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Silicon Labs gets off to strong start

Silicon Laboratories flew up 38 3/8 to 69 3/8 Friday in its initial public offering after pricing its shares at $31 a share.

In a sign of strong demand, Silicon Laboratories (Nasdaq: SLAB) priced its 3.2 million shares well above its increased range. Silicon Labs raised its price range Thursday morning to $25 to $27 from $21 to $23. Morgan Stanley is the lead underwriter.

The company reported earnings of $11 million on sales of $46.9 million in 1999. Sales jumped dramatically in every quarter last year. In 1998, Silicon Labs reported sales of $5.6 million and a loss of $3.4 million.

Silicon Labs (profile) mixed-signal integrated circuits, or ICs, for the communications sector. Silicon Labs' digital signal processing chips are found in cellular telephones, cable and satellite set-top boxes, modems, and fax machines.

Like other chip makers in the communications sector, Silicon Labs is cashing in on strong demand and the need for cheap, smaller and low-power semiconductors. The chip sector is in a cyclical upturn, and Silicon Labs is likely to run with other high-flying semiconductor stocks.

The company also has a blue-chip customer list. Silicon Labs' customers include Intel (Nasdaq: INTC), Lucent (NYSE: LU), Motorola (NYSE: MOT), PC-Tel (Nasdaq: PCTI), SmartLink and 3Com (Nasdaq: COMS).

However, there are risks with that client list, especially since four of those five customers accounted for 92 percent of sales. PC-Tel accounted for 62 percent of sales, followed by SmartLink at 12 percent, 3Com at 10 percent and Motorola at 8 percent. Silicon Labs doesn't have long-term arrangements with any of its customers.

In regulatory filings, Silicon Labs disclosed a few customer developments worth noting. Under the company's current agreement with PC-Tel, Silicon Labs is the sole supplier of chips. PC-Tel, however, is looking for a secondary source.

Aside from the PC-Tel risk, Silicon Labs is also suing 3Com and Analog Devices (NYSE: ADI), a competitor. The lawsuit, filed in January, alleges that Analog Devices and 3Com "have misappropriated our confidential information, know-how and trade secrets." Depending on how the lawsuit shakes out, Silicon Labs could lose some business.

Across all of its product areas, Silicon Labs competes with Advanced Micro Devices (NYSE: AMD), Analog Devices, Conexant (Nasdaq: CNXT), Delta Integration, Fujitsu, Infineon Technologies (NYSE: IFX), National Semiconductor (NYSE: NSM), Philips (NYSE: PHG) and Texas Instruments (NYSE: TXN).