease) in cash and cash equivalents		16,505			(39,041		)
Cash and cash equivalents at beginning of period		166,471			173,969
Cash and cash equivalents at end of period		$	182,976		$	134,928

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

MARVELL TECHNOLOGY GROUP LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. The Company and its Significant Accounting Policies

 

The Company

 

Marvell Technology Group Ltd. (the “Company”), a Bermuda company, was incorporated on January 11, 1995. The Company is a leading global semiconductor provider of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. The Company’s diverse product portfolio includes switching, transceivers, wireless, PC connectivity, gateways, communications controllers, storage and power management solutions that serve diverse applications used in business enterprise, consumer electronics and emerging markets.

 

Basis of presentation

 

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal years 2006 and 2005 are comprised of 52-weeks. For presentation purposes only, the financial statements and notes refer to January 31 as the Company’s year-end and April 30, July 31 and October 31 as the Company’s quarter-ends.

 

On February 25, 2004, the Board of Directors approved a 2 for 1 stock split of the Company’s common stock, to be effected pursuant to the issuance of additional shares. The stock split was subject to shareholder approval of an increase in the Company’s authorized share capital at the Company’s 2004 Annual General Meeting. On May 28, 2004, shareholders at the Company’s 2004 Annual General Meeting approved an increase in the authorized share capital by 250.0 million shares of common stock. Stock certificates representing one additional share for each share held were delivered on June 28, 2004 (payment date) to all shareholders of record at the close of business on June 14, 2004 (record date). All share and per share amounts in these condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.

 

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state the Company’s financial position as of April 30, 2005, the results of its operations for the three months ended April 30, 2005 and 2004, and its cash flows for the three months ended April 30, 2005 and 2004. These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2005. The results of operations for the three months ended April 30, 2005 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

 

Revenue recognition

 

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. Under these criteria, product revenue is generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances. However, some of the Company’s sales are made through distributors under agreements allowing for price protection and rights of return on product unsold by the distributors. Product revenue on sales made through distributors with rights of return is deferred until the distributors sell the product to end customers. Additionally, collection is not deemed to be “reasonably assured” if customers receive extended payment terms. As a result, revenue on sales to customers with payment terms substantially greater than the Company’s normal payment terms is deferred and is recognized as revenue as the payments become due. Deferred revenue less the related cost of the inventories is reported as deferred income.

 

The provision for estimated sales returns and allowances on product sales is recorded in the same period the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates.

 

6

 

The Company also enters into development agreements with some of its customers. Development revenue is recognized under the proportionate performance method, with the associated costs included in research and development expense. The Company estimates the proportionate performance of its development contracts based on an analysis of progress toward completion.

 

Revenue from licensed software is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided that the fee is fixed and determinable and collectibility is probable. Revenue from post-contract customer support and any other future deliverables is deferred and earned over the support period or as contract elements are delivered.

 

In arrangements that include a combination of hardware and software products that are also sold separately, where software is more than incidental and essential to the functionality of the product being sold, the Company follows the guidance in Emerging Issues Task Force (“EITF”) Issue No. 03-05, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software.” In these situations, the Company accounts for the entire arrangement as a sale of software and software-related items and follows the revenue recognition criteria in Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and related interpretations. Arrangements meeting the criteria are not material to the Company’s condensed consolidated financial statements.

 

The provisions of EITF Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” apply to sales arrangements with multiple arrangements that include a combination of hardware, software and/or services. For multiple element arrangements, revenue is allocated to the separate elements based on fair value. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, the Company defers the fair value of the undelivered elements and the residual revenue is allocated to the delivered elements. If the undelivered elements are essential to the functionality of the delivered elements, no revenue is recognized. Undelivered elements typically are software warranty and maintenance services.

 

Inventories

 

Inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value.

 

Warranty accrual

 

The Company’s products are generally subject to warranty, which provides for the estimated future costs of repair, replacement or customer accommodation upon shipment of the product in the accompanying statements of operations. The Company’s products typically carry a standard 90-day warranty with certain exceptions in which the warranty period can range from one to four years. The warranty accrual is estimated based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. For new products, the Company uses a historical percentage for the appropriate class of product.

 

Stock-based compensation

 

The Company’s employee stock based compensation is accounted for in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. Expense associated with stock-based compensation is amortized on an accelerated basis over the vesting periods of the individual awards consistent with the method described in Financial Accounting Standards Board Interpretation No. 28 (“FIN 28”). Application of FIN 28 to awards that vest progressively over five years results in amortization of approximately 46% of the compensation in the first 12 months of vesting, 26% of the compensation in the second 12 months of vesting, 15% of the compensation in the third 12 months of vesting, 9% of the compensation in the fourth 12 months of vesting and 4% of the compensation in the fifth 12 months of vesting. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18 (“EITF 96-18”), Accounting for Equity Instruments that are Offered to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services. Under SFAS 123 and EITF 96-18, stock option awards issued to non-employees are accounted for at their fair value using the Black-Scholes valuation method. The fair value of each non-employee stock award is remeasured at each period end until a commitment date is reached, which is generally the vesting date. The Company accounts for employee and director stock options in accordance with APB 25 and complies with the disclosure provisions of SFAS 123.

 

7

 

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below are pro forma statements of operations data of the Company giving effect to the valuation of stock-based awards to employees using the Black-Scholes option pricing model instead of the guidelines provided by APB 25.

 

		Three Months Ended April 30,
		2005			2004
Net income:
As reported		$	63,532		$	14,497
Adjustments:
Stock-based employee compensation expense included in reported net income, net of tax effects		871			1,388
Stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects		(33,581		)	(36,562		)
Pro forma		$	30,822		$	(20,677	)
Basic net income (loss) per share:
As reported		$	0.23		$	0.05
Pro forma		$	0.11		$	(0.08	)
Diluted net income (loss) per share:
As reported		$	0.20		$	0.05
Pro forma		$	0.10		$	(0.08	)

 

Reclassifications

 

Certain amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation.

 

2. Supplemental Financial Information

 

Available-for-sale investments

 

The amortized cost and fair value of available-for-sale investments are presented in the following tables (in thousands):

 

					April 30, 2005
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Corporate debt securities		$	77,016		$	—		$	(1,078	)	$	75,938
Auction rate securities		338,126			—			—			338,126
U.S. Federal, State, county and municipal debt securities		131,337			—			(1,606		)	129,731
Short-term investments		$	546,479		$	—		$	(2,684	)	$	543,795

 

					January 31, 2005
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Corporate debt securities		$	73,338		$	1		$	(925	)	$	72,414
Auction rate securities		298,101			—			—			298,101
U.S. Federal, State, county and municipal debt securities		124,073			3			(1,048		)	123,028
Short-term investments		$	495,512		$	4		$	(1,973	)	$	493,543

 

Auction rate securities are securities that are structured with short-term reset dates of generally less than 90 days but with legally stated maturities in excess of 90 days. At the end of the reset period, investors can sell or continue to hold the securities at par. These securities are classified in the table below based on their legal stated maturity dates.

 

8

 

The contractual maturities of available-for-sale debt securities classified as short-term investments at April 30, 2005 are presented in the following table (in thousands):

 

 

The Company reclassified certain auction rate securities from cash and cash equivalents to short-term investments as of April 30, 2004 and for all prior periods presented. The reclassifications have no effect on previously disclosed net income (loss), shareholders’ equity or operating cash flows. The following table summarizes the cash and cash equivalent and short-term investment balances as previously reported and as reclassified as of the three months ended April 30, 2004 (in thousands):

 

		Cash and Cash Equivalents						Short-Term Investments
		As Reported			As Reclassified			As Reported			As Reclassified
Three months ended:
April 30, 2004		$	245,875		$	134,928		$	175,537		$	286,484

 

As a result of these changes, the Company reclassified the following line items in the Statements of Cash Flows for the three months ended April 30, 2004 (in thousands):

 

		Cash Flow Activity
		As Reported			As Reclassified
Three months ended April 30, 2004:
Purchases of short-term investments		$	(56,268	)	$	(119,185	)
Sales and maturities of short-term investments		$	40,884		$	43,284
Net cash used in investing activities		$	(23,338	)	$	(83,855	)
Net increase (decrease) in cash and cash equivalents		$	21,476		$	(39,041	)

 

Included in the Company’s available-for-sale investments are fixed income securities. As market yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are primarily due to changes in interest rates and bond yields. The Company does not believe any unrealized losses represent an other-than temporary impairment based on its evaluation of available evidence. The following table shows the investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at April 30, 2005 (in thousands):

 

		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Corporate debt securities		$	40,217		$	(529	)	$	35,721		$	(549	)	$	75,938		$	(1,078	)
U.S. Federal, State, county and municipal debt securities		83,744			(927		)	45,987			(679		)	129,731			(1,606		)
Total temporarily impaired securities		$	123,961		$	(1,456	)	$	81,708		$	(1,228	)	$	205,669		$	(2,684	)

 

Inventories

 

The components of inventory are presented in the following table (in thousands):

 

		April 30, 2005			January 31, 2005
Work-in-process		$	58,931		$	63,027
Finished goods		54,294			65,862
		$	113,225		$	128,889

 

9

 

Property and equipment

 

		April 30, 2005			January 31, 2005
Property and equipment (in thousands):
Machinery and equipment		$	114,771		$	105,237
Computer software		90,501			79,494
Furniture and fixtures		8,609			8,430
Leasehold improvements		11,652			11,354
Buildings		7,129			7,096
Land		51,500			51,500
Construction in progress		23,734			16,471
		307,896			279,582
Less: Accumulated depreciation and amortization		(119,348		)	(117,812		)
		$	188,548		$	161,770

 

Goodwill and purchased intangible assets

 

The carrying amount of the goodwill and intangible assets are as follows (in thousands):

 

		As of April 30, 2005									As of January 31, 2005
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Purchased technology		$	394,715		$	(334,196	)	$	60,519		$	394,715		$	(314,460	)	$	80,255
Trade name		100			(93		)	7			100			(80		)	20
Customer contracts		200			(74		)	126			200			(64		)	136
Total identified intangible assets		395,015			(334,363		)	60,652			395,015			(314,604		)	80,411
Goodwill		1,828,131			(347,906		)	1,480,225			1,828,131			(347,906		)	1,480,225
Total intangible assets		$	2,223,146		$	(682,269	)	$	1,540,877		$	2,223,146		$	(662,510	)	$	1,560,636

 

Identified intangible assets consist of purchased technology, trade name, and customer contracts and related relationships. Purchased technology and customer contracts and related relationships are amortized on a straight-line basis over their estimated useful lives of five years. Trade name is amortized on a straight-line basis over its estimated useful life of two years. The aggregate amortization expense of identified intangible assets was $19.8 million in both of the first quarters of fiscal 2006 and 2005, respectively. The estimated total annual amortization expenses of acquired intangible assets is $57.8 million for the remaining nine months of fiscal 2006, $1.2 million for both fiscal 2007 and 2008 and $0.5 million for fiscal 2009.

 

In the first quarter of fiscal 2005, the Company entered into a technology license and non-assert agreement with a licensor pursuant to which the parties agreed to not take action against each other relative to the use of certain technologies. Under this arrangement, the Company agreed to make a one-time payment of $13.5 million, which was included in amortization and write-off of acquired intangible assets and other.

 

Other long-term liabilities

 

The following table presents details of other long-term liabilities (in thousands):

 

 

10

 

Warranty accrual

 

The following table presents changes in the warranty accrual during the three months ended April 30, 2005 and 2004, (in thousands):

 

 

Net income per share

 

The Company reports both basic net income per share, which is based upon the weighted average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted net income per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares. The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):

 

		Three Months Ended April 30,
		2005			2004
Numerator:
Net income		$	63,532		$	14,497
Denominator:
Weighted average shares of common stock outstanding		278,793			264,557
Less: unvested common shares subject to repurchase		—			(79		)
Weighted average shares — basic		278,793			264,478
Effect of dilutive securities-
Unvested common shares subject to repurchase		—			79
Warrants		803			638
Contingently issuable shares		409			1,023
Common stock options and other		30,731			26,956
Weighted average shares — diluted		310,736			293,174
Basic net income per share		$	0.23		$	0.05
Diluted net income per share		$	0.20		$	0.05

 

Options to purchase 256,143 common shares at a weighted average exercise price of $39.14 have been excluded from the computation of diluted net income per share for the three months ended April 30, 2005 because their exercise prices were greater than the average market price of the common shares for the period. Options to purchase 870,322 common shares at a weighted average exercise price of $27.16 have been excluded from the computation of diluted net income per share for the three months ended April 30, 2004 because their exercise prices were greater than the average market price of the common shares for the period.

 

Comprehensive income

 

The components of comprehensive income, net of tax, are presented in the following table (in thousands):

 

		Three Months Ended April 30,
		2005			2004
Net income		$	63,532		$	14,497
Other comprehensive loss:
Unrealized loss on available-for-sale investments and other, net of tax		(730		)	(1,702		)
Total comprehensive income		$	62,802		$	12,795

 

Accumulated other comprehensive income, as presented on the accompanying condensed consolidated balance sheets, consists of the unrealized gains and losses on available-for-sale investments and other, net of tax.

 

11

 

3. Acquisitions

 

On June 27, 2003, the Company completed the acquisition of RADLAN Computer Communications Ltd. (RADLAN). Upon the closing, the Company issued a total of 2,635,284 shares of common stock (valued at $24.0 million) and assumed 313,926 vested options (valued at $2.9 million). In addition, the Company issued warrants to purchase 1,086,366 shares of its common stock at an exercise price of $9.21 per share (valued at $7.5 million). On October 6, 2003, the Company issued an additional 2,325,582 shares valued at $47.4 million to former RADLAN shareholders. On December 8, 2003, certain milestones were achieved and 1,023,256 shares of common stock valued at $19.6 million were earned and issued to former RADLAN shareholders. Additionally, 1,023,256 shares of the Company’s common stock were reserved for future issuance over a one-year period to former RADLAN shareholders, which was dependent upon the Company’s revenues from certain products for the year ended January 31, 2005 compared to the year ended January 31, 2004. As of April 30, 2005, all 1,023,256 shares reserved for future issuance to former RADLAN shareholders were earned based on our achievement of revenues from certain products during fiscal 2005. Certificates for 614,624 shares earned through August 1, 2004 were issued on December 28, 2004. The remaining 408,632 shares earned subsequent to August 1, 2004 will be issued no later than June 27, 2005.

 

4. Facilities Consolidation Charge

 

During fiscal 2003, the Company recorded a $19.6 million charge associated with costs of consolidation of its facilities. These charges included $12.6 million in lease abandonment charges relating to the consolidation of its three facilities in California into one location. The lease abandonment charge included the remaining lease commitments for these facilities reduced by the estimated sublease income throughout the duration of the lease term. The Company incurred charges of $1.0 million during the quarter ended April 30, 2002, as a result of duplicate lease and other costs associated with the dual occupation of its current and abandoned facilities. The facilities consolidation charge also included $6.0 million associated with the write-down of certain property and leasehold improvements related to the abandoned facilities, which reduced the carrying amount of the impaired assets. During the quarter ended July 31, 2003, the Company subleased the abandoned facilities. Actual sublease income approximated the estimated sublease income.

 

As of April 30, 2005, cash payments of $9.0 million, net of sublease income, had been made in connection with these charges relating to the consolidation of the Company’s facilities in California. Approximately $4.5 million is accrued for this facilities consolidation charge as of April 30, 2005, of which $0.9 million is the current portion included in accrued liabilities, while the long-term portion, totaling $3.6 million, is payable through 2010 and is included in other long-term liabilities.

 

A summary of the facilities consolidation accrual related to the fiscal 2003 charge during the three months ended April 30, 2005 is as follows (in thousands):

 

		Balance at January 31, 2005			Net Cash Payments			Non-Cash Charges			Remaining Liability at April 30, 2005
Accrued losses on abandoned leased facilities:
Non-cancelable lease commitments		$	5,053		$	(570	)	$	—		$	4,483

 

During the third quarter of fiscal 2005, the Company recorded a facility consolidation charge of $2.4 million relating to costs associated with consolidating and relocating operations in Israel. The charges included $2.3 million associated with the write-down of certain property and leasehold improvements related to the abandoned facilities, which reduced the carrying amount of the impaired assets, and $0.1 million of remaining lease commitments for these facilities.

 

5. Recent Accounting Pronouncements

 

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS 151”), Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal periods beginning after November 24, 2004. The Company is currently evaluating the impact of adoption of SFAS 151 on its financial position and results of operations.

 

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In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in the Company’s consolidated statement of income. The statement requires companies to assess the most appropriate model to calculate the value of the options. The Company currently uses the Black-Scholes option pricing model to value options and is currently assessing which model it may use in the future under the statement and may deem an alternative model to be the most appropriate. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option pricing model. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of FAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The effective date of the new standard for the Company’s consolidated financial statements is its quarter ended April 30, 2006.

 

Upon adoption, this statement will have a significant impact on the Company’s consolidated financial statements because the Company will be required to expense the fair value of its stock option grants and stock purchases under its employee stock purchase plan rather than disclose the impact on its consolidated net income within the footnotes as is the Company’s current practice (see Note 1). The amounts disclosed within the Company’s footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of FAS 123R. Compensation expense calculated under FAS 123R may differ from amounts currently disclosed within the Company’s footnotes based on changes in the fair value of its common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors. In addition, upon adoption of FAS 123R the Company may choose to use a different valuation model to value the compensation expense associated with employee stock options.

 

 In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 includes interpretive guidance for the initial implementation of FAS 123R. The Company will apply the principles of SAB 107 in conjunction with its adoption of FAS 123R.

 

6. Commitments and Contingencies

 

Purchase Commitments

 

The Company’s manufacturing relationships with its foundries allow for the cancellation of all outstanding purchase orders, but requires repayment of all expenses incurred through the date of cancellation. As of April 30, 2005, foundries had incurred approximately $70.5 million of manufacturing expenses on the Company’s outstanding purchase orders. As of April 30, 2005, the Company also had approximately $43.4 million of other outstanding non-cancelable purchase orders for capital purchase obligations.

 

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On February 28, 2005 and as amended on March 31, 2005, the Company entered into an agreement with a foundry to reserve and secure foundry fabrication capacity for a fixed number of wafers at agreed upon prices for a period of five and half years beginning on July 1, 2005. In return, the Company agreed to pay the foundry $174.2 million over a period of eighteen months. The amendment extends the term of the agreement and the agreed upon pricing terms until December 31, 2015. As of April 30, 2005, payments totaling $37.0 million (paid in the first quarter of fiscal 2006 and included in prepaid expenses and other current assets) have been made. As of April 30, 2005, remaining commitments under the agreement were approximately $137.2 million.

 

Contingencies

 

On July 31, 2001, a putative class action suit was filed against two investment banks that participated in the underwriting of the Company’s initial public offering, or IPO, on June 29, 2000. That lawsuit, which did not name the Company or any of its officers or directors as defendants, was filed in the United States District Court for the Southern District of New York. Plaintiffs allege that the underwriters received “excessive” and undisclosed commissions and entered into unlawful “tie-in” agreements with certain of their clients in violation of Section 10(b) of the Securities Exchange Act of 1934. Thereafter, on September 5, 2001, a second putative class action was filed in the Southern District of New York relating to the Company’s IPO. In this second action, plaintiffs named three underwriters as defendants and also named as defendants the Company and two of its officers, one of whom is also a director. Relying on many of the same allegations contained in the initial complaint in which the Company was not named as a defendant, plaintiffs allege that the defendants violated various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In both actions, plaintiffs seek, among other items, unspecified damages, pre-judgment interest and reimbursement of attorneys’ and experts’ fees. These two actions relating to the Company’s IPO have been consolidated with hundreds of other lawsuits filed by plaintiffs against approximately 55 underwriters and approximately 300 issuers across the United States. A consolidated amended class action complaint against the Company and its two officers was filed on April 19, 2002. Subsequently, defendants in the consolidated proceedings moved to dismiss the actions. In February 2003, the trial court issued its ruling on the motions, granting the motions in part, and denying them in part. Thus, the cases may proceed against the underwriters and the Company as to alleged violations of section 11 of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934. Claims against the individual officers have been voluntarily dismissed without prejudice by agreement with plaintiffs. On June 26, 2003, the plaintiffs announced that a settlement among plaintiffs, the issuer defendants and their directors and officers, and their insurers had been structured, a part of which the insurers for all issuer defendants would guarantee up to $1 billion to investors who are class members, depending upon plaintiffs’ success against non-settling parties. The Company’s board of directors has approved the proposed settlement, which will result in the plaintiffs’ dismissing the case against the Company and granting releases that extend to all of its officers and directors. Definitive settlement documentation was completed in early June 2004 and first presented to the court on June 14, 2004. On February 15, 2005, the court issued an opinion preliminarily approving the proposed settlement, contingent upon certain modifications being made to one aspect of the proposed settlement — the proposed “bar order”. The court ruled that it had no authority to deviate from the wording of the Plaintiff’s Securities Law Reform Act of 1995 and that any bar order that may issue should the proposed settlement be finally approved must be limited to the express wording of 15 U.S.C. section 78u-4(f)(7)(A). On May 2, 2005 the issuer defendants and plaintiffs jointly submitted an amendment to the settlement agreement conforming the language of the settlement agreement with the court’s February 15, 2005 ruling regarding the bar order. The court has tentatively set a public hearing on the fairness of the proposed settlement for January 9, 2006. The Company believes that the claims asserted are without merit and intends to defend these claims vigorously. Based on currently available information, the Company does not believe that the ultimate disposition of this lawsuit will have a material adverse impact on its business, results of operations, financial condition or cash flows.

 

On September 12, 2001, Jasmine Networks, Inc. (“Jasmine”) filed a lawsuit in the Santa Clara County Superior Court asserting claims against Company personnel and the Company for improperly obtaining and using information and technologies during the course of the negotiations with Company personnel regarding the potential acquisition of certain Jasmine assets by the Company. The lawsuit claims that Company officers improperly obtained and used such information and technologies after the Company signed a non-disclosure agreement with Jasmine. The Company believes the claims asserted against its officers and it are without merit and the Company intends to defend all claims vigorously. The Company cannot predict the outcome of this litigation. Any litigation could be costly, divert Company management’s attention and could have a material adverse effect on its business, results of operations, financial condition or cash flows.

 

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On March 11, 2004, Trinity Technologies, Inc. (“Trinity”) filed a lawsuit against the Company’s subsidiary, Marvell Semiconductor, Inc. (“MSI”), in the Superior Court of California, alleging violations of the California Independent Wholesale Sales Representatives Contractual Relations Act of 1990, as well as breach of contract, breach of the implied covenant of good faith and fair dealing and fraud in connection with the termination by MSI of certain agreements it had entered into with Trinity. The complaint seeks declaratory relief, $25.0 million in monetary damages, special and punitive damages and trebling of damages as well as costs and attorneys’ fees. By order entered January 25, 2005, the court granted the Company’s motion for summary adjudication and dismissed one claim for violation of a statute, in which plaintiff sought damages exceeding $12 million. On May 2, 2005, Trinity filed an amended complaint. Discovery is proceeding. The Company believes the claims are without merit and intends to defend against all claims vigorously. The Company cannot predict the outcome of this litigation. Any litigation could be costly, divert Company management’s attention and could have a material adverse effect on its business, results of operations, financial condition or cash flows.

 

On October 7, 2004, Realtek Semiconductor Corporation (“Realtek”) filed a lawsuit against the Company and its subsidiary MSI in the U.S. District Court for the Northern District of California, alleging that the Company infringes certain patented technology proprietary to Realtek. In addition, Realtek filed a similar lawsuit in Taiwan against the same parties, the Company’s Taiwan subsidiary, Marvell Taiwan Ltd., and also naming an officer of the Company. The complaints seek a permanent injunction against the Company as well as the recovery of monetary damages. The Company believes the claims are without merit and intends to defend against all claims vigorously. The Company cannot predict the outcome of this litigation. Any litigation could be costly, divert Company management’s attention and could have a material adverse effect on its business, results of operations, financial condition or cash flows.

 

The Company is also party to other claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such claims and litigation cannot currently be ascertained, the Company does not believe that these matters will result in the payment of monetary damages, net of any applicable insurance proceeds that, in the aggregate, would be material in relation to the Company’s consolidated financial position or results of operations. There can be no assurance that these matters will be resolved without costly litigation, in a manner that is not adverse to the Company’s financial position, results of operations or cash flows, or without requiring royalty payments in the future, which may adversely impact gross margins.

 

7. Related Party Transactions

 

During the first quarters of fiscal 2006 and 2005, the Company incurred approximately $0.3 million and $0.2 million, respectively, of expenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”), for charter aircraft services provided to MSI. The aircraft provided by ACM to the Company for such services is owned by Estopia Air LLC (“Estopia Air”). The Company’s Chairman, President and Chief Executive Officer, Dr. Sehat Sutardja, Ph.D, and the Company’s Director, Secretary and Executive Vice President, Weili Dai, through their control and ownership of Estopia Air, own the aircraft provided by ACM. The expenses incurred were the result of the Company’s use of the aircraft for business travel purposes.

 

On February 19, 2005, the Company, through its subsidiaries MSI and Marvell Asia Pte. Ltd. (“MAPL”), entered into a development agreement with MagnetoX (“MagnetoX”). The Company recognized approximately $0.5 million of revenue from the development agreement during the first quarter of fiscal 2006. Total revenue expected to be recognized from the development agreement is $1.0 million. Herbert Chang, one of the Company’s directors, is Chairman of the Board, President and Chief Executive Officer of MagnetoX. Estopia LLC (“Estopia”) is also a shareholder of MagnetoX. Dr. Sehat Sutardja, Ph.D., the Company’s Chairman, President and Chief Executive Officer and Weili Dai, the Company’s Director, Secretary and Executive Vice President, through their ownership and control of Estopia, are indirect shareholders of MagnetoX.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Form 10-Q 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 include, but are not limited to, statements regarding the utilization of our products in a wide array of enterprise and consumer applications, our expectations as to growth in revenue from our products and reasons for such expectations, sources of revenue, our expectations as to research and development, sales and marketing and general and administrative expense, potential fluctuations in our gross margin and gross profit, the impact, if any, of legal proceedings, customer concentration and expected revenue concentration from Asia, working capital needs, accounts receivable, inventory, the rate of new orders, adequacy of capital resources, funding of capital requirements, factors impacting our capital requirements, liquidity, expected impact of our contractual obligations, the use of recently purchased land, commitments and costs to improve the buildings on recently purchased land, the impact of the adoption of accounting pronouncements, future acquisitions, strategic alliances or joint ventures, sources of competition, future design features and uses of our current and future products, strategic relationships with customers, the need for new and upgraded operational and financial systems, procedures and controls, reasons for decreases in gross profits, and payment of income taxes in foreign jurisdictions. Forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q titled “Additional Factors That May Affect Future Results,” which could cause actual results to differ from those discussed in the forward-looking statements. Forward-looking statements in this Form 10-Q are identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “should,” “will,” “may” and similar expressions. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements that could occur after the filing of this Form 10-Q. You are urged to review carefully our various disclosures in this Form 10-Q and our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended January 31, 2005, that attempt to advise you of the risks and factors that may affect our business.

 

Overview

 

We are a leading global semiconductor provider of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. Our diverse product portfolio includes switching, transceiver, wireless, PC connectivity, gateways, communications controller and storage and power management solutions that serve diverse applications used in business enterprises, consumer electronics and emerging markets. We were founded in 1995. We are a fabless integrated circuit company, which means that we rely on independent, third-party contractors to perform manufacturing, assembly and test functions. This approach allows us to focus on designing, developing and marketing our products and significantly reduces the amount of capital we need to invest in manufacturing products. In January 2001, we acquired Galileo Technology Ltd. (now Marvell Semiconductor Israel Ltd, or MSIL) in a stock-for-stock transaction for aggregate consideration of approximately $2.5 billion. MSIL develops high-performance internetworking and switching products for the broadband communications market. The acquisition was accounted for using the purchase method of accounting, and the operating results of MSIL have been included in our consolidated financial statements from the date of acquisition. In June 2003, we acquired RADLAN Computer Communications Ltd. (RADLAN), a leading provider of embedded networking software, for aggregate consideration to date of approximately $134.7 million.

 

We offer our customers a wide range of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. Our products can be utilized in a wide array of enterprise applications including hard disk drives, high-speed networking equipment, PCs, WLAN solutions for SOHO and residential gateway solutions, and consumer applications such as cell phones, printers, digital cameras, MP3 devices, speakers, game consoles and PDAs.

 

 Our sales have historically been made on the basis of purchase orders rather than long-term agreements. In addition, the sales cycle for our products is long, which may cause us to experience a delay between the time we incur expenses and the time revenue is generated from these expenditures. We expect to increase our research and development, selling and marketing, and general and administrative expenditures as we seek to expand our operations. We anticipate that the rate of new orders may vary significantly from quarter to quarter. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and future quarters may be adversely affected.

 

For the past three and a half years, we have been able to report significant sequential quarterly growth in revenues; however, our revenues have grown at a slower sequential rate since the third quarter of fiscal 2005 compared to the double digit sequential growth rate of the previous eleven quarters. This slower growth rate is due, among other things, to the larger base of revenue and market

 

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share we now enjoy, which makes continuation of double digit revenue growth on a sequential quarterly basis unlikely in the current market.

 

Our fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year 2006 is comprised of 52 weeks. For presentation purposes, our financial statements and notes and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refer to January 31 as our year-end and April 30, July 31 and October 31 as our quarter-ends.

 

Critical Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 31, 2005, as filed with the U.S. Securities and Exchange Commission. There have been no material changes in any of our accounting policies since January 31, 2005.

 

Results of Operations

 

The following table sets forth information derived from our unaudited condensed consolidated statements of operations expressed as a percentage of net revenue:

 

		Three Months Ended April 30,
		2005		2004
Net revenue		100.0	%	100.0	%
Operating costs and expenses:
Cost of goods sold*		48.0		47.4
Research and development*		19.7		23.5
Selling and marketing*		5.8		7.0
General and administrative*		1.9		2.5
Amortization of stock-based compensation		0.2		0.5
Amortization and write-off of acquired intangible assets and other		5.4		12.3
Total operating costs and expenses		81.0		93.2
Operating income		19.0		6.8
Interest and other income, net		1.0		0.6
Income before income taxes		20.0		7.4
Provision for income taxes		2.6		2.0
Net income		17.4	%	5.4	%

 

*           Excludes stock-based compensation

 

Three Months Ended April 30, 2005 and 2004

 

Net Revenue

 

		Three Months Ended April 30,
		2005			2004			% Change
Net revenue		$	364,770		$	269,577		35.3	%

 

Net revenue consists primarily of product revenue from sales of our semiconductor devices, and to a much lesser extent, development revenue derived from development contracts with our customers. Net revenue is gross revenue, net of accruals for estimated sales returns and allowances. The increases in net revenue in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 reflects a significant increase in volume shipments of our storage System-on-Chips, or SOCs, which increased $63.9 million, wireless products, which increased $17.5 million, and system controllers, which increased $6.5 million. The increases in net

 

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revenue are primarily due to increased acceptance of our storage SOC products by hard disk drive manufacturers, increased market share gains in the PC desktop segment with our storage SOC products and volume shipments of our wireless products and system controllers from new design wins. Revenue derived from development contracts increased in absolute dollars during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005, but represented less than 10% of net revenue for each period.

 

We expect that revenue for fiscal 2006 will increase from the level of revenue we reported in fiscal 2005 due to increases in shipments and volume production of our storage SOCs into the PC desktop segment and consumer storage electronics. Also, we expect additional growth in fiscal 2006 compared to fiscal 2005 due to increases in shipments of our WLAN products from new design wins and our Gigabit Ethernet products.

 

A portion of our revenue is concentrated with a relatively small number of customers. For the quarter ended April 30, 2005, four customers each represented more than 10% of our net revenues for a combined total of 54% of our net revenue. For the quarter ended April 30, 2004, four customers each represented more than 10% of our net revenue for a combined total of 51% of our net revenue. In addition, one distributor accounted for approximately 11% and 14% of our net revenue in the quarters ended April 30, 2005 and 2004, respectively.

 

Because we sell our products to many OEM manufacturers who have manufacturing operations located in Asia, a significant percentage of our sales are made to customers located outside of the United States. Sales to customers located in Asia represented 94% and 93% for the three months ended April 30, 2005 and April 30, 2004, respectively. The rest of our sales are to customers located in the United States and other geographic regions. We expect that a significant portion of our revenue will continue to be represented by sales to our customers in Asia. Substantially all of our sales to date have been denominated in United States dollars.

 

Cost of Goods Sold

 

		Three Months Ended April 30,
		2005			2004			% Change
Cost of goods sold		$	175,244		$	127,836		37.1	%
% of net revenue		48.0		%	47.4		%
Gross margin		52.0		%	52.6		%

 

Cost of goods sold consists primarily of the costs of manufacturing, assembly and test of integrated circuit devices and related overhead costs, and compensation and associated costs relating to manufacturing support, logistics and quality assurance personnel. Gross margin is calculated as net revenue less cost of goods sold as a percentage of net revenue. The decrease in gross margin percentage for the three months ended April 30, 2005 compared to the three months ended April 30, 2004 was primarily due to increased royalties of $1.9 million, increased warranty charges of $0.8 million and an increase in period costs of $1.8 million due to a reduction in volume purchase credits received from a vendor, partially offset by a decrease in inventory excess and obsolescence charges of $3.2 million for older, slow-moving products. The increase in royalties in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was due to higher sales of products that integrated licensed technology. The increase in warranty charges is due to increased volume of sales and extended warranties for certain customers. The decrease in inventory excess and obsolescence charges in the first quarter of fiscal 2006 compared to fiscal 2005 was due to better visibility of forecasted demand in the first quarter of fiscal 2006. The costs associated with contracted development work are included in research and development expense. Our gross margins are primarily driven by product mix; however, our margins may fluctuate in future periods due to, among other things, increased pricing pressures from our customers and competitors, particularly in the consumer product markets that we are targeting, charges for obsolete or potentially excess inventory, changes in the costs charged by our manufacturing and test subcontractors and changes in the amount of development revenue recognized.

 

Research and Development

 

		Three Months Ended April 30,
		2005			2004			% Change
Research and development		$	71,898		$	63,272		13.6	%
% of net revenue		19.7		%	23.5		%

 

Research and development expense consists primarily of compensation and associated costs relating to development personnel, prototype costs, depreciation and amortization expense, and allocated occupancy costs for these operations. The increase in research and development expense in absolute dollars in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was primarily due to the net hiring of 114 additional development personnel, which resulted in an increase in salary and related costs of

 

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$5.1 million. Additionally, we incurred increased costs for depreciation and amortization expense of $1.8 million arising from purchases of property, equipment and technology licenses and other allocated expenses of $1.6 million related to our expanding operations.

 

We expect that research and development expense will increase in absolute dollars in future periods as we continue to devote resources to develop new products, migrate to lower process geometries, meet the changing requirements of our customers, expand into new markets and technologies and hire additional personnel.

 

Selling and Marketing

 

		Three Months Ended April 30,
		2005			2004			% Change
Selling and marketing		$	20,989		$	18,701		12.2	%
% of net revenue		5.8		%	7.0		%

 

Selling and marketing expense consists primarily of compensation and associated costs relating to sales and marketing personnel, sales commissions, promotional and other marketing expenses, and allocated occupancy costs for these operations. The increase in selling and marketing expense in absolute dollars in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was primarily due to the net hiring of 50 additional sales and marketing personnel, which resulted in an increase in salary and related costs of $1.0 million. Additionally, we incurred higher commission costs of $1.5 million primarily due to an increase in sales.

 

We expect that selling and marketing expense will increase in absolute dollars in future periods as we hire additional sales and marketing personnel and expand our sales and marketing efforts in emerging product markets such as power management and consumer applications for our wireless and storage products.

 

General and Administrative

 

		Three Months Ended April 30,
		2005			2004			% Change
General and administrative		$	6,738		$	6,837		(1.4	)%
% of net revenue		1.9		%	2.5		%

 

General and administrative expense consists primarily of compensation and associated costs relating to general and administrative personnel, fees for professional services and allocated occupancy costs for these operations. The decrease in absolute dollars in general administrative expense in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was primarily due to a decrease of $1.5 million in attorney fees associated with our on-going legal proceedings. Offsetting the decrease in general and administrative expense was an increase in salary and related costs of $0.9 million due to an increased net hiring of 30 additional administrative personnel as a result of our expanding operations.

 

We expect that general and administrative expenses will remain consistent in fiscal 2006 compared to fiscal 2005 as we continue to focus on cost containment measures.

 

Amortization of Stock-Based Compensation

 

		Three Months Ended April 30,
		2005			2004			% Change
Amortization of stock-based compensation		$	871		$	1,388		(37.2	)%
% of net revenue		0.2		%	0.5		%

 

We have recorded deferred stock-based compensation in connection with the grant of stock options to our employees and directors prior to our initial public offering of common stock and in connection with the assumption and grant of stock options as a result of our acquisitions. Deferred stock-based compensation is being amortized using an accelerated method over the remaining option vesting period. The decrease in amortization expense in both absolute dollars and percentage of net revenue in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 primarily resulted from less amortization expense as a result of the graded-vesting method which results in lower amortization expense over the vesting period. For a discussion of the effects of future expensing of stock options, see “Recent Accounting Pronouncements” below.

 

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Amortization and Write-off of Acquired Intangible Assets and Other

 

		Three Months Ended April 30,
		2005			2004			% Change
Amortization of acquired intangible assets and other		$	19,759		$	33,258		(40.6	)%
% of net revenue		5.4		%	12.3		%

 

In connection with the acquisition of MSIL in the fourth quarter of fiscal 2001, we recorded $434.7 million of acquired intangible assets. In connection with the acquisition of RADLAN in June 2003, we recorded $5.7 million of acquired intangible assets. The acquired intangible assets from the RADLAN acquisition are being amortized over their estimated economic lives of two to five years.

 

During the first quarter of fiscal year 2005, we entered into a technology license and non-assert agreement with a licensor pursuant to which the parties agreed to not take action against each other relative to the use of certain technologies. Under this arrangement, we agreed to make a one-time payment of $13.5 million, which is included in amortization and write-off of acquired intangible assets and other. The decrease in amortization and write-off of acquired intangible assets and other in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was due mainly to this $13.5 million charge for payment made on the technology license and non-assert agreement.

 

Interest and Other Income, net

 

		Three Months Ended April 30,
		2005			2004			% Change
Interest and other income, net		$	3,612		$	1,672		116.0	%
% of net revenue		1.0		%	0.6		%

 

Interest and other income, net consists primarily of interest earned on cash, cash equivalents and short-term investment balances, offset by interest paid on capital lease obligations. The increase in interest and other income, net for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 is primarily due to higher interest income due to higher comparable invested cash balances and higher yields on our investments, partially offset by a decrease in realized gains of $0.3 million on the sale of marketable securities from the first quarter of fiscal 2005.

 

Provision for Income Taxes

 

		Three Months Ended April 30,
		2005			2004			% Change
Provision for income taxes		$	9,351		$	5,460		71.3	%
% of net revenue		2.6		%	2.0		%

 

Our effective tax rate was 12.8% for the three months ended April 30, 2005 compared to 27.4% for the three months ended April 30, 2004. The effective tax rate decreased due to an increase in profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and a decrease in non-operational expenses, such as stock based compensation, nondeductible acquisition related expenses, and asset impairment.

 

Liquidity and Capital Resources

 

Our principal source of liquidity as of April 30, 2005 consisted of $726.7 million of cash, cash equivalents and short-term investments. Since our inception, we have financed our operations through a combination of sales of equity securities, cash generated by operations and cash assumed in acquisitions.

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities was $68.9 million for the three months ended April 30, 2005 compared to $28.0 million for the three months ended April 30, 2004. The cash inflow from operations in the three months of fiscal 2006 was primarily a result of our generation of income during the period and changes in working capital. Non-cash charges in the first three months of fiscal 2006 included $19.8 million related to amortization of acquired intangible assets, $13.4 million of depreciation and amortization expense and $0.9 million of amortization of stock-based compensation. Significant working capital changes contributing to positive

 

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