Monolithic Power Systems, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise noted. MPS designs and sells high-performance power solutions and operates as a fabless semiconductor company. Its products serve communications, storage and computing, consumer, and industrial markets.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $84.5 million | $73.5 million; up 14.9% |
| Gross profit / margin | $45.5 million / 53.9% | $39.7 million / 54.0% |
| Operating income / margin | $10.4 million / 12.3% | $5.9 million / 8.0% |
| Net income / diluted EPS | $10.6 million / $0.25 | $6.0 million / $0.15 |
| Operating cash flow | $28.9 million | $15.7 million |
| Cash and cash equivalents | $77.8 million | $90.9 million at Dec. 31, 2015 |
| Short-term investments | $173.7 million | $144.1 million at Dec. 31, 2015 |
| Working capital | $300.2 million | $288.6 million at Dec. 31, 2015 |
- Including $5.4 million of long-term investments, cash, cash equivalents and investments totaled $256.9 million at quarter-end. The balance sheet reports no borrowings.
- Cash decreased $13.1 million in the quarter: operating activities provided $28.9 million, investing activities used $35.8 million, and financing activities used $6.2 million. Investing outflows included net purchases of investments and $5.3 million of property and equipment.
- Revenue growth reflected a 22% increase in unit shipments, partly offset by a 6% decline in average selling prices. DC-to-DC products generated $77.1 million, up 16.3%; lighting-control revenue was $7.4 million, up 2.1%.
Changes versus the prior period
- Net income rose to $10.6 million from $6.0 million, while operating income increased to $10.4 million from $5.9 million. Operating expenses grew more slowly than revenue; litigation expense declined to $45,000 from $270,000.
- Gross margin edged down 0.1 percentage point. Management attributed the change to sales mix and a larger inventory write-down, partly offset by lower labor and overhead costs as a share of revenue.
- Operating cash flow increased by $13.2 million year over year. In Q1 2015, inventory growth had used $12.5 million of cash; inventory provided $0.9 million in Q1 2016.
- Q1 2016 SG&A included a $2.9 million stock-compensation credit after the CFO’s retirement and cancellation of certain unvested awards. Total stock-based compensation expense was $9.0 million.
Outlook, risks and notable items
- No quantified revenue or earnings guidance is provided. Management says existing cash and investments, together with operating cash generation, should meet liquidity needs for the next 12 months. It expects future R&D spending to rise in absolute dollars over the foreseeable future.
- The company declared a $0.20-per-share quarterly dividend. A new repurchase authorization permits up to $50 million of buybacks through Dec. 31, 2016; no shares were repurchased in Q1.
- Approximately 89% of Q1 revenue came from customers in Asia. One distributor represented 20% of revenue; two distributors together represented 33% of accounts receivable at March 31. Distributor agreements may be terminated with advance notice.
- Key risks include semiconductor cyclicality, order cancellations or rescheduling, falling average selling prices, customer and geographic concentration, third-party manufacturing capacity and supply, inventory exposure, IP litigation, and foreign-exchange and China-related risks. Management warns that revenue forecasting is difficult because customers can change orders on short notice.
- U.S. export restrictions affecting customer ZTE were temporarily lifted through June 30, 2016; the filing identifies related compliance and customer-demand risk.
- The company held $5.4 million of illiquid student-loan auction-rate securities, with uncertain timing of renewed liquidity. It had $12.5 million of unrecognized tax benefits; the potential range of changes over the next 12 months was not determinable. No material legal proceedings were pending at March 31.
- The CFO retired during the quarter; the company reported an interim CFO. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether shipment growth can persist despite lower selling prices and the slight gross-margin decline, including the effect of product mix and inventory write-downs.
- Separate underlying SG&A trends from the one-time $2.9 million stock-compensation reversal and evaluate future equity-compensation expense and dilution.
- Track distributor concentration, receivable collection, Asian demand, and any continuing effects of export restrictions involving ZTE.
- Review manufacturing capacity, inventory levels, and the $40.6 million of outstanding purchase commitments against demand and cancellation risk.
- Monitor the use of cash for dividends and the authorized buyback, the liquidity and valuation of auction-rate securities, and developments in uncertain tax positions.