Monolithic Power Systems, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results. MPS designs high-performance power solutions and operates as a fabless semiconductor company, relying on third parties for manufacturing and assembly.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $106.5 million | $91.2 million | $285.0 million | $246.1 million |
| Gross profit / margin | $57.9 million / 54.4% | $49.4 million / 54.2% | $154.4 million / 54.2% | $133.3 million / 54.1% |
| Operating income / margin | $15.0 million / 14.2% | $13.3 million / 14.6% | $36.9 million / 13.0% | $29.3 million / 11.9% |
| Net income | $14.4 million | $11.2 million | $36.1 million | $25.1 million |
| Diluted EPS | $0.34 | $0.28 | $0.87 | $0.62 |
- For the nine months, operating cash flow was $76.8 million, versus $45.4 million in 2015. Investing cash flow was negative $37.7 million, including $29.0 million of property and equipment purchases; financing cash flow was negative $20.1 million, mainly dividends and dividend equivalents.
- At September 30, cash and cash equivalents were $109.5 million, short-term investments $149.6 million, and working capital $311.3 million. Total cash, cash equivalents and investments, including long-term investments, were $264.4 million.
- No borrowings or debt balance are presented in the supplied financial statements. Total liabilities were $78.6 million.
- Quarterly dividend declared was $0.20 per share; $24.6 million of dividends and dividend equivalents were paid during the nine-month period. No shares were repurchased in the first nine months of 2016 under the new $50 million authorization.
Material changes versus the prior comparable period
- Q3 revenue increased 16.7%; nine-month revenue increased 15.8%. Management attributed growth to stronger demand from existing customers and recent design wins; unit shipments rose 24% in Q3 and 18% year to date, partly offset by average selling-price declines of 5% and 3%, respectively.
- DC-to-DC products generated about 90% of revenue. Q3 DC-to-DC revenue rose 15.6%, while lighting-control revenue rose 27.9%.
- Gross margin edged up year over year. Q3 operating margin declined to 14.2% from 14.6%, as operating expenses grew faster than revenue; nine-month operating margin improved to 13.0% from 11.9%.
- Net income growth benefited from lower effective tax rates: 8.9% in Q3 2016 versus 15.8% in Q3 2015, and 6.9% year to date versus 16.9%. The 2015 nine-month tax provision included a $2.7 million one-time charge related to tax-audit resolution.
- Stock-based compensation was $34.2 million for the first nine months, up from $29.2 million. This included a one-time $2.9 million SG&A credit in Q1 2016 for reversal of compensation related to the former CFO’s unvested awards.
Outlook, commentary and risks
- Management stated that existing cash, investments and operating cash generation should meet liquidity needs for the next 12 months. The filing gives no quantified revenue or earnings guidance.
- Management highlighted semiconductor cyclicality, seasonal demand, short order lead times and customers’ ability to reschedule or cancel orders, making forecasting difficult. Continued product development, market entry, customer diversification and access to manufacturing capacity are important to growth.
- Revenue is concentrated in Asia (about 90% in the first nine months) and with one distributor, which represented 22% of revenue. Two distributors represented 36% of accounts receivable at quarter-end.
- Third-party wafer, assembly and test capacity, inventory management, product quality, average selling-price pressure, foreign exchange and China-related operating and regulatory risks could affect results. Outstanding purchase commitments were $41.9 million.
- The company held $5.4 million of illiquid student-loan auction-rate securities. The IRS was examining its 2014 federal tax return; no adjustments had been proposed as of quarter-end. Unrecognized tax benefits totaled $14.2 million.
- MPS reported no material pending legal proceedings as of September 30, 2016. It nevertheless identified potential intellectual-property litigation and related expense as ongoing risks. The filing also noted export restrictions involving customer ZTE were temporarily lifted only through November 28, 2016.
Important facts for investors to verify
- Whether shipment growth and new design wins can offset price declines and sustain revenue and margins.
- How much of earnings and future dilution is affected by substantial stock-based compensation and performance-based awards.
- Exposure to the largest distributor, Asian markets, and third-party manufacturing capacity, including the $41.9 million of purchase commitments.
- Liquidity and realizable value of the auction-rate securities, and any developments in the IRS examination or uncertain tax positions.
- Future dividend and repurchase decisions: dividends remain discretionary, and no repurchases had occurred through September 30, 2016.