Sunday, January 26, 2014

Silicom ( Nasdaq - SILC ) -- Big Data Yields Big Growth

Silicom (SILC $60.00) reported better than expected Q4 results.  The company is the leading provider of auxiliary products used in server farms to improve performance and reduce costs.  Volume responded in the period as several programs achieved broader distribution.  Sales advanced 52% to $25.4 million.  Earnings jumped 104% to $.94 a share.  Overhead costs were spread over a higher than predicted level of sales, propelling pretax margins to 28% in the quarter.  The trend towards cloud computing amplified demand.  Customers rely on Silicom's technologies to offload routine tasks onto special purpose cards, enabling their servers to accommodate more traffic.  A recent acquisition promises to reinforce that trend in upcoming periods.  That technology (data virtualization) helps cloud computing data centers manage huge information repositories more efficiently.  Meantime, Silicom's core technologies are continuing to proliferate into more systems.

Silicom is co-opting its only true competitor, Intel Corp.  The giant chip maker used to provide some of the technologies that Silicom offers as a bundled feature in certain semiconductor products.  In December Intel signed a deal with Silicom to work together on a series of new offerings.  Further collaboration is possible down the road if Intel elects to rely on Silicom's industry standard products instead of reinventing the wheel themselves.  The only other direct competition that Silicom currently encounters is from in-house design teams.  Many manufacturers of specialty computers still attempt to design 100% of the functionality of their products internally.  Silicom increasingly is replacing those efforts when new products are developed.

Several factors promise to sustain growth at a superior rate.  The industry itself is continuing to expand.  Big data, mobile, and cloud computing are expanding much more quickly than the computer industry as a whole.  Silicom already is well entrenched in those segments.  The data virtualization expansion is likely to reinforce that momentum.  Unit volume in existing programs should benefit directly.  Silicom also is adding new customers.  Over 90 companies currently rely on the company's technologies to some degree.  And those customers are engineering Silicom's technologies into a greater number of new designs.

We estimate 2014 sales will surge 25%-35% to $90-$100 million.  Income, excluding the affect of non-cash stock option expense, could reach $2.75-$3.25 a share.  Cash flow remains positive.  Silicom has expanded inventory levels to ensure the best possible response time when customers place orders.  Even so, a hike in the cash dividend is possible.  There's plenty of cash on hand, moreover, to purchase additional technologies.

Note - Older reports about Silicom can be found in the "Archives" in the "Israeli Growth Stock" section, which appears at the end.  Those companies now are followed in this blog, "International Growth Stocks."

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