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Zilog’s Outlook Remains Solid

Posted on May 11, 2007

Yesterday, Zilog (Nasdaq: ZILG, current price: $5.35, our recommended price $4.20) announced quarterly results which continue to support our thesis that the company’s business has stabilized and that new growth initiatives could significantly increase the top and bottom-line in the coming year or two. As such with the company trading at what is still a very low valuation relative to its peers, we think the downside risk in the stock remains minimal, while the upside could be quite significant, assuming new products start gaining traction.

Investors may also consider listening to the latest conference call, where new CEO Darin Billerbeck provided a sound vision of the business opportunity here. As noted in our first write-up Mr. Billerback was a former co-head of Intel’s $2 billion Flash division and we remain confident that he has the skill set and connections to greatly expand ZILG’s business in its new target markets.

Getting down to specifics, it appears that the company’s annual revenue run rate has now bottomed at about $80 million, as sales of new products continue to increase as a percentage of sales, mitigating the expected sales decline in legacy products. In addition, gross margin continues to improve, with further cost-cutting measures expected to enhance future operating efficiency, as well. On the upside, the company announced that its new 32-bit ARM based product is now shipping in production. This product targets the secured transaction point of sale market, and if successful represents a large opportunity for a company the size of Zilog ($70 million Enterprise Value).

All in all, we don’t think it’s inconceivable, assuming some decent market penetration for new products, for ZILG to achieve a $120 million annual revenue run rate in due time. Notably, in its prime years, before the Texas Pacific Group (TPG) takeover and subsequent bankruptcy, ZILG had a peak revenues of nearly $300 million. Applying, industry multiples to the potential $120 million top-line, gives some interesting potential upside price targets here. Importantly, even in a worst case, the company’s strong balance sheet, and stabilized core business, could easily support the current, or even a slightly higher, stock price.

Please Note: We hold a position in ZILG. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

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