MAXLINEAR, INC annual report, FY2011

MaxLinear, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011, filed March 14, 2012. The filing also provides unaudited fourth-quarter 2011 results. MaxLinear is a fabless semiconductor company providing integrated RF receivers and RF receiver systems-on-chip for cable, terrestrial television, broadband, automotive, consumer electronics and related applications.

Financial Performance and Position

Metric	2011	2010	Change
Net revenue	$71.9 million	$68.7 million	5% increase
Gross profit	$45.3 million	$47.1 million	4% decrease
Gross margin	63%	69%	Down 6 percentage points
Research and development	$40.2 million	$27.7 million	45% increase
SG&A	$20.2 million	$15.9 million	27% increase
Operating loss	$15.0 million	Operating income of $3.5 million	Material deterioration
Net loss	$22.0 million	Net income of $10.1 million	Material deterioration
Basic and diluted loss per share	$0.68 loss	$0.33 basic income; $0.30 diluted income	Shift to loss

Fourth quarter: Revenue was $19.3 million, gross profit was $11.7 million and net loss was $4.7 million, or $0.14 per basic and diluted share.

• Revenue growth was driven primarily by increased cable product sales, partly offset by declines in consumer terrestrial television set-top box and mobile handset applications.
• Gross margin declined because average selling prices fell faster than manufacturing costs and because of a less favorable product mix, including reduced higher-margin mobile handset sales.
• R&D spending increased substantially due to new RF receiver SoC programs, product enhancements, MoCA connectivity initiatives, technology licenses and higher headcount.
• 2011 included $7.4 million of stock-based compensation and a $6.7 million charge from establishing a valuation allowance on federal deferred tax assets.

Cash Flow, Liquidity and Debt

• Cash and cash equivalents were $28.0 million at December 31, 2011, compared with $21.6 million at December 31, 2010.
• Short-term investments were $47.2 million and long-term investments were $10.6 million, for total cash, cash equivalents and investments of $85.7 million.
• Net cash used in operating activities was $7.1 million, compared with $4.8 million provided in 2010. The use of cash reflected the net loss and a $7.4 million increase in accounts receivable associated with higher year-end shipments.
• Investing activities provided $10.8 million, primarily reflecting maturities of securities exceeding purchases of securities, property and equipment and intangibles.
• Financing activities provided $2.7 million, primarily from common-stock issuances.
• Working capital was $76.6 million, down from $95.4 million.
• Debt was minimal: capital lease obligations totaled $34,000, including $32,000 current and $2,000 long term. The filing does not report material funded debt.
• Total contractual obligations were $11.7 million, including $3.0 million of operating leases, $5.8 million of other obligations, $2.8 million of inventory purchase commitments and $36,000 of capital leases.

Material Changes Versus 2010

• Revenue increased 5%, but gross profit declined 4% and gross margin fell from 69% to 63%.
• Operating expenses increased from $43.6 million to $60.3 million, primarily due to R&D investment, expanded operations and public-company and regulatory compliance costs.
• The company moved from $10.1 million of net income to a $22.0 million net loss.
• Sales concentration declined modestly: the ten largest end customers represented approximately 59% of revenue versus 71% in 2010. Panasonic represented 14% and Arris 11% of 2011 revenue.
• Geographic concentration remained high, although Japan declined to 39% of revenue from 57%, while Taiwan increased to 30% from 13% and China represented 15% versus 24% in 2010.
• Cable and terrestrial set-top box applications increased to approximately 56% of revenue from 39% in 2010. Mobile revenue declined and was no longer a principal company focus.
• Sales through distributors declined to 71% of revenue from 93% in 2010, but distributors remained an important channel.

Guidance, Outlook, Risks and Unusual Items

• Management expected cable products to account for a substantial portion of any 2012 revenue growth and expected cable and terrestrial set-top box applications to remain the largest application area.
• Management expected R&D and SG&A to increase in absolute dollars as the company expanded its product portfolio, sales organization, international infrastructure and compliance capabilities.
• The company operates in a highly competitive, cyclical semiconductor market with risks from pricing pressure, rapid product obsolescence, evolving standards and larger competitors with greater resources.
• Customer concentration, distributor inventory levels, cancellable purchase orders, lengthy design cycles and reliance on design wins create significant revenue volatility.
• All products were manufactured, assembled and tested by third parties in Asia, with significant reliance on Taiwan and other Pacific Rim locations. The company had no long-term supply contracts and estimated that changing suppliers could require approximately nine to twelve months.
• In the first quarter of 2012, the company identified potential violations involving the possible facilitation of shipments of foreign-produced products to Iran. It made voluntary initial disclosures to OFAC and BIS and was preparing supplemental disclosures.
• The company recorded an $0.8 million fourth-quarter 2011 expense for estimated export compliance fines and penalties. Potential penalties could be materially higher; the filing states that the maximum civil penalty may be $250,000 or twice the transaction value per violation, whichever is greater.
• The company established a full valuation allowance on net federal deferred tax assets and carried approximately $3.0 million of unrecognized tax benefits at year-end.
• No material litigation was reported. The company stated that its disclosure controls and internal control over financial reporting were effective, and Ernst & Young issued unqualified audit opinions.
• The company did not pay dividends and did not expect to pay dividends in the foreseeable future.

Investor Verification Checklist

• Verify whether cable product growth and set-top box demand offset continued weakness in mobile and consumer terrestrial television applications.
• Monitor gross-margin recovery, average selling prices, product mix and manufacturing-cost trends.
• Assess whether R&D and SG&A growth produces sufficient design wins, revenue growth and operating leverage.
• Review cash burn, accounts receivable collection, distributor inventory and the company’s ability to fund operations without additional financing.
• Follow OFAC and BIS reviews, supplemental disclosures and any final fines or other sanctions related to the Iran export-compliance matter.
• Evaluate dependence on major customers, Asian distributors, Taiwan-based manufacturing and other third-party suppliers.
• Consider dilution from outstanding options, restricted stock units and the dual-class voting structure, under which Class B shares generally have enhanced voting rights for specified matters.