Revenue from Contracts with Customers

We adopted ASC 606 effective on December 31, 2017, the first day of our 2018 fiscal year. Under the guidance in effect prior to the adoption of ASC 606, we deferred the recognition of revenue and the cost of revenue from certain sales until the distributors of our products reported that they had sold the products to their customers (known as “sell-through” revenue recognition). Under ASC 606, we recognize revenue on sales to all distributors upon shipment and transfer of control (known as “sell-in” revenue recognition). Under ASC 606, we will also recognize certain licensing revenues that were not recognizable under previous GAAP due to the fixed and determinable revenue recognition criteria not being met. As a result of this adoption, we revised our accounting policy for revenue recognition as detailed below.

We recognize revenue under the core principle of depicting the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following five step approach, as further described below: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to each performance obligation in the contract, and (5) recognize revenue when applicable performance obligations are satisfied.

Product Revenue

Identify the contract with a customer - Product revenues consist of sales to original equipment manufacturers, or OEMs, and distributors. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. In certain cases we consider firm forecasts that are agreed to by both us and the customer to be contracts. For sales to distributors, we have concluded that our contracts are with the distributor, rather than with the distributor’s end customer, as we hold a contract bearing enforceable rights and obligations only with the distributor. As part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk).

Identify the performance obligations in the contract - For each contract, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligations.

Determine the transaction price - In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. As our standard payment terms are less than one year, we have elected to apply the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.

Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return of our products held in their inventory or upon sale to their end customers. Revenue from sales to distributors is recognized upon the transfer of control to the distributor, which generally occurs upon shipment of product to the distributor. Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship and debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, a credit memo is issued to the distributor for the ship and debit claim. In determining the transaction price, we consider ship and debit price adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an analysis of historical ship and debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. Any differences between the estimated consideration and the actual amount received from the customer is recorded in the period that the actual consideration becomes known. Most of our distributors are entitled to limited rights of return, referred to as stock rotation, not to exceed 5% of billings, net of returns and ship and debit price adjustments. Stock rotation reserves are recorded based on historical return rates, as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that is expected to be returned.

Sales to OEMs and certain distributors are made under terms that do not include rights of return or price concessions after the product is shipped. Accordingly, the transaction price equals the invoice price and there is no variable consideration.

Allocate the transaction price to each performance obligation in the contract - Because our product revenue contracts generally include the delivery of a certain quantity of semiconductors as the single performance obligation, there is no allocation of revenue required across distinct performance obligations. However, we frequently receive orders for products to be delivered over multiple dates that may extend across several reporting periods. We invoice for each delivery upon shipment and recognize revenues for each distinct product delivered, assuming transfer of control has occurred. Payment term for invoices are generally 30 to 60 days.

Recognize revenue when applicable performance obligations are satisfied - Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment. In determining whether control has transferred, we also consider if there is a present right to payment and legal title, along with whether the risks and rewards of ownership have transferred to the customer. We have certain vendor-managed inventory arrangements with certain OEM customers whereby we ship product into an inventory hub location but for which control does not transfer until the customer consumes the inventory. In such cases revenue is recognized upon customer consumption.

Licensing and Services Revenue

Identify the contract with a customer - Our licensing and services revenue is comprised of revenue from our intellectual property ("IP") core licensing activity, patent monetization activities, and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and help us monetize our IP and accelerate marketing adoption curves associated with our technology and standards. We consider licensing arrangements with our customers to be the contract.

Identify the performance obligations in the contract - For each contract, we consider the promise to deliver a license that grants the customer the right to use the IP as well as any professional services provided under the contract, as distinct performance obligations.

Determine the transaction price - Our HDMI and MHL standards revenue, as well as certain IP licenses, include variable consideration in the form of usage-based royalties. We apply the provisions of ASC 606-10-55-65 in accounting for these types of arrangements, whereby we do not include estimated royalties in the transaction price at the origination of the contract but rather recognize royalty revenue as usage occurs.

HDMI royalty revenue is determined by a contractual allocation formula agreed to by the Founders of the HDMI consortium. The contractual allocation formula is subject to periodic adjustment, generally every three years. The most recent agreement expired on December 31, 2016 and a new agreement has not yet been entered into covering the period beginning January 1, 2017. While a new royalty sharing agreement is being negotiated with the other Founders of the HDMI consortium, the HDMI agent is unable to distribute the majority of the royalties collected to the Founders. We are recording revenue based on our estimated share of the royalties. This estimate will be adjusted once the Founders finalize the agreement.

Allocate the transaction price to each performance obligation in the contract - For contracts that include multiple performance obligations (most commonly those that include licenses and professional services), we allocate revenue to each performance obligation based on the best estimate of the standalone selling price of each obligation. The judgments regarding the allocation of revenue on licensing arrangements are not material to our financial statements.

Recognize revenue when applicable performance obligations are satisfied - We recognize license revenue at the point in time that control of the license transfers to the customer, which is generally upon delivery. We recognize professional service revenue as we perform the services. Royalty revenues are recognized as customers sell products that include our IP and are legally obligated to remit royalties to us. We receive payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days.

Impact on Financial Statements

We adopted ASC 606, on December 31, 2017 using the modified retrospective method. Under this transition method, we applied the provisions of the new standard to all customer contracts which had not been completed as of the date of adoption and recorded the cumulative effect of adoption to Accumulated Deficit on December 31, 2017. We have not restated any prior financial statements presented. ASC 606 requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018 as compared to the guidance that was in effect in 2017, and an explanation of the reasons for significant changes. Such information is as follows:



Consolidated Statement of Operations	Three months ended March 31, 2018
(In thousands, except per share data)	As reported under new standard		Adjustments		Pro forma as if previous standard was in effect
Product revenue	95,109		(8,265	)	86,844
Licensing and services revenue	3,514		(1,212	)	2,302
Cost of product revenue	42,102		(3,819	)	38,283
Net loss	(5,952	)	(5,658	)	(11,610	)

Net loss per share, basic and diluted	(0.05	)	(0.04	)	(0.09	)



Consolidated Balance Sheets	As of March 31, 2018
(In thousands)	As reported under new standard		Adjustments		Pro forma as if previous standard was in effect
Accounts receivable, net of allowance for doubtful accounts	65,779		15,567		81,346
Inventories	77,917		(808	)	77,109
Prepaid expenses and other current assets	25,405		(9,102	)	16,303
Total assets	644,833		5,657		650,490

Accounts payable and accrued expenses (includes restructuring)	55,274		43		55,317
Deferred income and allowances on sales to distributors	—		38,673		38,673
Accumulated deficit	(456,413	)	(33,059	)	(489,472	)
Total liabilities and stockholders' equity	644,833		5,657		650,490



Consolidated Statement of Cash Flows	Three months ended March 31, 2018
(In thousands)	As reported under new standard		Adjustments		Pro forma as if previous standard was in effect
Cash flows from operating activities:
Net loss	(5,952	)	(5,658	)	(11,610	)
Accounts receivable, net	(8,867	)	(17,375	)	(26,242	)
Inventories	2,356		438		2,794
Prepaid expenses and other assets	(3,253	)	1,587		(1,666	)
Accounts payable and accrued expenses (includes restructuring)	1,567		(415	)	1,152
Deferred income and allowances on sales to distributors	—		21,423		21,423

The significant impacts of the new standard were to accelerate the recognition of revenues on both sales to certain distributors and certain licensing activities. As a result of adopting this standard, we recorded a cumulative effect adjustment of $27.4 million as a reduction to accumulated deficit on December 31, 2017, resulting primarily from $20.2 million of previously deferred distributor revenues and costs and $6.6 million of previously unrecognized licensing revenues.

Other matters

We generally provide an assurance warranty that our products will substantially conform to the published specifications for twelve months from the date of shipment. In some case the warranty period may be longer than twelve months, but the nature of the warranty is still for covering assurance that the product complies with agreed upon specifications and they are not separately priced or sold. Our liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. As such, we do not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.

Under the practical expedient provided by ASC 340-40-25-4, we generally expense sales commissions when incurred because the amortization period would have been less than one year. We record these costs within selling, general and administrative expenses.

Substantially all of our performance obligations are satisfied within twelve months. Accordingly, under the optional exemption provided by ASC 606-10-50-14, we do not disclose revenues allocated to future performance obligations of partially completed contracts.

We do not have any material contract liabilities recorded as of March 31, 2018. Contracts assets of $9.1 million relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI consortium, with collection dependent on events other than the passage of time, such as collection of licenses and royalties from customers by the HDMI licensing agent and the finalization of a new royalty sharing agreement. The contract assets are classified as Prepaid expenses and other current assets, and they are transferred to receivables when the rights become unconditional. During the quarter ended March 31, 2018, we recorded an additional $1.6 million of contract asset.

Disaggregation of revenue

The following tables provide information about revenue from contracts with customers disaggregated by major class of revenue and by geographical market, based on ship-to location of the end customer, where available, and ship-to location of distributor otherwise:



Major Class of Revenue	Three Months Ended
(In thousands)	March 31, 2018	April 1, 2017 *
Product revenue - Distributors	85,957	74,080
Product revenue - Direct	9,152	18,589
Licensing and services revenue	3,514	11,918
Total revenue	98,623	104,587

Revenue by Geographical Market	Three Months Ended
(In thousands)	March 31, 2018	April 1, 2017 *
Asia	71,921	73,458
Europe	12,142	11,080
Americas	14,560	20,049
Total revenue	98,623	104,587

* As noted above, prior period amounts have not been adjusted under the modified retrospective method of adopting ASC 606 and, therefore,
are presented under GAAP in effect during that period.