SILICON IMAGE INC SIMG
December 19, 2013 - 1:26pm EST by
cuyler1903
2013 2014
Price: 5.50 EPS $0.00 $0.00
Shares Out. (in M): 77 P/E 0.0x 0.0x
Market Cap (in $M): 426 P/FCF 0.0x 0.0x
Net Debt (in $M): -134 EBIT 0 0
TEV ($): 292 TEV/EBIT 0.0x 0.0x

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  • Consumer Electronics
  • Semiconductor
  • Potential Acquisition Target
  • Share Repurchase

Description

Silicon Image, Inc. (Nasdaq: SIMG) is an extremely undervalued, leading provider of semiconductors for mobile and consumer electronics and licensor of IP for HD connectivity with enormous growth fueled by mobile device proliferation, strong FCF, declining sharecount and recent insider buying.  Given its growth, valuation and leading IP position, SIMG is an obvious target for strategic buyers and is reasonably worth $9.20-$12.80/share, or 67-133% more than its current quote with strong downside protection from a fortress, cash-rich balance sheet consisting of $2.04 of cash/FD share. 

Company Overview:

SIMG, headquartered in Sunnyvale, CA and founded in 1995, is the leading provider of connectivity solutions that enable the reliable distribution and presentation of HD content for mobile, consumer electronics (CE) and personal computer (PC) markets.  SIMG delivers its technology via semiconductor and intellectual property (IP) products that are compliant with global industry standards and feature market-leading Silicon Image innovations such as InstaPort™ and InstaPrevue™.  SIMG’s products are deployed by the world’s leading electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video receivers, digital cameras, as well as desktop and notebook PCs.  SIMG has driven the creation of the highly successful High-Definition Multimedia Interface (HDMI®), the latest HD standard for mobile devices—Mobile High-Definition Link (MHL®), Digital Visual Interface (DVI™) industry standards and the leading 60GHz wireless video standard—WirelessHD®. Via its wholly-owned subsidiary, Simplay Labs LLC, Silicon Image offers manufacturers comprehensive product interoperability and standards compliance testing.

Keys to the thesis are as follows:

  • Underfollowed, off-the-radar
    • Covered only by handful of tiny shops, never written up on VIC
  • Strong guidance for growth of revenues, operating margins and free cash flow over next 12-18 months
    • 15-20% revenue growth, driven by mobile
    • Gross margins stable at 54-55%
    • Opex of 34-39%
    • Implied operating margins of ~18%, up from LTM level of ~9% - the Street has not picked up on this
    • Yields roughly $330mm of revenues and $60mm of EBITDA
  • Very cheap with enormous FCF conversion and fortress balance sheet
    • FD market cap of $460mm (77.4mm sh + 6.4mm options struck at $5.78)
    • Cash of $134mm + $37mm cash from option exercise ($2.04/FD share)
    • $0 debt
    • LTM capex of only $6.3mm
    • TEV of $289mm, implies only 0.88x revenue and 4.8x EBITDA
    • Likely worth 2-3x revenue and/or 10-15x EBITDA to strategic buyer, implies ~$9.20-$12.80/share, or 67-133% more than current price
    • Calculations give no credit for future cash build or share repurchases
  • Recent, clustered open-market stock purchases by insiders
    • 12/10/13:  Camillo Martino (CEO) purchased $38k at $5.39
    • 12/10/13:  William George (director) purchased $11k at $5.50
    • 11/8/13:  William Raduchel (director) purchased $51k at $5.13
    • 11/6/13:  Peter Hanelt (Chairman) purchased $31k at $5.14
  • Stock repurchases driving declining sharecount
    • $36.2mm of stock repurchases over LTM period
    • Sharecount has fallen from 82.6mm to 77.7mm over LTM as company repurchased 256k shares at $5.40 and 301k shares at $5.27
    • $57mm remains under two repurchase authorizations
  • Reduced cash taxes due to $88mm deferred tax asset
    • Only $6.3mm in cash taxes over LTM period
  • Dominant intellectual property position
    • 473 issued patents
    • 586 pending patents
  • Champion of standard connectivity methods with continuing innovation
    • HDMI – high definition multimedia interface (consumer electronics & PCs)
      • Version 2.0 released on September 4, 2013, which offers significant increase in bandwidth to support Ultra HD (4K) resolution, enhanced audio, etc.
      • Over 1,300 adopters and installed base of over 3 billion HDMI-enabled products
    • MHL – mobile high definition link (mobile to HD display)
      • Strong growth, from 10.5mm units in 2010 to >150mm units in 2013
      • 7 / 10 smartphone OEMs ship MHL phones, including virtually all Android-based smartphone OEMs (Samsung, Sony, Huawei, Oppo, LG, ZTE, HTC, etc…)
      • 28% of 2013 TVs ship with MHL
      • MHL 3.0 announced on August 20, 2013
      • Features Ultra HD (4K) resolution, enhanced audio, simultaneous high-speed data, touch screen support
      • Installed base of over 400 million MHL-enabled products
      • Applications in gaming, home entertainment, productivity and automotive
  • WirelessHD – wireless, high-speed, cable-quality connectivity from mobile to HD displayGlobal customer base consisting of virtually every major consumer electronics OEM (ex. AAPL)
    • 60 GHz technology enables full HD video with near-zero latency
    • Smart antennas eliminate Wi-Fi interference
    • Low power options for dual-screen interactive applications from mobile devices
  • Qualcomm’s formation of the AllSeen Alliancededicated to open-source architecture strongly benefits SIMG
    • Current members include QCOM, CSCO, LG, Panasonic, Sharp, HTC, Haier, Harman, TP-LINK, Sears, Wilocity, etc.
  • Multiple product cycles provide diversification
    • HDMI relative stable while MHL and WirelessHD adoption ramping up
  • Exposure to enormous growth, with mobile representing ~66% of Q3 product revenues
    • Mobile revenues grew from $10mm in 2010, $66mm in 2011 and $121mm in 2012

Links

Risks

  • Customer concentration:  Samsung was 35% of 2012 revenue and distributor Edom Technology was 10% of 2012 revenue; Top 5 customers (including distributors) account for 64% of revenueGrowth with other Android-based OEMs should further increase diversification
    • Relationship with Samsung is rock solid
  • Unexpected competition from new technology
  • Poor capital allocation
    • Unlikely given strong track record of repurchases

Catalysts

  • Investor awareness; analyst coverage from better known firms
  • Strong growth of revenues and free cash flow
  • Share repurchases and sharecount reduction
  • Integration of MHL and WirelessHD into new HDMI ports driving adoption of the standard
  • New customer acquisition (e.g. potentially Nokia, which just released its SailfishOS phone which supports Android apps)
  • Sale to larger player (QCOM, Samsung, MediaTek, CSCO, etc.)

 

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Please see above.
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