The Motley Fool's Rich Smith snagged some time with Necip Sayiner, president and CEO of two-time
Motley Fool Stock Advisor
recommendation Silicon Laboratories
Rich Smith: When investors are talking semiconductors, the name Silicon Labs doesn't often come up. Can you introduce your company to us?
Necip Sayiner: Silicon Labs specializes in designing semiconductors that enable the analog world to communicate with the digital world of computing. We leverage innovative design techniques to build mixed-signal semiconductors that are extremely small, high performance, and low cost. Our markets are large and growing, but our technology can be difficult for investors to understand. As a result, we've not gained the notoriety of some of our larger, more established competitors. But we've quietly grown, gained market share, and diversified our products and customers. And now, 10 years after inception, we have a profitable (and growing) half-billion-dollar business.
RS: How is the run-of-the-mill consumer most likely to encounter your products?
NS: Most consumers have used our products. For example, we supply more than half of the world's PC modems. We provide around 25% of the world's RF for GSM/GPRS cell phones. We provide connectivity for pay-per-view and downloading program guides in set top boxes. Our products also enable your traditional telephone to make calls over the Internet. As the world of computing continues to grow, the mixed-signal opportunities increase exponentially. That means that a company with expertise like ours becomes increasingly valuable and our technology becomes more and more pervasive.
RS: In your 10-K, you list about two dozen companies as competing with Silicon Labs -- from giants Phillips
NS: I admire leaders who have the ability to instill a strong commitment to execution across the company. In my experience, organizations that have an intense focus on execution and results tend to achieve sustained success in their markets. I also admire those executives at the companies you mention that have been able to pursue profitable growth. It is a challenge in the highly competitive semiconductor market to continue to outgrow your respective markets without sacrificing the business fundamentals. I personally value profitability and we've built a strong culture around that at Silicon Labs and I respect those leaders at my peers who have done the same. Finally, we have a great deal of admiration for those leaders that have been able to accurately predict major shifts in their key markets and adapt quickly.
RS: In your most recent quarterly earnings release, you announced a $100 million share buyback program. From management's perspective, why might a company prefer to return value to shareholders through declaring a regular quarterly dividend in preference to ad hoc share buybacks?
NS: A company should repurchase its shares only when it believes its stock is trading below its intrinsic value. The buyback then serves the purpose of transferring wealth from selling shareholders to continuing shareholders -- and the continuing shareholders earn a return in excess of the cost of equity.
Our peers that tend to issue dividends are in many cases beyond the high growth phase of their business, so a long-term dividend program is attractive to both the company and the shareholders. That's not the case for Silicon Labs at this phase in our growth cycle.
RS: Ordinarily, investors consider it a risk when a single "customer" accounts for too large a proportion of a company's sales. Just two of your distributors -- Edom Technology and Uniquest -- account for 40% of your sales. Is this something to worry about?
NS: An important point to note is that we capture revenue on a sell-through basis, so we view our distributor's end customers as our end customers. Edom is one of several distribution partners we have in China and Taiwan. They've been a valuable partner as we've grown our sales in that part of the world. It is also interesting to note that we represent Edom's second-largest line and we are Uniquest's largest line. Overall, there are many, many distributors able to handle fulfillment to customers in Asia, so we don't believe our concentration at Edom or any other distributor is a significant risk at this point.
RS: So far this year, you've increased R&D spending at 3.5 times the rate of sales growth. Why?
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Rich Smith does not own shares of any company mentioned. The Motley Fool has a disclosure policy.