In semiconductor-investing land, twin titans AMD (NYSE:AMD) and Intel (NASDAQ:INTC) get all the press. But has either one beat Wall Street estimates in every quarter since the third quarter of 2001? Hardly. To find a chip company that can make that boast, you need to shift your attention from the big names to little Silicon Labs (NASDAQ:SLAB).

Better focus quickly, though. This Motley Fool Stock Advisor recommendation reports its Q3 2006 earnings Monday morning.

What analysts say:

  • Buy, sell, or waffle? A dozen analysts follow "Silabs," and buy ratings outnumber holds 2-to-1.
  • Revenues. On average, analysts think the company will report another 11% rise in quarterly revenues, this time to $115.5 million.
  • Earnings. Profits, however, are predicted to fall 12% to $0.23 per share.

What management says:
Last month, Silicon Labs updated investors on what to expect in Monday's news: nothing good. Management slashed 8% from its sales expectations, substituting a new range of $113 million to $116 million, and predicted that GAAP profits would come in light as well -- somewhere in the neighborhood of $0.05 to $0.08 per share. Of course, GAAP profits might have been as much as $0.25 per share. A $0.03 charge for writing off in-process research and development on an acquisition, and a $0.14 charge for stock options expensing, explain the lower number under GAAP (generally accepted accounting principles). The firm blamed weak demand for its Aero transceivers and analog modem components, as well as continuing inventory bloat among Chinese customers, for the probable sales shortfall.

What management does:
Silabs has successfully kept its rolling gross margins moving upward over the past year. Operating and net margins, however, are another matter entirely. Thanks to rapidly rising selling, general, and administrative expenses, or SG&A, hefty investments in research and development (R&D) -- and yes, large charges to expense stock options -- over the past 18 months, the company's operating margin was nearly, and its net margin more than, cut in half.

Margins %

4/05

7/05

10/05

12/05

4/06

7/06

Gross

54.6

54.7

54.4

54.4

54.8

55.6

Op.

25.0

23.1

17.3

14.3

11.9

14.2

Net

16.6

15.6

11.0

11.2

9.5

7.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
How fast is "rapid?" How massive is "hefty?" Let's take a look.

Year to date, Silicon Labs' revenues have grown a respectable 12% versus last year's first half. Cost of goods sold, which rose just 7% over the same period, helps to explain the firm's strengthening gross margins.

The damage to the net resides farther down the income statement. There we find that SG&A costs grew at nearly three times the pace of sales gains -- 35% year over year. Meanwhile, R&D spending more than doubled to 32%. That, I fully understand -- high tech is an R&D-driven business, and the more Silabs spends to keep its technology at the head of the pack, the happier investors should be. The rapid rise in SG&A costs is more worrisome, however. Given my druthers, I'd much rather see a much lower SG&A number in Monday's news.

Speaking of wish lists, another number I'll be watching is accounts receivable. So far this year, they've spiked -- up 74%, or six times the rate of sales growth. The fact that average inventories are growing less quickly than sales (at 7%) is nice, of course. But I have to wonder whether Silabs' suggestion in September that its customers have more chips than they can use is related to its trouble in getting customers to pay promptly.

Competitors:

  • Agere (NYSE:AGR)
  • Broadcom (NASDAQ:BRCM)
  • Infineon (NYSE:IFX)
  • Texas Instruments (NYSE:TXN)

How do we love thee, Silicon Labs? Let me count the ways. One, two, three -- Silicon Labs is a three-time recommendation of Motley Fool Stock Advisor .

Intel is a Motley Fool Inside Value pick. What is Wall Street overlooking now?Inside Valuegives subscribers the big names with the best prospects for good returns. A free trial gives you all the picks and how they're doing.

Fool contributor Rich Smith owns shares of Intel. The Fool has a disclosure policy.