Tustin Microchip Maker Silicon Systems Is Heading for Best Year Since Founding
After several years of ho-hum performance, Silicon Systems Inc. is showing signs of robust health.
The Tustin-based microchip maker, whose stock trades in the over-the-counter market, reported net income of $2.4 million for the first quarter of 1988--nearly as much as its combined earnings for the previous four quarters and a quantum leap from the $302,000 profit of 1987’s first quarter.
The computer chip business is in a cyclical upturn, which helps account for the company’s improved fortunes. But other factors are at work that prompt analysts to predict that Silicon Systems will have its best year since the company was created in 1972.
Silicon Systems, for instance, is particularly well-poised for the microcomputer industry’s move toward smaller 3.5-inch hard-disk drives. The company has captured large market shares, up to 75% in some instances, for electronic components that go into those drives, said Jay Vleeschhouwer, an analyst with L. H. Friend, a Los Angeles investment bank.
In addition, the company decided several years ago to make chips for telephones and modems, an area that accounts for 20% of the company’s total sales. Silicon Systems supplies chips for the internal modems used in the popular Zenith and Toshiba laptop computers and Compaq portable computers.
Satisfying the strong demand for its chips is the company’s biggest problem, according to chief financial officer William Bendush. “With the general success of our new modem products, coupled with the seemingly insatiable demand for disk products, our main concern now is meeting capacity,” he said.
The company’s sales are expected to grow by 50% in 1988, followed by another strong year in 1989 “providing the economy holds up.” said Carmelo Santoro, Silicon Systems’ president.
“We have been executing a strategy for several years of identifying niches and then going out and getting market share. It’s finally starting to work,” Santoro said.
Analysts support that outlook. They generally expect revenues to fall within a range of $115 million to $130 million for 1988, contrasted with $80 million in 1987. Net income should be about $10.7 million in 1988, up from $2.8 million in 1987.
That translates to earnings per share of about $1.30, contrasted with 47 cents last year, Vleeschhouwer said. The company has 9.2 million shares outstanding on a fully diluted basis.
An area of significant accomplishment, according to Vleeschhouwer, has been the company’s ability to become a supplier of chips to Japanese disk-drive and modem manufacturers. About 20% of the company’s products are sold to Japanese firms.
While it is common for U.S. chip companies to supply overseas computer manufacturers, it is difficult to sell to the Japanese, who can go directly to other Japanese firms for their parts.
Silicon Systems operates two chip assembly plants, one in Tustin, one in Singapore.
The company also has cut costs in the past year. That effort included a mangement shake-up in May that resulted in the ouster of two top company operating officers.
Whether the high expectations for the company will translate into higher stock prices is the question facing investors. After trading in a range of $10 to $13 a share for most of 1986 and 1987, the stock began a gradual ascent last fall that came to an abrupt halt with Black Monday.
In late September, Silicon Systems was trading at $15.50, but it collapsed to $5.50 after the stock market collapse. Since then, the stock has climbed back to a range of $11 to $12 per share. It closed Friday at $11.50.
