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Silicon Motion (SIMO) Up 3.4% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Silicon Motion Technology Corporation SIMO. Shares have added about 3.4% in that time frame, underperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Silicon Motion reported adjusted earnings of $0.95 per ADS, which soared 72.7% from the year-ago quarter but declined 11.2% sequentially. Including stock-based compensation, earnings were $0.75 per ADS, which beat the Zacks Consensus Estimate of $0.65.

Net sales surged 47.1% year over year but declined 9.1% from the previous quarter to $144.2 million. The sequential decline was in line with management’s guided range and can be attributed to seasonally weak eMMC sales and SSD solutions that fully offset client SSD sales growth.

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Segment Sales

Sales from mobile storage products (which include Embedded Storage as well as Expandable Storage products) increased 49% year over year but declined 11% quarter over quarter to almost $130.3 million.

Client SSD controller sales grew over 5% sequentially with growth coming from the company’s NAND flash partners. However, sales to module makers were flat sequentially. Moreover, eMMC controller sales declined over 5% sequentially in line with past seasonal patterns.

SSD solution sales declined more than 40% sequentially as the company’s 2016 hyper-scale SSD project ended.

In the fourth quarter, two customers (Hynix was one) contributed more than 10% of sales. The company is an emerging leader in the SSD controller market with almost 30% share and primary customers include Intel, Micron and SanDisk.

Mobile communications product (which include mobile TV SoCs and handset transceivers) sales were $12.5 million as compared with $8.8 million in the year-ago quarter and $10.1 million in the previous quarter.

Operational Details

Non-GAAP gross margin (including stock-based compensation) remained flat on a year-over-year basis, but increased 120 basis points (bps) sequentially to 50%. This was almost in line with the higher-end of management’s guided range of 48.5–50.5%. The sequential improvement was primarily owing to favorable product mix.

Operating expenses as percentage of revenues plummeted 550 bps on year over year basis but increased 130 bps sequentially. As a result, operating margin expanded 550 bps from the year-ago quarter but contracted 10 bps sequentially to 24.5% in the reported quarter, slightly lower than management’s guided range of 25–27%.

Liquidity & Cash Flow

Exiting the quarter on Dec 31, Silicon Motion’s cash and cash equivalents increased to $277.8 million from $269.2 million at the end of Sep 30.

The company’s total cash from operating activities for the three-month period ended Dec 31, was $34.8 million, as compared with $54.9 million reported at the end of Sep 30.

Guidance

For first-quarter 2017, Silicon Motion expects non-GAAP sales to be in the range of $121–$128 million, reflecting 11–16% decline on a sequential basis. The anticipated decline is based on seasonally soft client SSD Controller sales, flat eMMC controller sales and declining SSD solution sales. However, on a year-over-year basis, sales are expected to grow in the range of 7–14%.

For the first-quarter, management expects SSD controller sales to decline seasonally. However, sales growth is expected to resume in the second-quarter driven by strong pipeline of SSD controller projects, including new PCIe/NVMe SSD controllers. Moreover, eMMC controller sales will likely be flat, similar to past seasonal patterns.

SSD solutions sales will likely continue declining further in the first-quarter due to limited availability of high grade flash components at favorable prices. However, sales are anticipated to rebound following shipment of the new 2017 projects.

Non-GAAP gross margin is anticipated within 48–50%, reflecting less contribution from client SSD controller sales. Moreover, operating margin is projected in the range of 23–25% for first-quarter 2017, exhibiting higher research & development (R&D) expense.

For full-year 2017, Silicon Motion anticipates revenues to increase 0–10% from 2016 to $556–$612 million range. The projection is based on strong client SSD controller sales growth in addition to modest eMMC controller sales growth, offset by the short-term decline in SSD solution sales.

Silicon Motion expects significant improvements in NAND flash supply in second-half 2017.

Management expects client SSD controllers to grow 20–25% from over $170 million in 2016. Further, eMMC controller sales are expected to grow about 5% over $170 million in 2016. The growth is anticipated to be in line with smartphone growth driven by the strength in the company’s partnership with Hynix.

SSD solutions sales for the full year are anticipated to decline 15% to 20% from over $80 million in 2016 due to lack of flash availability.

For full-year 2017, gross margin is anticipated within 49–51%, while operating margin is projected in the range of 27.5–29.5%. Operating expenses are expected to grow in line with sales growth. Majority of the operating expenses will be incurred in first-half of 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter. In the past month, the consensus estimate has shifted 11.57% downward due to these changes.

Silicon Motion Technology Corporation Price and Consensus

 

Silicon Motion Technology Corporation Price and Consensus | Silicon Motion Technology Corporation Quote

VGM Scores

At this time, Silicon Motion's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than value investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  Interestingly, the stock has a Zacks Rank # 3 (Hold). We are looking for an inline return from the stock in the next few months.


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