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WIKI ANALYSIS
Silicon Laboratories (NASDAQ: SLAB) designs and develops analog-intensive, mixed-signal integrated circuits (mixed-signal ICs). The company has divested of other product portfolios to focus on mixed-signal ICs, and has an opportunity to capitalize on increased demand for these products as demand for 3G mobile telephones and portable media devices increases in 2008. Increases in R&D expenditures in 2006 and 2007 have not yet translated to increased revenue, however, and margin pressures continue to dog the industry.
About the Mixed-Signal IC Business
Integrated circuits are small, purpose-specific devices built from many smaller discreet components, usually transistors, and the layering and interconnects required to make the chip function. ICs are generally classified as digital (i.e., microprocessors) or analog (i.e., operational amplifiers). Silicon Labs produces mixed-signal ICs, which contain both digital and analog circuits on the same chip.
Mixed-signal ICs are often used to convert analog signals to digital signals so that digital devices can process them. For example, mixed-signal ICs are essential components for FM tuners in digital products such as media players, which have digital amplifiers. Any analog signal (such as an FM radio transmission, a light wave or a sound) can be digitized using a very basic analog-to-digital converter, and the smallest and most energy efficient of these would be in the form of mixed-signal ICs.
Mixed-signal ICs also enable technologies like power over Ethernet. The analog power "signal", in this case a 60 Hz, 120V AC current in the United States, is transmitted alongside a digital data signal (Ethernet) over the same wire. Mixed-signal ICs, such as the Si3400 Power over Ethernet Powered Device controller, are manufactured by Silicon Laboratories to enable this capability.
Mixed-signal ICs are more difficult to design and manufacture than analog-only or digital-only integrated circuits. For example, an efficient mixed-signal IC would have its digital and analog components share a common power supply. However, as one can imagine, analog and digital components have very different power needs and consumption characteristics that make this a non-trivial goal in chip design. Silicon Laboratories therefore has a strong niche in designing low-profile (small), power-efficient mixed-signal ICs.
Business Financials
In the second quarter of 2007, Silicon Labs achieved record revenue of $75.6 million due to the growing production in the broadcast and MCU product lines, two of the six product segments of the company [1]. The company's revenue is dependent on sales to a relatively small number of customers, including: Samsung, Motorola, LG Electronics, and Agere Systems. Because there are so few customers, each one represents a large portion of the company's revenue; a small reduction in sales to a single customer can have a substantial negative impact on the company's overall revenue.
For example, Samsung used to be Silicon Labs' largest customer; it represented 17% of the company's revenue in 2004. However this figure dropped to 14% of revenue in 2005 and 11% of revenue in 2006 [2] [3]. By the end of the 2007 third quarter, Samsung (nor any other company) failed to represent more than 10% of the Silicon Lab's revenue [4]. This slight reduction in sales could be what is behind the slow growth in revenue the company has seen in the past few years.
On February 8th, 2007, Silicon Labs announced an agreement with NXP Semiconductors (NXP) to sell its Aero product line for $285 million. The company justified the agreement by saying that it could now devote much of its focus on producing mixed-signal products, its most profitable segment [5]. Silicon Laboratories is therefore almost entirely focused on mixed-signal ICs.
The company generates revenue by producing products in six categories:
Embedded Modems – marked as ISO modems that provide quick network access for devices needing to transmit data
Broadcast – consists of FM tuners, satellite radio receivers, transmitters, and transceivers
Voice over Broadband (VoB) – this segment is composed of the company’s ProSLIC product line and silicon direct access arrangements
Microcontrollers (MCUs) – provide memory for self contained functionality and are used in USB devices, Ethernet, and other small form factor platforms
Timing – Silicon Labs provides clock and frequency control solutions which are used in telecom, wireless, and industrial applications
Mature/Emerging Products – PC modems is an example of mature products and digital power controllers is an example of emerging products [6]
The revenue by segment graph below shows that in 2006, the embedded modems and voice over broadband segments generated the most revenue. However as the company refocuses its priorities (as seen by the NXP deal), 2007 first quarter numbers show that the embedded modem and broadcast segments, 25% and 20% respectively, generated the most revenue.
Over the past three years, Silicon Labs has seen stable revenue and profits, around $450mil and $250mil respectively. However during this time period, expenses in research and development have grown by 55% and as a result, operating income has decreased by 72% [7]. In 2006 alone, the company saw steady revenues and profits throughout all four quarters but also saw a sharp drop of 76% in operating income [8].
| Year | Total Revenue (millions US$) | Net Income (millions US$) |
|---|---|---|
| 2002 | $182.02 | $20.72 |
| 2003 | $325.31 | $44.72 |
| 2004 | $456.23 | $76.69 |
| 2005 | $425.69 | $47.51 |
| 2006 | $464.60 | $31.16 |
Key Trends and Forces
- Semiconductor Cyclicality: the semiconductor industry consistently moves in cycles. This highly cyclical industry can be illustrated by rapid changes in technology, rapid obsolescence in products, and evolving technological standards. High fluctuations in the industry are directly connected to maturing products, new product introductions, and the general economic conditions at the time. For Silicon Labs this means periods of high downturns and high upturns [13].
- Product Integration: the growth and development of Silicon Labs highly depends on the rate of the amalgamation of FM tuners in handsets and portable audio devices as well as the rate of transition to transmitters, transceivers, and AM/FM tuners. Slow integration would negatively impact the company whereas fast integration would positively impact the company.
- Credit Risks: although Silicon Labs does not have to directly worry about credit problems, the true concern lies with its customers and distributors. As Silicon Labs does not have many customers and distributors, each of the companies holds a substantial portion of the Silicon Labs’ accounts receivable. Any of the Silicon Labs' customers (ex. Samsung or Motorola) getting into credit problems would damage sales and substantially hurt the company's revenue. Any of Silicon Labs' distributers (ex. Edom Technology or Uniquest) getting into credit problems would also hurt revenue as it would be harder to get the product into the market. If credit problems were to hit any of these companies, Silicon Labs would suffer tremendously [14].
Competitors
Silicon Labs faces many competitors as the markets for semiconductors and mix-signal ICs are extremely competitive. An advantage that Silicon Labs has over its competitors is that its ICs are smaller in size and highly integrated, enabling the company to supply them on a rapid basis. A disadvantage however is that some customers need to redesign their products in order to incorporate the smaller ICs [15]. The company’s competitors include:
| Company | 2006 Revenue ($) | 2006 Operating Income ($) |
|---|---|---|
| Silicon Laboratories | $464,597,000 | $29,115,000 [16] |
| Texas Instruments | $14,255,000,000 | $3,367,000,000 [17] |
| Broadcom | $3,667,818,000 | $243,000,000 [18] |
| Analog Devices | $2,342,000,000 | $522,000,000 [19] |
| RF Micro Devices | $770,000,000 | $18,000,000 [20] |
| Skyworks Solutions | $773,000,000 | ($66,000,000) [21] |
Notes
- ↑ Silicon Laboratories Press Release July 25, 2007
- ↑ SLAB 2006 10K, Item 1, pg. 9
- ↑ SLAB 2006 10K, Item 7, pg. 38
- ↑ SLAB 2007 Q3 10Q, Item 1, pg. 17
- ↑ Silicon Laboratories Press Release February 8, 2007
- ↑ SLAB 2006 10K, Item 1, pg. 5-9
- ↑ SLAB 2006 10K, Item 15, pg. F-3
- ↑ SLAB 2006 10K, Item 15, pg. F-31
- ↑ SLAB 2006 10K, Item 15, pg. F-4
- ↑ SLAB 2004 10K, Item 15, pg. F-4
- ↑ SLAB 2006 10K, Item 15, pg. 43
- ↑ SLAB 2005 10K, Item 15, pg. 44
- ↑ SLAB 2006 10K, Item 1a, pg. 38
- ↑ SLAB 2006 10K, Item 1a, pg. 20
- ↑ SLAB 2006 10K, Item 1, pg. 13-14
- ↑ SLAB 2006 10K, Item 15, pg. F-4
- ↑ TXN 2006 10K, Exhibit 13, pg. 6
- ↑ BRCM 2006 10K, Item 15, pg. F-3
- ↑ ADI 2006 10K, Item 8, pg. 43
- ↑ RFMD 2006 10K, Item 7a, pg. 45
- ↑ SWKS 2006 10K, Item 8, pg. 49
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