| GENESIS MICROCHIP INC /DE ITEM 1A RISK FACTORS Our quarterly revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in our stock price |
| Our historical revenues and operating results have varied significantly from quarter to quarter |
| Moreover, our actual or projected operating results for some quarters may not meet the expectations of stock market analysts and investors, which may cause our stock price to decline |
| In addition to the factors discussed elsewhere in this “Risk Factors” section, a number of factors may cause our revenue to fall short of our expectations or cause fluctuations in our operating results, including: • Our ability to gain “design wins” with our customers and ramp new designs into production volumes; • Growth rate of the flat-panel TV and LCD monitor markets; • Seasonal consumer demand for flat-panel TVs and LCD monitors into which our products are incorporated; • Customer inventory levels and market share; • Changes in the mix of products we sell, especially between our higher-priced TV/video products and our lower-priced monitor products, and between our legacy two-chip solutions and newer one-chip solutions; • Increased competition and competitive pricing pressures; • Availability and pricing of panels and other components for flat-panel TVs and LCD monitors; • Wafer costs and other product fabrication costs; • Foreign exchange rate fluctuations, research and development tax credits and other factors that impact tax rates; • Changes in product costs or manufacturing yields or available production capacity at our fabrication facilities; and • Costs and outcome of legal proceedings |
| 7 _________________________________________________________________ [9]Table of Contents As a result of the fluctuation in our revenues and operating results, our stock price can be volatile, especially if our actual financial performance in a quarter deviates from the financial targets we set at the beginning of that quarter, or from market expectations |
| Our success will depend on the growth of the market for flat panel televisions and LCD monitors, and our customers’ share of those markets |
| Our ability to generate revenues depends on the growth of the market for flat-panel televisions, LCD computer monitors, and digital televisions |
| Since we do not sell to every manufacturer in those markets, our revenues also depend on how well our customers perform in those markets |
| To the extent that our customers’ share of the flat panel television, LCD monitor or digital television markets declines or does not grow, the sales of our products will be negatively impacted |
| In addition, our growth will also depend upon emerging markets for consumer electronics markets such as HDTV The potential size of these markets and the timing of their development are uncertain and will depend in particular upon: • A continued reduction in the costs of products in the respective markets; • The availability, at a reasonable price, of components required by such products (such as LCD panels); and • The emergence of competing technologies and standards |
| These and other potential markets may not develop as expected, which would harm our business |
| We must develop new products and enhance our existing products to react to rapid technological change and market demands |
| We must develop new products and enhance our existing products with improved technologies to meet rapidly evolving customer requirements and industry standards |
| In addition, we are developing products for digital television, which is a new market and a new application for our display technology |
| We cannot assure you that we will be able to transition our current technology to meet the demands of the digital television market |
| We need to design products for customers that continually require higher functionality at lower costs |
| We must, therefore, continue to add features to our products and to include these features on a single chip |
| The development process for these advancements is lengthy and will require us to accurately anticipate technological innovations and market trends |
| Developing and enhancing these products is time-consuming, costly and complex |
| There is a risk that these developments and enhancements will be late, fail to meet customer or market specifications, and will not be competitive with other products using alternative technologies that offer comparable functionality |
| We may be unable to successfully develop new products or product enhancements |
| Any new products or product enhancements may not be accepted in new or existing markets |
| If we fail to develop and introduce new products or product enhancements, that failure will harm our business |
| We face intense competition and may not be able to compete effectively |
| The markets in which we operate are intensely competitive and are characterized by technological change, evolving industry standards and rapidly declining average selling prices |
| We compete with both large and small companies, including ATI Technologies, Broadcom Corp, Intel Corp, LSI Logic Corp, Micronas Semiconductor Holding AG, Mediatek Corp, Mstar Semiconductor, Inc, National Semiconductor, Novatek Microelectronics, Philips Semiconductors, a division of Philips Electronics NV, Pixelworks, Inc, Realtek Semiconductor Corp, Silicon Image, Inc, ST Microelectronics, Inc, Trident Microsystems, Inc, Vastview and Zoran Corporation |
| In addition, many of our current and potential customers have their own internally developed integrated circuit solutions, and may choose not to purchase solutions from third party suppliers like Genesis |
| We may also face competition from start-up companies |
| 8 _________________________________________________________________ [10]Table of Contents As the markets for our products continue to develop, our current customers may increase reliance on their own internally developed solutions, and competition from diversified electronic and semiconductor companies will intensify |
| Some competitors, who may include our own customers, are likely to include companies with greater financial and other resources than we have |
| Our overseas competitors have reduced cost structures that enable them to compete aggressively on price |
| Increased competition could harm our business, by, for example, increasing pressure on our profit margins or causing us to lose customers |
| Also, the Court of Appeals for the Federal Circuit has affirmed the judgment of the federal district court for the Eastern District of Virginia that we have received a license from Silicon Image, Inc |
| for certain of their DVI and HDMI patents, and must pay Silicon Image royalties on all of our DVI and HDMI products |
| This judgment could hinder our ability to compete with unlicensed competitors that are not required to pay royalties on competing products |
| Our customers experience fluctuating product cycles and seasonality, which causes their sales to fluctuate |
| Our products are incorporated into flat panel and CRT displays |
| Because the market for flat panel displays is characterized by numerous new product introductions, our operating results may vary significantly from quarter to quarter |
| Our customers also experience seasonality in the sales of their products, which affects their orders of our products |
| Typically, the second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of our sales |
| Also, our sales in the first quarter of the calendar year may be lower as a result of the Chinese New Year holiday in Asia |
| We expect these sales fluctuations to continue for the foreseeable future |
| A loss of any of our major customers could have a significant impact on our business |
| The markets for our products are highly concentrated |
| Sales to our largest five customers accounted for 51prca of our revenues, and for our largest customer 15prca, for the year ended March 31, 2006 |
| We expect that a small number of customers will continue to account for a large amount of our revenues |
| The decision by any large customer to decrease or cease using our products could harm our business |
| In addition, our customers sell to a limited number of original equipment manufacturers (OEMs) |
| The decision by any large OEM to decrease or cease using our customer’s products could, in turn, cause our customer to decrease or cease buying from us |
| Most of our sales are made on the basis of purchase orders rather than long-term agreements so that any customer could cease purchasing products at any time without penalty |
| We must sell our current products in greater volumes, or introduce new products with improved margins |
| Average selling prices for our products have declined, in many cases significantly |
| When average selling prices decline, our revenues decline unless we are able to sell more units, and our gross margin dollars decline unless we are able to reduce our manufacturing and/or other supply chain costs by a commensurate amount |
| We therefore need to sell our current products in greater volumes to offset the decline in their ASPs, while also introduce new products that have improved gross margins |
| Our semiconductor products are complex and are difficult to manufacture cost-effectively |
| The manufacture of semiconductors is a complex process |
| 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 yield problems may occur well into the production cycle, when a product exists which can be physically analyzed and tested |
| Low yields negatively impact our gross margins and our financial results |
| In the past, we have encountered defects and errors in our products |
| 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, increased product returns, and product liability claims against us which may not be covered by insurance |
| We subcontract our manufacturing, assembly and test operations |
| We do not have our own fabrication facilities, assembly or testing operations |
| Instead, we rely on others to fabricate, assemble and test all of our products |
| Most of our products use silicon wafers manufactured by Taiwan Semiconductor Manufacturing Corporation, the loss of which could result in a material increase in the price we must pay for silicon wafers |
| There are many risks associated with our dependence upon outside manufacturing, including: • Lack of adequate capacity during periods of excess demand; • Increased manufacturing cost or the unavailability of product in the event that manufacturing capacity becomes constrained; • Reduced control over manufacturing and delivery schedules of products; • Reduced control over quality assurance and reliability; • Difficulty of management of manufacturing costs and quantities; • Potential misappropriation of intellectual property; and • Political or environmental risks (including earthquake and other natural disasters) in Taiwan, where the manufacturing facilities are located; We depend upon outside manufacturers to fabricate silicon wafers on which our integrated circuits are imprinted |
| These wafers must be of acceptable quality and in sufficient quantity and the manufacturers must deliver them to assembly and testing subcontractors on time for packaging into final products |
| We have at times experienced delivery delays and long manufacturing lead times |
| These manufacturers fabricate, test and assemble products for other companies |
| We cannot be sure that our manufacturers will devote adequate resources to the production of our products or deliver sufficient quantities of finished products to us on time or at an acceptable cost |
| The lead-time necessary to establish strategic relationships with new manufacturing partners is considerable |
| We would be unable to readily obtain an alternative source of supply for any of our products if this proves necessary |
| Any occurrence of these manufacturing difficulties could harm our business or cause us to incur costs to obtain adequate and timely supply of products |
| Intellectual property infringement suits brought against us or our customers may significantly harm our business |
| We defended claims brought against us by Silicon Image, Inc, alleging that certain of our products that contain digital receivers infringe various Silicon Image patent claims |
| In addition, IP Innovation LLC has sued Dell Computer Corporation, LG Electronics and other companies that incorporate our products into their displays, alleging patent infringement by certain consumer and professional electronics products, including some that contain our display controller products |
| This lawsuit, or any future patent infringement lawsuits, could subject us to permanent injunctions preventing us from selling the accused products and/or cause us to incur significant costs, including defense costs, settlements and judgments |
| In addition, as a result of this lawsuit or any future patent infringement lawsuits, our existing customers may decide to stop buying our products, and prospective customers may be unwilling to buy our products |
| 10 _________________________________________________________________ [12]Table of Contents Intellectual property lawsuits, regardless of their success, are time-consuming and expensive to resolve and divert management time and attention |
| In addition, if we are unsuccessful and our products (or our customers’ monitors or televisions that contain our products) are found to infringe the intellectual property rights of others, we could be forced to do one or more of the following: • Stop selling the products or using the technology that are allegedly infringing; • Attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; • Incur substantial costs including defense costs, settlements and/or judgments; and • Attempt to redesign those products that are allegedly infringing |
| As a result, intellectual property litigation could have a material adverse effect on our revenues, financial results and market share |
| We may be required to indemnify our customers against claims of intellectual property infringement |
| From time to time, we enter into agreements with our customers that contain indemnification provisions for claims based on infringement of third party intellectual property rights |
| As a result, if such a claim based on our products is made against an indemnified customer, we may be required under our indemnification obligations to defend or settle the litigation, and/or to reimburse that customer for its costs, including defense costs, settlements and judgments |
| We may also be subject to claims for indemnification under statutory or common law |
| For example, we have agreed to indemnify some of our customers in connection with lawsuits or threatened lawsuits by IP Innovation LLC against Dell Computer Corporation, LG Electronics and other consumer electronics companies, alleging patent infringement by various products that contain our display controller products |
| This or other patent litigation and any indemnification obligations we may have could have a material adverse effect on our revenues, financial results and market share, and could result in significant payments by us that could have a material adverse effect on our financial position |
| We may be unable to adequately protect our intellectual property |
| We rely on a combination of patent, copyright, trademark and trade secret laws, as well as non-disclosure agreements and other methods to protect our proprietary technologies |
| We have been issued patents and have pending United States and foreign patent applications |
| However, we cannot assure you that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology |
| 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 |
| Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries |
| In addition, it is possible that existing or future patents, or even court rulings in our favor regarding our patents, may be challenged, invalidated or circumvented |
| For example, US Customs has declined to apply our ITC exclusion order to MStar’s Tsunami (or TSU) |