SSTI report, reposted from SI:
SILICON STORAGE TECHNOLOGY (SSTI: $8.02) UPSIDE TO FQ2 RESULTS
Tai Nguyen - 415-403-6558 - nguyent@sig.com
Victor Lim - 415-403-6516 - lim@sig.com
RATING: CONTINUED NET POSITIVE
Earnings Estimates: Q3: $0.20; FY04: $0.78; FY05: $0.95
Due to lower manufacturing costs, SSTI delivered FQ2 EPS that exceeded our and the consensus estimate by $0.04. FQ2 revenue of $129 mln, up 23% Q/Q, was at the high end of the previous guidance. The company also guided FQ3 revenue to be up another 1-13% Q/Q. However, lower gross margin guidance due to lower licensing/royalty revenue could be viewed as negative for SSTI. We continue to be Net Positive on shares of SSTI since the company is growing its revenue much faster than the industry while we look for the company to expand its operating margins in order to deliver higher EPS.
HIGHLIGHTS
* Strong FQ2 results. Silicon Storage Technology (SSTI) reported FQ2 revenue of $129 mln, up 23% Q/Q, slightly below our estimate of $130 mln, but in line with the consensus estimate of $129 mln. Strong revenue growth in FQ2 was driven by a 9% Q/Q increase in average selling prices (ASPs) coupled with strong demand for the company's 8Mb and below NOR flash products that go into consumer and wireless applications. Including a $1.5 mln non-recurring charge and a lower tax rate, EPS was $0.22, which was well ahead of our and the consensus estimate of $0.18. Without the charge, EPS would have been $0.23.
The lower tax rate of 6% helped SSTI's EPS gain about $0.01. Gross margin of 37.9% exceeded the company's prior guidance of 33-35% due to a better-than-expected yield of 8Mb products that are being manufactured at Grace. Positive Factor
* Product revenue continues to expand while licensing/royalty revenue is trending down. For FQ3, SSTI guided its total revenue and EPS to be in the range of $130 mln-$145 mln, up 1-13% Q/Q, and $0.16-$0.21, respectively. SSTI's FQ3 guidance is in line with the consensus revenue and EPS estimates of $142 mln, up 11% Q/Q, and $0.21, albeit this guidance is at the high end of the range. SSTI expects its NOR flash unit shipments to increase 10-20% Q/Q driven by seasonal strength in the PC and consumer markets. However, SSTI is slated to cut its pricing by 5-8% in FQ3 as the company continues to expand its market share. Additionally, the company expects its FQ3 licensing/royalty revenue to decline about $2.0 mln-$2.5 mln from $12.9 mln in FQ2 as new licensees have yet to ramp their embedded flash programs coupled with existing licensees deciding to shift their wafer starts to more profitable wafer production. Neutral Factor
* Entering the high density NOR flash market. Currently, 16Mb and 32Mb NOR flash products account for less than 5% of SSTI's total unit shipments, and we believe that they could reach over 10% by year end with the addition of 64Mb flash memory. Although these high density flash products will help drive the growth of SSTI's total revenue, they bear a negative impact on the company's gross margins due to higher start up costs. But as SSTI migrates these high-density flash products to 0.13-micron technology by FQ4, we believe that the company could be able to improve gross margins due to the cost savings from a smaller die size. Neutral Factor
* Balance sheet update. Total cash and cash equivalents decreased by $10 mln Q/Q in FQ2 to $168 mln. DSO increased from 58 days to 60 days as net accounts receivables increased from $68 mln in FQ1 to $86 mln in FQ2. DOI also increased in FQ2 from 93 days to 103 days due to a $21.3 mln rise in inventory in anticipation of a seasonally stronger 2H. The company expects to work this inventory level down in absolute dollars in FQ3. Of the $21.3 mln of additional inventory, $17.9 mln is in raw material/work-in-process and $3.4 mln is in finished goods. Neutral Factor
* Adjusting estimates. For FQ3, we are maintaining our revenue and EPS estimates of $141 mln and $0.20. We are also maintaining our F04 revenue estimate of $536 mln, but raising our EPS estimate from $0.75 to $0.78 due to the better-than-expected FQ2 EPS of $0.22 versus our $0.18 estimate. For F05, we are raising our revenue estimate from $687 mln to $693 mln, but are lowering our EPS estimate from $1.05 to $0.95 due to our new lower licensing/royalty revenue forecast. Neutral Factor
CONTRA CASE
Bearish investors will likely focus on SSTI's peak gross margin in FQ2 and rising inventory levels as early indicators that the company's fundamentals are deteriorating. We would disagree with this conclusion as the company has demonstrated that it can execute successfully (i.e., earnings upside) in a seasonally weak period while growing total revenue much faster than the overall industry. Additionally, we continue to believe that SST will be able to expand its operating margin in order to deliver EPS growth of more than 20% Y/Y in C05.
Figure 1. Silicon Storage Technology (SSTI) Earnings Snapshot
52-Week Range $17.31-$8.02EPS(FYDec) 2003 A 2004 E Prior 2005 E Prior
Shrs Out (mln) 101 1Q ($0.11) $0.14 A $0.20 $0.22
Market Cap($M) $806 2Q ($0.05) $0.22 A $0.18 $0.21 $0.24
Avg Daily Vol 2,337 3Q ($0.62) $0.20 $0.20 $0.25 $0.27(000)
Dividend Yield 0.00% 4Q $0.09 $0.22 $0.24 $0.29 $0.31
ROE 23.7% FY EPS ($0.68) $0.78 $0.75 $0.95 $1.05
Enterp Val ($M) $638 CY EPS ($0.68) $0.78 $0.75 $0.95 $1.05
Net Cash ($mln) $168 P/E - 10.3x 8.4x
Net Cash/Share $1.67 FY Revs($M) $295 $535 $536 $693 $687
Debt Equity 0% CY Revs($M) $295 $535 $536 $693 $687
EV/Rev 2.2x 1.2x 0.9x
Source: SFG Research and company reports
COMPANY DESCRIPTION
Based in Sunnyvale, California, Silicon Storage Technology, Inc. (SSTI) is a fabless semiconductor company focused on the NOR flash memory market. SSTI's NOR flash memory can be found in digital consumer devices, PCs (desktops and notebooks), networking equipment, and wireless-related applications (cordless and cell phones). SST's foundry partners include Taiwan Semiconductor Manufacturing Co., Samsung, Seiko, and Sanyo as well as Hua Hong NEC, Grace Semiconductor Manufacturing Co., SMIC, and Vanguard.
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