I also submitted this to the old thread:
Here's what Dow Jones Newswire had to say about today:
ESS Tech Drops 36%; Warns Of Declining 2Q Margins
By Thomas Granahan
NEW YORK (Dow Jones)--Increasing pricing pressure in the audio and video markets caused chip maker ESS Technology Inc. (ESST) to warn of margin pressure in the second quarter, lopping 36% off the company's market value.
ESS, which designs and markets mixed-signal semiconductor and software solutions for multimedia applications, said first-quarter gross margins fell to 49%, a drop of about 200 basis points from the December quarter, and said until its new products are shipping in volume, margins will continue to get squeezed.
"New products are one month late, causing gross margins to decline as mature audio and video products continue to experience a weak pricing environment," said Hambrecht & Quist analyst Rob Chaplinsky, who maintained his strong buy rating on the stock.
"It's primarily a product transition issue,'' he added. ''When the new products are available, the company will be able to accelerate earnings later in the year.''
Chaplinksy said he was surprised, however, by the magnitude of the decline on the audio side, which represents about 57% of ESS' business, down from almost 100% in the September 1996 quarter.
The analyst estimates at the end of the year that audio chip revenue will represent 46% of sales, and video and telephony chips 43% and 10%, respectively.
The Fremont, Calif., concern Wednesday night posted net income for the quarter of 43 cents a share, a penny above the mean Wall Street estimate, on revenue of $81.5 million. That compares with operating net of 25 cents a year ago on sales of $41.2 million.
Strong VideoCD sales, however, were offset by weak audio chip revenue.
"Seasonal weak sales and continued price erosion caused audio chip revenue to decline to $46.5 million, down from $64.4 million, or approximately 17%, from the December quarter," Chaplinsky said. He said about 70% of that drop in revenue was related to weaker pricing.
Compounding the problem, ESS' main competitor, C-Cube Microsystems Inc. (CUBE), recently said it was lowering its chip prices to become more competitive.
Ian Gilson, who follows the company for Van Kasper & Co., noted that the ESS for the past four or five quarters has said margins were expected to drop in the next quarter and stabilize in the mid-40% range.
"Everybody that follows the company should have had margin attrition factored in,'' he said. Gilson also maintained his strong buy rating on the company.
Separately, the company said it agreed to acquire Platform Technologies Inc., a developer of multimedia subsystems, for 2.2 million shares.
ESS was recently off 7 15/16 at 14 1/8 on Nasdaq volume of 11.9 million shares, compared with average daily turnover of 1.3 million. |
