SLAB: Silicon Labs is Running Out of Options
According to today’s press release:
Silicon Laboratories Inc. SLAB, a leader in high-performance, analog-intensive, mixed-signal integrated circuits (ICs), today announced a definitive agreement with NXP, formerly Philips Semiconductor. NXP will purchase the Aero transceiver, AeroFONE(TM - Annual Report) single-chip phone and power amplifier product lines, for $285 million in cash, with additional earn-out potential of up to an aggregate of $65 million over the next three years.
Based on that purchase price, NXP is paying between 22% and 27% of SLAB’s enterprise value to acquire businesses that accounted for 33% of revenue and 20% of operating income (according to a guesstimate given on the conference call) in the fourth quarter. However, other guidance given on the call suggests the wireless business may have provided the bulk of operating income:
There will likely be a hefty tax on the proceeds, so after the deal is completed we would expect Silicon Labs to have about $600 million of cash and marketable securities and no debt underlying their $1.7 billion market cap, for a remaining enterprise value of $1.1 billion. Assuming all goes according to the company’s plan they will achieve their 25% operating margin goal beginning next year, which would make that valuation appear relatively cheap.
The problem is, things seldom go according to plan. And much of Silicon Labs’ premium valuation was justified by the options the company had:
- Selling the whole company. The company could still sell the remaining portion, but the valuation they got for wireless (presumably based on a trough level of revenue and earnings) it is hard to see anyone paying a significant premium for the remainder.
- A recovery in the wireless segment. Silicon Labs defied all odds to take a good chunk of market share with its GSM transceiver. The possibility that they could pull another rabbit out of the hat was surely worth something. Now the value is locked in, and apparently at a relatively modest level.
With these options now essentially off the radar, we are left with a company trading at something like 100x trailing operating earnings for the continuing businesses. While we’ll root for SLAB to achieve their plan, we probably won’t be buying the stock.
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[...] When Silicon Laboratories SLAB announced it was selling its handset chip business, we said it left the company with few options. The main one is to make a whole lot more of the chips that don’t go into cel phones. In keeping with that strategy, the company annouced a new product: Silicon Laboratories Inc. (Nasdaq: SLAB), a leader in high-performance, analog-intensive, mixed-signal ICs, today announced at International IC-China Conference and Exhibition/Embedded Systems Conference-China 2007 the most highly integrated 8-bit MCU combining a 25 MIPS CPU, 10-bit 500 ksps ADC and an internal /-2 % oscillator in a 3×3 mm package. The C8051T60x product family adds to Silicon Laboratories’ portfolio of over 60 high-performance Small Form Factor MCUs. The C8051T60x is ideal for consumer and industrial applications including toys, camera modules, cell phone accessories, portable devices, home appliances and motor controllers.”The C8051T60x is the first mixed-signal 8-bit MCU with unprecedented functionality designed for cost- and space-sensitive applications,” said Derrell Coker, vice president of Silicon Laboratories. “With the highest performance and integration in a small form factor, the C8051T60x enables manufacturers to easily and cost-effectively design high-performance products.” They’ll have to design a bunch of them for the product to move the needle. Pricing begins at $0.45 in quantities of 10K. Given the company’s non-wireless revenue run rate of $300 million, that indicates it would take about six million of these chips per year to boost revenue by 1%. The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA - Annual Report; Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Tempur-Pedix (TPX) put options; Landstar (LSTR - Annual Report) put options; Plantronics (PLT) put options; [...]