Monolithic Power Systems, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. MPS designs and sells high-performance analog and power semiconductor solutions, primarily through third-party manufacturing and distribution arrangements. Financial statement amounts below are in U.S. dollars; figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $160.0 | $128.9 | $428.9 | $341.5 |
| Gross profit / gross margin | $89.0 / 55.6% | $70.9 / 55.0% | $238.1 / 55.5% | $187.1 / 54.8% |
| Operating income / margin | $33.5 / 20.9% | $23.8 / 18.5% | $80.4 / 18.7% | $52.4 / 15.3% |
| Net income | $31.6 | $23.6 | $77.6 | $53.1 |
| Diluted EPS | $0.71 | $0.54 | $1.75 | $1.22 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $93.9 | $80.4 |
- Q3 revenue increased 24.1% year over year; nine-month revenue increased 25.6%. Management attributed growth to higher demand: Q3 unit shipments rose 22% and average selling prices rose 2%; nine-month shipments rose 17% and average selling prices rose 6%.
- At September 30, cash and cash equivalents were $131.1 million and short-term investments were $216.8 million, totaling $347.8 million. Working capital was $471.9 million, versus $383.3 million at December 31, 2017. Current assets were $557.4 million and current liabilities $85.5 million.
- Nine-month investing cash outflow was $21.8 million, including $18.1 million of property and equipment purchases. Financing cash outflow was $21.7 million, including $34.4 million of dividends and dividend equivalents. Cash, cash equivalents and restricted cash increased $48.3 million.
- No borrowings or debt balance are listed on the reported balance sheet. Total liabilities were $153.0 million. The company reported $22.0 million of remaining transition-tax liability and $67.7 million of outstanding purchase commitments.
Changes versus prior comparable periods
- Profitability improved alongside revenue growth: gross margin rose 0.6 percentage point in Q3 and 0.7 point for the nine-month period. Operating margin increased 2.4 points in Q3 and 3.4 points year to date.
- Growth was broad across end markets except consumer in Q3. Computing and storage revenue grew 64.2%, automotive 53.9%, industrial 52.1%, and communications 24.6%; consumer revenue declined 12.4%, mainly on weaker high-volume consumer demand, particularly in greater China. For nine months, all listed end markets grew, led by computing and storage (56.0%) and automotive (52.1%).
- Operating expenses increased in dollars but declined as a share of revenue. Nine-month R&D rose 16.6% and SG&A rose 16.7%; together, they represented 36.4% of revenue versus 39.2% a year earlier. Stock-based compensation expense was $45.8 million for the nine months.
- The effective tax rate increased to 12.8% in Q3 and 9.5% for nine months, from 5.8% and 5.5%, respectively, in 2017. The filing cites GILTI under the 2017 Tax Act, foreign income taxed at lower rates, and stock-based compensation deductions as factors.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said existing cash, investments and operating cash generation should meet liquidity needs for the next 12 months; future dividends remain at the board’s discretion. The quarterly dividend increased from $0.20 to $0.30 per share in 2018.
- Management described the semiconductor business as cyclical and revenue forecasting as difficult: customer orders can be cancelled or rescheduled, sales cycles are lengthy, and typical order lead times are under 90 days. The company depends on third-party wafer, assembly and testing capacity.
- Geographic and customer concentration are notable: 89% of Q3 revenue came from customers in Asia, and the largest distributor accounted for 23% of Q3 revenue and 21% for nine months. China revenue was $91.5 million in Q3. Management identified trade tariffs, including U.S.-China measures, as a potential adverse risk.
- Inventory rose to $136.8 million from $99.3 million at year-end, reflecting strategic wafer and die inventory and finished goods. Management cited increased inventory write-downs of $3.7 million in Q3 and $8.7 million for nine months. Q3 warranty provision was $3.8 million versus $0.1 million a year earlier; the filing also records a $2.8 million release of unused warranty provision during Q3.
- MPS adopted Topic 606 revenue recognition on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $0.4 million net of tax. Compared with prior Topic 605 accounting, reported nine-month 2018 revenue was $0.4 million higher and net income $0.2 million higher.
- The company reported no material pending legal proceedings as of September 30, 2018, while noting ordinary-course litigation and the possibility of significant legal expense. Tax estimates under the 2017 Tax Act remained provisional; unrecognized tax benefits were $18.1 million. The company also held $5.3 million of illiquid student-loan auction-rate securities.
Important facts for investors to verify
- Whether Q3 growth and margin gains continue, particularly given the consumer-market decline and semiconductor cyclicality.
- Inventory quality, the level of future write-downs, and the drivers of the sharp increase in Q3 warranty provisions.
- Customer and regional concentration, distributor demand and inventory, and exposure to U.S.-China trade measures.
- Final tax effects of the 2017 Tax Act, GILTI and uncertain tax positions, including the timing of the $22.0 million transition-tax liability.
- Cash conversion and capacity to sustain dividends while funding purchase commitments, capital spending and growth.