SITIME CORPORATION The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
The information in this Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended ("Exchange Act"), which are subject to the "safe harbor"
created by those sections. These forward-looking statements reflect our
management's beliefs and views with respect to future events and are based on
estimates and assumptions as of the date of this report and are subject to risks
and uncertainties. We may, in some cases, use words such as "anticipate,"
"believe," "could," "continue," "estimate," "expect," "intend," "may,"
"objective," "plan," "potential," "predict," "project," "should," "will,"
"would," or the negative of those terms, and similar expressions that convey
uncertainty of future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this report include, but are not
limited to, statements regarding:
• our plans to focus on oscillators, clock ICs, resonators and timing
synchronization solutions and to aggressively expand our presence in these
markets;
• the impact of the COVID-19 pandemic on our business, employees, revenue and
other operating results, liquidity, and cash flows, and its impact on the
businesses of our suppliers and customers, and our anticipated responses
thereto;
• our ability to address market and customer demands and to timely develop new
or enhanced solutions to meet those demands;
• anticipated trends, challenges and growth in our business and the markets in
which we operate, including pricing expectations;
• our expectations regarding our revenue, gross margin, and expenses;
• expected impact of new legislation and
COVID-19 pandemic;
• our belief as to the sufficiency of our existing cash and cash equivalents and
funds available for borrowing under our credit facilities to meet our cash
needs for at least the next 12 months and our future capital requirements over
the longer term, including the potential impact of the COVID-19 pandemic
thereon;
• our expectations regarding dependence on our largest customer;
• our customer relationships and our ability to retain and expand our customer
relationships and to achieve design wins;
• the success, cost, and timing of new products;
• the size and growth potential of the markets for our solutions, and our
ability to serve and expand our presence in those markets;
• our plans to expand sales and marketing efforts through increased
collaboration with our distributors, resellers, and contracted sales
representatives, and our plans to introduce a self-service web portal as well
as digital marketing campaigns for branding and lead generation;
• our goal to become the leading timing solution provider for advanced and
challenging applications;
• our positioning of being designed into current systems as well as future
products;
• our belief that our advanced packaging designs can enable the smallest
footprints in the industry;
• our expectations regarding competition in our existing and future markets;
• regulatory developments in
• the performance of, and our relationships with, our third-party suppliers and
manufacturers;
• our and our customers' ability to respond successfully to technological or
industry developments;
• our ability to attract and retain key personnel;
• intellectual property and related litigation;
• the adequacy and availability of our leased facilities;
• the accuracy of our estimates regarding capital requirements, expectations
regarding renewal of loans, and needs for additional financing.
In addition, any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. Forwardlooking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from those expected or referenced in these
forward-looking statements. These risks and uncertainties include, but are not
limited to, those risks discussed in Part II, Item 1A Risk Factors of this
report. Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements we may make. Given these uncertainties, you should
not place undue reliance on these forward-looking statements. We qualify all of
the forward-looking statements in this report by these cautionary statements.
You should not rely upon forward-looking statements as predictions of future
events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee that the future
results, levels of activity, performance, or events and circumstances reflected
in the forward-looking statements will be achieved or occur. Moreover, neither
we nor any other
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-------------------------------------------------------------------------------- person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. Overview We are a leading provider of silicon timing solutions. Our timing solutions are the heartbeat of our customers' electronic systems, solve complex timing problems and enable industry-leading products. We provide solutions that are differentiated by high performance and reliability, programmability, small size, and low power consumption. Our products have been designed into over 250 applications across our target markets, including communications and enterprise, automotive, industrial, aerospace, and mobile, IoT and consumer.
We commenced commercial shipments of our first oscillator products in 2006. Substantially all of our revenue to date has been derived from sales of oscillator systems across our target end markets. We intend to focus on clock IC and timing sync solutions in the future. We seek to aggressively expand our presence in these two markets.
We sell our products primarily through distributors and resellers, who in turn sell to our end customers. We also sell products directly to end customers who integrate our products into their applications. Based on sell-through information provided by these distributors, we believe the majority of our end customers are based in theU.S. We operate a fabless business model, allowing us to focus on the design, sales, and marketing of our products, quickly scale production, and significantly reduce our capital expenditures. We leverage our global network of distributors and resellers to address the broad set of end markets we serve. For our largest accounts, dedicated sales personnel work with the end customer to ensure that our solutions fully address the end customer's timing needs. Our smaller customers work directly with our distributors to select the optimum timing solution for their needs. We were acquired by MegaChips in 2014 and were a wholly-owned subsidiary of MegaChips, a fabless semiconductor company based inJapan and traded on theTokyo Stock Exchange , untilNovember 25, 2019 . OnNovember 25, 2019 , we completed the initial public offering of shares of our common stock. OnJune 16, 2020 , we completed a follow-on public offering, in which we issued and sold 1,525,000 shares of our common stock and MegaChips sold 2,500,000 shares of our common stock held by them. OnFebruary 22, 2021 , we completed an additional follow-on public offering, in which we issued and sold 1,500,000 shares of our common stock and MegaChips sold 1,500,000 shares of our common stock held by them. MegaChips continues to be our largest stockholder and held approximately 31.5% of our common stock as ofJune 30, 2021 . We are currently experiencing a growth in demand for some of our products, however, there are a number of industry-wide supply constraints affecting the supply of analog circuits manufactured by certain foundries, including Taiwan Semiconductor Manufacturing Company, which may limit our ability to fully satisfy the increase in demand. If we cannot ship our products to our customers on time and in the quantity required as a result of this supply constraint our sales could decline and we could lose customers.
Impact of COVID-19 on our Business
The future impact of the ongoing COVID-19 pandemic on our business remains
unknown. In an effort to protect the health and safety of our employees, we took
proactive actions and adopted social distancing policies at our locations around
the world, including requiring employees to work from home ("WFH") in certain
locations, reducing the number of people in certain of our sites at any one
time, and limiting employee travel. In an effort to contain the COVID-19
pandemic or slow its spread, governments around the world have also enacted
various measures, including orders to close all businesses not deemed
"essential," isolate residents in their homes or places of residence, and
practice social distancing. In addition, the United States and other countries
in which we operate have imposed measures such as quarantines and
"shelter-in-place" orders that restrict business operations and travel and
require individuals to WFH, which has impacted all aspects of our business, as
well as those of the third-parties we rely upon for our manufacturing, assembly,
testing, shipping and other operations. The current and future spread of
COVID-19 variants may cause the reinstatement of one or more of these measures.
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-------------------------------------------------------------------------------- We anticipate the global health crisis caused by the COVID-19 pandemic will continue to impact business activity across the globe and will continue to impact our business, employees and operations for the foreseeable future. We believe that the COVID-19 pandemic could cause delay and disruption in the manufacture, shipment, and sales of, and overall demand for, our products. In addition, we believe the production capabilities of our suppliers has been, and may continue to be, impacted as a result of quarantines, closures of production facilities, lack of supplies, or delays caused by restrictions on travel or WFH orders. For example, inMarch 2020 , the government ofMalaysia announced measures to restrict movement in that country to suppress the number of COVID-19 cases, which have been extended currently untilAugust 2021 . These restrictions could limit our suppliers' ability to operate their manufacturing facilities in that country. Any delay or disruption in the manufacture, shipment and sales of, or overall demand for, our products in turn may negatively and materially impact our operating and financial results, including revenue, gross margins, operating margins, cash flows and other operating results. Further, the resumption of normal business operations after such disruptions may be delayed and a resurgence of COVID-19 could result in continued disruption to us, our suppliers, and/or our customers. To date, we have experienced minimal impact from any supplier disruption. The duration and full magnitude of the COVID-19 pandemic's impact on credit and financial markets is also unknown, which creates uncertainty as to the financial condition of our distributors or customers. In addition, the deterioration in credit markets could limit our ability to obtain external financing to fund our operations and capital expenditures. We may also experience losses on our holdings of cash and investments due to failures of financial institutions and other parties. We currently have employees, third-party contractors, distributors, and customers in numerous countries throughout the world that have each been impacted by the COVID-19 pandemic. The COVID-19 pandemic has restricted and is expected to continue to restrict travel and use of our facilities and the facilities of our suppliers, customers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our customers, third-party suppliers and contractors, and results of operations. We cannot predict with certainty what other impacts the COVID-19 pandemic may have on our business, employees, service providers, customers and results of operations. There remains a high degree of uncertainty in the global business environment given the impact of the COVID-19 pandemic which creates challenges with visibility beyond the near term. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, operations, and prospects, or on our financial results for remainder of fiscal 2021 or beyond. For additional discussion, please see Part II, Item 1A Risk Factors of this report.
Results of Operations
Revenue
We derive revenue primarily from sales of silicon timing products to
distributors and resellers who in turn sell to our end customers. We also sell
products directly to end customers who integrate our products into their
applications. Our sales are made pursuant to standard purchase orders which may
be cancelled, reduced, or rescheduled, with little or no notice. We recognize
product revenue upon shipment when we satisfy our performance obligations as
evidenced by the transfer of control of our products to customers. We measure
revenue based on the amount of consideration we expect to be entitled to in
exchange for products.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands except percentage)
Revenue $ 44,496 $ 21,473 $ 23,023 107 % $ 80,038 $ 43,215 $ 36,823 85 %
Revenue increased by $23.0 million , or 107% , for the three months ended
June 30, 2021 compared to the same period in the prior year. The increase was
primarily related to 66% higher volume of shipments year over year and an
increase of 25% in average selling price ("ASPs") of our products. The increase
in sales volume was driven by higher demand for our products from new and
existing customers, including new design wins at new and existing customers. The
ASP increase was related to change in mix of the products we shipped and
increase in selling prices for certain customers.
Revenue increased by $36.8 million , or 85%, for the six months ended June 30,
2021 compared to the same period in the prior year. The increase was primarily
related to 53% higher volume of shipments year over year and an increase of 21%
in ASPs. The increase in sales volume was driven by higher demand for our
products from new and existing customers, including new design wins at new and
existing customers. The ASP increase was related to change in mix of the
products we shipped and increase in selling prices for certain customers.
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-------------------------------------------------------------------------------- We expect our revenue to fluctuate in the future primarily based on the volume of shipments and ASP changes. We may not be able to sustain our ASP increases in the future at this current rate. For the three and six months endedJune 30, 2021 and 2020, sales attributable to our largest end customer accounted for 15%, 25%, 26%, and 30%, respectively, of our revenue. Our end customers predominantly purchase our products from distributors. For the three and six months endedJune 30, 2021 and 2020, our top three distributors by revenue together accounted for approximately 46%, 53%, 51%, and 54%, respectively, of our revenue. Revenue attributable to our largest ten end customers accounted for 47%, 51%, 50% and 51%, respectively, of our revenue for the three and six months endedJune 30, 2021 and 2020.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue consists of wafers acquired from third-party foundries,
assembly, packaging, and test cost of our products paid to third-party contract
manufacturers, and personnel and other costs associated with our manufacturing
operations. Cost of revenue also includes depreciation of production equipment,
inventory write-downs, amortization of internally developed software, shipping
and handling costs, and allocation of overhead and facility costs. We also
include credits for rebates received from foundries to cost of revenue.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands except percentage) (in thousands except percentage)Cost of Revenue$ 17,669 $ 11,490 $ 6,179 54 %$ 34,393 $ 23,256 $ 11,137 48 % Gross Profit 26,827 9,983 16,844 169 % 45,645 19,959 25,686 129 % Gross Margin 60 % 46 % 57 % 46 % Gross profit increased by$16.8 million in the three months endedJune 30, 2021 compared to the same period in the prior year. Gross profit increased a net$18.4 million mainly from higher sales volume and an increase in ASPs of our products. This increase was offset by higher other manufacturing and overhead costs of$1.6 million of which$0.4 million was related to higher stock-based compensation expense. Gross profit increased by$25.7 million in the six months endedJune 30, 2021 compared to the same period in the prior year. Gross profit increased a net$28.2 million mainly from higher sales volume and an increase in ASPs of our products. This increase was offset by higher other manufacturing and overhead costs of$2.5 million of which$0.8 million was related to higher stock-based compensation expense. Gross margin was higher by 14% in the three months endedJune 30, 2021 when compared to the same period in the prior year. The gross margin increased by 10% from higher sales volume and an increase in ASPs. There was additonal 4% improvement in our other manufacturing costs as it decreased as a percentage of revenue. Gross margin was higher by 11% in the six months endedJune 30, 2021 when compared to the same period in the prior year. The gross margin increased by 8% from higher sales volume and an increase in ASPs. There was additonal 3% improvement in our other manufacturing costs as it decreased as a percentage of revenue. Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of our operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and commissions. Our operating expenses also include consulting costs, allocated costs of facilities, information technology and depreciation.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands except percentage) (in thousands except percentage)Operating Expenses: Research and development$ 12,067 $ 7,398 $ 4,669 63 %$ 23,247 $ 14,422 $ 8,825 61 % Selling, general and administrative 12,686 7,856 4,830 61 % 23,809 15,664 8,145 52 % Total operating expenses$ 24,753 $ 15,254 $ 9,499 62 %$ 47,056 $ 30,086 $ 16,970 56 % 19
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Research and Development Our research and development efforts are focused on the design and development of next-generation silicon timing systems solutions. Our research and development expense consists primarily of personnel costs, which include stock-based compensation, pre-production engineering mask costs, software license and intellectual property expenses, design tools and prototype-related expenses, facility costs, supplies, professional and consulting fees, and allocated overhead costs. We expense research and development costs as incurred. We believe that continued investment in our products and services is important for our future growth and acquisition of new customers and, as a result, we expect our research and development expenses to continue to increase in absolute dollars. However, we expect our research and development expense to fluctuate as a percentage of revenue from period to period depending on the timing of these expenses. Research and development expense increased by$4.7 million , or 63%, for the three months endedJune 30, 2021 compared to the same period in the prior year, primarily due to higher personnel costs of$1.9 million due to increased headcount, an increase in stock-based compensation expense of$1.8 million , and higher project expenses. Research and development expense increased by$8.8 million , or 61%, for the six months endedJune 30, 2021 compared to the same period in the prior year, primarily due to an increase in stock-based compensation expense of$3.6 million , higher personnel costs of$3.1 million due to increased headcount, and higher project expenses.
Sales, General and Administrative
Sales, general and administrative expense consists of personnel costs, including stock-based compensation, professional and consulting fees, accounting and audit fees, legal costs, field application engineering support, travel costs, advertising expenses and allocated overhead costs. We expect sales, general and administrative expense to continue to increase in absolute dollars as we increase our personnel and grow our operations, although it may fluctuate as a percentage of revenue from period to period depending on the timing of these expenses. Selling, general and administrative expense increased by$4.8 million , or 61%, for the three months endedJune 30, 2021 compared to the same period in the prior year, primarily due to higher personnel costs of$1.9 million related to increased headcount and commissions and higher stock-based compensation expense of$1.9 million . Selling, general and administrative expense increased by$8.1 million , or 52%, for the six months endedJune 30, 2021 compared to the same period in the prior year, primarily due to higher stock-based compensation expense of$3.9 million , higher personnel costs of$2.1 million largely related to increased headcount and higher commission expenses of$1.5 million due to increased revenue.
Other Expense (Income)
Other expense (income) consists primarily of interest expense on our outstanding
debt, interest income on our cash balances, foreign exchange gains and losses,
and asset dispositions. See Note 9 to our condensed consolidated financial
statements under Item 1 for more information about our debt.
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands except percentage) (in thousands except percentage)Interest Expense $ - $ 313$ (313 ) (100 %) $ - $ 616$ (616 ) (100 %) Other expense (income), net 28 20 8 40 % 68 (48 ) 116 (242 %) Total other expense$ 28 $ 333$ (305 ) (92 %)$ 68 $ 568$ (500 ) (88 %) Other expense decreased$0.3 million and$0.5 million for three and six months endedJune 30, 2021 compared to the same period in the prior year, primarily as a result of interest expense savings from paying down of all our outstanding loans under our credit facilities.
Income Tax Expense
Income tax expense consists primarily of state income taxes and income taxes in
certain foreign jurisdictions in which we conduct business. We have a full
valuation allowance for deferred tax assets as the realization of the full
amount of our deferred tax asset is uncertain, including NOL, carryforwards, and
tax credits related primarily to research and development. We expect to maintain
this full valuation allowance until realization of the deferred tax assets
becomes more likely than not.
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Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands except percentage) (in thousands except percentage)Income tax (expense) benefit $ (23 ) $ 1$ (24 ) n/a $ (63 )$ (1 ) $ (62 ) 6200%
Liquidity and Capital Resources
As ofJune 30, 2021 andDecember 31, 2020 , we had cash and cash equivalents of$253.5 million and$73.5 million , respectively. Our principal use of cash is to fund our operations to support growth. InJune 2020 , we completed a follow-on public offering of our shares, resulting in net proceeds to us of$45.8 million after deducting underwriting discounts and commissions and deferred offering costs. We used the funds obtained to pay down all our outstanding debt. InFebruary 2021 , we completed an additional follow-on public offering of our shares, resulting in net proceeds to us of$181.6 million after deducting underwriting discounts and commissions and deferred offering costs. The Company canceled its$50.0 million credit facility with MUFG. We believe that our existing cash and cash equivalents will be sufficient to meet our cash needs for at least the next 12 months. Over the longer term, our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, and the continuing market acceptance of our solutions. In the event that we need to borrow funds or issue additional equity, we cannot provide any assurance that any such additional financing will be available on terms acceptable to us, if at all. If we are unable to raise additional capital when we need it, it would harm our business, results of operations and financial condition. Six Months EndedJune 30, 2021 2020 (in thousands)
Net cash provided by operating activities
(11,965 ) (2,881 )
Net cash provided by financing activities 181,588 36,294
Net increase in cash and cash equivalents
Operating Activities In the six months endedJune 30, 2021 , net cash provided by operating activities of$10.4 million was primarily due to a net loss of$1.5 million and net increase in operating assets and liabilities of$5.8 million offset by non-cash expenses of$17.7 million . Non-cash expenses were mainly related to depreciation and amortization and stock-based compensation expense. Operating assets and liabilities increased primarily due to higher accounts payable due to timing of payments and higher accounts receivables due to timing of shipments partially offset by an increase in inventories as we managed our inventory levels for increased demand. In the six months endedJune 30, 2020 , net cash provided by operating activities of$5.7 million was primarily due to a net loss of$10.7 million offset by non-cash expenses of$9.7 million and a change in operating assets and liabilities of$6.7 million . Non-cash expenses were mainly related to depreciation and amortization, stock-based compensation expense, and non-cash operating lease costs. Operating assets and liabilities increased primarily due to lower accounts receivables and related party receivables due to timing of shipments and collections, lower prepaid expenses and other current assets related to advance payments to suppliers for inventory and higher accrued expenses and other liabilities due to timing of payments partially offset by an increase in inventories as we managed our inventory levels.
Investing Activities
Our investing activities consist primarily of capital expenditures for property and equipment purchases. Our capital expenditures for property and equipment have primarily been for general business purposes, including machinery and equipment, leasehold improvements, acquired software, internally developed software used in production and support of our products, computer equipment used internally, and production masks to manufacture our products. In the six months endedJune 30, 2021 , net cash used in investing activities was$12.0 million . We paid$11.4 million largely to purchase test and other manufacturing equipment to support the increase in demand of our products and other property and equipment for general business purposes. In the six months endedJune 30, 2020 , net cash used in investing activities was approximately$2.9 million and consisted primarily of the purchase of production masks, internally developed software, and other property and equipment for general business purposes. 21
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Financing Activities
Cash provided by financing activities includes proceeds from borrowings under our credit facilities and proceeds from issuance of shares.
In the six months endedJune 30, 2021 , net cash provided by financing activities was$181.6 million , consisting of proceeds from issuance of shares of$190.5 million net of underwriting commissions and discounts of$8.6 million and deferred offering costs of$0.3 million . In the six months endedJune 30, 2020 net cash provided by financing activities was$36.3 million , consisting of proceeds from issuance of shares of$45.8 million net of underwriting commissions and discounts of$2.7 million and deferred offering costs of$0.3 million and borrowings of$35.0 million offset by repayments of$41.0 million under our short-term revolving line of credit and$3.5 million payment of tax withholdings paid on behalf of employees for net share settlement at the time of vesting.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements and accompanying disclosures requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes.The Securities and Exchange Commission , orSEC , has defined a company's critical accounting policies as policies that are most important to the portrayal of a company's financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) inventory; (3) stock-based compensation; (4) accounting for income taxes and (5) segment reporting. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information not presently available. Actual results may differ significantly from these estimates if the assumptions, judgments, and conditions upon which they are based turn out to be inaccurate. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 16, 2021 .
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