Silicon Motion(SIMO) - 2022 Q3 - Quarterly Report

Third Quarter 2022 Financial Results Financial and Business Highlights Silicon Motion reported a 1% sequential and year-over-year sales decline to $250.8 million in Q3 2022, with mixed product line performance and pending acquisition approval Q3 2022 Financial Highlights | Metric | GAAP | Non-GAAP | | :--- | :--- | :--- | | Net Sales | $250.8 million (-1% Q/Q, -1% Y/Y) | $250.8 million (-1% Q/Q, -1% Y/Y) | | Gross Margin | 47.5% | 47.6% | | Operating Margin | 22.1% | 25.0% | | Earnings per Diluted ADS | $1.29 | $1.53 | - Business performance showed divergent trends: SSD controller sales declined 15% to 20% both Q/Q and Y/Y; eMMC+UFS controller sales increased 5% to 10% both Q/Q and Y/Y; SSD solutions sales declined 5% to 10% Q/Q but increased 15% to 20% Y/Y[1] - The company demonstrated its MonTitan™ enterprise-class PCIe Gen5 SM8366 SSD controller at the OCP Global Summit[1] - Securityholders approved the acquisition by MaxLinear on August 31, with closing pending regulatory approval from China's State Administration for Market Regulation (SAMR)[1] Management Commentary CEO Wallace Kou noted challenging PC and smartphone end markets impacting SSD controller sales, while OEM market sales remained strong due to PCIe Gen 4 SSD controller design wins - End markets for PC and smartphones remain challenging, affecting controller sales; year-to-date, SSD controller sales to the OEM market grew about 50% YoY, while sales to the channel market declined about 40% YoY[5] - The ramp-up of PCIe Gen 4 SSD controllers for PC OEMs is a key driver, with Gen 4 controllers accounting for over half of all SSD controller sales in the previous quarter[5] - The company is making excellent progress with its MonTitan™ enterprise-class PCIe Gen5 SSD controller, expecting to begin sampling in early 2023 and be production-ready by the end of 2023[5] - Year-to-date sales for eMMC+UFS controllers have grown by approximately one-third year-over-year, driven by controller outsourcing trends and partnerships with NAND flash makers[5] Detailed Financial Results This section provides a comprehensive view of the company's financial performance, including key financial metrics, consolidated statements of income, balance sheets, and cash flows for Q3 2022 Key Financial Results Summary The summary table shows a year-over-year and sequential decline in key profitability metrics for Q3 2022, with GAAP operating income falling to $55.4 million Q3 2022 Key Financial Results (in millions, except per ADS) | Metric | 3Q 2022 GAAP | 2Q 2022 GAAP | 3Q 2021 GAAP | 3Q 2022 Non-GAAP | 2Q 2022 Non-GAAP | 3Q 2021 Non-GAAP | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $250.8 | $252.4 | $254.2 | $250.8 | $252.4 | $254.2 | | Gross Profit | $119.1 | $133.6 | $127.2 | $119.3 | $133.8 | $127.8 | | Operating Income | $55.4 | $67.1 | $68.9 | $62.7 | $77.0 | $74.8 | | Earnings per ADS | $1.29 | $1.55 | $1.58 | $1.53 | $1.88 | $1.70 | Consolidated Statements of Income For Q3 2022, the company reported net sales of $250.8 million and a net income of $42.9 million, a decrease from $55.4 million in the prior year Q3 2022 vs Q3 2021 Income Statement (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Sales | $250,812 | $254,241 | | Gross Profit | $119,121 | $127,171 | | Operating Income | $55,370 | $68,891 | | Net Income | $42,891 | $55,424 | | Earnings per Diluted ADS | $1.29 | $1.58 | Consolidated Balance Sheet As of September 30, 2022, total assets increased to $961.5 million, driven by a significant rise in inventories to $305.6 million, while cash and cash equivalents decreased Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Sep 30, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $199,215 | $364,071 | | Inventories | $305,566 | $161,010 | | Total current assets | $796,872 | $784,970 | | Total assets | $961,482 | $921,574 | | Total liabilities | $267,125 | $214,352 | | Shareholders' equity | $694,357 | $707,222 | Condensed Consolidated Statements of Cash Flows In Q3 2022, net cash provided by operating activities was $42.6 million, leading to a net increase in cash of $17.5 million after investing and financing activities Q3 2022 Cash Flow Summary (in thousands) | Activity | Three Months Ended Sep 30, 2022 | | :--- | :--- | | Net cash provided by operating activities | $42,640 | | Net cash used in investing activities | ($8,568) | | Net cash used in financing activities | ($16,608) | | Net increase in cash | $17,464 | Shareholder Returns and Acquisition Update The company paid a $0.50 per ADS quarterly dividend, totaling $16.5 million, and its pending acquisition by MaxLinear received shareholder approval, with regulatory approval from SAMR anticipated in Q2 or Q3 2023 - On August 25, 2022, the company paid $16.5 million to shareholders, representing the final $0.50 per ADS installment of its $2.00 per ADS annual dividend[10] - The acquisition by MaxLinear was approved by Silicon Motion's securityholders at an Extraordinary General Meeting on August 31, 2022[12] - The companies have refiled with China's State Administration for Market Regulation (SAMR) under normal procedures and expect a final determination in Q2 or Q3 of 2023, with closing subject to this regulatory approval[12] Discussion of Non-GAAP Financial Measures This section details the company's use of non-GAAP financial measures, excluding items like stock-based compensation and M&A expenses, to provide a clearer view of core operational performance Rationale for Non-GAAP Measures The company uses non-GAAP measures to enhance understanding of its financial performance by excluding certain expenses and gains not indicative of core operating results - Non-GAAP results are provided to help investors make more meaningful period-to-period comparisons, identify business trends, and understand how management measures the company's performance[14] - Key adjustments to derive non-GAAP figures include excluding: stock-based compensation expense, SSD solutions restructuring charges, M&A transaction expenses related to the pending sale to MaxLinear, loss from settlement of litigation, and foreign exchange gains and losses[15][16] GAAP to Non-GAAP Reconciliation For Q3 2022, non-GAAP operating profit was $62.7 million (25.0% margin) compared to GAAP operating profit of $55.4 million (22.1% margin), reflecting adjustments for various expenses Q3 2022 GAAP to Non-GAAP Reconciliation (in thousands, except per ADS) | Metric | GAAP | Adjustments | Non-GAAP | | :--- | :--- | :--- | :--- | | Gross Profit | $119,121 | $143 | $119,264 | | Operating Profit | $55,370 | $7,288 | $62,658 | | Net Income | $42,891 | $8,270 | $51,161 | | Earnings per Diluted ADS | $1.29 | $0.24 | $1.53 | Company Overview and Forward-Looking Statements Silicon Motion is a global leader in NAND flash controllers for SSDs and embedded storage, with forward-looking statements cautioning on risks related to the MaxLinear acquisition and macroeconomic conditions - The company is a global leader in supplying NAND flash controllers for SSDs and the leading merchant supplier of eMMC and UFS embedded storage controllers for smartphones and IoT devices[28] - Forward-looking statements carry risks, including the possibility that the acquisition by MaxLinear may not be completed on the anticipated timeline or at all, potential failure to satisfy closing conditions like regulatory approvals, and the effect of the announcement on business relationships[29][31]