This Chip Designer Has a Brand New Bag

Shares of chip designer Silicon Motion (NAS: SIMO) surged as much as 18.7% in pre-market action today. The specialist in mixed-signal and digital controllers for storage systems and radio signal processing just reported a 38% year-over-year sales jump to $69.7 million, powering a slight non-GAAP earnings boost to $0.42 per American Depositary Share.

The Taiwanese company beat Wall Street estimates on both the top and bottom lines, albeit with a strand of cooked spaghetti and a careful hand. The midpoint of management's third-quarter guidance pointed to about $74.2 million in revenue, well above the current consensus at $72.1 million. A back-of-the-envelope rundown of guided expenses, then, points to adjusted earnings of about $0.48 per ADS. That's also better than your average analyst had expected.

CEO Wallace Kou said that "new growth products" are driving Silicon Motion's results these days. Demand is high -- and rising -- for its solid-state storage controllers and LTE radio solutions. The company ships LTE chips in the hot-selling Samsung Galaxy S3 smartphone in certain markets, and Sammy is bringing Silicon Motion's LTE chips to America next year. Given that Samsung outsells even Apple in head-to-head smartphone battles right now, that's not a bad feather to stick in your corporate cap.

It's not all wine and roses, of course. The core products segment, which includes controller chips for USB drives and flash-based memory cards, has stalled, due to plunging prices on flash memory chips. Investors in Micron Technology (NAS: MU) and Spansion (NAS: CODE) should take note of these comments, because these companies make flash chips that are more directly exposed to pricing changes. However, volatility in that market is enough to make memory-card builders scale back their orders for controller chips. Why build cards if you can't sell 'em for profit?

Moreover, demand for mobile TV tuners in the Chinese market is weak, thanks to rising competition.

So the core products division is becoming less "core" with every passing quarter. The new products segment already accounts for 32% of sales, and Kou expects that share to rise above 40% in 2013. The future for this company lies in LTE controllers and solid-state drive products, led by an expected 50% rise in LTE orders from Samsung next year.

"We believe we are gaining market share [in LTE transceivers] from the competition," Kou said. That competition includes Qualcomm (NAS: QCOM) , which is the current LTE provider of choice for Apple's iPad -- and most of the high-end Android fleet. Truly stealing share here could give Silicon Motion a very significant catalyst for exploding sales.

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