Mystery solved:
Hi/fn's Sales Forecast Sparks Concerns In Communications-Chip Sector
Dow Jones Newswires
NEW YORK -- Shares of companies that sell chips used in communications and networking devices fell Friday after Hi/fn Inc., a maker of such chips, confirmed that two large customers will reduce purchases.
Shares of Hi/fn (HIFN) plunged $36.25, or 49%, to close at $37.75 on Friday. On Thursday, the stock fell 29% after fears about the lost business surfaced.
Shares of rival communications-chip maker PMC-Sierra Inc. (PMCS) fell $10.375, or 10%, to close at $89.50. Shares of Vitesse Semiconductor Corp. (VTSS) fell by as much as 12% before recovering. Vitesse lost $3.875, or 4.5%, to close at $82.375. Other chip companies pressured, in some cases unfairly, by the Hi/fn news included Transwitch Corp. (TXCC), Applied Micro Circuits Corp. (AMCC), Broadcom Corp. (BRCM) and Cypress Semiconductor Corp. (CY).
Hi/fn late Thursday said revenue will fall short of estimates because telecom-equipment giant Lucent Technologies Inc. and data-storage concern Quantum Corp. will reduce their purchases. Quantum reduced orders because it had too much inventory of its storage devices. Lucent's sales of devices that use Hi/fn's chips are growing slower than Lucent previously projected.
In a bid to limit the stock drop, Los Gatos, Calif.-based Hi/fn esaid arnings for the fourth quarter ended Sept. 30 will top analysts' expectations. The company didn't provide a specific number. Investors, however, focused on the company's first-quarter revenue oulook.
Hi/fn, which is pronounced "hyphen," was spun off from data-storage device maker Stac Inc. last year. Hi/fn specializes in chips with data-compression and encryption features.
Clark Westmont, an analyst at Salomon Smith Barney, lowered his investment rating on Vitesse and PMC Sierra because of concerns about inventory stockpiling at its customers. Westmont said there was a "shortage mentality" over the past few months as companies prepared for the year 2000 transition. "The sky is not falling .. (but) this could lead to an order slowdown."
He stressed that there doesn't appear to be a demand problem in the industry, but an inventory-management problem at Ascend Communications, which was acquired by Lucent. Companies that sell chips used in telecom and networking gear been the fastest-growing segment of the rebounding semiconductor sector, and they had the stock prices to prove it. Hi/fn certainly fit in that category, with its nifty "compression" technology that allows 10 pounds of data to fit into a five-pound bag.
"If you look at the build-out of the Internet infrastructure, it's being done by equipment from Lucent and Nortel" Networks Corp., Westmont said. And those companies buy chips from the likes of PMC Sierra, Vitesse and Hi/Fn.
Only a month ago, Hi/fn Chief Executive Officer Raymond Farnham said networking revenues had doubled in the first nine months this year and that he expected that trend to continue for years.
The perception that inventory issues at Lucent's Ascend division will hurt the businesses of Vitesse and PMC-Sierra prompted Salomon Smith Barney analyst Clark Westmont to turn cautious on both firms. Although Westmont expects both Vitesse, of Camarillo, Calif., and PMC Sierra, of Burnaby, B.C., to post very strong results for the September quarter, Westmont feels the shockwaves from Hi/fn's disappointing outlook will chase investors away from the sector.
According to Westmont, Lucent represents 20% of Vitesse's sales, between 10% to 20% of PMC-Sierra's sales and about 35% of Hi/fn's sales. Hi/fn supplies chips that are used in Ascend's MAX-TNT remote-access switching equipment. The news doesn't bode well for both PMC-Sierra and Vitesse because it raises questions about Lucent's inventory practices. Westmont said inventory turns at Lucent "have deteriorated over the last several quarters."
Westmont said Vitesse isn't likely to get entangled in the same trouble because it mostly supplies chips for fiber-optic networking, something that is very different than the MAX-TNT switch. Westmont doesn't expect Vitesse to guide down estimates for the December quarter or for next year. In fact, the news could be quite the opposite, said Westmont, who believes business with Lucent, which had been moving downward in the June quarter, could be rising.
And PMC-Sierra's "just-in-time" delivery practices should prevent excess stockpiling by Lucent. Westmont expects PMC-Sierra to "meet or beat earnings expectations for the September quarter and provide positive guidance for December, as well as 2000."
Robertson Stephens analyst Arun Veerappan said the slide in PMC-Sierra's and Vitesse's share prices Friday were an "overreaction." Veerappan also said there are significant differences between the companies. PMC-Sierra sells "almost nothing to Ascend," said Veerappan. He said PMC-Sierra's makes 5% of its Lucent sales to Ascend, 5% to Lucent's Cascade Communications unit and 10% to the main Lucent business. Veerappan said almost all of Vitesse's sales to Lucent are shipped to the core business.
Based on conversations with Lucent and others, Hambrecht & Quist Inc. analyst Jeffrey Lipton believes the problems Hi/fn faces are specific to the company. He said it's been his experience that many times blanket explanations don't apply to all companies.
But CIBC World Markets Corp. analyst Kenneth Pearlman said Friday's sell-off "makes some sense." In cases where stocks are trading at high valuations, investors tend to "shoot first, ask questions later," said Pearlman. The analyst expects semiconductor stocks will have a rough time in the coming weeks because chief executives will probably advise some caution going into the December quarter. Pearlman said most will be hedging will stem from part shortages caused by the Taiwan earthquake.
And Quantum Corp.'s data-storage tracking stock -- DLT & Storage Systems Group -- tumbled after BancBoston Robertson Stephens analyst Dane E. Lewis cut his rating to "long-term attractive" from "buy." The analyst cited anticipated weakness in the company's calendar fourth-quarter earnings. Lewis said high inventory levels and weak demand for Quantum's DLT tape drives will hurt results for the traditionally strong quarter. Lewis based his projections on inventory checks and Hi/fn's announcement. Shares of the Milpitas, Calif.-based Quantam -- DLT & Storage (DSS) fell $1.875, or 14%, to settle at $11.50.
Lewis said he expects the company's tracking stock to remain under pressure for the rest of the calendar year. He said the shares may start gaining ground once year 2000 concerns have subsided and with increased assurance that the company's DLT product is "time-to-market competitive."
Needless to say, all the talk and stock movement prompted some analysts to look at Lucent's inventory practices. Lucent had no comment on the talk of an inventory problem. Paul Sagawa, an analyst at Sanford Berstein, said Lucent has been criticized this year for allowing its inventory to swell. That prompted the company to set a goal of reducing inventory in the September quarter. That it has cut back on ordering parts is a sign that Lucent is taking steps to cut back its inventory.
"Hi/fn's explanation is clear evidence of the action Lucent has taken this quarter to address (the inventory) issue," Sagawa said. "Unfortunately, small suppliers like Hi/Fn are at the end of the whip."
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