California Micro Devices 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period Ended December 31, 2007
For The Transition Period from to
Commission File Number 0-15449
CALIFORNIA MICRO DEVICES CORPORATION
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of January 31, 2008 was 23,298,274.
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Form 10-Q for the Quarter Ended December 31, 2007
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements should be read in conjunction with the financial statements included with our annual report on Form 10-K for the fiscal year ended March 31, 2007. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of California Micro Devices Corporation (the “Company”, “CMD”, “we”, “us” or “our”) as of December 31, 2007, and the results of operations for the three and nine month periods ended December 31, 2007 and 2006, and cash flows for the nine month periods ended December 31, 2007 and 2006. Results for the three and nine month periods are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending March 31, 2008. Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform to the current 2008 presentation.
The unaudited condensed consolidated financial statements include the accounts of CMD and its wholly owned subsidiary. Intercompany accounts and transactions have been eliminated.
2. Use of Estimates
The preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical experience, input from sources outside of the company, and other relevant facts and circumstances. Actual results could differ from those estimates, and such differences could be material.
3. Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" (“FAS 157”). FAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact that FAS 157 will have on our results of operations and financial position.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, of adopting FAS 159 on our financial position and results of operations.
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In December 2007, the FASB issued Statement No. 141(R), “Business Combinations”(“FAS 141(R)”) which expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of FAS 141(R) is required for combinations after December 15, 2008. Early adoption and retroactive application of FAS 141(R) to fiscal years preceding the effective date are not permitted. We believe that there is no impact of FAS 141(R) on our financial position and results of operations.
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“FAS 160”) which re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under FAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for FAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of FAS 160 to fiscal years preceding the effective date are not permitted. We believe that there is no impact of FAS 160 on our financial position and results of operations.
4. Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents represent cash and money market funds as follows (in thousands);
Short-term investments represent investments in certificates of deposits and debt securities with remaining maturities less than 360 days. We invest our excess cash in high quality financial instruments. We have classified our marketable securities as available for sale securities. Our available for sale securities are carried at fair value, with unrealized gains and losses reported in a separate component of shareholders’ equity. Realized gains and losses and declines in value judged to be other than temporary, if any, on available for sale securities are included in interest income. Interest on securities classified as available for sale is also included in interest and other income, net. The cost of securities sold is based on the specific identification method.
Short-term investments were as follows (in thousands):
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5. Goodwill and Other Intangible Assets
Goodwill as of December 31, 2007, relates entirely to our purchase of Arques Technology, Inc. in April 2006. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets: ("SFAS 142") goodwill is tested for impairment on annual basis, or earlier if indicators of impairment exist. We perform our annual test for impairment of goodwill during our fourth fiscal quarter.
In connection with the Arques acquisition, $590,000 of the purchase consideration was allocated to intangible assets. The components of intangible assets as of December 31, 2007 were as follows (in thousands):
The amortization expense for developed and core technology and distributor relationships was $41,000 and $124,000 for the three and nine months ended December 31, 2007, respectively, as compared to $41,000 and $117,000 for the same periods a year ago. Based on intangible assets recorded at December 31, 2007, and assuming no subsequent additions to, or impairment of, the underlying assets, the future estimated amortization expense is approximately $41,000, $131,000 and $135,000 in the remainder of 2008, 2009 and 2010, respectively.
In assessing the recoverability of goodwill and intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. It is reasonably possible that these estimates, or their related assumptions, may change in the future, in which case we may be required to record impairment charges for these assets.
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6. Balance Sheet Components
Balance sheet components were as follows (in thousands):
7. Capital Lease Obligations
In October 2006, we entered into a three-year software lease agreement with Synopsys. The capitalized amount associated with the lease is $362,000. Concurrently, we also entered into a three-year software lease agreement with Applied Wave Research, for which the capitalized amount is $34,000. The imputed interest rate for each of these leases is approximately 8% and capital lease payments aggregating to $132,000 per year. The outstanding capital lease obligation as of December 31, 2007 and March 31, 2007 was $132,000 and $264,000 respectively. Interest expense on the lease during nine months ended December 31, 2007 was $9,000.
Total fixed assets purchased under capital leases and the associated accumulated amortization was as follows (in thousands):
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Amortization expense for fixed assets purchased under capital leases is included in the line item titled “depreciation and amortization” on our condensed consolidated statements of cash flows.
8. Employee Stock Benefit Plans
Our equity incentive program is a long-term retention program that is intended to attract and retain qualified management and technical employees and align shareholder and employee interests. Under our current equity incentive program, stock options have varying vesting periods typically over four years and are generally exercisable for a period of ten years from the date of issuance and are granted at prices equal to the fair market value of the Company’s common stock at the grant date. These plans are described fully in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended March 31, 2007.
Stock option activity for the nine months ended December 31, 2007, is as follows (in thousands, except share prices):
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $4.64 as of December 31, 2007, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date.
Net cash proceeds from the exercise of stock options for the three and nine months ended December 31, 2007 were $9,000 and $22,000 respectively compared to $94,000 and $509,000 for the same periods a year ago.
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The following table summarizes the ranges of the exercise prices of outstanding and exercisable options at December 31, 2007:
Employee Stock Purchase Plan (ESPP)
Our ESPP provides that eligible employees may contribute up to 15% of their eligible earnings, through accumulated payroll deductions, toward the semi-annual purchase of our common stock at 85% of the fair market value of the common stock at certain defined points in the plan offering periods. We issued 77,014 and 126,021 shares under the ESPP during the three and nine months ended December 31, 2007 respectively, compared to 53,527 and 87,565 for the same periods a year ago. Net cash proceeds from the ESPP were $251,000 and $436,000 for the three and nine months ended December 31, 2007 respectively, compared to 206,000 and $412,000 for the same periods a year ago.
Shares Available for Future Issuance under Employee Benefit Plans
As of December 31, 2007, 775,000 shares were available for future issuance, which included 317,000 shares of common stock available for issuance under our ESPP, 22,000 under our UK Sub-Plan and 436,000 under our 2004 Omnibus Incentive Compensation Plan.
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense for the three and nine months ended December 31, 2007 and 2006 resulting from employee stock options and ESPP included in our Condensed Consolidated Statements of Operations in accordance with FAS 123(R) (in thousands):
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The effect of recording employee stock-based compensation expense for the three and nine months ended December 31, 2007 and 2006 was as follows (in thousands, except per share amounts):
Income tax benefit of $16,000 and $22,000 was realized from ESPP purchases during the three and nine months ended December 31, 2007, respectively, whereas no such benefit was realized during the same periods a year ago.
The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted average assumptions for the three and nine months ended December 31, 2007 and 2006, respectively:
We currently estimate our forfeiture rate to be 17%, which is based on an analysis of expected forfeiture data using our current demographics and probabilities of employee turnover.
As of December 31, 2007, we had $2.3 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average period of 3.2 years.
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9. Stock Issuances
During the three and nine months ended December 31, 2007 and 2006, we issued the following shares of common stock under our employee stock option and employee stock purchase plans:
10. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):
Basic income (loss) per share was computed using the net income (loss) and weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the additional shares issuable upon the assumed exercise of stock options.
Due to our net loss for the nine months ended December 31, 2007 and 2006, all of our outstanding options were excluded from the diluted loss per share calculation because their inclusion would have been anti-dilutive. If we had earned a profit during the nine months ended December 31, 2007 and 2006, we would have added 39,832 and 139,952 common equivalent shares respectively, to our basic weighted-average shares outstanding to compute the diluted weighted-average shares outstanding.
Options to purchase 4,827,604 and 4,278,287 shares of common stock were outstanding during the three months ended December 31, 2007 and 2006, but were not included in the computation of diluted earnings per share because the effect was antidilutive.
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11. Comprehensive Income (Loss)
Comprehensive income (loss) is principally comprised of net income (loss) and unrealized gain on our available for sale securities. Comprehensive income (loss) for the three and nine months ended December 31, 2007 and 2006 was as follows (in thousands):
12. Income Taxes
Effective at the beginning of the first quarter of fiscal 2008, we adopted the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold of more-likely-than-not to be sustained upon examination, specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions.
As a result of the implementation of FIN 48, we recognized a $149,000 increase in the liability for unrecognized tax benefits related to tax positions taken in prior periods. This increase was accounted for as a cumulative effect of a change in accounting principle that resulted in an increase to accumulated deficit.
The amount of unrecognized tax benefits as of April 1, 2007 after the FIN 48 adjustment was $175,000. For the nine months ended December 31, 2007, there was no significant change to the liability for unrecognized tax benefits booked at the beginning of the year.
Our policy is to include interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the amount of any accrued interest or penalties associated with any unrecognized tax positions was $49,000. The additional amount of interest and penalties for the nine months ended December 31, 2007 was insignificant.
We estimated that it is more likely than not that approximately $2.3 million and $2.2 million, respectively, of the deferred tax assets as of December 31, 2007 and March 31, 2007 will be realized in the following year. As of December 31, 2007, a valuation allowance of approximately $22.8 million was recorded against the net deferred tax assets. The valuation allowance is decreased by approximately $0.6 million during the nine months ended December 31, 2007 primarily due to revisions in estimates of our ability to realize deferred tax assets.
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We file income tax returns in the U.S. federal jurisdiction and in several states and foreign jurisdictions. As of December 31, 2007, the federal returns for the years ended March 31, 2005 through the current period and certain state returns for the years ended March 31, 2004 through the current period are still open to examination. However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.
13. Segment Information
Our operations are classified into one operating segment. A significant portion of our net sales is derived from a relatively small number of customers. Our net sales from customers and distributors, individually representing more than 10% of total net sales during three and nine months ended December 31, 2007 and 2006, are as follows;
* Distributor accounted for less than 10% of total net sales during the period.
Net sales to geographic regions reported below are based on the customers’ ship to locations (amounts in millions):
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We have been subject to a variety of federal, state and local regulations in connection with the discharge and storage of certain chemicals used in our manufacturing processes, which are now fully outsourced to independent contract manufacturers. We have obtained all necessary permits for such discharges and storage, and we believe that we have been in substantial compliance with the applicable environmental regulations. Industrial waste generated at our facilities was either processed prior to discharge or stored in double-lined barrels until removed by an independent contractor. With the completion of our Milpitas site remediation and the closure of our Tempe facility during fiscal 2005, we now expect our environmental compliance costs to be minimal.
We enter into certain types of contracts from time to time that require us to indemnify parties against third party claims. These contracts primarily relate to (1) certain agreements with our directors and officers under which we may be required to indemnify them for the liabilities arising out of their efforts on behalf of the company; and (2) agreements under which we have agreed to indemnify our contract manufacturers and customers for claims arising from intellectual property infringement or in some instances from product defects or other issues. The conditions of these obligations vary and generally a maximum obligation is not explicitly stated. Because the obligated amounts under these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. We have not recorded any associated obligations at December 31, 2007 and March 31, 2007. We carry coverage under certain insurance policies to protect ourselves in the case of any unexpected liability; however, this coverage may not be sufficient.
We typically provide a one-year warranty that our products will be free from defects in material and workmanship and will substantially conform in all material respects to our most recently published applicable specifications although sometimes we provide shorter or longer warranties, especially to some of our larger OEM customers. We have experienced minimal warranty claims in the past, and we accrue for such contingencies in our sales allowances and return reserve.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report.
Forward Looking Statements>
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products will decline approximately 15% per year; (2) our having a target gross margin of 38% to 40%; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our expectation not to pay dividends in the foreseeable future; (6) our plan to examine goodwill we recorded from our acquisition of Arques Technology for impairment on or before the end of fiscal 2008; (7) our having a long term target for research and development expenses of 9% to 10% of sales. (8) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially; (9) our expectation to sell in the fourth quarter the wafers to one customer which were delayed from the third quarter due to the ASMC wafer fab shut down in late October and November; (10) our expectation of further cost reductions of our products in future and (11) our expectation of future interest income to reduce significantly as a result of decline in interest rates. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our core markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful developing new products which our customers will design into their products and whether design wins and bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
We design and sell application specific protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets. We are a leading supplier of protection devices for mobile handsets that provide Electromagnetic Interference (EMI) filtering and Electrostatic Discharge (ESD) protection and of low capacitance ESD protection devices for digital consumer electronics and personal computers. Both types of protection devices are typically used to protect various interfaces, both external and internal, used in our customers’ products. Our protection products are built using our proprietary silicon manufacturing process technology and provide the function of multiple discrete passive components in a single silicon chip. They occupy significantly less space, cost our customers less on a total cost of ownership basis, offer higher performance and are more reliable than traditional solutions based on discrete passive components. Some of these devices also include active circuit analog elements that provide additional functionality.
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We also offer application specific display electronic devices for the mobile handset display market that include high speed serial interface display controllers and white light emitting diode (LED) drivers. Our serial interface display controller products features the industry’s smallest solution form factor and unique audio and video features. Our white LED drivers provide an optimal voltage and current to illuminate white LEDs employed in mobile handsets as liquid crystal display (LCD) backlights and camera flash applications. Our display electronics devices are designed using industry standard active analog and mixed signal process technology.
At the end of October, one of our wafer fab partners, ASMC of Shanghai, experienced a power failure which impacted some of its in-process wafers, including some for us, and its wafer fab lines, including some lines which make product for us and in some cases are our only current source for such product. As a result of responsive steps taken by ASMC and ourselves, we currently believe that the main implication of the power failure was that a wafer order from a customer which was scheduled for shipment in the third quarter of fiscal 2008 was delayed but is now expected to be shipped in the fourth quarter of fiscal 2008.
End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products.
We are completely fabless, using independent providers of wafer fabrication services. We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our contract wafer manufacturers, assemblers and test houses.
Third Quarter Key Financial Highlights
The following are key financial highlights of third quarter of fiscal 2008:
Net Sales of $15.0 Million: Our net sales were $15.0 million in third quarter of fiscal 2008, down 16% from $17.7 million in the same period a year ago.
Gross Margin of $4.9 Million: Our gross margin was $4.9 million (32% of our net sales) in the third quarter of fiscal 2008 as compared to gross margin of $6.3 million (36% of our net sales) in the same period a year ago.
Net Income of $0.01 per Share: Our net income per share, basic and diluted, was $0.01 in the third quarter of fiscal 2008 compared to net income per share, basic and diluted, of $0.03 in the same period a year ago.
Cash Provided by Operating Activities of $3.6 Million: We generated operating cash inflow of $3.6 million during the nine months ended December 31, 2007 as compared to $6.0 million in the same period a year ago.
Cash* Position: We ended the third quarter of fiscal 2008 with a cash position of $51.2 million as compared to $49.0 million, as of March 31, 2007.
* Cash = Cash and cash equivalents + Short-term investments
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Results of Operations
The table below shows our net sales, cost of sales, gross margin, expenses and net income (loss), both in dollars and as a percentage of net sales, for the three and nine months ended December 31, 2007 and 2006 (in thousands):
Net sales by market for three months ended December 31, 2007 and 2006 were as follows (in millions):
Our net sales declined to $15.0 million during the three months ended December 31, 2007 from $17.7 million during the same period a year ago. The decline in our product sales in mobile handset market was primarily due to two factors a) lower sales to a major customer as a result of share shifts in the mobile handset market and competition as well as b) price decreases of our products. These declines were partially offset by increases in unit sales to other customers. Sales from products for the personal computer and digital consumer market increased by 26% during three months ended December 31, 2007 compared to same period a year ago.
Total units sold during the three months ended December 31, 2007 decreased to approximately 178 million units from approximately 255 million units during the same period a year ago.
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Net sales by market for nine months ended December 31, 2007 and 2006 were as follows (in millions):
Our net sales declined to $44.2 million during the nine months ended December 31, 2007 from $52.5 million during the same period a year ago. The decline in our product sales in mobile handset market was primarily due to two factors a) lower sales to a major customer as a result of share shifts in the mobile handset market, competition and inventory adjustments as well as b) price decreases of our products. These declines were partially offset by increases in unit sales to other customers. Sales from products for the personal computer and digital consumer market increased by 10% during nine months ended December 31, 2007 compared to same period a year ago.
Total units sold during the nine months ended December 31, 2007 decreased to approximately 539 million units from approximately 685 million units during the same period a year ago.
Gross margin decreased by $1.5 million and $5.7 million for the three and nine months ended December 31, 2007 respectively, compared to the same periods a year ago due to the following reasons:
The gross margin decrease was primarily driven by a decrease in prices and volume of our products as well as change in our product mix partially offset by product cost reductions. Our ASP declined 9% based on a constant mix of products in the third quarter of fiscal 2008 as compared to the same period a year ago. In the future we expect our ASP for similar products based on a constant mix of products to decline at a rate of approximately 15% per year. Units sold in mobile handset market decreased by 39% and units sold in digital consumer electronics and personal computer markets increased by 30% during the quarter ended December 31, 2007 as compared to the same quarter a year ago. The cost reductions of our products were primarily due to outsourcing with lower cost subcontractors and continued improvement in our assembly and testing processes.
As a percentage of sales, gross margin decreased to 32% for the three and nine months ended December 31, 2007, compared to 36% and 38% for the three and nine months ended December 31, 2006, respectively. Our long-range gross margin target remains 38% to 40%. However, our gross margin could fail to achieve this target range or could decline.
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Research and Development
Research and development expenses consist primarily of compensation and related costs for employees, prototypes, masks and other expenses for the development of new products, process technology and packages. The decrease in research and development expenses for the three and nine months ended December 31, 2007, compared to the three and nine months ended December 31, 2006, respectively, was due to the following reasons:
Research and development expenses decreased by $0.2 and $1.0 million during three and nine months ended December 31, 2007, respectively, as compared with the same periods a year ago, primarily due to the timing of our new product development projects. Research and development expenses decreased primarily due to lower expenses related to development of our serial interface display controller product and protection devices. This decline is considered temporary as the serial interface display controller and protection devices developments will begin to ramp up during the remainder of fiscal year 2008 and continue in fiscal 2009.
As a percentage of sales, research and development expenses decreased to 11% during the nine months ended December 31, 2007 from 12% during the same period