Silicon Laboratories Faces Tougher Growth Prospects Ahead

Image: Silicon Labs.

Silicon Laboratories has been one of the beneficiaries of investors' excitement about the buddingInternet of Things. Even as companies across the tech sector crowd into the IoT space, the manufacturer of integrated circuits is trying to make itself an indispensable part of any viable strategy among potential business clients. Coming into Wednesday morning's first-quarter financial report, investors expected Silicon Labs to keep growing at a healthy pace. Although it largely accomplished that goal, tougher times could be ahead. Let's look more closely at Silicon Labs and its prospects for the rest of the year and beyond.

Silicon Labs keeps climbing -- for now In its first-quarter results, Silicon Labs continued a string of record results. Revenue jumped more than 12% to $163.7 million, setting another new sequential high. Silicon Labs' numbers were even more impressive on the bottom line, with adjusted earnings of $0.54 per share topping the $0.46 that most of those following the stock had expected.

Digging more deeply into the numbers, Silicon Labs finally made the logical move of renaming the portion of its business that relates most closely to the Internet of Things as the IoT category. IoT revenue hit a new all-time high of $60.9 million, already making up about three-eighths of the company's overall sales. Infrastructure-related products also hit a new all-time revenue high during the quarter, and the broadcast segment saw record results in the automotive area. Sales from the company's access segment were in line with what Silicon Labs had forecast.

In addition, Silicon Labs continued to roll out new products. On the IoT front, the acquisition of Bluetooth- and Wi-Fi-specialist Bluegiga led to a new suite of solutions dubbed Blue Gecko Bluetooth Smart, which should make it easier for customers to develop IoT solutions with low-power connectivity over wireless networks. New microcontrollers and other products targeted a wide range of industries ranging from smart-grid technology to industrial systems and automotive entertainment.

Image: Silicon Labs.

Silicon Labs was happy about its strong start to 2015. As CEO Tyson Tuttle noted, the company did well "in what is typically a seasonally down quarter," and the acquisition of Bluegiga opened up what Tuttle called a solid opportunity for the company to bolster its growth in another key area of the tech sector.

Is a slowdown at Silicon Labs inevitable?The question many investors have, though, is whether Silicon Labs will keep growing as a result of its IoT efforts. The company's second-quarter guidance was somewhat mixed, with projections for better sales but potential weakness on the earnings front. Specifically, Silicon Labs expects to bring in $164 million to $169 million in revenue this quarter, which would represent growth of 6% to 9%. Yet adjusted earnings of $0.50 to $0.56 per share would actually be down from last year, and the midpoint of that range was below what most investors had expected from Silicon Labs right now.

The other long-term issue shareholders must focus on is the amount of stock-based compensation that Silicon Labs is paying its employees. Just looking at the disparities between the company's generally accepted accounting principles and adjusted financials shows how large an impact stock-based compensation has on its results, with more than $10.5 million going toward equity-like pay in just the past quarter alone. Providing workers with incentives is valuable, but the resulting dilution could keep hurting Silicon Labs' share price well into the future.

Silicon Labs shareholders seemed to share those concerns, as the stock fell 3% in the first hour of trading following the announcement. There's no doubt the Internet of Things represents a huge opportunity for Silicon Labs and its customers, but the company will have to fight hard to build up and maintain a prominent position in the IoT industry, especially given the efforts that its tech peers and competitive rivals are making to capture the same opportunities.

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Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Silicon Laboratories. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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