MAXLINEAR, INC quarterly report, Q2 FY2018

MaxLinear, Inc. Form 10-Q Summary

Business Context and Reporting Period

MaxLinear is a fabless semiconductor company providing RF, analog, mixed-signal, connectivity, power-management, and interface solutions for connected-home, infrastructure, industrial, and multi-market applications. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.

The results include the continuing integration of the 2017 Exar and Marvell G.hn acquisitions. MaxLinear adopted ASC 606 on January 1, 2018, changing certain distributor sales from sell-through to sell-in recognition and requiring estimates for price protection, rebates, and stock rotation rights.

Key Financial Metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net revenue	$101.5 million	$104.2 million	$212.4 million	$193.0 million
Gross profit	$56.3 million	$51.1 million	$119.0 million	$104.0 million
Gross margin	55%	49%	56%	54%
Operating income (loss)	$(0.2) million	$(15.8) million	$4.2 million	$(5.4) million
Net income (loss)	$(14.4) million	$11.0 million	$(12.6) million	$19.4 million
Diluted EPS	$(0.21)	$0.16	$(0.18)	$0.28
Cash flow from operations	Not separately provided	Not separately provided	$47.8 million	$15.6 million

Q2 revenue declined 3% year over year, while six-month revenue increased 10%. Gross margin improved to 55% in Q2 and 56% for the first half, primarily reflecting higher-margin product mix and lower acquisition-related inventory step-up amortization.

Q2 operating expenses were $56.6 million, including $30.2 million of research and development, $24.5 million of selling, general and administrative expense, and $1.9 million of restructuring charges.
Six-month operating expenses were $114.8 million, including $61.3 million of research and development and $51.6 million of selling, general and administrative expense.
Stock-based compensation was $7.3 million in Q2 and $15.8 million for the first half.
Cash and cash equivalents were $74.1 million at June 30, 2018; total cash, cash equivalents, and restricted cash were $75.1 million.
Working capital was $129.5 million, compared with $124.9 million at December 31, 2017.
Accounts receivable was $83.6 million and inventory was $44.3 million at quarter-end.
Long-term debt had a net carrying value of $305.2 million and principal outstanding of $312.0 million. The term loan matures in May 2024.
The effective interest rate on the debt was approximately 4.2%. An interest-rate swap effectively fixed a substantial portion of the debt at approximately 4.25% through October 2020.

Material Changes Versus the Prior Comparable Period

Connected-home revenue decreased 29% in Q2 and 22% for the first six months, driven by declines in legacy MoCA, satellite, tuner, and video SoC products, partially offset by cable modem, gateway, and G.hn shipments.
Infrastructure revenue increased 26% in Q2 and 48% for the first six months, primarily from Exar and prior wireless-infrastructure acquisitions, partially offset by declines in high-speed interconnect and wireless access products.
Industrial and multi-market revenue increased 168% in Q2 and 422% for the first six months, principally reflecting Exar products.
Q2 selling, general and administrative expense fell 22%, mainly because the prior-year period included higher merger and acquisition professional fees. Six-month SG&A increased 3% because of acquisition-related amortization and payroll costs.
Restructuring charges declined to $1.9 million from $6.5 million in both comparable periods. The 2018 charges primarily related to lease-related costs, including $0.7 million of leasehold-improvement impairment.
Interest and other expense increased to $3.0 million in Q2 and $7.4 million for the first half, primarily because of interest on debt incurred for the Exar acquisition.
The company reported tax expense of $11.2 million in Q2 and $9.4 million for the first half, compared with tax benefits of $29.5 million and $27.5 million, respectively, in 2017. The 2017 benefit primarily reflected release of a federal valuation allowance.
Operating cash flow increased to $47.8 million from $15.6 million, while financing cash flow was $(42.8) million because of $43.0 million of debt repayment. Total cash, cash equivalents, and restricted cash increased modestly by $0.7 million.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management stated that $74.1 million of cash and cash equivalents should fund projected operating requirements for at least the next twelve months, but noted that additional capital or debt may be required for acquisitions or other strategic initiatives.
Management expects research and development expense to increase as the company expands its product portfolio. SG&A is expected to decrease or remain flat in the near term, although it may rise with future sales and marketing expansion.
Gross margin is expected to fluctuate based on product mix, average selling prices, and manufacturing costs.
ASC 606 materially changes the timing of distributor revenue and cost recognition. Distributor sales represented 38% of Q2 revenue and 39% of six-month revenue, compared with 20% and 24%, respectively, in the prior-year periods. The company cautions that the full-year impact may vary materially with distributor inventory levels.
Revenue concentration remains significant: one customer represented 28% of Q2 revenue and 27% of six-month revenue; the ten largest customers represented 69% and 66%, respectively. China represented 65% of Q2 revenue and 63% of six-month revenue based on shipment destination.
Contractual obligations totaled $410.6 million, including $312.0 million of long-term debt, $45.1 million of inventory purchase obligations, $38.1 million of operating leases, and $15.3 million of other obligations.
Trango Systems litigation remains pending, with trial scheduled for May 10, 2019; the company cannot predict the outcome and identifies a potential adverse determination as material.
The CrestaTech district court litigation was dismissed in April 2018. The filing states that all 13 asserted claims had been found unpatentable by the PTAB and Federal Circuit, but the company continues to disclose residual litigation uncertainty.
Exar-related indemnification obligations could be material in the event of certain breaches. The company believes no material obligation exists as of June 30, 2018; remaining escrow was $0.8 million, while certain fundamental representations remain subject to longer survival periods.
Goodwill was $238.3 million and intangible assets were $281.0 million. No goodwill or finite-lived intangible impairment was recorded during the first half, but future impairment remains a risk.
Adoption of the new lease standard in 2019 is expected to have a material impact on the balance sheet because operating lease liabilities and right-of-use assets will be recognized.
Key operating risks include semiconductor cyclicality, pricing pressure, product obsolescence, dependence on third-party manufacturing, distributor inventory and pricing adjustments, customer concentration, international and China exposure, tariffs, acquisition integration, debt service, intellectual property claims, and tax-law changes.

Important Facts for Investors to Verify

Assess whether revenue growth from Exar and other acquired products can offset continuing declines in legacy connected-home products.
Monitor distributor inventory, price-protection liabilities, stock rotation reserves, and the ongoing ASC 606 effects on reported revenue and gross profit.
Evaluate debt repayment capacity, interest expense, remaining variable-rate exposure, and the May 2024 term-loan maturity.
Review customer and geographic concentration, particularly the 27% to 28% contribution from the largest customer and the approximately 63% China exposure.
Track gross-margin sustainability as product mix, average selling prices, and acquisition-related amortization change.
Confirm the final accounting impact of the Tax Cuts and Jobs Act and the company’s remaining valuation allowances and tax incentives.
Monitor Exar integration, restructuring costs, potential goodwill or intangible impairment, and the expected 2019 lease-accounting transition.
Follow the Trango litigation, residual CrestaTech proceedings, and Exar-related indemnification exposure.