MaxLinear, Inc. Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2016. MaxLinear is a fabless semiconductor company providing radio-frequency and mixed-signal integrated circuits for broadband communications, connected-home, optical interconnect, data-center and wireless-infrastructure applications.
During the quarter, MaxLinear acquired selected wireless infrastructure access assets from Microsemi for $21.0 million. On July 1, 2016, after the reporting period, it acquired selected wireless infrastructure backhaul assets from Broadcom for $80.0 million.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net revenue | $101.7 million | $70.8 million | $204.4 million | $106.2 million |
| Gross profit | $62.9 million | $26.9 million | $124.1 million | $48.6 million |
| Gross margin | 62% | 38% | 61% | 46% |
| Operating income (loss) | $22.4 million | $(32.1) million | $44.1 million | $(36.6) million |
| Net income (loss) | $22.6 million | $(30.6) million | $43.3 million | $(35.4) million |
| Diluted EPS | $0.33 | $(0.58) | $0.64 | $(0.78) |
| Operating cash flow | Not separately provided | Not separately provided | $71.3 million | $8.4 million |
Research and development expense was $24.0 million in Q2 and $47.8 million for the first six months. Selling, general and administrative expense was $16.5 million and $30.1 million, respectively. Restructuring charges were zero in Q2 and $2.1 million year to date, compared with $11.4 million in both comparable 2015 periods.
At June 30, 2016, cash and cash equivalents were $147.6 million, short-term investments were $28.9 million and working capital was $195.8 million. Total cash, cash equivalents and investments were $176.5 million. The filing does not identify outstanding borrowings or debt; current liabilities were $55.6 million and total liabilities were $70.7 million.
Cash increased by $79.6 million during the first six months. Investing cash flow was $7.6 million, including the $21.0 million Microsemi acquisition, $4.7 million of capital expenditures and net securities maturities. Financing cash flow was $0.7 million. Management stated that available cash and short-term investments were sufficient for projected operating requirements for at least the next twelve months, while noting that additional capital or indebtedness could be required for acquisitions or other strategic initiatives.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 44% year over year; six-month revenue increased 92%.
- Operator application revenue rose 46% in Q2 and 87% year to date, driven primarily by satellite gateway, channel-stacking, cable gateway and MoCA shipments.
- Infrastructure and other revenue increased 209% in Q2 and 121% year to date, reflecting higher high-speed interconnect shipments and an initial contribution from the Microsemi wireless access business.
- Legacy video SoC revenue declined 35% in Q2, although it increased 98% for the first six months because of the timing of the prior-year Entropic acquisition.
- Gross margin improved substantially, primarily because Q2 2015 included approximately $13.0 million of amortization of Entropic acquisition-related inventory step-up costs and because of a higher-margin product mix.
- Operating results benefited from the absence of significant 2015 Entropic restructuring and acquisition-related expenses.
- Adoption of ASU 2016-09 reduced income tax expense by $3.5 million in Q2 and $5.1 million for the first six months, increasing net income and EPS. The adoption also increased diluted share counts because excess tax benefits were excluded from the treasury-stock-method calculation.
- Goodwill increased from $49.8 million to $56.7 million and finite-lived intangible assets increased from $48.2 million to $56.2 million, primarily due to the Microsemi acquisition.
Guidance, Outlook, Commentary and Risks
- Management cautioned that recent year-over-year growth rates are not expected to continue. Certain legacy video SoC and analog channel-stacking products are nearing the end of their life cycles, and operator consolidation may pressure future revenue.
- Research and development and selling, general and administrative expenses are expected to increase as MaxLinear expands its product portfolio, sales organization, international infrastructure and newly acquired businesses.
- The Broadcom acquisition consumed $80.0 million of cash after quarter-end and will create additional integration, purchase-accounting and execution risks.
- Revenue is concentrated: Arris represented 29% of Q2 revenue and 26% of six-month revenue; the ten largest customers represented 77% and 75%, respectively. Products shipped to Asia represented 93% of Q2 revenue and 94% of six-month revenue.
- Key operating risks include semiconductor cyclicality, pricing pressure, product obsolescence, lengthy design-win and qualification cycles, reliance on third-party foundries and assembly providers, supply disruptions, customer and distributor inventory changes, and dependence on a limited number of customers.
- The CrestaTech ITC investigation was resolved in MaxLinear’s favor, but related inter partes review proceedings, a Federal Circuit appeal and stayed district-court litigation remained unresolved. The company stated that an adverse district-court determination could materially affect results.
- Trango Systems filed a lawsuit on August 2, 2016 concerning a chipset acquired from Broadcom. The case was in preliminary stages and sought damages, penalties, fees and injunctive relief.
- Future minimum operating lease, other-obligation and inventory-purchase payments totaled $60.7 million, including $14.9 million of inventory purchase obligations.
- Goodwill and intangible assets totaled approximately $117.4 million at quarter-end and remain subject to impairment risk. The company recorded a prior $21.6 million impairment of acquired in-process research and development in Q4 2015.
Important Facts for Investors to Verify
- Whether revenue growth is sustained after normalizing for the Entropic acquisition, Microsemi contribution and favorable comparison against 2015 acquisition-related charges.
- The effect of the July 2016 Broadcom acquisition on cash, revenue, margins, operating expenses, goodwill and intangible assets.
- Customer concentration, particularly Arris and the combined impact of customer consolidation and purchase-order volatility.
- Whether legacy video SoC and analog channel-stacking product declines offset growth in infrastructure, optical interconnect and wireless-infrastructure products.
- The recurring versus non-recurring components of the 61% six-month gross margin and the effect of acquired-intangible amortization and inventory step-up charges.
- The status and potential exposure from the CrestaTech proceedings and Trango litigation.
- Future cash requirements for acquisitions, contractual obligations and potential need for additional capital or debt.
- The $5.1 million year-to-date tax benefit from ASU 2016-09, which may introduce volatility into future tax expense and EPS.