Annual Report (10-k)

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.

Our success depends on our ability to develop and bring to market innovative new technologies and semiconductor products as well as continued growth in consumer and customer demand for these new technologies and products. We may not be able to develop and bring to market such technologies and products in a timely manner because the process of developing high-performance semiconductor products is complex and costly.

Our future growth and success depends on the continued growth in the market acceptance of and the 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. This would have a negative impact on our business and results of operations.

Our future growth and success also depends on our ability to continuously develop and bring to market new and innovative products on a timely basis, such as our 60Ghz WirelessHD enabled mobile products. There can be no assurance that we will be successful in developing and marketing these new or other future products. Moreover, there is no assurance that our new or future products will 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 seen the growth in the demand for and revenue from the sale of our 60Ghz WirelessHD enabled mobile products that we anticipated when we undertook development of the product.  There is no way to make certain that any such 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. 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 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:

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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 in the past and expect to continue to make such acquisitions in the future as we look to develop and bring to market new and innovative semiconductor and products and technologies on a timely basis. 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 b asis. The acquisition of companies or intangible assets is a strategy we have used in the past and will continue to use 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 past or future 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:

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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 and continue to make 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 and will continue to make 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 s tandards, 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:

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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 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 over. These factors include, but are not limited to:

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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.

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 77.5%, 73.5% and 69.5% of total revenue for the years ended December 31, 2013, 2012 and 2011, respectively, is dependent on continued demand 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 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 d isproportionate 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

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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 lev erage 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 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 servi ces. 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 red uce our costs. Currently most of our products are manufactured in 180 nanometer, 130 nanometer, 65 nanometer and 55 nanometer geometry processes. We are now designing new products in 40 nanometer process technologies. 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 40 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.

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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 inc ur 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. A customer may decide to cancel or change its 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.

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 genera te 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 c ompensate 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 lo nger require such inventory, we may be left with excessive inventories, which could adversely affect our operating results.

Our continued success selling MHL ICs into the mobile phone market may ultimately be dependent on the number of end users who actually use the functionality provided by our IC.

Currently our smart phone customers implement a “mirroring” use case with our MHL ICs.  That is, 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 it is decided that this use case is no longer required as part of the base functionality of a mobile devices due to low end user usage or other reason, our customers may choose to remove our MHL IC from their design to reduce their sy stem cost.

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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, 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.  Today, Samsung and Sony are key customers and our MHL technology is well positioned within their products; however, we do not have a presence in the iOS or Windows eco-systems nor 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. 

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. E ach 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.

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, 2013, total revenue from Samsung Electronics accounted for 40.2% of our total revenue. No other customer generated revenues 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. For the year ended December 31, 2011, total revenue from Samsung Electronics and our distributors Edom Technology and Weikeng Group accounted for 23.4 %, 13.8% and 10.2% 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:

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.

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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 Marc h.  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 32.2%, 38.4% and 50.1% of our total revenue for the years ended December 31, 2013, 2012 and 2011, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

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 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.

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 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.

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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. Although we have not yet determined whether our products contain conflict minerals, if we determine (i) that our products do contain conflict minerals and (ii) that the conflict minerals 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.

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 effec tive 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, p roduction 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:

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, w e 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:

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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 pro duction 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 assembli ng, 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 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 c an 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, 2013, 2012 and 2011, approximately 52.7%, 57.4% and 67.1% of our total revenue 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:

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 %, 30.7% and 30.1% for the year ended December 2013, 2012 and 2011, 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.

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In addition, if we are required to invest significantly greater resources than an ticipated 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.

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 issue d 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 countrie s. 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 prope rty 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 aga inst 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.

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A material change in the agreements governing encryption keys we use could place additional restrictions on us, our distributors or contract manufacturers from shipping parts or significantly increase the cost to track parts throughout the distribution chain.

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. A key 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 thes e 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:

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 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 intelle ctual 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 also are entitled to receive a portion of the royalties paid by adopters of the HDMI and MHL specifications. There is no assurance that we will continue to be entitled to receive such royalties in the amounts that we have historically received or at all, in which case, the loss of such royalty revenue in whole or in part may adversely impact our financial results.

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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 specification in connection as our role as agent. There can be no assurance that, going forward, we will continue to act as agent of the HDMI specification and/or receive or to continue to oversee the management of all the adopter fees paid b y HDMI adopters, in which event our financial results may be adversely impacted.

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. Currently, we receive between 36% to 39% as our share of the royalty allocation. The HDMI founders have agreed to review the allocation of HDMI royalties every three years, and such a review is currently in process. Failure by the HDMI Founders to reach agreement on the allocation of royalties in the requisite timeframe will result in an interruption in our ability to recognize a portion of the royalties otherwise receivable by us for so long as agreement is not reached.  Such an interuption may have a material adverse effect on our financial results for the fiscal period in which it occurs. We cannot provide any assurance regarding the portion of HDMI royalties received by us in the future. Should the level of our royalty allocation be reduced materially, 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 stan dards 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 whi ch 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 us.

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. In 2013, 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. 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.

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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 numb er 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. Addit ionally, 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 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:

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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 discontinuanc e 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 o r 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 technica l, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our locations throughout the world. 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 busi ness. New regulations could make it more difficult or expensive to grant options to employees, we may incur 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 re quire 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

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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 u s 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.

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, 2013, 2012 and 2011 customers and distributors located in Japan generated 13.3%, 14.5% and 19.7% of our total revenue based on billing location, respectively, and customers and distributors located in Taiwan generated 14.5%, 22.3% and 26.2% of our total revenue based on billing location, respectively.

Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.

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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:

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.

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 whic h 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:

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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:

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.