Why Silicon Image, Inc. Shares Sank Today

Is Silicon Image's plunge meaningful? Or just another movement?

Apr 30, 2014 at 5:49PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Silicon Image (NASDAQ:SIMG) plunged more than 10% in Wednesday's early trading, then settled to close down around 7% after the company announced solid first-quarter earnings, but followed with disappointing forward guidance.

So what: Quarterly revenue fell slightly from the same year-ago period to $61.6 million, which translated to adjusted net income of $4.3 million, or $0.05 per diluted share. Analysts, on average, were looking for earnings of just $0.04 per share on sales of $60.13 million.

For the second quarter, however, management stated revenue is expected to be in the range of $71 million to $76 million, the midpoint of which sits well below expectations for Q2 sales of $75.61 million. 

Now what: In addition, investors are concerned with Silicon Image's gross margin, which is trending lower as product revenue increases in its overall mix with respect to higher margin licensing revenue. For perspective, gross margin decreased from 62% in the fourth quarter to 60.3% in Q1, and is expected to fall to 56.5% in the current quarter. To be fair, management did remind analysts on the subsequent earnings call their long-term gross margin target is 55%.

Even so, Silicon's lack of top-line growth and falling margins aren't exactly compelling from a long-term investor's standpoint. For now, I'm perfectly happy watching from the sidelines.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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