MaxLinear, Inc. 2017 Q1 Form 10-Q Summary
Business context and reporting period
MaxLinear is a fabless semiconductor company providing radio-frequency and mixed-signal integrated circuits for cable and satellite broadband, connected-home, wired infrastructure, wireless infrastructure, optical interconnect, and related markets. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. Results are not necessarily indicative of the full fiscal year.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $88.8 million | $102.7 million | Down 13% |
| Gross profit | $52.9 million | $61.2 million | Down 13% |
| Gross margin | 59.6% | 59.6% | Flat |
| Operating income | $10.4 million | $21.7 million | Down 52% |
| Operating margin | 11.7% | 21.1% | Down 9.4 percentage points |
| Net income | $8.5 million | $20.7 million | Down 59% |
| Diluted EPS | $0.12 | $0.31 | Down $0.19 |
| Operating cash flow | $22.7 million | $39.0 million | Down 42% |
Research and development expense was $23.9 million, or 26.9% of revenue, compared with $23.8 million, or 23.1%, in the prior-year quarter. Selling, general and administrative expense increased 37% to $18.6 million, primarily due to merger-and-acquisition professional fees and additional amortization. No restructuring charges were recorded in Q1 2017 versus $2.1 million in Q1 2016.
At March 31, 2017, cash and cash equivalents were $89.1 million, restricted cash was $2.1 million, and investments were $63.6 million, for total cash, cash equivalents, restricted cash and investments of $154.9 million. Working capital was $183.9 million. The company had no term debt outstanding at quarter-end, but expected to incur approximately $425.0 million of secured term-loan debt in connection with the proposed Exar acquisition.
Material changes versus the prior comparable period
- Operator revenue declined 21% to $73.0 million, primarily because of continued declines in legacy video SoC, satellite analog channel-stacking, and cable video RF transceiver products. Infrastructure and other revenue increased 60% to $15.8 million, primarily from the 2016 wireless infrastructure acquisitions.
- Gross margin remained approximately 60%, despite lower revenue and higher intellectual-property amortization.
- Operating margin declined materially because revenue fell while research and development spending remained broadly stable and SG&A increased significantly.
- Operating cash flow decreased by $16.3 million, reflecting lower net income and unfavorable working-capital changes, including increases in accounts receivable and inventory.
- Cash used in investing activities improved to $10.7 million from $30.7 million, mainly because purchases of investments were partially offset by maturities. Financing activities used $4.9 million, primarily for employee tax withholding on equity awards.
- On March 29, 2017, Class A and Class B common stock automatically converted into a single class of common stock with one vote per share. The conversion did not change the number of shares outstanding.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific quarterly revenue or earnings forecast in the filing. Management expects revenue declines in legacy video SoC and satellite analog channel-stacking products to continue because those products are near the end of their life cycles. Research and development and SG&A are expected to increase as the company expands its product portfolio, sales organization, international infrastructure, and market presence.
On March 29, 2017, MaxLinear agreed to acquire Exar Corporation for approximately $700.0 million, or approximately $472.0 million net of Exar cash acquired. The transaction was expected to close in Q2 2017, subject to customary conditions and regulatory approvals, and was to be funded with cash, Exar cash, and approximately $425.0 million of new secured debt. The filing states that the transaction could reduce liquidity, increase variable-rate interest expense, add integration and restructuring costs, and create additional goodwill and intangible assets. Exar shareholder litigation was pending, although the parties had reached an agreement in principle for dismissal and supplemental disclosures after quarter-end.
On April 4, 2017, after the reporting date, MaxLinear acquired Marvell's G.hn business and a related Spain entity for $21.0 million in cash. The company also began operating under favorable Singapore tax incentives in April 2017, subject to employment and investment conditions.
Other material risks include customer concentration, product-life-cycle declines, semiconductor industry cyclicality, pricing pressure, reliance on third-party foundries and assembly providers, international and supply-chain exposure, intellectual-property disputes, litigation, inventory and distributor risks, and execution risk from multiple acquisitions. Arris represented 31% of Q1 2017 revenue, the ten largest customers represented 70%, Asia accounted for 95% of shipments, and China accounted for 78% of revenue based on ship-to location.
The CrestaTech patent litigation remained unresolved, although the PTAB had found all 13 asserted claims unpatentable and the district court case remained stayed. The company also faced Trango Systems litigation relating to discontinuation of an acquired chip line. Management could not predict the outcomes of these matters.
The company adopted certain accounting standards early, including guidance on income taxes and restricted cash; management reported no material impact from these adoptions. The company expects the future lease standard to have a material impact on its consolidated financial position. Disclosure controls and procedures were deemed effective as of March 31, 2017.
Important facts for investors to verify
- Whether the Exar acquisition closed as planned, the final purchase price allocation, goodwill and intangible assets recorded, and the final terms, interest rate and covenants of the debt financing.
- Post-acquisition liquidity, leverage, interest expense, free cash flow, integration costs, and achievement of projected synergies.
- Trends in legacy video SoC and satellite analog channel-stacking revenue and the growth of wireless infrastructure, optical, connected-home, and other newer product lines.
- Customer concentration, distributor inventory, accrued price-protection liabilities of $21.9 million, and the sustainability of approximately 60% gross margins.
- Inventory growth to $31.7 million, accounts receivable of $57.8 million, and the effect of working-capital requirements on cash conversion.
- Developments in the CrestaTech and Trango litigation and any additional Exar shareholder litigation or transaction-related claims.
- Compliance with Singapore tax-incentive conditions and the potential effect of future tax-rate changes or release of the company’s valuation allowance.