Silicom is Firing on All Cylinders

Zacks Small Cap Research

By Ken Nagy, CFA

On July 22, 2013, Silicom Ltd (NasdaqGM:SILC) the provider of high-performance server and appliances networking solutions, reported financial results for its second quarter and six months, ended June 30, 2013.

The company’s solid momentum continued with revenues for the second quarter jumping year over year by $5.302 million or nearly 51 percent to $15.715 million, which compares to revenues of $10.413 million for the three months ended June 30, 2012. Sequentially, revenues increased 4.6 percent from $15.030 million from the first quarter of 2013.

The jump in revenues was a result of new design wins with both new and existing customers including a previously announced long-term strategic customer, which is now standardizing on Silicom’s solutions for a variety of modules and appliance product lines, ramping sales to that customer to about $4 million per year; and a design win from an important new customer for SETAC kits and modules with potential sales of about $1 million per year.

Similarly, the contribution to growth was diversified across all product lines and especially from the newer ones with products being sold across Silicom’s entire base of customers.

This was the third quarter in a row in which the company has been able to show substantial revenue increases at these levels highlighting the continued trend of immense growth that Silicom is experiencing and demonstrating that it’s on track and evolving into a different and higher level company. 

Operating income for the quarter increased year over year by over 54 percent to a record $3.479 million, which compares to $2.256 million for the comparable quarter of 2012. Sequentially, operating income improved nearly 5 percent from $3.322 million for the quarter ended March 31, 2013.

Although total operating expenses increased year over year by $714,000, they fell to 18.3 percent of revenues from 20.8 percent of revenues during the second quarter of 2012. Still, operating expenses as a percent of revenues increased sequentially from 18.0 percent of revenues for the quarter ended March 31, 2013.

Operating expenses growing at a much lower rate than revenues demonstrates the inner and operating leverage and ongoing strength of Silicom’s business model.

Gross margin for the three months ended June 30, 2013, fell to 40.1 percent compared to 41.2 percent for the second quarter, ended June 30, 2012. Sequentially, gross margin was flat at 40.1 percent for the three months ended March 31, 2013. Gross margin varies between quarters mainly as a result of the specific mix of products sold during the quarter.

On a GAAP basis, the company’s second quarter net income increased year over year by over 44 percent or $1.007 million to a record $3.289 million from net income of $2.282 million for the comparable quarter of 2012. Sequentially, GAAP net income improved by $186,000 from $3.103 million for the quarter ended March 31, 2013.

Based on a weighted average number of diluted shares of 7.263 million shares, diluted net income per share resulted in net income of $0.45 during the second quarter of fiscal 2013.  This compared to a diluted net income per share of $0.33 on a weighted average number of diluted shares of 7.020 million shares during the three months ended June 30, 2012.

On a non-GAAP basis, the Company reported second quarter net income of $3.456 million or $0.48 per diluted share. This compares to non-GAAP net income of $2.380 million or $0.34 per diluted share for the quarter ended June 30, 2012 and $3.268 million or $0.46 per diluted share for the quarter ended March 31, 2013.

For the six months ended June 30, 2013, year over year revenues improved by nearly 50 percent or $10.231 million to $30.745 million from $20.514 million for the comparable six months of 2012.

GAAP net income for the six months jumped by $2.133 million year over year to $6.392 million for the six months ended June 30, 2013. This compares to $4.259 million for the comparable six months ended June 30, 2012.

Total operating expenses increased year over year by $1.104 million, but fell to 18.0 percent of revenues from 21.6 percent during the six months ended June 30, 2012.

Gross margin for the first half fell to 40.1 percent compared to gross margin of 41.9 percent for the six months ended June 30, 2012.

Once again, gross margin varies between quarters mainly as a result of the specific mix of products sold during the quarter.

Based on a weighted average number of diluted shares of 7.218 million shares, diluted net income per share resulted in net income of $0.89 per diluted share during the six months ended June 30, 2013.  This compared to a diluted net income per share of $0.61 on a weighted average number of diluted shares of 7.021 million shares during the comparable six months of 2012.

On a non-GAAP basis, net income for the six months increased year over year by 50.9 percent to $6.724 million and non-GAAP earnings per diluted share for first half of fiscal 2013 jumped to $0.93 compared to $0.63 for the first six months of fiscal 2012.

For the period ended June 30, 2013, Silicom’s total cash, cash equivalents, bank deposits and marketable securities totaled $52.7 million or $7.41 per outstanding share, which compares to $56.4 million or $7.93 per outstanding share as of March 31, 2013.

With the SDN, NFV, virtualization and cloud computing concepts all based on the use of standard servers, and with the Silicom solutions recognized as important building blocks for enhancing standard server performance, the company now has a major opportunity to benefit from these new market trends.

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