Silicom Growth Moving To The Next Level

| About: Silicom Ltd (SILC)

Fourth Quarter 2011, should mark the inflection point for the next higher level for Silicom (NASDAQ:SILC), a provider of high-performance networking solutions. Having inched past the $10 Million quarterly revenue mark in Q3, expect a very strong Q4, probably in the $12.5 -13.5 Million range, fueled by the 10 announced Design Wins totalling more than $14 Million annually ramped since August 2010 and beginning to coalesce during this quarter.

A midpoint assumption for EPS would be $.43, and may show incremental gross margin improvement, given a favorable product mix with more intelligent products and SETAC (Silicom's Server To Appliance Converter product family) products in the mix. While Q4 benefits from seasonality, also expect HI 2012 to be above the $11.00 Million quarterly run rate as the 10 Design Wins continue to accumulate. Expect revenue to be on the way toward $15 Million quarterly run rates by H2 2012 and H1 2013.

The buildup of inventory in recent quarters is one such signal suggesting a strong revenue number along with Silicom management's bullish comments in the Conference Call accompanying the Q3 results, pointing to strong growth for the remainder of 2011, 2012, and beyond. Most of Silicom's publicly traded customers have reported favorable forward looking comments for Q4 and beyond into 2012, and Silicom is right in the sweet spot where Tech budgets are being prioritized, even if restrained.

SETAC vision continues to materialize. With recent announcement of Major Networking player standardizing around the SETAC platform, this further validates the solution and serves as a major pivot point to further penetrate standardization throughout the networking space, and perhaps is a precursor to Silicom's SETAC solution becoming the "go-to" solution for the next several years, putting the company in a most enviable position.

At a recent price of $16 1/2, the valuation of Silicom is extremely attractive by almost any metric. The stock being a micro cap has low institutional sponsorship, but expect this to change as Silicom begins to attract further investor visibility, stoked by outstanding fundamentals, execution, and increasing growth visibility. The Q4 EPS report, or an announced win of another Tier 1 server vendor standardizing around SETAC, which it was suggested on the Q3 2011 Conference Call is in advanced discussions, could be the catalyst for a rapid stock price appreciation, catching up to peer valuations. An announcement of a Tier 1 Server Vendor standardizing around SETAC would translate into annual revenue potential, once fully ramped, of $10 - $25 Million or more from one customer.

The Napkin model

Midpoint of $13.00 Million Revenue
Gross Margin 44.1%
OpEx $2.4 Million
Tax Rate 9%
EPS $.43 assuming 7.0 MM shares outstanding

Disclosure: I am long SILC.