Silicom ( Nasdaq - SILC ) -- Higher Than Expected Q4 Results

Silicom (SILC $20.00) reported excellent Q4 results, above our estimates.  Sales advanced 45% to $9.88 million, fueled primarily by the core server networking business.  The new high potential SETAC line only contributed 4% of total revenue.   That figure is headed towards 10% in 2011 and perhaps as much as 50% by the middle of the decade.  Reported earnings advanced 40% to $.28 a share.  The true figure might be somewhat higher, but Silicom didn't break out its non cash stock option expense.  (See "Accounting Notes.")  We might revise the final number upwards after all the statements are filed with the S.E.C.  For the entire year sales rose 48% to $30.4 million.  SETAC accounted for 2% of that.  Earnings finished at $.82 a share.  That figure might be revised upward, as well.

Silicom ended 2010 with more than 70 customers.  About half of those generated revenue during the year.  The remainder have designed the company's technology into new products that will be launched in future periods.  Growth was especially robust in cloud computing, wide area network optimization, virtualization (running multiple programs and operating systems on the same cluster of computers), and encryption.  Order rates remain strong, suggesting that another good showing is in the cards for Q1'11. 

We estimate the core business will expand 15% in 2011.  Combined with a larger SETAC contribution, that promises to support an overall sales gain of 25% to $38 million.  Margins are likely to improve modestly on the higher volume, leading to a somewhat faster pick-up in earnings.  We estimate income will advance 28% to $1.05 a share.  A stronger performance appears possible. 

Above average growth could be maintained for several years as the SETAC line builds momentum.  Silicom proved the technology's commercial viability last year.  More partners now are coming on board.  And the size of those deals is growing larger.  Acquisitions could provide further leverage.  Silicom finished 2011 with cash reserves of $45.8 million ($6.68 per share), and had no debt obligations. 

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IncrediMail ( Nasdaq - MAIL ) -- Follow-up Report

IncrediMail (MAIL $7.50) appears on track to report excellent on target Q4 results.  Sales are likely to finish ahead by 6% year to year at $7.9 million.  We estimate non-GAAP income will increase by a penny to $.22 a share.  For the entire year sales should end around $29.5 million; earnings, $1.00 a share.

A more dynamic strategy will be implemented in 2011.  IncrediMail hired a new CEO last year to reignite growth.  Following the recent contract renewal with Google, which solidified the core business, expansion efforts are geared to accelerate in upcoming quarters.  IncrediMail plans to boost advertising to attract new users to its industry leading email enhancement service.  That line currently has seven million active users, predominantly middle aged and older women.  The company also plans to make acquisitions to leverage that customer base.  Most of those targets are premium (subscription) services that could benefit from IncrediMail's search expertise, in addition to cross selling opportunities.  Possibilities include Facebook communication graphics, to-do lists, email foreign language translators, mobile phone and tablet computer enhancements, and personalized websites.

Higher advertising costs will reduce margins in the short term.  We are lowering our 2011 earnings estimate accordingly, to $.75 a share from $1.10 a share previously.  Once the installed base starts to rise revenues should begin to offset those higher customer acquisition costs.  Margins should rebound in 2012, laying the groundwork for faster earnings gains beyond.  Acquisitions could provide an incremental boost.  IncrediMail likely ended 2010 with about $3.00 a share in cash.  So the funds to make deals are in place.  Earnings of $1.50 a share within 2-3 years remain a realistic goal.

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Allot Communications ( Nasdaq - ALLT ) - Follow-up Report

Allot Communications (ALLT $12.00) appears on track to report excellent on target Q4 results.  U.S. based telecom network operators remained on the sidelines due to an uncertain regulatory environment.  But demand for the company's deep packet inspection systems continued to thrive in Europe and Asia, where broadband carriers are allowed to employ usage based pricing schemes.  Corporate buyers in the U.S. are adopting Allot's technology, too, to more efficiently use their internal networks.  Emerging markets in Africa and Latin America also are thriving.  A few weeks ago the F.C.C. issued initial guidelines addressing the net neutrality issue.  Those rules opened the door to variable pricing on mobile networks, where Allot's technology currently is strongest.  U.S. carriers have been hesitant to place orders to date, fearing the landscape will keep changing in upcoming periods.  Some business is likely to emerge in 2011, though, as those companies familiarize themselves with the technology and get in position to move quickly once the final regulations are established.

We are raising our 2011 estimates.  Bolstered by surging international growth and the likelihood of an incremental U.S. boost, we are raising our sales estimate by $5 million to $75 million.  Margins could rise beyond our previous target due to the addition of more value added software to Allot's product line.  Unit prices are likely to remain stable despite the downward trend in hardware costs as a result of that greater functionality.  More software features also promise to enhance sales by addressing a wider range of applications.  Overhead costs are likely to stay relatively consistent, too, enabling margins to benefit further from the rapid escalation in revenues.  We are lifting our (fully taxed) 2011 earnings estimate a dime to $.35 a share.

The long term outlook remains bright.  Mobile Internet traffic is poised to continue its explosive growth over the next several years as smart phones, tablet computers, and other devices proliferate.  Broadband operators are likely to rely on Allot's technology to maximize network efficiency and implement revenue enhancing pricing systems.  Larger datacomm equipment manufacturers may eye the business as the technology matures and goes mainstream.  That could present a risk if they decide to develop competitive products internally.  Allot alternatively could be viewed as a prospective takeover candidate.  As well as the stock has performed to date, further appreciation remains attainable.

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Commtouch ( Nasdaq - CTCH ) - Follow-up Report

Commtouch (CTCH $3.80) appears on track to report excellent on target Q4 results.  Sales of the company's core Internet security products is continuing to expand at a 10%-20% rate, fueled by the addition of new customers and greater penetration of existing accounts.  A new line of anti virus software, acquired last September, is generating additional impetus.  The consolidation of that operation has been smooth, and cross marketing opportunities are starting to bear fruit.  Commtouch signs contracts with OEMs and Internet providers that are recognized as revenue over time.  So results will build up as those deals go into effect, setting the stage for a steady upward progression in 2011 and beyond.  We continue to estimate that 2010 sales finished around $18 million, producing income of $.20 a share (fully taxed).  In the current year a move to $24 million and $.25 a share appears to be a realistic target.  Additional acquisitions may be completed during the upcoming year.  Commtouch already provides the most comprehensive product line in the industry.  Further deals could cement that position.

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