Silicon Laboratories Surprised Itself In the Third Quarter

Silicon Labs has found an unofficial mascot in the Gecko series of microcontrollers. Source: Silicon Labs.

Semiconductor designer Silicon Laboratories reported third-quarter results on Wednesday morning. The quarter left management's own projections far behind, and Silicon Labs shares rose as much as 12.4% in Thursday's morning session.

Silicon Labs results: The raw numbers

Source: SEC filings.

What happened with Silicon Labs this quarter? Sales came in at the very top end of management's official guidance for the third quarter. On the bottom line, Silicon Labs had set the top end of its guidance range at $0.10 per share.

  • That soft guidance was based on macroeconomic trends, which management expected to "stifle the global demand for TVs." The third quarter's surprise overcame that headwind thanks to strong sales into the automotive and Internet of Things (IoT) markets.
  • In particular, the IoT division saw 25% year-over-year sales growth, and represented 42% of Silicon Labs' total revenues in the quarter. In the year-ago quarter, IoT pulled in 33% of total sales.
  • The plump bottom line was also helped by strong cost controls. Silicon Labs reduced its selling, general, and administrative expenses by 18.8% while increasing R&D budgets by 9.4%. Overall, operating expenses declined by 5%.

Management offered the following guidance targets for the fourth quarter, based on current business trends and macroeconomic environments.

  • Revenues should land somewhere between $156 million and $161 million. At the midpoint, Silicon Labs would see a 2% sales decrease year over year.
  • Fourth-quarter GAAP earnings should land between $0.05 per share and $0.011 per share, fully diluted. The midpoint of that range sits far below the equivalent 2014 quarter's earnings of $0.23 per diluted share.

What management had to say Silicon Labs CEO Tyson Tuttle basically urged the rampant macro headwinds to come and get him: "Despite the challenging macro environment, we are confident in our strategy and proud of our accomplishments," Tuttle said. "We are engaging with top industry leaders who are rapidly adopting our IoT solutions and propelling our design win activity to record levels. We are executing on our vision and strategy and excited about what lies ahead."

Looking ahead Silicon Labs investors have been riding a dramatic roller coaster over the last 52 weeks. The stock has barely outperformed the S&P 500 in that period, including Wednesday's sudden surge.

Including these results, Silicon Labs shares now trade for 25 times trailing earnings. That's right in line with the competition, as Analog Devices trades at 28 times trailing earnings and Texas Instruments looks back at a P/E ratio of 21. But neither one of these giants can match Silicon Labs' earnings growth figures, and TI's profits are actually shrinking.

On a grander scale, Silicon Labs prides itself on providing "energy-friendly solutions for a smarter, more connected world." The IoT division fits right into that timely vision, and that segment's results speak for themselves.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Silicon Laboratories. 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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