SiTime Corporation: Q3 2020 Form 10-Q Summary
Business context and reporting period
SiTime is a fabless provider of silicon timing systems, including MEMS oscillators, resonators and clock IC products. The company sells primarily through distributors and resellers across communications, computing, automotive, industrial, IoT, mobile, aerospace and defense markets. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
SiTime completed a follow-on public offering on June 16, 2020, issuing 1.525 million shares and receiving net proceeds of $45.8 million. MegaChips remained the largest stockholder, owning approximately 44.3% of outstanding shares at September 30, 2020.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Revenue | $32.7 million | $25.3 million | +29% | $75.9 million | $56.0 million | +36% |
| Gross profit | $16.9 million | $12.1 million | +39% | $36.9 million | $26.1 million | +41% |
| Gross margin | 51.8% | 48.0% | +3.8 pts | 48.6% | 46.6% | +2.0 pts |
| Operating income (loss) | $(0.6) million | $1.5 million | Unfavorable | $(10.7) million | $(5.9) million | Unfavorable |
| Net income (loss) | $(0.7) million | $1.1 million | Unfavorable | $(11.4) million | $(7.2) million | Unfavorable |
| Basic and diluted EPS | $(0.04) | $0.11 | Unfavorable | $(0.72) | $(0.72) | Flat |
| Net cash from operations | Not separately provided | Not separately provided | — | $9.8 million | $4.9 million | +$5.0 million |
Revenue growth reflected higher volume from the largest end customer, increased sales in Asia and higher average selling prices driven primarily by product mix. Gross margin improved despite a $0.7 million Q3 2019 benefit from the sale of previously reserved inventory and a $2.4 million benefit for the comparable nine-month period.
Operating expenses increased substantially. Nine-month research and development expense rose 28% to $22.9 million, while selling, general and administrative expense rose 74% to $24.6 million. Increases were driven primarily by stock-based compensation, headcount, public-company costs and $1.0 million of internal-use software impairment charges.
At September 30, 2020, cash and cash equivalents were $69.2 million versus $63.4 million at December 31, 2019. Current assets were $105.4 million and current liabilities were $17.6 million. Inventory increased to $15.2 million from $11.9 million at year-end. The company had no outstanding loan balance, compared with $41.0 million at December 31, 2019, and retained $50.0 million of availability under its MUFG revolving credit facility.
For the first nine months, operating cash flow was $9.8 million, investing cash flow was $(5.3) million and financing cash flow was $1.3 million. Financing activity included the $45.8 million equity offering, $35.0 million of borrowings, $76.0 million of loan repayments and $3.5 million of employee tax withholding payments related to net share settlement.
Material changes versus the prior comparable period
- Revenue increased 29% in Q3 and 36% for the first nine months, primarily from higher unit volumes, increased sales to the largest end customer and favorable product mix.
- Gross margin expanded to approximately 52% in Q3 and 49% year to date, although the 2019 periods benefited from sales of previously reserved inventory.
- Operating losses increased because operating expenses grew faster than gross profit, particularly stock-based compensation, research and development and public-company costs.
- Stock-based compensation was $4.6 million in Q3 and $10.7 million for the first nine months, compared with none in the 2019 comparable periods.
- The company raised $45.8 million in net equity proceeds and repaid all outstanding MUFG borrowings by July 24, 2020, materially reducing debt and interest expense.
- Intangible assets declined to $2.1 million from $4.5 million at year-end, including $1.0 million of internal-use software impairment charges year to date following a product-roadmap change.
- Customer and distributor concentration increased the exposure to a limited number of counterparties: the largest end customer represented approximately 45% of Q3 revenue and 36% of nine-month revenue, while the top three distributors represented approximately 61% and 57%, respectively.
Guidance, outlook, commentary and risks
Management stated that existing cash, cash equivalents and available credit were expected to be sufficient to meet cash needs for at least the next 12 months. The filing does not provide a clear numerical revenue, gross-margin or earnings forecast. The company adopted a second-half 2020 bonus and retention plan tied to revenue, non-GAAP operating profit and individual performance goals.
COVID-19 created significant uncertainty regarding customer demand, supplier operations, manufacturing, shipping, employee productivity, credit conditions and liquidity. Management reported minimal supplier disruption to date but warned that renewed restrictions, including those affecting Malaysian suppliers, could materially affect revenue, margins, operating results and cash flows.
- Dependence on the largest end customer and major distributors, with purchase orders that may be cancelled, reduced or rescheduled with little notice.
- Reliance on third parties, including Bosch and TSMC for wafer fabrication and several overseas providers for assembly and testing.
- Semiconductor cyclicality, competitive pricing pressure, product mix and potential average-selling-price erosion.
- Execution risk associated with new clock IC and timing synchronization products, design wins and customer qualification cycles.
- Foreign exchange, geopolitical, trade-tariff, export-control and international operating risks.
- Patent and intellectual-property exposure, product liability and lifetime warranty obligations.
- VTT patent litigation: the district court found the asserted patent claims invalid in July 2020; VTT appealed, and no loss contingency was accrued because a potential loss was not considered probable or reasonably estimable.
- MegaChips’ approximately 44.3% ownership may allow significant influence over stockholder votes, board composition and strategic matters.
Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement continue after the Q3 2020 product-mix and volume benefits.
- The sustainability of demand from the largest end customer and the effect of any order changes or inventory adjustments.
- Progress and commercial adoption of clock IC and timing synchronization products.
- Future stock-based compensation, headcount growth and public-company operating costs relative to revenue growth.
- Availability and terms of the remaining $50.0 million MUFG credit facility, including covenant and minimum-cash requirements after termination of the MegaChips guarantee.
- COVID-19 effects on suppliers, customers, logistics, credit quality and international operations.
- Outcome and potential economic impact of the VTT patent appeal and any other intellectual-property claims.
- Inventory levels, purchase commitments and exposure to excess or obsolete inventory.
- MegaChips’ future ownership, related-party transactions and influence over corporate governance.