MANHASSET, N.Y. The sudden resignation of Silicon Image CEO Steve Tirado earlier this week may not have surprised those following the company's recent financial results. Still, questions remain about whether Silicon Image's business model, which the company has always insisted is "unique," may have caused Triado's downfall.
Over the span of 14 years, Silicon Image may have perfected possibly the most innovative business model for a startup chip vendor. The Sunnyvale, Calif., company is in the business of championing standards (i.e. HDMI); it designs its own chips based on the standards it promotes; it licenses its intellectual property cores; then it offers to OEMs testing and verification services for systems (but not chips) based on the standards it helped create.
Silicon Image prospered on the strength of its business formula—with a quite a bit of luck. It developed an uncompressed digital signal interface technology at a time when no solutions existed and digital TV sets were being rolled out to the global market.
Although beneficial to the company in the early years, the business model is taking a pounding in today's troubled economy. After years of strong growth, with annual revenue rising 51 percent between 2005 and 2007, Silicon Image hit a brick wall in 2008. Sales dipped 14 percent, to $274 million from $321 million in 2007.
The sales decline in the first half of this year was even more troubling and deeper than for the entire semiconductor industry. In the second quarter, for instance, Silicon Image's revenue tumbled 47 percent compared with typical declines of 20 to 30 percent across the industry. More significantly, however, the company's production costs have surged, showing Silicon Image has been rather tardy in reining in costs.
Production costs surged to 59 percent of sales in the second quarter compared to 46 percent in the year-ago comparable period. Other costs remain stifling as research and development expenses shot up to 47 percent of sales in the June quarter from 36 percent in the second quarter of 2008. During the same period, selling, general and administrative costs rose to 34 percent of sales from 27 percent, helping to drive Silicon Image deeper into the red as net losses widened to $13.3 million, or 18 cents per share, from $462,000, or 1 cent per share, in the year-ago quarter.
The higher costs and failure to immediately implement a wider range of expense-reduction measures may be partly behind the company's decision to dismiss Tirado and name chief financial officer Hal Covert to serve as president and chief operating officer while the company looks for a new CEO.
Silicon Image attributed its latest revenue woes to "our ongoing product transition as customers transition from HDMI receivers to more cost-effective port processors and increased competition." The company also said it believes "revenue will increase'as we start to roll out our new products in the second half of fiscal year 2009."