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Silicon Motion Technology Corporation (SIMO - Free Report) reported second-quarter adjusted earnings of 71 cents per American Depositary Share (ADS), which declined 17.4% from the year-ago quarter but increased 1.4% sequentially.

Including stock-based compensation, earnings were 69 cents per share, which missed the Zacks Consensus Estimate of 73 cents.

Net sales decreased 5.7% year over year but increased 4.2% from the previous quarter to $132.7 million. The figure also missed the Zacks Consensus Estimate of $136 million. Revenues were also below the guided range of $134-$140 million.    

Silicon Motion noted that NAND supply continues to remain tight, which affected module maker customers, hyperscale customers, and NAND flash partners in the quarter. This negatively impacted top-line growth. Management expects NAND supply constraints to impact second-half 2017 sales as well.

The company has gained 5.7% year-to-date, underperforming the 27.6% rally of the industry it belongs to.



Segment Sales

Sales from mobile storage products (which include Embedded Storage as well as Expandable Storage products) decreased 6% year over year but increased 4% quarter over quarter to $121.6 million. It constituted 92% of revenues.

Client SSD controller sales declined almost 10% sequentially. However, eMMC controller sales increased 5% sequentially.

SSD solutions sales increased over 50% driven by strong growth from Shannon hyperscale SSDs and Ferri industrial SSDs.

Mobile communications product (which include mobile TV SoCs and handset transceivers) sales were $10 million and represented 7% of the total revenue.

Operational Details

Non-GAAP gross margin expanded more than 30 basis points (bps) on a year-over-year basis but declined 220 bps sequentially to 48.7%. This was within management’s guided range of 48.5–55.5%. The sequential decrease was primarily attributed to the difference between SSD pricing agreement with customers and subsequent NAND component price rise.

Operating margin decreased 260 bps on year-over-year basis and 250 bps sequentially to 23.9%, lower than the guided range of 25.5%–27.5%.

Liquidity & Cash Flow

Exiting the quarter, Silicon Motion’s cash and cash equivalents were $303.6 million, up from $302.4 million as of Mar 31, 2017.

Guidance

For third-quarter 2017, Silicon Motion expects non-GAAP sales to be in the range of $122–$129 million, reflecting 3%–8% decline on a sequential basis.

Non-GAAP gross margin is anticipated within 45%–47%, reflecting higher NAND costs. Moreover, operating margin is projected in the range of 19%–21% for third-quarter 2017. Operating expenses are anticipated to be similar to the figure reported in the first quarter.

For full-year 2017, Silicon Motion anticipates revenues to decrease 5–8% from 2016 to $512–$528 million.

For the full-year, client SSD controller is anticipated to be flat. Moreover, eMMC and SSDs solutions are also expected to be down.

For full-year 2017, non-GAAP gross margin is anticipated within 47.5%–49%, while operating margin is projected in the range of 22%–24%.

The disappointing guidance is based on the company’s anticipation that NAND supply constraint will continue, which will hurt the company’s top line as well as margin growth.

Zacks Rank & Key Picks

Currently, Silicon Motion carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Better-ranked stocks  in the industry are Alibaba Group Holding Limited (BABA - Free Report) , and Applied Optoelectronics, Inc. (AAOI - Free Report) , both sporting a Zacks Rank #1, and Symantec Corp. (SYMC - Free Report) with Zacks Rank #2 (Buy).

Long-term earnings growth rates for Alibaba Group, Applied Optoelectronics and Symantec are projected to be 28.9%, 18.7% and 10.3%, respectively.

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