The Fundies for Silicon Labs (SLAB): 10Q Review

Summary: Silicon Laboratories SLAB is an innovative, fabless analog chip designer. Its history of successful products has earned the company a premium valuation, but the long lead times necessary for customers to evaluate new products has resulted in lumpy fundamentals and a volatile stock price. Given that consensus estimates are at the high end or above management guidance, there may be a high risk of disappointment at the next earnings release.

Income statement analysis

Sales growth – overall sales grew 9.3 per cent year/year, with mobile handset products growing 15.8 per cent and broad-based mixed signal products rising 4.3 per cent.

Unit vs. dollar – in mobile, unit sales were up 66.1 per cent, with average selling price declining 30.3 per cent. In mixed signal volumes declined by 12.4 per cent but ASPs rose 19.1 per cent.

Sales quality

·        Revenue recognition – revenue sold to distributors is not recognized until it is sold by the distributor.

·        Other – two customers, Sagem and Samsung, accounted for 12 and 10 per cent of sales, respectively. Sales through two distributors accounted for a further 47 per cent of revenues.

Seasonality – none apparent

Earnings quality

·        Operating margins – margins declined considerably year/year. About half of the decline was due to the new requirement to expense stock options. The remainder was the company spending more on research and development that management believes (but has no guarantee) will lead to future sales growth.

·        Net margins – declined due to falling operating margin.

·        Stock options – reduced reported net income by $0.10 per share in Q1.

Balance sheet analysis

Debt load and maturity schedule – virtually no debt on the balance sheet.

Exotic debt instruments – none

Value of unexercised options – intrinsic value of $210 million, which is the minimum value for what some analysts consider to be an off balance sheet liability. Restricted stock grants have a further intrinsic value of $66 million.

Accruals

·        Doubtful accounts – allowance held flat despite a four per cent sequential sales gain and an 11 per cent rise in receivables. This modestly increased net income but had no effect on EPS.

·        Legal reserves – none disclosed

·        Other – large increase ($6 million, or 25 per cent) sequential increase in “other assets, net.” What are these and why did they increase?

Inventory trends (DOH) – stable

Receivables trends (DSO) – stable

SPEs and other off-balance sheet items – $28 million in net future minimum operating lease commitments.

Cash flow analysis

Operating cash flow and net income trends – net income declined $6 million year/year, operating cash flow declined $4 million. $3 million of the decline in operating cash flow resulted from the change in accounting for stock options, as a portion of the tax benefit was shifted to the financing section of the cash flow section.

Free cash flow and net income trends – nearly $20 million in the first quarter for both 2005 and 2006.

Capital investment relative to depreciation – Capex is expected to be $20-$25 million in 2006, compared with estimated depreciation of $19 million.

Cash taxes paid relative to tax accrual – cash taxes paid were well below the taxes accrued on the income statement due to prior period net operating losses and the tax treatment of stock options.

Footnotes

Legal issues – is defending against one shareholder suit and two patent infringement suits.

Growth indicators

Guidance – company expects second quarter revenue of $116-120 (10 per cent year/year at midpoint) million and EPS of $0.18-0.20. Consensus estimates are for $118.4 million and $0.33 in EPS, which excludes stock-based compensation expense. Still, consensus appears to be on the aggressive side, which suggests potentially high risk of disappointment.

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One Comment on “The Fundies for Silicon Labs (SLAB): 10Q Review”

  1. [...] SLAB: Silicon Labs Wants to Put Radios Everywhere As a small-cap semiconductor company, Silicon Labs must rely on innovation to drive growth and stand out from the crowd. To do so, Silicon Labs relies on its particular strength of putting analog components onto standard CMOS (rather than exotic material) chips. Another example of this was announced today. Silicon Laboratories Inc. SLAB, a leader in high-performance, analog-intensive, mixed-signal ICs, today announced the extension of its broadcast audio product portfolio to include the Si473x AM/FM receiver family. The Si473x enables an AM/FM receiver to be easily added to consumer devices such as clock and portable radios, home stereos, MP3 players, docking stations and mobile handsets.The Si473x is the first fully integrated AM/FM radio receiver from antenna input to audio output in a single monolithic IC. Conventional AM/FM radio implementations are large, expensive and difficult to manufacture, limiting the inclusion of AM radio functionality in many small, portable, high-volume applications. The single-chip Si473x requires only two external components in 0.15 cm(2) of board space compared to more than 50 components and 10 cm(2) of board space for conventional solutions. Samples of the Si4730 and Si4731 are available in a compact 3×3 mm 20-pin quad flat no-lead (QFN) package. Pricing for the Si4730 begins at $4.87 in quantities of 10K. Pricing for the Si4731, which supports RDS/RBDS, begins at $5.53 in quantities of 10K. An evaluation board is available for $150. [...]

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