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Silicon Motion (SIMO) Shares Down on Q2 Preliminary Results

Zacks Equity Research

Silicon Motion Technology Corporation SIMO recently reported preliminary second-quarter 2019 results. The company anticipates non-GAAP revenues to come in around 4% below the lower end of previous guidance of $98-$107 million issued on May 3. The revised guidance translates to revenues of approximately $94.08 million.

Meanwhile, the Zacks Consensus Estimate for revenues is pegged at $103.64 million, which is almost 10.2% higher than the updated guidance figure. This doesn’t bode well for the upcoming earnings release, as it hints toward downward estimate revisions and plausible revenue miss.

The revenue guidance originally reflected growth of 10-20% on a sequential basis. The revised guidance now translates into growth of roughly 5.8% on a quarter-over-quarter basis.

Following the news, Silicon Motion stock declined 3.4%, yesterday. However, the company’s shares have returned 26.7% in the year-to-date period, outperforming the industry’s rally of 19.3%.

Notably, Silicon Motion is scheduled to release full second-quarter 2019 financial results on Jul 30.

Margin Update

Silicon Motion now projects non-GAAP gross margin to be around 100 basis points greater than the high-end of its prior guided range of original range of 48.5-50.5%, which translates to almost 51.5%. The updated guidance reflects expansion of 130 bps on a sequential basis.

The company provided no update on non-GAAP operating margin metrics, originally guided to lie in the range of 18.6% to 21.6%. On the back of pipeline expansion, Silicon Motion had stated initially that it expects SSD controller sales to “grow sharply in the second quarter.” Nonetheless, challenging macroeconomic environment owing to declining NAND flash prices remains a concern.

Recent Developments Shaping Estimates for Q2

In the second quarter of 2019, Silicon Motion concluded the divestiture of its mobile communications business (FCI product line) to Dialog Semiconductor Plc, in a bid to focus on SSD controllers. This move is expected to favor growth prospects, as the company is benefiting from sturdy adoption of Ferri industrial SSDs. Moreover, as the company’s Open-Channel NVMe SSD controller enters into production, Client SSD Controller sales are anticipated to increase.

Further, the company’s efforts to reward shareholders through share buybacks are expected to favor bottom line. In fact, Silicon Motion has an average positive earnings surprise of 13.4% in the trailing four quarters.

Notably, the Zacks Consensus Estimate for earnings has remained unchanged for the past 60 days at 55 cents, indicating year-over-year decline of 40.2%.

However, intensifying competition in the USB flash drive controller market and anticipated dip in smartphones sales owing to weakness in China are likely to weigh on the top line.

Zacks Rank & Key Picks

Currently, Silicon Motion carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the broader sector are HubSpot HUBS, Alteryx AYX and Rosetta Stone RST, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for HubSpot, Alteryx and Rosetta Stone is pegged at 47.8%, 13.7% and 12.5%, respectively.

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