Business context and reporting period
Silicon Laboratories Inc. filed this unaudited Form 10-Q for the quarter ended April 4, 2020, comparing results with the three months ended March 30, 2019. This conflicts with the request metadata of “2019 Q1”; the filing itself reports fiscal 2020 Q1. Fiscal 2020 included an extra week in Q1. The company designs mixed-signal semiconductor products, grouped as Internet of Things (IoT) and Infrastructure and automotive.
Financial results
Amounts below are in millions of U.S. dollars unless noted.
- Revenue: $214.9, up 14.2% from $188.1. IoT revenue rose 10.9% to $118.0; Infrastructure and automotive rose 18.5% to $96.8. Unit volumes increased 27.7%, while average selling prices declined 10.3%.
- Profit and margins: Gross profit was $129.2, up from $115.9, but gross margin fell to 60.1% from 61.6%, primarily due to product mix. Operating income declined to $3.9 from $5.1; operating margin was 1.8% versus 2.7%. Net income was $2.2 versus $5.4; diluted EPS was $0.05 versus $0.12.
- Costs: Operating expenses rose 13.0% to $125.2, with R&D up 15.7% to $71.2 and SG&A up 9.7% to $54.0. Management cited higher personnel, occupancy and acquisition-related costs.
- Cash flow: Operating cash flow was $59.7, compared with $32.0. Investing activities provided $51.5, largely reflecting net sales of investments. Financing activities provided $277.4, primarily from a $310.0 revolver borrowing. Cash and cash equivalents ended at $615.8, up from $227.1 at fiscal year-end.
- Liquidity: Cash, cash equivalents and short-term investments totaled $1,058.3 at quarter-end. Current assets were $1,248.0 and current liabilities $446.7.
- Debt: The company had $310.0 drawn on its $400.0 revolving facility and $400.0 principal amount of 1.375% convertible notes due March 2022 (carrying value $372.0). It reported compliance with credit-facility covenants. A swap fixed the Eurodollar portion of the revolver borrowing at 0.5% through April 1, 2021.
Changes, outlook and risks
- Management attributed revenue growth to increased demand for IoT MCU and wireless connectivity products, and for Infrastructure and automotive power, consumer and automotive products. The additional fiscal week also increased revenue, gross-profit dollars and expenses versus the prior-year quarter.
- Second-quarter fiscal 2020 outlook: revenue of $190–$210 million, gross margin of 60.5%, operating expenses of $122 million, effective tax rate of 0.0%, and diluted loss per share of $(0.26) to $(0.03). Management expected R&D expense to increase, partly due to the Redpine acquisition, and SG&A to decrease.
- COVID-19 created material uncertainty around demand, customer and supplier operations, global supply chains, liquidity and financial performance. The company had moved largely to work-from-home operations; its third-party manufacturing, assembly, packaging and testing partners had generally remained operational as of the filing.
- On April 28, 2020, after quarter-end, the company acquired Redpine Signals’ Wi-Fi and Bluetooth business for approximately $314 million. Management said it expected the acquisition to accelerate its product roadmap.
- The board terminated the $200 million share-repurchase program in April 2020. During Q1, the company repurchased 0.2 million shares for $16.3 million.
- Other notable exposures include reliance on third-party manufacturing concentrated in Asia, distributor sales and return/price-protection arrangements, product and pricing competition, and an unresolved Norwegian tax assessment of approximately $13.5 million. The company said it believed its position was more likely than not to be sustained, but an unfavorable outcome could materially affect results. Legal proceedings in the ordinary course were not expected to have a material adverse effect.
- The company stated that existing liquidity and credit availability should meet capital requirements for at least 12 months. It also reported $6.0 million par value of illiquid auction-rate securities, with uncertain timing of access to the funds.
Important facts to verify
- Confirm the intended reporting period: the supplied metadata says 2019 Q1, while this filing covers Q1 fiscal 2020 ended April 4, 2020.
- Assess whether the Q2 revenue and loss-per-share outlook adequately reflects pandemic-related demand and supply-chain uncertainty.
- Review the Redpine acquisition’s $314 million cash cost, funding and subsequent impact on liquidity and expenses.
- Monitor revolver borrowings, covenant headroom, convertible-note settlement exposure and the share-repurchase program’s termination.
- Track the Norwegian tax appeal and the continuing liquidity and valuation risks of auction-rate securities.