Monolithic Power Systems, Inc.

    • Spruce Point has significant concerns about Monolithic Power Systems (Nasdaq: MPWR), a designer and manufacturer of power management solutions. Despite being headquartered and publicly listed in the U.S., MPWR operates largely as a foreign company with ~90% of its production, and 58% of sales reported in China. After a close on-the-ground and forensic financial investigation, Spruce Point finds evidence that suggests $245 – $265m (~40%) of its sales are irreconcilable. With MPWR’s shares valued among the highest in the semiconductor space, and fundamental and accounting pressures mounting, we see the potential for 75% – 85% downside risk ($21 – $35 per share).
    • Key Disclosures At IPO Have Vanished: MPWR used to disclose backlog, distributors, end customers, and manufacturing partners, but has ceased all of these disclosures. It remains heavily dependent on distributors, which is a notorious way companies can manipulate results.
    • Days Inventory Exploding, A Red Flag That Foreshadowed Two Past Semiconductor Accounting Scandals; Vitesse Semi and Sipex Corp: MPWR’s days inventory outstanding are currently 180, and have grown consistently over the past few years while most semi peers have been stable. Based on our analysis, the long-term industry average is 106 days. If we assume $245 – $265m and $93m of potential revenue and inventory overstatement, respectively, MPWR’s pro forma inventory metrics fall exactly in-line with peers. A former MPWR audit member concealed his connection to the scandal at Sipex Corp, which restated revenues lower by 35% and slashed gross margins by 1,590bps.
    • MPWR Has Been Dodgy About Disclosing Product Average Selling Prices (ASPs): Despite >70% historically, and now >90% of product sales reported as DC to DC converters, MPWR has claimed it cannot provide color on ASP trends. However, as noted in its Risk Factors, and consistent with the semi industry, prices tend to decline over time. Yet, the CEO once claimed that ASPs have been stable throughout time.
    • Former CFO Rao Claimed ASPs and Margins Don’t Go Up With New Products: Rao made this statement in January 2016. Less than a month later, she abruptly resigned. Post an SEC comment letter in 2014 asking for price drivers to revenue, MPWR revealed that from 2013-2016, prices declined on average by 5% per year.
    • A Former Employee Told Us He Left MPWR Recently Due To Ethical Concerns And Having Seen Inventory Manipulation: “...if they need to hit a number to show a sale, they will force the distributor ..They’ll make a deal. They’ll cut a deal with the distributor and they’ll convert that inventory to distributor owned inventory to show that they met their numbers for the quarter”.
    • $126M Spent On Real Estate, Notably A Large Recent Office Purchase At A 35% Premium: Beyond dividends, MPWR has a voracious appetite for real estate. Of particular concern, it abandoned a land acquisition and 50,000 sqft HQ development project in favor of an even larger 75,000 sqft commercial office building in Kirkland, WA this year. The local media called the 35% premium paid by MPWR “insane” given that the prior owner purchased the property just 9 months earlier, and made no capital improvements. According to a local broker, MPWR will occupy “only a small portion” of the building. The $53m purchase was funded by cash repatriated from Bermuda, a notoriously opaque financial center. MPWR paid $707/sqft when it its average rent expense is just $16/sqft (44x buy vs. rent).
    • Trading at a substantial premium to semiconductor peers at 10x, 37x, and 37x 2019E Sales, EBITDA, and P/E, MPWR’s share price incorporates an unfounded belief it is a best-of-breed takeover target. Yet, industry takeout multiples are closer to 3.3x, 17.5x, 39x. Based on our conversations with people familiar with MPWR, we believe its “cowboy” culture is not a good cultural fit with traditional more conservative industry players. As such, we see little chance a takeover ever materializes.
    • Analysts also take MPWR’s results at face value, and we don’t believe they’ve consider the fact that ~$260m of revenues cannot be reconciled in its China tax filings, and de minimis inventory was reported. At worst, this explains phantom sales and inventory which continues to balloon, and allows gross margins to appear stable and growing in the notoriously volatile semiconductor industry.
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