Monolithic Power Systems, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; amounts below are in U.S. dollars. MPS designs and sells high-performance analog and power solutions and reports as one segment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Revenue | $128.9 million | $106.5 million | +21.1% |
| Gross profit / margin | $70.9 million / 55.0% | $57.9 million / 54.4% | Margin +0.6 percentage points |
| Operating income / margin | $23.8 million / 18.5% | $15.0 million / 14.2% | |
| Net income | $23.6 million | $14.4 million | +64.5% |
| Diluted EPS | $0.54 | $0.34 |
For the first nine months, revenue was $341.5 million (+19.8%), gross profit $187.1 million (54.8% margin versus 54.2%), operating income $52.4 million, and net income $53.1 million. Diluted EPS was $1.22, compared with $0.87.
Management attributed Q3 revenue growth to approximately 4% higher unit shipments and a 15% increase in average selling prices. Growth was broad except in communications: automotive revenue rose 48.8%, consumer 26.8%, and computing and storage 23.7%; communications declined 5.0%. DC-to-DC products generated $119.1 million, the large majority of quarterly sales. Gross margin improvement reflected lower labor and manufacturing overhead as a share of revenue, partly offset by a mix shift toward lower-margin products. Nine-month cost of revenue also included $1.7 million more inventory write-downs than the prior-year period.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $104.4 million and short-term investments $195.2 million; together they totaled $299.6 million. Including $5.4 million of long-term investments, cash and investments totaled $305.0 million.
- Working capital was $397.6 million, up from $330.1 million at December 31, 2016. Total current assets were $463.8 million and current liabilities $66.2 million.
- No borrowings or interest-bearing debt are reported on the balance sheet. Total liabilities were $99.5 million.
- Nine-month operating cash flow was $80.4 million versus $76.8 million. Investing activities used $67.8 million, including $25.1 million for property and equipment and $40.6 million of net short-term investment purchases. Financing activities used $22.7 million, primarily for $25.3 million of dividends and dividend equivalents. Cash and cash equivalents decreased $8.3 million to $104.4 million.
- Accounts receivable increased to $50.8 million from $34.2 million and inventory to $99.9 million from $71.5 million. Management cited higher sales, longer payment terms for certain customers, strategic wafer and die stocks, and inventory built to meet demand.
Changes, outlook and risks
- Revenue grew 21.1% in Q3 and 19.8% for the nine-month period. Nine-month shipments increased 8% and average selling prices increased 11%, according to management. Operating and net margins improved year over year.
- Management said cash from operations and existing cash and short-term investments should meet liquidity requirements for the next 12 months. The filing gives no specific forward revenue or earnings guidance. MPS expects to continue investing in product development and may continue quarterly dividends, subject to board discretion and business conditions.
- Approximately $173.1 million of cash and short-term investments was held by international subsidiaries; MPS said it intended to reinvest those funds abroad. Repatriation for U.S. needs could require U.S. taxes.
- Customer and geographic concentration remain notable: Asia accounted for 89% of revenue in Q3; the largest distributor represented 17% and a second distributor 15%. The company warns that semiconductor cyclicality, short order lead times and cancellations, supplier capacity, inventory management, competition, foreign exchange, and litigation can make results volatile.
- Stock-based compensation was $40.8 million for the first nine months, up from $34.2 million, and is a significant noncash expense. Litigation expense was $0.9 million for the period; the company reported no material pending legal proceedings at September 30.
- Unrecognized tax benefits were $16.1 million, of which $4.5 million would affect the effective tax rate if recognized after valuation allowance. Tax treatment related to intercompany cost sharing remained uncertain; no adjustment was recorded.
- MPS planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method and did not expect a material financial-statement impact. For certain U.S. distributors, it expects to estimate price adjustments and recognize revenue upon shipment rather than defer it until resale; $2.7 million of revenue was deferred for such unsold distributor inventory at September 30.
- After quarter-end, MPS entered into and closed purchases of office space in Shanghai and Hangzhou for approximately $14.4 million and $16.0 million, respectively. Outstanding purchase commitments at September 30 were $52.8 million, primarily for wafers, assembly and licenses.
Key facts for investors to verify
- Whether shipment, average-selling-price, product-mix and customer-demand trends persist, particularly given short customer order lead times and distributor concentration.
- Whether higher receivables and inventory convert to cash without elevated collection, obsolescence or write-down risk.
- How the 2018 revenue-recognition adoption affects reported revenue timing and related disclosures.
- The potential financial effect of tax uncertainties, litigation, and the company’s significant stock-based compensation.
- Cash availability and capital-allocation plans, including the subsequent $30.4 million office purchases, quarterly dividends, and the unused $50 million share-repurchase authorization.