SILC

[David Randolph]

It's a good thing that SILC stays asleep when the market goes down, not doing any damage whatsoever to the technical picture. I'm eager to see the first quarter results. My expectation is $6 - $7 M in revenues and EPS of $0.25 - $0.30.

I'll continue holding SILC.

[David Randolph]

Nothing new on SILC, it continues to consolidate recent gains, I'll continue holding the stock.

[David Randolph]

SILC continues to consolidate recent gains above $16. It is possible the stock goes down some more to touch the 50 days SMA again, I don't know about that. What I do know is that I see $32 M in revenues for 2007 and $6.8 M in net income. If these estimates are proven correct and SILC trades at an industry average earnings multiple of 34 it will end the year at about $44 per share. These are my guidelines.

I'll continue holding SILC.

[David Randolph]

I think it is a good idea to read SILC's 4th quarter results again:

Silicom Posts Outstanding Quarter to Cap Record Year: Q4 Sales of $5.0M Yield $1.1M of Net Profit

Momentum Continues: 3 Straight Years of Quarterly Revenue Growth; New Quarterly and Annual Records Set for Sales, Operating Income & Net Income

Jan 29, 2007 8:28:00 AM
Copyright Business Wire 2007

Silicom Ltd. (NASDAQ and TASE: SILC) today reported record revenues, operating income and net income for the fourth quarter and full year ended December 31, 2006.

Revenues for the fourth quarter of 2006 were $5.0 million, an increase of 60% compared with $3.1 million in the fourth quarter of 2005 and 20% compared sequentially to the third quarter of 2006. This is the Company's twelfth consecutive quarter of increasing revenues and its highest quarterly revenues on record. Operating income for the quarter was $950,000, an increase of 100% compared to the parallel quarter of 2005 and 53% compared sequentially to the third quarter of 2006. Net income for the quarter increased by 125%, reaching $1.1 million, or $0.20 per diluted share ($0.21 per basic share), compared to $473,000, or $0.11 per share (basic and diluted) for the fourth quarter of 2005. This represents a 60% increase in net income compared sequentially with the third quarter of 2006.

Revenues for the full year of 2006 increased by 48% to a record $16.1 million compared with $10.9 million for 2005. Net income for the period increased by 97% to $2.6 million, or $0.49 per diluted share ($0.51 per basic share), compared with $1.3 million, or $0.30 per diluted share ($0.31 per basic share) for 2005.

Commenting on the results, Shaike Orbach, President and CEO, said, "We are proud to report an outstanding fourth quarter as the climax of the best year in our history. After crossing the $4 million revenue milestone in Q3, during the final three months of the year our sales grew by an additional 20%, giving us quarterly revenues above $5 million and a 100% year-over-year increase in operating income.

"This exceptional performance is attributable to two exceptionally strong growth engines. As we have indicated in the past, the platform of 40+ Design Wins that we have accumulated over the past several years represents a continuously expanding source of orders, and we have been adding new Design Wins to the base each quarter. In addition, during the fourth quarter we began to see an exponential ramp up in the order volumes of some of our customers - particularly those in the exploding WAN Optimization arena - in response to the incredible growth of their markets."

Mr. Orbach concluded, "Looking forward into 2007, we believe that the momentum of both these growth engines will continue to accelerate, driving continued strong growth for our company. With strong traction and a favorable environment, we are working to achieve our full potential and to create additional value for our shareholders."

They're not saying they will maintain the growth rate, they're saying the growth rate will continue to accelerate!

But OK, an acceleration in growth is needed to reach my $6.8 M net income and $32 M revenue estimates for 2007. $6.8 M net income times the average 33.6 earnings multiple gives me a $228.5 M market cap or $44.64 a share price.

I'll keep holding SILC.

[buddjas1]

I listened to the Q4 conference call.  Highlights:

1) WAN optimization is "booming";
2) At least one analyst report predicts 10 fold increase in WAN optimization in the next two years;
3) "huge" growth opportunities;
4) executives meeting with potential institutional shareholders w/in next few months;
5) current WAN optimization customers are "market leaders";
6) will start to pay taxes, at "the very low effective tax rate," in '07 (i.e., 1Q'07);
7) has the capacity to handle growth;
8 ) growth plans in '07 are only organic (no need to raise capital);
9) quarterly to quarterly revenue could fluctuate (not necessarily sequential growth);
10) full fiscal year '07 will present "significant growth";
11) as revenue increases, margins will get better;
12) "definitely yes" expects more design wins in first half '07.

[David Randolph]

I listened to the Q4 conference call.  Highlights:

1) WAN optimization is "booming";
2) At least one analyst report predicts 10 fold increase in WAN optimization in the next two years;
3) "huge" growth opportunities;
4) executives meeting with potential institutional shareholders w/in next few months;
5) current WAN optimization customers are "market leaders";
6) will start to pay taxes, at "the very low effective tax rate," in '07 (i.e., 1Q'07);
7) has the capacity to handle growth;
8 ) growth plans in '07 are only organic (no need to raise capital);
9) quarterly to quarterly revenue could fluctuate (not necessarily sequential growth);
10) full fiscal year '07 will present "significant growth";
11) as revenue increases, margins will get better;
12) "definitely yes" expects more design wins in first half '07.

Thanks a lot for these highlights from SILC's conferece call buddjas1, applaud

I especially enjoyed the part "as revenue increases, margins will get better". It means that, despite the already very fat net profit margin of 21.25%, there's still room for improvement. In fact they seem very skillful in controlling costs, as we can see on the next graph of the Selling, General & Administrative (SG&A) expenses as a percentage of sales:



SG&A costs are going down as a % of sales, to just 11.7% in Q4 2006. But not just as a % of sales, also in absolute terms, as SG&A costs in Q4 2006 were just $585 K compared to $590 K in Q3 2006. I call this a very well managed company, working for the benefit of the common shareholder.

I'll keep holding SILC.

[berloga]

I didn't know where to post this, but since SILC is in the same industry...

David, could you please take a look at BBND? Although BigBand may compete for market with the likes of Cisco Systems (CSCO) and Juniper Networks (JNPR), they have a unique digital encryption and compression technology to simultaneously broadcast digital video in HDTV and HD with all other analog signals. I believe, they have a differentiator compared with Cisco and Juniper. I will look into this more. BBND just went IPO a week ago.

Thank you.

BigBand Networks, Inc., (NASDAQ: BBND - News), is a leading provider of broadband multimedia infrastructure for video, voice and data. The company's solutions are designed to process, optimize, and deliver services such as broadband Internet, VoIP, digital broadcast television, HDTV, transport of high quality video, local advertising, VOD, interactive TV and IPTV across coaxial cable, fiber or copper. Service providers use BigBand Networks' platforms to cost-effectively expand revenue-generating offerings of rich content and advanced interactive services. Customers include six of the ten largest service providers in the U.S., and leading service providers in North America, Asia, Europe and Latin America. Founded in 1998, BigBand Networks is based in Redwood City, Calif., with offices worldwide. For more information, please call +1.650.995.5000, email [email protected] or visit www.bigbandnet.com.

[David Randolph]

BBND is a $1.1 B market cap company with negative book value (at least according to my fundamental data service). I also don't like recent IPO stocks, as they often dilute shareholder's value a lot right after the IPO.

But I would need a much deeper analysis to have a more conclusive opinion, if you still want me to review this company, please send me a private message with your bullish reasoning. Thank you

As for SILC, the stock went down a bit on profit taking after yesterday's 7% run up. Fundamentally nothing changed. I'll keep holding SILC for the long term.

[David Randolph]

Another design win for SILC:

SILICOM ACHIEVES DESIGN WIN WITH ANOTHER WORLD-LEADING WAN OPTIMIZATION PLAYER:
4TH DESIGN WIN IN EXPLODING MARKET

[buddjas1]

"Another design win"

SILC is silky smooth!     Great call!

[DragonAMG]

Unfortunately I didn't get in on SILC.  Would you guys recommend buying at these current levels or should I wait (do you think) there will be a correction?

[David Randolph]

Unfortunately I didn't get in on SILC.  Would you guys recommend buying at these current levels or should I wait (do you think) there will be a correction?

That is always a tough question dragonamg. Certainly the potential isn't the same as it was when we bought it for the Main Portfolio at $12.6. But, how much potential is left? Is it still worth a buy?

I'm trying to develop a fundamental metric to answer this question, as I build a "Long Term Estimation Model". This model will tell me how much "juice" is left in each holding as the price hopefully rises, until it says "there's no more juice".

Juice here can be defined as market inefficiency.

Well, as you can read on this thread, if my estimates are met, SILC will probably end 2007 between $40 and $50, but of course, that's a big if. I'm estimating revenues will double to $32 M and EPS will be $1.33 for the full year of 2007 (as the company maintains its net profit margin of 21.25% - but management said it will probably expand even more in the conference call) and SILC will be trading at the industry's average valuation of 36.2 times earnings.

Since I'm holding SILC I still consider it a buy. You be the judge. Good luck

[David Randolph]

"Another design win"

SILC is silky smooth!   Great call!

Thanks buddjas1

Unfortunately I didn't get in on SILC.  Would you guys recommend buying at these current levels or should I wait (do you think) there will be a correction?

My take is short term movements in stocks are unpredictable, especially the "corrections" as you say. Nobody knows if the stock will pullback now or if the trend will just continue. There's no scientific way to know that, at least not one based in sound economic principles.

I've run my new valuation model for SILC, and I am quite surprised to see that SILC, considering just the next 3 years, is still extremely attractive, with an estimated compound annual growth rate (CAGR) of 96.6%

This gives me an optimal selling price of $95.5, given what we can extrapolate from current fundamental trends:



Perhaps the assumption of a revenue CAGR of 2 (or 100%) is too optimistic, but it isn't me, the company is the one saying it has a study showing 10 fold growth in the WAN optimization market for the next couple of years. And revenue growth in 2006 was already 60%, with not much effect from this exploding market.

I also estimate net profit margin to grow from the 21.25% in Q4 2006, to 25%, since the company said, over the latest conference call, that net margin will expand even more as revenue grows.

I'll keep holding SILC.

[Dory99]

Hi David,

  Love your analysis. One quick question: could you explain the calculation in deriving the $95.50 optimal selling price? Thanks!

Dory99

[DragonAMG]

"Another design win"

SILC is silky smooth!   Great call!

Thanks buddjas1

Unfortunately I didn't get in on SILC.  Would you guys recommend buying at these current levels or should I wait (do you think) there will be a correction?

My take is short term movements in stocks are unpredictable, especially the "corrections" as you say. Nobody knows if the stock will pullback now or if the trend will just continue. There's no scientific way to know that, at least not one based in sound economic principles.

I've run my new valuation model for SILC, and I am quite surprised to see that SILC, considering just the next 3 years, is still extremely attractive, with an estimated compound annual growth rate (CAGR) of 96.6%

This gives me an optimal selling price of $95.5, given what we can extrapolate from current fundamental trends:



Perhaps the assumption of a revenue CAGR of 2 (or 100%) is too optimistic, but it isn't me, the company is the one saying it has a study showing 10 fold growth in the WAN optimization market for the next couple of years. And revenue growth in 2006 was already 60%, with not much effect from this exploding market.

I also estimate net profit margin to grow from the 21.25% in Q4 2006, to 25%, since the company said, over the latest conference call, that net margin will expand even more as revenue grows.

I'll keep holding SILC.

Thanks David.  I am kicking myself for not buying in yesterday at $19 when I asked you that question.    It is now $21.  I may just buy a small position on Monday, hoping to add to it if it corrects... if it doesn't, at least I won't be totally out and enjoy the ride up with some position).

Keep up the good work!!!  I looked at IPII today and that stock looks attractive.  I can't wait to watch your analysis on that.