SITIME Corp quarterly report, Q3 FY2022

SiTime Corporation — Q3 2022 Form 10-Q Summary

Business context and reporting period

SiTime designs and sells precision timing solutions, including MEMS-based oscillators, resonators and emerging clock IC products. The company operates a fabless model and sells primarily through distributors, particularly in Asia, to communications and enterprise, automotive, industrial, aerospace, mobile, IoT and consumer markets. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Revenue	$73.1 million	$63.0 million	$222.8 million	$143.1 million
Gross profit	$47.3 million	$41.7 million	$145.2 million	$87.3 million
Gross margin	65%	66%	65%	61%
Income from operations	$3.5 million	$14.1 million	$21.9 million	$12.7 million
Net income	$5.8 million	$14.0 million	$24.8 million	$12.4 million
Diluted EPS	$0.26	$0.66	$1.09	$0.60
Operating cash flow	Not separately provided	Not separately provided	$34.9 million	$34.4 million

Q3 revenue increased 16% year over year, while nine-month revenue increased 56%. Q3 gross margin declined one percentage point, but the nine-month margin improved four percentage points. Q3 operating income and net income declined despite higher revenue, primarily because operating expenses increased substantially. Interest income contributed $2.5 million in Q3 and $3.3 million for the nine-month period.

Research and development expense increased 84% in Q3 and 83% for the first nine months, driven by headcount, stock-based compensation, new-product costs and depreciation.
Selling, general and administrative expense increased 36% in Q3 and 48% for the first nine months.
Stock-based compensation expense was $15.7 million in Q3 and $41.8 million for the first nine months, compared with $7.4 million and $21.5 million, respectively, in the prior-year periods.
Q3 shipment volume declined 20% year over year, offset by higher average selling prices, product mix and a $2.7 million customer-rebate waiver recognized as revenue.
For the first nine months, shipment volume increased 15%, with higher average selling prices and new design wins also contributing to growth.

Balance sheet, cash flow and liquidity

Cash and cash equivalents were $41.6 million at September 30, 2022, compared with $559.5 million at December 31, 2021.
Short-term held-to-maturity investments were $522.2 million, consisting of Treasury bills. Total cash, cash equivalents and short-term investments were approximately $563.8 million.
Total assets were $738.1 million and total liabilities were $43.6 million. The filing reports no debt borrowings; liabilities primarily consisted of accounts payable, accrued expenses and operating lease liabilities.
Operating cash flow was $34.9 million for the first nine months, substantially unchanged from $34.4 million in the prior-year period.
Investing cash flow was negative $547.9 million, including $519.9 million invested in Treasury bills, $25.0 million of property and equipment purchases and $3.0 million of intangible-asset purchases.
Financing cash flow was negative $4.9 million, reflecting $27.9 million of employee tax withholding payments, partially offset by $23.0 million of net proceeds from the at-the-market equity offering.
Inventory increased to $45.4 million from $23.6 million at year-end 2021, primarily reflecting higher wafer inventory levels.
Management stated that existing cash, cash equivalents and short-term investments should be sufficient to meet cash needs for at least the next 12 months.

Material changes versus the prior comparable periods

Revenue growth slowed in Q3 relative to the first-half trend, with lower shipment volume and management citing weaker demand from new and existing customers.
Operating leverage deteriorated in Q3 as operating expenses rose 58%, compared with 16% revenue growth.
Customer concentration increased: the largest end customer represented 25% of Q3 revenue versus 20% in Q3 2021. The ten largest end customers represented 80% of Q3 revenue versus 46% previously.
The top three distributors represented approximately 55% of Q3 revenue versus 45% in the prior-year quarter.
Management reported customer and contract-manufacturer inventory buildup related to macroeconomic conditions, which may reduce future demand.
During July 2022, a customer waived $2.7 million of accrued rebates, which SiTime recognized as revenue in Q3.
SiTime sold 125,334 shares under its at-the-market program during the first nine months for net proceeds of approximately $23.0 million. The company also paid $27.9 million for employee tax withholding related to restricted stock unit vesting.

Guidance, outlook, commentary and risks

The filing does not provide specific quantitative revenue, margin or earnings guidance. Management expects research and development and selling, general and administrative expenses to increase in absolute dollars, while research and development contra-expenses from non-recurring engineering arrangements are expected to decline. Management also expects continued manufacturing-cost increases during the remainder of fiscal 2022.

Management believes industry-wide supply constraints contributed to prior revenue and gross-margin growth, but cautions that these benefits may not continue.
Key supply-chain dependencies include Bosch for MEMS wafers, TSMC for analog circuits, and several outsourced assembly and test providers. Capacity, pricing, yields and qualification delays could affect revenue and margins.
The company remains exposed to semiconductor cyclicality, inflation, recession risk, geopolitical tensions, the Russia-Ukraine conflict, COVID-19 effects, trade restrictions and foreign-exchange fluctuations.
Most sales are made through distributors on purchase orders that may be canceled, reduced or rescheduled with little notice. The company has no broad long-term or minimum purchase commitments from customers.
Apple, identified as the largest end customer, accounted for approximately 25% of Q3 revenue and 19% of nine-month revenue. The related agreement does not require minimum purchases.
SiTime provides lifetime warranties and may face product-liability, indemnification, intellectual-property and warranty claims. The filing does not identify any material current legal contingency.
MegaChips held approximately 23.3% of outstanding common stock and may significantly influence stockholder matters and corporate governance.
The company maintains a full valuation allowance against deferred tax assets. The effective tax rate was approximately zero because the company has accumulated operating losses and tax benefits are not currently recognized.
Disclosure controls and procedures were assessed as effective, and no material changes in internal control over financial reporting were reported.

Important facts for investors to verify

Whether Q3’s 20% shipment-volume decline and customer inventory buildup continue into subsequent quarters.
Whether revenue growth can continue without reliance on favorable product mix, pricing and the nonrecurring $2.7 million rebate waiver.
The sustainability of the 65% gross margin amid rising manufacturing, wafer, packaging and testing costs.
The effect of substantially higher research and development, selling and administrative spending and stock-based compensation on future operating margins.
Customer and distributor concentration, especially the largest end customer and the ten largest end customers.
Availability and pricing of foundry and outsourced assembly capacity, including dependencies on Bosch and TSMC.
The conversion of short-term Treasury-bill investments into available cash and the company’s future capital-spending needs.
Potential dilution from the remaining at-the-market offering capacity and outstanding equity awards.
Whether macroeconomic, geopolitical, COVID-19, trade and supply-chain risks materially affect demand, production or liquidity.