We rely on foundries to provide silicon-based products and to supplement our wafer manufacturing capacity. Our recent efforts to consolidate our manufacturing footprint, including the planned closure of our Woburn manufacturing facility and the consolidation of operations into our Newbury Park site, divestitures of assembly and test operations in both China and Costa Rica, as well as the sale of our North Carolina fabrication facility, have increased our reliance on third parties. There are significant risks associated with reliance on third-party foundries, including:
- the lack of wafer supply, potential wafer shortages, and higher wafer prices,
- required minimum purchase commitments,
- limited ability to respond to unanticipated changes in customer demand,
- limited control over delivery schedules, manufacturing yields, production costs, process technologies, and quality assurance, and
- the inaccessibility of, or delays in obtaining access to, key process technologies, materials, and IP blocks.
Even in cases where we have long-term supply arrangements to obtain additional external manufacturing capacity, the third-party foundries we use for our standby manufacturing capacity may allocate their limited capacity to the production requirements of other customers and in general we have no contractual right to prevent them from making such allocations. If we choose to use a new foundry to replace either existing or backup capacity, it will typically take an extended period of time for us to complete our qualification process for that foundry, which will result in a significant passage of time before we can begin shipping products from that new foundry.
Further, the third-party foundries may experience financial difficulties or changes in control, be unable to deliver products to us in a timely manner, be unwilling to invest in processes that meet our needs, or suffer damage or destruction to their facilities, particularly since some of them are located in areas prone to natural disasters or to severe weather events and other impacts of climate change. If any disruption of manufacturing capacity occurs, we may not have alternative manufacturing sources immediately available. We may therefore experience difficulties, delays, or additional costs in securing an adequate supply of our products, which could impair our ability to meet our customers’ needs and have a material adverse effect on our operating results.
Although we own and operate assembly and test facilities, as part of our supply resilience and business continuity strategies, we still depend on subcontractors to package, assemble, and test certain of our products at cost-competitive rates. For those assembly and test subcontractors with whom we do not have long-term agreements, we typically procure services on a per-order basis. If any of our subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences outages or any other disruption of assembly or testing capacity or is otherwise unable or unwilling to provide us sufficient capacity to meet our demand, we may not be able to obtain alternative assembly and testing services in a timely manner and/or at cost-competitive rates. Due to the amount of time that it usually takes to qualify assembly and test subcontractors, we could experience significant delays and/or increased costs in product shipments if we are required to find alternative assembly and test subcontractors for our components. These supply challenges have impacted, and may continue to impact, our ability to satisfy increases in demand for our products. Any problems that we may encounter with the delivery, quality, or cost of our products could damage our customer relationships and our ability to establish new customer relationships and materially and adversely affect our business, results of operations, and financial condition.
During fiscal 2026 [and subsequent to the end of fiscal 2026], in reaction to market demand factors impacting capacity at a number of our vendors, including increased demand that foundries have faced associated with data center and AI-related buildouts, we entered into or continued to perform under long-term capacity reservation and supply agreements with certain third-party foundries and OSATs, under which we agreed to certain minimum purchase commitments and/or upfront cash payments. We currently expect that market forces will require us to enter into additional long-term capacity reservation and supply agreements. These long-term capacity reservation agreements may have an adverse effect on our operating results in the event our future supply needs are reduced below the minimum purchase requirements as a result of a reduction in demand for our products. In addition, we may not be able to enter into new long-term capacity reservation and supply agreements. If we are unable to secure such supply agreements or even with such supply agreements, we are still subject to risks that a supplier will prioritize other customers’ capacity demands or be unable to meet its supply commitments, achieve anticipated manufacturing yields, produce wafers or other components on a timely basis, or provide additional capacity beyond its commitments sufficient to meet our supply needs. If so, we may experience delays in product launches or supply shortages for certain products, which could cause an unanticipated decline in our sales and damage our existing customer relationships and our ability to establish new customer relationships. In addition, if a supplier experiences financial difficulties or goes into bankruptcy, it could be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our payments and deposits made as part of any supply agreement.