Silicon Laboratories: A Promising Future

Silicon Laboratories Inc. (SLAB) is a leading designer of high-performance, analog-intensive, mixed-signal integrated circuits [ICs] that have a broad range of applications. Its chips are used in the consumer, automotive, communications, and industrial end-markets. With its strongest product cycle in a decade, multiple growth drivers expected to fuel growth in the second half of 2009, a well-respected management team, and a sterling balance sheet with over $6 a share in cash, SLAB is at an important inflection point.

In late April, SLAB reported an impressive Q109, beating revenue estimates by $6 million and earnings estimates by almost 100% at $0.22 a share. Gross margins were 61% and expectations are for higher margins as the year progresses. Additionally, the company’s Q2 revenue guidance of $92-$97 million beat expectations by about 20%. (Call Transcript)

The impressive quarter was largely due to a smaller than expected decline in revenue from FM tuners and Microcontrollers and increased sales of new products. A smaller than expected decline in FM tuners should alleviate some investors concerns that OEM’s are switching to combo solutions. This has been one of the main bearish cases for the stock over the past few quarters (tuners generate roughly 30% of SLAB’s revenue) and signs that the rate of decline in that business is slowing should be a boost for the stock. Analysts at Credit Suisse noted that the multi-quarter correction in portable navigation products, in which SLAB’s FM tuners are used, will most likely end in Q2.

Over the past week, SLAB was upgraded by analysts at Roth Capital and Jefferies. The Roth analyst gave the stock a Buy rating and catapulted the price target from $32 to $44. The Jefferies analyst maintained his Buy rating and raised the price target from $40 to $48. In his report, the Roth analyst cited the reasons behind the upgrade were a shift in product mix toward segments with greater growth potential and higher than anticipated margins. The Jefferies upgrade was a result of checks that revealed Q2 revenue were on pace to beat management’s new guidance and that due to the increased visibility of late, management may return to providing full-year guidance during next quarter’s conference call. The checks also revealed that SLAB gained a key design win with Nokia (NOK) that should start hitting the bottom line in Q2, with the analysts believing this deal to add between $5-$10 million in 2009 and possibility for $10-20 million in 2010.

Silicon Laboratories is well positioned to grow revenues and increase market share in three categories – Timing, Video and Power – over the next several quarters. Revenue from the company’s Timing segment increased 10% q/q as SLAB continues to expand its product line and secure new wins in the core networking equipment space. The Video segment, while only accounting for about $1.4 million in revenue in Q1, saw revenue increase 100% q/q as SLAB’s products gained further traction with Samsung (SSNLF.PK). Growth in the Power segment, which increased its revenue 10% q/q in Q2, is being driven by new digital isolator products obtained in the acquisition of Integration Associates. SLAB has just begun to penetrate the Power market and investors should expect gains in revenue and market share over the next few quarters.

While SLAB may continue to base out for a few more weeks, we have begun working into the name and are planning on buying more on a pullback to $33-34. With $6 a share in cash, a rebound in the FM tuner market and earnings power of over $2 a share in 2010, SLAB could trade into the $40s by year-end.

This article was co-authored by Andrew Florio, analyst at JBH Capital.

Disclaimer: The author is long SLAB

Comments

[PhillyDan:]

Silicon Labs is a great company with a good management team and a very good engineering development team. It would not surprise me to see them do very well in the Power market. Having sold and marketed their products as a Director of Technical Marketing for one of their Distributors, SLAB had been one of our fastest growing lines. They provided excellent technical support for their products and engineers liked designing with SLAB products when they could. They should continue to grow the timing business and bring new innovative timing products to market.

Jun 16 07:10 PM

[The Inflect...:]

Agreed. Think the premium multiple gets bigger next year. The strong action in the stock suggests a strong 2nd half of the year. Thanks for the input! best, John


On Jun 16 07:10 PM PhillyDan wrote:

> Silicon Labs is a great company with a good management team and a
> very good engineering development team. It would not surprise me
> to see them do very well in the Power market. Having sold and marketed
> their products as a Director of Technical Marketing for one of their
> Distributors, SLAB had been one of our fastest growing lines. They
> provided excellent technical support for their products and engineers
> liked designing with SLAB products when they could. They should
> continue to grow the timing business and bring new innovative timing
> products to market.

Jun 17 07:18 AM