SiTime Corporation 2019 Form 10-K Summary
Business context and reporting period
SiTime designs silicon-based timing solutions, including MEMS oscillators, resonators and clock integrated circuits. The company operates a fabless model using third-party foundries, assembly and test contractors, and distributors or resellers. This filing covers the fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter data for the three months ended December 31, 2019.
SiTime completed its initial public offering on November 25, 2019, issuing 4.945 million shares at $13.00 per share and receiving net proceeds of approximately $56.4 million. MegaChips remained the controlling stockholder with approximately 66.8% ownership at December 31, 2019.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $84.1 million | $85.2 million | Down 1% |
| Gross profit | $39.6 million | $36.2 million | Up 9% |
| Gross margin | 47% | 42% | Up 5 percentage points |
| Operating expenses | $44.4 million | $44.0 million | Up 1% |
| Loss from operations | $4.9 million | $7.8 million | Improved $2.9 million |
| Net loss | $6.6 million | $9.3 million | Improved $2.7 million |
| Basic and diluted loss per share | $0.63 | $0.93 | Improved |
| Operating cash flow | $7.4 million | $(1.0) million | Improved $8.4 million |
Fourth-quarter 2019 revenue was $28.1 million, gross profit was $13.4 million, gross margin was approximately 48%, operating income was $1.0 million and net income was $0.6 million. This compared with fourth-quarter 2018 revenue of $22.9 million, operating income of $2.1 million and net income of $1.7 million.
Research and development expense increased 4% to $23.8 million, while selling, general and administrative expense decreased 3% to $20.6 million. Interest expense increased 13% to $1.7 million, primarily due to higher interest rates on revolving debt.
Liquidity, debt and balance sheet
- Cash and cash equivalents increased to $63.4 million from $7.9 million, primarily due to the IPO.
- Working capital was $46.4 million at year-end 2019, compared with a $5.6 million deficit in 2018.
- Total debt was $41.0 million, all classified as current, compared with $46.0 million in 2018. The debt consisted of MUFG borrowings; the SMBC and MegaChips loan balances were zero at year-end.
- Available borrowing capacity was approximately $59.0 million, including $9.0 million under MUFG, $20.0 million under SMBC and $30.0 million under MegaChips.
- The company stated that cash, cash equivalents and available borrowing capacity should be sufficient to meet cash needs for at least the next 12 months.
- Cash used in investing activities was $3.2 million, primarily for production masks, internally developed software and other equipment.
- Contractual obligations totaled $53.0 million, including $41.0 million of debt, $11.2 million of operating leases and $0.9 million of purchase obligations.
Material changes versus the prior comparable period
- Revenue declined modestly because revenue from the largest end customer decreased by approximately $5.5 million, primarily following the loss of a design win; this was largely offset by $4.4 million of growth from other customers, mainly in Asia.
- Gross profit and margin improved substantially. The 2018 results included a significant inventory write-down, while approximately $2.5 million of previously written-down inventory was sold in 2019.
- Inventory declined to $11.9 million from $20.5 million as management reduced inventory levels.
- Operating cash flow improved from a use of $1.0 million to generation of $7.4 million, aided by inventory reductions and non-cash expenses.
- Accumulated deficit increased to $54.0 million from $47.4 million, and the company remained unprofitable for the year.
- The company began sampling clock IC products in the second quarter of 2019 and entered the 5G communications market during 2019.
- Research and development increased as the company invested in engineering tape-outs and new products; legal expense also increased by approximately $1.0 million due to patent litigation.
Guidance, outlook, commentary and risks
Management did not provide a specific numerical revenue or earnings outlook in the filing. Its strategy is to expand silicon-based timing products, broaden the product portfolio into clock ICs and timing synchronization, secure new design wins, enter markets such as 5G, automotive, industrial and aerospace, and pursue margin expansion through higher-value products and supply-chain improvements.
- Customer concentration is significant. The largest end customer, believed to be Apple, represented approximately 35% of revenue in 2019 versus 40% in 2018. The top three distributors represented approximately 59% of revenue.
- Orders are generally made under purchase orders without long-term minimum commitments and may be cancelled, reduced or rescheduled with little notice.
- The company depends heavily on Bosch for MEMS wafer fabrication and TSMC for analog circuit fabrication, while assembly and testing are outsourced to a limited number of contractors.
- The semiconductor industry was experiencing a downturn in 2019, including weakness related to excess inventory, pricing pressure and U.S.-China trade tensions.
- The company disclosed risks related to the coronavirus outbreak in China, international operations, tariffs, supply-chain disruption, foreign exchange, export controls and geopolitical tensions.
- VTT Technical Research Centre of Finland filed a patent infringement lawsuit in March 2019 seeking unspecified damages and injunctive relief. Mediation in January 2020 did not resolve the matter, and no loss contingency was accrued because a loss was not considered probable and reasonably estimable.
- MegaChips controls the company and can generally control board elections and shareholder actions while it retains a majority of the voting power. SiTime is consequently a controlled company under Nasdaq rules.
- The company provides a limited lifetime warranty and has indemnification obligations that could produce material costs if product defects or intellectual property claims arise.
- The company has substantial tax attributes, including approximately $156.5 million of federal and $63.7 million of state net operating loss carryforwards, but maintains a full valuation allowance because realization is not considered more likely than not.
- The company is an emerging growth company and did not include management or auditor attestation reports on internal control over financial reporting. Management concluded that disclosure controls and procedures were effective at year-end.
Important facts for investors to verify
- Whether revenue growth from new customers, clock ICs, 5G and other markets can offset continued dependence on the largest end customer.
- The timing, renewal terms and repayment or refinancing of the $41.0 million of short-term MUFG debt and the availability of the company’s credit facilities.
- Whether gross-margin improvement is sustainable after the benefit from selling inventory previously written down in 2018.
- The status and potential financial impact of the VTT patent litigation and any related indemnification obligations.
- Supply continuity, pricing and capacity arrangements with Bosch, TSMC and outsourced assembly and test providers.
- Progress toward sustained profitability given continued research and development investment, public-company costs and $54.0 million of accumulated deficit.
- The effect of MegaChips’ controlling ownership and related-party distribution, financing and other arrangements.
- Subsequent developments relating to coronavirus, tariffs, export restrictions and broader semiconductor demand conditions.