Monolithic Power Systems, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars.
Business context
MPS designs and sells high-performance power solutions, including DC-to-DC converters and lighting-control products. It operates as a single reportable segment and relies on third parties for manufacturing and assembly. Most revenue is generated in Asia; management reported that 90% of Q1 revenue came from customers there.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $100.4 million | $84.5 million | +18.8% |
| Gross profit / gross margin | $54.8 million / 54.6% | $45.5 million / 53.9% | +20.5% / +0.7 percentage points |
| Operating income / operating margin | $13.6 million / 13.5% | $10.4 million / 12.3% | +30.8% / +1.2 percentage points |
| Net income / diluted EPS | $14.5 million / $0.33 | $10.6 million / $0.25 | Net income +36.9% |
| Cash provided by operations | $21.9 million | $28.9 million | Down $7.0 million |
| Property and equipment purchases | $3.4 million | $5.3 million |
Revenue growth reflected an 8% increase in unit shipments and an 11% increase in average selling prices. Industrial revenue rose 50.2%, computing and storage 33.9%, and consumer 5.3%; communications declined 2.5%. DC-to-DC products generated $91.4 million of revenue, with lighting control contributing $8.9 million.
Gross margin improved on higher sales of higher-margin products and lower direct and overhead costs as a percentage of revenue, partly offset by higher warranty costs and inventory write-downs. Operating expenses rose 17.5% to $41.3 million. SG&A increased 24.3%, partly because Q1 2016 included a $2.9 million stock-compensation credit related to the former CFO’s departure. Stock-based compensation was $11.7 million, versus $9.0 million.
Liquidity, cash flow and capital
At March 31, 2017, cash and cash equivalents were $76.8 million and short-term investments were $201.8 million, totaling $278.6 million. Working capital was $350.3 million, compared with $330.1 million at year-end 2016. Current liabilities were $56.0 million; the balance sheet reported no debt. Cash and cash equivalents fell $35.9 million during the quarter, while short-term investments increased $46.3 million. Investing cash outflow of $51.2 million largely reflected net investment purchases; financing cash outflow of $7.0 million primarily reflected $8.2 million in dividends and dividend equivalents.
Cash from operations was lower year over year, with working-capital changes including increased receivables and inventory. Management stated that operating cash generation, cash balances and short-term investments should be sufficient for liquidity needs over the next 12 months. The company declared a $0.20-per-share quarterly dividend. A $50 million repurchase authorization remained available, with no repurchases in Q1.
Of cash and cash equivalents and short-term investments, $153.8 million was held by international subsidiaries. Management said it intends to indefinitely reinvest these funds abroad; repatriation for U.S. use could trigger U.S. taxes. Purchase commitments were $60.3 million, up from $46.3 million at December 31, 2016.
Changes, outlook and risks
- Outlook: The filing provides no numerical revenue or earnings guidance. Management plans to develop new products and expand into product categories and markets, and says growth depends partly on design wins, market-share gains, customer diversification and securing manufacturing capacity.
- Demand and execution: Management cautions that semiconductor demand is cyclical and orders can be cancelled or rescheduled with limited penalty, making revenue difficult to forecast. New-product ramps can take several quarters.
- Customer and geographic concentration: Distributor A represented 18% of revenue and Distributor B 10%. Together, the two distributors accounted for 33% of accounts receivable at quarter-end. Asia represented 90% of revenue.
- Supply and inventory: MPS depends on third-party wafer, assembly and test providers; capacity, yield, cost or delivery disruptions could constrain sales or margins. Inventory increased to $78.5 million from $71.5 million at year-end, and management cited increased purchasing for current demand and expected growth.
- Unusual accounting and expenses: Adoption of the stock-compensation standard on January 1, 2017 changed forfeiture accounting and diluted-EPS treatment; diluted weighted-average shares increased by approximately 0.5 million. Q1 included $0.3 million of litigation expense, versus $45,000 a year earlier. The company recorded a 3.2% effective tax rate; $15.0 million of unrecognized tax benefits remained at quarter-end.
- Contingencies and investments: No material pending legal proceedings were reported, although ordinary-course matters include intellectual-property, shareholder and employment claims. The portfolio includes $5.3 million of illiquid student-loan auction-rate securities, valued using significant unobservable inputs.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether Q1’s shipment and average-selling-price growth, particularly in industrial and computing and storage, continues in subsequent quarters.
- Whether margin gains persist as warranty costs, inventory write-downs, product mix and manufacturing costs evolve.
- Whether inventory growth and the decline in operating cash flow reflect demand appropriately, and whether distributor receivables are collected on schedule.
- How customer and Asia concentration, supplier capacity, and the $60.3 million in purchase commitments affect results and liquidity.
- Potential tax, liquidity and valuation effects from overseas cash, unrecognized tax benefits, and illiquid auction-rate securities.
- Whether the dividend and any future share repurchases remain consistent with cash generation and the board’s discretion.