MaxLinear, Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed July 25, 2019. Financial statements are unaudited and presented under U.S. GAAP. MaxLinear is a fabless semiconductor company serving connected home, wired and wireless infrastructure, and industrial and multi-market applications.
Financial Highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $82.5 million | $101.5 million | $167.1 million | $212.4 million |
| Gross profit | $44.1 million | $56.3 million | $89.2 million | $119.0 million |
| Gross margin | 53% | 55% | 53% | 56% |
| Operating income (loss) | $(3.0) million | $(0.2) million | $(10.8) million | $4.2 million |
| Net income (loss) | $(2.2) million | $(14.4) million | $(7.1) million | $(12.6) million |
| Diluted EPS | $(0.03) | $(0.21) | $(0.10) | $(0.18) |
| Operating cash flow | Not separately provided | Not separately provided | $28.5 million | $47.8 million |
- Q2 revenue declined 19%; six-month revenue declined 21% year over year.
- Revenue by market in Q2 was $38.6 million from connected home, $22.6 million from infrastructure, and $21.3 million from industrial and multi-market applications.
- Connected-home revenue fell 32% in Q2 and 33% for the six-month period, primarily because of the cable-market slowdown, the transition from DOCSIS 3.0 to DOCSIS 3.1, and customer inventory reductions. Infrastructure revenue increased 16% in Q2 and 12% year to date.
- Operating expenses were $47.0 million in Q2 and $100.0 million for the six-month period. Research and development declined, but selling, general and administrative expense increased as a percentage of revenue.
- The Q2 tax benefit was $3.4 million versus a $11.2 million tax provision in the prior-year quarter. The six-month tax benefit was $9.9 million versus a $9.4 million provision in 2018, reflecting jurisdictional mix, stock-based compensation tax effects, and releases of certain uncertain tax positions.
Liquidity, Debt and Cash Flow
- At June 30, 2019, cash and cash equivalents were $66.6 million, restricted cash was $0.4 million, net accounts receivable was $56.6 million, and working capital was $105.7 million.
- Total cash, cash equivalents and restricted cash decreased to $67.0 million from $74.2 million at December 31, 2018.
- Six-month operating cash flow was $28.5 million, capital expenditures were $2.7 million, and financing cash outflow was $33.9 million.
- The company repaid $30.0 million of debt during the first six months and had repaid $193.0 million cumulatively since origination.
- Remaining term-loan principal was $232.0 million, with a net carrying amount of $226.3 million. The loan matures May 12, 2024, and the company was in compliance with its covenants.
- The effective interest rate on debt was approximately 4.9%. An interest-rate swap effectively fixes a substantial portion of the debt at approximately 4.25% through October 2020.
- Management stated that existing cash and cash equivalents should fund projected operating requirements for at least the next twelve months, while noting that additional capital or debt could be required for acquisitions or strategic initiatives.
Material Changes and Unusual Items
- Gross margin declined two percentage points in both Q2 and the six-month period, primarily due to lower revenue and product mix.
- Restructuring charges were $0.4 million in Q2 and $2.3 million year to date. Six-month charges included lease-related impairments and employee separation costs, partly offset by a $2.9 million gain on extinguishment of lease liabilities. Management does not expect additional material costs from current restructuring plans.
- Adoption of ASC 842 on January 1, 2019 added approximately $24.8 million of right-of-use assets and $25.1 million of lease liabilities; the expected effect on 2019 operating results was not material.
- Intangible assets were $216.3 million and goodwill was $238.3 million at June 30, 2019. No goodwill or finite-lived intangible impairment was recognized during the period.
- Products shipped to Asia represented 83% of Q2 revenue and 84% of six-month revenue; China represented 60% and 64%, respectively. One customer accounted for 12% of revenue in both periods, while the ten largest customers accounted for 60%.
- Sales through distributors increased to 49% of Q2 revenue and 45% of six-month revenue, compared with 38% and 39% in the comparable 2018 periods.
Outlook, Risks and Contingencies
- No specific quantitative revenue or earnings guidance is provided in the filing. Management expects revenue and gross margin to fluctuate with customer demand, product mix, average selling prices, manufacturing costs, product transitions, and macroeconomic conditions.
- Management expects research and development and selling, general and administrative expenses to remain relatively flat in the near term, with potential increases as the company develops products and expands into new markets.
- In May 2019, the company ceased business with Huawei-affiliated entities following U.S. export restrictions and expects the action to adversely affect near-term revenue and operating results.
- Key risks include customer concentration, distributor inventory and price-protection obligations, the DOCSIS transition, semiconductor cyclicality, competitive pricing, trade restrictions and tariffs, reliance on Asian manufacturing and supply-chain partners, and limited visibility because customers buy primarily through purchase orders.
- The company remains involved in disputes relating to the CrestaTech '585 patent. The related district-court litigation was dismissed in April 2018, but reinstatement remains uncertain and inter partes review and appeal matters continue. The Trango litigation was settled and dismissed with prejudice on June 6, 2019, without a material adverse effect.
- Future minimum obligations included $232.0 million of long-term debt, $26.9 million of operating leases, $65.0 million of inventory purchase commitments, and $10.3 million of other contractual obligations.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Whether connected-home demand stabilizes as customers complete the DOCSIS 3.0-to-3.1 transition and reduce channel inventories.
- The revenue and margin impact of the Huawei restrictions, U.S.-China trade policies, and any additional export controls or tariffs.
- Progress in reducing $232.0 million of remaining term-loan principal while funding operations, inventory, capital expenditures, and potential acquisitions.
- Distributor inventory levels, price-protection and stock-rotation liabilities, and the sustainability of the 53% gross margin.
- Whether infrastructure growth can offset continued declines in connected home and industrial and multi-market revenue.
- Potential exposure from the CrestaTech patent dispute, tax examinations and uncertain tax positions, and the company’s significant goodwill and intangible-asset balances.