Let’s take a big step back. MSCC boasted that 2017 calendar year would showcase their organic growth rate, which they had told the Street to model in the 6-8% y/y range.
Here is a picture of their GAAP financials so we can take a quick look-see. (Why GAAP? Because if they manipulate GAAP they go to jail, whereas if they manipulate non-GAAP no one will ever know).
Year over Year revenue is up 7.6% from Dec-16 to Dec-17. Like they promised. But if we strip out acquired revenue, it looks like revenue growth was 2-3% y/y, which is a lot closer to what we said would happen in 2017 compared to what management promised. The two acquisitions were Phonon & Vectron.
A good trick for double checking that most of the growth happened via acquired revenue:
As of Dec-Q ’16, MSCC had 60+% GAAP GM and ~13% GAAP OM. If revenue growth had been organic, then the profit fall through rate should have been well above their 13% OM on an incremental margins basis. But the incremental fall through rate was only 11%. That is what happens in acquisitions when new revenues come with their own cost structures, compared to organic revenue which drives accretion to the bottom line better than the stand-still cost structure, especially in high fixed cost businesses like semis.
Net income, on the other hand, is up huge as MSCC has to quickly eat up their expiring NOLs and translate them into near term earnings. As their NOLs expire (starts in CY18) the company's cash taxes will rise.
Where is the buyback?
MSCC announced a $250m buyback back in July 2017 to support the stock after a weak EPS. Yet the share count continues to go higher and we know there was no buyback in the September Q. We will have to wait for the new 10-Q to come out to see that MSCC likely did not buyback any shares in the Dec-Q. Why are we so certain about a lack of reality to the announced $250m buyback? Maybe it is because the company has $1.8b in debt and $167m in cash, and needs to keep the M&A treadmill running or else the wheels will fall off on revenue growth, leaving profits and cash flow to deteriorate.
Where does that leave us with MSCC? We moved to the bench in October ahead of a quarter with an easier comparison (Dec-Q). We are lucky to have also avoided the latest go-around for M&A rumors. Remember that almost any company that buys MSCC becomes an automatic Short. We will review potential takeout candidates and rationale in our next note. The countdown to Shorting MSCC again has begun.
