C-Cube Saga Takes a Turn for the Worse for Company Bulls
Another case where investors ignored the warning signs
Herb Greenberg
Now I'm beginning to understand why C-Cube Microsystems CEO Alex Balkanski hasn't
returned my calls for months, and why he hasn't responded to my three public invitations to state
his side of the C-Cube story in this column.
I guess he didn't want to have to go on the record telling me why he thought short-sellers, who
have been quoted here lambasting his company, were wrong. For good reason, which became
apparent yesterday: Milpitas-based C-Cube disclosed that its second-quarter profits would be as
much as 50 percent shy of analyst estimates. In response, its stock tumbled 22 percent to a
19-month low of $19.88. The company blamed most of the shortfall on a seasonal slump in
demand for video-compression chips used in video-disk players. These players are sold mostly in
China and used for viewing pornography and counterfeit films. This is from the very same
company whose CEO, a little more than a month ago, told analysts: ``We will not see seasonality
or see very little seasonality'' in the sale of chips to China. At the same time he said the market
was ``running much faster than expectations,'' and he boasted that Cube's gross margins would
remain a robust 56 percent.
Yet, there were already plenty of signs the company was headed for trouble. Perhaps the loudest
warning came from Fremont-based ESS Technology, Cube's chief rival, which candidly stated
less than a week after C-Cube's bullish report that ``seasonal'' factors in China as well as price
competition would cause ESS' gross margins to slide to 49 percent. The news caused ESS' stock
to lose more than one-third of its value. But rather than heed the warning, many C-Cube investors
congregated in online message forums to pat each other on the back as they declared C-Cube the
winner, and yours truly as the villain. C-Cube is no stranger to this column. Short-seller Marc
Cohodes, of Rocker Partners, has been quoted here frequently over the past year warning of its
impending doom. It had some of the same characteristics as Iomega, the maker of the popular Zip
disk drive. Its stock had developed somewhat of a cult following, leaping to a high of $70 early
last year from around $10 in a matter of months.
And like Iomega, it quickly grabbed a dominant share of its market. Message boards devoted to
C-Cube quickly became one of the most active on the Motley Fool investment site on America
Online.
Then, late last year, ESS crashed the party when it came out with a video-com pression chip of its
own. Prices started tumbling -- as did Cube's market share and profitability. As was the case with
Iomega, chatter turned to fury against any and all critics of C-Cube. ``Greenberg . . . better get a
bodyguard and keep his slimy mouth shut,'' was the post last February on Motley Fool by a
stockbroker from Shreveport, La., who apparently thought he had been anonymous but forgot
that he had filled out a public profile of himself that's accessible to any AOL member. And several
weeks ago, on the Internet's Silicon Investor investment site, Robert Gintel, who was identified as
a money manager from Greenwich, Conn., wrote that several C-Cube shareholders ``have
exposed (Greenberg) as a complete investment dilettante with no real investment research acumen
or knowledge whatsoever, and to whom Wall Street, in his words, is no more than a soap opera.
He is sort of a financial press Hedda Hopper, caring very little about the factual correctness of the
information he passes on, or who he hurts in the process.'' (Well, he at least got the soap opera
part right.)
Gintel, who according to the SEC, held 184,300 C-Cube shares as of December 31, didn't return
my call yesterday.
Cohodes, meanwhile, doesn't think the bad news is over for C- Cube. With a book value of $3
and more than $90 million in convertible securities -- the equivalent of debt -- ``this company is in
a precarious position,'' he says.
Analysts apparently agree. They've cut earnings estimates on the company to around $1.10 a
share for this year from earlier expectations of $2.05 a share.
Meanwhile, I'm just curious how the company could go from saying that its business isn't seasonal,
to saying that it is, in such a short amount of time.
Maybe they don't know, because they didn't return my calls. |
