Silicon Labs Selling Aero Products to NXP

Yesterday, Silicon Laboratories (SLAB) announced a deal to sell its Aero transceiver and its AeroFone single-chip phone and amplifier products to NXP, the former Philips Semicondcutor, for $285 million in cash, plus up to another $65 million based on performance. The Street in general seemed unhappy with the deal.

Craig Berger, an analyst at Wedbush Morgan, says management comments on the impact on profitability are “somewhat disappointing and difficult to triangulate.”

Berger notes that the company said it should be able to reach its goal of 25% operating margins by year end. But he said management also said the business being sold comprised one-third of revenues but just 20% of operating expense. The implication, he points out, is that the rest of the business is operating at 18%-21% margins, below the company’s own guidance. “Perhaps management is being cautious with respect to the cellular cost savings associated with this transaction, or alternatively perhaps management is being too aggressive in its operating margin guidance,” he writes. Berger nonetheless maintains a Buy rating on the stock.

“The transaction is a mixed bag,” Berger writes, “with benefits including better margins, less business volatility, less exposure to large competitors that have huge R&D scale to attack large investments; cost of this transaction includes the opportunity cost of the firm exiting the very large handset market and thus not being able to benefit from a large AeroFone ramp.”

Merrill Lynch’s Srini Pajjuri is more bullish on the deal. In fact, he has raised his rating on the stock to Buy from Neutral. “Wireless has been a drag on SLAB’s growth and profitability, and we believe exiting wireless removes the biggest overhang on the stock,” he wrote in a research note. Pajjuri set a price target on the stock of $40. “SLAB has multiple new products that we think could drive upside to 2007 and 2008 estimates. The company’s timing, power, satellite and fax ICs are already beginning to contribute modestly. Also, the company has an excellent track record in R&D efficiency, and we expect more new product announcements over the next few quarters. Given the growth potential in the existing markets and the upside potential from new markets, we believe the stock could trade at a premium to its fabless mixed signal peers.”

Silicon Labs shares yesterday were down $1.34 at $31.90.

SLAB 1-yr chart