Say What?
Needham in a Haystack
By Monica Rivituso
The Call:
The semiconductor sector is notoriously volatile — a fact highlighted all too well by ESS Technology (NASDAQ:ESST - news), a leading maker of chips for DVD players. ESS shares hit a rough patch a couple of weeks ago, after there was talk of a competitor, Zoran (NASDAQ:ZRAN - news), winning a design contract with Samsung Electronics. Skittish investors fled the stock on Feb. 15, sending it down 11.6% to $19.06.
Shares continued to languish for the next couple of days, and by Feb. 19 they had slipped to $17.41 — some 30% off their 52-week high. The following day, Needham & Co. analyst Dan Scovel issued a note to clients saying that the recent price weakness in the stock was a buying opportunity. (Needham & Co. underwrote the company's secondary stock offering in February. Scovel doesn't own any shares of the stock.)
Despite the recent nervousness, he said, ESS remained the leading supplier of DVD controller chips. And since the DVD market is the hottest consumer electronics segment these days, market share matters. Over the past year, ESS Technology has nearly doubled its market share, to the mid- to high 30% range. What's more, a Zoran design win with Samsung wouldn't negatively impact ESS, according to Scovel. After the stock's recent slide, shares traded at a mere 20 times Scovel's fiscal 2002 earnings estimate of 85 cents a share, and less than 16 times his 2003 estimate of $1.10. Meanwhile, he said he expects the DVD-player market to continue to grow in the 30% to 40% range over the next couple of years. ``We believe business conditions [for ESS] over the next few months are likely to exceed our expectations,'' he wrote.
The Reality:
On Thursday, ESS Technology gave a big boost to its first- and second-quarter guidance. Shipments in the current quarter were ahead of forecasts, thanks to ``an exceedingly robust market'' for DVD players, said Robert Blair, president and chief executive of ESS, in a statement. ``We believe the market for DVD players must be bigger and growing faster than previously estimated or that our market share is growing faster than we had previously thought,'' he said.
Either way, it's hard to argue with the results. For the first quarter (ending March), the company now expects revenue to be $68 million to $70 million, far above its previous guidance for $57 million to $60 million. Net income should come in between 22 cents and 25 cents a share, as opposed to the 11 cents to 14 cents a share originally expected. And for the second quarter, ESS upped its revenue guidance to $66 million to $70 million from $62 million to $66 million. Net income should be 18 cents to 22 cents a share, rather than 14 cents to 17 cents.
ESS's stock rallied on the news, jumping 9.63% to $20.84 on Thursday. It continued its upward climb on Friday, rising another 9.9% and ending the day at $22.91 — 32% higher than when Scovel made his call. |
