DAILY TROUBLE
Tuesday, June 24, 1997
C-Cube Microsystems Inc.
(Nasdaq: CUBE) (N) (S)
Phone: 408-944-6300
c-cube.com
Price (6/24/97): $19 1/4
HOW DID IT FIND TROUBLE?
DVD or not DVD? That is the question investors are trying to answer in assessing the role C-Cube
will play in the promising digital video disc (DVD) market, especially since its present video
business is not painting a pretty picture. Vertical Hold? Vertical Plunge! After trading as high as
$50 in November and at more than $40 as recently as January, shares of C-Cube have fallen off the
screen.
Soft sales and heightened competition has tinkered with the once rosy image shareholders had of
C-Cube. For a company that once dominated the VideoCD market, it was caught off guard when
ESS TECHNOLOGY (Nasdaq: ESST) (N) (S) stormed in with lower prices. Its potentially
lucrative role in DVD has been muddied by new competitors as well. While new product
introductions may brighten spirits, it won't happen this quarter. Last month the company
announced that earnings would come in significantly below analyst expectations.
BUSINESS DESCRIPTION
California-based C-Cube Microsystems designs and markets integrated circuits that implement
international standards for digital images and video. Half of its revenues come from the
communications segment, where its encoders are being used by digital satellite broadcasters. A
close but fading second is its VideoCD niche. While demand continues to strengthen in its Asian
stronghold, competition has been fierce. Then there is DVD, where it has yet to line up significant
backers in what looks to be the hot-selling tech gear this year.
The excitement over DVD is not to be taken lightly. With the capacity to store up to 9 hours of
digital video or 30 hours of audio, the storage capability shatters that of the similar compact disc.
(They both have the same diameter, but DVD is twice as thick.)
FINANCIAL FACTS
Income Statement
12-month sales: $345.9 million
12-month income: $62.1 million*
12-month EPS: $1.64*
Profit Margin: 18%
Market Cap: $723.3 million
(*Excludes charges associated
with the acquisition of DiviCom Inc.)
Balance Sheet
Cash: $103.7 million
Current Assets: $214.5 million
Current Liabilities: $68.1 million
Long-term Debt: $87.6 million
Ratios
Price-to-earnings: 11.6
Price-to-sales: 2.1
HOW COULD YOU HAVE SEEN IT COMING?
ESS TECHNOLOGY (Nasdaq: ESST) (N) (S) began to stomp on C-Cube's turf late last year in
the VideoCD market, and the troubled circuit-maker was slow to counter with price cuts. Once it
did, beyond being too late to stall ESS Technology's momentum in the Far East, it was only a
matter of time before the once lofty profit margins in this substantial C-Cube business segment
would shrink. This ultimately led to the lower earnings forecast when it was not able to make up the
shortfall with volume.
Shareholders may have overlooked this to some degree if there was at least some assurance that
C-Cube would have a dominant role in DVD. That has not happened. ZORAN (Nasdaq: ZRAN)
(N) (S) has stolen some of the company's thunder by announcing a software-based solution.
WHERE TO FROM HERE?
One good half deserves another. When C-Cube announced that earnings would come in at a little
better than half of the $0.41 per share earnings estimate for the current quarter, the analysts halved
their projections clear on through next year. 1998 projections have gone from $2.29 per share to
$1.27 per share. Naturally, the stock price has also been halved as well. But could Wall Street be
shortsighted?
VideoCD competition is tough, so C-Cube got tougher. Its new CL-680 solution is based on just
one chip, considerably cheaper to produce than the competition's two chip products. And as for
Zoran's software salvo, it has weak copy protection, something that C-Cube's solution thrives on
in a pirate-conscious Hollywood that plans to stock the shelves with DVD films later this year.
This summer C-Cube will introduce its MPEG Video Peripherals, or MVP. The external device will
allow digital storage on computers from any analog source. While it will offer many of the features
of existing products like tv-tuner cards and video capture peripherals, those products have limited
communications capability. Full-motion video conferencing, e-mail, even web pages will be
possible, as well as the archiving of family videos thanks to the ever-dropping storage capacity
costs of recordable CD-ROMs. Retailing at under $300, the MVP may prove worthy of its acronym
in contributing to C-Cube's future, and the sooner the better.
C-Cube is boxed in, but the future has yet to be squared away.
-Rick Aristotle Munarriz (tmfedible@aol.com) |
