Silicon Laboratories Inc. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended September 29, 2018 (fiscal 2018 Q3), not 2017 Q3 as specified in the request metadata. Comparative figures are for the quarter and nine months ended September 30, 2017. Financial statements are unaudited; dollar amounts below are in millions except per-share data.
Business context and reporting period
Silicon Laboratories designs mixed-signal integrated circuits and related software for IoT, infrastructure, broadcast, and access markets. It is a fabless semiconductor company dependent on third parties, primarily in Asia, for wafer fabrication, assembly, and testing. Fiscal Q3 comprised 13 weeks.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $230.2 | $198.7 | $652.7 | $567.8 |
| Gross profit | $135.6 | $116.6 | $391.2 | $334.9 |
| Gross margin | 58.9% | 58.7% | 59.9% | 59.0% |
| Operating income | $25.1 | $25.0 | $66.8 | $58.6 |
| Operating margin | 10.9% | 12.6% | 10.2% | 10.3% |
| Net income | $27.8 | $19.9 | $68.4 | $51.9 |
| Diluted EPS | $0.63 | $0.46 | $1.55 | $1.20 |
Q3 revenue rose 15.9% year over year; net income increased about 39%. Revenue growth and improved gross margin were offset at the operating-income level by higher expenses. Q3 R&D was $61.1 million and SG&A was $49.4 million, up 17.5% and 24.7%, respectively. For the first nine months, revenue increased 14.9% and operating income increased 14.1% year over year.
- Revenue mix: Q3 IoT revenue was $125.4 million (+25.5%) and Infrastructure was $52.6 million (+35.2%). Broadcast was $36.1 million (-16.0%) and Access was $16.2 million (-4.1%).
- Cash flow: Nine-month operating cash flow was $145.1 million versus $141.4 million in 2017. Investing activities used $149.2 million, including $239.7 million net cash for the Z-Wave acquisition; financing activities used $40.0 million. Cash and cash equivalents declined $44.0 million to $225.3 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $601.9 million. Current assets were $801.1 million and current liabilities $147.3 million. Convertible notes had a $351.5 million carrying value ($400 million principal), 1.375% coupon, and March 2022 maturity. The $300 million revolving facility had no borrowings at quarter-end; the company reported covenant compliance.
- Working capital: Receivables were $74.6 million (29 days sales outstanding); inventory was $77.6 million (74 days of inventory).
Material changes and unusual items
- Silicon Labs acquired the Z-Wave smart-home IoT business on April 18, 2018 for approximately $243 million cash. The acquired business contributed $20.5 million revenue from acquisition through quarter-end. The purchase allocation included $108.5 million goodwill and $125.7 million intangible assets; allocation remained preliminary. Acquisition-related costs were approximately $4.9 million for the nine months.
- Q3 gross profit included $4.0 million of acquisition-related inventory fair-value write-up charges; the nine-month amount was $6.1 million.
- ASC 606 adoption accelerated recognition of certain distributor sales. The company reported that adoption increased Q3 revenue by $10.3 million and net income by $5.9 million, and nine-month revenue by $18.5 million and net income by $10.8 million. Prior-year periods were not restated, limiting direct comparability.
- Tax benefits produced effective tax rates of -24.4% for Q3 and -15.9% for the nine months, chiefly reflecting the lower U.S. statutory tax rate, revenue-accounting tax effects, and a discrete transition-tax benefit. Accounting for some Tax Cuts and Jobs Act effects remained incomplete.
- The company repurchased 0.3 million shares for $24.3 million during the first nine months. In October 2018, after quarter-end, the board increased the repurchase authorization to $200 million and extended it through December 2019.
- Revenue from outside the U.S. represented 82% of the nine-month total. Distributors represented 72% of revenue; Arrow Electronics and Edom Technology each exceeded 10% of nine-month revenue. No individual customer exceeded 10%.
Outlook, risks, and contingencies
Management’s Q4 fiscal 2018 outlook was revenue of $221–$227 million, gross margin of 60.0%, operating expenses of $111.0 million, an effective tax rate of 10.0%, and diluted EPS of $0.39–$0.45. Management expected R&D expense to rise in absolute dollars and SG&A to remain relatively stable. Fiscal 2018 capital expenditures were estimated at $32–$36 million. Management said existing liquidity and credit availability were expected to meet requirements for at least 12 months.
- Key operating risks include semiconductor cyclicality, pricing pressure, seasonal or shifting demand, customer order variability, inventory obsolescence, product-development and design-win uncertainty, and reliance on third-party manufacturing and distribution channels.
- Most manufacturing and several assembly/test operations and customers are concentrated in the Pacific Rim, exposing supply and sales to capacity constraints, natural disasters, and geopolitical disruption. The filing also flags potential customer-component shortages and U.S.-China trade-policy risk.
- A Bandspeed patent suit filed in June 2018 alleges infringement of eight U.S. patents; the company said it intended to defend the matter and could not predict the outcome or financial impact. The Cresta/Crespe disputes were settled, with the company receiving a non-material payment and a full patent license.
- A Norwegian tax assessment dispute could result in approximately $17.6 million additional tax under the revised assessment; the company disagrees and is appealing. It said the tax authority was likely to request approximately $9.5 million during the appeal. An unfavorable outcome could materially affect financial statements.
- The company held $5.75 million fair value of illiquid auction-rate securities, with contractual maturity in 2046; it cannot predict when the funds will become available. It reported no other-than-temporary impairment at quarter-end.
- The company expected adoption of the new lease standard to increase reported assets and liabilities. The convertible notes also carry potential dilution if the company cannot settle principal in cash upon conversion.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2018 Q3, despite the request metadata stating 2017 Q3.
- Assess revenue growth and profitability excluding ASC 606 timing effects, acquisition contributions, and acquired-inventory charges.
- Track Z-Wave integration, acquired intangible amortization, and the final purchase-price allocation.
- Monitor the Q4 guidance against subsequent results, especially gross margin, operating expenses, and tax rate.
- Follow the Norwegian tax appeal and Bandspeed litigation, along with any changes in expected cash exposure.
- Review distributor concentration and inventory/return exposure, semiconductor supply capacity, and cash deployment under the expanded repurchase authorization.