Document

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission file number: 001-34666

MaxLinear, Inc.

(Exact name of Registrant as specified in its charter)



Delaware		14-1896129
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5966 La Place Court, Suite 100 Carlsbad, California		92008
(Address of principal executive offices)		(Zip Code)

(760) 692-0711

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by 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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of May 2, 2017, the registrant had 65,458,802 shares of common stock, par value $0.0001, outstanding.

Table of Contents

MAXLINEAR, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		Page
Part I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	4
	Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	4
	Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016	5
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	44
Part II	OTHER INFORMATION	45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3.	Defaults Upon Senior Securities	77
Item 4.	Mine Safety Disclosures	77
Item 5.	Other Information	78
Item 6.	Exhibits	79

Table of Contents

PART I — FINANCIAL INFORMATION

Table of Contents


ITEM 1.	FINANCIAL STATEMENTS

MAXLINEAR, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except par value amounts)



	March 31, 2017			December 31, 2016

Assets
Current assets:
Cash and cash equivalents	$	89,121		$	81,086
Short-term restricted cash	615			614
Short-term investments, available-for-sale	63,637			47,918
Accounts receivable, net	57,836			50,487
Inventory	31,685			26,583
Prepaid expenses and other current assets	5,535			6,159
Total current assets	248,429			212,847
Long-term restricted cash	1,502			1,196
Property and equipment, net	19,162			20,549
Long-term investments, available-for-sale	—			5,991
Intangible assets, net	99,679			104,261
Goodwill	75,673			76,015
Other long-term assets	1,652			1,793
Total assets	$	446,097		$	422,652
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,319		$	6,757
Deferred revenue and deferred profit	5,684			5,991
Accrued price protection liability	21,947			15,176
Accrued expenses and other current liabilities	14,984			16,358
Accrued compensation	6,621			10,261
Total current liabilities	64,555			54,543
Deferred rent	9,075			9,656
Other long-term liabilities	6,454			6,029
Total liabilities	80,084			70,228

Commitments and contingencies	—			—
Stockholders’ equity:
Preferred stock, $0.0001 par value; 25,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.0001 par value; 550,000 shares authorized, 65,446 shares issued and outstanding at March 31, 2017 and 550,000 shares authorized, no shares issued or outstanding December 31, 2016, respectively	7			—
Class A common stock, $0.0001 par value; 441,124 shares authorized, no shares issued and outstanding at March 31, 2017 and 500,000 shares authorized, 58,363 shares issued and outstanding at December 31, 2016, respectively	—			6
Class B common stock, $0.0001 par value; 493,430 shares authorized, no shares issued and outstanding at March 31, 2017 and 500,000 shares authorized, 6,668 shares issued and outstanding at December 31, 2016, respectively	—			1
Additional paid-in capital	418,682			413,909
Accumulated other comprehensive loss	(1,207		)	(1,560		)
Accumulated deficit	(51,469		)	(59,932		)
Total stockholders’ equity	366,013			352,424
Total liabilities and stockholders’ equity	$	446,097		$	422,652

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in thousands, except per share data)



	Three Months Ended March 31,
	2017			2016
Net revenue	$	88,841		$	102,685
Cost of net revenue	35,917			41,515
Gross profit	52,924			61,170
Operating expenses:
Research and development	23,878			23,752
Selling, general and administrative	18,613			13,610
Restructuring charges	—			2,106
Total operating expenses	42,491			39,468
Income from operations	10,433			21,702
Interest income	195			170
Other expense, net	(144		)	(198		)
Income before income taxes	10,484			21,674
Provision for income taxes	2,021			993
Net income	$	8,463		$	20,681
Net income per share:
Basic	$	0.13		$	0.33
Diluted	$	0.12		$	0.31
Shares used to compute net income per share:
Basic	65,238			62,585
Diluted	69,149			66,643

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in thousands)



	Three Months Ended March 31,
	2017			2016
Net income	$	8,463		$	20,681
Other comprehensive income, net of tax:
Unrealized gain (loss) on investments, net of tax of $0 for the three months ended March 31, 2017 and 2016	(17		)	126
Unrealized gain (loss) on investments, net of tax	(17		)	126
Foreign currency translation adjustments, net of tax benefit of $35 for the three months ended March 31, 2017 and $0 for the three months ended March 31, 2016 ⁽¹⁾	370			108
Foreign currency translation adjustments, net of tax	370			108
Other comprehensive income	353			234
Total comprehensive income	$	8,816		$	20,915

____________________________


⁽¹⁾	Tax amount recognized in Other Long-Term Liabilities on the Consolidated Balance Sheets as part of long-term deferred tax liabilities.

See accompanying notes.

Table of Contents

MAXLINEAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)



	Three Months Ended March 31,
	2017			2016
Operating Activities
Net income	$	8,463		$	20,681
Adjustments to reconcile net income to cash provided by operating activities:
Amortization and depreciation	6,899			5,772
Provision for losses on accounts receivable	87			—
Amortization of investment premiums, net	47			149
Stock-based compensation	5,474			5,109
Deferred income taxes	155			233
Gain on disposal of property and equipment	(88		)	—
Change in fair value of contingent consideration	—			86
(Gain) loss on foreign currency	(216		)	124
Excess tax benefits on stock-based awards	(914		)	(1,565		)
Changes in operating assets and liabilities:
Accounts receivable	(7,436		)	1,359
Inventory	(5,102		)	3,022
Prepaid expenses and other assets	825			(2,416		)
Accounts payable, accrued expenses and other current liabilities	7,952			3,080
Accrued compensation	382			3,231
Deferred revenue and deferred profit	(307		)	2,457
Accrued price protection liability	6,771			(1,583		)
Other long-term liabilities	(320		)	(785		)
Net cash provided by operating activities	22,672			38,954
Investing Activities
Purchases of property and equipment	(743		)	(3,222		)
Purchases of intangible assets	(120		)	—
Purchases of available-for-sale securities	(30,577		)	(37,773		)
Maturities of available-for-sale securities	20,785			10,300
Net cash used in investing activities	(10,655		)	(30,695		)
Financing Activities
Repurchases of common stock	(334		)	(3		)
Net proceeds from issuance of common stock	361			1,727
Minimum tax withholding paid on behalf of employees for restricted stock units	(4,903		)	(1,092		)
Net cash provided by (used in) financing activities	(4,876		)	632
Effect of exchange rate changes on cash and cash equivalents	1,201			(7		)
Increase in cash, cash equivalents and restricted cash	8,342			8,884
Cash, cash equivalents and restricted cash at beginning of period	82,896			67,956
Cash, cash equivalents and restricted cash at end of period	$	91,238		$	76,840
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	421		$	30
Supplemental disclosures of non-cash activities:
Issuance of restricted stock units to Physpeed continuing employees	$	861		$	—
Issuance of accrued share-based bonus plan	$	3,314		$	—

See accompanying notes.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Organization and Summary of Significant Accounting Policies

Description of Business

MaxLinear, Inc. was incorporated in Delaware in September 2003. MaxLinear, Inc., together with its wholly owned subsidiaries, collectively referred to as MaxLinear, or the Company, is a provider of radio-frequency and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and wired and wireless infrastructure markets. MaxLinear's customers include module makers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, who incorporate the Company’s products in a wide range of electronic devices including Pay-TV operator set-top boxes, DOCSIS data and voice gateways, hybrid analog and digital televisions and consumer terrestrial set-top boxes, Direct Broadcast Satellite outdoor units, optical modules for data center, metro, and long-haul transport network applications, and RF transceivers and modem solutions for wireless carrier infrastructure applications. The Company is a fabless semiconductor company focusing its resources on the design, sale and marketing of its products.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of MaxLinear, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, or 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 disclosures required by GAAP for complete financial statements. All intercompany transactions and investments have been eliminated in consolidation. In the opinion of management, the Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income and cash flows.

The consolidated balance sheet as of December 31, 2016 was derived from the Company’s audited consolidated financial statements at that date. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission, or the SEC, on February 9, 2017, or the Annual Report. Certain prior period amounts have been reclassified to conform with the current period presentation. Interim results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes to unaudited consolidated financial statements. Actual results could differ from those estimates.

Summary of Significant Accounting Policies

Refer to the Company’s Annual Report for a summary of significant accounting policies. There have been no material changes to our significant accounting policies during the three months ended March 31, 2017.

Restricted Cash

As of March 31, 2017 and December 31, 2016, the Company has restricted cash of $2.1 million and $1.8 million, respectively. The cash is on deposit in connection with guarantees for certain office leases.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Adoption of the amendments in this guidance is expected to accelerate the timing of the Company’s revenue recognition on products sold via distributors which will change from the sell-through method to the sell-in method. The Company currently has no plans to alter its selling practices or terms of sales through distributors in anticipation of adoption of the amendments in this guidance. The Company has performed a preliminary assessment of the impact of adopting this new accounting standard on its consolidated financial position and results of operations and believes the change would not have a material impact on the Company's revenues for the year ending December 31, 2018 and comparative periods expected to be presented, based on the current volume and amount of distributor transactions. The Company plans to apply the guidance prospectively with an adjustment to retained earnings for the cumulative effect of adoption.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for the Company beginning in the first quarter of fiscal year 2017 and has been applied prospectively. The adoption of ASU No. 2015-11 by the Company in the first quarter of fiscal year 2017 did not have a material impact on the Company's consolidated financial position and results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update include a requirement to measure equity investments (except equity method investments) at fair value with changes in fair value recognized in net income; previously changes in fair value were recognized in other comprehensive income. The amendments in this update are effective for the Company beginning in the first quarter of fiscal year 2018. The adoption of the amendments in this update are not expected to have a material impact on the Company's consolidated financial position and results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this update are effective for the Company for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of the amendments in this update on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in this update is expected to have a material impact on the Company's consolidated financial position.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this update are effective for the Company beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for the Company for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. The new guidance requires, among other things, excess tax benefits and tax deficiencies to be recorded on a prospective basis in the income statement in the provision for income taxes when awards vest or are settled. On the statement of cash flows, excess tax benefits must be classified along with other income tax cash flows as an operating activity on either a prospective transition method or a retrospective transition method. Also, because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. The Company adopted ASU No. 2016-09 during the quarter ended June 30, 2016, as previously described in the Company's Form 10-Q for the period ended June 30, 2016 filed with the Securities Exchange Commission on August 8, 2016. ASU No. 2016-09 permitted early adoption in an interim period but required the adjustments to be reflected as of the beginning of the fiscal year that includes that interim period and accordingly, the Company restated previously reported results for the three months ended March 31, 2016. The impact of adoption on the Company's previously reported results for the three months ended March 31, 2016 is shown below and related to the inclusion of excess tax benefits in the provision for income taxes on a prospective basis as of the beginning of the period and the exclusion of excess tax benefits that would have been recognized in additional paid-in capital in assumed proceeds from applying the treasury stock method in the calculation of earnings per share.



	Three months ended March 31, 2016
	As reported		As adjusted
	(in thousands, except per share amounts)
Provision for income taxes	$	2,558	$	993
Net income	$	19,116	$	20,681
Basic earnings per share	$	0.31	$	0.33
Diluted earnings per share	$	0.29	$	0.31
Diluted weighted average shares outstanding	65,818		66,643

There was no cumulative effect on retained earnings in the consolidated balance sheet upon adoption since the Company has a full valuation allowance against U.S. deferred tax assets. The Company elected to continue to estimate forfeitures of share-based awards resulting in no impact to stock-based compensation expense, and is also continuing to classify cash paid by the Company when directly withholding shares for tax withholding purposes in cash flows from financing activities. On the statement of cash flows, excess tax benefits were classified along with other income tax cash flows as an operating activity upon adoption on a prospective basis.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments to eliminate the diversity in practice regarding the presentation and classification of certain cash receipts and cash payments, including, among other things, contingent consideration payments made following a business combination and proceeds from the settlement of insurance claims in the statement of cash flows. Cash payments not made soon after the acquisition date up to the amount of the contingent consideration liability recognized at the acquisition date should be classified as financing activities, with any excess payments classified as operating activities, whereas cash payments made soon after the acquisition date to settle the contingent consideration should be classified as investing activities. Cash proceeds received from settlement of insurance claims should be classified on the basis of the nature of the related losses. The amendments in this update are effective for fiscal years beginning with fiscal year 2018, including interim periods within those years, with early adoption permitted. The adoption of this guidance is not expected have a material impact on the Company's consolidated statement of cash flows.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

adoption is permitted as of the first quarter of fiscal 2017, or the beginning of the annual reporting period only. The Company has elected to early adopt the amendments in this update in the three months ended March 31, 2017. Due to a full valuation allowance on U.S. and certain foreign deferred tax assets, the adoption of the amendments in this update did not have a material impact on the Company’s consolidated financial position and results of operations for the three months ended March 31, 2017.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. When cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall, for each period that a statement of financial position is presented, disclose the line items and amounts of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents disaggregated by the line item in which they appear within the statement of financial position, with a sum to the total amount of cash, cash equivalents, restricted cash and restricted cash equivalents. The amendments in this update are effective for the Company beginning in fiscal 2018, including interim periods within that year and should be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The Company has elected to early adopt the amendments in this update in the three months ended March 31, 2017. The adoption did not have a material impact on the Company’s consolidated cash flows for the three months ended March 31, 2017 and 2016.

In December 2016, the FASB issued ASU No. 2016-19, Technical Corrections and Improvements. The new standard is intended to provide clarity to the Accounting Standards Codification, or ASC, or correct unintended application of the guidance that is not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. ASU No. 2016-19 is effective for annual and interim fiscal reporting periods beginning after December 15, 2017 with respect to the amendments that require transition guidance, and early adoption is permitted. All other amendments were effective on issuance. The Company is currently evaluating the expected impact of the amendments that require transition guidance, but does not expect these to have a material impact on its consolidated financial statements upon adoption.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses and provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in this update are effective for the Company beginning in the first quarter of 2018 and are required to be applied prospectively on or after the effective date. No disclosures are required at transition. Early application is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company plans to adopt the amendments in this update starting with 2017 acquisitions. Such adoption is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update are effective for the Company beginning with fiscal year 2020, including interim periods, with early adoption permitted for interim or annual



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.

2. Net Income Per Share

Net income per share is computed as required by the accounting standard for earnings per share, or EPS. Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock options, restricted stock units and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted EPS when their effect is dilutive.



	Three Months Ended March 31,
	2017		2016
	(in thousands, except per share amounts)
Numerator:
Net income	$	8,463	$	20,681
Denominator:
Weighted average common shares outstanding—basic	65,238		62,585
Dilutive common stock equivalents	3,911		4,058
Weighted average common shares outstanding—diluted	69,149		66,643
Net income per share:
Basic	$	0.13	$	0.33
Diluted	$	0.12	$	0.31

The Company excluded 0.4 million and 0.2 million common stock equivalents for the three months ended March 31, 2017 and 2016, respectively, resulting from outstanding equity awards for the calculation of diluted net income per share due to their anti-dilutive nature.

3. Business Combination

Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Backhaul Business of Broadcom Corporation

On July 1, 2016, the Company consummated the transactions contemplated by an asset purchase agreement entered into with Broadcom Corporation. The Company paid cash consideration of $80.0 million for the purchase of certain assets of Broadcom's wireless infrastructure backhaul business, and the assumption of certain liabilities. The acquired assets and assumed liabilities, together with employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets and employees into the Company's existing business. In the three months ended March 31, 2017, the Company recorded an adjustment to decrease certain assumed liabilities and a corresponding decrease to goodwill of $0.3 million (Note 5). The Company has completed its purchase price allocation accounting associated with this acquisition.

Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Access Business of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)

On April 28, 2016, the Company entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. The Company paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's wireless infrastructure access business, and assumed certain liabilities. The acquired assets and assumed liabilities, together with employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets and employees into the Company's existing business.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Acquisition of Entropic Communications, Inc.

On April 30, 2015, the Company completed its acquisition of Entropic Communications, Inc., or Entropic, for aggregate consideration of $289.4 million, which was comprised of the equity value of shares of the Company's common stock that were issued in the transaction of $173.8 million, the portion of outstanding equity awards deemed to have been earned as of April 30, 2015 of $4.5 million and cash of $111.1 million.

Refer to Note 4 for disclosures following this acquisition for the three months ended March 31, 2017 and 2016.

Acquisition of Physpeed, Co., Ltd.

On October 31, 2014, the Company acquired 100% of the outstanding common shares of Physpeed Co., Ltd., or Physpeed, a privately held developer of high-speed physical layer interconnect products addressing enterprise and telecommunications infrastructure market applications. The Company paid $9.3 million in cash in exchange for all outstanding shares of capital stock and equity of Physpeed.

The following disclosures regarding this acquisition are for the three months ended March 31, 2017 and 2016.

Earn-Out

The definitive merger agreement also provided for potential earn-out consideration of up to $0.75 million to the former shareholders of Physpeed for the achievement of certain 2015 and 2016 revenue milestones. The contingent earn-out consideration had an estimated fair value of $0.3 million at the date of acquisition. The 2015 earn-out amount was determined by multiplying $0.375 million by a 2015 revenue percentage that was defined in the definitive merger agreement. The 2016 earn-out amount was determined by multiplying $0.375 million by a 2016 revenue percentage that was defined in the definitive merger agreement and was fully earned as of December 31, 2016. During the three months ended March 31, 2017, the Company paid $0.375 million for the 2016 earn-out (Note 6).

Restricted Stock Units

The Company agreed to grant restricted stock units, or RSUs, under its equity incentive plan to Physpeed continuing employees if certain 2016 revenue targets were met contingent upon continued employment. Qualifying revenues were the net revenues recognized directly attributable to sales of Physpeed products or the Company’s provision of non-recurring engineering services exclusively with respect to the Physpeed products. In February 2017, the Company settled the remaining obligations of $1.6 million related to the 2016 revenue period by issuing $0.86 million in RSUs and through payment of $0.76 million in cash.

4. Restructuring Activity

From time to time, the Company approves and implements restructuring plans as a result of acquisitions, internal resource alignment and cost saving measures.

In connection with the Company's acquisition of Entropic in 2015, the Company entered into a restructuring plan to address matters primarily relating to the integration of the Company and Entropic businesses. Later in 2015, the Company ceased use of the majority of Entropic's former headquarters. The Company recognized $0 and $2.0 million in additional lease impairment charges in the three months ended March 31, 2017 and 2016. This included adjustments to the estimates of net present value of the remaining lease obligation for actual sublease income and period costs associated with the Entropic lease, including commissions to brokers involved in subleasing property. Total sublease income related to leased facilities the Company ceased using as part of the Entropic restructuring plan for the three months ended March 31, 2017 and 2016 was approximately $0.5 million and $0.1 million, respectively.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents the activity related to the restructuring plans, which is included in restructuring charges in the consolidated statements of income:



	Three Months Ended March 31,
	2017		2016
	(in thousands)
Lease related charges	$	—	$	1,976
Other	—		130
	$	—	$	2,106

The Company does not expect to incur material additional costs related to these restructuring plans.

The following table presents a roll-forward of the Company's restructuring liability as of March 31, 2017, which is included in accrued expenses and other current liabilities in the consolidated balance sheets:



	Lease Related Charges			Other		Total
	(in thousands)
Liability as of December 31, 2016	$	499		$	37	$	536
Cash payments	(481		)	—		(481		)
Non-cash charges	2			—		2
Liability as of March 31, 2017	$	20		$	37	$	57

5. Goodwill and Intangible Assets

Goodwill

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. The fair values of net tangible assets and intangible assets acquired are based upon preliminary valuations and the Company's estimates and assumptions are subject to change within the measurement period (potentially up to one year from the acquisition date). During the three months ended March 31, 2017, the Company adjusted its allocation of purchase price for the acquisition of the wireless infrastructure backhaul business related to a decrease in an assumed liability and a corresponding decrease in goodwill of $0.3 million (Note 3).

The following table presents the changes in the carrying amount of goodwill:



	Carrying Amount
	(in thousands)
Balance as of January 1, 2017	$	76,015
Adjustments	(342		)
Balance as of March 31, 2017	$	75,673

Goodwill is not amortized, but is assessed for impairment on an annual basis on October 31 each year and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. No goodwill impairment was recognized for the three months ended March 31, 2017 and 2016.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Acquired Intangibles

Finite-lived Intangible Assets

The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and technology licenses purchased, which continue to be amortized:



		March 31, 2017							December 31, 2016
	Weighted Average Useful Life (in Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
		(in thousands)
Licensed technology	3	$	3,431	$	(2,999	)	$	432	$	3,311	$	(2,957	)	$	354
Developed technology	7	77,900		(16,330		)	61,570		77,800		(13,550		)	64,250
Trademarks and trade names	7	1,700		(465		)	1,235		1,700		(405		)	1,295
Customer relationships	3.7	20,000		(6,527		)	13,473		20,000		(4,782		)	15,218
Covenants non-compete	3	900		(231		)	669		900		(156		)	744
Backlog	0.5	26,600		(26,600		)	—		26,600		(26,600		)	—
		$	130,531	$	(53,152	)	$	77,379	$	130,311	$	(48,450	)	$	81,861

Amortization expense related to intangible assets was $4.7 million and $2.1 million in the three months ended March 31, 2017 and 2016, respectively.

The following table sets forth the activity during the three months ended March 31, 2017 related to finite-lived intangible assets resulting from additions, transfers to developed technology from in-process research and development, or IPR&D, and amortization:



	Carrying Amount
	(in thousands)
Balance as of December 31, 2016	$	81,861
Additions	120
Transfers to developed technology from IPR&D	100
Amortization	(4,702		)
Balance as of March 31, 2017	$	77,379

The Company regularly reviews the carrying amount of its long-lived assets subject to depreciation and amortization, as well as the useful lives, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset’s fair value. During the three months ended March 31, 2017 and 2016, no impairment losses related to finite-lived intangible assets were recognized.

The following table presents future amortization of the Company’s finite-lived intangible assets at March 31, 2017:



	Amount
	(in thousands)
2017 (9 months)	$	14,117
2018	18,830
2019	12,529
2020	11,715
2021	11,337
Thereafter	8,851
Total	$	77,379



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Indefinite-lived Intangible Assets

The following table sets forth the activity of the Company’s indefinite-lived intangible assets resulting from transfers to developed technology from IPR&D:



	Gross Carrying Amount
	(in thousands)
Balance as of December 31, 2016	$	22,400
Transfers to developed technology from IPR&D	(100		)
Balance as of March 31, 2017	$	22,300

The Company performs its annual assessment of indefinite-lived intangible assets on October 31 each year or more frequently if events or changes in circumstances indicate that the asset might be impaired utilizing a qualitative test as a precursor to the quantitative test comparing the fair value of the assets with their carrying amount. Based on the qualitative test, if it is more likely than not that indicators of impairment exists, the Company proceeds to perform a quantitative analysis. During the three months ended March 31, 2017 and 2016, no indicators of impairment were identified and, as a result, no impairment of indefinite-lived intangible assets was recorded.

6. Financial Instruments

The composition of financial instruments is as follows:



	March 31, 2017
	Amortized Cost			Gross Unrealized					Fair Value
	Amortized Cost			Gains		Losses			Fair Value
	(in thousands)
Assets
Money market funds	$	8,640		$	—	$	—		$	8,640
Government debt securities	26,016					(35		)	25,981
Corporate debt securities	37,676			—		(20		)	37,656
	72,332			—		(55		)	72,277
Less amounts included in cash and cash equivalents	(8,640		)	—		—			(8,640		)
	$	63,692		$	—	$	(55	)	$	63,637



	December 31, 2016
	Amortized Cost			Gross Unrealized					Fair Value
	Amortized Cost			Gains		Losses			Fair Value
	(in thousands)
Assets
Money market funds	$	39,181		$	—	$	—		$	39,181
Government debt securities	28,025			—		(32		)	27,993
Corporate debt securities	25,923			—		(7		)	25,916
	93,129			—		(39		)	93,090
Less amounts included in cash and cash equivalents	(39,181		)	—		—			(39,181		)
	$	53,948		$	—	$	(39	)	$	53,909



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



	Fair Value at December 31, 2016
	(in thousands)
Liabilities
Contingent consideration	$	375
Total	$	375

At March 31, 2017, the Company held 22 government and corporate debt securities with an aggregate fair value of $44.5 million that were in an unrealized loss position for less than 12 months. No securities have been in unrealized loss positions for greater than 12 months. Gross unrealized losses were immaterial at March 31, 2017, and represented temporary impairments on government agency and corporate debt securities related to multiple issuers, and were primarily caused by fluctuations in U.S. interest rates. The Company evaluates securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis; the financial condition and near-term prospects of the issuer; changes in the financial condition of the security’s underlying collateral; any downgrades of the security by a rating agency; nonpayment of scheduled interest, or the reduction or elimination of dividends; as well as our intent and ability to hold the security in order to allow for an anticipated recovery in fair value.

The fair values of the Company’s financial instruments are the amounts that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

The Company classifies its financial instruments within Level 1 or Level 2 of the fair value hierarchy on the basis of valuations using quoted market prices or alternate pricing sources and models utilizing market observable inputs, respectively. The Company’s money market funds were valued based on quoted prices for the specific securities in an active market and were therefore classified as Level 1. The government and corporate debt securities have been valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. The pricing services may use a consensus price which is a weighted average price based on multiple sources or mathematical calculations to determine the valuation for a security, and have been classified as Level 2. The Company reviews Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to independent pricing sources. In addition, the Company reviews third-party pricing provider models, key inputs and assumptions and understands the pricing processes at its third-party providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments. As of March 31, 2017, the Company has not made any adjustments to the prices obtained from its third party pricing providers. The contingent liability is classified as Level 3 as of December 31, 2016 and is valued using an internal rate of return model. The assumptions used in preparing the internal rate of return model include revenues earned related to Physpeed products and services and a discount factor of 1 at December 31, 2016. The contingent liability was settled in the three months ended March 31, 2017. The assumptions used in preparing the internal rate of return model include estimates for outcome if milestone goals are achieved, the probability of achieving each outcome and discount rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in estimated future revenues would be accompanied by a directionally similar change in fair value.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents a summary of the Company’s financial instruments that are measured on a recurring basis:



			Fair Value Measurements at March 31, 2017
	Balance at March 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Money market funds	$	8,640	$	8,640	$	—	$	—
Government debt securities	25,981		—		25,981		—
Corporate debt securities	37,656		—		37,656		—
	$	72,277	$	8,640	$	63,637	$	—



			Fair Value Measurements at December 31, 2016
	Balance at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets
Money market funds	$	39,181	$	39,181	$	—	$	—
Government debt securities	27,993		—		27,993		—
Corporate debt securities	25,916		—		25,916		—
	$	93,090	$	39,181	$	53,909	$	—
Liabilities
Contingent consideration	$	375	$	—	$	—	$	375

The following summarizes the activity in Level 3 financial instruments:



	Three Months Ended March 31,
	2017			2016
	(in thousands)
Contingent Consideration ⁽¹⁾
Beginning balance	$	375		$	395
Physpeed earn-out payment	(375		)	(240		)
Loss recognized in net income⁽²⁾	—			86
Ending balance	$	—		$	241
Net loss for the period included in net income attributable to contingent consideration held at the end of the period	$	—		$	(86	)

____________________________

⁽¹⁾

In connection with the acquisition of Physpeed, the Company recorded contingent consideration based upon the expected achievement of 2015 and 2016 revenue milestones. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expense in the unaudited consolidated statements of income.


⁽²⁾	Changes to the estimated fair value of contingent consideration for the three months ended March 31, 2016 were primarily due to updates to present value discount factors.

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three months ended March 31, 2017.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

7. Balance Sheet Details

Cash, cash equivalents, restricted cash and investments consist of the following:



	March 31, 2017		December 31, 2016
	(in thousands)
Cash and cash equivalents	$	89,121	$	81,086
Short-term restricted cash	615		614
Long-term restricted cash	1,502		1,196
Total cash, cash equivalents and restricted cash	91,238		82,896
Short-term investments	63,637		47,918
Long-term investments	—		5,991
	$	154,875	$	136,805

Inventory consists of the following:



	March 31, 2017		December 31, 2016
	(in thousands)
Work-in-process	$	20,992	$	13,947
Finished goods	10,693		12,636
	$	31,685	$	26,583

Property and equipment consist of the following:



	Useful Life (in Years)	March 31, 2017			December 31, 2016
		(in thousands)
Furniture and fixtures	5	$	1,988		$	1,983
Machinery and equipment	3-5	27,632			27,028
Masks and production equipment	2	8,418			9,153
Software	3	3,701			3,625
Leasehold improvements	1-5	11,670			11,635
Construction in progress	N/A	146			39
		53,555			53,463
Less accumulated depreciation and amortization		(34,393		)	(32,914		)
		$	19,162		$	20,549

Depreciation expense for the three months ended March 31, 2017 and 2016 was $2.2 million and $3.7 million, respectively.

Deferred revenue and deferred profit consist of the following:



	March 31, 2017			December 31, 2016
	(in thousands)
Deferred revenue—rebates	$	249		$	464
Deferred revenue—distributor transactions	8,348			7,987
Deferred cost of net revenue—distributor transactions	(2,913		)	(2,460		)
	$	5,684		$	5,991



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Accrued price protection liability consists of the following activity:



	Three Months Ended March 31,
	2017			2016
	(in thousands)
Beginning balance	$	15,176		$	20,026
Charged as a reduction of revenue	11,698			10,243
Reversal of unclaimed rebates	—			(1,302		)
Payments	(4,927		)	(10,524		)
Ending balance	$	21,947		$	18,443

Accrued expenses and other current liabilities consist of the following:



	March 31, 2017		December 31, 2016
	(in thousands)
Accrued technology license payments	$	3,465	$	5,850
Accrued professional fees	4,063		1,620
Accrued engineering and production costs	565		1,232
Accrued restructuring	57		536
Accrued royalty	940		846
Accrued leases - other	1,745		1,560
Accrued customer credits	1,169		1,207
Other	2,980		3,507
	$	14,984	$	16,358

8. Stock-Based Compensation and Employee Benefit Plans

Common Stock

On March 29, 2017, each share of the Company’s then outstanding Class A common stock and Class B common stock automatically converted into a single class of common stock pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. Also on March 29, 2017, the shares underlying outstanding stock options, restricted stock units and restricted stock awards automatically converted to rights to receive shares of a single class of common stock. The conversion had no impact on the total number of issued and outstanding shares of capital stock; the Class A shares and Class B shares converted into an equivalent number of shares of common stock. The board of directors approved a reduction in the Company’s total number of authorized shares of capital stock by 65,445,853 from 1,575,000,000 to 1,509,554,147 to account for the 58,876,053 shares of Class A common stock and 6,569,800 shares of Class B common stock retired upon conversion, such that the authorized number of shares of Class A common stock is 441,123,947 and the authorized number of shares of Class B common stock is 493,430,200. No additional Class A shares or Class B shares will be issued following the conversion. The authorized number of shares of common stock and preferred stock remain unchanged at 550,000,000 shares and 25,000,000 shares, respectively.

Following the conversion, each share of common stock is entitled to one vote per share and otherwise has the same designations, rights, powers and preferences as the Class A common stock prior to the conversion. In addition, holders of the common stock vote as a single class of stock on any matter that is submitted to a vote of stockholders. Prior to the conversion, the holders of the Company’s Class A and Class B common stock had identical voting rights, except that holders of Class A common stock were entitled to one vote per share and holders of Class B common stock were entitled to ten votes per share with respect to transactions that would result in a change of control of the Company or that relate to the Company’s equity incentive plans. In addition, holders of Class B common stock had the exclusive right to elect two members of the Company’s Board of Directors, each referred to as a Class B Director. The shares of Class B common stock were not publicly traded. Each share of Class B common stock was convertible at any time at the option of the holder into one share of Class A common stock and in most instances automatically converted upon sale or other transfer.

Employee Benefit Plans

At March 31, 2017, the Company had stock-based compensation awards outstanding under the following plans: the 2004 Stock Plan, the 2010 Equity Incentive Plan, as amended, or 2010 Plan, and the 2010 Employee Stock Purchase Plan, or ESPP, as well as the following former Entropic plans: the 2007 Equity Incentive Plan and the 2007 Non-Employee Director's Plan.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Refer to the Company’s Annual Report for a summary of the stock-based compensation and equity plans. Other than the automatic conversion of common stock underlying the plans as described above, there have been no material changes to such plans during the three months ended March 31, 2017.

As of March 31, 2017, the number of shares of common stock reserved for issuance under the 2010 Plan was 12,984,290 shares. As of March 31, 2017, the number of shares of common stock reserved for issuance under the ESPP was 1,780,443 shares.

Stock-Based Compensation

The Company recognizes stock-based compensation in the consolidated statements of income, based on the department to which the related employee reports, as follows:



	Three Months Ended March 31,
	2017		2016
	(in thousands)
Cost of net revenue	$	59	$	43
Research and development	3,493		3,279
Selling, general and administrative	1,922		1,787
	$	5,474	$	5,109

The total unrecognized compensation cost related to unvested restricted stock units and restricted stock awards as of March 31, 2017 was $46.8 million, and the weighted average period over which these equity awards are expected to vest is 2.62 years. The total unrecognized compensation cost related to unvested stock options as of March 31, 2017 was $0.5 million, and the weighted average period over which these equity awards are expected to vest is 0.61 years.

Restricted Stock Units and Restricted Stock Awards

The Company calculates the fair value of restricted stock units based on the fair market value of the Company's common stock (formerly Class A common stock) on the grant date. Stock based compensation is recognized over the vesting period using the straight-line method.

A summary of the Company’s restricted stock unit and restricted stock award activity is as follows:



	Number of Shares (in thousands)		Weighted-Average Grant-Date Fair Value per Share
Outstanding at December 31, 2016	3,670		$	14.67
Granted	549		26.66
Vested	(507	)	16.78
Canceled	(76	)	16.61
Outstanding at March 31, 2017	3,636		16.15

Employee Stock Purchase Rights and Stock Options

The Company uses the Black-Scholes valuation model to calculate the fair value of employee stock purchase rights and stock options granted to employees. Stock based compensation expense is recognized over the vesting period using the straight-line method. No stock options were granted during the three months ended March 31, 2017.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Employee Stock Purchase Rights

During the three months ended March 31, 2017, there were no purchases of common stock under the ESPP.

The fair values of employee stock purchase rights were estimated using the Black-Scholes option pricing model at their respective grant date using the following assumptions:



	Three Months Ended
	March 31, 2017
Weighted-average grant date fair value per share	$	6.20
Risk-free interest rate	0.60		%
Dividend yield	—		%
Expected life (in years)	0.50
Volatility	49.94		%

The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The expected life is the duration of the offering period for each grant date, which occurs on a semi-annual basis. In addition, the estimated volatility incorporates the historical volatility of the Company's daily share closing price.

Stock Options

A summary of the Company’s stock options activity is as follows:



	Number of Options (in thousands)		Weighted-Average Exercise Price		Weighted-Average Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	3,025		$	6.78
Granted⁽¹⁾	—		N/A
Exercised	(90	)	3.96
Canceled⁽²⁾	—		N/A
Outstanding at March 31, 2017	2,935		$	6.87	2.53	$	62,160
Vested and expected to vest at March 31, 2017	2,931		$	6.87	2.53	$	62,091
Exercisable at March 31, 2017	2,693		$	6.77	2.43	$	57,331

____________________________

⁽¹⁾ No options were granted during the three months ended March 31, 2017.

⁽²⁾ No options were canceled during the three months ended March 31, 2017.

The intrinsic value of stock options exercised was $1.9 million and $2.0 million in the three months ended March 31, 2017 and 2016, respectively.

Cash received from exercise of stock options was $0.4 million and $1.3 million during the three months ended March 31, 2017 and 2016, respectively. The tax benefit from stock options exercised was $0.3 million and $1.6 million during the three months ended March 31, 2017 and 2016, respectively.



Table of Contents	MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Employee Incentive Bonus

The Company settles a majority of bonus awards for its employees, including executives, in shares of common stock under the 2010 Equity Incentive Plan. When bonus awards are settled in common stock issued under the 2010 Equity Incentive Plan, the number of shares issuable to plan participants is determined based on the closing price of the Company's common stock as determined in trading on the New York Stock Exchange on a date approved by the Board of Directors. In connection with the Company's bonus programs, in February 2017 we issued 0.2 million freely-tradable shares of our Class A common stock in settlement of bonus awards to employees, including executives, for the July 1, 2016 to December 31, 2016 performance period. At March 31, 2017, an accrual of $1.7 million was recorded for bonus awards for employees for year-to-date achievement in the 2017 performance period. The Company's compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.

9. Income Taxes

In order to determine the quarterly provision for income taxes, the Company used an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. The provision for income taxes primarily relates to projected current federal and state income taxes and income taxes in certain foreign jurisdictions. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The Company utilizes the asset and liability method of accounting for income taxes. The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, the Company concluded that a full valuation allowance should continue to be recorded against its U.S. and certain foreign net deferred tax assets at March 31, 2017. Furthermore, the Company does not incur expense or benefit in certain tax free jurisdictions in which it operates.

The Company recorded a provision for income taxes of $2.0 million and $1.0 million in the three months ended March 31, 2017 and 2016, respectively. The provision for income taxes in the three months ended March 31, 2017 primarily relates to federal alternative minimum tax due to the Company’s limitation on use of net operating losses, credit carryforwards, state income taxes, and income taxes in certain foreign jurisdictions. In the three months ended March 31, 2017, the Company elected to early adopt ASU No. 2016-16, Income Taxes (Topic 740), which requires companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which the transfer occurs (Note 1). The amendments in this update are applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Due to a full valuation allowance on the Company's U.S. and certain foreign deferred tax assets, the adoption of the amendments in this update did not have a material impact on the Company’s consolidated financial position and results of operations for the three months ended March 31, 2017.

The income tax provision in the three months ended March 31, 2016 primarily relates to federal tax due to the Company’s limitation on use of net operating losses, state income taxes, and income taxes in certain foreign jurisdictions. During the quarter ended June 30, 2016, the Company adopted ASU No. 2016-09, Improvements to Share Based Compensation, which resulted in the recognition of excess tax benefits within the provision for income taxes in the unaudited consolidated statement of operations. ASU No. 2016-09 permitted early adoption in an interim period but required the adjustments to be reflected as of the beginning of the fiscal year that includes that interim period and accordingly, we restated the previously reported income tax provision for the three months ended March 31, 2016. For the three months ended March 31, 2016, the impact of including net excess tax benefits was to reduce the provision for income taxes by $1.6 million (Note 1).

During the three months ended March 31, 2017, the Company’s unrecognized tax benefits increased by $0.5 million. The Company expects decreases to its unrecognized tax benefits of $0.2 million within twelve months, due to the lapse of statutes of limitations. Accrued interest and penalties associated with uncertain tax positions as of March 31, 2017 were $0.19 million and $0.02 million, respectively.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of March 31, 2017, the Company's tax years for 2013 to 2016, 2012 to 2016, and 2009 to 2016 are subject to examination by federal, state, and foreign tax authorities. The Company is not currently under any tax examinations.



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10. Concentration of Credit Risk, Significant Customers and Geographic Information

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. Collateral is generally not required for customer receivables. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Significant Customers

The Company markets its products and services to manufacturers of a wide range of electronic devices, including cable and terrestrial and satellite set-top boxes and gates, DOCSIS data and voice gateways, hybrid analog and digital televisions, satellite low-noise blocker transponders or outdoor units, physical medium devices that go into optical modules for data center, metro, and long-haul transport network applications, and RF transceiver and modem devices for wireless access and backhaul applications. The Company makes periodic evaluations of the credit worthiness of its customers.

Customers comprising greater than 10% of net revenues for each of the periods presented are as follows:



	Three Months Ended March 31,
	2017		2016
Percentage of total net revenue
Arris	31	%	24	%
Cisco	*		18	%
WNC Corporation	*		14	%

____________________________


*	Represents less than 10% of the net revenue for the respective period.

Balances that are 10% or greater of accounts receivable, based on the Company's billings to the contract manufacturer customers, are as follows:



	March 31,		December 31,
	2017		2016
Percentage of gross accounts receivable
Pegatron Corporation	21	%	17	%
Sernet Technologies Corporation	12	%	15	%
WNC Corporation	*		12	%

____________________________


*	Represents less than 10% of the gross accounts receivable for the respective period end.

Suppliers comprising greater than 10% of total inventory purchases are as follows:



	Three Months Ended March 31,
	2017		2016
United Microelectronics Corporation	21	%	14	%
Taiwan Semiconductor Manufacturing Company	19	%	*
Globalfoundries	17	%	20	%
Semiconductor Manufacturing International Corp	15	%	13	%
Advanced Semiconductor Engineering	12	%	11	%
Tower-Jazz Semiconductor	*		18	%

____________________________


*	Represents less than 10% of the inventory purchases for the respective period.



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Geographic Information

The Company's consolidated net revenues by geographic area based on ship-to location are as follows:



	Three Months Ended March 31,
	2017				2016
	Amount		% of total net revenue		Amount		% of total net revenue
Asia	$	84,332	95	%	$	96,979	94	%
United States	145		—	%	2,948		3	%
Rest of world	4,364		5	%	2,758		3	%
Total	$	88,841	100	%	$	102,685	100	%

The products shipped to individual countries representing greater than 10% of net revenue for each of the periods presented are as follows:



	Three Months Ended March 31,
	2017		2016
Percentage of total net revenue
China	78	%	81	%

The determination of which country a particular sale is allocated to is based on the destination of the product shipment. No other individual country in Asia Pacific, United States, or the rest of the world accounted for more than 10% of net revenue during these periods.

Long-lived assets, which consists of property and equipment, net, intangible assets, net, and goodwill by geographic area are as follows (in thousands):



	March 31,				December 31,
	2017				2016
	Amount		% of total		Amount		% of total
United States	$	108,158	56	%	$	111,336	55	%
Singapore	83,998		43	%	78,318		39	%
Rest of world	2,358		1	%	11,171		6	%
Total	$	194,514	100	%	$	200,825	100	%

11. Commitments and Contingencies

Lease Commitments and Other Contractual Obligations

The Company leases facilities and certain equipment under operating lease arrangements expiring at various years through fiscal 2023. As of March 31, 2017, future minimum payments under non-cancelable operating leases, other obligations, and inventory purchase obligations are as follows:



	Operating Leases		Inventory Purchase Obligations		Total
	(in thousands)
2017 (9 months)	$	6,930	$	10,859	$	17,789
2018	6,862		—		6,862
2019	7,037		—		7,037
2020	7,383		—		7,383
2021	7,323		—		7,323
Thereafter	2,787		—		2,787
Total minimum payments	$	38,322	$	10,859	$	49,181



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The total rental expense for operating leases was $0.7 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively.

The Company has subleased certain facilities that it ceased using in connection with a restructuring plan (Note 4). Such subleases expire at various years through fiscal 2023. As of March 31, 2017, future minimum rental income under non-cancelable subleases is as follows:



	Amount
	(in thousands)
2017 (9 months)	$	1,648
2018	2,362
2019	2,927
2020	3,392
2021	3,511
Thereafter	293
Total minimum rental income	$	14,133

Total sublease income related to leased facilities the Company ceased using in connection with a restructuring plan for the three months ended March 31, 2017 and 2016 was approximately $0.5 million and $0.1 million, respectively (Note 4).

CrestaTech Litigation

On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against the Company in the United States District Court of Delaware, or the District Court Litigation. In its complaint, CrestaTech alleges that the Company infringes U.S. Patent Nos. 7,075,585, or the ‘585 Patent, and 7,265,792, or the ‘792 Patent. In addition to asking for compensatory damages, CrestaTech alleges willful infringement and seeks a permanent injunction. CrestaTech also names Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of the Company's television tuners.

On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, MaxLinear, Sharp, Sharp Electronics, and VIZIO, or the ITC Investigation. On May 16, 2014, the ITC granted CrestaTech’s motion to file an amended complaint adding six OEM Respondents, namely, SIO International, Inc., Hon Hai Precision Industry Co., Ltd., Wistron Corp., Wistron Infocomm Technology (America) Corp., Top Victory Investments Ltd. and TPV International (USA), Inc., which are collectively referred to with MaxLinear, Sharp and VIZIO as the Company Respondents. CrestaTech’s ITC complaint alleged a violation of 19 U.S.C. § 1337 through the importation into the United States, the sale for importation, or the sale within the United States after importation of MaxLinear's accused products that CrestaTech alleged infringe the same two patents asserted in the Delaware action. Through its ITC complaint, CrestaTech sought an exclusion order preventing entry into the United States of certain of the Company's television tuners and televisions containing such tuners from Sharp, Sharp Electronics, and VIZIO. CrestaTech also sought a cease and desist order prohibiting the Company Respondents from engaging in the importation into, sale for importation into, the sale after importation of, or otherwise transferring within the United States certain of the Company's television tuners or televisions containing such tuners.

On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.

On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge, or the ALJ, issued a written Initial Determination, or ID, ruling that the Company Respondents do not violate Section 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of the Company's television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent, and these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.



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The ITC subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the ALJ that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the ALJ's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.

On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal resulting in final resolution of the ITC Investigation in the Company's favor.

In addition, the Company has filed four petitions for inter partes review, or IPR, by the US Patent Office, two for each of the CrestaTech patents asserted against the Company. The Patent Trial and Appeal Board, or the PTAB, did not institute two of these IPRs as being redundant to IPRs filed by another party that were already underway for the same CrestaTech patent. The remaining two petitions were instituted or instituted-in-part and, together with the IPRs filed by third parties, there are currently six pending IPR proceedings involving the two CrestaTech patents asserted against the Company.

In October 2015, the PTAB issued final decisions in two of the six pending IPR proceedings (one for each of the two asserted patents), holding that all of the reviewed claims are unpatentable. Included in these decisions was one of the three claims of the ‘585 Patent mentioned above in connection with the ITC’s final decision. CrestaTech appealed the PTAB’s decisions at the Federal Circuit. On November 8, 2016, the Federal Circuit issued an opinion affirming the PTAB’s finding of unpatentability.

In August 2016, the PTAB issued final written decisions in the remaining four pending IPR proceedings (two for each of the asserted patents), holding that many of the reviewed claims - including the two remaining claims of the ‘585 Patent which the ITC held were infringed - are unpatentable. As a result of these IPR decisions, all 13 claims that CrestaTech asserted against the Company in the ITC Investigation have been found to be unpatentable by the PTAB. The parties have appealed the two decisions related to the ‘585 Patent; however, no appeals were filed as to the PTAB's rulings for the '792 Patent. The Company filed its opening brief in its '585 appeal in mid-February 2017; CrestaTech's (now CF Crespe's, see below) response brief is currently due on April 26, 2017.

On March 18, 2016, CrestaTech filed a petition for Chapter 7 bankruptcy in the Northern District of California. As a result of this proceeding, all rights in the CrestaTech asserted patents, including the right to control the pending litigation, were assigned to CF Crespe LLC, or CF Crespe. CF Crespe is now the named party in the pending IPRs, the Federal Circuit appeal and District Court Litigation.

Per the Court’s request, on April 19, 2017, the parties submitted a status report in the District Court Litigation. In their report, the parties suggested that the District Court Litigation remain stayed pending the Federal Circuit’s decision in the appeal of the ‘585 IPRs, and any subsequent appeal thereof.

The Company cannot predict the outcome of any appeal by CF Crespe or CrestaTech, the District Court Litigation, or the IPRs. Any adverse determination in the District Court Litigation could have a material adverse effect on the Company's business and operating results.

Trango Systems, Inc. Litigation

On or about August 2, 2016, Trango Systems, Inc., or Trango, filed a complaint in the Superior Court of California, County of San Diego, Central Division, against defendants Broadcom Corporation, Inc., or Broadcom, and the Company, collectively, Defendants. On or about December 6, 2016, Trango filed its second amended complaint. Trango is a purchaser that alleges various fraud, breach of contract, and interference with economic relations claims in connection with the discontinuance of a chip line the Company recently acquired from Broadcom. Trango seeks unspecified general and special damages, pre-judgment interest, expenses and costs, statutory penalties, attorneys’ fees, punitive damages, and unspecified injunctive and equitable relief. The Company intends to vigorously defend against the lawsuit. On January 11, 2017, the Company filed its demurrer to each cause of action in the second amended complaint. The court hearing on the demurrer is scheduled for June 23, 2017.

The Company cannot predict the outcome of the Trango litigation. Any adverse determination in the Trango litigation could have a material adverse effect on the Company's business and operating results.



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Other Matters

In addition, from time to time, the Company is subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. Other than the CrestaTech and Trango litigation described above, the Company believes that there are no other currently pending litigation matters that, if determined adversely by the Company, would have a material effect on the Company's business or that would not be covered by the Company's existing liability insurance.

12. Subsequent Events

Acquisition of Exar Corporation

On March 29, 2017, the Company entered into a merger agreement with Exar Corporation, or Exar, a designer and developer of high performance analog mixed-signal integrated circuits and sub-system solutions, under which the Company agreed to acquire Exar for $13.00 per share in cash or an aggregate amount of approximately $700.0 million, or $472.0 million net of Exar’s cash acquired. The boards of directors of both MaxLinear and Exar have unanimously approved the transaction, which is subject to customary closing conditions and regulatory approvals. The Company intends to fund the transaction with cash from the balance sheet of the combined companies and approximately $425.0 million of new transaction debt. The transaction is currently expected to close in the second quarter of 2017.

In connection with the merger agreement, MaxLinear entered into a debt commitment letter effective March 28, 2017 with certain initial lenders who have committed to provide a secured term loan facility in an aggregate principal amount of up to $425.0 million, subject to the satisfaction of certain customary closing conditions. The facilities are available (i) to finance the Merger, refinance certain existing indebtedness of Exar and its subsidiaries, and fund all related transactions, (ii) to pay fees and expenses incurred in connection therewith and (iii) for working capital and general corporate purposes. The commitment letter provides that the term loan facility will have a seven-year term and that term loans will bear interest at either an Adjusted LIBOR or an Adjusted Base Rate, at the Company's option, and, in each case, plus a fixed applicable margin. The definitive documentation governing the debt financing has not been finalized, and, accordingly, the actual terms may differ from the description of such terms in the commitment letter.

Acquisition of Spain Entity and Certain Assets and Assumption of Certain Liabilities of the G.hn business of Marvell Semiconductor, Inc.

On April 4, 2017, the Company consummated the transactions contemplated by a share and asset acquisition agreement with Marvell Semiconductor, Inc., or Marvell, to purchase the Spain entity of Marvell along with the acquisition of certain assets and assumption of certain liabilities of Marvell’s G.hn business for aggregate cash consideration of $21.0 million. The Company also hired certain employees of the G.hn business outside of Spain, and employees of Marvell's former Spain subsidiary remained employees of the same company, which is now a subsidiary of MaxLinear. The assets acquired include, among other things, patents and other intellectual property, a workforce-in-place and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory and other property and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees of Marvell that were acquired or hired by the Company upon close of the acquisition. The acquired assets and assumed liabilities, together with the employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company intends to integrate the acquired assets and employees into the Company's existing business.

Singapore Tax Incentives

In April 2017, the Company began operating under certain favorable tax incentives in Singapore, which are generally effective through March 2022 and may be extended through March 2027. The incentives are conditional upon our meeting certain employment and investment thresholds over time.

Exar Shareholder Litigation

On April 18, 2017, The Vladimir Gusinsky Revocable Trust, which alleges that it owns 110 shares of common stock in Exar, filed a complaint in the United States District Court for the Northern District of California against Exar, its board of directors, MaxLinear, and Eagle Acquisition Corporation (a wholly owned subsidiary of MaxLinear), captioned The Vladimir Gusinsky Rev. Trust v. Exar Corp. et al., No. 5:17-CV-2150-SI (N.D. Cal.). On April 25, 2017, Richard E. Marshall, who alleges that he owns 25 shares of common stock in Exar, filed a complaint in United States District Court for the Northern District of California against Exar and its board of directors, captioned Marshall v. Exar Corp. et al., No. 3:17-CV-02334 (N.D. Cal.). MaxLinear and Eagle Acquisition Corp. are not named as defendants in the Marshall action. The complaints generally allege that the proposed merger with Exar offers inadequate consideration to Exar’s shareholders and that the Schedule 14D-9



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filed by Exar in connection with the merger omits material information. The complaints purport to bring class claims for violation of sections 14(e), 14(d), and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 14d-9. The complaints seek certification of a class; an injunction barring the merger or, if defendants enter into the merger, an order rescinding it or awarding rescissory damages; declaratory relief; and plaintiff’s costs, including attorneys’ fees and experts’ fees. Additional similar lawsuits may be filed in the future.

On or about May 3, 2017, the parties to the above-referenced lawsuits reached an agreement in principle whereby plaintiffs will voluntarily dismiss the claims brought by Mr. Marshall and The Vladimir Gusinsky Revocable Trust with prejudice (but without prejudice as to other members of the putative class), defendants will make certain supplemental disclosures, and the plaintiffs will seek a mootness fee from the Court. On May 3, 2017, Exar made the supplemental disclosures contemplated by this agreement in principle.

Should the contemplated resolution of these lawsuits not become final, the defendants intend to vigorously defend against this and any subsequently filed similar actions. However, the Company cannot predict the outcome of the Exar shareholder litigation. Any adverse determination in the Exar shareholder litigation could have a material adverse effect on the Company's business and operating results.

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ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a provider of radio frequency, or RF, and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and wired and wireless infrastructure markets. Our high performance RF receiver products capture and process digital and analog broadband signals to be decoded for various applications. These products include both RF receivers and RF receiver systems-on-chip, or SoCs, which incorporate our highly integrated radio system architecture and the functionality necessary to receive and demodulate broadband signals, modem solutions and physical medium devices that provide a constant current source, current-to-voltage regulation, and data alignment and retiming functionality in optical interconnect applications. Through our acquisition of Entropic Communications, Inc., or Entropic, in April of 2015, and the acquisition of Marvell's G.hn business in April 2017, we provide semiconductor solutions for the connected home and home broadband access markets, including MoCA® (Multimedia over Coax Alliance) and G.hn solutions that transform how traditional HDTV broadcast and Internet Protocol, or IP, based streaming video content is seamlessly, reliably, and securely distributed into and throughout the home. Through our acquisition of the Microsemi wireless infrastructure access business in April of 2016, we provide integrated circuits for wireless infrastructure markets, including wideband RF transceivers and synthesizers for 3G, 4G, and future 5G cellular base station and remote radio head (RRH) unit platforms. Through our acquisition of the Broadcom wireless infrastructure backhaul business in July of 2016, we also provide modem and RF transceiver solutions into cellular infrastructure backhaul applications.

Our net revenue has grown from approximately $0.6 million in fiscal 2006 to $387.8 million in fiscal 2016. In the three months ended March 31, 2017, revenues were $88.8 million. In fiscal 2016 and in the three months ended March 31, 2017, our net revenue was derived primarily from sales of RF receivers and RF receiver systems-on-chip and MoCA connectivity solutions into broadband operator voice and data modems and gateways, and global analog and digital RF receiver products for analog and digital Pay-TV applications. These analog and digital television applications include Direct Broadcast Satellite outdoor unit, or DBS ODU solutions, which consist of our translation switch, or BTS, and channel stacking switch, or CSS, products. These products simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable. Our ability to achieve revenue growth in the future will depend on, among other factors, our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set-top boxes, data modems, and gateways for the broadband service provider and Pay-TV industries, manufacturers selling into the Cable infrastructure market, and manufacturers of optical module and telecommunications infrastructure equipment.

Products shipped to Asia accounted for 95% and 94% in the three months ended March 31, 2017 and 2016, respectively. Although a large percentage of our products are shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, we believe revenue generated from sales of our digital terrestrial set-top box products in the three months ended March 31, 2017 and 2016 related principally to sales to Asian set-top box manufacturers delivering products into Europe, Middle East, and Africa, or EMEA markets. Similarly, revenue generated from sales of our cable modem products in the three months ended March 31, 2017 and 2016 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, most of our sales have been denominated in United States dollars. There is a growing portion of our business, related specifically to our high-speed optical interconnect products, that are shipped to, and are ultimately consumed in Asian markets, with the majority of these products being purchased by end customers in China.

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A significant portion of our net revenue has historically been generated by a limited number of customers. In the three months ended March 31, 2017, one of our customers, Arris Group, Inc., or Arris, accounted for 31% of our net revenue, and our ten largest customers collectively accounted for 70% of our net revenue. In the three months ended March 31, 2016, Arris accounted for 24% of our net revenue, and our ten largest customers collectively accounted for 79% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems, satellite set-top boxes and broadband gateways.

Our business depends on winning competitive bid selection processes, known as design wins, to develop semiconductors for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer’s device is a first generation or subsequent generation product. Our customers’ products can be complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue. We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated into a customer’s design, however, we believe that our product is likely to remain a component of the customer’s product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the hybrid television market, a design-in can have a product life cycle of 9 to 18 months. In the terrestrial retail digital set-top box market, a design-in can have a product life cycle of 18 to 24 months. In the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the satellite operator gateway and DBS ODU sectors, a design-in can have a product life cycle of 24 to 60 months and beyond.

On April 30, 2015, we completed our acquisition of Entropic. Pursuant to the terms of the merger agreement or merger agreements dated as of February 3, 2015, by and among MaxLinear, Entropic, and two wholly-owned subsidiaries of MaxLinear, all of the Entropic outstanding shares were converted into the right to receive consideration consisting of cash and shares of our Class A common stock. We paid an aggregate of $111.1 million in cash and issued an aggregate of 20.4 million shares of our Class A common stock to the stockholders of Entropic. In addition, we assumed all outstanding Entropic stock options and unvested restricted stock units that were held by continuing service providers (as defined in the merger agreement). We used Entropic’s cash and cash equivalents to fund a significant portion of the cash portion of the merger consideration and, to a lesser extent, our own cash and cash equivalents.

On April 28, 2016, we entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. We paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's wireless infrastructure access business, and assumed certain specified liabilities. The assets acquired include, among other things, radio frequency and analog/mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees of the wireless infrastructure access business that were rehired by the Company.

On May 9, 2016, we entered into a definitive agreement to purchase certain assets and assume certain liabilities of the wireless infrastructure backhaul business of Broadcom Corporation, or Broadcom. On July 1, 2016, we consummated the transactions contemplated by the purchase agreement and paid aggregate cash consideration of $80.0 million and hired certain employees of the wireless infrastructure backhaul business. The assets acquired include, among other things, digital baseband, radio frequency, or RF, and analog/mixed signal patents and other intellectual property, in-production and next-generation digital baseband and RF transceiver integrated circuit and reference platform designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property and equipment. The liabilities assumed include, among other things, product warranty obligations, liabilities for technologies acquired, and a payable to Broadcom as reimbursement of costs associated with the termination of those employees of the wireless infrastructure backhaul business who were not hired by MaxLinear upon the closing of the acquisition. For more information, please refer to Note 3 of our consolidated financial statements.

The acquired assets and liabilities, together with the rehired employees for each of these acquisitions, represent a business as defined in ASC 805, Business Combinations. We are integrating the acquired assets and rehired employees into our existing business.

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Recent Developments

On March 29, 2017, each share of our then outstanding Class A common stock and Class B common stock and shares underlying our then outstanding stock options, restricted stock units and restricted stock awards automatically converted into a single class of our common stock or rights to receive shares of a single class of our common stock pursuant to the terms of our Fifth Amended and Restated Certificate of Incorporation. The conversion had no impact on the total number of issued and outstanding shares of our capital stock; the Class A shares and Class B shares converted into an equivalent number of shares of our common stock. In addition, the conversion did not increase the total number of authorized shares of our common stock, which prior to the conversion was, and remains, 550,000,000 shares. However, our total number of authorized shares of capital stock was reduced from 1,575,000,000 to 1,509,554,147, to account for the retirement of the Class A shares and Class B shares that were outstanding at the time of the conversion. Following the conversion, our authorized capital stock includes 441,123,947 Class A shares and 493,430,200 Class B shares, which represents Class A shares and Class B shares that were authorized but unissued at the time of the conversion. No additional Class A shares or Class B shares will be issued following the conversion.

Following the conversion, each share of our common stock is entitled to one vote per share and otherwise has the same designations, rights, powers and preferences as the Class A common stock prior to the conversion. In addition, holders of our common stock vote as a single class of stock on any matter that is submitted to a vote of our stockholders. Prior to the conversion, the holders of our Class A and Class B common stock had identical voting rights, except that holders of Class A common stock were entitled to one vote per share and holders of Class B common stock were entitled to ten votes per share with respect to transactions that would result in a change of control of our company or that relate to our equity incentive plans. In addition, holders of Class B common stock had the exclusive right to elect two members of our Board of Directors, each referred to as a Class B Director. The shares of our Class B common stock were not publicly traded. Each share of our Class B common stock was convertible at any time at the option of the holder into one share of Class A common stock and in most instances automatically converted upon sale or other transfer.

On March 29, 2017, we entered into a definitive agreement with Exar Corporation, or Exar, a designer and developer of high performance analog mixed-signal integrated circuits and sub-system solutions, under which we agreed to acquire Exar for $13.00 per share in cash or an aggregate amount of approximately $700 million, or $472 million net of Exar’s cash acquired. The boards of directors of both MaxLinear and Exar have unanimously approved the transaction, which is subject to customary closing conditions and regulatory approvals. The transaction is currently expected to close in the second quarter of 2017. We intend to fund the transaction with cash from the balance sheet of the combined companies and approximately $425.0 million of new transaction debt. For more information, please refer to Note 12 of our unaudited consolidated financial statements.

On March 28, 2017, in connection with the merger agreement with Exar Corporation, we entered into a debt commitment letter with certain initial lenders who have committed to provide a secured term loan facility in an aggregate principal amount of up to $425.0 million, subject to the satisfaction of certain customary conditions. The facilities are available (i) to finance the Merger, refinance certain existing indebtedness of Exar and its subsidiaries, and fund all related transactions, (ii) to pay fees and expenses incurred in connection therewith and (iii) for working capital and general corporate purposes. The commitment letter provides that the term loan facility will have a seven-year term and that term loans will bear interest at either an Adjusted LIBOR or an Adjusted Base Rate, at our option, and, in each case, plus a fixed applicable margin. The definitive documentation governing the debt financing has not been finalized, and accordingly, the actual terms may differ from the description of such terms in the commitment letter.

On April 4, 2017, we consummated the transactions contemplated by a share and asset acquisition agreement with Marvell Semiconductor Inc., or Marvell, to purchase the Spain entity of Marvell along with the acquisition of certain assets and assumption of certain liabilities of Marvell’s G.hn business for aggregate cash consideration of $21.0 million. We also hired certain employees of the G.hn business outside of Spain and assumed employment obligations for the Spanish entity we acquired, which is now a subsidiary of MaxLinear. The assets acquired include, among other things, patents and other intellectual property, a workforce-in-place and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory and other property and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees who joined MaxLinear and its subsidiaries as a result of the transaction. The acquired assets and assumed liabilities, together with the employees, represent a business as defined in ASC 805, Business Combinations. We intend to integrate the acquired assets and employees into our existing business.

In April 2017, we began operating under certain favorable tax incentives in Singapore, which are generally effective through March 2022 and may be extended through March 2027. The incentives are conditional upon our meeting certain employment and investment thresholds over time.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, allowance for doubtful accounts, inventory valuation, goodwill and other intangible assets valuation, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

We believe that accounting policies we have identified as critical involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

For a summary of our critical accounting policies and estimates, refer to Management's Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2016, which we filed with the Securities and Exchange Commission, or SEC, on February 9, 2017, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2017.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for us beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Adoption of the amendments in this guidance is expected to accelerate the timing of our revenue recognition on products sold via distributors which will change from the sell-through method to the sell-in method. We currently have no plans to alter our selling practices or terms of sales through distributors in anticipation of adoption of the amendments in this guidance. We have performed a preliminary assessment of the impact of adopting this new accounting standard on our consolidated financial position and results of operations and believe the change would not have a material impact on our revenues for the year ending December 31, 2018 and comparative periods expected to be presented, based on the current volume and amount of distributor transactions. We plan to apply the guidance prospectively with an adjustment to retained earnings for the cumulative effect of adoption.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for us beginning in the first quarter of fiscal year 2017 and has been applied prospectively. The adoption of ASU No. 2015-11 in the first quarter of fiscal year 2017 did not have a material impact on our consolidated financial position and results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update include a requirement to measure equity investments (except equity method investments) at fair value with changes in fair value recognized in net income; previously changes in fair value were recognized in other comprehensive income. The amendments in this update are effective for us beginning in the first quarter of fiscal year 2018. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

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to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this update are effective for us for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of the amendments in this update on our consolidated financial position and results of operations; however, adoption of the amendments in this update is expected to have a material impact on our consolidated financial position.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this update are effective for us beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for us for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. The new guidance requires, among other things, excess tax benefits and tax deficiencies to be recorded on a prospective basis in the income statement in the provision for income taxes when awards vest or are settled. On the statement of cash flows, excess tax benefits must be classified along with other income tax cash flows as an operating activity on either a prospective transition method or a retrospective transition method. Also, because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. We adopted ASU No. 2016-09 during the quarter ended June 30, 2016, as previously described in our Form 10-Q for the period ended June 30, 2016 filed with the Securities Exchange Commission on August 8, 2016. ASU No. 2016-09 permitted early adoption in an interim period but required the adjustments to be reflected as of the beginning of the fiscal year that includes that interim period and accordingly, we restated previously reported results for the three months ended March 31, 2016. The impact of adoption on our previously reported results for the three months ended March 31, 2016 is shown below and related to the inclusion of excess tax benefits in the provision for income taxes on a prospective basis as of the beginning of the period and the exclusion of excess tax benefits that would have been recognized in additional paid-in capital in assumed proceeds from applying the treasury stock method in the calculation of earnings per share.



	Three months ended March 31, 2016
	As reported		As adjusted
	(in thousands, except per share amounts)
Provision for income taxes	$	2,558	$	993
Net income	$	19,116	$	20,681
Basic earnings per share	$	0.31	$	0.33
Diluted earnings per share	$	0.29	$	0.31
Diluted weighted average shares outstanding	65,818		66,643

There was no cumulative effect on retained earnings in the consolidated balance sheet upon adoption since we have a full valuation allowance against U.S. deferred tax assets. We elected to continue to estimate forfeitures of share-based awards resulting in no impact to stock-based compensation expense, and are also continuing to classify cash paid by us when directly withholding shares for tax withholding purposes in cash flows from financing activities. On the statement of cash flows, excess tax benefits were classified along with other income tax cash flows as an operating activity upon adoption on a prospective basis.

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In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740) to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this update are effective for us beginning in the first quarter of fiscal 2018, including interim reporting periods. Early adoption is permitted as of the first quarter of fiscal 2017, or the beginning of the annual reporting period only. We have elected to early adopt the amendments in this update in the three months ended March 31, 2017. Due to a full valuation allowance on U.S. and certain foreign deferred tax assets, the adoption of the amendments in this update did not have a material impact on our consolidated financial position and results of operations for the three months ended March 31, 2017.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. When cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall, for each period that a statement of financial position is presented, disclose the line items and amounts of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents disaggregated by the line item in which they appear within the statement of financial position, with a sum to the total amount of cash, cash equivalents, restricted cash and restricted cash equivalents. The amendments in this update are effective for us beginning in fiscal 2018, including interim periods within that year and should be applied using a retrospective transition method to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We have elected to early adopt the amendments in this update in the three months ended March 31, 2017. The adoption did not have a material impact on our consolidated cash flows for the three months ended March 31, 2017 and 2016.

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quarter of 2018 and are required to be applied prospectively on or after the effective date. No disclosures are required at transition. Early application is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. We plan to adopt the amendments in this update starting with 2017 acquisitions. Such adoption is not expected to have a material impact on our consolidated financial position and results of operations.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update are effective for us beginning with fiscal year 2020, including interim periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operations.

Results of Operations

The following describes the line items set forth in our unaudited consolidated statements of income.

Net Revenue. Net revenue is generated from sales of radio-frequency and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and wired and wireless infrastructure markets. A significant portion of our end customers purchases products indirectly from us through distributors. Although we actually sell the products to, and are paid by, the distributors, we refer to these end customers as our customers.

Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of certain production mask costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs.

Research and Development. Research and development expense includes personnel-related expenses, including stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred.

Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including stock-based compensation, distributor and other third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs.

Restructuring Charges. Restructuring charges consist of an adjustment related to lease and leasehold impairment charges related to a restructuring plan entered into as a result of our acquisition of Entropic.

Interest Income. Interest income consists of interest earned on our cash, cash equivalents and investment balances.

Other Income (Expense). Other income (expense) generally consists of income (expense) generated from non-operating transactions.

Provision for Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years.

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The following table sets forth our unaudited consolidated statement of income data as a percentage of net revenue for the periods indicated:



	Three Months Ended March 31,
	2017		2016
Net revenue	100	%	100	%
Cost of net revenue	40		40
Gross profit	60		60
Operating expenses:
Research and development	27		23
Selling, general and administrative	21		13
Restructuring charges	—		2
Total operating expenses	48		38
Income from operations	12		22
Interest income	—		—
Other expense, net	—		—
Income before income taxes	12		22
Provision for income taxes	2		2
Net income	10	%	20	%

Net Revenue



	Three months ended
	March 31,
	2017			2016			$ Change			% Change
	(dollars in thousands)
Operator	$	72,994		$	92,797		$	(19,803	)	(21	)%
% of net revenue	82		%	90		%
Infrastructure and other	15,847			9,888			5,959			60	%
% of net revenue	18		%	10		%
Total net revenue	$	88,841		$	102,685		$	(13,844	)	(13	%)

Net revenue decreased $13.8 million from $102.7 million in the three months ended March 31, 2016 to $88.8 million in the three months ended March 31, 2017. The decrease in operator net revenue of $19.8 million was primarily driven by the inclusion of the now negligible legacy video SoC revenue, which declined significantly year-over-year, declines in satellite analog channel-stacking, or aCSS, and cable video RF transceiver shipments, partially offset by increased cable modem and gateway, satellite gateway, and terrestrial set-top box tuner demodulator shipments. In addition, infrastructure and other revenue increased $6.0 million. The increase was primarily related to the incremental contribution of shipments from our recently acquired wireless infrastructure businesses, which we acquired in April 2016 and July 2016, partially offset by declines in consumer terrestrial set-top box shipments and TV tuner product shipments. We expect year-over-year revenue declines in the legacy video SoC and aCSS products to continue, as these products are near the end of their life cycles, which along with other factors, including but not limited to operator consolidation, could adversely affect future revenues for these product categories.

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Cost of Net Revenue and Gross Profit



	Three months ended
	March 31,
	2017			2016			$ Change			% Change
	(dollars in thousands)
Cost of net revenue	$	35,917		$	41,515		$	(5,598	)	(13	)%
% of net revenue	40		%	40		%
Gross profit	52,924			61,170			(8,246		)	(13	)%
% of net revenue	60		%	60		%

Cost of net revenue decreased $5.6 million from $41.5 million in the three months ended March 31, 2016 to $35.9 million in the three months ended March 31, 2017. The decrease was primarily driven by lower sales and lower manufacturing overhead, partially offset by increased intellectual property amortization of $1.1 million primarily related to the acquisition of the wireless infrastructure backhaul business. The gross profit percentage remained flat in the three months ended March 31, 2017, as compared to the three months ended March 31, 2016.

Research and Development



	Three months ended
	March 31,
	2017			2016			$ Change		% Change
	(dollars in thousands)
Research and development	$	23,878		$	23,752		$	126	1	%
% of net revenue	27		%	23		%

Research and development expense in the three months ended March 31, 2017 increased $0.1 million to $23.9 million from $23.8 million in the three months ended March 31, 2016. The increase was primarily due to increases in payroll-related expense and occupancy expense of $1.5 million related to our acquisitions of the wireless infrastructure businesses in April 2016 and July 2016. This increase was partially offset by lower mask prototype expenses of $1.4 million.

We expect our research and development expenses to increase in the future as we continue to focus on expanding our product portfolio and enhancing existing products.

Selling, General and Administrative



	Three months ended
	March 31,
	2017			2016			$ Change		% Change
	(dollars in thousands)
Selling, general and administrative	$	18,613		$	13,610		$	5,003	37	%
% of net revenue	21		%	13		%

Selling, general and administrative expense increased $5.0 million from $13.6 million in the three months ended March 31, 2016, to $18.6 million in the three months ended March 31, 2017. The increase was primarily due to an increase in professional fees of $3.7 million related to our merger and acquisition activities during the three months ended March 31, 2017, and an increase in intangible amortization expense of $1.6 million related to developed technology and customer-related intangibles from the wireless infrastructure acquisitions in April 2016 and July 2016.

We expect selling, general and administrative expenses to increase in the future as we expand our sales and marketing organization to enable expansion into existing and new markets and continue to build our international administrative infrastructure.

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Restructuring charges



	Three months ended
	March 31,
	2017			2016			$ Change			% Change
	(dollars in thousands)
Restructuring charges	$	—		$	2,106		$	(2,106	)	100	%
% of net revenue	—		%	2		%

Restructuring charges decreased from $2.1 million in the three months ended March 31, 2016 to $0 in the three months ended March 31, 2017. The charges in the three months ended March 31, 2016 consisted of an adjustment to restructuring charges related to our exiting of facilities under lease arrangements assumed in connection with the Entropic acquisition. In the three months ended March 31, 2017, there were no similar charges.

Interest and Other Expense, Net



	Three months ended
	March 31,
	2017			2016			$ Change			% Change
	(dollars in thousands)
Interest income	$	195		$	170		$	25		15	%
Other expense, net	(144		)	(198		)	(54		)	(27	)%

Interest income increased $0.03 million from $0.17 million in the three months ended March 31, 2016 to $0.20 million in the three months ended March 31, 2017. Interest income is primarily derived from our cash, cash equivalent and investment balances. The changes in other expense, net was primarily due to fluctuations in foreign currency transactions.

Provision for Income Taxes



	Three months ended
	March 31,
	2017			2016			$ Change		% Change
	(dollars in thousands)
Provision for income taxes	$	2,021		$	993		$	1,028	104	%
% of net revenue	2		%	1		%

The provision for income taxes in the three months ended March 31, 2017 was $2.0 million or approximately 19% of pre-tax income compared to $1.0 million or approximately 5% of pre-tax income in the three months ended March 31, 2016.

The provision for income taxes for the three months ended March 31, 2017 primarily relates to federal tax due to our limitation on use of net operating losses, credit carryforwards, state income taxes, and income taxes in certain foreign jurisdictions. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. For example, effective in the second quarter of 2017, we began to operate under certain favorable tax incentives in Singapore which are effective through March 2022 and may be extended through March 2027. Such incentives are conditional upon our meeting certain employment and investment thresholds over time. The change is also expected to result in additional taxable income in the U.S. related to an intellectual property buy-in payment from a foreign affiliate in connection with the change in tax structure.

The provision for income taxes for the three months ended March 31, 2016 primarily relates to federal tax due to our limitation on use of net operating losses, state income taxes, and income taxes in certain foreign jurisdictions. During the quarter ended June 30, 2016, the Company adopted ASU No. 2016-09, Improvements to Share Based Compensation, which resulted in the recognition of excess tax benefits within the provision for income taxes in the unaudited consolidated statement of operations. ASU No. 2016-09 permitted early adoption in an interim period but required the adjustments to be reflected as of the beginning of the fiscal year that includes that interim period and accordingly, we restated the previously reported income tax provision for the three months ended March 31, 2016. For the three months ended March 31, 2016, the impact of including net excess tax benefits was to reduce the provision for income taxes by $1.6 million.

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Since the amount of such excess tax benefits and deficiencies depend on the fair market value of our common stock, our income tax provision is now subject to volatility in our stock price and in the future, could unfavorably affect our future effective tax rate.

We continue to maintain a valuation allowance to offset the federal, California and certain foreign deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. In making such determination, we consider all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. As of March 31, 2017, we are in a three-year U.S. cumulative pre-tax book loss position. Based upon our review of all positive and negative evidence, we concluded that a full valuation allowance should continue to be recorded against our U.S. and certain foreign net deferred tax assets at March 31, 2017. We are closely assessing the need for a valuation allowance on the deferred tax assets by evaluating positive and negative evidence that may exist. If we continue to generate taxable income, we could remove some or all of the valuation allowance against federal, California and certain foreign deferred tax assets if we meet the more-likely-than-not threshold. The impact of releasing some or all of such valuation allowance will be material in the period in which such release occurs. Until such time that we remove the valuation allowance against our federal, California and certain foreign deferred tax assets, our provision for income taxes will primarily consist of federal and state current income taxes and income taxes in certain foreign jurisdictions. Furthermore, we do not incur expense or benefit in certain tax free jurisdictions in which we operate.

Liquidity and Capital Resources

As of March 31, 2017, we had cash and cash equivalents of $89.1 million, restricted cash of $2.1 million, short-term investments of $63.6 million, and net accounts receivable of $57.8 million.

Our primary uses of cash are to fund operating expenses, purchases of inventory and the acquisition of businesses, property and equipment and intangible assets, and is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used to fund operating expenses in our consolidated statements of cash flows excludes the impact of non-cash items such as stock-based compensation and amortization and depreciation of property and equipment and acquired intangible assets, and step-ups of acquired inventory to fair value.

Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period depending on the payment cycles of our major distributor customers.

Following is a summary of our working capital and cash and cash equivalents, restricted cash and investments for the periods indicated:



	March 31,		December 31,
	2017		2016
	(in thousands)
Working capital	$	183,874	$	158,304
Cash and cash equivalents	$	89,121	$	81,086
Short-term restricted cash	615		614
Long-term restricted cash	1,502		1,196
Total cash, cash equivalents and restricted cash	91,238		82,896
Short-term investments	63,637		47,918
Long-term investments	—		5,991
Total cash, cash equivalents, restricted cash and investments	$	154,875	$	136,805

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Following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods indicated:



	Three Months Ended March 31,
	2017			2016
	(in thousands)
Net cash provided by operating activities	$	22,672		$	38,954
Net cash used in investing activities	(10,655		)	(30,695		)
Net cash provided by (used in) financing activities	(4,876		)	632
Effect of exchange rate changes on cash and cash equivalents	1,201			(7		)
Net increase in cash, cash equivalents and restricted cash	$	8,342		$	8,884

Cash Flows from Operating Activities

Net cash provided by operating activities was $22.7 million for the three months ended March 31, 2017. Net cash provided by operating activities primarily consisted of net income of $8.5 million, $11.4 million in non-cash operating expenses, and $2.8 million in changes in operating assets and liabilities. Non-cash items included in net income for the three months ended March 31, 2017 primarily consisted of depreciation and amortization of property, equipment and acquired intangible assets of $6.9 million, stock-based compensation of $5.5 million, partially offset by excess tax benefits on stock-based awards of $0.9 million.

Net cash provided by operating activities was $39.0 million for the three months ended March 31, 2016. Net cash provided by operating activities for this period primarily consisted of net positive cash flow from adding back $9.9 million in non-cash operating expenses to net income of $20.7 million, and changes in operating assets and liabilities of $8.4 million. Non-cash items included in net loss for the three months ended March 31, 2016 primarily included depreciation and amortization expense of property and equipment and acquired intangible assets of $5.8 million and stock-based compensation of $5.1 million, partially offset by excess tax benefits on stock based awards of $1.6 million