Ken Nagy, CFA
Strength Across all Segments for Slilcom
Silicom (SILC) engages in the design, manufacture, marketing, and support of connectivity solutions for a range of servers and server based systems. The firm has several growth engines including Information Technology’s return to growth, the march to 10GB per second technology, large and growing base of OEM customers includes most of the market-leading players, staged launch of new products, and a strong OEM business model which limits operating expenses. SETAC, the firms new Server to Appliance Converter, which combines the best of standard servers with hardware appliances should allow the firm to push its revenues to the 100 million run rate level in coming years
On April 21, 2011 SILC announced results for the first quarter of fiscal year 2011 ending March 2011. Revenue for the period was $9.2 million falling 7.1% sequentially from $9.9 million and up 43.4% year over year. The firm’s fourth quarter revenue mark was a high watermark for the firm and this marked the second highest quarter.
Non-GAAP net income was $1.88 million or $0.27 per diluted share ($0.27 per basic share), up 86.9% compared with $1.0 million, or $0.14 per diluted share ($0.15 per basic share), for the first quarter of 2009, and down 8.8% compared with last quarters record $2.06 million or $0.29 per basic and $0.28 per diluted share.
Looking at the balance sheet, as of March 31, 2011, the Company’s cash, cash equivalents, bank deposits and marketable securities totaled $46.9 million, or $6.81 per outstanding share. This represented a $1.1 million increase from the fourth quarter of 2010.
Similar to the last quarter, the firm continued to secure new customers and succeeded in penetrating new divisions of existing customers. Silicom introduced and sold new products to both current and new customers, and achieved major wins with the SETAC product line. Further, management pointed to increased demand from all target market segments, which are growing faster than ever due to increased demand for bandwidth-hungry cloud computing and virtualization environments.
| Internal Growth Drivers | External Growth Drivers |
| Growing revenues to existing clients | IT Market's Return to growth |
| Improve offering within existing product line | Continued Evolution to new computing (Nehalem) |
| SETAC based sales growth | Migration to 10GBPS from 1GBPS |
Business highlights during the quarter include
- Silicom secured two major Design Wins from existing major customers: an additional business unit of a Fortune-100 networking customer, and a leading Application Delivery customer. After they have reached their production run rate, these Design Wins will generate a total of $4 million per year.
- A Tier 1 server manufacturer has begun offering an appliance that combines SETAC Server To Appliance Converter with one of its popular standard servers, thereby moving SETAC further into the industry spotlight. This is in line with SILC’s strategy for building SETAC into a powerful growth engine.
Our Take
SILC seems primed to enter a new growth phase. The growth engine in the short term is three fold. The first is the growth of Server Adapters in security markets and optimization, the next growth engine is new customers as well as new product lines every quarter. The strength of the OEM business model is evident in that SILC can roll out new business and keep operating expenses in check. Lastly the evolution of 10GB server adapters should provide growth in the short term. SETAC, which enables branded high technology servers to be configured as hardware appliances, Should push Silicom’s revenues to a $100 million per year run rate in the long-term.
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