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The Connectivity  segment represents our subsidiary Dialog Semiconductor B.V. (Dialog B.V.), which we acquired on 10 February 2011, therefore its results are consolidated from this date (see note 4 to the consolidated financial statements). 

Revenue from our Connectivity  segment in 2012 was US$96.1 million (2011: US$108.8 million). In 2012, the Connectivity  segment contributed an operating loss of US$13.1 million, compared to an operating profit of US$4.9 million for 2011. The decrease in revenue can be mainly attributed to the overall softening in the cordless DECT market, driven by unfavourable macroeconomics – especially in Europe – but also by the Company’s strategy to not take market share at low margin whilst it refocuses R&D investments to address new applications and markets. 

Had the Connectivity business been consolidated from the beginning of 2011, the total revenue in 2011 would have been US$120.2 million, US$24.1 million above the US$96.1 million achieved in 2012. The operating profit would have been US$3.6 million, US$16.7 million above the operating loss of US$13.1 million in 2012. The revenue decrease translates into a reduction of the operating income of approximately US$9.5 million. 

During 2012, further adverse effects impacted connectivity; inventory write-downs and revaluations of US$2.0 million (2011: US$0.2 million); a one-time expense of about US$0.9 million related to the transfer of certain legacy connectivity products to a new assembly site which will lead to further cost improvements once the transfer is completed in Q1 2013 (2011: nil), restructuring expenses of US$1.5 million (2011: nil) – please see explanation here below under “restructuring expenses” – increased outsourced R&D expenses of US$1.7 million compared to 2011 to accelerate the development of new products, government grants for R&D activities received were US$0.4 million lower than in 2011, capitalised R&D and overhead expenses reduced by US$1.0 million compared to 2011 and US$0.4 million of overhead cost associated with the Company’s share option programme were allocated to Connectivity (2011: nil) – this amount related mainly to National Insurance provisions for UK-based employees, associated to share options that had to be provided for by the Company. 

On the other hand, during 2012, other favourable effects were recorded: the operating loss in 2012 included an amortisation expense resulting from fair value adjustments in connection with the purchase price allocation of US$5.6 million (2011 US$6.0 million). 2012 also included 

US$0.6 million (2011: US$2.7 million) for the accelerated amortisation of intangible assets in relation to previously capitalised R&D expenses for close to end of life products (these products were fully amortised by the end of Q1 2012) and finally 2011 benefited from a first-time inventory overhead capitalisation of US$0.5 million to align the local accounting procedures to those of the Group. Furthermore, in 2012 the underlying 1) operational loss in 2012 was US$6.3 million, compared to a profit of US$16.8 million in 2011 

For further information please refer to notes 4 and 24 to the consolidated financial statements. 

## Revenues 

Total revenues for 2012 were up 46.7% at US$773.6 million (2011: US$527.3 million. The increase in revenue is mainly a result of higher sales volumes in our Mobile Systems  segment. 

## Cost of sales 

Cost of sales consists of material costs, the costs of outsourced production and assembly, related personnel costs and applicable overhead and depreciation of test and other equipment. Cost of sales for the period ended 31 December 2012 was up 50.7% at US$481.0 million (2011: US$319.1 million). The increase in cost of sales was mostly in line with the increase in production volume. 

As a percentage of revenue, cost of sales increased from 60.5% in 2011 to 62.2% in 2012. This increase can largely be attributed to the product mix, which reflects higher volume customer contracts together with higher material costs against the backdrop of an ongoing constrained supply chain environment. Additionally, very high volume ramps of new products using new manufacturing processes, introduced early last year, continued to drive lower yields through 2012 although measurable improvements were already visible in the second half of 2012. 

## Gross profit 

Our gross margin decreased from 39.5% of revenue in 2011 to 37.8% in 2012. This was due to higher cost of sales as a percentage of revenue, as described above. 

However, during the course of 2012, our gross margin improved quarter on quarter to peak at 38.5% of revenues in Q4 2012. 

For the most part of 2012, gross margins remained under pressure due to the reasons described above and the continuous supply constraints, which inhibited expected cost reductions from suppliers. 

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## Selling and marketing expenses 

Selling and marketing expenses consist primarily of salaries, sales commissions, travel expenses, advertising and other marketing costs. In line with our increased sales volume and continuous growth of our business, selling and marketing expenses increased from US$32.4 million in 2011 to US$38.7 million in 2012. As a percentage of total revenue, selling and marketing expenses decreased from 6.1% of total revenue in 2011 to 5.0% in 2012, demonstrating the Company’s ability to control cost. 

## General and administrative expenses 

General and administrative expenses consist primarily of personnel and support costs for our finance, human resources and other management departments and in 2011 the acquisition-related costs in connection with the purchase of SiTel. General and administrative expenses for 2012 were up 37.0% at US$33.5 million (2011: US$24.4 million). General and administrative expenses as a percentage of total revenue decreased from 4.6% in 2011 to 4.3% in 2012. 

